Notes to Interim
Financial Statements
September 30, 2021 (unaudited)
(1) Organization
ETF Managers Group Commodity Trust I (the “Trust”)
was organized as a Delaware statutory trust on July 23, 2014. The Trust is a series trust formed pursuant to the Delaware Statutory Trust
Act and currently consists of one separate series. BREAKWAVE DRY BULK SHIPPING ETF (“BDRY,” the “Fund”), is a
commodity pool that continuously issues shares of beneficial interest that may be purchased and sold on NYSE Arca. As described below,
SIT RISING RATE ETF (“RISE”) also operated as a series of the Trust, but was closed and liquidated prior to September 30,
2021. The Fund is managed and controlled by ETF Managers Capital LLC (the “Sponsor”), a Delaware limited liability company.
The Sponsor is registered with the Commodity Futures Trading Commission (“CFTC”) as a “commodity pool operator”
(“CPO”) and is a member of the National Futures Trading Association (“NFA”). Breakwave Advisors, LLC (“Breakwave”)
is registered as a “commodity trading advisor” (“CTA”) with the CFTC and serves as BDRY’s commodity trading
advisor.
RISE Closure and Liquidation
On October 16, 2020, the Sponsor announced that
it would close and liquidate the RISE because of the then current market conditions and the Fund’s asset size. The last day the
liquidated fund accepted creation orders was on October 30, 2020. Trading in RISE was suspended after the close of the NYSE Arca on October
30, 2020. Proceeds of the liquidation were sent to shareholders on November 18, 2020 (the “Distribution Date”). From October
30, 2020 through the distribution date, shares of RISE did not trade on the NYSE Arca nor was there a secondary market for the shares.
Any shareholders that remained in RISE on the Distribution Date automatically had their shares redeemed for cash at the current net asset
value on November 18, 2020.
BDRY commenced investment operations on March
22, 2018. BDRY commenced trading on NYSE Arca on March 22, 2018 and trades under the symbol “BDRY.”
BDRY
BDRY’s investment objective is to provide
investors with exposure to the daily change in the price of dry bulk freight futures, before expenses and liabilities of BDRY, by tracking
the performance of a portfolio (the “BDRY Benchmark Portfolio”) consisting of a three-month strip of the nearest calendar
quarter of futures contracts on specified indexes (each a “Reference Index”) that measure rates for shipping dry bulk freight
(“Freight Futures”). Each Reference Index is published each United Kingdom business day by the London-based Baltic Exchange
Ltd. (the “Baltic Exchange”) and measures the charter rate for shipping dry bulk freight in a specific size category of cargo
ship – Capesize, Panamax or Supramax. The three Reference Indexes are as follows:
|
●
|
Capesize:
the Capesize 5TC Index;
|
|
●
|
Panamax:
the Panamax 4TC Index; and
|
|
●
|
Supramax:
the Supramax 6TC Index.
|
The value of the Capesize 5TC Index is disseminated
at 11:00 a.m., London Time and the value of the Panamax 4TC Index and the Supramax 6TC Index each is disseminated at 1:00 p.m., London
Time. The Reference Index information disseminated by the Baltic Exchange also includes the components and value of each component in
each Reference Index. Such Reference Index information also is widely disseminated by Reuters and/or other major market data vendors.
BDRY seeks to achieve its investment objective
by investing substantially all of its assets in the Freight Futures currently constituting the BDRY Benchmark Portfolio. The BDRY Benchmark
Portfolio includes all existing positions to maturity and settles them in cash. During any given calendar quarter, the BDRY Benchmark
Portfolio progressively increases its positions to the next calendar quarter three-month strip, thus maintaining constant exposure to
the Freight Futures market as positions mature.
The BDRY Benchmark Portfolio maintains long-only
positions in Freight Futures. The BDRY Benchmark Portfolio includes a combination of Capesize, Panamax and Supramax Freight Futures. More
specifically, the BDRY Benchmark Portfolio includes 50% exposure in Capesize Freight Futures contracts, 40% exposure in Panamax Freight
Futures contracts and 10% exposure in Supramax Freight Futures contracts. The BDRY Benchmark Portfolio does not include and BDRY does
not invest in swaps, non-cleared dry bulk freight forwards or other over-the-counter derivative instruments that are not cleared through
exchanges or clearing houses. BDRY may hold exchange-traded options on Freight Futures. The BDRY Benchmark Portfolio is maintained by
Breakwave and will be rebalanced annually. The Freight Futures currently constituting the BDRY Benchmark Portfolio, as well as the daily
holdings of BDRY are available on BDRY’s website at www.drybulketf.com.
When establishing positions in Freight Futures,
BDRY will be required to deposit