This
Prospectus provides important information about the Fund that you should know before investing. Please read it carefully and keep
it for future reference.
The Securities and
Exchange Commission has not approved or disapproved these securities or determined if this Prospectus is truthful or complete.
Any representation to the contrary is a criminal offense.
Principal
Investment Risks
All ETFs carry a certain
amount of risk. As with any ETF, there is no guarantee that the Fund will achieve its objective. Investment markets are unpredictable
and there will be certain market conditions where the Fund will not meet its investment objective and will lose money. The Fund’s
net asset value, market price and returns will vary and you could lose money on your investment in the Fund and those losses could
be significant. An investment in the Fund is not a complete investment program. These risks affect the Fund directly as well as
through the Underlying Funds in which it invests.
The following summarizes the principal risks
of the Fund. These risks could adversely affect the net asset value, market price, total return and the value of the Fund and your
investment. The risk descriptions below provide a more detailed explanation of the principal investment risks that correspond to
the risks described in the Fund’s Fund Summary section of the Prospectus. These risks affect
the Fund directly as well as through the Underlying Funds in which it invests.
Active Trading Risk. Active trading
will cause the Fund to have an increased portfolio turnover rate, which is likely to generate shorter-term gains for its shareholders,
which are taxed at a higher rate than longer-term gains. Actively trading portfolio securities increases the Fund’s trading
costs and may have an adverse impact on the Fund’s performance.
Authorized Participant Risk. The Fund
has a limited number of financial institutions that may act as Authorized Participants. An “Authorized Participant”
is a participant in the Continuous Net Settlement System of the National Securities Clearing Corporation or the Depository Trust
Company (“DTC”) and that has executed a Participant Agreement with the Fund’s distributor (“Distributor”).
To the extent these Authorized Participants exit the business or are unable to process creation and/or redemption orders and no
other Authorized Participant is able to step forward to process creation and/or redemption orders, in either of these cases, shares
of the Fund may trade like closed-end fund shares at a discount to NAV and possibly face delisting.
Basic Materials Sector Risk. To the
extent that the Fund’s investments are exposed to issuers conducting business in basic materials, the Fund is subject to
the risk that the securities of such issuers will underperform the market as a whole due to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting that economic sector. World events, political, environmental and
economic conditions, energy conservation, environmental policies, commodity price volatility, changes in exchange rates, imposition
of import controls, increased competition, depletion of resources and labor relations may adversely affect such issuers. The prices
of the securities of basic materials companies also may fluctuate widely in response to such events.
Cash and Cash Equivalent Risk. At
times, the Fund may have significant investments in cash or cash equivalents. When a substantial portion of a portfolio is held
in cash or cash equivalents, there is the risk that the value of the cash account, including interest, will not keep pace with
inflation, thus reducing purchasing power over time. Additionally, in rising markets, holding cash or cash equivalents may adversely
affect the Fund’s performance and the Fund may not achieve its investment objective.
Communications Services Sector
Risk. Companies in the communications services sector may be affected by industry competition, substantial capital requirements,
government regulations and obsolescence of communications products and services due to technological advancement. Companies may
encounter cash flow strains due to the need to commit substantial capital to developing new products and services using new technology.
Technological innovations may make certain current services obsolete.
Consumer Discretionary Sector Risk.
The success of consumer product manufacturers and retailers is tied closely to the performance of domestic and international economies,
interest rates, exchange rates, competition, consumer confidence, changes in demographics and consumer preferences. Companies in
the consumer discretionary sector depend heavily on disposable household income and consumer spending, and may be strongly affected
by social trends and marketing campaigns. These companies may be subject to severe competition, which may have an adverse impact
on their profitability.
Consumer Staples Sector Risk.
The consumer staples sector may be affected by the regulation of various product components and production methods, marketing campaigns
and other factors affecting consumer demand. Tobacco companies, in particular, may be adversely affected by new laws, regulations
and litigation. The consumer staples sector may also be adversely affected by changes or trends in commodity prices, which may
be influenced by unpredictable factors.
Derivatives Risk. The Fund may
use derivatives including options and futures. The Fund's use of derivative instruments involves risks different from, or possibly
greater than, the risks associated with investing directly in securities and other traditional investments. These risks include
(i) the risk that the counterparty to a derivative transaction may not fulfill its contractual obligations; (ii) risk of mispricing
or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying
reference asset. Derivatives may also be less tax efficient and subject to changing government regulation that could impact the
Fund’s ability to use certain derivatives or their cost. In addition, changes in government regulation of derivative instruments
could affect the character, timing and amount of the Fund’s taxable income or gains, and may limit or prevent the Fund from
using certain types of derivative instruments as a part of its investment strategy, which could make the investment strategy more
costly to implement or require the Fund to change its investment strategy. When a derivative is used for hedging, the change in
value of the derivative may also not correlate specifically with the risk of the underlying asset being hedged. Derivative prices
are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors
that affect the markets, including, but not limited to: changing supply and demand relationships; government programs and policies;
national and international political and economic events, and changes in interest rates, inflation and deflation. Trading derivative
instruments involves risks different from, or possibly greater than, the risks associated with investing directly in securities
including:
Call Options Risk. There
are risks associated with the sale and purchase of call options. As the seller (writer) of a covered call option, the Fund assumes
the risk of a decline in the market price of the underlying security below the purchase price of the underlying security less the
premium received, and gives up the opportunity for gain on the underlying security above the exercise option price. The Fund continues
to bear the risk that it will lose money if the value of the security falls below the strike price. Option premiums are treated
as short-term capital gains and when distributed to shareholders, are usually taxable as ordinary income, which may have a higher
tax rate than long-term capital gains for shareholders holding Fund shares in a taxable account. As the buyer of a call option,
the Fund assumes the risk that the market price of the underlying
security will not increase above
the strike price plus the premiums paid, so the Fund bears the risk that it will lose the premium paid for the option.
Futures Risk. The Fund’s
use of futures involves risks different from, or possibly greater than, the risks associated with investing directly in securities
and other traditional investments and exposes the Fund to the risks associated with derivative instruments described above. These
risks include (i) leverage risk (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of
the futures contract may not correlate perfectly with the underlying index. Investments in futures contracts involve leverage,
which means a small percentage of assets invested in futures can have a disproportionately large impact on the Fund. This risk
could cause the Fund to lose more than the principal amount invested. In addition, futures contracts may become mispriced or improperly
valued relative to the Advisor’s expectations and may not produce the desired investment results. Additionally, changes in
the value of futures contracts may not track or correlate perfectly with the underlying reference asset because of temporary, or
even long-term, supply and demand imbalances. Most U.S. commodity futures exchanges impose daily limits regulating the maximum
amount above or below the previous day's settlement price which a futures contract price may fluctuate during a single day. During
a single trading day no trades may be executed at prices beyond the daily limit. Once the price of a particular futures contract
has increased or decreased to the limit point, it may be difficult, costly or impossible to liquidate a position. It is also possible
that an exchange or the Commodity Futures Trading Commission ("CFTC"), which regulates commodity futures exchanges, may
suspend trading in a particular contract, order immediate settlement of a contract or order that trading to the liquidation of
open positions only.
Hedging Risk. Hedging is
a strategy in which the Fund uses a security or derivative to reduce the risks associated with other Fund holdings. There can be
no assurance that the Fund's hedging strategy will reduce risk or that hedging transactions will be either available or cost effective.
Leverage and Volatility Risk:
Derivative contracts ordinarily have leverage inherent in their terms. The low margin deposits normally required in trading derivatives
permit a high degree of leverage. Accordingly, a relatively small price movement may result in an immediate and substantial loss
to the Fund. The use of leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to
do so in order to satisfy its obligations or to meet collateral segregation requirements. The use of leveraged derivatives can
magnify the Fund's potential for gain or loss and, therefore, amplify the effects of market volatility on the Fund's share price.
Liquidity Risk: It is possible
that particular derivative investments might be difficult to purchase or sell, possibly preventing the Fund from executing positions
at an advantageous time or price, or possibly requiring the Fund to dispose of other investments at unfavorable times or prices
in order to satisfy its obligations.
Options Market Risk. Markets
for options and options on futures may not always operate on a fair and orderly basis. At times, prices for options and options
on futures may not represent fair market value and prices may be subject to manipulation, which may be extreme under some circumstances.
The dysfunction and manipulation of volatility and options markets may make it difficult for the Fund to effectively implement
its investment strategy and achieve its objectives and could potentially lead to significant losses.
Options Risk. There
are risks associated with the Fund’s options strategy. Generally, options may not be an effective hedge because they may
have imperfect correlation to the value of the Fund's portfolio securities. Additionally, the underlying reference instrument on
which the option is based may have imperfect correlation to the value of the Fund's portfolio securities. As the buyer of a call
option, the Fund risks losing the entire premium invested in the option if the underlying reference instrument does not rise above
the strike price, which means the option will expire worthless. As the buyer of a put option, the Fund risks
losing the entire premium invested
in the option if the underlying reference instrument does not fall below the strike price, which means the option will expire worthless.
Additionally, purchased options may decline in value due to changes in the price of the underlying reference instrument, passage
of time and changes in volatility. As a seller (writer) of a put option, the Fund will lose money if the value of the underlying
reference instrument falls below the strike price. As a seller (writer) of a call option, the Fund will lose money if the value
of the underlying reference instrument rises above the strike price. The Fund's losses are potentially large in a written put transaction
and potentially unlimited in a written call transaction. Option premiums are treated as short-term capital gains and when distributed
to shareholders, are usually taxable as ordinary income, which may have a higher tax rate than long-term capital gains for shareholders
holding Fund shares in a taxable account. Because option premiums paid or received by the Fund are small in relation to the market
value of the investments underlying the options, buying and selling put and call options can be more speculative than investing
directly in securities.
In general, option prices are
highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that
affect the markets, including, but not limited to: changing supply and demand relationships; government programs and policies;
national and international political and economic events, changes in interest rates, inflation and deflation and changes in supply
and demand relationships. Trading options involves risks different from, or possibly greater than, the risks associated with investing
directly in securities including:
·
Leverage and Volatility Risk: Option contracts ordinarily have leverage inherent in their terms. The low initial
investment normally required in trading options permits a high degree of leverage. Accordingly, a relatively small price movement
in the underlying reference instrument may result in an immediate and substantial loss. The use of leverage may also cause the
Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy its obligations or to meet
collateral requirements. The use of options can amplify the effects of market volatility on the Fund's share price.
·
Liquidity Risk: Although it is anticipated that the options traded will be actively traded, it is possible that particular
options might be difficult to purchase or sell, possibly preventing the Fund from executing positions at an advantageous time or
price, or possibly requiring it to dispose of other investments at unfavorable times or prices in order to satisfy its obligations.
·
Tracking Risk: Options may not be perfect substitutes for the securities or other underlying reference instrument
they are intended to track or hedge. Factors such as differences in supply and demand for certain options may cause their returns
to deviate from the Advisor's expectations. Consequently, option returns may not be highly correlated to the securities they are
intended to hedge.
Energy Sector Risk. Risks of
energy related securities include the risks that a decrease in the production of natural gas, natural gas liquids, crude oil, coal
or other energy commodities or a decrease in the volume of such commodities available for transportation, mining, processing, storage
or distribution may adversely impact the financial performance of energy related securities. To maintain or grow their revenues,
these companies need to maintain or expand their reserves through exploration of new sources of supply, through the development
of existing sources, through acquisitions, or through long-term contracts to acquire reserves. The financial performance of energy
related securities may be adversely affected if a master limited partnership, or the companies to whom it provides the service,
are unable to cost-effectively acquire additional reserves sufficient to replace the natural decline. Various governmental authorities
have the power to enforce compliance with regulations and the permits issued under them, and violators are subject to administrative,
civil and criminal penalties, including civil fines, injunctions or both. Stricter laws, regulations or enforcement policies could
be enacted in the future which would likely increase compliance costs and may adversely affect the financial performance of energy
related securities. Volatility of commodity prices, which may lead to a reduction in production or supply, may also negatively
impact the
performance of energy related securities.
energy related securities are also subject to risks that are specific to the industry they serve. Energy related entities that
provide crude oil, refined product, natural gas liquids and natural gas services are subject to supply and demand fluctuations
in the markets they serve which will be impacted by a wide range of factors, including fluctuating commodity prices, weather, increased
conservation or use of alternative fuel sources, increased governmental or environmental regulation, depletion, rising interest
rates, declines in domestic or foreign production, accidents or catastrophic events, and economic conditions, among others.
Equity Securities Risk. Equity securities
are susceptible to general stock market fluctuations and to volatile increases and decreases in value. Equity securities may experience
sudden, unpredictable drops in value or long periods of decline in value. This may occur because of factors affecting securities
markets generally, the equity securities of a particular sector, or a particular company. 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.
ETF Structure Risk. The Fund,
and the ETFs the Fund invests in, are structured as ETFs and as a result are subject to special risks, including:
o
Not Individually Redeemable. Shares are not individually redeemable and may be redeemed by the Fund at NAV only in
large blocks known as “Creation Units.” You may incur brokerage costs purchasing enough Shares to constitute a Creation
Unit. Fund shares are typically bought and sold in the secondary market and investors typically pay brokerage commissions or other
charges on these transactions.
o
Trading Issues. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in
the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility. There can be no assurance
that Shares will continue to meet the listing requirements of the Exchange. An active trading market for the Fund’s shares
may not be developed or maintained. If the Fund’s shares are traded outside a collateralized settlement system, the number
of financial institutions that can act as authorized participants that can post collateral on an agency basis is limited, which
may limit the market for the Fund’s shares.
o
Market Price Variance Risk. Individual Shares of the Fund that are listed for trading on the Exchange can be bought
and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to changes in NAV and
supply and demand for Shares. There may be times when the market price and the NAV vary significantly and you may pay more than
NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. The market price
of Shares, like the price of any exchange-traded security, includes a “bid-ask spread” charged by the exchange specialists,
market makers or other participants that trade the particular security. In times of severe market disruption, the bid-ask spread
often increases significantly. This means that Shares may trade at a discount to NAV and the discount is likely to be greatest
when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares. The Fund’s investment
results are measured based upon the daily NAV of the Fund over a period of time. Investors purchasing and selling Shares in the
secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly
with the Fund.
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In times of market stress, market makers may step away from their role market making in shares
of ETFs and in executing trades, which can lead to differences between the market value of Fund shares and the Fund’s net
asset value.
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The market price for the Fund’s shares may deviate from the Fund’s net asset value,
particularly during times of market stress, with the result that investors may pay significantly more or significantly less for
Fund shares than the Fund’s net asset value, which is reflected in the bid
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and ask price for Fund shares
or in the closing price.
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When all or a portion of an ETF’s underlying securities trade in a market that is closed
when the market for the Fund’s shares is open, there may be changes from the last quote of the closed market and the quote
from the Fund’s trading day, which could lead to differences between the market value of the Fund’s shares and the
Fund’s net asset value.
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In stressed market conditions, the market for the Fund’s shares may become less liquid in
response to the deteriorating liquidity of the Fund’s portfolio. This adverse effect on the liquidity of the Fund’s
shares may, in turn, lead to differences between the market value of the Fund’s shares and the Fund’s net asset value.
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Exchange Traded Fund (“ETF”)
Risk. The Fund may invest in ETFs as part of its principal investment strategy. ETFs are subject to investment advisory and
other expenses, which will be indirectly paid by the Fund. As a result, your cost of investing in the Fund will be higher than
the cost of investing directly in ETFs and may be higher than other ETFs that invest directly in stocks and bonds. ETFs are listed
on national stock exchanges and are traded like stocks listed on an exchange. ETF shares may trade at a discount to or a premium
above net asset value if there is a limited market in such shares. ETFs are also subject to brokerage and other trading costs,
which could result in greater expenses to the Fund. Because the value of ETF shares depend on the demand in the market, the adviser
or sub-adviser (as applicable) may not be able to liquidate the Fund’s holdings at the most optimal time, adversely affecting
performance. The ETF is subject to specific risks, depending on the nature of its investment strategy. These risks could include
liquidity risk, sector risk and emerging market risk. In addition, ETFs that use derivatives may be subject to counterparty risk,
liquidity risk, and other risks commonly associated with investments in derivatives. ETFs in which the Fund invests will not be
able to replicate exactly the performance of the indices they track, if any, because the total return generated by the securities
will be reduced by transaction costs incurred in adjusting the actual balance of the securities. In addition, the ETFs in which
the Fund invests will incur expenses not incurred by their applicable indices. Certain securities comprising the indices tracked
by the ETFs in which the Fund invests may, from time to time, temporarily be unavailable, which may further impede the ETFs’
ability to track their applicable indices.
Financials Sector Risk. Performance
of companies in the financials sector may be adversely impacted by many factors, including, among others, government regulations,
economic conditions, credit rating downgrades, changes in interest rates, and decreased liquidity in credit markets. The impact
of more stringent capital requirements, recent or future regulation of any individual financial company, or recent or future regulation
of the financials sector as a whole cannot be predicted.
Futures Risk. The Fund’s
use of futures involves risks different from, or possibly greater than, the risks associated with investing directly in securities
and other traditional investments. These risks include (i) leverage risk (ii) risk of mispricing or improper valuation; and (iii)
the risk that changes in the value of the futures contract may not correlate perfectly with the underlying index. Investments in
futures involve leverage, which means a small percentage of assets invested in futures can have a disproportionately large impact
on the Fund. This risk could cause the Fund to lose more than the principal amount invested. Futures contracts may become mispriced
or improperly valued when compared to the adviser’s expectation and may not produce the desired investment results. Additionally,
changes in the value of futures contracts may not track or correlate perfectly with the underlying index because of temporary,
or even long-term, supply and demand imbalances and because futures do not pay dividends unlike the stocks upon which they are
based.
Healthcare Sector Risk. The healthcare
sector may be affected by government regulations and government healthcare programs, increases or decreases in the cost of medical
products and services and product liability claims, among other factors. Many healthcare companies are heavily dependent on patent
protection, and the expiration of a company's patent may adversely affect that company's profitability. Healthcare companies are
subject to
competitive forces that may result in price
discounting, and may be thinly capitalized and susceptible to product obsolescence.
Industrials Sector Risk.
The value of securities issued by companies in the industrials sector may be adversely affected by supply and demand related to
their specific products or services and industrials sector products in general. The products of manufacturing companies may face
obsolescence due to rapid technological developments and frequent new product introduction. Government regulations, world events,
economic conditions and exchange rates may adversely affect the performance of companies in the industrials sector. Companies in
the industrials sector may be adversely affected by liability for environmental damage and product liability claims. Companies
in the industrials sector, particularly aerospace and defense companies, may also be adversely affected by government spending
policies because companies involved in this sector rely to a significant extent on government demand for their products and services.
Information Technology Sector Risk.
Information technology companies face intense competition, both domestically and internationally, which may have an adverse effect
on profit margins. Information technology companies may have limited product lines, markets, financial resources or personnel.
The products of information technology companies may face obsolescence due to rapid technological developments and frequent new
product introduction, unpredictable changes in growth rates and competition for the services of qualified personnel. Companies
in the information technology sector are heavily dependent on patent and intellectual property rights. The loss or impairment of
these rights may adversely affect the profitability of these companies.
Investment Style Risk. The particular
type of investments in which the Fund focuses (such as large-capitalization stocks) may underperform other asset classes or the
overall market. Individual market segments such as the large-cap U.S. equity market segment tends to go through cycles of performing
better or worse than other types of securities. These periods may last as long as several years. Additionally, a particular market
segment could fall out of favor with investors, causing the Fund that focuses on that market segment to underperform those that
favor other kinds of securities.
Large Capitalization Company Risk. The
investments in larger, more established companies are subject to the risk that larger companies are sometimes unable to attain
the high growth rates of successful, smaller companies, especially during extended periods of economic expansion. Large-capitalization
companies may be less able than smaller capitalization companies to adapt to changing market conditions. Larger, more established
companies may be unable to respond quickly to new competitive challenges such as changes in consumer tastes or innovative smaller
competitors potentially resulting in lower markets for their common stock. During different market cycles, the performance of large
capitalization companies has trailed the overall performance of the broader securities markets.
Limited History of Operations Risk.
The Fund has a limited history of operations for investors to evaluate. Investors in the Fund bear the risk that the Fund may not
be successful in implementing its investment strategies, may be unable to implement certain of its investment strategies or may
fail to attract sufficient assets, any of which could result in the Fund being liquidated and terminated at any time without shareholder
approval and at a time that may not be favorable for all shareholders. Such a liquidation could have negative tax consequences
for shareholders and will cause shareholders to incur expenses of liquidation. ETFs and their advisers are subject to restrictions
and limitations imposed by the Investment Company Act of 1940, as amended, and the Internal Revenue Code that do not apply to the
Advisor's management of individual and institutional accounts. As a result, the Advisor may not achieve its intended result in
managing the Fund.
Management Risk. The Advisor's reliance
on its sector allocation and risk management strategies and related judgments about the value and potential appreciation of securities
in which the Fund invests may prove to be incorrect. The Advisor may not successfully implement the Fund’s investment strategies
and, as a result, the Fund
may not meet its investment objective and/or
underperform other investment vehicles with similar investment objectives and strategies.
Market Risk. The market value of the
Fund’s portfolio securities may decline, sometimes rapidly and unpredictably. These fluctuations may cause a security to
be worth less than the price the Fund originally paid for it, or less than it was worth at an earlier time. Market risk may affect
a single issuer, Sector or the market as a whole. This volatility may cause the value of investment in the Fund to decline. Overall
stock and bond market risks may also affect the value of the Fund. Factors such as domestic and foreign economic growth rates and
market conditions, interest rate levels and political events may adversely affect the securities markets. Stocks and bonds involve
the risk that they may never reach what the Advisor believes is their full market value, either because the market fails to recognize
the security’s intrinsic worth or the manager misgauged that worth. They also may decline in price, even though, in theory,
they are already undervalued.
Model and Data Risk. Like all quantitative
analysis, the investment models utilized by the Advisor carry the risk that the ranking system, valuation results and predictions
might be based on one or more incorrect assumptions, insufficient historical data, inadequate design, or may not be suitable for
the purpose intended. In addition, models may not perform as intended for many reasons including errors, omissions, imperfections
or malfunctions. Because the use of models are usually constructed based on data supplied by third parties, the success of the
Advisor’s use of such models is dependent on the accuracy and reliability of the supplied data. Historical data inputs may
be subject to revision or corrections, which may diminish data reliability and quality of predictive results. Changing and unforeseen
market dynamics could also lead to a decrease in the short-term or long-term effectiveness of a model. Models may lose their predictive
validity and incorrectly forecast future market behavior and asset prices, leading to potential losses. No assurance can be given
that a model will be successful under all or any market conditions.
Market Price Variance Risk. Individual
shares of the Fund are listed for trading on the Exchange and can be bought and sold in the secondary market at market prices.
The market prices of the Fund’s shares will fluctuate in response to changes in its NAV and supply and demand for their shares.
Differences between secondary market prices and NAV for the Fund’s shares may be due largely to supply and demand forces
in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by the
Fund at a particular time. There may, however, be times when the market price and the NAV vary significantly and an investor may
pay more than NAV when buying Fund shares on the secondary market, and receive less than NAV when it sells those Fund shares. The
market price of Fund shares includes a “bid-ask spread” charged by the market makers that trade the Fund’s shares.
In times of severe market disruption, the bid-ask spread often increases significantly. This means that the Fund’s shares
may trade at a discount to NAV, and the discount is likely to be greatest when the price of the Fund’s shares is falling
fastest, which may be the time that investors most want to sell the Fund’s shares. However, given that the Fund’s shares
can be purchased and redeemed in Creation Units at NAV, and the Fund’s portfolio holdings are fully disclosed on a daily
basis, the Advisor believes that large discounts or premiums to the NAV of the Fund’s shares should not be sustained. A disruption
in creations and redemptions, however, may cause the market price of the Fund’s shares to deviate significantly from the
Fund’s NAV. In addition, the Fund’s investment results are measured based upon the daily NAV of the Fund. Accordingly,
investors purchasing and selling the Fund’s shares in the secondary market may not experience investment results consistent
with those purchasing from and redeeming Creation Units with the Fund directly.
Options Market Risk. Markets for options
and options on futures may not always operate on a fair and orderly basis. At times, prices for options and options on futures
may not represent fair market value and prices may be subject to manipulation, which may be extreme under some circumstances. The
dysfunction and manipulation of volatility and options markets may make it difficult for the fund to effectively implement its
investment strategy and achieve its objectives and could potentially lead to significant losses.
Options Risk. The Fund may lose the
entire put option premium paid if the underlying security does not decrease in value at expiration. Put options may not be an effective
hedge because they may have imperfect correlation to the value of the Fund's portfolio securities. Purchased put options may decline
in value due to changes in the price of the underlying security, passage of time and changes in volatility. Written call and put
options may limit the Fund's participation in equity market gains and may magnify the losses if the price of the written option
instrument increases in value between the date when the Fund writes the option and the date on which the Fund purchases an offsetting
position. The Fund will incur a loss as a result of a written options (also known as a short position) if the price of the written
option instrument increases in value between the date when the Fund writes the option and the date on which the Fund purchases
an offsetting position. The Fund's losses are potentially large in a written put transaction and potentially unlimited in an unhedged
written call transaction.
Real Estate Sector Risk. The Fund is
subject to the risks of the real estate market as a whole, such as taxation, regulations and economic and political factors that
negatively impact the real estate market and the direct ownership of real estate. These may include decreases in real estate values,
overbuilding, rising operating costs, interest rates and property taxes. In addition, some real estate related investments are
not fully diversified and are subject to the risks associated with financing a limited number of projects.
Sector Risk. Sector concentration
risk is the possibility that securities within the same sector will decline in price due to sector-specific market or economic
developments. If the Fund invests more heavily in a particular sector, the value of its shares may be especially sensitive to factors
and economic risks that specifically affect that sector. As a result, the Fund's share price may fluctuate more widely than the
value of shares of a mutual fund that invests in a broader range of sectors. Additionally, some sectors could be subject to greater
government regulation than other sectors. Therefore, changes in regulatory policies for those sectors may have a material effect
on the value of securities issued by companies in those sectors.
Underlying Fund Risk. The ETFs and money
market funds (“Underlying Funds”) in which the Fund invests are subject to investment advisory and other expenses,
which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing
directly in the Underlying Funds and may be higher than other funds that invest directly in stocks and bonds. In addition, when
the Fund invests in Underlying Funds, there is a risk that the investment advisers of those Underlying Funds may make investment
decisions that are detrimental to the performance of the Fund. Each of the Underlying Funds is subject to its own specific risks.
Additional risks of investing in the Underlying Funds below:
• Closed-End
Fund Risk. Closed-end funds are subject to investment advisory and other expenses, which will be indirectly paid by the Fund.
As a result, your cost of investing will be higher than the cost of investing directly in a closed-end fund and may be higher than
other mutual funds that invest directly in stocks and bonds. Closed-end funds are also subject to management risk because the adviser
to the underlying closed-end fund may be unsuccessful in meeting the fund's investment objective. These funds may also trade at
a discount or premium to their net asset value and may trade at a larger discount or smaller premium subsequent to purchase by
the Fund. Since closed-end funds trade on exchanges, the Fund will also incur brokerage expenses and commissions when it buys or
sells closed-end fund shares.
• ETF
Tracking Risk. Investment in the Fund should be made with the understanding that the passive ETFs in which the Fund invests
will not be able to replicate exactly the performance of the indices they track because the total return generated by the securities
will be reduced by transaction costs incurred in adjusting the actual balance of the securities. In addition, the passive ETFs
in which the Fund invests will incur expenses not incurred by their applicable indices. Certain securities comprising the indices
tracked by the passive ETFs may, from time to time, temporarily be unavailable, which may further impede the passive ETFs’
ability to track their applicable indices.
• Inverse
Correlation Risk. Underlying Funds that are inverse funds should lose value as the index or security tracked by such fund’s
benchmark increases in value; a result that is the opposite from traditional
mutual funds. Successful
use of inverse funds requires that the adviser correctly predict short term market movements. If the Fund invests in an inverse
fund and markets rise, the Fund could lose money. Inverse funds may also employ leverage such that their returns are more than
one times that of their benchmark.
• Management
Risk. When the Fund invests in Underlying Funds there is a risk that the investment advisers of those Underlying Funds may
make investment decisions that are detrimental to the performance of the Fund.
• Mutual
Fund Risk. Mutual funds are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As
a result, your cost of investing will be higher than the cost of investing directly in a mutual fund and may be higher than other
mutual funds that invest directly in stocks and bonds. Mutual funds are also subject management risk because the adviser to the
underlying mutual fund may be unsuccessful in meeting the fund's investment objective and may temporarily pursue strategies which
are inconsistent with the Fund's investment objective.
• Net
Asset Value and Market Price Risk. The market value of ETF shares may differ from their net asset value. This difference in
price may be due to the fact that the supply and demand in the market for fund shares at any point in time is not always identical
to the supply and demand in the market for the underlying basket of securities. Accordingly, there may be times when shares trade
at a premium or discount to net asset value.
• Strategies
Risk. Each Underlying Fund is subject to specific risks, depending on the nature of the fund. These risks could include liquidity
risk, sector risk, and foreign currency risk, as well as risks associated with fixed income securities and commodities.
Utilities Sector Risk. Deregulation
may subject utility companies to greater competition and may adversely affect their profitability. As deregulation allows utility
companies to diversify outside of their original geographic regions and their traditional lines of business, utility companies
may engage in riskier ventures. In addition, deregulation may eliminate restrictions on the profits of certain utility companies,
but may also subject these companies to greater risk of loss. Companies in the utilities industry may have difficulty obtaining
an adequate return on invested capital, raising capital, or financing large construction projects during periods of inflation or
unsettled capital markets; face restrictions on operations and increased cost and delays attributable to environmental considerations
and regulation; find that existing plants, equipment or products have been rendered obsolete by technological innovations; or be
subject to increased costs because of the scarcity of certain fuels or the effects of man-made or natural disasters. Existing and
future regulations or legislation may make it difficult for utility companies to operate profitably. Government regulators monitor
and control utility revenues and costs, and therefore may limit utility profits. There is no assurance that regulatory authorities
will grant rate increases in the future, or that such increases will be adequate to permit the payment of dividends on stocks issued
by a utility company. Energy conservation and changes in climate policy may also have a significant adverse impact on the revenues
and expenses of utility companies.
U.S. Government Obligations Risk.
U.S. Treasury obligations are backed by the “full faith and credit” of the U.S. government and generally have negligible
credit risk. Securities issued or guaranteed by federal agencies or authorities and U.S. government-sponsored instrumentalities
or enterprises may not be backed by the full faith and credit of the U.S. government, which could affect the Fund’s ability
to recover should they default. No assurance can be given that the U.S. government will provide financial support to its agencies
and authorities if it is not obligated by law to do so.
non-Principal
Investment Risks
Descriptions of non-principal
risks are set forth below. These risks could adversely affect the net asset value, total return and the value of the Fund and your
investment.
American Depositary Receipts (“ADRs”)
Risk. ADRs, which are typically issued by a bank, are certificates that evidence ownership of shares of a foreign company and
are alternatives to purchasing foreign securities directly in their national markets and currencies. ADRs are subject to the same
risks as direct investment in foreign companies and involve risks that are not found in investments in U.S. companies. In addition
to the risks of investing in foreign securities discussed below, there is no guarantee that an ADR issuer will continue to offer
a particular ADR. As a result, the Fund may have difficulty selling the ADR, or selling them quickly and efficiently at the prices
at which they have been valued. In a sponsored ADR arrangement, the foreign company assumes the obligation to pay some or all of
the depositary’s transaction fees. Under an unsponsored ADR arrangement, the foreign company assumes no obligations and the
depositary’s transaction fees are paid directly by the ADR holders. Because unsponsored ADR arrangements are organized independently
and without the cooperation of the foreign company, available information concerning the foreign company may not be as current
as for sponsored ADRs and voting rights with respect to the deposited securities are not passed through. ADRs may not track the
price of the underlying foreign securities on which they are based, and their value may change materially at times when U.S. markets
are not open for trading. Certain ADRs are not listed on an exchange and therefore may be considered to be illiquid. Because ADRs
are denominated in US dollars, they are also subject to currency risk, as movements in the exchange rate of the local currency
of the foreign issuer versus the US dollar are automatically reflected in the price of the ADR in US dollars. Therefore, even if
the price of the foreign security does not change on its local market, if the exchange rate of the local currency relative to the
US dollar declines, the ADR price would decline by a similar measure.
ADR Currency Risk. To establish
a value for the shares, the issuer establishes a “conversion rate” equal to one share of an ADR for a certain number
of shares of the stock of a foreign company. This “conversion rate” establishes a universal monetary relationship between
the value of the ADR and the local currency of the foreign company stock. Although an ADR is priced in the US dollar, in order
to preserve the uniformity of the established “conversion rate,” movements in the exchange rate of the local currency
versus the US dollar are automatically reflected in the price of the ADR in US dollars. Therefore, even if the price of the foreign
security does not change on its market, if the exchange rate of the local currency relative to the US Dollar declines, the ADR
price would decline by a similar measure.
Affiliated Investment Company
Risk. The Fund invest in affiliated underlying funds (the “Affiliated Funds”), unaffiliated underlying funds, or
a combination of both. The Advisor, therefore, is subject to conflicts of interest in allocating the Fund’s assets among
the underlying funds. The Advisor will receive more revenue to the extent it selects an Affiliated Fund rather than an unaffiliated
fund for inclusion in the Fund’s portfolio. In addition, the Advisor may have an incentive to allocate the Fund’s assets
to those Affiliated Funds for which the net advisory fees payable to the Advisor are higher than the fees payable by other Affiliated
Funds.
Asset-Backed and Mortgage Backed
Security Risk. Prepayment risk is associated with mortgage-backed and asset-backed securities. If interest rates fall, the
underlying debt may be repaid ahead of schedule, reducing the value of the Fund’s investments. If interest rates rise, there
may be fewer prepayments, which would cause the average bond maturity to rise, increasing the potential for the Fund to lose money.
The value of these securities may be significantly affected by changes in interest rates, the market’s perception of issuers,
and the creditworthiness of the parties involved. The ability of the Fund to successfully utilize these instruments may depend
on the ability of the Fund’s Adviser to forecast interest rates and other economic factors correctly. These securities may
have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value
highly volatile. Certain mortgage-backed securities may be secured by pools of mortgages on single-family, multi-family properties,
as well as commercial properties. Similarly, asset backed securities may be secured by pools of loans, such as student loans, automobile
loans and credit card receivables. The credit risk on such securities is affected by homeowners or borrowers defaulting on their
loans. The values of assets underlying mortgage-backed and asset-backed securities may decline and, therefore, may not be adequate
to cover underlying investors. Mortgage-backed securities and other securities issued by participants in housing and commercial
real estate finance, as well as other real estate-related markets have experienced extraordinary weakness and volatility in recent
years. Possible legislation in the area of residential mortgages, credit cards and other loans that may collateralize
the securities in
which the Fund may invest could negatively impact the value of the Fund’s investments. To the extent the Fund focuses its
investments in particular types of mortgage-backed or asset-backed securities, the Fund may be more susceptible to risk factors
affecting such types of securities.
Bank Loans Risk. The market for
bank loans may not be highly liquid and the Fund may have difficulty selling them. These investments expose the Fund to the credit
risk of both the financial institution and the underlying borrower. Bank loans settle on a delayed basis, potentially leading to
the sale proceeds of such loans not being available to meet redemptions for a substantial period of time after the sale of the
bank loans. Certain bank loans may not be considered “securities” under the federal securities laws and purchasers,
such as the Fund, therefore may not be entitled to rely on the protections of such laws, including anti-fraud provisions.
Business Development Companies (“BDC”)
Risk. BDCs may carry risks similar to those of a private equity or venture capital fund. BDC company securities are not redeemable
at the option of the shareholder and they may trade in the market at a discount to their net asset value. A BDC is a form of investment
company that is required to invest at least 70% of its total assets in securities (typically debt) of private companies, thinly
traded U.S. public companies, or short-term high quality debt securities. The BDCs held by the Fund may leverage their portfolios
through borrowings or the issuance of preferred stock. While leverage often serves to increase the yield of a BDC, this leverage
also subjects a BDC to increased risks, including the likelihood of increased volatility and the possibility that a BDC’s
common share income will fall if the dividend rate of the preferred shares or the interest rate on any borrowings rises. A significant
portion of a BDC’s investments are recorded at fair value as determined by its board of directors which may create uncertainty
as to the value of the BDC’s investments. Non-traded BDCs are illiquid and it may not be possible to redeem shares or to
do so without paying a substantial penalty. Publicly-traded BDCs usually trade at a discount to their net asset value because they
invest in unlisted securities and have limited access to capital markets. BDCs are subject to high failure rates among the companies
in which they invest and federal securities laws impose restraints upon the organization and operations of BDCs that can limit
or negatively impact the performance of a BDC. However, the Fund does not believe it would be liable for the actions of any entity
in which it invests and that only its investment is at risk. Also, BDCs may engage in certain principal and joint transactions
that a mutual fund or closed-end fund may not without an exemptive order from the SEC.
Capacity Risk. The markets and
securities in which the Fund invests may, at times, be limited. Under such conditions, the execution of the Fund’s strategy
may be affected and the Fund may not achieve its investment objective. In addition, the Fund may not be able to purchase or sell
securities at favorable market prices.
Cash Transactions. ETFs generally are
able to make in-kind redemptions and avoid being taxed on gain on the distributed portfolio securities at the Fund level. Because
the Fund may effect redemptions partly or entirely in cash, rather than in-kind, it may be required to sell portfolio securities
in order to obtain the cash needed to distribute redemption proceeds. If the Fund recognizes gain on these sales, this generally
will cause the Fund to recognize gain it might not otherwise have recognized, or to recognize such gain sooner than would otherwise
be required if it were to distribute portfolio securities in-kind. The Fund generally intends to distribute these gains to shareholders
to avoid being taxed on this gain at the Fund level and otherwise comply with the special tax rules that apply to it. This strategy
may cause shareholders to be subject to tax on gains they would not otherwise be subject to, or at an earlier date than, if they
had made an investment in a different ETF. Moreover, cash transactions may have to be carried out over several days if the securities
market is relatively illiquid and may involve considerable brokerage fees and taxes. These brokerage fees and taxes, which will
be higher than if the Fund sold and redeemed its shares principally in-kind, could be imposed on the Fund and thus decrease the
Fund’s NAV to the extent they are not offset by the creation and redemption transaction fees paid by purchasers and redeemers
of Creation Units.
Collateralized Debt Obligations
(“CDO”) and Collateralized Loan Obligations (“CLO”) Risk. CDOs and CLOs
are securities backed by an underlying portfolio of debt and loan obligations, respectively. CDOs and CLOs issue classes or “tranches”
that vary in risk and yield and may experience substantial losses due to actual defaults, decrease of market value due to collateral
defaults and removal of subordinate tranches, market anticipation of
defaults and investor aversion to
CDO and CLO securities as a class. The risks of investing in CDOs and CLOs depend largely on the tranche invested in and the type
of the underlying debts and loans in the tranche of the CDO or CLO, respectively, in which the Fund invests. The risks of investing
in CDOs and CLOs depend largely on the tranche held by the Fund and the types of underlying debts and loans in such tranche of
the CDO or CLO, respectively. The risks of CDOs and CLOs will be greater if the Fund invests in CDOs and CLOs that hold debt or
loans of uncreditworthy borrowers or if the Fund holds subordinate tranches of the CDO or CLO that absorb losses from the defaults
before senior tranches. CDOs and CLOs also carry risks including, but not limited to, interest rate risk and credit risk.
Changing
Fixed Income Market Conditions Risk. Following the financial crisis that began in 2007, the Board of Governors of the Federal
Reserve System (the “Federal Reserve”) attempted to support the U.S. economic recovery by keeping the federal funds
rate at a low level. The Federal Reserve has raised the federal funds rate and may continue to do so. Further interest rate
increases could cause the value of the Fund that invests in fixed income securities to decrease.
Federal Reserve policy changes may expose fixed-income and related markets to heightened volatility and may reduce liquidity for
certain Fund investments, which could cause the value of the Fund’s investments and share price to decline. If the Fund invests
in derivatives tied to fixed-income markets, the Fund may be more substantially exposed to these risks than the Fund that does
not invest in derivatives. To the extent the Fund experiences high redemptions because of these policy changes, the Fund may experience
increased portfolio turnover, which will increase the costs the Fund incurs and may lower its performance. Furthermore, if rising
interest rates cause the Fund to lose enough value, the Fund could also face increased shareholder redemptions, which could force
the Fund to liquidate investments at disadvantageous times or prices, therefore adversely affecting the Fund. In addition, decreases
in fixed income dealer market-making capacity may persist in the future, potentially leading to decreased liquidity and increased
volatility in the fixed income markets.
Collateralized Bond Obligation Risk.
The pool of securities underlying collateralized bond obligations is typically separated in groupings called tranches representing
different degrees of credit quality. The higher quality tranches have greater degrees of protection and pay lower interest rates.
The lower quality tranches carry greater risk and pay higher interest rates.
Commodity Risk. The Fund’s
exposure to the commodities futures markets may subject the Fund to greater volatility than investments in traditional securities.
The value of commodity-linked derivative instruments, commodity-based exchange traded trusts and commodity-based exchange traded
funds and notes may be affected by changes in overall market movements, commodity index volatility, changes in interest rates,
or sectors affecting a particular industry or commodity, such as drought, floods, weather, livestock disease, embargoes, tariffs,
and international economic, political and regulatory developments.
Conflict of Interest - Advisors Risk.
The Advisor and other individuals associated with the Advisor may have compensation and/or other arrangements that may be in
conflict to the interests of the Fund.
Conflict of Interest - Portfolio
Manager Risk. Actual or apparent conflicts of interest may arise when a portfolio manager has day-to-day management responsibilities
with respect to more than one fund or other accounts. More specifically, portfolio managers who manage multiple funds are presented
with the following potential conflicts:
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The management of multiple accounts may result in a portfolio manager devoting unequal time and
attention to the management of each account. The management of multiple funds and accounts also may give rise to potential conflicts
of interest if the funds and accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must
allocate his time and investment ideas across multiple funds and accounts.
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With respect to securities transactions for the Fund, the Advisor determines which broker to use
to execute each order, consistent with the duty to seek best execution of the transaction. The portfolio manager may
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execute transactions for another
fund or account that may adversely impact the value of securities held by the Fund. Securities selected for funds or accounts other
than the Fund may outperform the securities selected for the Fund.
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The appearance of a conflict of interest may arise where the Advisor has an incentive, such as
a performance-based management fee. The management of personal accounts may give rise to potential conflicts of interest; there
is no assurance that the Fund’s code of ethics will adequately address such conflicts. One of the portfolio manager's numerous
responsibilities is to assist in the sale of Fund shares. Because the portfolio manager’s compensation is indirectly linked
to the sale of Fund shares, they may have an incentive to devote time to marketing efforts designed to increase sales of Fund shares
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The Advisor has adopted a code of ethics that, among other things, permits personal trading by
employees under conditions where it has been determined that such trades would not adversely impact client accounts. Nevertheless,
the management of personal accounts may give rise to potential conflicts of interest, and there is no assurance that these codes
of ethics will adequately address such conflicts.
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Convertible Securities Risk.
Convertible bonds are hybrid securities that have characteristics of both bonds and common stocks and are subject to fixed income
security risks and conversion value-related equity risk. Convertible bonds are similar to other fixed-income securities because
they usually pay a fixed interest rate and are obligated to repay principal on a given date in the future. The market value of
fixed-income securities tends to decline as interest rates increase. Convertible bonds are particularly sensitive to changes in
interest rates when their conversion to equity feature is small relative to the interest and principal value of the bond. Convertible
issuers may not be able to make principal and interest payments on the bond as they become due. Convertible bonds may also be subject
to prepayment or redemption risk. If a convertible bond is called for redemption, the Fund will be required to surrender the security
for redemption, convert it into the issuing company's common stock or cash at a time that may be unfavorable to the Fund. Convertible
securities have characteristics similar to common stocks especially when their conversion value is greater than the interest and
principal value of the bond. The price of equity securities may rise or fall because of economic or political changes. Stock prices
in general may decline over short or even extended periods of time. Market prices of equity securities in broad market segments
may be adversely affected by a prominent issuer having experienced losses or by the lack of earnings or such an issuer's failure
to meet the market's expectations with respect to new products or services, or even by factors wholly unrelated to the value or
condition of the issuer, such as changes in interest rates. When a convertible bond's value is more closely tied to its conversion
to stock feature, it is sensitive to the underlying stock's price.
Counterparty
Risk. The Fund may engage in transactions in securities and financial instruments that involve counterparties. Counterparty
risk is the risk that a counterparty (the other party to a transaction or an agreement or the party with whom the Fund executes
transactions) to a transaction with the Fund may be unable or unwilling to make timely principal, interest or settlement payments,
or otherwise honor its obligations. To limit the counterparty risk associated with such transactions, the Fund conducts
business only with financial institutions judged by the Advisor to present acceptable credit risk.
Credit Default Swap Risk. Credit default
swaps ("CDS") are typically two-party financial contracts that transfer credit exposure between the two parties. Under
a typical CDS, one party (the "seller") receives pre-determined periodic payments from the other party (the "buyer").
The seller agrees to make compensating specific payments to the buyer if a negative credit event occurs, such as the bankruptcy
or default by the issuer of the underlying debt instrument. The use of CDS involves investment techniques and risks different from
those associated with ordinary portfolio security transactions, such as potentially heightened counterparty, concentration and
exposure risks.
Credit Risk. Credit risk is
the risk that an issuer of a security will fail to pay principal and interest in a timely manner, reducing the Fund’s total
return. In addition, the credit quality of fixed income securities held by the Fund may be lowered if an issuer's financial condition
changes. The issuer of a fixed income security may also default
on its obligations. The Fund’s
exposure to credit risk may be increased through its investments in high-yield securities commonly known as “junk bonds.”
Credit risk may be substantial for the Fund.
Credit Risk (for Floating Rate Loans).
Credit risk is the risk that the issuer of a security and other instrument will not be able to make principal and interest payments
when due. The value of the Fund’s shares, and the Fund’s ability to pay dividends, is dependent upon the performance
of the assets in its portfolio. Prices of the Fund’s investments can fall if the actual or perceived financial health of
the borrowers on, or issuers of, such investments deteriorates, whether because of broad economic or issuer-specific reasons. In
severe cases, the borrower or issuer could be late in paying interest or principal, or could fail to pay altogether.
In the event a borrower fails to pay
scheduled interest or principal payments on an investment held by the Fund, the Fund will experience a reduction in its income
and a decline in the market value of such investment. This will likely reduce the amount of dividends paid by the Fund and likely
lead to a decline in the net asset value and market price of the Fund’s shares.
The Fund may invest in floating rate
loans that are senior in the capital structure of the borrower or issuer, and that are secured with specific collateral. Loans
that are senior and secured generally involve less risk than unsecured or subordinated debt and equity instruments of the same
borrower because the payment of principal and interest on senior loans is an obligation of the borrower that, in most instances,
takes precedence over the payment of dividends or the return of capital to the borrower’s shareholders, and payments to bond
holders; and because of the collateral supporting the repayment of the debt instrument. However, the value of the collateral may
not equal the Fund’s investment when the debt instrument is acquired or may decline below the principal amount of the debt
instrument subsequent to the Fund’s investment. Also, to the extent that collateral consists of stocks of the borrower, or
its subsidiaries or affiliates, the Fund bears the risk that the stocks may decline in value, be relatively illiquid, or may lose
all or substantially all of their value, causing the Fund’s investment to be undercollateralized. Therefore, the liquidation
of the collateral underlying a floating rate loan in which the Fund has invested, may not satisfy the borrower’s obligation
to the Fund in the event of non-payment of scheduled interest or principal, and the collateral may not be able to be readily liquidated.
In the event of the bankruptcy of a
borrower or issuer, the Fund could experience delays and limitations on its ability to realize the benefits of the collateral securing
the Fund’s investment. Among the risks involved in a bankruptcy are assertions that the pledge of collateral to secure a
loan constitutes a fraudulent conveyance or preferential transfer that would have the effect of nullifying or subordinating the
Fund’s rights to the collateral.
The floating rate debt in which the
Fund invests may be generally rated lower than investment-grade credit quality, i.e., rated lower than “Baa3” by Moody’s
Investors Service, Inc. (“Moody’s”) or “BBB-” by Standard & Poor’s Ratings Services (“S&P”),
or have been made to borrowers who have issued debt securities that are rated lower than investment-grade in quality or, if unrated,
would be rated lower than investment-grade credit quality. A fund’s investments in lower than investment-grade floating rate
loans will generally be rated at the time of purchase between “B3” and “Ba1” by Moody’s, “B-”
and “BB+” by S&P or, if not rated, would be of similar credit quality. Investment decisions for the Fund will be
based largely on the credit analysis performed by the Advisor, and not entirely on rating agency evaluation. This analysis may
be difficult to perform. Information about a loan and its borrower generally is not in the public domain. Many borrowers have not
issued securities to the public and are not subject to reporting requirements under federal securities laws. Generally, however,
borrowers are required to provide financial information to lenders and information may be available from other loan market participants
or agents that originate or administer loans.
Currency Risk. Currency trading
involves significant risks, including market risk, interest rate risk, country risk, counterparty credit risk and short sale risk.
Market risk results from the price movement of foreign currency values in response to shifting market supply and demand. Since
exchange rate changes can readily move in one direction, a currency position carried overnight or over a number of days may involve
greater risk than one carried a few
minutes or hours. Interest rate risk
arises whenever a country changes its stated interest rate target associated with its currency. Country risk arises because virtually
every country has interfered with international transactions in its currency. Interference has taken the form of regulation of
the local exchange market, restrictions on foreign investment by residents or limits on inflows of investment funds from abroad.
Restrictions on the exchange market or on international transactions are intended to affect the level or movement of the exchange
rate. This risk could include the country issuing a new currency, effectively making the "old" currency worthless. The
Fund may also take short positions, through derivatives, if the Advisor believes the value of a currency is likely to depreciate
in value. A "short" position is, in effect, similar to a sale in which the Fund sells a currency it does not own but,
has borrowed in anticipation that the market price of the currency will decline. The Fund must replace a short currency position
by purchasing it at the market price at the time of replacement, which may be more or less than the price at which the Fund took
a short position in the currency.
Cybersecurity Risk. The computer systems,
networks and devices used by the Fund and its service providers to carry out routine business operations employ a variety of protections
designed to prevent damage or interruption from computer viruses, network failures, computer and telecommunication failures, infiltration
by unauthorized persons and security breaches. Despite the various protections utilized by the Fund and its service providers,
systems, networks, or devices potentially can be breached. The Fund and its shareholders could be negatively impacted as a result
of a cybersecurity breach.
Cybersecurity breaches can include unauthorized
access to systems, networks, or devices; infection from computer viruses or other malicious software code; and attacks that shut
down, disable, slow, or otherwise disrupt operations, business processes, or website access or functionality. Cybersecurity breaches
may cause disruptions and impact the Fund’s business operations, potentially resulting in financial losses; interference
with the Fund’s ability to calculate its NAV; impediments to trading; the inability of the Fund, the Advisor and other service
providers to transact business; violations of applicable privacy and other laws; regulatory fines, penalties, reputational damage,
reimbursement or other compensation costs, or additional compliance costs; as well as the inadvertent release of confidential information.
Similar adverse consequences could result
from cybersecurity breaches affecting issuers of securities in which the Fund invests; counterparties with which the Fund engages
in transactions; governmental and other regulatory authorities; exchange and other financial market operators, banks, brokers,
dealers, insurance companies, and other financial institutions (including financial intermediaries and service providers for the
Fund’s shareholders); and other parties. In addition, substantial costs may be incurred by these entities in order to prevent
any cybersecurity breaches in the future.
Dividend Yield Risk. While the
Fund may hold securities of companies that have historically paid a dividend, those companies may reduce or discontinue their dividends,
thus reducing the yield of the Fund. Lower priced securities in the Fund may be more susceptible to these risks. Past dividend
payments are not a guarantee of future dividend payments. Also, the market return of high dividend yield securities, in certain
market conditions, may be worse than the market return of other investment strategies or the overall stock market.
Duration Risk. Longer-term
securities may be more sensitive to interest rate changes. Given the recent, historically low interest rates and the potential
for increases in those rates, a heightened risk is posed by rising interest rates to a fund whose portfolio includes longer-term
fixed income securities. Effective duration estimates price changes for relatively small changes in rates. If rates rise significantly,
effective duration may tend to understate the drop in a security’s price. If rates drop significantly, effective duration
may tend to overstate the rise in a security’s price. Duration should not be confused with maturity. The maturity of a fixed
income security is a measure of the amount of time left until the security “matures” or repays its face value. In contrast,
duration measures the price sensitivity of a fixed income security to changes in interest rates rather than the amount of time
remaining to maturity. Longer duration tends to result in greater volatility and a greater sensitivity to interest rate changes.
For example, a five
year duration means that the fixed
income security will decrease in value by 5% if interest rates rise 1% and increase in value by 5% if interest rates fall 1%.
Emerging Markets Risk. The Fund
may invest in countries with newly organized or less developed securities markets. There are typically greater risks involved in
investing in emerging markets securities. Generally, economic structures in these countries are less diverse and mature than those
in developed countries and their political systems tend to be less stable. Emerging market economies may be based on only a few
industries, therefore security issuers, including governments, may be more susceptible to economic weakness and more likely to
default. Emerging market countries also may have relatively unstable governments, weaker economies, and less-developed legal systems
with fewer security holder rights. Investments in emerging markets countries may be affected by government policies that restrict
foreign investment in certain issuers or industries. The potentially smaller size of their securities markets and lower trading
volumes can make investments relatively illiquid and potentially more volatile than investments in developed countries, and such
securities may be subject to abrupt and severe price declines. Due to this relative lack of liquidity, the Fund may have to accept
a lower price or may not be able to sell a portfolio security at all. An inability to sell a portfolio position can adversely affect
the Fund's value or prevent the Fund from being able to meet cash obligations or take advantage of other investment opportunities.
Energy and Infrastructure Industry Risk.
Companies in the energy and infrastructure industry are subject to many risks that can negatively impact the revenues and viability
of companies in this industry. These risks include, but are not limited to, commodity price volatility risk, supply and demand
risk, reserve and depletion risk, operations risk, regulatory risk, environmental risk, terrorism risk and the risk of natural
disasters.
Exchange Traded Note (“ETN”)
Risk. Similar to ETFs, owning an ETN generally reflects the risks of owning the assets that comprise the underlying market
benchmark or strategy that the ETN is designed to reflect. ETNs also are subject to issuer and fixed income risk. In addition,
ETNs are subject to counterparty risk, which is the risk that the broker-dealer or bank that issues the notes will not fulfill
its contractual obligation to complete the transaction with the Fund. ETNs constitute general unsecured contractual obligations
of the banks or broker-dealers that issue them, and the Fund is relying on the creditworthiness of such banks or broker-dealers.
ETNs that are linked to market volatility are subject to default risk of the issuer; may not provide an effective hedge as historical
correlation trends between the reference volatility index or measure and other asset classes may not continue or may reverse, limiting
or eliminating any potential hedging effect; may become mispriced or improperly valued when compared to expectations and may not
produce the desired investment results; may have tracking risk if the ETN does not move in step with its reference index; and may
become illiquid.
Extension Risk. Extension risk
is the risk that if interest rates rise, repayments of principal on certain debt securities, including, but not limited to, floating
rate loans and mortgage-related securities, may occur at a slower rate than expected and the expected maturity of those securities
could lengthen as a result. Securities that are subject to extension risk generally have a greater potential for loss when prevailing
interest rates rise, which could cause their values to fall sharply.
Fixed Income Securities Risk. The
value of the Fund’s fixed income securities will fluctuate with changes in interest rates. Typically, a rise in interest
rates causes a decline in the value of fixed income securities owned by the Fund. In general, the market price of fixed income
securities with longer maturities will increase or decrease more in response to changes in interest rates than shorter-term securities.
Other risk factors include credit risk (the risk that the debtor may default), extension risk (an issuer may exercise its right
to repay principal on a fixed rate obligation held by the Fund later than expected), and prepayment risk (the risk that the debtor
may pay its obligation early, reducing the amount of interest payments). Recently, interest rates have been historically low and
interest rate risk may be heightened. Other risk factors include credit risk (the risk that the debtor may default). Lowered credit
ratings may cause a drop in a fixed income security’s price and are associated with greater risk of default on interest and
principal payments. Certain fixed income securities may be paid off early when the issuer can repay the principal prior to a security’s
maturity. If interest rates are falling, the Fund may have to reinvest the
unanticipated proceeds at lower interest
rates, resulting in a decline in the Fund’s income. If interest rates rise, repayments of principal on certain fixed income
securities may occur at a slower rate than expected and the expected maturity of those securities could lengthen as a result, which
reduces the Fund’s ability to reinvest at higher rates. These risks could affect the value of a particular investment by
the Fund, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments.
Floating Rate Loans Risk. The
Fund may invest in floating rate loans that are senior in the capital structure of the borrower or issuer, and that are secured
with specific collateral. Loans that are senior and secured generally involve less risk than unsecured or subordinated debt and
equity instruments of the same borrower because the payment of principal and interest on senior loans is an obligation of the borrower
that, in most instances, takes precedence over the payment of dividends or the return of capital to the borrower’s shareholders,
and payments to bond holders; and because of the collateral supporting the repayment of the debt instrument. However, the value
of the collateral may not equal the Fund’s investment when the debt instrument is acquired or may decline below the principal
amount of the debt instrument subsequent to the Fund’s investment. Also, to the extent that collateral consists of stocks
of the borrower, or its subsidiaries or affiliates, the Fund bears the risk that the stocks may decline in value, be relatively
illiquid or may lose all or substantially all of their value, causing the Fund’s investment to be under-collateralized. Therefore,
the liquidation of the collateral underlying a floating rate loan in which the Fund has invested, may not satisfy the borrower’s
obligation to the Fund in the event of non-payment of scheduled interest or principal, and the collateral may not be able to be
readily liquidated.
In the event of the bankruptcy of a
borrower or issuer, the Fund could experience delays and limitations on its ability to realize the benefits of the collateral securing
the Fund’s investment. Among the risks involved in a bankruptcy are assertions that the pledge of collateral to secure a
loan constitutes a fraudulent conveyance or preferential transfer that would have the effect of nullifying or subordinating the
Fund’s rights to the collateral.
Floating rate loans are also subject
to interest rate risk arising from changes in short-term market interest rates. If short-term market interest rates fall, the yield
on the Fund’s shares will also fall. Conversely, when short-term market interest rates rise, because of the lag between changes
in such short-term rates and the resetting of the floating rates on the floating rate debt in the Fund’s portfolio, the impact
of rising rates will be delayed to the extent of such lag. The impact of market interest rate changes on the Fund’s yield
will also be affected by whether, and the extent to which, the floating rate debt in the Fund’s portfolio is subject to floors
on the LIBOR base rate on which interest is calculated for such loans (a “LIBOR floor”). So long as the base rate for
a loan remains under the LIBOR floor, changes in short-term interest rates will not affect the yield on such loans. In addition,
to the extent that the interest rate spreads on floating rate debt in the Fund’s portfolio experience a general decline,
the yield on the Fund’s shares will fall and the value of the Fund’s assets may decrease, which will cause the Fund’s
net asset value to decrease.
The floating rate debt in which the
Fund invests may be generally rated lower than investment-grade credit quality, i.e., rated lower than “Baa3” by Moody’s
Investors Service, Inc. (“Moody’s”) or “BBB-” by S&P Global Ratings (“S&P”),
or have been made to borrowers who have issued debt securities that are rated lower than investment-grade in quality or, if unrated,
would be rated lower than investment-grade credit quality. Investment decisions for the Fund will be based largely on the credit
analysis performed by the Advisor, and not entirely on rating agency evaluation. This analysis may be difficult to perform. Information
about a loan and its borrower generally is not in the public domain. Many borrowers have not issued securities to the public and
are not subject to reporting requirements under federal securities laws. Generally, however, borrowers are required to provide
financial information to lenders and information may be available from other loan market participants or agents that originate
or administer loans.
Foreign Exchanges Risk. Neither
existing CFTC regulations nor regulations of any other U.S. governmental agency apply to derivative transactions on foreign markets.
Some of these foreign markets, in contrast to U.S. exchanges, are so-called principals’ markets in which performance is the
responsibility only of the individual
counterparty with whom the trader has
entered into a commodity interest transaction and not of the exchange or clearing corporation. In these kinds of markets, there
is risk of bankruptcy or other failure or refusal to perform by the counterparty.
Foreign Investment Risk. To the
extent the Fund invest in foreign securities, the Fund could be subject to greater risks because the Fund’s performance may
depend on issues other than the performance of a particular company or U.S. market sector. Changes in foreign economies and political
climates are more likely to affect the Fund than they would a mutual fund that invests exclusively in U.S. companies. The value
of foreign securities is also affected by the value of the local currency relative to the U.S. dollar. There may also be less government
supervision of foreign markets, resulting in non-uniform accounting practices and less publicly available information. The values
of foreign investments may be affected by changes in exchange control regulations, application of foreign tax laws (including withholding
tax), changes in governmental administration or economic or monetary policy (in this country or abroad) or changed circumstances
in dealings between nations. In addition, foreign brokerage commissions, custody fees and other costs of investing in foreign securities
are generally higher than in the United States. Investments in foreign issuers could be affected by other factors not present in
the United States, including expropriation, armed conflict, confiscatory taxation, and potential difficulties in enforcing contractual
obligations. As a result, the Fund may be exposed to greater risk and will be more dependent on the Advisor’s ability to
assess such risk than if the Fund invested solely in more developed countries.
Foreign Currency Risk. Currency
trading risks include market risk, credit risk and country risk. Market risk results from adverse changes in exchange rates in
the currencies the Fund is long or short. Credit risk results because a currency-trade counterparty may default. Country risk arises
because a government may interfere with transactions in its currency.
Forwards Risk. Foreign currency
forward contract are a type of derivative contract whereby the Fund may agree to buy or sell a country's or region's currency at
a specific price on a specific date, usually 30, 60, or 90 days in the future. These contracts are subject to the risk of political
and economic factors applicable to the countries issuing the underlying currencies and may fall in value due to foreign market
downswings or foreign currency value fluctuations. Forward foreign currency contracts are individually negotiated and privately
traded so they are dependent upon the creditworthiness of the counterparty and subject to counterparty risk. The Fund's investment
or hedging strategies may not achieve their objective. Derivative prices are highly volatile and may fluctuate substantially during
a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to:
changing supply and demand relationships; government programs and policies; national and international political and economic events,
changes in interest rates, inflation and deflation and changes in supply and demand relationships. Derivative contracts ordinarily
have leverage inherent in their terms and low margin deposits normally required in trading derivatives permit a high degree of
leverage. Accordingly, a relatively small price movement may result in an immediate and substantial loss to the Fund. The use of
leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so in order to satisfy
its obligations or to meet collateral segregation requirements. The use of leveraged derivatives can magnify the Fund's potential
for gain or loss and, therefore, amplify the effects of market volatility on the Fund's share price.
Geographic Concentration Risk. The Fund
may be particularly susceptible to economic, political, regulatory or other events or conditions affecting countries within the
specific geographic regions in which the Fund invests. Currency devaluations could occur in countries that have not yet experienced
currency devaluation to date, or could continue to occur in countries that have already experienced such devaluations. As a result,
the Fund's net asset value may be more volatile than a more geographically diversified fund.
Growth Stock Risk. "Growth"
stocks can react differently to issuer, political, market, and economic developments than the market as a whole and other types
of stocks. "Growth" stocks also tend to be more expensive relative to their earnings or assets compared to other types
of stocks. As a result, "growth" stocks tend to be sensitive to changes in their earnings and more volatile in price
than the stock market as a whole. In addition, companies that the Advisor
or Advisor believes have significant
growth potential are often companies with new, limited or cyclical product lines, markets or financial resources and the management
of such companies may be dependent upon one or a few key people. The stocks of such companies can therefore be subject to more
abrupt or erratic market movements than stocks of larger, more established companies or the stock market in general.
Income Risk. The Fund’s distributions
to shareholders may decline when prevailing interest rates fall, when the Fund experiences deterioration of the underlying debt
securities it holds, or when the Fund realizes a loss upon the sale of a debt security.
Index-Linked Derivative Securities
Risk. If the derivative is linked to the performance of an index, it will be subject to the risks associated with changes in
that index.
Inflation-Indexed
Bond Risk. Inflation-indexed bonds are fixed income securities whose principal values are periodically adjusted according to
a measure of inflation. If the index measuring inflation falls, the principal value of inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will
be reduced. Repayment of the original bond principal upon maturity (as adjusted for inflation) is guaranteed in the case of U.S.
Treasury inflation indexed bonds. For bonds that do not provide a similar guarantee, the adjusted principal value of the bond repaid
at maturity may be less than the original principal. With regard to municipal inflation-indexed bonds and certain corporate inflation-indexed
bonds, the inflation adjustment is reflected in the semi-annual coupon payment. As a result, the principal value of municipal inflation-indexed
bonds and such corporate inflation indexed bonds does not adjust according to the rate of inflation. The value of inflation-indexed
bonds is expected to change in response to changes in real interest rates. Real interest rates are tied to the relationship between
nominal interest rates and the rate of inflation. If nominal interest rates increase at a faster rate than inflation, real interest
rates may rise, leading to a decrease in value of inflation-indexed bonds. Inflation-indexed bonds may cause a potential cash flow
mismatch to investors, because an increase in the principal amount of an inflation-indexed bond will be treated as interest income
currently subject to tax at ordinary income rates even though investors will not receive repayment of principal until maturity.
If the Fund invests in such bonds, it will be required to distribute such interest income in order to qualify for treatment as
a regulated investment company and eliminate the Fund-level tax, without a corresponding receipt of cash, and therefore may be
required to dispose of portfolio securities at a time when it may not be desirable.
Inflation Protected Securities Risk.
Inflation-protected debt securities tend to react to changes in real interest rates. Real interest rates represent nominal (stated)
interest rates reduced by the expected impact of inflation. In general, the price of an inflation-protected debt security can fall
when real interest rates rise, and can rise when real interest rates fall. Interest payments on inflation-protected debt securities
can be unpredictable and will vary as the principal and/or interest is adjusted for inflation.
Interest Rate Risk. Interest rate risk
is the risk that bond prices overall, including the prices of securities held by the Fund, will decline over short or even long
periods of time due to rising interest rates. Bonds with longer maturities tend to be more sensitive to interest rates than bonds
with shorter maturities. For example, if interest rates go up by 1.0%, the price of a 4% coupon bond will decrease by approximately
1.0% for a bond with 1 year to maturity and approximately 4.4% for a bond with 5 years to maturity. The maturity and effective
duration of the Fund’s investment portfolio may vary materially, from time to time, and there is no assurance that the Fund
will achieve or maintain any particular target maturity or effective duration of its investment portfolio.
Inverse ETF and ETN Risk. Investing
in inverse ETFs and ETNs may result in increased volatility due to the ETF’s or ETN’s possible use of short sales of
securities and derivatives such as options and futures. The use of leverage by an ETF or ETN increases risk to the Fund. The more
the Fund invests in leveraged instruments, the more the leverage will magnify any gains or losses on those investments. During
periods of increased volatility, inverse ETFs and ETNs may not perform in the manner they are designed.
Investment Style Risk. The particular
type of investments in which the Fund focuses (such as large-capitalization stocks or growth stocks) may underperform other asset
classes or the overall market. Individual market segments such as the large-cap, mid-cap and small-cap U.S. equity market segments
tend to go through cycles of performing better or worse than other types of securities. These periods may last as long as several
years. Additionally, a particular market segment could fall out of favor with investors, causing the Fund that focuses on that
market segment to underperform those that favor other kinds of securities.
Issuer Specific Risk. The value of a
specific security can be more volatile than the market as a whole and can perform differently from the value of the market as a
whole. The value of securities of smaller issuers can be more volatile than those of larger issuers. The value of certain types
of securities can be more volatile due to increased sensitivity to adverse issuer, political, regulatory, market, or economic developments.
Certain managers may be dependent upon a single individual or small group of individuals, the loss of which could adversely affect
their success.
Junk Bond Risk. Lower-quality
bonds, known as “high yield” or “junk” bonds are considered to be speculative with respect to the issuer’s
ability to pay interest and principal when due and present a significant risk for loss of principal and interest. These bonds offer
the potential for higher return, but also involve greater risk than bonds of higher quality, including an increased possibility
that the bond’s issuer, obligor or guarantor may not be able to make its payments of interest and principal (credit quality
risk). If that happens, the value of the bond may decrease, and the Fund’s share price may decrease and its income distribution
may be reduced. An economic downturn or period of rising interest rates (interest rate risk) could adversely affect the market
for these bonds and reduce the Fund’s ability to sell the bonds in its portfolio (liquidity risk). Such securities may also
include “Rule 144A” securities, which are subject to resale restrictions. The lack of a liquid market for these bonds
could decrease the value of the Fund’s portfolio and net asset value per share.
Leverage Risk. Using derivatives can
create leverage, which can amplify the effects of market volatility on the Fund’s share price and make the Fund’s returns
more volatile. The use of leverage may cause the Fund to liquidate portfolio positions when it would not be advantageous to do
so in order to satisfy its obligations. The use of leverage may also cause the Fund to have higher expenses than those of funds
that do not use such techniques.
Leveraged ETF Risk. Investing
in leveraged ETFs will amplify the Fund’s gains and losses. Most leveraged ETFs “reset” daily. Due to the effect
of compounding, their performance over longer periods of time can differ significantly from the performance of their underlying
index or benchmark during the same period of time.
Liquidity Risk.
Liquidity risk exists when particular investments of the Fund would be difficult to purchase or sell, possibly preventing the Fund
from selling such illiquid securities at an advantageous time or price, or possibly requiring the Fund to dispose of other investments
at unfavorable times or prices in order to satisfy its obligations. Liquid securities can become illiquid due to political, economic
or issuer specific events; supply/demand imbalances; changes in a specific market’s size or structure, including the number
of participants; or overall market disruptions.
Litigation Risk. The Fund may
be named in a lawsuit despite no wrongdoing by the Fund, its Advisor or any other service provider to the Fund. The defense of
a lawsuit may detrimentally impact the Fund and its shareholders, including incurring legal defense cost, regulatory costs and
increased insurance premiums.
Loan Risk. Investments in bank
loans may subject the Fund to heightened credit risks because such loans tend to be highly leveraged and potentially more susceptible
to the risks of interest deferral, default and/or bankruptcy. Senior floating rate loans are often rated below investment grade,
but may also be unrated. The risks associated with these loans can be similar to the risks of below investment grade fixed income
instruments. An economic downturn would generally lead to a higher non-payment rate, and a senior floating rate loan may lose significant
market value before a default occurs.
Moreover, any specific collateral used to secure a senior floating rate loan may decline in value or become illiquid, which would
adversely affect the loan’s value. Unlike the securities markets, there is no central clearinghouse for loan trades, and
the loan market has not established enforceable settlement standards or remedies for failure to settle. Therefore, portfolio transactions
in loans may have uncertain settlement time periods. Senior floating rate loans are subject to a number of risks described elsewhere
in this Prospectus, including liquidity risk and the risk of investing in below-investment grade fixed income instruments.
Machinery and Electrical Equipment
Industry Risk. The machinery and electrical equipment industries can be significantly affected by general economic trends,
including employment, economic growth, and interest rates; changes in consumer sentiment and spending; overall capital spending
levels, which are influenced by an individual company’s profitability and broader factors such as interest rates and foreign
competition; commodity prices; technical obsolescence; labor relations legislation; government regulation and spending; import
controls; and worldwide competition. Companies in these industries also can be adversely affected by liability for environmental
damage, depletion of resources, and mandated expenditures for safety and pollution control.
Market Volatility-Linked ETFs Risk.
ETFs that are linked to market volatility have the risks associated with investing in futures.
Medium Capitalization Company Risk.
To the extent the Fund invests in the stocks of mid-sized companies, the Fund may be subject to additional risks. The earnings
and prospects of these companies are more volatile than larger companies. These companies may experience higher failure rates than
larger companies. Mid-sized companies normally have a lower trading volume than larger companies, which may tend to make their
market price fall more disproportionately than larger companies in response to selling pressures. Mid-sized companies may also
have limited markets, product lines or financial resources and may lack management experience.
MBS and CMO Risk. MBS and CMOs
are subject to credit risk because underlying loan borrowers may default. MBS and CMO default rates tend to be sensitive to overall
economic conditions and to localized property vacancy rates and prices. Borrower default rates may be significantly higher than
estimated. Certain individual securities may be more sensitive to default rates because payments may be subordinated to other securities
of the same issuer. The Advisor's assessment, or a rating agency’s assessment, of borrower credit quality, default rates
and loss rates may prove to be overly optimistic. Additionally, MBS and CMOs are subject to prepayment risk because the underlying
loans held by the issuers may be paid off prior to maturity at faster or lower rates than expected. The value of these securities
may go down as a result of changes in prepayment rates on the underlying mortgages or loans. During periods of declining interest
rates, prepayment rates usually increases and the Fund may have to reinvest prepayment proceeds at a lower interest rate. CMOs
may be less susceptible to this risk because payment priorities within the CMO may have the effect of a prepayment lock out period.
Micro Capitalization Company Risk.
Micro capitalization companies may be newly formed or have limited product lines, distribution channels and financial and managerial
resources. The risks associated with those investments are generally greater than those associated with investments in the securities
of larger, more established companies. This may cause the Fund’s net asset value to be more volatile when compared to investment
companies that focus only on large capitalization companies.
Generally, securities of micro capitalization
companies are more likely to experience sharper swings in market value and generally are more volatile than larger companies. Micro
capitalization companies may trade in less liquid markets in which it may be more difficult for the Advisor to sell at times and
at prices that the Advisor believes appropriate. Compared to large companies, micro capitalization companies are more likely to
have (i) less information publicly available, (ii) more limited product lines or markets and less mature businesses, (iii) fewer
capital resources, (iv) more limited management depth and (v) shorter operating histories. Further, the equity securities of micro
capitalization companies are often traded over the counter and generally experience a lower trading volume than is typical for
securities that are traded on a national securities exchange. Consequently, the
Fund may be required to dispose of these
securities over a longer period of time (and potentially at less favorable prices) than would be the case for securities of larger
companies, offering greater potential for gains and losses and associated tax consequences.
MLP and MLP-Related Securities Risk.
Investments in MLPs and MLP-related securities involve risks different from those of investing in common stock including risks
related to limited control and limited rights to vote on matters affecting the MLP or MLP-related security, risks related to potential
conflicts of interest between an MLP and the MLP’s general partner, cash flow risks, dilution risks (which could occur if
the MLP raises capital and then invests it in projects whose return fails to exceed the cost of capital raised) and risks related
to the general partner’s limited call right. MLPs and MLP-related securities are generally considered interest-rate sensitive
investments. During periods of interest rate volatility, these investments may not provide attractive returns. Depending on the
state of interest rates in general, the use of MLPs or MLP-related securities could enhance or harm the overall performance of
the Fund.
MLPs do not pay U.S. federal income
tax at the partnership level, subject to the application of certain partnership audit rules. Instead, each partner is allocated
a share of the partnership’s income, gains, losses, deductions and expenses. A change in current tax law or in the underlying
business mix of a given MLP could result in an MLP being treated as a corporation for U.S. federal income tax purposes, which would
result in such MLP being required to pay U.S. federal income tax on its taxable income. The classification of an MLP as a corporation
for U.S. federal income tax purposes would have the effect of reducing the amount of cash available for distribution by the MLP.
Thus, if any of the MLPs owned by the Fund were treated as corporations for U.S. federal income tax purposes, it could result in
a reduction of the value of your investment in the Fund and lower income, as compared to an MLP that is not taxed as a corporation.
Mortgage-Backed Securities Risk.
Mortgage-backed securities represent participating interests in pools of residential mortgage loans, some of which are guaranteed
by the U.S. government, its agencies or instrumentalities. However, the guarantee of these types of securities relates to the principal
and interest payments and not the market value of such securities. In addition, the guarantee only relates to the mortgage-backed
securities held by the Fund and not the purchase of shares of the Fund.
Mortgage-backed securities do not have
a fixed maturity and their expected maturities may vary when interest rates rise or fall. An increased rate of prepayments on the
Fund’s mortgage-backed securities will result in an unforeseen loss of interest income to the Fund as the Fund may be required
to reinvest assets at a lower interest rate. A decreased rate of prepayments lengthens the expected maturity of a mortgage-backed
security, causing the price of the mortgage-backed securities and the Fund’s net asset value per share to fall and making
the mortgage-backed securities more sensitive to interest rate changes. The prices of mortgage-backed securities may decrease more
than prices of other fixed-income securities when interest rates rise. An unexpectedly high rate of defaults on the mortgages held
by a mortgage pool will adversely affect the value of mortgage-backed securities and will result in losses to the Fund. The liquidity
of mortgage-backed securities may change over time. Mortgage-backed securities and other securities issued by participants in housing
and commercial real estate finance, as well as other real estate-related markets have experienced extraordinary weakness and volatility
in certain years.
Mortgage-backed securities issued or
guaranteed by private issuers are also known as “non-agency mortgage-backed securities.” Non-agency mortgage-backed
securities are not subject to the same underwriting requirements as those with government or government-sponsored entity guarantees
and, therefore, mortgage loans underlying privately issued mortgage-related securities may have less favorable collateral, credit
risk or other underwriting characteristics, and wider variances in interest rate, term, size, purpose and borrower characteristics.
The market for non-agency mortgage-backed securities is smaller and less liquid than the market for government-issued mortgage-backed
securities.
Lower-quality notes, such as those considered
"sub-prime" are more likely to default than those considered "prime" by a rating evaluation agency or service
provider. An economic downturn or period of rising interest rates could adversely affect the market for sub-prime notes and reduce
the Fund's ability to sell these securities. The lack of a liquid market for these securities could decrease the Fund's share price.
Additionally, borrowers may seek bankruptcy protection which would delay resolution of security holder claims and may eliminate
or materially reduce liquidity.
Municipal Bond Risk. The value of municipal
bonds that depend on a specific revenue source or general revenue source to fund their payment obligations may fluctuate as a result
of changes in the cash flows generated by the revenue source(s) or changes in the priority of the municipal obligation to receive
the cash flows generated by the revenue source(s). In addition, changes in federal tax laws or the activity of an issuer may adversely
affect the tax-exempt status of municipal bonds. Investments in inverse floating rate securities typically involve greater risk
than investments in municipal bonds of comparable maturity and credit quality and their values are more volatile than municipal
bonds due to the leverage they entail.
Over-the-Counter (“OTC”)
Trading Risk. Certain of the derivatives in which the Fund may invest may be traded (and privately negotiated) in the OTC market.
While the OTC derivatives market is the primary trading venue for many derivatives, it is largely unregulated. As a result and
similar to other privately negotiated contracts, the Fund is subject to counterparty credit risk with respect to such derivative
contracts.
Preferred Stock Risk. The value
of preferred stocks will fluctuate with changes in interest rates. Typically, a rise in interest rates causes a decline in the
value of preferred stock. Preferred stocks are also subject to credit risk, which is the possibility that an issuer of preferred
stock will fail to make its dividend payments. Preferred stock prices tend to move more slowly upwards than common stock prices.
In an issuer bankruptcy, preferred stock holders are subordinate to the claims of debtholders and may receive little or no recovery.
Prepayment Risk. The Fund may
invest in debt securities that may be paid off early when the issuer of a debt security can repay the principal prior to a security’s
maturity. If interest rates are falling, the Fund may have to reinvest the unanticipated proceeds at lower interest rates, resulting
in a decline in the Fund’s income.
Real Estate Risk. The Fund is
subject to the risks of the real estate market as a whole, such as taxation, regulations and economic and political factors that
negatively impact the real estate market and the direct ownership of real estate. These may include decreases in real estate values,
overbuilding, rising operating costs, interest rates and property taxes. In addition, some real estate related investments are
not fully diversified and are subject to the risks associated with financing a limited number of projects.
REIT Risk. Investing in REITs
involves certain unique risks in addition to those associated with the real estate sector generally. REITs whose underlying properties
are concentrated in a particular industry or region are also subject to risks affecting such industries and regions. REITs (especially
mortgage REITs) are also subject to interest rate risks. By investing in REITs through the Fund, a shareholder will bear expenses
of the REITs in addition to Fund expenses. An entity that fails to qualify as a REIT would be subject to a corporate level tax,
would not be entitled to a deduction for dividends paid to its shareholders and would not pass through to its shareholders the
character of income earned by the entity.
Regulatory Risk. Regulatory authorities
in the United States or other countries may adopt rules that restrict the ability of the Fund to fully implement its strategy,
either generally, or with respect to certain securities, industries or countries, which may impact the Fund’s ability to
fully implement its investment strategies. Regulators may interpret rules differently than the Fund or the fund industry generally,
and disputes over such interpretations can increase in legal expenses incurred by the Fund.
Repurchase and Reverse Repurchase
Agreements Risk. The Fund may enter into repurchase agreements in which it purchases a security (known as the "underlying
security") from a securities dealer or bank. In the event of a bankruptcy or other default by the seller of a repurchase agreement,
the Fund could experience delays in liquidating the underlying security. The Fund may also experience losses in the event of a
decline in the value of the underlying security while the Fund is seeking to enforce its rights under the repurchase agreement.
Reverse repurchase agreements involve the sale of securities held by the Fund with an agreement to repurchase the securities at
an agreed-upon price, date and interest payment, and involve the risk that (i) the other party may fail to return the securities
in a timely manner, or at all, and (ii) the market value of assets that are required to be repurchased decline below the purchase
price of the asset that has to be sold, resulting in losses to the Fund.
Restricted Securities Risk. The
Fund may hold securities that are restricted as to resale under the U.S. federal securities laws. There can be no assurance that
a trading market will exist at any time for any particular restricted security. Limitations on the resale of these securities may
prevent the Fund from disposing of them promptly at reasonable prices or at all. The Fund may have to bear the expense of registering
the securities for resale and the risk of substantial delays in effecting the registration. Also, restricted securities may be
difficult to value because market quotations may not be readily available, and the values of restricted securities may have significant
volatility.
Risk Management Risk. The measures
that the Advisor or portfolio manager use to monitor and manage the risks of the Fund may not accomplish the intended results and
the Fund may experience losses significantly greater than expected.
Security Risk. The value of the Fund
may decrease in response to the activities and financial prospects of an individual security in the Fund’s portfolio. The
net asset value of the Fund will fluctuate based on changes in the value of the securities in which the Fund invests. The Fund
may invest in securities that may be more volatile and carry more risk than some other forms of investment. The price of securities
may rise or fall because of economic or political changes. Security prices in general may decline over short or even extended periods
of time. Market prices of securities in broad market segments may be adversely affected by a prominent issuer having experienced
losses, lack of earnings, failure to meet the market’s expectations with respect to new products or services, or even by
factors wholly unrelated to the value or condition of the issuer, such as changes in interest rates.
Short Selling Risk. If a security or
other instrument sold short increases in price, the Fund may have to cover its short position at a higher price than the short
sale price, resulting in a loss. The Fund may have substantial short security positions and must borrow those securities to make
delivery to the buyer. The Fund may not be able to borrow a security that it needs to deliver or it may not be able to close out
a short position at an acceptable price and may have to sell related long positions before it had intended to do so. Thus, the
Fund may not be able to successfully implement its short sale strategy due to limited availability of desired securities or for
other reasons.
The Fund also may be required to pay a commission
and other transaction costs, which would increase the cost of the security sold short. The amount of any gain will be decreased,
and the amount of any loss increased, by the amount of the commission, dividends, interest or expenses the Fund may be required
to pay in connection with the short sale.
Until the Fund replaces a borrowed security,
it is required to maintain a segregated account of cash or liquid assets with a broker or custodian to cover the Fund's short position.
Generally, securities held in a segregated account cannot be sold unless they are replaced with other liquid assets. The Fund's
ability to access the pledged collateral may also be impaired in the event the broker fails to comply with the terms of the contract.
In such instances the Fund may not be able to substitute or sell the pledged collateral. Additionally, the Fund must maintain sufficient
liquid assets (less any additional collateral pledged to the broker), marked-to-market daily, to cover the short sale obligations.
This may limit the Fund's investment flexibility and may cause the Fund to miss favorable trading opportunities due to a lack of
sufficient cash or readily marketable securities. This may also affect the Fund’s ability
to meet redemption requests or other
current obligations. This requirement may also cause the Fund to realize losses on offsetting or terminated derivative contracts
or special transactions.
Because losses on short sales arise
from increases in the value of the security sold short, such losses are theoretically unlimited. By contrast, a loss on a long
position arises from decreases in the value of the security and is limited by the fact that a security's value cannot go below
zero.
Small Capitalization Company Risk. To
the extent the Fund invests in the stocks of smaller-sized companies, the Fund may be subject to additional risks. The earnings
and prospects of these companies are more volatile than larger companies. Smaller-sized companies may experience higher failure
rates than do larger companies. The trading volume of securities of smaller-sized companies is normally less than that of larger
companies and, therefore, may disproportionately affect their market price, tending to make them fall more in response to selling
pressure than is the case with larger companies. Smaller-sized companies may have limited markets, product lines or financial resources
and may lack management experience.
Sovereign Debt Risk. The issuer
of foreign debt or the governmental authorities that control the repayment of the debt may be unable or unwilling to repay principal
or interest when due, and the Fund may have limited recourse in the event of a default. The market prices of sovereign debt, and
the Fund’s net asset value, may be more volatile than prices of U.S. debt obligations and certain emerging markets may encounter
difficulties in servicing their debt obligations.
Structured Note Risk. The Fund
may seek investment exposure to sectors through structured notes that may be exchange traded or may trade in the over the counter
market. These notes are typically issued by banks or brokerage firms, and have interest and/or principal payments which are linked
to changes in the price level of certain assets or to the price performance of certain indices. The value of a structured note
will be influenced by time to maturity, level of supply and demand for this type of note, interest rate and market volatility,
changes in the issuer's credit quality rating, and economic, legal, political, events that affect the industry, and adverse changes
in the index or reference asset to which the payments are linked. In addition, there may be a lag between a change in the value
of the underlying reference asset and the value of the structured note. Structured notes may also be subject to counterparty risk.
The Fund may also be exposed to increased transaction costs when it seeks to sell such notes in the secondary market.
Sub-Prime Mortgage Risk. Lower-quality
notes, such as those considered "sub-prime" are more likely to default than those considered "prime" by a rating
evaluation agency or service provider. An economic downturn or period of rising interest rates could adversely affect the market
for sub-prime notes and reduce the Fund's ability to sell these securities. The lack of a liquid market for these securities could
decrease the Fund's share price. Additionally, borrowers may seek bankruptcy protection which would delay resolution of security
holder claims and may eliminate or materially reduce liquidity.
Volatility Risk. The
Fund may have investments that appreciate or decrease significantly in value of short periods of time. This may cause the Fund’s
net asset value and market price per share to experience significant increases or declines in value over short periods of time,
however, all investments long- or short-term are subject to risk of loss.
Exclusion of Investment Advisor from
Commodity Pool Operator Definition
With respect to the Fund, the Advisor has
claimed an exclusion from the definition of “commodity pool operator” (“CPO”) under the Commodity Exchange
Act (“CEA”) and the rules of the CFTC and, therefore, is not subject to CFTC registration or regulation as a CPO. In
addition, with respect to the Fund, the Advisor is relying upon a related exclusion from the definition of “commodity trading
advisor” (“CTA”) under the CEA and the rules of the CFTC.
The terms of the CPO exclusion require the
Fund, among other things, to adhere to certain limits on its investments in commodity futures, commodity options and swaps, which
in turn include non-deliverable currency forward contracts, as further described in the Fund’s SAI. Because the Advisor and
the Fund intend to comply with the terms of the CPO exclusion, the Fund may, in the future, need to adjust its investment strategies,
consistent with its investment goal, to limit its investments in these types of instruments. The Fund is not intended as a vehicle
for trading in the commodity futures, commodity options, or swaps markets. The CFTC has neither reviewed nor approved the Advisor’s
reliance on these exclusions, or the Fund, its investment strategies or this Prospectus.
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information
(“SAI”) contains information that may be of interest to investors in Day Hagan/Ned Davis Research Smart Sector ETF
(the “Fund”), a series of Strategy Shares (the “Trust”), but that is not included in the Fund’s prospectus
dated January 10, 2020 (the “Prospectus”). This SAI is not a prospectus and is only authorized for distribution when
accompanied or preceded by the Prospectus. This SAI should be read together with the Prospectus. Investors may obtain a free copy
of the Prospectus by writing the Trust at 36 North New York Avenue, Huntington, NY 11743, or by telephoning toll free 1-800-594-7930.
This SAI is also available on the Fund’s website at www.dhfunds.com.
January 10, 2020
TABLE OF CONTENTS
DEFINITIONS
|
4
|
OVERVIEW OF THE TRUST
|
5
|
EXCHANGE LISTING AND TRADING
|
5
|
INVESTMENT PRACTICES
|
6
|
INVESTMENT RISKS
|
21
|
INVESTMENT RESTRICTIONS
|
30
|
MANAGEMENT
|
31
|
SERVICE PROVIDERS
|
36
|
PURCHASE AND REDEMPTION OF CREATION UNITS
|
41
|
BROKERAGE TRANSACTIONS
|
50
|
ADDITIONAL INFORMATION ABOUT THE TRUST
|
52
|
DETERMINATION OF NET ASSET VALUE
|
55
|
TAXES
|
56
|
FINANCIAL STATEMENTS
|
61
|
APPENDIX 1
|
62
|
APPENDIX 2
|
65
|
APPENDIX 3
|
66
|
DEFINITIONS
For convenience, we will use
the following defined terms throughout this SAI.
Defined Term
|
Definition
|
Advisor
|
Day Hagan Asset Management
|
Advisers Act
|
Investment Advisers Act of 1940, as amended.
|
Authorized Participant
|
An entity that has entered a Participant Agreement with the Distributor that has been accepted by the Custodian with respect to the offer and sale of the Fund’s Creation Units and is either a participant in the CNS System or is a DTC Participant.
|
Board
|
Board of Trustees of the Trust.
|
Business Day
|
Any day that the Exchange is open for business. As of the date of this SAI, the Exchange observes the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day (Washington’s Birthday), Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
|
Citi
|
Citi Fund Services Ohio, Inc., the financial administrator, fund accountant, and transfer agent of the Trust.
|
CNS System
|
Continuous Net Settlement System of the NSCC.
|
CNS Participant
|
An entity that participates in the CNS System.
|
Code
|
Internal Revenue Code of 1986, as amended.
|
Creation Unit
|
Block of 25,000 Fund shares.
|
Custodian
|
Citibank, N.A.
|
Distributor
|
Foreside Fund Services, LLC
|
DTC
|
Depository Trust Company.
|
DTC Participant
|
An entity for which DTC holds securities and which has access to the DTC system.
|
ETF
|
Exchange-traded fund.
|
Exchange
|
NYSE Arca, Inc.
|
Fund
|
Day Hagan/Ned Davis Research Smart Sector ETF
|
Independent Trustees
|
Trustees who are not “interested persons” of the Trust, as defined in the 1940 Act.
|
Interested Trustees
|
Trustees who are “interested persons” of the Trust, as defined in the 1940 Act.
|
NAV
|
Net asset value.
|
NRSRO
|
Nationally Recognized Statistical Ratings Organization such as Moody’s Investor Service (“Moody’s”) or S&P Global Ratings (“S&P”).
|
NSCC
|
National Securities Clearing Corporation, a clearing agency registered with the SEC.
|
SEC
|
U.S. Securities and Exchange Commission.
|
Transfer Agent
|
Citi.
|
1933 Act
|
The Securities Act of 1933, as amended.
|
1934 Act
|
The Securities Exchange Act of 1934, as amended.
|
1940 Act
|
The Investment Company Act of 1940, as amended.
|
OVERVIEW
OF THE TRUST
The Trust was organized on September 7,
2010 as a Delaware statutory trust and is registered under the 1940 Act as an open-end management investment company.
The Declaration of Trust permits the Trust
to issue an unlimited number of shares of beneficial interest in one or more series representing interests in separate portfolios
of securities. The Declaration of Trust also permits the Trust to offer two or more classes of shares. Currently, the Trust offers
its shares in several separate series. The Fund is a non-diversified exchange-traded series of the Trust. Additional series may
be created from time to time.
The Fund only offers, sells, and redeems shares
on a continuous basis at NAV in large aggregations or “Creation Units.” The Fund’s shares are not individually
redeemable.
Currently, the Fund’s Creation Unit is
comprised of 25,000 shares. Under the Declaration of Trust, the Board has the unrestricted right and power to alter the number
of shares of the Fund that constitute a Creation Unit. Therefore, in the event of a termination of the Fund, the Board, in its
sole discretion, could determine to permit the Fund’s shares to be individually redeemable. In such circumstances, the Trust
might elect to pay cash redemptions to all shareholders with an “in-kind” election for shareholders owning in excess
of a certain stated minimum amount.
Generally, the Fund sells and redeems Creation
Units on an in-kind basis. Except for the circumstances specified in this SAI (see “Cash Transactions - Generally”
and “Custom Transactions,” below), investors will generally be required to purchase Creation Units by making an in-kind
deposit of specified instruments (“Deposit Instruments”), and shareholders redeeming their shares will generally receive
an in-kind transfer of specified instruments (“Redemption Instruments”). The names and quantities of the instruments
that constitute the Deposit Instruments will be specified by the Fund each day, and these instruments are referred to, in the case
of either a purchase or a redemption, as the “Creation Basket.” If there is a difference between the NAV of a Creation
Unit and the aggregate market value of the Creation Basket exchanged for a Creation Unit, the party conveying instruments with
the lower value will also pay to the other an amount in cash equal to that difference (“Cash Amount”).
The Fund may impose a transaction fee in connection
with the purchase and redemption of its Creation Units. Such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities.
Once “created,” the Fund’s
shares trade in the secondary market at market prices that change throughout the day.
EXCHANGE
LISTING AND TRADING
Shares of the Fund are approved for listing
and trading on the Exchange, subject to notice of issuance, and will be available for purchase and sale through a broker-dealer
at market price on each day that the Exchange is open for business. The market price of the Fund’s shares may trade below,
at, or above the most recently calculated NAV per share of the Fund. As is the case of other publicly traded securities, your purchase
or sale of Fund shares in the secondary market will be subject to brokerage commissions which will be based on negotiated commission
rates at customary levels. The Exchange or another information provider will disseminate, every fifteen seconds during the regular
trading day, an indicative optimized portfolio value (“IOPV”) relating to the Fund. The IOPV calculation is based on
the current value of the Deposit Instruments and the estimated Cash Amount. The IOPV does not necessarily reflect the best possible
valuation of the current portfolio of securities held by the Fund and may not be calculated in the same manner as the NAV. The
IOPV price is based on quotes and closing prices from the portfolio securities’ local market and may not reflect events that
occur subsequent to the local market’s close. Deviations between the IOPV and the market price may occur. Therefore, the
IOPV should not be viewed as a “real-time” update of the Fund’s NAV, which is calculated only once a day. Neither
the Fund, the Advisor, nor any of their affiliates are involved in, or responsible for, the calculation or dissemination of such
IOPVs and make no warranty as to their accuracy.
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 maintains certain
listing standards and requires listed companies like the Fund to continue to comply with such standards while their shares are
available for trading on the Exchange. The Exchange may, but is not required to, remove the shares of the Fund from listing if:
(1) following the initial twelve-month period beginning upon the commencement of trading of the shares, there are fewer than 50
beneficial holders of the shares; (2) the IOPV is no longer calculated or available: or (3) such other event shall occur or condition
exists that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. In addition, the Exchange will
remove the shares from listing and trading upon termination of the Trust or the Fund.
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 is calculated and the trading currency is the
currency in which shares of the Fund are listed and traded on the Exchange.
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.
INVESTMENT
PRACTICES
The Prospectus discusses the Fund’s principal investment strategies.
Below you will find more detail about the types of investments and investment practices permitted by the Fund, as noted in the
preceding table, including those which are not part of the Fund’s principal investment strategy.
EQUITY SECURITIES
Equity securities include both foreign and
domestic common stocks, preferred stocks, exchange-traded funds, other business organizations, real estate investment trusts, and
other securities which the Advisor believes have equity characteristics.
Common Stock
Common stock is a type of equity security which
represents an ownership interest in a corporation (including real estate investment trusts (“REITs”) discussed below)
and the right to a portion of the assets of the corporation in the event of liquidation. This right, however, is subordinate to
that of preferred stockholders and any creditors, including holders of debt issued by a corporation. Owners of common stock are
generally entitled to vote on important matters. A corporation may pay dividends on common stock.
Preferred Stock
Preferred stock is a type of equity security
which represents an ownership interest in a corporation and the right to a portion of the assets of the corporation in the event
of a liquidation. This right, however, is subordinate to that of any creditors, including holders of debt issued by the corporation.
Owners of preferred stock ordinarily do not have voting rights, but are entitled to dividends at a specified rate if the corporation
has the financial ability to pay such dividends.
Exchange-Traded Funds
ETFs are traded on stock exchanges or on
the over-the-counter market at their market price. Certain ETFs track the performance of a designated index or benchmark and invest
in the securities comprising that index or benchmark. Other ETFs do not attempt to track the performance of an index and hold portfolio
securities that are actively managed by their investment advisor. ETFs generally issue and redeem shares in creation units (large
aggregations of shares) at their NAV per share, generally in exchange for: (1) a portfolio of securities that correspond pro rata
to the securities comprising the product’s investment portfolio; and (2) a specified amount of cash.
Generally, shares of ETFs are not individually
redeemable. To redeem, the Fund must accumulate enough shares to reconstitute a creation unit of the ETF. The liquidity of small
holdings of an ETF, therefore, will depend upon the existence of a secondary market.
Interests in Other Business Organizations
Entities such as limited partnerships, limited
liability companies, and companies organized outside the U.S. (see “Foreign Securities” below) may issue securities
comparable to common or preferred stock. Limited partnerships are partnerships consisting of one or more general partners, by whom
the business is conducted, and one or more limited partners who contribute capital to the partnership. Limited liability companies
frequently consist of one or more managing members, by whom the business is conducted, and other members who contribute capital
to the company. Limited partners and members of limited liability companies generally are not liable for the debts of the partnership
beyond their capital contributions or commitments. Limited partners and non-managing members are not involved in the day-to-day
management of the partnership or limited liability company. They receive income and capital gains from the partnership or limited
liability company in accordance with the terms established in the partnership or operating agreement. Typical limited partnerships
and limited liability companies are involved in real estate, oil and gas, and equipment leasing, but they also finance movies,
research and development, and other projects.
For an organization classified as a partnership
under the Code (including most limited partnerships and limited liabilities companies), each item of income, gain, loss, deduction,
and credit is not taxed at the partnership level but flows through with the same character to the partners or members. This allows
the partnership to avoid double taxation.
A master limited partnership (“MLP”)
is a publicly traded limited partnership or limited liability company. MLPs combine the tax advantages of a partnership with the
liquidity of a publicly traded security. MLPs must limit their operations to avoid being taxed as corporations under the Code.
REITs
REITs, or real estate investment trusts, are
pooled investment vehicles which invest primarily in income producing real estate or real estate related loans or interests. REITs
are generally classified as equity REITs, mortgage REITs or a combination of equity and mortgage REITs. Equity REITs invest the
majority of their assets directly in real property and derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling property that has appreciated in value. Mortgage REITs invest the majority of their assets in
real estate mortgages and derive income from the collection of interest payments. The real property and mortgages serving as investment
vehicles for REITs may be either residential or commercial in nature and may include healthcare facilities. Similar to investment
companies, REITs are not taxed on income distributed to shareholders provided they comply with several requirements of the Code.
Such tax requirements may limit a REIT’s ability to respond to changes in the commercial real estate market.
FIXED INCOME SECURITIES
Fixed income securities include convertible
securities (other than preferred stock), corporate debt securities, money market instruments, U.S. Government securities, and zero-coupon
securities, which provide a stream of fixed payments to the holder.
Convertible Securities
Convertible securities include certain fixed
income securities that may be exchanged or converted into a predetermined number of shares of an issuer’s underlying common
stock at the option of the holder during a specified period. Convertible securities may take the form of convertible preferred
stock, convertible bonds or debentures, units consisting of “usable” bonds and warrants, or a combination of the features
of several of these securities. The investment characteristics of each convertible security vary widely, which allows convertible
securities to be employed for a variety of investment strategies. The Fund will exchange or convert the convertible securities
held in its portfolio into shares of the underlying common stock when, in the Advisor’s
opinion, the investment characteristics of
the underlying common stock will assist the Fund in achieving its investment objective. Otherwise, the Fund may hold or trade convertible
securities.
Corporate Debt Securities (Including Bonds, Notes, and
Debentures)
Corporate debt includes any obligation of a
corporation to repay a borrowed amount at maturity and usually to pay the holder interest at specific intervals. Corporate debt
can have a long or short maturity and is often rated by one or more NRSROs. See the Appendix 1 to this SAI for a description of
these ratings.
The credit risk of an issuer’s debt security
may vary based on its priority for repayment. For example, higher ranking (senior) debt securities have a higher priority than
lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing
to make payments on senior securities. In addition, in the event of bankruptcy, holders of senior securities may receive amounts
otherwise payable to the holders of subordinated securities. Some subordinated securities, such as trust preferred and capital
securities notes, also permit the issuer to defer payments under certain circumstances. For example, insurance companies issue
securities known as surplus notes that permit the insurance company to defer any payment that would reduce its capital below regulatory
requirements.
Money Market Instruments
Except where otherwise noted, the Fund may,
pending investment or for liquidity purposes, invest its assets in money market instruments.
Bank Obligations. Bank obligations are
short-term obligations issued by U.S. and foreign banks, including bankers’ acceptances, certificates of deposit, time deposits,
and similar securities.
Bankers’ acceptances are negotiable drafts
or bills of exchange typically drawn by an importer or exporter to pay for specific merchandise that are “accepted”
by a bank, meaning, in effect, that the issuing bank unconditionally agrees to pay the face value of the instrument on maturity.
Investments in bankers’ acceptances will be limited to those guaranteed by domestic and foreign banks having, at the time
of investment, total assets of $1 billion or more (as of the date of the institution’s most recently published financial
statements).
Certificates of deposit and time deposits represent
funds deposited in a commercial bank or a savings and loan association for a definite period of time and earn a specified return.
Investments in certificates of deposit and
time deposits may include Eurodollar Certificates of Deposit, which are U.S. dollar denominated certificates of deposit issued
by offices of foreign and domestic banks located outside the U.S., Yankee Certificates of Deposit, which are certificates of deposit
issued by a U.S. branch of a foreign bank denominated in U.S. dollars and held in the U.S., Eurodollar Time Deposits, which are
U.S. dollar denominated deposits in a foreign branch of a U.S. bank or a foreign bank, and Canadian Time Deposits, which are U.S.
dollar denominated certificates of deposit issued by Canadian offices of major Canadian banks. All investments in certificates
of deposit and time deposits will be limited to those (a) of domestic and foreign banks and savings and loan associations which,
at the time of investment, have total assets of $1 billion or more (as of the date of the institution’s most recently published
financial statements) or (b) the principal amount of which is insured by the Federal Deposit Insurance Corporation.
Commercial Paper and Variable Amount Master
Demand Notes. Commercial paper (including Section 4(2) commercial paper) consists of unsecured promissory notes issued by corporations
normally having maturities of 270 days or less and rates of return which are fixed. These investments may include Canadian Commercial
Paper, which is U.S. dollar denominated commercial paper issued by a Canadian corporation or a Canadian counterpart of a U.S. corporation,
and europaper, which is U.S. dollar denominated commercial paper of a foreign issuer.
Variable amount master demand notes are unsecured
demand notes that permit the indebtedness thereunder to vary and provide for periodic adjustments in the interest rate according
to the terms of the instrument. Because master demand notes are direct lending arrangements between the Fund and the issuer, they
are not normally traded. Although there is no secondary market in the notes, the Fund may demand payment of principal and accrued
interest at any time. A variable amount master demand note will be deemed to have a maturity equal to
the longer of the period of time remaining
until the next readjustment of its interest rate or the period of time remaining until the principal amount can be recovered from
the issuer through demand.
Variable Rate Demand Notes. Variable
rate demand notes (“VRDNs”) are unsecured, direct lending arrangements between the Fund, as the lender, and a corporation,
financial institution, government agency, municipality or other entity.
VRDNs have interest rates which float or which
are adjusted at regular intervals ranging from daily to annually. Although VRDNs are not generally traded, the Fund may demand
payment of principal and accrued interest according to its arrangement with the borrower (usually upon no more than seven days’
notice). VRDNs are, therefore, treated as maturing on the later of the next interest adjustment or the date on which the Fund may
next demand payment. Some VRDNs are backed by bank letters of credit.
The Fund may only invest in VRDNs which satisfy
its credit requirements for commercial paper.
Other Money Market Instruments. These
instruments may include: obligations (certificates of deposit, time deposits, bank master notes, and bankers’ acceptances)
of thrift institutions, and savings and loans, provided that such institutions have total assets of $1 billion or more as shown
on their last published financial statements at the time of investment; short-term corporate obligations rated within the three
highest rating categories by an NRSRO (e.g., at least A by S&P or A by Moody’s) at the time of investment, or, if not
rated, determined by the Advisor to be of comparable quality; general obligations issued by the U.S. Government and backed by its
full faith and credit, and obligations issued or guaranteed as to principal and interest by agencies or instrumentalities of the
U.S. Government (e.g., obligations issued by Farmers Home Administration, Government National Mortgage Association, Federal Farm
Credit Bank, and Federal Housing Administration); receipts, including Treasury Receipts, Treasury Income Growth Receipts, and Certificates
of Accrual on Treasuries; repurchase agreements involving such obligations; money market funds, and foreign commercial paper.
U.S. Government Securities
U.S. Government securities are securities that
are either issued or guaranteed as to payment of principal and interest by the U.S. Government, its agencies or instrumentalities.
U.S. Government securities are limited to: direct obligations of the U.S. Treasury, such as bills, notes, and bonds of the U.S.
Treasury, and notes, bonds, and discount notes of U.S. Government agencies or instrumentalities, including certain mortgage securities.
Agency securities are issued or guaranteed
by a federal agency or other government sponsored entity (“GSE”) acting under federal authority. Some GSE securities
are supported by the full faith and credit of the U.S. Government and some GSE securities are not. GSE securities backed by the
full faith and credit of the U.S. Government include securities issued by the Government National Mortgage Association, Small Business
Administration, Farm Credit System Financial Assistance Corporation, Farmers Home Administration, Federal Financing Bank, General
Services Administration, Department of Housing and Urban Development, Export-Import Bank, Overseas Private Investment Corporation,
and Washington Metropolitan Area Transit Authority Bonds.
GSE securities, which not backed by the full
faith and credit of the U.S. Government but receive support through federal subsidies, loans or other benefits include securities
issued by the Federal Home Loan Bank System, Federal Home Loan Mortgage Corporation, Federal National Mortgage Association and
Tennessee Valley Authority.
Other GSE securities are not backed by the
full faith and credit of the U.S. Government and have no explicit financial support, including securities issued by the Farm Credit
System, Financing Corporation, and Resolution Funding Corporation. Investors regard agency securities as having low credit risks,
but not as low as Treasury securities.
Zero Coupon Securities
Zero-coupon securities are debt obligations
which are generally issued at a discount, are payable in full at maturity, and do not provide for current payments of interest
prior to maturity. Zero-coupon securities usually
trade at a deep discount from their face or
par value and are subject to greater market value fluctuations from changing interest rates than debt obligations of comparable
maturities which make current distributions of interest. As a result, the NAV of shares of the Fund investing in zero-coupon securities
may fluctuate over a greater range than shares of other investment companies investing in securities making current distributions
of interest and having similar maturities.
Zero-coupon securities may include U.S. Treasury
bills issued directly by the U.S. Treasury or other short-term debt obligations, and longer-term bonds or notes and their unmatured
interest coupons which have been separated by their holder, typically a custodian bank or investment brokerage firm. A number of
securities firms and banks have stripped the interest coupons from the underlying principal (the “corpus”) of U.S.
Treasury securities and resold them in custodial receipt programs with a number of different names, including TIGRS and CATS. The
underlying U.S. Treasury bonds and notes themselves are held in book-entry form at the Federal Reserve Bank or, in the case of
bearer securities (i.e., unregistered securities that are owned ostensibly by the bearer or holder thereof), in trust on behalf
of the owners thereof.
In addition, the U.S. Treasury has facilitated
transfers of ownership of zero-coupon securities by accounting separately for the beneficial ownership of particular interest coupons
and corpus payments on U.S. Treasury securities through the Federal Reserve book-entry record-keeping system. The Federal Reserve
program, as established by the U.S. Treasury Department, is known as “STRIPS” or “Separate Trading of Registered
Interest and Principal of Securities.” Under the STRIPS program, the Fund will be able to have its beneficial ownership of
U.S. Treasury zero-coupon securities recorded directly in the book-entry record-keeping system in lieu of having to hold certificates
or other evidence of ownership of the underlying U.S. Treasury securities.
When debt obligations have been stripped of
their unmatured interest coupons by the holder, the stripped coupons are sold separately. The principal or corpus is sold at a
deep discount because the buyer receives only the right to receive a future fixed payment on the security and does not receive
any rights to periodic cash interest payments. Once stripped or separated, the corpus and coupons may be sold separately. Typically,
the coupons are sold separately or grouped with other coupons with like maturity dates and sold in such bundled form. Purchasers
of stripped obligations acquire, in effect, discount obligations that are economically identical to the zero-coupon securities
issued directly by the obligor.
FOREIGN SECURITIES (including emerging markets)
Generally, foreign securities are those securities
which are issued by companies organized outside the U.S. and principally traded in foreign markets (“Foreign Companies”).
This includes equity and fixed income securities of Foreign Companies and obligations of foreign branches of U.S. banks and foreign
or U.S. branches of foreign banks, including European Certificates of Deposit, European Time Deposits, Canadian Time Deposits,
Canadian Yankee Bonds, Canadian Certificates of Deposit, investments in Canadian Commercial Paper, and europaper. In addition,
the Fund may invest in depositary receipts. The Fund may also invest in securities issued or guaranteed by Foreign Companies or
foreign governments, their political subdivisions, agencies or instrumentalities, and obligations of supranational entities such
as the World Bank and the Asian Development Bank.
Foreign securities are normally denominated
and traded in foreign currencies. Although foreign exchange dealers do not charge a fee for currency conversion, they do realize
a profit based on the difference (the “spread”) between prices at which they buy and sell various currencies. Thus,
a dealer may offer to sell a foreign currency to the Fund at one rate, while offering a lesser rate of exchange should the Fund
desire to resell that currency to the dealer. For additional information see “Foreign Currency Transactions” above.
The Fund may also invest in securities of emerging
markets issuers. A nation's economy that is progressing toward becoming advanced, as shown by some liquidity in local debt and
equity markets and the existence of some form of market exchange and regulatory body is considered to be an emerging market.
Emerging markets generally do not have the
level of market efficiency and strict standards in accounting and securities regulation to be on par with advanced economies (such
as the United States, Europe and Japan), but emerging markets will typically have a physical financial infrastructure including
banks, a stock exchange and a unified currency. Emerging markets may be sought by investors for the prospect of high returns, as
they often
experience faster economic growth as measured
by GDP. Investments in emerging markets may involve greater risk due to political instability, domestic infrastructure problems,
currency volatility and limited equity opportunities. Also, local stock exchanges may not offer liquid markets for outside investors.
Some emerging markets countries may have fixed
or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be traded internationally.
Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluation in the currencies
in which the Fund’s securities are denominated may have a detrimental impact on the Fund.
Some countries with emerging securities markets
have experienced substantial, and in some periods, extremely high, rates of inflation for many years. Inflation and rapid fluctuation
in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain countries.
Moreover, the economies of some countries may differ favorably or unfavorably from the U.S. economy in such respects as rate of
growth of gross domestic product, the rate of inflation, capital reinvestment, resource self-sufficiency, number and depth of industries
forming the economy’s base, governmental controls and investment restrictions that are subject to political change and balance
of payments position. Further, there may be greater difficulties or restrictions with respect to investments made in emerging markets
countries.
Emerging markets typically have substantially
less volume than U.S. markets. In addition, securities in many such markets are less liquid, and their prices often are more volatile,
than securities of comparable U.S. companies. Such markets often have different clearance and settlement procedures for securities
transactions, and in some markets there have been times when settlements have been unable to keep pace with the volume of transactions,
making it difficult to conduct transactions. Delays in settlement could result in temporary periods when assets may be uninvested.
Settlement problems in emerging markets countries also could cause the Fund to miss attractive investment opportunities. Satisfactory
custodial services may not be available in some emerging markets countries, which may result in the Fund incurring additional costs
and delays in the transportation and custody of such securities.
For more information regarding the risks associated
with investing in emerging markets, please see “Emerging Markets Risk” below.
Depositary Receipts
American Depositary Receipts (“ADRs”)
are securities, typically issued by a U.S. financial institution (a “depositary”), that evidence ownership interests
in a security or a pool of securities issued by a foreign issuer and deposited with the depositary. ADRs include American Depositary
Shares and New York Shares. European Depositary Receipts (“EDRs”), which are sometimes referred to as Continental Depositary
Receipts (“CDRs”), are securities, typically issued by a non-U.S. financial institution, that evidence ownership interests
in a security or a pool of securities issued by either a U.S. or foreign issuer. Global Depositary Receipts (“GDRs”)
are issued globally and evidence a similar ownership arrangement. Generally, ADRs are designed for trading in the U.S. securities
markets, EDRs are designed for trading in European securities markets and GDRs are designed for trading in non-U.S. securities
markets. The Fund will only invest in ADRs, EDRs, CDRs, and GDRs available for investment through “sponsored facilities.”
A sponsored facility is established jointly by the issuer of the security underlying the receipt and a depositary.
Foreign Government Securities
Foreign government securities generally consist
of fixed income securities supported by national, state or provincial governments or similar political subdivisions. Foreign government
securities also include debt obligations of supranational entities, such as international organizations designed or supported by
governmental entities to promote economic reconstruction or development, international banking institutions and related government
agencies. Examples of these include, but are not limited to, the International Bank for Reconstruction and Development (the “World
Bank”), the Asian Development Bank, the European Investment Bank, and the Inter-American Development Bank.
Foreign government securities also include
fixed income securities of quasi-governmental agencies that are either issued by entities owned by a national, state or equivalent
government or are obligations of a political unit that are not backed by the national government’s full faith and credit.
Foreign Currency Transactions
Foreign currency transactions include purchasing
and selling foreign currencies, entering into forward or futures contracts to purchase or sell foreign currencies (see “Forward
Foreign Currency Contracts and Foreign Currency Futures Contracts,” below), and purchasing and selling options on foreign
currencies (see “Foreign Currency Options,” below). Foreign currency transactions may be used to hedge against uncertainty
in the level of future foreign currency exchange rates and to increase current return.
Purchases and sales of foreign currencies on
a spot basis are used to increase current return. They are also used in connection with both “transaction hedging”
and “position hedging.”
Transaction hedging involves entering into
foreign currency transactions with respect to specific receivables or payables generally arising in connection with the purchase
or sale of portfolio securities. Transaction hedging is used to “lock in” the U.S. dollar price of a security to be
purchased or sold, or the U.S. dollar equivalent of a dividend or interest payment in a foreign currency. The goal is to protect
against a possible loss resulting from an adverse change in the relationship between the U.S. dollar and the applicable foreign
currency during the period between the date on which the security is purchased or sold or on which the dividend or interest payment
is declared, and the date on which such payments are made or received.
Position hedging involves entering into foreign
currency transactions either to protect against: (1) a decline in the value of a foreign currency in which a security held or to
be sold is denominated; or (2) an increase in the value of a foreign currency in which a security to be purchased is denominated.
In connection with position hedging, the Fund may purchase put or call options on foreign currency and foreign currency futures
contracts and buy or sell forward contracts and foreign currency futures contracts.
Neither transaction nor position hedging eliminates
fluctuations in the underlying prices of the securities that the Fund owns or intends to purchase or sell. They simply establish
a rate of exchange that can be achieved at some future point in time. Additionally, although these techniques tend to minimize
the risk of loss due to a decline in the value of the hedged currency, they also tend to limit any potential gain that might result
from the increase in the value of such currency.
Hedging transactions are subject to correlation
risk due to the fact that the amounts of foreign currency exchange transactions and the value of the portfolio securities involved
will not generally be perfectly matched. This is because the future value of such securities in foreign currencies will change
as a consequence of market movements in the values of those securities between the dates the currency exchange transactions are
entered into and the dates they mature.
DERIVATIVE CONTRACTS
Derivative contracts are financial
instruments that require payments based upon changes in the values of designated (or underlying) securities, currencies, commodities,
financial indices or other assets. Some derivative contracts (such as futures, forwards and options) require payments relating
to a future trade involving the underlying asset. Other derivative contracts (such as swaps) require payments relating to the income
or returns from the underlying asset. The other party to a derivative contract is referred to as a counterparty.
Depending upon how the Fund uses
derivative contracts and the relationships between the market value of a derivative contract and the underlying asset, derivative
contracts may increase or decrease the Fund’s exposure to interest rate and currency risks, and may also expose the Fund
to liquidity and leverage risks. Over-the-counter (“OTC”) contracts also expose the Fund to credit risks in the event
that a counterparty defaults on the contract.
The regulation of derivatives is
a rapidly changing area of law and is subject to modification by government and judicial action. In addition, the SEC, Commodity
Futures Trading Commission (“CFTC”) and the exchanges are authorized to take extraordinary actions in the event of
a market emergency, including, for example, the
implementation or reduction of speculative
position limits, the implementation of higher margin requirements, the establishment of daily price limits and the suspension of
trading.
It is not possible to predict fully
the effects of current or future regulation. However, it is possible that developments in government regulation of various types
of derivative instruments, such as speculative position limits on certain types of derivatives, or limits or restrictions on the
counterparties with which the Fund engages in derivative transactions, may limit or prevent the Fund from using or limit the Fund’s
use of these instruments effectively as a part of its investment strategy, and could adversely affect the Fund’s ability
to achieve its investment goal(s). The Advisor will continue to monitor developments in the area. New requirements, even if not
directly applicable to the Fund, may increase the cost of the Fund’s investments and cost of doing business.
Options on Equities, Fixed Income Securities, and Stock
Indices
A call option gives the purchaser of the option
the right to buy a security at a stated price from the writer (seller) of the option. A put option gives the purchaser of the option
the right to sell a security at a stated price to the writer of the option. In a covered call option and during the option period,
the writer owns the security (or a comparable security sufficient to satisfy securities exchange requirements) which may be sold
pursuant to the option. In a covered put option, the writer holds cash and/or short-term debt instruments in an amount equal to
the exercise price of the option. In addition, a call or put will be considered covered if and to the extent that some or all of
the risk of the option has been offset by another position. The Fund may write combinations of covered puts and calls on the same
underlying security. In general, the Fund may write options in an attempt to increase returns or purchase options for hedging purposes.
The premium received from writing a put or
call option increases the Fund’s return on the underlying security in the event that the option expires unexercised or is
closed out at a profit. The amount of the premium reflects, among other things, the relationship between the exercise price and
the current market value of the underlying security, the volatility of the underlying security, the amount of time remaining until
expiration, current interest rates, and the effect of supply and demand in the options market and in the market for the underlying
security. A put option locks in the price at which the Fund may sell a security it holds, thus hedging against market declines.
Such protection is provided during the life of the put option since the Fund, as holder of the option, is able to sell the underlying
security at the option’s exercise price regardless of any decline in the underlying security’s market price. A call
option locks in the price at which the Fund may purchase a security, thus hedging against an increase in the market price of a
security.
By writing a call option, the Fund limits its
opportunity to profit from any increase in the market value of the underlying security above the exercise price of the option but
continues to bear the risk of a decline in the value of the underlying security. By writing a put option, the Fund assumes the
risk that it may be required to purchase the underlying security for an exercise price higher than its then current market value,
resulting in a potential capital loss unless the security subsequently appreciates in value.
The Fund may terminate an option that it has
written prior to its expiration by entering into a closing purchase transaction, in which it purchases an offsetting option. The
Fund realizes a profit or loss from a closing transaction if the cost of the transaction (option premium plus transaction costs)
is less or more than the premium received from writing the option. Because increases in the market price of a call option generally
reflect increases in the market price of the security underlying the option, any loss resulting from a closing purchase transaction
may be offset in whole or in part by unrealized appreciation of the underlying security owned by the Fund.
In order for a put option to be profitable,
the value of the underlying security/index must decline sufficiently below the exercise price to cover the premium and transaction
costs. By using put options in this manner, the Fund will reduce any profit it might otherwise have realized from appreciation
of the underlying security/index by the premium paid for the put option and by transaction costs.
In order for a call option to be profitable,
the market price of the underlying security/index must rise sufficiently above the exercise price to cover the premium and transaction
costs.
The successful use of options depends on the
ability of the Advisor to forecast interest rate and market movements. For example, if the Fund were to write a call option based
on the Advisor’s expectation that the
price of the underlying security will fall,
but the price rises instead, the Fund could be required to sell the security upon exercise at a price below the current market
price. Similarly, if the Fund were to write a put option based on the Advisor’s expectations that the value of the underlying
security will rise, but the price falls instead, the Fund could be required to purchase the security upon exercise at a price higher
than the current market price.
Foreign Currency Options
Options on foreign currencies operate similarly
to options on securities, and are traded primarily in the over-the-counter market (“OTC options”), although options
on foreign currencies may also be listed on several exchanges. Options will be purchased or written only when the Advisor believes
that a liquid secondary market exists for such options. There can be no assurance that a liquid secondary market will exist for
a particular option at any specific time. Options on foreign currencies are affected by all of those factors which influence exchange
rates and investments generally.
Purchases and sales of options may be used
to increase current return. They are also used in connection with hedging transactions. (See “Foreign Currency Transactions,”
above).
Writing covered call options on currencies
may offset some of the costs of hedging against fluctuations in currency exchange rates. For transaction hedging purposes the Fund
may also purchase exchange-listed and OTC put and call options on foreign currency futures contracts and on foreign currencies.
A put option on a futures contract gives the Fund the right to assume a short position in the futures contract until expiration
of the option. A call option on a futures contract gives the Fund the right to assume a long position in the futures contract until
the expiration of the option.
The value of a foreign currency option is dependent
upon the value of the foreign currency and the U.S. dollar, and may have no relationship to the investment merits of a foreign
security. Because foreign currency transactions occurring in the interbank market involve substantially larger amounts than those
that may be involved in the use of foreign currency options, investors may be disadvantaged by having to deal in an odd lot market
(generally consisting of transactions of less than $1 million) for the underlying foreign currencies at prices that are less favorable
than for round lots.
There is no systematic reporting of last sale
information for foreign currencies and there is no regulatory requirement that quotations available through dealers or other market
sources be firm or revised on a timely basis. Available quotation information is generally representative of very large transactions
in the interbank market and thus may not reflect relatively smaller transactions (less than $1 million) where rates may be less
favorable. The interbank market in foreign currencies is a global, around-the-clock market. To the extent that the U.S. options
markets are closed while the markets for the underlying currencies remain open, significant price and rate movements may take place
in the underlying markets that cannot be reflected in the U.S. options markets. Options contracts are generally valued at the mean
of the bid and asked price as reported on the highest-volume exchange (in terms of the number of option contracts traded for that
issue) on which such options are traded.
Futures Contracts and Options on Futures Contracts
A futures contract is a binding contractual
commitment which, if held to maturity, will result in an obligation to make or accept delivery of a security at a specified future
time and price. By purchasing futures (assuming a “long” position), the Fund will legally obligate itself to accept
the future delivery of the underlying security and pay the agreed price. By selling futures (assuming a “short” position),
it will legally obligate itself to make the future delivery of the security against payment of the agreed price. Positions taken
in the futures markets are not normally held to maturity, but are instead liquidated through offsetting transactions which may
result in a profit or a loss. While futures positions taken by the Fund will usually be liquidated in this manner, the Fund may
instead make or take delivery of the underlying securities whenever it appears economically advantageous to the Fund to do so.
A clearing corporation associated with the exchange on which futures are traded assumes responsibility for such closing transactions
and guarantees that the Fund’s sale and purchase obligations under closed-out positions will be performed at the termination
of the contract. Futures contracts are considered to be commodity contracts. The Advisor has claimed an exclusion from the definition
of the term “commodity pool operator” under the Commodity
Exchange Act and, therefore, is not subject
to registration or regulation as a commodity pool operator under the Act.
The Fund may purchase and write put and call
options on futures contracts, as they become available. Such options are similar to options on securities except that options on
futures contracts give the purchaser the right, in return for the premium paid, to assume a position in a futures contract (a long
position if the option is a call and a short position if the option is a put) at a specified exercise price at any time during
the period of the option. As with options on securities, the holder or writer of an option may terminate its position by selling
or purchasing an option of the same series. There is no guarantee that such closing transactions can be effected. The Fund will
be required to deposit initial margin and variation margin with respect to put and call options on futures contracts written by
it pursuant to brokers’ requirements, and, in addition, net option premiums received will be included as initial margin deposits.
See “Margin Payments” below. Compared to the purchase or sale of futures contracts, the purchase of call or put options
on futures contracts involves less potential risk to the Fund because the maximum amount at risk is the premium paid for the options
plus transactions costs. However, there may be circumstances when the purchases of call or put options on a futures contract would
result in a loss to the Fund when the purchase or sale of the futures contracts would not, such as when there is no movement in
the prices of debt securities. The writing of a put or call option on a futures contract involves risks similar to those risks
relating to the purchase or sale of futures contracts.
Margin Payments. When the Fund purchases
or sells a futures contract, it is required to deposit with the Custodian an amount of cash, U.S. Treasury bills, or other permissible
collateral equal to a small percentage of the amount of the futures contract. This amount is known as “initial margin.”
The nature of initial margin is different from that of margin in security transactions in that it does not involve borrowing money
to finance transactions. Rather, initial margin is similar to a performance bond or good faith deposit that is returned to the
Fund upon termination of the contract, assuming the Fund satisfies its contractual obligations.
Subsequent payments to and from the broker
occur on a daily basis in a process known as “marking to market.” These payments are called “variation margin,”
and are made as the value of the underlying futures contract fluctuates. For example, when the Fund sells a futures contract and
the price of the underlying security rises above the delivery price, the Fund’s position declines in value. The Fund then
pays a broker a variation margin payment equal to the difference between the delivery price of the futures contract and the market
price of the securities underlying the futures contract. Conversely, if the price of the underlying security falls below the delivery
price of the contract, the Fund’s futures position increases in value. The broker then must make a variation margin payment
equal to the difference between the delivery price of the futures contract and the market price of the currency underlying the
futures contract.
When the Fund terminates a position in a futures
contract, a final determination of variation margin is made, additional cash is paid by or to the Fund, and the Fund realizes a
loss or gain. Such closing transactions involve additional commission costs.
Index Futures Contracts and Options on Index Futures Contracts
A stock index futures contract is a contract
to buy or sell units of a stock index at a specified future date at a price agreed upon when the contract is made. A debt index
futures contract is a contract to buy or sell units of a specified debt index at a specified future date at a price agreed upon
when the contract is made. A unit is the current value of the index.
The following example illustrates generally
the manner in which index futures contracts operate. The Standard & Poor’s 100 Stock Index (“S&P 100”)
is composed of 100 selected common stocks, most of which are listed on the New York Stock Exchange (“NYSE”). The S&P
100 assigns relative weightings to the common stocks included in the Index, and the Index fluctuates with changes in the market
values of those common stocks. In the case of the S&P 100, contracts are to buy or sell 100 units. Thus, if the value of the
S&P 100 were $180, one contract would be worth $18,000 (100 units x $180). The stock index futures contract specifies that
no delivery of the actual stocks making up the index will take place. Instead, settlement in cash must occur upon the termination
of the contract, with the settlement being the difference between the contract price and the actual level of the stock index at
the expiration of the contract. For example, if the Fund enters into a futures contract
to buy 100 units of the S&P 100 at a specified
future date at a contract price of $180 and the S&P 100 is at $184 on that future date, the Fund will gain $400 (100 units
x gain of $4).
If the Fund enters into a futures contract
to sell 100 units of the stock index at a specified future date at a contract price of $180 and the S&P 100 is at $182 on that
future date, the Fund will lose $200 (100 units x loss of $2). The Fund may purchase or sell futures contracts with respect to
any stock index. Positions in index futures may be closed out only on an exchange or board of trade which provides a secondary
market for such futures.
Purchases and sales of index futures may be
used to hedge an investment. To hedge an investment successfully, however, the Fund must invest in futures contracts with respect
to indices or sub-indices the movements of which will have a significant correlation with movements in the prices of the Fund’s
securities.
Options on index futures contracts are similar
to options on securities except that options on index futures contracts give the purchaser the right, in return for the premium
paid, to assume a position in an index futures contract (a long position if the option is a call and a short position if the option
is a put) at a specified exercise price at any time during the period of the option. Upon exercise of the option, the holder assumes
the underlying futures position and receives a variation margin payment of cash or securities approximating the increase in the
value of the holder’s option position. If an option is exercised on the last trading day prior to the expiration date of
the option, the settlement is made entirely in cash based on the difference between the exercise price of the option and the closing
level of the index on which the futures contract is based on the expiration date. Purchasers of options who fail to exercise their
options prior to the exercise date suffer a loss of the premium paid. As an alternative to purchasing call and put options on index
futures contracts, the Fund may purchase put and call options on the underlying indices themselves to the extent that such options
are traded on national securities exchanges. Index options are similar to options on individual securities in that the purchaser
of an index option acquires the right to buy, and the writer undertakes the obligation to sell, an index at a stated exercise price
during the term of the option. Instead of giving the right to take or make actual delivery of securities, the holder of an index
option has the right to receive a cash “exercise settlement amount.” This amount is equal to the amount by which the
fixed exercise price of the option exceeds (in the case of a put) or is less than (in the case of a call) the closing value of
the underlying index on the date of the exercise, multiplied by a fixed “index multiplier.” The Fund will enter into
an option position only if there appears to be a liquid secondary market for such options.
The aggregate premium paid on all options on
stock indices will not exceed 20% of the Fund’s total assets.
Forward Foreign Currency Contracts and Foreign Currency
Futures Contracts
A forward foreign currency contract
involves an obligation to purchase or sell a specific currency at a future date, which may be any fixed number of days from the
date of the contract as agreed by the parties, at a price set at the time of the contract. In the case of a cancelable forward
contract, the holder has the unilateral right to cancel the contract at maturity by paying a specified fee. The contracts are traded
in the interbank market conducted directly between currency traders (usually large commercial banks) and their customers. A forward
contract generally has no deposit requirement, and no commissions are charged at any stage for trades.
A foreign currency futures contract
is a standardized contract for the future delivery of a specified amount of a foreign currency at a future date at a price set
at the time of the contract. Foreign currency futures contracts traded in the U.S. are designed by and traded on exchanges regulated
by the Commodity Futures Trading Commission (“CFTC”), such as the New York Mercantile Exchange.
Forward foreign currency contracts differ from
foreign currency futures contracts in certain respects. For example, the maturity date of a forward contract may be any fixed number
of days from the date of the contract agreed upon by the parties, rather than a predetermined date in a given month. Forward contracts
may be in any amounts agreed upon by the parties rather than predetermined amounts. Also, forward foreign currency contracts are
traded directly between currency traders so that no intermediary is required. A forward contract generally requires no margin or
other deposit.
At the maturity of a forward or futures
contract, the Fund may either accept or make delivery of the currency specified in the contract, or at or prior to maturity enter
into a closing transaction involving the purchase or sale of an offsetting contract. Closing transactions with respect to forward
contracts are usually effected with the currency
trader who is a party to the original
forward contract. Closing transactions with respect to futures contracts are effected on a commodities exchange; a clearing corporation
associated with the exchange assumes responsibility for closing out such contracts.
Forward foreign currency contracts and
foreign currency futures contracts can be used to increase current return. They are also used in connection with both “transaction
hedging” and “position hedging.” (“Foreign Currency Transactions,” above).
Swap Agreements
The Fund may enter into interest rate,
index and currency exchange rate swap agreements in an attempt to obtain a particular desired return at a lower cost to the Fund
than if it had been invested directly in an instrument that yielded that desired return. Swap agreements are two-party contracts
entered into primarily by institutional investors for periods ranging from a few weeks to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in rates of returns) earned or realized on particular
predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated
with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested
at a particular interest rate, in a particular foreign currency, or in a “basket” of securities representing a particular
index. The “notional amount” of the swap agreement is only a fictive basis on which to calculate the obligations the
parties to a swap agreement have agreed to exchange. The Fund’s obligations (or rights) under a swap agreement will generally
be equal only to the amount to be paid or received under the agreement based on the relative values of the positions held by each
party to the agreement (the “net amount”). The Fund’s obligations under a swap agreement will be accrued daily
(offset against any amounts owing to the Fund) and any accrued by unpaid net amounts owed to a swap counterparty will be covered
by the maintenance of a segregated account consisting of cash, U.S. government securities, or other liquid securities, to avoid
leveraging of the Fund’s portfolio.
Whether the Fund’s use of swap
agreements enhance the Fund’s total return will depend on the Advisor’s ability correctly to predict whether certain
types of investments are likely to produce greater returns than other investments. Because they are two-party contracts and may
have terms of greater than seven days, swap agreements may be considered to be illiquid. Moreover, the Fund bears the risk of loss
of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
The Advisor or sub-advisor, if any, will cause the Fund to enter into swap agreements only with counterparties that would be eligible
for consideration as repurchase agreement counterparties under the Fund’s repurchase agreement guidelines. The swap market
is a relatively new market and is largely unregulated. It is possible that developments in the swaps market, including potential
government relation, could adversely affect the Fund’s ability to terminate existing swap agreements or to realize amounts
to be received under such agreements.
Certain swap agreements are exempt from
most provisions of the Commodity Exchange Act and, therefore, are not regulated as futures or commodity option transactions under
the Commodity Exchange Act., pursuant to regulations of the CFTC. To qualify for this exemption, a swap agreement must be entered
into by “eligible participants,” which include the following, provided the participants’ total assets exceed
established levels: a bank or trust company, savings association or credit union, insurance company, investment company subject
to regulation under the 1940 Act, commodity pool, corporation, partnership, proprietorship, organization, trust or foreign person.
To be eligible, natural persons and most other entities must have total assets exceeding $10 million; commodity pools and employee
benefit plans must have assets exceeding $5 million. In addition, an eligible swap transaction must meet three conditions. First,
the swap agreement may not be part of a fungible class of agreements that are standardized as to their material economic terms.
Second, the creditworthiness of parties with actual or potential obligations under the swap agreement must be a material consideration
in entering into or determining the terms of the swap agreement, including pricing, cost or credit enhancement terms. Third, swap
agreements may not be entered into and traded on or through multilateral transaction execution facility.
Exclusion of Investment Advisor from Commodity Pool
Operator Definition
With respect to the Fund, the Advisor has
claimed an exclusion from the definition of “commodity pool operator” (CPO) under the Commodity Exchange Act (“CEA”)
and the rules of the CFTC and, therefore, is not subject to CFTC registration or regulation as a CPO. In addition, with respect
to the Fund, the Advisor is relying upon a
related exclusion from the definition of
“commodity trading advisor” (“CTA”) under the CEA and the rules of the CFTC.
The terms of the CPO exclusion require the
Fund, among other things, to adhere to certain limits on its investments in “commodity interests.” Commodity interests
include commodity futures, commodity options and swaps, which in turn include non-deliverable currency forward contracts, as further
described below. Because the Advisor and the Fund intend to comply with the terms of the CPO exclusion, the Fund may, in the future,
need to adjust its investment strategies, consistent with its investment objective, to limit its investments in these types of
instruments. The Fund is not intended as a vehicle for trading in the commodity futures, commodity options or swaps markets. The
CFTC has neither reviewed nor approved the Advisor’s reliance on these exclusions, or the Fund, its investment strategies
or this SAI.
Generally, the exclusion from CPO regulation
on which the Advisor relies requires the Fund to meet one of the following tests for its commodity interest positions, other than
positions entered into for bona fide hedging purposes (as defined in the rules of the CFTC): either (1) the aggregate initial margin
and premiums required to establish the Fund’s positions in commodity interests may not exceed 5% of the liquidation value
of the Fund’s portfolio (after taking into account unrealized profits and unrealized losses on any such positions); or (2)
the aggregate net notional value of the Fund’s commodity interest positions, determined at the time the most recent such
position was established, may not exceed 100% of the liquidation value of the Fund’s portfolio (after taking into account
unrealized profits and unrealized losses on any such positions). In addition to meeting one of these trading limitations, the Fund
may not be marketed as a commodity pool or otherwise as a vehicle for trading in the commodity futures, commodity options or swaps
markets. If, in the future, the Fund can no longer satisfy these requirements, the Advisor would withdraw its notice claiming an
exclusion from the definition of a CPO, and the Advisor would be subject to registration and regulation as a CPO with respect to
the Fund, in accordance with CFTC rules that apply to CPOs of registered investment companies. Generally, these rules allow for
substituted compliance with CFTC disclosure and shareholder reporting requirements, based on the Advisor’s compliance with
comparable SEC requirements. However, as a result of CFTC regulation with respect to the Fund, the Fund may incur additional compliance
and other expenses.
OTHER TRANSACTIONS/INVESTMENTS
Exchange-Traded Notes
The Fund may invest in exchange-traded
notes (“ETNs”). ETNs are generally notes representing the debt of the issuer, usually a financial institution. ETNs
combine both aspects of bonds and ETFs. An ETN’s returns are based on the performance of one or more underlying assets, reference
rate or indexes, minus fees and expenses. Similar to ETFs, ETNs are listed on an exchange and traded in the secondary market. However,
unlike an ETF, an ETN can be held until the ETN’s maturity, at which time the issuer will pay a return linked to the performance
of the specific asset, index or rate (“reference instrument”) to which the ETN is lined minus certain fees. Unlike
regular bonds, ETNs do not make periodic interest payments, and principal is not protected.
The value of an ETN may be influenced
by, among other things, time to maturity, level of supply and demand for the ETN, volatility and lack of liquidity in underlying
markets, changes in the applicable interest rates, the performance of the reference instrument, changes in the issuer’s credit
rating and economic, legal, political or geographic events that affect the reference instrument. ETNs also incur certain expenses
not incurred by their applicable reference instrument. Some ETNs that use leverage can, at times, be relatively illiquid and, thus,
they may be difficult to purchase or sell at a fair price. Levered ETNs are subject to the same risk as other instruments that
use leverage in any form. While leverage allows for greater potential return, the potential for loss is also greater. Finally,
additional losses may be incurred if the investment loses value because, in addition to the money lost on the investment, the loan
still needs to be repaid.
Other Investment Companies Securities
The Fund may invest in securities of other
investment companies (“Acquired Funds”), including ETFs and traditional mutual funds, as an efficient means of carrying
out its investment policies and managing their uninvested cash.
The Fund’s shareholders indirectly
bear the expenses of the Acquired Funds in which the Fund invests. Except under exemptive rules or relief from the SEC, the Fund
may not invest more than 10% of its total assets at any one time in the shares of Acquired Funds, 5% of its total assets in the
shares of any one Acquired Fund, or own more than 3% of the shares of any one Acquired Fund. When the Fund invests in the shares
of Acquired Funds, investment advisory and other fees will apply, and the investment’s yield will be reduced accordingly.
Repurchase Agreements
Repurchase agreements are agreements through
which banks, broker-dealers, and other financial institutions approved by the Trustees, sell securities (usually U.S. Government
securities) to the Fund and agree to repurchase those securities at a specified price and time (usually not more than seven days
from the original sale). The seller’s obligation to pay the repurchase price is secured by the securities to be repurchased.
These securities are required to be held by the Fund, the Custodian, or a third-party custodian. In order to protect the Fund’s
interest, collateral securities must have a value of at least 100% of the resale price at all times. (The seller must provide additional
collateral in the event that this condition is not met). In general, the Advisor will require collateral securities to have a value
of at least 102% of the resale price at the time the repurchase agreement is made. The collateral is marked to market on a daily
basis, thus enabling the Advisor to determine when to request additional collateral from the seller.
If a seller defaults on its repurchase obligation,
the Fund could realize a loss on the sale of the underlying securities to the extent that the proceeds of the sale (including accrued
interest) are less than the resale price. In addition, even though the U.S. Bankruptcy Code provides protection to the Fund if
the seller becomes bankrupt or insolvent, the Fund may suffer losses in such event.
Reverse Repurchase Agreements
The Fund may borrow funds for temporary purposes
by entering into reverse repurchase agreements, provided such action is consistent with the Fund’s investment objective and
fundamental investment restrictions; as a matter of non-fundamental policy, the Fund intends to limit total borrowings under reverse
repurchase agreements to no more than 10% of the value of its total assets. Pursuant to a reverse repurchase agreement, the Fund
will sell portfolio securities to financial institutions such as banks or to broker-dealers, and agree to repurchase the securities
at a mutually agreed-upon date and price.
The Fund intends to enter into reverse repurchase
agreements only to avoid otherwise selling securities during unfavorable market conditions to meet redemptions. At the time the
Fund enters into a reverse repurchase agreement, it will place in a segregated custodial account assets such as U.S. Government
securities or other liquid, high-quality debt securities consistent with the Fund’s investment objective having a value at
least equal to 100% of the repurchase price (including accrued interest), and will subsequently monitor the account to ensure that
an equivalent value is maintained. Reverse repurchase agreements involve the risk that the market value of the securities sold
by the Fund may decline below the price at which the Fund is obligated to repurchase the securities. Reverse repurchase agreements
are considered to be borrowings by the Fund under the 1940 Act.
Restricted and Illiquid Securities
Generally, an “illiquid
security” or “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. Illiquid investments generally include investments for which no market exists or which are legally restricted
as to their transfer (such as those issued pursuant to an exemption from the registration requirements of the federal securities
laws). Restricted securities are generally sold in privately negotiated transactions, pursuant to an exemption from registration
under the 1933
Act. If registration
of a security previously acquired in a private transaction is required, the Fund, as the holder of the security, may be obligated
to pay all or part of the registration expense and a considerable period may elapse between the time it decides to seek registration
and the time it will be permitted to sell a security under an effective registration statement. If, during such a period, adverse
market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to seek registration
of the security. To the extent it is determined that there is a liquid institutional or other market for certain restricted securities,
the Fund would consider them to be liquid securities. An example is a restricted security that may be freely transferred among
qualified institutional buyers pursuant to Rule 144A under the 1933 Act, and for which a liquid institutional market has developed.
Rule 144A securities may be subject, however, to a greater possibility of becoming illiquid than securities that have been registered
with the SEC.
The following factors
may be taken into account in determining whether a restricted security is properly considered a liquid security: (i) the frequency
of trades and quotes for the security; (ii) the number of dealers willing to buy or sell the security and the number of other potential
buyers; (iii) any dealer undertakings to make a market in the security; and (iv) the nature of the security and of the marketplace
trades (e.g., any demand, put or tender features, the method of soliciting offers, the mechanics and other requirements for transfer,
and the ability to assign or offset the rights and obligations of the security). The nature of the security and its trading includes
the time needed to sell the security, the method of soliciting offers to purchase or sell the security, and the mechanics of transferring
the security including the role of parties such as foreign or U.S. custodians, subcustodians, currency exchange brokers, and depositories.
The sale of illiquid
investments often requires more time and results in higher brokerage charges or dealer discounts and other selling expenses than
the sale of investments eligible for trading on national securities exchanges or in the OTC markets. Illiquid investments often
sell at a price lower than similar investments that are not subject to restrictions on resale.
The risk to the Fund
in holding illiquid investments is that they may be more difficult to sell if the Fund wants to dispose of the investment in response
to adverse developments or in order to raise money for redemptions or other investment opportunities. Illiquid trading conditions
may also make it more difficult for the Fund to realize an investment's fair value.
The Fund may also be
unable to achieve its desired level of exposure to a certain investment, issuer, or sector due to overall limitations on its ability
to invest in illiquid investments and the difficulty in purchasing such investments.
The Fund may not acquire
any illiquid investment if, immediately after the acquisition, the Fund would have invested more than 15% of its net assets in
illiquid investments that are assets. Because illiquid investments may not be readily marketable, the portfolio managers and/or
investment personnel may not be able to dispose of them in a timely manner. As a result, the Fund may be forced to hold illiquid
investments while their price depreciates. Depreciation in the price of illiquid investments may cause the net asset value of the
Fund to decline.
Securities Lending
In order to generate
additional income, the Fund may lend its portfolio securities on a short-term basis to certain brokers, dealers or other financial
institutions. In determining whether to lend to a particular broker, dealer or financial institution, the Advisor will consider
all relevant facts and circumstances, including the size, creditworthiness and reputation of the borrower. Any loans made will
be continuously secured by collateral in cash at least equal to 100% of the value of the securities on loan for the Fund. The Fund
may lend up to 33 ⅓% of its total assets. Such loans must be fully collateralized by cash, U.S. government obligations or
other high-quality debt obligations and marked to market daily. Although the loan is fully collateralized, if the borrower defaults,
the Fund could lose money.
While portfolio securities
are on loan, the borrower will pay to the lending Fund any dividends or interest received on the securities. In addition, the Fund
retains all or a portion of the interest received on investment of the collateral or receives a fee from the borrower. Although
voting rights, or rights to consent, with respect to
the loaned securities
pass to the borrower, the lending Fund retains the right to call the loans at any time on reasonable notice, and it will do so
to enable the Fund to exercise voting rights on any matters materially affecting the investment. The Fund may also call such loans
in order to sell the securities.
One of the risks in lending portfolio securities,
as with other extensions of credit, is the possible delay in recovery of the securities or possible loss of rights in the collateral
should the borrower fail financially. There is also the risk that, when lending portfolio securities, the securities may not be
available to the Fund on a timely basis and the Fund may, therefore, lose the opportunity to sell the securities at a desirable
price. In addition, in the event that a borrower of securities would file for bankruptcy or become insolvent, disposition of the
securities may be delayed pending court action.
When-issued and Delayed Delivery Transactions
When-issued and delayed delivery transactions
are arrangements through which the Fund purchases securities with payment and delivery scheduled for a future time. No fees or
other expenses, other than normal transaction costs, are incurred. However, liquid assets of a purchasing Fund sufficient to make
payment for the securities are segregated on the Fund’s records at the trade date. These assets are then marked to market
daily and maintained until the transaction has been settled. The Fund does not consider the purchase and/or sale of securities
on a when-issued and delayed delivery basis to be a borrowing for purposes of the Fund’s fundamental restrictions or other
limitations on borrowing.
The Fund does not intend to engage
in when-issued and delayed delivery transactions to an extent that would cause the segregation of more than 20% of the total value
of the Fund’s total assets.
A seller’s failure
to complete a transaction may cause the Fund to miss a desired price or yield. In addition, because of delayed settlement, the
Fund may pay more than market value on the settlement date. The Advisor may choose to dispose of a commitment prior to settlement.
INVESTMENT
RISKS
The Prospectus discusses the Fund’s
principal investment risks. Below you will find more detail about the risks associated with the types of investments and investment
practices permitted by the Fund, including those which are not principal investment risks of the Fund.
EQUITY SECURITIES RISK
General Risk
Equity risk is the risk that stock prices will
fall quickly and dramatically over short or extended periods of time. Stock markets tend to move in cycles, with periods of rising
prices and periods of falling prices. Often, dramatic movements in prices occur in response to the overall market environment or
reports of a company’s earnings, economic statistics, or other factors that affect an issuer’s profitability. The price
of equity securities can decline and reduce the value of the Fund investing in equities. Stock markets are volatile.
To the extent that the Fund invests in smaller
capitalization stocks, it may be subject to greater risks than those associated with investment in larger, more established companies.
Smaller companies tend to have limited product lines, markets, or financial resources, and may be dependent on a small management
group. Smaller company stocks may be subject to more abrupt or erratic price movements, for reasons such as lower trading volumes,
greater sensitivity to changing conditions, and less certain growth prospects. Additionally, there are fewer market makers for
these stocks and wider spreads between quoted bid and ask prices in the over-the-counter market for these stocks. Small cap stocks
also tend to be subject to greater liquidity risk, particularly during periods of market disruption, and there is often less publicly
available information concerning these securities. The Fund that invests in high quality or “blue chip” equity securities
or securities of established companies with large market capitalizations (which generally have strong financial characteristics)
can also be negatively impacted by overall market and economic conditions.
Exchange-Traded Funds Risk
ETFs generally present the same primary
risks as an investment in a conventional fund (e.g., one that is not exchange traded) that has the same investment objectives,
strategies, and policies. The price of an ETF can fluctuate up or down, and the Fund could lose money investing in the ETF if the
prices of the securities owned by the ETF go down. In addition, an investment in an ETF may be subject to the following risks that
do not apply to conventional funds: (1) the market price of the ETF’s shares may trade above or below their NAV; (2) an active
trading market for the ETF’s shares may not develop or be maintained; or (3) trading of the ETF’s shares may be halted
if the listing exchange’s officials deem such action appropriate, the shares are delisted from the exchange, or the activation
of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Market Price Variance Risk (ETFs).
ETFs are listed for trading on a securities exchange and can be bought and sold in the secondary market at market prices. The market
prices of ETF shares will fluctuate in response to changes in their respective NAVs and supply and demand for their shares. Differences
between secondary market prices and the NAV for an ETF’s shares may be due largely to supply and demand forces in the secondary
market, which forces may not be the same as those influencing prices for securities or instruments held by the Fund at a particular
time. There may, however, be times when the market price and the NAV vary significantly and an investor may pay more than NAV when
buying ETF shares on the secondary market, and receive less than NAV when it sells those ETF shares. The market price of ETF shares
includes a “bid-ask spread” charged by the lead market maker, market makers or other participants that trade ETF shares.
In times of severe market disruption, the bid-ask spread often increases significantly. This means that an ETF’s shares may
trade at a discount to NAV, and the discount is likely to be greatest when the price of the ETF’s shares is falling fastest,
which may be the time that investors most want to sell the ETF’s shares. An ETF’s investment results are measured based
upon the daily NAV of the ETF. Accordingly, the Fund purchasing and selling ETFs in the secondary market may not experience investment
results consistent with those purchasing from and redeeming Creation Units with an ETF directly.
Securities Linked to the Real Estate Market and REIT Risk
Investing in securities of companies in the real
estate industry subjects the Fund to the risks associated with the direct ownership of real estate. These risks include:
• declines
in the value of real estate;
• risks
related to local, regional, and national economic conditions;
• possible lack
of availability of mortgage funds;
• overbuilding;
• extended vacancies
of properties;
• increased
competition;
• increases
in property taxes and operating expenses;
• change in
zoning laws;
• losses due
to costs resulting from the clean-up of environmental problems;
• liability
to third parties for damages resulting from environmental problems;
• casualty or
condemnation losses;
• limitations
on rents;
• changes in
neighborhood values and the appeal of properties to tenants; and
• changes in
interest rates.
Securities of companies in the real
estate industry include equity REITs and mortgage REITs. 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-liquidations. In addition, equity and mortgage REITs could possibly
fail to qualify for tax free pass-through of income under the Code, or to maintain their exemptions
from registration under the 1940 Act.
The above factors may also adversely affect a borrower’s or a lessee’s ability to meet its obligations to the REIT.
In the event of a 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.
In addition, even the larger REITs in the industry
tend to be small to medium-sized companies in relation to the equity markets as a whole. See “Small and Medium Size Company
Risk” (below) for a discussion of the risks associated with investments in these companies.
Small and Medium Size Company Risk
Companies that are small or unseasoned
(e.g., less than three years of operating history) are more likely than larger or established companies to fail or not to accomplish
their goals. As a result, the value of their securities could decline significantly. These companies are less likely to survive
since they are often dependent upon a small number of products and may have limited financial resources and a small management
group. Small or unseasoned companies often have a greater degree of change in earnings and business prospects than larger or established
companies, resulting in more volatility in the price of their securities. The securities of small or unseasoned companies may have
limited marketability. This factor could cause the value of the Fund’s investments to decrease if it needs to sell such securities
when there are few interested buyers. Small or unseasoned companies usually have fewer outstanding shares than larger or established
companies. Therefore, it may be more difficult to buy or sell large amounts of these shares without unfavorably impacting the price
of the security. There may be less publicly available information about small or unseasoned companies. Therefore, when making a
decision to purchase a security for the Fund, the Advisor may not be aware of problems associated with the company issuing the
security. Investments in the securities of medium-sized companies present risks similar to those associated with small or unseasoned
companies, although to a lesser degree due to the larger size of the companies.
FOREIGN SECURITIES RISK
General Risk
Compared with investing in the U.S.,
investing in foreign markets involves a greater degree and variety of risk. Investors in international or foreign markets may face
delayed settlements, currency controls, and adverse economic developments as well as higher overall transaction costs. Foreign
governments may expropriate assets, impose capital or currency controls, impose punitive taxes, impose limits on ownership, or
nationalize a company or industry. Any of these actions could have a severe effect on security prices and impair the Fund’s
ability to bring its capital or income back to the U.S. The value of foreign securities may be affected by incomplete, less frequent
or inaccurate financial information about their issuers, social upheavals or political actions ranging from tax code changes to
governmental collapse. Foreign Companies may also receive less coverage than U.S. companies by market analysts and the financial
press. In addition, foreign countries may lack uniform accounting, auditing, and financial reporting standards or regulatory requirements
comparable to those applicable to U.S. companies.
The securities of some Foreign Companies
are less liquid and at times more volatile than securities of comparable U.S. companies. Foreign brokerage commissions and other
fees are also generally higher than in the U.S.
In addition, with respect to certain
foreign countries, there is a possibility of nationalization or expropriation of assets, confiscatory taxation, political or financial
instability, and diplomatic developments which could affect the value of investments in those countries. In certain countries,
legal remedies available to investors may be more limited than those available with respect to investments in the U.S. or other
countries. The laws of some foreign countries may limit the Fund’s ability to invest in securities of certain issuers located
in those countries. Special tax considerations apply to foreign securities.
ADRs and Domestically Traded Foreign Securities Risk
Because the Fund may invest in ADRs
and other domestically traded securities of Foreign Companies, the Fund’s share prices may be more affected by foreign economic
and political conditions, taxation policies, and accounting and auditing standards than if the Fund did not invest in such securities.
Currency Risk
Exchange rates for currencies fluctuate
daily. Fluctuations in the U.S. dollar’s value versus other currencies may erode or reverse gains from investments denominated
in foreign currencies or widen losses. The combination of currency risk and market risk tends to make securities traded in foreign
markets more volatile than securities traded exclusively in the U.S. Exchange rates for currencies fluctuate daily. Foreign securities
are normally denominated and traded in foreign currencies. As a result, the value of the Fund’s foreign investments and the
value of its shares may be affected favorably or unfavorably by changes in currency exchange rates relative to the U.S. dollar.
The combination of currency risk and market risks tends to make securities traded in foreign markets more volatile than securities
traded exclusively in the U.S. Exchange rate fluctuations also may impair an issuer’s ability to repay U.S. dollar denominated
debt, thereby increasing credit risk of such debt.
Foreign Custodial Services and Related Investment Costs
Risk
Foreign custodial services and other
costs relating to investment in international securities markets are generally more expensive than in the U.S. Foreign markets
have settlement and clearance procedures that differ from those in the U.S. Foreign settlement procedures and trade regulations
also may involve certain risks such as delays in payment or delivery of securities or in the recovery of the Fund’s assets
held abroad. In certain markets, particularly emerging markets, there have been times when settlements have been unable to keep
pace with the volume of securities transactions, making it difficult to conduct such transactions. Inability of the Fund to make
intended securities purchases due to settlement problems could cause the Fund to miss attractive investment opportunities. Inability
to dispose of a portfolio security caused by settlement problems could result in losses to the Fund due to a subsequent decline
in value of the portfolio security. In addition, security settlement and clearance procedures in some emerging market countries
may not fully protect the Fund against loss or theft of its assets.
Emerging Markets Risk
Investing in emerging market securities
involves risks which are in addition to the usual risks inherent in foreign investments. Some emerging markets countries may have
fixed or managed currencies that are not free-floating against the U.S. dollar. Further, certain currencies may not be traded internationally.
Certain of these currencies have experienced a steady devaluation relative to the U.S. dollar. Any devaluation in the currencies
in which the Fund’s securities are denominated may have a detrimental impact on the Fund.
Some countries with emerging securities
markets have experienced substantial, and in some periods, extremely high, rates of inflation for many years. Inflation and rapid
fluctuation in inflation rates have had and may continue to have negative effects on the economies and securities markets of certain
countries. Moreover, the economies of some countries may differ favorably or unfavorably from the U.S. economy in such respects
as rate of growth of gross domestic product, the rate of inflation, capital reinvestment, resource self-sufficiency, number and
depth of industries forming the economy’s base, governmental controls, and investment restrictions that are subject to political
change and balance of payments position. Further, there may be greater difficulties or restrictions with respect to investments
made in emerging markets countries.
Emerging markets typically have substantially
less volume than U.S. markets. In addition, securities in many such markets are less liquid, and their prices often are more volatile,
than securities of comparable U.S. companies. Such markets often have different clearance and settlement procedures for securities
transactions, and in some markets there have been times when settlements have been unable to keep pace with the volume of transactions,
making it difficult to conduct transactions. Delays in settlement could result in temporary periods when assets may not be invested.
Settlement problems in emerging markets countries also could cause the Fund to miss attractive investment opportunities. Satisfactory
custodial services may not be available in some emerging markets countries, which may result in the Fund incurring additional costs
and delays in the transportation and custody of such securities.
FIXED INCOME SECURITIES RISK
Counterparty Credit Risk
The value of the Fund’s investments
may be adversely affected if a security’s credit rating is downgraded; an issuer of an investment held by the Fund fails
to pay an obligation on a timely basis, otherwise defaults, or is perceived by other investors to be less creditworthy; or a counterparty
to a derivatives or other transaction with the Fund files for bankruptcy, becomes insolvent, or otherwise becomes unable or unwilling
to honor its obligation to the Fund.
Credit Risk
Credit risk is the possibility that
an issuer may default on a security by failing to pay interest or principal when due. If an issuer defaults, the Fund will lose
money.
Many fixed income securities receive
credit ratings from services such as S&P and Moody’s. These services assign ratings to securities by assessing the likelihood
of issuer default. Lower credit ratings correspond to higher credit risk. If a security has not received a rating, the Fund must
rely entirely upon the Advisor’s credit assessment.
Fixed income securities generally compensate
for greater credit risk by paying interest at a higher rate. The difference between the yield of a security and the yield of a
U.S. Treasury security with a comparable maturity (the spread) measures the additional interest paid for risk. Spreads may increase
generally in response to adverse economic or market conditions. A security’s spread may also increase if the security’s
rating is lowered, or the security is perceived to have an increased credit risk. An increase in the spread will cause the price
of the security to decline.
Interest Rate Risk
Prices of fixed income securities rise
and fall in response to changes in the interest rate paid by similar securities. Generally, when interest rates rise, prices of
fixed income securities fall. However, market factors, such as the demand for particular fixed income securities, may cause the
price of certain fixed income securities to fall while the prices of other securities rise or remain unchanged. Interest rate changes
have a greater effect on the price of fixed income securities with longer durations. Duration measures the price sensitivity of
a fixed income security to changes in interest rates.
ETN Investment Risk
Because the return on the ETN is dependent
on the issuer’s ability or willingness to meet its obligations, the value of the ETN may change due to a change in the issuer’s
credit rating, despite no change in the underlying reference instrument. The market value of ETN shares may differ from the value
of the reference instrument.
This difference in price may be due
to the fact that the supply and demand in the market for ETN shares at any point in time is not always identical to the supply
and demand in the market for the assets underlying the reference instrument that the ETN seeks to track.
There may be restrictions on the Fund’s
right to redeem its investment in an ETN, which are generally meant to be held until maturity. The Fund’s decision to sell
its ETN holdings may be limited by the availability of a secondary market. An investor in an ETN could lose some or all of the
amount invested.
DERIVATIVE CONTRACTS RISK
General Risk
Second, while some strategies involving
derivatives may reduce the risk of loss, they may also reduce potential gains or, in some cases, result in losses by offsetting
favorable price movements in portfolio holdings. Third, there is a risk that derivative contracts may be mispriced or improperly
valued and, as a result, the Fund may need to make increased cash payments to the counterparty. Fourth, derivative contracts may
cause the Fund to realize increased ordinary income or short-term capital gains (which are treated as ordinary income for Federal
income tax purposes) and, as a result,
may increase taxable distributions to shareholders. Fifth, a common provision in OTC derivative contracts permits the counterparty
to terminate any such contract between it and the Fund, if the value of the Fund’s total net assets declines below a specified
level over a given time period. Factors that may contribute to such a decline (which usually must be substantial) include significant
shareholder redemptions and/or a marked decrease in the market value of the Fund’s investments. Any such termination of the
Fund’s OTC derivative contracts may adversely affect the Fund (for example, by increasing losses and/or costs, and/or preventing
the Fund from fully implementing its investment strategies). Finally, derivative contracts may also involve other risks described
in this SAI, such as stock market, interest rate, credit, currency, liquidity and leverage risks.
When a derivative is used as a hedge
against an offsetting position that the Fund also holds, any loss generated by that derivative will be substantially offset by
the gains on the hedged security, and vice versa. To the extent the Fund uses a derivative security for purposes other than as
a hedge, or, if the Fund hedges imperfectly, the Fund is directly exposed to the risks of that derivative or other instrument and
any loss generated by that derivative or other instrument will not be offset by a gain.
Options Risk
When the Fund purchases an option, it
runs the risk that it will lose its entire investment in the option in a relatively short period of time, unless the Fund exercises
the option or enters into a closing sale transaction with respect to the option during the life of the option. If the price of
the underlying security does not rise (in the case of a call) or fall (in the case of a put) to an extent sufficient to cover the
option premium and transaction costs, the Fund will lose part or all of its investment in the option. This contrasts with an investment
by the Fund in the underlying security, since the Fund will not lose any of its investment in such security if the price does not
change.
The use of options also involves the
risk of imperfect correlation between movements in option prices and movements in the value of the underlying securities.
The effective use of options also depends
on the Fund’s ability to terminate option positions at times when the Advisor deems it desirable to do so. Although the Fund
will take an option position only if the Advisor believes there is a liquid secondary market for the option, there is no assurance
that the Fund will be able to effect closing transactions at any particular time or at an acceptable price.
The Fund generally expects that its
options transactions will be conducted on recognized exchanges. In certain instances, however, the Fund may purchase and sell options
in the OTC markets. The Fund’s ability to terminate options in the OTC market may be more limited than for exchange-traded
options and may also involve the risk that securities dealers participating in such transactions would be unable to meet their
obligations to the Fund.
The Fund will, however, engage in OTC
market transactions only when appropriate exchange-traded transactions are unavailable and when, in the opinion of the Advisor,
the pricing mechanism and liquidity of the OTC market is satisfactory and the participants are responsible parties likely to meet
their contractual obligations.
If a secondary trading market in options
were to become unavailable, the Fund could no longer engage in closing transactions. Lack of investor interest might adversely
affect the liquidity of the market for particular options or series of options. A market may discontinue trading of a particular
option or options generally. In addition, a market could become temporarily unavailable if unusual events, such as, volume in excess
of trading or clearing capability, were to interrupt its normal operations.
A market may at times find it necessary
to impose restrictions on particular types of options transactions, such as opening transactions. For example, if an underlying
security ceases to meet qualifications imposed by the market or the Options Clearing Corporation, new series of options on that
security will no longer be opened to replace expiring series, and opening transactions in existing series may be prohibited. If
an options market were to become unavailable, the Fund as a holder of an option would be able to realize profits or limit losses
only by exercising the option, and the Fund, as option writer, would remain obligated under the option until expiration.
Disruptions in the markets for the securities
underlying options purchased or sold by the Fund could result in losses on the options. If trading is interrupted in an underlying
security, the trading of options on that security is normally halted as well. As a result, the Fund as purchaser or writer of an
option will be unable to close out its positions until options trading resumes, and it may be faced with considerable losses if
trading in the security reopens at a substantially different price. In addition, the Options Clearing Corporation or other options
markets may impose exercise restrictions. If a prohibition on exercise is imposed at the time when trading in the option has also
been halted, the Fund as a purchaser or writer of an option will be locked into its position until one of the two restrictions
has been lifted. If the Options Clearing Corporation were to determine that the available supply of an underlying security appears
insufficient to permit delivery by the writers of all outstanding calls in the event of exercise, it may prohibit indefinitely
the exercise of put options by holders who would be unable to deliver the underlying interest. The Fund, as holder of such a put
option, could lose its entire investment if the prohibition remained in effect until the put option’s expiration and the
Fund was unable either to acquire the underlying security or to sell the put option in the market.
Special risks are presented by internationally-traded
options. Because of time differences between the U.S. and various foreign countries, and because different holidays are observed
in different countries, foreign options markets may be open for trading during hours or on days when U.S. markets are closed. As
a result, option premium may not reflect the current prices of the underlying interest in the U.S.
An exchange-listed option may be closed
out only on an exchange which provides a secondary market for an option of the same series. There is no assurance that a liquid
secondary market on an exchange will exist for any particular option or at any particular time. If no secondary market were to
exist, it would be impossible to enter into a closing transaction to close out an option position. As a result, the Fund may be
forced to continue to hold, or to purchase at a fixed price, a security on which it has sold an option at a time when the Advisor
believes it is inadvisable to do so.
Higher than anticipated trading activity
or order flow or other unforeseen events might cause the Options Clearing Corporation or an exchange to institute special trading
procedures or restrictions that might restrict the Fund’s use of options. The exchanges have established limitations on the
maximum number of calls and puts of each class that may be held or written by an investor or group of investors acting in concert.
It is possible that the Trust and other clients of the Advisor may be considered such a group. These position limits may restrict
the Trust’s ability to purchase or sell options on particular securities. Options that are not traded on national securities
exchanges may be closed out only with the other party to the option transaction. For that reason, it may be more difficult to close
out unlisted options than listed options. Furthermore, unlisted options are not subject to the protection afforded purchasers of
listed options by the Options Clearing Corporation.
Liquidity Risk
Positions in futures contracts may be
closed out only on an exchange or board of trade which provides a secondary market for such futures. Although the Fund intends
to purchase or sell futures only on exchanges or boards of trade where there appears to be an active secondary market, there is
no assurance that a liquid secondary market on an exchange or board of trade will exist for any particular contract or at any particular
time. If there is not a liquid secondary market at a particular time, it may not be possible to close a futures position at such
time and, in the event of adverse price movements, the Fund would continue to be required to make daily cash payments of variation
margin. However, in the event financial futures are used to hedge portfolio securities, such securities will not generally be sold
until the financial futures can be terminated. In such circumstances, an increase in the price of the portfolio securities, if
any, may partially or completely offset losses on the financial futures. In addition to the risks that apply to all options transactions,
here are several special risks relating to options on futures contracts. The ability to establish and close out positions in such
options will be subject to the development and maintenance of a liquid secondary market. It is not certain that such a market will
develop. Although the Fund generally will purchase only those options for which there appears to be an active secondary market,
there is no assurance that a liquid secondary market on an exchange will exist for any particular option or at any particular time.
In the event no such market exists for particular options, it might not be possible to effect closing transactions in such options,
with the result that the Fund would have to exercise the options in order to realize any profit.
Hedging Risk
There are several risks in connection with
the use by the Fund of futures contracts and related options as a hedging device. One risk arises because of the imperfect correlation
between movements in the prices of the futures contracts and options and movements in the prices of securities that are the subject
of the hedge. The Advisor will, however, attempt to reduce this risk by purchasing and selling, to the extent possible, futures
contracts and related options on securities and indices, the movements of which will, in its judgment, correlate closely with movements
in the prices of the portfolio securities sought to be hedged.
Successful use of futures contracts and options
by the Fund for hedging purposes is also subject to the Advisor’s ability to predict correctly movements in the direction
of the market. It is possible that, where the Fund has purchased puts on futures contracts to hedge its portfolio against a decline
in the market, the securities or index on which the puts are purchased may increase in value and the value of securities held in
the portfolio may decline. If this occurred, the Fund would lose money on the puts and also experience a decline in value in its
portfolio securities. In addition, the prices of futures, for a number of reasons, may not correlate perfectly with movements in
the underlying securities or index due to certain market distortions. First, all participants in the futures market are subject
to margin deposit requirements. Such requirements may cause investors to close futures contracts through offsetting transactions
which could distort the normal relationship between the underlying security or index and futures markets. Second, the margin requirements
in the futures markets are less onerous than margin requirements in the securities markets in general, and as a result the futures
markets may attract more speculators than the securities markets do. Increased participation by speculators in the futures markets
may also cause temporary price distortions. Due to the possibility of price distortion, even a correct forecast of general market
trends by the Advisor may still not result in a successful hedging transaction over a very short time period.
Other Risk
The Fund will incur brokerage fees in connection
with their futures and options transactions. In addition, while futures contracts and options on futures will be purchased and
sold to reduce certain risks, those transactions themselves entail certain other risks. Thus, while the Fund may benefit from the
use of futures and related options, unanticipated changes in interest rates or stock price movements may result in a poorer overall
performance for the Fund than if it had not entered into any futures contracts or options transactions. Moreover, in the event
of an imperfect correlation between the futures position and the portfolio position that is intended to be protected, the desired
protection may not be obtained and the Fund may be exposed to risk of loss.
Forward Foreign Currency and Foreign Currency Futures
Contracts Risk
Among the risks of using foreign currency futures
contracts is the fact that positions in these contracts (and any related options) may be closed out only on an exchange or board
of trade which provides a secondary market. Although it is intended that the Fund using foreign currency futures contracts and
related options will only purchase or sell them on exchanges or boards of trade where there appears to be an active secondary market,
there is no assurance that a secondary market on an exchange or board of trade will exist for any particular contract or option
or at any particular time. In such event, it may not be possible to close a futures or related option position and, in the event
of adverse price movements, the Fund would continue to be required to make daily cash payments of variation margin on its futures
positions.
In addition, it is impossible to forecast with
precision the market value of a security at the expiration or maturity of a forward or futures contract. Accordingly, it may be
necessary to purchase additional foreign currency on the spot market (and bear the expense of such purchase) if the market value
of the security being hedged is less than the amount of foreign currency the Fund is obligated to deliver and if a decision is
made to sell the security and make delivery of the foreign currency. Conversely, it may be necessary to sell on the spot market
some of the foreign currency received upon the sale of the hedged portfolio security if the market value of such security exceeds
the amount of foreign currency the Fund is obligated to deliver.
Swaps
The Fund may use swaps to enhance returns
and manage risk. The Fund’s use of swaps involves risks different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional investments. These risks included (i) the risk that the counterparty to
a derivative transaction may not fulfill its contractual obligations; (ii) the risk of mispricing or improper valuation; and (iii)
the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset, rate or index. Derivative
prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous
factors that affect the markets, including, but not limited to: changing supply and demand relationships; government programs and
policies; national and international political and economic events, changes in interest rates, and inflation and deflation. Trading
derivative instruments involves risks different from, or possibly greater than, risks associated with investing directly in securities.
Derivative contracts ordinarily have leverage inherent in their terms. The low margin deposits normally required in trading derivatives,
including futures contracts, permit a high degree of leverage. Accordingly, a relatively small price movement may result in an
immediate and substantial loss to the Fund. The use over leverage may also cause the Fund to liquidate portfolio positions when
it would not be advantageous to do so in order to satisfy its obligations or to meet collateral segregations requirements. The
use of leveraged derivatives can magnify the Fund’s potential for loss and, therefore, amplify the effects of market volatility
on the Fund’s share price.
OTHER TRANSACTIONS/INVESTMENT RISKS
Government Intervention and Extreme Volatility Risk
In the past, instability in the financial
markets led the U.S. Government and other governments to take a number of unprecedented actions designed to support certain financial
institutions and segments of the financial markets that experienced extreme volatility, and in some cases lack of liquidity. Federal,
state, and other governments, their regulatory agencies, or self-regulatory organizations could take actions that affect the regulation
of the instruments in which the Fund invests, or the issuers of such instruments, in ways that are unforeseeable. Legislation or
regulation may also change the way in which the Fund itself is regulated. Such legislation or regulation could limit or preclude
the Fund’s ability to achieve its investment objective.
Reduced liquidity in credit and fixed-income
markets may adversely affect many issuers worldwide. Reduced liquidity may result in less money being available to purchase raw
materials, goods and services from emerging markets, which may, in turn, bring down the prices of these economic staples. It may
also result in emerging market issuers having more difficulty obtaining financing, which may, in turn, cause a decline in their
stock prices. If they arise, these issues may have an adverse effect on the Fund.
Leverage Risk
Leverage risk is created when an investment
exposes the Fund to a level of risk that exceeds the amount invested. Changes in the value of such an investment magnify the Fund’s
risk of loss and potential for gain.
Some transactions may give rise to a
form of leverage. These transactions may include, among others, derivatives and reverse repurchase agreements, and may expose the
Fund to greater risk and increase its costs. When transactions create leverage, adverse changes in the value or level of the underlying
asset, reference rate or index can result in a loss substantially greater than the amount invested in the derivatives or other
instruments themselves. Certain transactions have the potential for unlimited loss, regardless of the size of the initial investments.
Increases and decreases in the value of the securities held by the Fund and therefore in the Fund’s NAV will be magnified
when the Fund uses leverage because leverage tends to increase the Fund’s exposure to market risk, interest rate risk or
other risks by, in effect, increasing assets available for investment.
To mitigate leverage risk, the Advisor
will segregate liquid assets on the books of the Fund or otherwise cover the transactions. The use of leverage may cause the Fund
to liquidate Fund positions when it may not be advantageous to do so to satisfy its obligations or to meet segregation requirements.
The Fund will also have to pay interest on its borrowing, reducing the Fund’s return. This interest expense may be greater
than the Fund’s return on the underlying investment.
INVESTMENT
RESTRICTIONS
FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund has adopted
the following fundamental investment restrictions that may not be changed without approval by a “majority of the outstanding
shares” of the Fund which, as used in this SAI, means the vote of the lesser of (a) 67% or more of the shares of the Fund
represented at a meeting, if the holders of more than 50% of the outstanding shares of the Fund are present or represented by proxy,
or (b) more than 50% of the outstanding shares of the Fund.
The Fund:
|
(1)
|
May not invest 25% or more of its total assets in a particular industry or
group of industries. This limitation is not applicable to investments in obligations issued or guaranteed by the U.S. government,
its agencies and instrumentalities.
|
|
(2)
|
May not issue senior securities, except to the extent permitted by the 1940
Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the Securities and Exchange
Commission (“SEC”) and as may be amended from time to time.
|
|
(3)
|
May not borrow money, except to the extent permitted by the 1940 Act, or
any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC and as may be amended from
time to time.
|
|
(4)
|
May not purchase or sell commodities, except to the extent permitted by the
1940 Act, or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC and as may be
amended from time to time.
|
|
(5)
|
May not purchase or sell real estate unless acquired as a result of ownership
of securities or other instruments, except to the extent permitted by the 1940 Act, or any rules, exemptions or interpretations
thereunder that may be adopted, granted or issued by the SEC and as may be amended from time to time. This restriction does not
prevent the Fund from (i) investing in issuers that invest, deal, or otherwise engage in transactions in real estate or interests
therein, or investing in securities that are secured by real estate or interests therein, or (ii) making, purchasing or selling
real estate mortgage loans.
|
|
(6)
|
May not act as an underwriter, except to the extent the Fund may be deemed
to be an underwriter when disposing of securities it owns or when selling its own shares.
|
|
(7)
|
May not make loans, except to the extent permitted by the 1940 Act, or any
rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC and as may be amended from time
to time. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other
debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies,
and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
|
If a restriction on the Fund’s
investments is adhered to at the time an investment is made, a subsequent change in the percentage of Fund assets invested in certain
securities or other instruments resulting from changes in the value of the Fund’s total assets, will not be considered a
violation of the restriction, with the exception of the Fund’s limitations on borrowing as described herein or unless otherwise
noted herein.
With respect to the Fund’s
fundamental restriction on concentration, to the extent sufficient information is reasonably available, the Fund will consider
the investments of underlying investment companies when determining its compliance with this policy.
With respect to the
Fund’s fundamental restriction on borrowing, the 1940 Act limits the Fund’s ability to borrow money, except that the
Fund may borrow from any bank provided that immediately after any such borrowing there is an asset coverage of at least 300% for
all borrowings by the Fund and provided further, that in the event that such asset coverage shall at any time fall below 300%,
the Fund shall, within three days thereafter or such longer period as the SEC may prescribe by rules and regulations, reduce the
amount of its borrowings to such an extent that the asset coverage of such borrowing shall be at least 300%.
In addition to
borrowings that are subject to 300% asset coverage and are considered by the SEC to be permitted “senior securities,”
the Fund is also permitted under the 1940 Act to borrow for temporary purposes in an amount not exceeding 5% of the value of its
total assets at the time when the loan is made. A loan will be presumed to be for temporary purposes if it is repaid within 60
days and is not extended or renewed.
Regulatory Compliance.
The Fund may follow non-fundamental operational policies that are more restrictive than its fundamental investment limitations,
as set forth in the Prospectus and this SAI, in order to comply with applicable laws and regulations, including the provisions
of and regulations under the 1940 Act. The Fund may change these operational policies to reflect changes in the laws and regulations
without the approval of its shareholders.
NON-FUNDAMENTAL INVESTMENT RESTRICTIONS
The Fund’s investment objective is non-fundamental
and may be changed by the Board without shareholder approval upon 60 days’ prior written notice to the Fund’s
shareholders.
The Fund has adopted the following non-fundamental
investment restriction which may be changed by the Board without the approval of the Fund’s shareholders. Any
changes in the Fund’s non-fundamental limitations will be communicated to the Fund’s shareholders prior to effectiveness.
The Fund:
|
(1)
|
May not invest in any other investment company or company relying on Section 3(c)(1) or 3(c)(7)
of the 1940 Act in excess of the limitations contained in Section 12(d)(1)(A) of the 1940 Act, except to the extent permitted by
exemptive relief from the SEC permitting the Fund to purchase shares of other investment companies for short-term cash management
purposes.
|
MANAGEMENT
Trustees
and Officers
The following
tables provide information about Board of Trustees and the senior officers of the Trust. Each of the Trustees is deemed to be an
Independent Trustee of the Trust. Each Trustee oversees all portfolios of the Trust and serves for an indefinite term (subject
to mandatory retirement provisions). Information about each Trustee is provided below and includes each person’s: name, address,
age (as of the date of the Fund’s most recent fiscal year end), present position(s) held with the Trust, principal occupations
for the past five years and total compensation received as a Trustee for the most recent fiscal year. Please note that the information
consolidates and includes historical information from their service as Trustee or Officer of the Original Trusts. Unless otherwise
noted, the business address of each person listed below is c/o Strategy Shares, 36 North New York Avenue, Huntington, NY 11743.
Unless otherwise noted, each officer is elected annually by the Board. Each Trustee and officer also serves in the same capacity
for Mutual Fund and Variable Insurance Trust, another open-end investment company whose series are managed by Rational Advisors,
Inc. Collectively, the Trust, Mutual Fund and Variable Insurance Trust, Mutual Fund Series Trust, Variable Insurance Trust, AlphaCentric
Prime Meridian Income Fund and the TCG Financial Series Trusts I-X comprise the “Fund Complex.”
Independent
Trustees Background
Name, Address and Age
|
|
Position with the Trust
|
|
Term of Office and
Length of Time Served*
|
|
Principal Occupation(s)
During Past 5 Years
|
|
Number of Portfolios in
Fund Complex**
Overseen by Trustee
|
|
Other Directorships
Held by Trustee
|
Tobias Caldwell
Year of Birth: 1967
|
|
Chairman of the Board and Trustee
|
|
Since January 2016
|
|
Managing Member, Genovese Family Enterprises, LLC (1999 – present) (real estate firm); Managing member, PTL Real Estate, LLC (2000 – present) (real estate/investment firm); Managing member, Bear Properties, LLC (2006 - present) (real estate firm).
|
|
56
|
|
Chairman of the Board, Strategy Shares (2016-present); Lead Independent Trustee and Chairman of Audit Committee, Mutual Fund Series Trust (2006-present); Independent Trustee and Chairman of Audit Committee, Variable Insurance Trust (2010-present); Trustee, M3Sixty Trust (2016-present); Chairman of the Board, AlphaCentric Prime Meridian Income Fund (July 2018 to present).
|
|
|
|
|
|
|
|
|
|
|
|
|
Stephen P. Lachenauer
Year of Birth: 1967
|
|
Trustee and Audit Committee Chairman
|
|
Since January 2016
|
|
Attorney, private practice. (2011 – present).
|
|
17
|
|
Trustee and Chairman of the Audit Committee, Strategy Shares (2016 – present); Trustee, TCG Financial Series Trusts I-X (2015–present); Trustee and Chairman of the Audit Committee, AlphaCentric Prime Meridian Income Fund (July 2018 – present).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Donald McIntosh
Year of Birth: 1967
|
|
Trustee
|
|
Since January 2016
|
|
Business Control & Risk Management Advisor, Santander Bank (February 2019 to present); Quality Control Advisor, Santander Bank (July 2016 – January 2019); Credit risk review analyst, Santander Holdings USA (May 2015 – 2016); Governance analyst, Santander Bank (2011 – April 2015).
|
|
17
|
|
Trustee, Strategy Shares (2016– present); Trustee, TCG Financial Series Trusts I-X (2015–present); Trustee, AlphaCentric Prime Meridian Income Fund (July 2018 – present).
|
*
|
The term of office of each Trustee is indefinite.
|
**
|
The “Fund Complex” includes the Trust, Mutual Fund and Variable Insurance Trust, Mutual Fund Series Trust, Variable Insurance Trust, AlphaCentric Prime Meridian Income Fund and the TCG Financial Services Trusts I-X, each a registered investment company.
|
Officers*
Jerry Szilagyi
Year of Birth: 1962
|
President and Chief Executive Officer
|
Since 3/2016
|
President, Rational Advisors, Inc., 1/2016 – present; Chief
Executive Officer, Catalyst Capital Advisors LLC, 1/2006 – present; Member, AlphaCentric Advisors LLC, 2/2014 to present;
Chief Executive Officer, Alt Fund Distributors LLC, 12/2014 – present; Managing Member, MFund Distributors LLC, 10/2012–
present; Managing Member, MFund Services LLC, 1/2012 – present; President, Abbington Capital Group LLC, 1998– present;
CEO, Catalyst Capital International, LLC 2017-present; President, USA Mutuals, Inc., 3/2011 to 7/2016; President, Cross Sound LLC,
6/11 to 7/2016.
|
James Szilagyi
Year of Birth: 1963
|
Treasurer
|
Since 3/2016
|
Product Manager, Catalyst Capital Advisors LLC, 9/2015 to present;
Senior Business Consultant, Fidelity Information Services, 2011 – 9/2015.
|
Frederick J. Schmidt
Year of Birth: 1959
|
Chief Compliance Officer
|
Since 3/2016
|
Director, MFund Services LLC 5/2015 to present; Director & Chief Compliance Officer, Citi Fund Services, 2010 – 2015.
|
Jennifer A. Bailey
Year of Birth: 1968
|
Secretary
|
Secretary
since 3/2016
|
Director of Legal Services, MFund Services LLC, 2/2012 – present.
|
Michael Schoonover
Year of Birth: 1983
|
Vice President
|
Since 6/2018
|
Chief
Operating Officer, Catalyst Capital Advisors LLC & Rational Advisors, Inc., June 2017 to present; Portfolio Manager, Catalyst
Capital Advisors LLC 12/2013 to present; Portfolio Manager, Rational Advisors, Inc. 1/2016 to 5/2018.
|
|
|
|
|
|
* Officers do not receive any compensation from the Trust.
Compensation of the Board of
Trustees
The Independent
Trustees are paid a quarterly retainer, and receive compensation for each committee meeting, telephonic Board meeting, and special
in-person Board meeting attended. Officers receive no compensation from the Trust. The Trust reimburses each of the Independent
Trustees for travel and other expenses incurred in connection with attendance at such meetings. The Trust has no retirement or
pension plans.
The following table describes the
compensation that the Trust and the Fund Complex paid to the Trustees of the Trust during the most recent fiscal year ended April
30, 2019.
.
|
|
|
|
|
Name of Trustee
|
|
Compensation from the Trust
|
|
Compensation
from the Fund Complex*
|
Tobias Caldwell
|
|
$1,850
|
|
$223,117
|
|
|
|
Stephen Lachenauer
|
|
$2,100
|
|
$49,6171
|
|
|
|
Donald McIntosh
|
|
$1,350
|
|
$36,7171
|
* The Fund Complex consists of the Trust, Mutual Fund and
Variable Insurance Trust, Variable Insurance Trust, Mutual Fund Series Trust, AlphaCentric Prime Meridian Income Fund, and the
TCG Financial Series Trusts I-X, each a registered investment company. Variable Insurance Trust and TCG Financial Series Trusts
I-X were not in operations and did not compensate its Trustees during the period shown.
1Does not include compensation from Variable Insurance Trust
or Mutual Fund Series Trust, of which he does not serve on the Board.
TRUSTEES OWNERSHIP
OF SHARES IN THE FUND AND IN THE FUND COMPLEX AS OF
DECEMBER 31,
2019
|
|
|
|
|
Name of Trustee
|
|
Dollar Range of Shares Owned
in the Fund*
|
|
Dollar Range of Shares
Owned
in the Fund Complex**
|
Tobias Caldwell
|
|
None
|
|
Over $100,000
|
|
|
|
Stephen Lachenauer
|
|
None
|
|
None1
|
|
|
|
Donald McIntosh
|
|
None
|
|
None1
|
*
**
|
The Fund was not in operation as of December 31, 2019.
The “Fund Complex” includes the Trust, Mutual
Fund and Variable Insurance Trust, Variable Insurance Trust, Mutual Fund Series Trust, AlphaCentric Prime Meridian Income Fund,
and the TCG Financial Series Trusts I-X, each a registered investment company. Variable Insurance Trust and TCG Financial Series
Trusts I-X were not in operations as of December 31, 2019.
1Does not include ownership of shares in Variable Insurance
Trust or Mutual Fund Series Trust, of which he does not serve on the Board.
|
As of December 31, 2019, none of
the Trustees (including their immediate family members) owned beneficially or of record securities of the Advisor or the Distributor
or any entity directly or indirectly controlling, controlled by, or under common control with the Advisor or Distributor.
Qualifications and Experience
of the Trustees
The following
provides an overview of the considerations that led the Board to conclude that each individual serving as a Trustee of the Trust
should so serve. Generally, no one factor was decisive in the original selection of an individual to join the Board. Among the
factors the Board considered when concluding that an individual should serve on the Board were the following: (1) the individual’s
business and professional experience and accomplishments; (2) the individual’s prior experience serving on the boards of
public companies, and other complex enterprises and organizations; and (3) how the individual’s skills, experience, and attributes
would contribute to an appropriate mix of relevant skills and experience on the Board.
In respect
of each current Trustee, the individual’s substantial professional accomplishments and prior experience, including, in some
cases, in fields related to the operations of the Trust, were a significant factor in the determination that the individual should
serve as a Trustee of the Trust.
In addition
to the information set forth above, the following sets forth additional information about the qualifications and experience of
each of the Trustees that lead to the conclusion that each Trustee should serve as Trustee of the Trust.
Tobias Caldwell
Mr.
Caldwell is the manager of a real estate investment firm. Mr. Caldwell has served on the boards of mutual funds for over ten years,
including as chair of the audit committee for over ten years. Mr. Caldwell also serves as a Trustee of other registered investment
companies in the Fund Complex. His experience in the real estate and investment industries provides the Board with an additional
perspective and understanding of investment strategies used by advisors to the funds.
Stephen
Lachenauer
Mr.
Lachenauer has been an attorney in private practice for over six years, providing advice and counsel to small businesses
and individuals on business and financial matters. Mr. Lachenauer’s previous experience at large law firms and
as an attorney at a large investment bank provides the Board with knowledge of financial and investment regulatory matters. Mr.
Lachenauer also serves as a Trustee of other registered investment companies in the Fund Complex.
Donald McIntosh
Mr. McIntosh is
a credit risk review analyst for a large international financial services company, and he has many years of credit analysis and
loan servicing experience. Mr. McIntosh’s experience in evaluating companies’ financial condition would provide the
Board with knowledge about investment strategies used by the advisors of the funds. Mr. McIntosh also serves as a Trustee
of other registered investment companies in the Fund Complex.
Board Structure
The Board is
responsible for overseeing the management and operations of the Trust. The Board consists of three Independent Trustees. The Chairperson
of the Trust, Tobias Caldwell, is an Independent Trustee.
The Board holds
four regular meetings each year to consider and address matters involving the Fund. The Board also may hold special meetings to
address matters arising between regular meetings. In addition, the Independent Trustees regularly meet outside the presence of
management and are advised by independent legal counsel. These meetings may take place in-person or by telephone.
The Board reviews
its structure regularly and believes that its leadership structure, including being composed entirely of Independent Trustees is
appropriate and in the best interests of the Trust, given its specific characteristics. The Board of Trustees also believes its
leadership structure facilitates the orderly and efficient flow of information to the Independent Trustees from Trust management.
When considering
potential nominees to fill vacancies on the Board, and as part of its annual self-evaluation, the Board reviews the mix of skills
and other relevant experiences of the Trustees.
Committees
of the Board of Trustees
The Board has
two standing committees, the Audit Committee and the Risk and Compliance Committee.
Audit Committee.
The Audit Committee is comprised of each of the Trustees. The primary function of the Audit Committee is to assist the full
Board in fulfilling its oversight responsibilities to the shareholders and the investment community relating to fund accounting,
reporting practices and the quality and integrity of the financial reports. To satisfy these responsibilities, the Audit Committee
reviews with the independent auditors the audit plan and results and recommendations following independent audits, reviews the
performance of the independent auditors and recommends engagement or discharge of the auditors to the full Board, reviews the independence
of the independent auditors, reviews the adequacy of the Fund’s internal controls and prepares and submits Committee meeting
minutes and supporting documentation to the full Board. The Audit Committee met four times during the fiscal year ended April 30,
2019.
Risk and
Compliance Committee. The Risk and Compliance Committee is comprised of each of the Trustees. The Risk and Compliance Committee
is responsible for general oversight of the Trust’s compliance with the legal and regulatory requirements of the Trust’s
operations. The Risk and Compliance Committee also serves as a means to provide feedback and guidance to the Trust’s Chief
Compliance Officer (“CCO”) and assists the Board in identifying and managing risks. The Risk and Compliance Committee
is newly established and met once during the fiscal year ended April 30, 2019.
Board Oversight of Risk
An integral
part of the Board’s overall responsibility for overseeing the management and operations of the Trust is the Board’s
oversight of the risk management of the Trust’s investment programs and business affairs. The Fund is subject to a number
of risks, such as investment risk, valuation risk, risk of operational failure or lack of business continuity, and legal, compliance
and regulatory risk. The Fund, the Advisor, and other service providers to the Trust have implemented various processes, procedures,
and controls to identify risks to the Fund, to lessen the probability of their occurrence, and to mitigate any adverse effect should
they occur. Different processes, procedures, and controls are employed with respect to different types of risks.
The Board exercises
oversight of the risk management process through the Audit Committee and through oversight by the Board itself. The Board holds
four regular meetings each year to consider and address matters involving the Fund.
In addition
to adopting, and periodically reviewing, policies and procedures designed to address risks to the Fund, the Board requires management
of the Advisor and the Trust, including the Trust’s Chief Compliance Officer (“CCO”), to report to the Board
and the Audit Committee of the Board on a variety of matters, including matters relating to risk management, at regular and special
meetings. The Board and the Audit Committee receive regular reports from the Trust’s independent public accountants on internal
control and financial reporting matters. On at least a quarterly basis, the Independent Trustees meet with the Trust’s CCO,
including outside the presence of management, to discuss issues related to compliance. Furthermore, the Board receives a quarterly
report from the Trust’s CCO regarding the operation of the compliance policies and procedures of the Trust and its primary
service providers. The Board monitors the Fund’s investment policies and procedures as well as valuation of the Fund’s
securities. The Board also receives quarterly reports from the Advisor on the investments and securities trading of the Fund, including
their investment performance and asset weightings compared to appropriate benchmarks, as well as reports regarding the valuation
of the Fund’s securities. The Board also receives reports from the Trust’s primary service providers regarding their
operations as they relate to the Fund.
SERVICE
PROVIDERS
INVESTMENT ADVISORY SERVICES
Investment Advisor
Donald L. Hagan, LLC, also known as Day
Hagan Asset Management, a Florida limited liability company located at 1000 South Tamiami Trail, Sarasota, FL 34236, serves as
advisor to the Fund. The Advisor was formed in 2004 and, as of September 30, 2019, has approximately $262.5 million in assets under
advisement or management for individuals, institutions and financial advisors around the country. Under the terms of the management
agreement, the Advisor is responsible for formulating the Fund’s investment policies, making ongoing investment decisions
and directing portfolio transactions. The Advisor is controlled by Donald Hagan and Arthur Day.
The Management Agreement
provides that the Advisor will provide the Fund with investment advice and supervision and will continuously furnish an investment
program for the Fund consistent with the investment objectives and policies of the Fund. The Advisor is responsible for the payment
of the salaries and expenses of all of its personnel, office rent and the expenses of providing investment advisory and related
clerical expenses.
Under the terms
of the Management Agreement, the Advisor manages the investment of the assets of the Fund in conformity with the investment objectives
and policies of the Fund. It is the responsibility of the Advisor to make investment decisions for the Fund and to provide continuous
supervision of the investment portfolio of the Fund.
As full
compensation for its services to the Fund, the Advisor receives monthly compensation from the Fund at the annual rate of 0.68%
of the Fund’s average daily net assets. In consideration of the fees paid with respect to the Fund, the Adviser has agreed
to pay all routine expenses of the Fund (including, without limitation, transfer agent fees, administrative fees and expenses,
custodian fees, legal fees, accounting fees, any other expenses (including clerical expenses) of issue, sale, repurchase or redemption
of shares, expenses of registering or qualifying shares for sale, transfer taxes, all expenses of preparing the Trust’s registration
statement and prospectus for the Fund, and the cost of printing and delivering to shareholders prospectuses and reports), except
the Fund’s management fee; taxes; brokerage commissions and trading costs; interest (including borrowing costs and overdraft
charges); short sale dividends and interest expenses; acquired fund fees and expenses; and non-routine or extraordinary expenses
of the Fund (such as litigation or reorganizational costs), each of which is paid by the Fund.
The Management
Agreement with the Fund continues in effect for an initial two-year term and then from year to year as long as its continuation
is approved at least annually by the Board of Trustees, including a majority of the Trustees who are not “interested persons,”
or by the shareholders of the Fund. The Management Agreement may be terminated at any time upon 60 days’ written notice by
the Fund or by a majority vote of the outstanding shares or 90 days’ written notice by the Advisor and will terminate automatically
upon assignment. A discussion of the matters considered by the Board in connection with the approval of the Management Agreement
will be available in the Fund’s initial Annual or Semi-Annual Report to Shareholders.
The Management
Agreement provides that the Advisor shall not be liable for any error of judgment or mistake of law or for any loss suffered by
the Trust in connection with the performance of its duties, except a loss resulting from a breach of fiduciary duty with respect
to the receipt of compensation for services or a loss resulting from willful misfeasance, bad faith, or gross negligence on the
part of the Advisor in the performance of its duties, or from reckless disregard of its duties and obligations thereunder.
From time to
time, the Advisor may use a portion of its reasonable resources and profits to pay for certain administrative services provided
by financial institutions for Shares of the Fund.
ADDITIONAL INFORMATION REGARDING PORTFOLIO MANAGERS
Donald Hagan, Arthur
Day and Regan Teague are the portfolio managers responsible for the day-to-day management of the Fund. Mr. Hagan is the Lead Portfolio
Manager of the Fund.
Other Accounts Under Management
As of November 31, 2019, the number
of, and total assets in all registered investment companies, other pooled investment vehicles, and other accounts overseen by the
Fund’s portfolio managers were as follows:
|
|
|
Other Accounts Managed
By Donald Hagan
|
|
Total Number of Other Accounts Managed/
Total Assets
|
Registered Investment Companies
|
|
2/$84 Million
|
Other Pooled Investment Vehicles
|
|
0/$0
|
Other Accounts
|
|
8,230/$1.193 Million
|
|
|
|
Other Accounts Managed
By Arthur Day
|
|
Total Number of Other Accounts Managed/
Total Assets
|
Registered Investment Companies
|
|
1/$16 Million
|
Other Pooled Investment Vehicles
|
|
0/$0
|
Other Accounts
|
|
8,230/$1.193 Million
|
Other Accounts Managed
By Regan Teague
|
|
Total Number of Other Accounts Managed/
Total Assets
|
Registered Investment Companies
|
|
1/$16 Million
|
Other Pooled Investment Vehicles
|
|
0/$0
|
Other Accounts
|
|
700/$65 Million
|
None of the accounts above are subject
to performance-based fees.
Because the Fund has not yet commenced
operations as of the date of this SAI, the portfolio managers do not own any shares of the Fund.
Compensation
Mr. Hagan and Mr.
Day’s compensation from the Advisor is based on a base salary plus a share of the net income of the Advisor
and is paid monthly. They are also entitled to a portion of the proceeds if the Advisor sells
all or a portion of the Advisor's business. They do not receive bonuses or participate in a pension plan.
Mr. Teague receives
a salary plus a bonus based on the profitability of the firm and participates in the Advisor’s
401k plan.
Conflicts of Interest
Actual or apparent conflicts of interest may
arise when a portfolio manager has day-to-day management responsibilities with respect to more than one fund or other accounts.
The management of multiple accounts may result in a portfolio manager devoting unequal time and attention to the management of
each account. The management of multiple funds and accounts also may give rise to potential conflicts of interest if the funds
and accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his time and
investment ideas across multiple funds and accounts.
With respect to securities transactions
for the Fund, the Advisor determines which broker to use to execute each order, consistent with the duty to seek best execution
of the transaction. The portfolio manager may execute transactions for another fund or account that may adversely impact the value
of securities held by the Fund. Securities selected for funds or accounts other than the Fund may outperform the securities
selected for the Fund.
The appearance of a conflict of interest may
arise where the Advisor has an incentive, such as a performance-based management fee. The management of personal accounts may give
rise to potential conflicts of interest; there is no assurance that the Fund’s code of ethics will adequately address such
conflicts. One of the portfolio manager's numerous responsibilities is to assist in the sale of Fund shares. Because
the portfolio manager’s compensation is indirectly linked to the sale of Fund shares, they may have an incentive
to devote time to marketing efforts designed to increase sales of Fund shares.
The Fund has adopted a code of ethics that,
among other things, permits personal trading by employees under conditions where it has been determined that such trades would
not adversely impact client accounts. Nevertheless, the management of personal accounts may give rise to potential conflicts of
interest, and there is no assurance that these codes of ethics will adequately address such conflicts.
The Fund may invest in affiliated funds
advised by the Advisor. The Advisor is subject to conflicts of interest in allocating the Fund’s assets among the affiliated
funds. The Advisor will receive more revenue when it selects an affiliated fund rather than an unaffiliated fund for inclusion
in the Fund’s portfolio. This conflict may provide an incentive for the Advisor to invest Fund assets in affiliated funds
that perform less well than unaffiliated funds. The Advisor may have an incentive to allocate the Fund’s assets to those
affiliated funds for which the net advisory fees payable to the Advisor are higher than the fees payable by other affiliated funds.
The Advisor and the Fund have each adopted
certain compliance procedures which are designed to address these types of conflicts. However, there is no guarantee that such
procedures will detect each and every situation in which a conflict arises.
DISTRIBUTION SERVICES
Distributor
Foreside Fund Services, LLC, located
at Three Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection
with the continuous offering of the Fund’s shares. The Distributor is a broker-dealer registered with the SEC under
the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust offers Shares of
the Fund for sale through the Distributor in Creation Units. The Distributor will not accept purchase or sell orders
in quantities less than Creation Units. The Distributor will deliver a Prospectus to Authorized Participants that purchase Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it.
Pursuant to a Distribution Services Agreement, the Adviser pays the Distributor for distribution-related services.
Distribution Services Agreement
The Distributor has entered into a Distribution
Services Agreement with the Advisor pursuant to which it provides the Fund and the Advisor with the distribution support services
set forth in a Distribution Agreement between the Fund and the Distributor.
Rule 12b-1 Plan
The Trust has adopted but has yet to
implement a Rule 12b-1 Distribution Plan (the “Plan”). Under the Plan, the Fund is authorized to pay an amount up to
0.25% of its average annual daily net assets for certain distribution-related services.
The Plan is designed to compensate financial
intermediaries (including the Advisor, and their affiliates) for activities principally intended to result in the sale of Fund
shares such as advertising and marketing of shares (including printing and disseminating prospectuses and sales literature to prospective
shareholders and financial intermediaries) and providing incentives to financial intermediaries to sell shares. The Plan is also
designed to
cover the cost of administrative services
performed in conjunction with the sale of shares, including, but not limited to, shareholder services, recordkeeping services,
and educational services, as well as the costs of implementing and operating the Plan. In accordance with the Plan, the Distributor
may enter into agreements with financial intermediaries and dealers to provide these distribution and distribution-related services
with respect to the Fund.
The Plan could benefit the Fund by helping
the Fund attract and retain assets, thus providing securities and cash for orderly portfolio management.
Under the Plan, the Fund may compensate
a financial intermediary more or less than its actual marketing and administrative expenses. In no event will the Fund pay for
any expenses of a financial intermediary that exceed the maximum Plan fee.
No distribution fees are currently charged
to the Fund and there are no plans to impose these fees. To the extent that the Plan is implemented in the future, the Prospectus
will be updated to reflect the implementation and the implementation will also be disclosed on the Fund’s website. The Board
will pre-approve the implementation of the Plan.
FINANCIAL ADMINISTRATION, TRANSFER AGENCY, AND FUND ACCOUNTING
SERVICES
Pursuant to a Services Agreement with Citi
Fund Services Ohio, Inc., located at 4400 Easton Commons, Suite 200, Columbus, Ohio, 43219, Citi provides financial administration,
transfer agency, and fund accounting services to the Trust. As financial administrator, Citi performs certain services on behalf
of the Trust including but not limited to: (1) preparing the Trust’s periodic financial reports on forms prescribed by the
SEC and filing those reports with the SEC upon review and approval of the Trust and Trust counsel; (2) calculating Fund expenses
and making required disbursements; (3) calculating Fund performance data; and (4) providing certain compliance support services.
As fund accountant, Citi maintains certain
financial records of the Trust and provides accounting services to the Fund that include the daily calculation of the Fund’s
NAV. Citi also performs certain other services on behalf of the Trust including providing financial information for the Trust’s
federal and state tax returns and financial reports required to be filed with the SEC. As Transfer Agent, Citi issues shares of
the Fund in Creation Units to fill purchase orders for Fund shares, maintains records of the issuance and redemption of the Fund’s
shares, and acts as the Fund’s dividend disbursing agent.
For the financial administration and fund accounting
services provided to the Trust, the Trust has agreed to pay an annual fee equal to 0.04% of the aggregate net assets of the Fund,
subject to certain breakpoints and minimum fee requirements.
Support Services Agreement. Citi has
entered into a Support Services Agreement with the Advisor pursuant to which it prepares and provides facts sheets for the Fund
and certain information required by the Advisor to determine the Fund’s Creation Basket and estimated Cash Amount for each
Business Day.
MANAGEMENT AND LEGAL ADMINISTRATION SERVICES
MFund Services LLC (“MFund”),
located at 36 North New York Avenue, Huntington, NY 11743, provides the Fund with various management and legal administrative services.
For these services, the Fund pays MFund a $30,000 annual fee, plus an annual asset-based
fee equal to 0.03% of the first $1 billion of net assets of the Fund and 0.02% thereafter. In addition, the Fund reimburses
MFund for any reasonable out-of-pocket expenses incurred in the performance of its duties under the Management Services Agreement.
Jerry Szilagyi, President and Chief Executive Officer of the Trust, is the controlling member of MFund Services and the controlling
member of Rational Capital LLC, the investment advisor to other series of the Trust.
Compliance Services
Pursuant to a Compliance Services Agreement,
MFund provides chief compliance officer services to the Fund. For these services, the Fund pays MFund a monthly base fee plus an
asset-based fee. In addition, the Fund
reimburses MFund for any reasonable
out-of-pocket expenses incurred in the performance of its duties under the Services Agreement.
OTHER SERVICE PROVIDERS
Custodian
Pursuant to a Custodial and Agency Services
Agreement with the Trust, Citibank, N.A. (“Citibank”), located at 388 Greenwich Street, New York, NY 10048 serves as
Custodian for the Fund and safeguards and holds the Fund’s cash and securities, settles the Fund’s securities transactions
and collects income on Fund investments. Under the agreement, Citibank also: (1) provides data required by the Advisor to determine
the Fund’s Creation Basket and estimated Cash Amount for each Business Day (this services is paid for by the Advisor directly
pursuant to the Support Services Agreement between Citi and the Advisor (see “Support Services Agreement,” above));
(2) monitors the settlement of securities comprising the Creation Basket and any cash in connection with the purchase and redemption
of Creation Units and requests the issuance of related Creation Units; (3) deposits securities comprising the Creation Basket
and/or cash received from Authorized Participants in connection with purchases of Creation Units into the Fund’s
custody and cash accounts; (4) disburses securities comprising the Creation Basket and/or cash from the Fund’s custody and
cash accounts to Authorized Participants in connection with the redemptions of Creation Units; and (5) performs certain other related
services, (See “Purchase and Redemption of Creation Units,” below).
Independent Registered Public Accounting
Firm
The Fund’s independent registered
public accounting firm is Cohen & Company, Ltd., 151 N. Franklin St., Suite 575, Chicago, IL 60606. Shareholders will receive
annual financial statements, together with a report of independent accountants, and semiannual unaudited financial statements of
the Fund. Cohen & Company, Ltd. will report on the Fund’s annual financial statements, review certain regulatory reports
and the Fund’s income tax returns, and perform other professional accounting, auditing, tax and advisory services when engaged
to do so by the Fund.
Legal Counsel
Stradley Ronon Stevens & Young,
LLP, 2005 Market Street, Suite 2600, Philadelphia, PA 19103-7018, serves as counsel for the Trust and the Independent Trustees.
Please refer to Appendix 2 for service
provider addresses.
SUPPLEMENTAL PAYMENTS TO FINANCIAL INTERMEDIARIES
Financial intermediaries that promote
the sale of Fund shares may be paid fees out of the assets of, the Advisor and their affiliates (but not out of Fund assets).
Financial intermediaries who solicit
the sale of Fund shares may receive fees for providing distribution-related, recordkeeping or shareholder services such as sponsoring
sales, providing sales literature, conducting training seminars for employees, and engineering sales-related computer software
programs and systems. Also, these financial intermediaries may be paid cash or promotional incentives, such as reimbursement of
certain expenses relating to attendance at informational meetings about the Fund or other special events at recreational-type facilities,
or items of material value. These payments will be based upon the amount of Fund shares the financial intermediary sells or may
sell and/or upon the type and nature of sales or marketing support furnished by the financial intermediary.
From time to time, the Advisor, and
their affiliates, at their expense, may provide additional compensation to financial intermediaries that sell or arrange for the
sale of Fund shares. Such compensation may include financial assistance to financial intermediaries that enable the Advisor, and
their affiliates to participate in or present at conferences or seminars, sales or training programs for invited employees, client
and investor events and other financial intermediary-sponsored events.
The Advisor, and their affiliates also
may hold or sponsor, at their expense, sales events, conferences, and programs for employees or associated persons of financial
intermediaries in order to facilitate the sale of Fund shares and may pay the travel and lodging expenses of attendees. The Advisor,
and their affiliates also may provide, at their expense, meals and entertainment in conjunction with meetings with these financial
intermediaries. Other compensation may be offered to the extent not prohibited by applicable laws, regulations or the rules of
any self-regulatory agency, such as FINRA.
PURCHASE
AND REDEMPTION OF CREATION UNITS
The Fund only offers and redeems its shares
in Creation Units. The Fund will offer and sell Creation Units through the Distributor on a continuous basis, without a sales load
(but subject to transaction fees), at the NAV per share next determined after an order in proper form is received by the Distributor.
The NAV of the Fund is expected to be determined as of the close of regular trading on the Exchange (ordinarily 4:00 p.m. Eastern
Time) on each Business Day (“NAV Calculation Time”). The Fund will sell and redeem Creation Units only on a Business
Day.
The Trust generally does not offer its shares outside of the U.S.
IN-KIND TRANSACTIONS - GENERALLY
In order to
keep costs low and permit the Fund to be as fully invested as possible, shares of the Fund will be purchased and redeemed in Creation
Units and generally on an in-kind basis. Accordingly, except
where the purchase or redemption will include cash under the circumstances described in this SAI (see “Cash Transactions
– Generally,” below), investors will generally be required to purchase Creation Units by making an in-kind deposit
of Deposit Instruments, and shareholders redeeming their shares will generally receive an in-kind transfer of Redemption Instruments.
The names and quantities of the instruments that constitute the Deposit Instruments and the
names and quantities of the instruments that constitute the Redemption Instruments will be specified by the Fund each day, and
these instruments may be referred to, in the case of either a purchase or a redemption, as the “Creation Basket.” In
addition, under normal circumstances, the Creation Basket
will generally correspond pro rata to the securities, assets or other positions held by the Fund on a Trade Date + 1 (“T+1”)
settlement basis (including cash positions), except:[1]
-
in the case of bonds,
for minor differences when it is impossible to break up bonds beyond certain minimum sizes needed for transfer and settlement;
-
for minor differences
when rounding is necessary to eliminate fractional shares or lots that are not tradable round lots;[2]
or
-
positions that cannot
be transferred in-kind will be excluded from the Creation Basket.[3]
If there is a difference between
the NAV attributable to a Creation Unit and the aggregate market value of the Creation Basket exchanged for the Creation Unit (the
“Difference”), the party conveying instruments with the lower value will also pay to the other cash equal in value
to the Difference.
Each Business
Day, before the open of trading on the Exchange (ordinarily 9:30 a.m., Eastern Time), the Fund
will cause to be published through the NSCC
the names and quantities of
the instruments comprising the Creation Basket (based on Fund portfolio information as of the
end of the prior Business Day), as well as the estimated
Cash Amount (if any, effective through and including the previous Business Day), for that day.
_______________________
1 The
portfolio used for this purpose will be the same portfolio used to calculate the Fund’s NAV for that Business Day.
2 A
tradable round lot for a security will
be the standard unit of trading
in that particular type of security in
its primary market.
3 This
includes instruments that can be transferred in-kind only with the consent of the counterparty to the extent the Fund does not
intend to seek such
consents.
CASH TRANSACTIONS – GENERALLY
Purchases and redemptions
of Creation Units may be made in whole or in part on a cash basis, rather than in kind, under certain circumstances, including:
-
to the extent there is a Cash Amount;
-
if, on a given Business
Day, the Fund announces before the open of trading that all purchases, all redemptions, or all purchases and redemptions on that
day will be made entirely in cash;
-
if, upon receiving
a purchase or redemption order from an Authorized Participant, the Fund determines to require the purchase or redemption, as applicable,
to be made entirely in cash;
-
if, on a given Business
Day, the Fund requires all Authorized Participants purchasing or redeeming Fund shares on that day to deposit or receive (as applicable)
cash in lieu of some or all of the Deposit Instruments or Redemption Instruments, respectively, solely because: (i) such instruments
are not eligible for transfer through either the Clearing Process (defined below) or DTC Process; or (ii) in the case of the Fund
holding foreign instruments, such instruments are not eligible for trading due to local trading restrictions, local restrictions
on securities transfers or other similar circumstances; or
-
if
the Fund permits an Authorized Participant to deposit or receive (as applicable) cash in lieu of some or all of the Deposit Instruments
or Redemption Instruments, respectively, solely because: (i) such instruments are, in the case of the purchase of a Creation Unit,
not available in sufficient quantity; (ii) such instruments are not eligible for trading by an Authorized Participant or the investor
on whose behalf the Authorized Participant is acting; or (iii) a holder of shares of the Fund holding foreign instruments
would be subject to unfavorable income tax treatment if the holder receives redemption proceeds
in kind.
CUSTOM TRANSACTIONS
Under certain circumstances,
the Fund may utilize custom Creation Baskets, including (i) all cash baskets; (ii) baskets that substitute cash in lieu of
certain securities that would otherwise be included in the Fund’s Creation or Basket; or (iii) a non-representative basket
that consists of a selection of instruments that are already included in the Fund’s portfolio holdings (each, a “Custom
Order”). Custom Orders typically clear outside the Continuous Net Settlement System of the NSCC (the “Clearing Process”)
and, therefore, like other orders outside the Clearing Process, may need to be transmitted early on the relevant Business Day to
be effectuated at that day’s NAV. Custom Orders may be required to be received by the Distributor by 3:00 p.m. Eastern time
to be effectuated based on the Fund’s NAV on that Business Day. A Custom Order may be placed when, for example, an Authorized
Participant cannot transact in a security in the in-kind Creation Basket and therefore has additional cash included in a Creation
Basket in lieu of such security.
Persons placing or
effectuating custom orders should be mindful of time deadlines imposed by intermediaries, which may impact the successful processing
of such orders.
Shares of the Fund
will only be issued against full payment, as further described in the Prospectus and this SAI.
PROCEDURES FOR PURCHASE OF CREATION UNITS
All orders to purchase Creation Units must
be placed with the Distributor by or through an Authorized Participant. An Authorized Participant is a broker-dealer or other participant
in the clearing process through the Clearing Process or a DTC Participant and in each case, must have an executed agreement with
the Distributor with respect to the creations and redemption of the Fund’s Creation Units (“Participant Agreement”).
The Participant Agreement must also be accepted by the Transfer Agent.
An investor does not have to be an Authorized
Participant, but must place an order to purchase or redeem Creation Units through an Authorized Participant. All shares of the
Fund purchased through the creation process will be entered on the records of DTC in the name of Cede & Co. for the account
of the applicable DTC Participant.
There may be a limited number of Authorized
Participants at any one point in time and only certain of these entities may be eligible to purchase and transmit non-U.S. instruments
comprising a Creation Basket. To the extent that your financial institution is not an Authorized Participant, you may have to purchase
Creation Units directly through an Authorized Participant or indirectly through your financial institution. If you opt to purchase
Creation Units indirectly through your financial institution, you may incur additional transaction fees.
An order to purchase Creation
Units of the Fund must be transmitted to the Distributor on a Business Day and received in proper form no later than the NAV Calculation
Time (no later than 3:00 p.m., Eastern Time, for Custom Orders if required by the Distributor) in order for the purchase order
to be processed at the NAV of the Fund’s shares calculated on the date of transmittal (“Transmittal Date”). An
order to purchase the Fund’s Creation Units is considered to be in “proper form” if all procedures set forth
in the Participant Agreement are properly followed. On Business Days that the Exchange closes early, the Fund may require an order
for the purchase of Creation Units to be submitted earlier during the day. An Authorized Participant must deliver a Custom Order
to the Distributor sufficiently in advance of the NAV Calculation Time in order to help ensure that the order is effected at the
NAV calculated on that date.
Orders must be transmitted
by the Authorized Participant to the Distributor by telephone or other transmission method acceptable to the Distributor pursuant
to the procedures set forth in the applicable Participant Agreement. All orders to purchase Creation Units must be submitted consistent
with the processing requirements set forth in the applicable Participant Agreement (see “Placement of Creation Orders Outside
the Clearing Process” and “Placement of Creation Orders Using the Clearing Process,” below).
An investor must place orders
to purchase the Fund’s Creation Units in the form required by the Authorized Participant. An Authorized Participant may require
an investor to make certain representations or enter into agreements with respect to the placement of an order to purchase the
Fund’s shares (e.g. to provide for payments of cash, when required).
Severe economic or market
disruptions or changes, or telephone or other communication failure may impede the ability to reach the Distributor or an Authorized
Participant. If an investor is submitting an order to purchase Creation Units through an Authorized Participant, the investor should
ensure that an appropriate amount of time is provided for submission of such order by the Authorized Participant to the Distributor
prior to the NAV Calculation Time.
All questions as to the composition of Deposit
Instruments and the amount of any 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 Authorized Participant shall be solely responsible for any loss, liability, cost, and expense (including
reasonable attorneys’ fees) incurred by the Fund or the Distributor related to the cancellation of an order to purchase or
redeem Creation Units.
Placement of Purchase Orders Outside the Clearing Process
To settle a purchase order
outside the Clearing Process, the Authorized Participant must instruct the transfer of the relevant Deposit Instruments and/or
any applicable cash in a timely fashion so as to ensure the timely delivery of the Deposit Instruments and/or any cash on the Settlement
Date. The “Settlement Date” for the Fund is generally the second Business Day after an order to purchase or redeem
shares is received by the Distributor.
A purchase order shall be
deemed received on the Transmittal Date if the order is received by the Distributor in proper form no later than the NAV Calculation
Time on the Transmittal Date (no later than 3:00 p.m., Eastern Time, for Custom Orders if required by the Distributor). Purchase
orders received on time on the Transmittal Date will be processed at the NAV calculated on the Transmittal Date.
The delivery of any Deposit Instruments must
be made by 12:00 p.m., Eastern Time, on the Settlement Date. Any cash, including the applicable transaction fee (see “Transaction
Fees on Purchases of Creation Units,” below), shall be payable by 2:00 p.m., Eastern Time, on the Settlement Date. If the
Custodian does not receive the Deposit Instruments and/or the applicable cash by the designated times on the Settlement Date, the
purchase order may be cancelled. A canceled order may be resubmitted the following Business Day based on the Creation
Basket and estimated Cash Amount for that
Business Day. The delivery of Creation Units will take place no later than the Settlement Date.
Generally, an Authorized
Participant shall deliver cash and any Deposit Instruments that are U.S. government or U.S. government agency securities to the Fund through the Federal Reserve System. An Authorized Participant may deliver Deposit
Instruments that are DTC eligible domestic equity or fixed income securities through the DTC manual clearing process (“DTC
Process”). Shares of the Fund shall settle and clear through the DTC Process. The DTC Process involves the manual line-by-line
transfer of multiple securities. Because the DTC Process involves the movement of multiple securities while the Clearing Process
(see below) involves the movement of one unitary basket that automatically processes the movement of numerous securities, the DTC
will charge the Fund more than the NSCC to settle a purchase of Creation Units.
Foreign securities cannot currently be processed
through either the Clearing Process or the DTC Process. With respect to foreign Deposit Instruments, once a purchase order for
Creation Units has been placed with the Distributor, the Distributor will inform the Advisor and the Custodian. The Custodian will
then inform the appropriate sub-custodians, as applicable. The Authorized Participant must then timely deliver the relevant Deposit
Instruments and/or any cash, including the transaction fee, to the Fund’s account maintained with the relevant
local custodian(s) by the Settlement Date. If applicable, the sub-custodians will confirm to the Custodian that the Deposit Instruments
and/or any applicable cash have been delivered, and the Custodian will notify the Advisor of the same.
After the Distributor has receive a purchase
order and the Custodian has received delivery of the Deposit Instruments and/or any applicable cash, including the transaction
fee, delivery of the appropriate number of Fund shares will be made to the book-entry account designated by the Authorized Participant.
Except as provided herein, a Creation Unit of the Fund will not be issued until the transfer of good title to the Trust of any
Deposit Instruments has been completed and/or the applicable cash has been received.
Placement of Purchase Orders Using the Clearing Process
Authorized Participants that are CNS Participants
will be able to use the Clearing Process to purchase the Fund’s Creation Units when Deposit Instruments are limited to DTC
eligible domestic equity and fixed income securities and a Cash Amount or an all-cash payment. Under certain circumstances, a CNS
Participant that tenders a Custom Order to purchase the Fund’s Creation Units will be required to process the order outside
the Clearing Process because the Clearing Process can only handle non-conforming deposits in specified situations. Additionally,
Creation Units created in advance of receipt by the Custodian of all or a portion of the Deposit Instruments must be processed
outside the Clearing Process (see “Additional Purchase Procedures,” below).
The Clearing System has been
specifically enhanced to effect purchases and redemptions of ETF securities such as the Fund’s shares. The Clearing Process
simplifies the settlement and delivery process by transferring a basket of securities between two parties and treating all of the
securities that comprise the basket as a single position. By contrast, the DTC Process, which is available to all Authorized Participants,
involves a manual line-by-line movement of each security position. To the extent that the Clearing Process is available for use,
the Participant Agreement will authorize the Distributor to transmit through the Custodian to the NSCC, on behalf of the CNS Participant,
applicable trade instructions as are necessary to effect a purchase order for the Fund’s Creation Units. Pursuant to the
trade instruction, the Authorized Participant agrees to deliver the Deposit Instruments and any/or any cash (including the transaction
fee) to the Fund, together with such additional information as may be required by the Distributor.
An order to purchase Creation Units through
the Clearing Process is deemed received on the Transmittal Date if such order is received by the Distributor in proper form no
later than the NAV Calculation Time on the Transmittal Date (no later than 3:00 p.m., Eastern Time, for Custom Orders if required
by the Distributor); and these Creation Units will be priced at Transmittal Date NAV. The delivery of any Deposit Instruments must
be made by 12:00 p.m., Eastern Time, on the Settlement Date. Any cash, including the applicable transaction fee (see “Transaction
Fees on Purchases of Creation Units,” below), shall be payable by 2:00 p.m., Eastern Time, on the Settlement Date. If the
Custodian does not receive the Deposit Instruments and/or the applicable cash by the designated times on the Settlement Date, the
purchase order may be cancelled. A canceled order may be
resubmitted the following Business Day based
on the Creation Basket and estimated Cash Amount for that Business Day. The delivery of Creation Units will take place no later
than the Settlement Date.
After the Distributor has received a purchase
order and the Custodian has received delivery of the Deposit Instruments and/or any applicable cash, including the transaction
fee, delivery of the appropriate number of Fund shares will be made to the book-entry account designated by the Authorized Participant.
Except as provided herein, a Creation Unit of the Fund will not be issued until the transfer of good title to the Trust of any
Deposit Instruments has been completed and/or the applicable cash has been received.
Rejection of Purchase Orders
The Distributor may reject a purchase
order for Creation Units if the order is not submitted in proper form consistent with the requirements set forth in the Participant
Agreement.
The Trust reserves the absolute right
to reject an order for Creation Units transmitted to it by the Distributor in respect to the Fund including, without limitation,
if: (1) the order is not in proper form; (2) the securities delivered do not conform with the Deposit Instruments for the relevant
date; (3) an investor, upon obtaining the shares ordered, would own 80% or more of the currently outstanding shares of the Fund;
(4) acceptance of the Deposit Instruments would have certain adverse tax consequences to the Fund; (5) the acceptance of the Deposit
Instruments and/or any applicable cash would, in the opinion of counsel to the Trust, be unlawful; (6) the acceptance of the Deposit
Instruments and/or any applicable cash would otherwise, in the discretion of the Trust or the Advisor have an adverse effect on
the Trust or the rights of beneficial owners; (7) the acceptance or receipt of the order for a Creation Unit would, in the opinion
of counsel to the Trust, be unlawful; or (8) in the event that circumstances outside the control of the Fund, the Custodian, the
Transfer Agent, and/or the Advisor make it for all practical purposes not feasible to process creation orders.
Examples of such circumstances include
natural disasters 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, the Transfer Agent, the DTC, the NSCC,
the Federal Reserve System, or any other participant in the creation process, and other extraordinary events. The Distributor shall
notify an Authorized Participant of the rejection of any order. The Trust, the Transfer Agent, the Custodian, and the Distributor
are under no duty, however, to give notification of any defects or irregularities in the delivery of Deposit Instruments and/or
any cash 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.
Additional Purchase Procedures
Creation Units may be issued to an Authorized
Participant in advance of receipt by the Trust of all or a portion of the applicable Deposit Instruments provided that the Authorized
Participant deposits an initial deposit of cash with the Trust having a value greater than the NAV of the requisite Fund shares
on the date the order is received. In addition to available Deposit Instruments, cash must be deposited in an amount equal to the
sum of the Cash Amount plus 115% of the market value of the Deposit Instruments not delivered (“Additional Cash Deposit”).
An order will be deemed received on
the Transmittal Date if: (1) the order is received by the Distributor in proper form no later than the NAV Calculation Time on
that date (no later than 3:00 p.m., Eastern Time if required by the Distributor); and (2) federal funds equal to the sum of the
Cash Amount, the Additional Cash Deposit, and the applicable transaction fee are received by the Custodian by 12:00 p.m., Eastern
Time, on the Business Day following the Transmittal Date.
Pending delivery of the undelivered
Deposit Instruments, the Authorized Participant shall be required to deposit additional cash, as needed, to maintain the Additional
Cash Deposit at an amount equal to 115% of the value of undelivered Deposit Instruments, which shall be marked to market daily
by the Fund until the outstanding securities are received. Under these circumstances, the shares of the Fund
shall be delivered no later than the Settlement Date.
If an order is not received in proper
form by the NAV Calculation Time on the Transmittal Date (no later than 3:00 p.m., Eastern Time, if required by the Distributor)
or the required cash deposit is not timely received on the Settlement Date by the Custodian, then the order may be cancelled or
deemed not received and the Authorized Participant effecting the transaction will be liable to the Fund for any losses
resulting therefrom.
To the extent that the undelivered Deposit
Instruments are not received by 12:00 p.m., Eastern Time, on the Settlement Date, the Fund may utilize the Additional
Cash Deposit to buy the missing Deposit Instruments at any time and the Authorized Participant effecting the transaction will be
liable to the Fund for the costs incurred by the Fund in connection with such purchases and any shortfall between the cost to the
Fund of purchasing such securities and the value of the Additional Cash Deposit. Costs to purchase the outstanding Deposit Instruments
shall include, but not be limited to, any applicable transaction fee imposed by the Fund in connection with the purchase
of the undelivered Deposit Instruments, the amount by which the actual purchase price of the undelivered Deposit Instruments exceeds
the Additional Cash Deposit or the market value of such Deposit Instruments on the day the purchase order was received by the Distributor
plus the brokerage and related transaction costs associated with such purchases. The Fund will return the remaining
Additional Cash Deposit once the undelivered Deposit Instruments are received by the Custodian or purchased by and deposited into
the Fund.
The Participant Agreement may contain
further information relating to this collateral process.
Transaction Fees on Purchases of Creation Units
The Fund charges a transaction fee, which
is intended to cover the transfer and other transactional costs it incurs to issue Creation Units. A per transaction fee charge
will be charged by the Fund (“Standard Charge”), regardless of the number of Creation Units purchased. The Fund reserves
the right to charge additional transactions fees of up to three (3) times the Standard Charge for: (1) purchase orders processed
outside the Clearing Process; (2) purchase orders involve cash in lieu amounts; and (3) cash purchases (“Additional
Charges”). The Fund also reserves the right to adjust the Standard Charge and/or the Additional Charges at any time in order
to ensure that the Fund is able to continue to recoup the costs it actually incurs to issue Creation Units. Authorized Participants
are responsible for paying the costs to transfer Deposit Instruments to the Fund. Authorized Participants may also charge investors
a fee to purchase Creation Units on their behalf.
The Standard Charge and maximum transaction
fee for the Fund are $250 and $1,000, respectively. An investor purchasing Creation Units outside the Clearing Process may be required
to pay higher transaction fees than if the purchase is processed through the Clearing Process.
Risks of Purchasing Creation Units
The proposed method by which the Fund’s
Creation Units will be purchased and traded may raise certain issues under applicable securities laws. Because new Creation Units
of the Fund’s shares may be issued and sold on an ongoing basis, a “distribution” of that Fund’s shares
may be occurring at any time. Certain activities that a shareholder performs as a dealer may, depending on the circumstances, result
in their being deemed participants in a distribution in a manner which could render them statutory underwriters and subject them
to the prospectus delivery and liability provisions of the 1933 Act.
For example, a shareholder could be deemed
a statutory underwriter if it takes Creation Units from the Fund, breaks them down into the constituent shares and sells the shares
directly to customers. A shareholder may also
be deemed to be a statutory underwriter if
the shareholder chooses to couple the purchase of a supply of new shares of the Fund with an active selling effort involving solicitation
of secondary market demand for the shares.
Whether a person is an underwriter depends
on all the facts and circumstances pertaining to that person’s activities and the examples set forth here are not intended
to depict all circumstances under which a shareholder may be deemed to be a statutory underwriter.
Dealers who are not “underwriters”
but are participating in a distribution (as opposed to ordinary secondary market transactions), and thus dealing with the Fund’s
shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the 1933 Act, will be unable to rely
on the prospectus-delivery exemption provided by Section 4(3) of the 1933 Act.
Pursuant to Rule 153 under the 1933 Act, a
prospectus delivery obligation under Section 5(b)(2) of the 1933 Act owed to a member of the Exchange in connection with a sale
on the Exchange is satisfied by the fact that a Prospectus is available at the Exchange upon request. This prospectus delivery
mechanism is only available with respect to transactions on the Exchange.
REDEMPTION OF CREATION UNITS
Redemption requests must be placed by
or through an Authorized Participant. Shares of the Fund may only be redeemed in Creation Units except upon liquidation of the
Fund. To redeem shares with the Fund, an investor must accumulate enough shares of that Fund to constitute one or more Creation
Units. An investor may accumulate the shares necessary to comprise a Creation Unit of the Fund on the Exchange. However, there
is no assurance that there will be sufficient liquidity in the market to enable the purchase of a sufficient number of shares of
the Fund to complete a Creation Unit. An investor should expect to incur brokerage commissions and other costs to purchase the
required number of shares to complete a Creation Unit.
Creation Units of the Fund may be redeemed
on any Business Day at their NAV next calculated after a redemption request in proper form is received by the Distributor. A redemption
request is considered to be in “proper form” if all procedures set forth in the Participant Agreement are properly
followed.
The redemption of the Fund’s Creation
Units will be subject to compliance with applicable federal and state securities laws. An Authorized Participant that is not a
“qualified institutional buyer” or “QIB” as such term is defined in Rule 144A of the 1933 Act will not
be able to receive Redemption Instruments that are restricted securities eligible for resale under Rule 144A. An Authorized Participant
may be required by the Fund to provide a written confirmation with respect to QIB status in order to receive Redemption Instruments.
An Authorized Participant may request a redeeming investor on whose behalf it is acting to enter in to agreements outlining the
terms under which cash must be substituted for one or more Redemption Instruments in order to comply with applicable securities
laws and other legal restrictions relevant to the investor.
All orders to redeem Creation Units
of the Fund must be received by the Distributor in proper form no later than the NAV Calculation on a Business Day (no later than
3:00 p.m., Eastern Time, for orders involving cash in lieu requests by Authorized Participants if required by the Distributor)
in order to receive the NAV calculated on that date (“Transmittal Date”). On Business Days that the Exchange closes
early, the Fund may require orders for the redemption of a Creation Unit(s) to be submitted earlier during the day. An Authorized
Participant must deliver a Custom Order to the Distributor sufficiently in advance of the NAV Calculation Time in order to help
ensure that the order is effected at the NAV calculated on the Transmittal Date.
An investor redeeming the Fund’s
Creation Units should submit the redemption order in the form required by the Authorized Participant selected to process the transaction.
An investor intending to redeem the Fund’s Creation Units should allow sufficient time to permit a timely submission of the
redemption request to the Distributor and transfer of the Creation Units to the Fund.
There may be a limited number of Authorized
Participants at any one point in time and only certain of these entities may be eligible to receive foreign securities on your
behalf as part of the in-kind redemption process. To the extent that your financial institution is not an Authorized Participant,
you may redeem Creation Units directly through an Authorized Participant or indirectly through your financial institution. If you
opt to redeem Creation Units indirectly through your financial institution, you may incur additional transaction fees. You should
also allow additional time to effect redemptions through your financial intermediary if the financial intermediary is not an Authorized
Participant.
Although the Settlement Date for the
redemption of Fund shares is generally the second Business Day after an order to redeem shares is received by the Distributor,
the Settlement Date may be up to seven days after the Transmittal Date.
Placement of Redemption Orders Outside the Clearing Process
An order to redeem Creation Units is deemed
received by the Distributor on the Transmittal Date if: (1) the order is received by the Distributor in proper form no later than
the NAV Calculation Time (no later than 3:00 p.m., Eastern Time, for orders involving cash in lieu requests by Authorized Participants
if required by the Distributor) on the Transmittal Date; (2) the order is accompanied or followed by the delivery of the requisite
Creation Units, which delivery must be made through the DTC to the Custodian no later than 12:00 p.m., Eastern Time, on the Settlement
Date; and (3) the order is accompanied or followed by the delivery of any Cash Amount and the applicable transaction fee to the
Custodian through the Federal Reserve System no later than 2:00 p.m., Eastern Time, on the Settlement Date.
After a redemption request is received by the
Distributor, the Custodian shall initiate procedures for the transfer of the Redemption Instruments and any Cash Amount, less any
transaction fee, which is expected to be delivered by the Settlement Date.
The value of the Redemption Instruments and
any Cash Amount will be calculated in accordance with the Trust’s procedures for calculation of the Fund’s
NAV as summarized in the Prospectus and this SAI. Therefore, if a redemption in proper form is submitted to the Distributor by
an Authorized Participant no later than the NAV Calculation Time on the Transmittal Date (no later than 3:00 p.m., Eastern Time,
for orders involving cash in lieu requests from Authorized Participants if required by the Distributor), and the requisite number
of Fund shares are timely delivered to the Custodian no later than 12:00 P.M. on the Settlement Date, then the value of the Redemption
Instruments and any Cash Amount will be determined by the Fund Accountant as of the Transmittal Date. If a redemption order is
submitted to the Distributor on the Transmission Date not later than the NAV Calculation Time on the Transmittal Date (no later
than to 3:00 p.m., Eastern Time, for Custom Orders if required by the Distributor) but either: (1) the requisite number of shares
of Fund shares are not timely delivered or (2) the redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value of the Redemption Instruments and any Cash Amount
will be computed as of the Business Day that an order in proper form is received by the Distributor.
Placement of Redemption Orders Using the Clearing Process
Shareholders redeeming Creation Units pursuant
to Custom Orders may be required to settle their redemptions outside of the Clearing Process. Redemptions of Creation Units in
advance of receipt by the Custodian of all Fund shares (see “Additional Redemption Procedures,” below) must
be processed outside of the Clearing Process.
An order to redeem Creation Units using the
Clearing Process is deemed received on the Transmittal Date if such order is received by the Distributor in proper form no later
than the NAV Calculation Time on such Transmittal Date. An order deemed received after the NAV Calculation Time on the Transmittal
date (after 3:00 p.m., Eastern Time, for orders involving cash in lieu requests from Authorized Participants if required by the
Distributor) will be effected at the NAV calculated on the next Business Day. The Redemption Instruments and any Cash Amount, less
the transaction fee, will be transmitted by the Settlement Date.
If a redemption order is submitted to the Distributor
not later than the NAV Calculation Time on the Transmittal Date (no later than to 3:00 p.m., Eastern Time, for Custom Orders if
required by the Distributor) but either: (1) the requisite number of shares of Fund shares are not timely delivered or (2) the
redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date.
In such case, the value of the Redemption Instruments and any Cash Amount will be computed as of the Business Day that an order
in proper form is received by the Distributor.
Additional Redemption Procedures
Creations Units may be redeemed in advance
of receipt by the Trust of all or a portion of Fund shares provided that the Authorized Participant deposits an initial
deposit of cash with the Trust in an amount equal to the sum of any Cash Amount plus 115% of the market value of the missing Fund
shares not delivered (“Redemption Deposit”).
An order will be deemed received on the Transmittal
Date if: (1) the Distributor received the order in proper form no later than the NAV Calculation Time on that date (no later than
3:00 p.m., Eastern Time, if required by the Distributor); and (2) the federal funds equal to the sum of any Cash Amount, the Redemption
Deposit, and the applicable transaction fee are received by the Custodian by 12:00 p.m., Eastern Time, on the Business Day following
the Transmittal Date. Pending delivery of the undelivered Fund shares, the Authorized Participant shall be required to deposit
additional cash, as needed, to maintain the Redemption Deposit at an amount equal to 115% of the value of undelivered Fund shares,
which shall be marked to market daily by the Fund until the outstanding shares are delivered. Under these circumstances,
the Redemption Instruments, and any Cash Amount, less the applicable transaction fee, shall be delivered no later than the Settlement
Date.
If an order is not received in proper form
by the NAV Calculation Time on the Transmittal Date (no later than 3:00 p.m., Eastern Time, if required by the Distributor) or
the required cash deposit is not timely received on the next Business Day following the date the order was received by the Distributor,
then the order may be cancelled and deemed not received and the Authorized Participant affecting the transaction will be liable
to the Fund for any losses resulting therefrom.
To the extent that the undelivered Fund shares
are not received by 12:00 p.m., Eastern Time, the Fund may use the Redemption Deposit to purchase the undelivered shares
at any time and the Authorized Participant shall be liable to the Fund for the costs incurred by the Fund in connection with such
purchases and any shortfall between the cost to the Fund to acquire the shares and the value of the Redemption Deposit. Costs to
purchase the outstanding Fund shares shall include, but not be limited to, the amount by which the actual purchase price of the
undelivered Fund shares exceeds the Redemption Deposit or the market value of such shares on the day the purchase order was received
by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Fund will return
the remaining Redemption Deposit once the undelivered shares are received by the Custodian.
The Participant Agreement may contain
further information relating to this collateral process.
Transaction Fees on Redemptions of Creation Units
The Fund charges a transaction fee, which
is intended to cover the transfer and other transactional costs it incurs to redeem Creation Units. A transaction fee will be charged
by the Fund to Authorized Participants per redemption (“Standard Redemption Fee”). The Fund reserves the right to charge
additional transactions fees not to exceed three (3) times the Standard Redemption Fee for: (1) orders processed outside of the
Clearing Process; (2) orders involving cash in lieu amounts; and (3) cash redemptions (“Additional Redemption Charges”).
The Fund also reserves the right to adjust the Standard Charge and/or the Additional Redemption Charges at any time in order to
ensure that the Fund is able to continue to recoup the costs it actually incurs to issue Creation Units. Authorized Participants
are responsible for paying the costs to transfer the Redemption Instruments from the Fund. Authorized Participants may
charge investors a fee to redeem Creation Units on their behalf.
The standard transaction fee and maximum transaction
fee for the Fund are $250 and $1,000, respectively.
Suspension of Redemption Rights
The right of redemption may be suspended with
respect to the Fund for: (1) any period during which the Exchange is closed (other than customary weekend and holidays); (2) any
period during which trading on the Exchange is suspended or restricted; (3) any period which an emergency exists as a result of
which disposal of Fund shares or determination of the Fund’s NAV is not reasonably practicable; or (4) such other periods
as the SEC may permit.
BROKERAGE
TRANSACTIONS
While changes to the Fund’s investment
portfolio will generally be implemented through the issuance and redemption of the Fund’s Creation Units in exchange for
a Creation Basket, there may be occasions wherein the Advisor will purchase or sell securities directly on behalf of the Fund.
To the extent that the Fund issues or redeems Creation Units partly or solely for cash, the Advisor may have to execute portfolio
transactions on behalf of the Fund.
As of the date of this Statement of Additional
Information, the Fund had not yet commenced operations and had did not pay any brokerage commissions.
TRADE ALLOCATION
Investment decisions for the Fund and other
clients of the Advisor are made with a view to achieving their respective investment objectives and after consideration of such
factors as their current holdings, availability of cash for investment, and the size of their investments generally.
A security may be bought or sold by the Advisor
for only one client or in different amounts and at different times for more than one but less than all clients. Likewise, a particular
security may be bought for one or more clients when one or more other clients are selling the security. In addition, purchases
or sales of the same security may be made for two or more clients of the Advisor on the same day. To the extent that multiple clients
are purchasing or selling a specific security at the same time, such transactions will be allocated among the clients in a manner
believed by the Advisor to be equitable to each. In some cases, this procedure could have an adverse effect on the price or amount
of the securities purchased or sold by the Fund. Purchase and sale orders for the Fund may be combined with those of other clients
of the Advisor in the interest of achieving the most favorable net results for the Fund.
BROKERAGE ALLOCATION
The Advisor may place orders for the purchase
and sale of portfolio securities for the Fund through numerous brokers and dealers. In so doing, it uses its best efforts to obtain
for the Fund the best price and execution available. In seeking the best price and execution, the Advisor, having in mind the Fund’s
best interests, considers all factors it deems relevant, including, by way of illustration, price, the size of the transaction,
the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market
prices and trends, the reputation, experience, and financial stability of the broker-dealer involved, and the quality of service
rendered by the broker-dealer in other transactions.
Transactions on U.S. stock exchanges and other
agency transactions involve the payment by the Fund of negotiated brokerage commissions. Such commissions vary among brokers. Also,
a particular broker may charge different commissions according to such factors as the difficulty and size of the transaction. Transactions
in foreign securities often involve the payment of fixed brokerage commissions, which are generally higher than those in the U.S.
There is generally no stated commission in the case of securities traded in the over-the-counter markets, but the price paid by
the Fund usually includes an undisclosed dealer commission or mark-up. Purchases and sales of fixed income securities (for instance,
money market instruments and bonds, notes, and bills) usually are principal transactions. In a principal transaction, the party
from whom the Fund purchases, or to whom the Fund sells, is acting on its own behalf (and not as the agent of some other party
such as its customers). These securities normally are purchased directly from the issuer or from an underwriter or market maker
for the securities. The prices of securities purchased from dealers serving as market makers reflect the spread between
the bid and asked price. In underwritten offerings,
the price paid by the Fund includes a disclosed, fixed commission or discount retained by the underwriter or dealer.
SOFT DOLLAR PRACTICES
It has for many years been a common
practice in the investment advisory business for advisors of investment companies and other institutional investors to receive
research, statistical, and quotation services from broker-dealers that execute portfolio transactions for their clients. Consistent
with this practice, the Advisor may receive research, statistical, and quotation services from broker-dealers with which it places
the Fund’s portfolio transactions. These services, which in some cases may also be purchased for cash, include general economic
and security market reviews, industry and company reviews, evaluations of securities, and recommendations as to the purchase and
sale of securities. Some of these services are of value to the Advisor and its affiliates in advising various of its clients (including
the Fund), although not all of these services are necessarily useful and of value in managing the Fund. The investment advisory
fee paid by the Fund to the Advisor is not reduced because the Advisor and its affiliates receive such services.
As permitted by Section 28(e) of
the 1934 Act and by the Trust’s Management Agreement with the Advisor, the Advisor may cause the Fund to pay a broker-dealer
that provides the brokerage and research services described above an amount of disclosed commission for effecting a securities
transaction for the Fund in excess of the commission which another broker-dealer may charge for effecting that transaction. The
Advisor’s authority to cause the Fund to pay any such greater commissions is also subject to such policies as the Trustees
may adopt from time to time.
ADDITIONAL
INFORMATION ABOUT THE TRUST
SHAREHOLDER RIGHTS
All shareholders are entitled to one vote
for the Fund share held on the record date for any action requiring a vote by the shareholders. Shareholders of the Trust will
vote in the aggregate and not by Fund except as otherwise expressly required by law or when the Trustees determine that the matter
to be voted upon affects only the interests of the shareholders of the Fund.
Each share of the Fund represents a
pro rata interest in the assets of the Fund. Fund shares have no preemptive, exchange, subscription or conversion rights and there
are no restrictions on the transfer of Fund shares. The Fund share participates pro rata in all dividends and distributions of
the Fund and in the net distributable assets upon liquidation.
The Trust is not required to hold annual
meetings of shareholders for the purpose of electing Trustees except that (1) the Trust is required to hold a shareholder meeting
for the election of Trustees at such time as less than a majority of the Trustees holding office have been elected by shareholders
and (2) if, as a result of a vacancy on the Board, less than two-thirds of the Trustees holding office have been elected by the
shareholders, that vacancy may only be filled by a vote of the shareholders. Except as set forth above, a Trustee may continue
to hold office and may appoint successor Trustees.
Under the Declaration of Trust, the
Trustees have the power to liquidate any Fund without shareholder approval. While the Trustees have no present intent to exercise
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.
The rights of shareholders cannot be
modified without a majority vote of the Shareholders.
PRINCIPAL HOLDERS OF SECURITIES
From time to time, certain shareholders,
including Authorized Participants, may own, of record, beneficially, or both, more than 25% of the Fund’s shares and those
shareholders may be able to control the outcome of a shareholder vote.
As of the date of this Statement of Additional
Information, the Fund had not yet commenced operations and had no shareholders.
BOOK ENTRY ONLY SYSTEM
The information below supplements disclosure
in the Prospectus regarding the book entry system. This information should be read in conjunction with the disclosure included
in the Prospectus.
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. Generally, certificates will not be issued for shares.
DTC is a limited-purpose trust company that
was created to hold securities of the DTC Participants and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby
eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers,
banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own
DTC. More specifically, DTC is owned by a number of its DTC Participants and by the Exchange 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 the Fund’s shares
is limited to DTC Participants, Indirect Participants, and persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in the Fund’s shares (owners of such beneficial interests are referred to herein as “Beneficial
Owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are
not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their
purchase of the Fund’s shares. The Trust recognizes DTC or its nominee as the record owner of the Fund’s shares for
all purposes. Beneficial Owners of the Fund’s shares are not entitled to have Fund 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 the Fund’s shares.
Conveyance of all notices, statements, and
other communications to Beneficial Owners is affected as follows. DTC will make available to the Trust upon request and for a fee
a listing of the Fund’s shares held by each DTC Participant. The Trust shall obtain from each such DTC Participant the number
of Beneficial Owners holding the Fund’s shares, directly or indirectly, through such DTC Participant. The Trust shall provide
each such DTC Participant with copies of such notice, statement, or other communication, in such form, number and at such place
as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners.
In addition, the Trust shall pay to each such
DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable
statutory and regulatory requirements.
Share distributions shall be made to DTC or
its nominee, Cede & Co., as the registered holder of the Fund’s 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 the Fund’s shares held through
such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The Trust has no responsibility or liability
for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership
interests in the Fund’s shares, or for maintaining, supervising, or reviewing any records relating to such beneficial ownership
interests, or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC
Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing
its service with respect to any 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 the Fund’s shares, unless the Trust makes other arrangements with respect thereto satisfactory
to the Exchange. The DTC Participants’ rules and policies are made publicly available through its website at www.dtcc.com.
VOTING PROXIES OF FUND PORTFOLIO SECURITIES
The Board of Trustees
of the Trust has delegated responsibilities for decisions regarding proxy voting for securities held by the Fund to the Fund’s
Advisor. The Advisor may further delegate such proxy voting to a third party proxy voting service provider. The Advisor will vote
such proxies in accordance with their proxy policies and procedures. In some instances, the Advisor may be asked to cast a proxy
vote that presents a conflict between its interests and the interests of the Fund’s shareholders. In such a case, the Trust’s
policy requires that the Advisor abstain from making a voting decision and to forward all necessary proxy voting materials to the
Trust to enable the Board of Trustees to make a voting decision. When the Board of Trustees of the Trust is required to make a
proxy voting decision, only the Trustees without a conflict of interest with regard to the security in question or the matter to
be voted upon shall be permitted to participate in the decision of how the Fund’s vote will be cast. The Advisor has developed
a detailed proxy voting policy that has been approved by the Board of Trustees. A copy of the proxy voting policy is attached hereto
as Appendix 3.
Information on how the
Fund voted proxies for the most recent year ended June 30, relating to portfolio securities is available without charge, upon request,
by calling 1-800-594-7930 or on the SEC's Internet site at www.sec.gov. In addition, a copy of the Fund’s proxy voting policies
and procedures is also available by calling 1-800-594-7930 and will be sent within three business days of receipt of a request.
PORTFOLIO HOLDINGS DISCLOSURE PRACTICES
The Fund’s Board of Trustees has adopted
policies and procedures for the public and nonpublic disclosure of the Fund’s portfolio securities.
Each day the Fund is open for business,
before the opening of regular trading on the Exchange, the Fund will publicly disclose on the Fund’s website at www.dhfunds.com
the Fund’s full portfolio holdings that will form the basis of the next calculation of current NAV, which are based on the
Fund’s portfolio holdings as of the close of business on the prior Business Day. In addition, each Business Day, a portfolio
composition file, which displays the names and quantities of the instruments comprising the Creation Basket(s), as well as the
estimated Cash Amount (if any), for that day, is publicly disseminated prior to the opening of the Exchange via the NSCC.
in addition, as a general matter, no information
concerning the portfolio holdings of the Fund may be disclosed to any unaffiliated third party except (1) to service providers
that require such information in the course of performing their duties (for example, the Fund’s custodian, administrator,
the Advisor, any sub-advisor, independent public accountants, attorneys, officers and trustees) and are subject to a duty of confidentiality
including a duty not to trade on non-public information, and (2) pursuant to certain exceptions that serve a legitimate business
purpose. These exceptions may include: (1) disclosure of portfolio holdings only after such information has been publicly disclosed
on the Fund’s website, in marketing materials or through filings with the SEC as described below and (2) to third-party vendors,
that (a) agree to not distribute the portfolio holdings
or results of the analysis to third parties,
other departments or persons who are likely to use the information for purposes of purchasing or selling the Fund before the portfolio
holdings or results of the analysis become publicly available; and (b) sign a written confidentiality agreement. The confidentiality
agreement must provide, but is not limited to, that the recipient of the portfolio holdings information agrees to limit access
to the portfolio holdings information to its employees who, on a need to know basis are (1) authorized to have access to the portfolio
holdings information and (2) subject to confidentiality obligations, including duties not to trade on non-public information,
no less restrictive that the confidentiality obligations contained in the confidentiality agreement.
The Fund’s portfolio holdings are
currently disclosed to the public through filings with the SEC. The Fund’s discloses portfolio holdings by mailing the annual
and semi-annual reports to shareholders approximately two months after the end of the fiscal year and semi-annual period, respectively.
In addition, the Fund discloses portfolio holdings reports on Forms N-CSR and Form N-Q two months after the end of each quarter/semi-annual
period. Beginning April 30, 2020, the Fund’s portfolio holdings as of the end of first and third fiscal quarters will be
available two months after each such quarter-end on Form N-PORT rather than Form N-Q.
Neither the Fund nor the Advisor may enter
into any arrangement providing for the disclosure of non-public portfolio holding information for the receipt of compensation or
benefit of any kind. Any exceptions to the policies and procedures may only be made by the consent of the Trust’s chief compliance
officer upon a determination that such disclosure serves a legitimate business purpose and is in the best interests of the Fund
and will be reported to the Board at the Board’s next regularly scheduled meeting.
CODE OF ETHICS
The Trust, the Advisor, and the Distributor
have adopted codes of ethics under Rule 17j-1(c) of the 1940 Act. The purpose of each code is to avoid potential conflicts of interest
and to prevent fraud, deception or misconduct with respect to the Fund. Such codes of ethics permit personnel covered by the codes
to invest in securities that may be purchased or held by the Fund, subject to the restrictions of the codes. The codes are filed
as exhibits to the Trust’s registration statement.
PORTFOLIO TURNOVER
The portfolio turnover rate of the Fund
is defined by the SEC as the ratio of the lesser of annual sales or purchases to the monthly average value of the portfolio, excluding
from both the numerator and the denominator securities with maturities at the time of acquisition of one year or less. Portfolio
turnover generally involves some expense to the Fund, including brokerage commissions or dealer mark-ups and other transactions
costs on the sale of securities and reinvestment in other securities. Since the Fund had not commenced operations as of the end
of the Trust's last fiscal year, it does not have any annual portfolio turnover data to report. Such information will be provided
in future filings.
DETERMINATION
OF NET ASSET VALUE
The Fund calculates its NAV per share
as of the close of the Exchange (normally 4:00 p.m. Eastern Time) on each Business Day. The NAV per share is calculated by dividing
the value of the net assets of the Fund (e.g. value of total assets less total liabilities) by the total number of shares outstanding.
To calculate the Fund’s NAV per
share, the Trust follows valuation procedures approved by the Board. Pursuant to these procedures, the Trust relies on certain
security pricing services to provide current market values for the Fund’s portfolio securities. These security pricing services
value equity securities (including foreign equity securities) traded on a securities exchange at the last reported sales price
on the principal exchange. Equity securities quoted by NASDAQ are valued at the NASDAQ Official Closing Price. If there is no reported
sale on the principal exchange and in the case of over-the-counter securities, equity securities are valued at a bid price estimated
by the security pricing service. Debt securities traded on a national securities exchange or in the over
the-counter market are valued at the
last reported sales price on the principal exchange. If there is no reported sale on the principal exchange, and for all other
debt securities, including zero-coupon securities, debt securities are valued at a bid price estimated by the security pricing
service. Foreign securities quoted in foreign currencies are translated in U.S. dollars at the foreign exchange rate in effect
as of the close of the Exchange (generally 4:00 p.m., Eastern Time) on the day the value of the foreign security is determined.
Options contracts are generally valued
at the mean of the bid and asked price as reported on the highest-volume exchange (in terms of the number of option contracts traded
for that issue) on which such options are traded. Short-term investments with remaining maturities of 60 days or less at the time
of purchase may be valued at amortized cost. Investments in other open-end investment companies are valued at NAV (except ETFs
which are valued consistent with the pricing process for equity securities). In certain limited circumstances such as when a security’s
closing price versus the prior day’s closing price exceeds a defined variance tolerance, or when a security’s closing
price is unchanged as compared to the prior day’s closing price, a financial intermediary’s good faith determination
of the fair value of a security or option may be used instead of its current market value, even if the security’s market
price is readily available.
In cases where market prices for portfolio
securities are not readily available, a Pricing Committee established and appointed by the Trustees determines in good faith, subject
to Trust procedures, the fair value of portfolio securities held by the Fund.
TAXES
This following information is a summary
of certain key federal income tax considerations affecting the Fund and its shareholders and is in addition to the information
provided in the Prospectus. No attempt has been made to present a complete explanation of the federal, state, local or foreign
tax treatment of the Fund or the tax implications to its shareholders. The discussions here and in the Prospectus are not intended
as substitutes for careful tax planning.
FEDERAL INCOME TAXATION
The Fund is treated as a separate corporation
for federal income tax purposes. The Fund has elected to be treated, and intends to qualify each year, as a regulated investment
company (a “RIC”) under Subchapter M of the Code. Qualification as a RIC requires, among other things, that the Fund:
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(1)
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derive in each taxable year at least 90% of its gross income from: (a) dividends,
interest, payments with respect to certain securities loans, and gains from the sales or other disposition of stock, securities
or foreign currencies, or other income (including but not limited to gain from options, futures, and forward contracts) derived
with respect to its business of investing in such stock, securities or foreign currencies; and (b) net income derived from interests
in certain publicly traded partnerships that are treated as partnerships for U.S. federal income tax purposes and that derive less
than 90% of their gross income from the items described in (a) above (each a “Qualified Publicly Traded Partnership”);
and
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(2)
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diversify its holdings so that, at the end of each quarter of each taxable
year: (a) at least 50% of the value of the Fund’s total assets is represented by (I) cash and cash items, U.S. Government
securities, the securities of other regulated investment companies and (II) other securities, with such other securities limited,
in respect of any one issuer, to an amount not greater than 5% of the value of the Fund’s total assets and not more than
10% of the outstanding voting securities of such issuer and (b) not more than 25% of the value of the Fund’s total assets
is invested in the securities (other than U.S. Government securities and the securities of other regulated investment companies)
of (I) any one issuer, (II) any two or more issuers that the Fund controls and that are determined to be engaged in the same or
similar trades or
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businesses or related trades or
businesses or (III) any one or more Qualified Publicly Traded Partnerships.
As a RIC, the Fund will not be subject
to federal income tax on its “net investment income” (i.e., its investment company taxable income, as that term is
defined in the Code, determined without regard to the deduction for dividends paid) and “net capital gain” (the excess
of the Fund’s net long-term capital gain over net short-term capital loss), if any, that it distributes in each taxable year
to its shareholders, provided that it distributes at least 90% of the sum of its investment company taxable income for such taxable
year and its net tax-exempt interest income for such taxable year. However, the Fund will be subject to federal corporate income
tax (currently at a maximum rate of 35%) on any undistributed income other than tax-exempt income and to alternative minimum tax
(currently at a maximum rate of 20% for corporations such as the Fund) on alternative minimum taxable income.
If the Fund were to fail to qualify
as a regulated investment company accorded special tax treatment in any taxable year, the Fund would be subject to tax on its income
at corporate rates, and all distributions from earnings and profits, including any distribution of net tax-exempt income and net
long-term capital gains, would be taxable to shareholders as ordinary income. In addition, the Fund could be required to recognize
net unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying as a regulated
investment company that is accorded special tax treatment.
If the Fund fails to distribute in a
calendar year substantially all of its ordinary income for such year and substantially all of its net capital gains for the year
ending October 31 (or later if the Fund is permitted so to elect and so elects), plus any retained amount from the prior year,
the Fund will be subject to a 4% excise tax on the under-distributed amounts. A dividend paid to shareholders by the Fund in January
is generally deemed to have been paid by the Fund on December 31 of the preceding year, if the dividend was declared and payable
to shareholders of record on a date in October, November or December of that preceding year. The Fund intends generally to make
distributions sufficient to avoid imposition of the 4% excise tax, although there can be no assurance that it will be able to do
so.
FUND DISTRIBUTIONS
Distributions from the Fund (other than
exempt-interest dividends, as discussed below) will be taxable to shareholders as ordinary income to the extent derived from the
Fund’s investment income and net short-term gains. Distributions of net capital gains (that is, the excess of net gains from
capital assets held more than one year over net losses from capital assets held by the Fund for not more than one year) will be
taxable to shareholders as such, regardless of how long a shareholder has held the shares in the Fund. Distributions are taxable
to shareholders even if they are paid from income or gains earned by the Fund before a shareholder’s investment (and thus
were included in the price the shareholder paid). Distributions from capital gains are generally made after applying any available
capital loss carryovers. Distributions reinvested in additional shares of the Fund through a dividend reinvestment service will
be taxable to the same extent as if the distributions had been received in cash.
Individuals, trusts and estates whose
income exceeds certain threshold amounts will be subject to a 3.8% Medicare contribution tax on “net investment income.”
Net investment income includes any ordinary dividends and capital gain distributions from the Fund as well as any capital gains
recognized on the sale or exchange of Fund shares.
Distributions of investment income properly
designated by the Fund as derived from “qualified dividend income” are taxed at the rates applicable to long-term capital
gains. Long-term capital gain distributions paid to certain high income taxpayers will be subject to a regular tax rate of 20%.
High income taxpayers, for this purpose, are defined as individuals and married couples filing jointly whose taxable income exceeds
$400,000 and $450,000, respectively, per year.
In order for some portion of the dividends
received by the Fund shareholder to be “qualified dividend income,” the Fund must meet holding period and other requirements
with respect to some portion of the dividend-paying
stocks in its portfolio and the shareholder
must meet holding period and other requirements with respect to the Fund’s shares. Generally, dividends paid by REITs do
not qualify for the lower tax rates that apply to certain other “qualified investment income.” A dividend will not
be treated as qualified dividend income (at either the Fund or shareholder level): (1) if the dividend is received with respect
to any share of stock held for fewer than 61 days during the 120-day period beginning on the date that is 60 days before the date
on which such share becomes ex-dividend with respect to such dividend (or, in the case of certain preferred stock, 91 days during
the 180-day period beginning 90 days before such date); (2) to the extent that the recipient is under an obligation (whether pursuant
to a short sale or otherwise) to make related payments with respect to positions in substantially similar or related property;
(3) if the recipient elects to have the dividend income treated as investment income for purposes of the limitation on deductibility
of investment interest, or (4) if the dividend is received from a foreign corporation that is (a) not eligible for the benefits
of a comprehensive income tax treaty with the U.S. (with the exception of dividends paid on stock of such a foreign corporation
readily tradable on an established securities market in the U.S.s) or (b) treated as a foreign personal holding company, foreign
investment company, or passive foreign investment company.
In general, distributions of investment
income designated by the Fund as derived from qualified dividend income will be treated as qualified dividend income by non-corporate
taxpayers provided the shareholder meets the holding period and other requirements described above with respect to the Fund’s
shares. If the aggregate qualified dividends received by the Fund during any taxable year are 95% or more of its gross income,
then 100% of the Fund’s dividends (other than properly designated capital gain dividends) will be eligible to be treated
as qualified dividend income. For this purpose, the only gain included in the term “gross income” is the excess of
net short-term capital gain over net long-term capital loss.
Dividends of net investment income received
by corporate shareholders of the Fund will qualify for the 70% dividends received deduction generally available to corporations
to the extent of the amount of qualifying dividends received by the Fund from domestic corporations for the taxable year. A dividend
received by the Fund will not be treated as a qualifying dividend: (1) if the stock on which the dividend is paid is considered
to be “debt-financed” (generally, acquired with borrowed funds); (2) if it has been received with respect to any share
of stock that the Fund has held for less than 46 days (91 days in the case of certain preferred stock) during the 90-day period
beginning on the date that is 45 days before the date on which such share becomes ex-dividend with respect to such dividend (during
the 180-day period beginning 90 days before such date in the case of certain preferred stock); or (3) to the extent that the Fund
is under an obligation (pursuant to a short sale or otherwise) to make related payments with respect to positions in substantially
similar or related property. Moreover, the dividends received deduction may be disallowed or reduced: (1) if the corporate shareholder
fails to satisfy the foregoing requirements with respect to its shares of the Fund; or (2) by application of the Code.
If the Fund distributes amounts in excess
of the Fund’s “earnings and profits” (which provide a measure of the Fund’s dividend paying capacity for
tax purposes), such excess distributions to shareholders will be treated as a return of capital to the extent of a shareholder’s
basis in his or her shares, and thereafter as gain from the sale or exchange of a capital asset. A return of capital is not taxable
to a shareholder but has the effect of reducing the shareholder’s basis in the relevant shares, thus reducing any loss or
increasing any gain on a subsequent taxable disposition by a shareholder of his or her shares. However, because the Fund’s
expenses attributable to earning tax exempt income do not reduce the Fund’s current earnings and profits, a portion of any
distribution in excess of the Fund’s net tax exempt and taxable income may be considered paid out of the Fund’s earnings
and profits and may therefore be treated as a taxable dividend (even though that portion economically represents a return of the
Fund’s capital).
Dividends and distributions on the Fund’s
shares are generally subject to federal income tax as described herein to the extent they do not exceed the Fund’s realized
income and gains, even though such dividends and distributions may economically represent a return of a particular shareholder’s
investment. Such distributions are likely to occur in respect of shares purchased at a time when the Fund’s NAV reflects
gains that are either unrealized, or realized but not distributed.
HEDGING TRANSACTIONS
Certain investment and hedging activities
of the Fund, including transactions in options, futures contracts, forward contracts, foreign currencies, foreign securities, or
other similar transactions, will be subject to special tax rules. In a given case, these rules may accelerate income to the Fund,
defer losses to the Fund, cause
adjustments in the holding periods
of the Fund’s assets, convert long-term capital gains into short-term capital gains or convert short-term capital losses
into long-term capital losses. These rules could therefore affect the amount, timing, and character of the Fund’s income
and distributions to shareholders. Income earned as a result of these transactions would, in general, not be eligible for the dividends
received deduction or for treatment as exempt-interest dividends when distributed to shareholders. The Fund will endeavor to make
any available elections pertaining to such transactions in a manner believed to be in the best interests of the Fund.
Certain of the Fund’s hedging
activities (including its transactions, if any, in foreign currencies or foreign currency-denominated instruments) are likely to
produce a difference between its book income and its taxable income. If the Fund’s book income exceeds its taxable income
the distribution (if any) of such excess will be treated as: (1) a dividend to the extent of the Fund’s remaining earnings
and profits (including earnings and profits arising from tax-exempt income); (2) thereafter as a return of capital to the extent
of the recipient’s basis in the shares; and (3) thereafter as gain from the sale or exchange of a capital asset. If the Fund’s
book income in less than its taxable income, the Fund could be required to make distributions exceeding book income to qualify
as a regulated investment company that is accorded special tax treatment.
FOREIGN CURRENCY-DENOMINATED SECURITIES AND RELATED HEDGING
TRANSACTIONS
The Fund’s transactions in foreign
currency-denominated debt securities, certain foreign currency options, futures contracts, and forward contracts may give rise
to ordinary income or loss to the extent such income or loss results from fluctuations in the value of the foreign currency concerned.
FOREIGN INVESTMENTS
If the Fund purchases foreign securities, its
investment income may be subject to foreign withholding or other taxes that could reduce the return on these securities. Tax treaties
between the U.S. and foreign countries, however, may reduce or eliminate the amount of foreign taxes to which the Fund would be
subject. The effective rate of foreign tax cannot be predicted since the amount of Fund assets to be invested within various countries
is uncertain. However, the Fund intends to operate so as to qualify for treaty-reduced tax rates when applicable.
Distributions from the Fund may be based on
estimates of book income for the year. Book income generally consists solely of the coupon income generated by the portfolio, whereas
tax-basis income includes gains or losses attributable to currency fluctuation. Due to differences in the book and tax treatment
of fixed income securities denominated in foreign currencies, it is difficult to project currency effects on an interim basis.
Therefore, to the extent that currency fluctuations
cannot be anticipated, a portion of distributions to shareholders could later be designated as a return of capital, rather than
income, for income tax purposes, which may be of particular concern to simple trusts.
FOREIGN TAX CREDIT
Investment by the Fund in “passive foreign
investment companies” could subject the Fund to a U.S. federal income tax or other charge on the proceeds from the sale of
its investment in such a company; however, this tax can be avoided by making an election to mark such investments to market annually
or to treat the passive foreign investment company as a “qualified electing Fund.”
A “passive foreign investment company”
is any foreign corporation: (1) 75 percent or more of the income of which for the taxable year is passive income; or (2) the average
percentage of the assets of which (generally by value, but by adjusted tax basis in certain cases) produce or are held for the
production of passive income is at least 50 percent. Generally, passive income for this purpose means dividends, interest (including
income equivalent to interest), royalties, rents, annuities, the excess of gain over losses from certain property transactions
and commodities transactions, and foreign currency gains. Passive income for this purpose does not include rents and royalties
received by the foreign corporation from active business and certain income received from related
persons. The Fund’s investments in foreign
securities may be subject to withholding taxes at the source on dividends or interest payments.
SALE OR REDEMPTION OF SHARES
The sale, exchange or redemption of the Fund’s
shares 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 long-term capital gain or loss if the shares have been held for more than 12 months. Otherwise the gain or loss on the sale,
exchange, or redemption of the Fund’s shares will be treated as short-term capital gain or loss. However, if a shareholder
sells the Fund’s shares at a loss within six months of purchase, any loss will be disallowed for Federal income tax purposes
to the extent of any exempt-interest dividends received on such shares. In addition, any loss (not already disallowed as provided
in the preceding sentence) realized upon a taxable disposition of the Fund’s shares held for six months or less will be treated
as long-term, rather than short-term, to the extent of any long-term capital gain distributions received by the shareholder with
respect to the Fund’s shares. All or a portion of any loss realized upon a taxable disposition of the Fund’s shares
will be disallowed if other shares of the same Fund are purchased within 30 days before or after the disposition. In such a case,
the basis of the newly purchased Fund shares will be adjusted to reflect the disallowed loss.
IN-KIND PURCHASE AND REDEMPTION OF CREATION UNITS
To the extent that the Fund sells shares in
exchange for securities and/or cash, the investor will recognize a gain or loss equal to the difference between the market value
of the Creation Unit at the time and the investor’s aggregate basis in the securities surrendered and/or the amount of any
cash paid for the Creation Unit. An investor who redeems a Creation Unit for securities or securities and cash will generally recognize
a gain or loss equal to the difference between the investor’s basis in the Creation Unit and the aggregate market value of
the securities and/or cash received for the Creation Unit. The Internal Revenue Service, however, may assert that a loss realized
upon an exchange of primarily securities for a Creation Unit cannot be deducted currently under the rules governing “wash
sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities should
consult their own tax advisor with respect to whether wash sale rules apply and when a loss might be deductible.
Under current federal tax laws, any capital
gain or loss realized upon redemption of a Creation Unit is generally treated as long-term capital gain or loss if the shares have
been held for more than 12 months and as short-term capital gain or loss if the shares have been held for 12 months or less.
If you purchase or redeem Creation Units, you
will be sent a confirmation statement showing how many Creation Units of the Fund you purchased and sold and at what price.
BACKUP WITHHOLDING
In general, the Fund is required to withhold
and remit to the U.S. Treasury a percentage of the proceeds of share sales, exchanges, or redemptions made by and taxable dividends
and other distributions paid to any individual shareholder who fails to properly furnish the Fund with a correct taxpayer identification
number (“TIN”), who has under-reported dividend or interest income, or who fails to certify to the Fund that he or
she is a U.S. person and is not subject to such withholding. The backup withholding tax rate is 28% for amounts paid through 2015.
Unless Congress enacts tax legislation providing otherwise, this legislation could expire and the backup withholding rate will
be 31% for amounts paid after December 31, 2015.
SECURITIES ISSUED OR PURCHASED AT A DISCOUNT
The Fund’s investment in securities issued
at a discount and certain other obligations will (and investments in securities purchased at a discount may) require the Fund to
accrue and distribute income not yet received. In order to generate sufficient cash to make the requisite distributions, the Fund
may be required to sell securities in its portfolio that it otherwise would have continued to hold.
SHARES PURCHASED THROUGH TAX-QUALIFIED PLANS
Special tax rules apply to investments purchased though defined
contribution plans and other tax-qualified plans. Shareholders should consult their tax adviser to determine the suitability of
shares of the Fund as an investment through such plans and the precise effect of an investment on their particular tax situation.
UNRELATED BUSINESS TAXABLE INCOME
Under current law, the Fund generally serves
to block unrelated business taxable income (“UBTI”) from being realized by its tax-exempt shareholders. Notwithstanding
the foregoing, a tax-exempt shareholder could realize UBTI by virtue of its investment in the Fund if either: (1) the Fund invests
in REITs that hold residual interests in real estate mortgage investment conduits (“REMICs”); or (2) shares in the
Fund constitute debt-financed property in the hands of the tax-exempt shareholder within the meaning of Code Section 514(b).
If a charitable remainder trust (as defined
in Code Section 664) realizes any UBTI for a taxable year, it will be subject to an excise tax equal to the amount of the UBTI.
FINANCIAL
STATEMENTS
The Fund has not yet commenced operations
and, therefore, has not produced financial statements. Once produced, a copy of the Annual Report or Semi-Annual Report to Shareholders
may be obtained without charge by calling 1-800-594-7930.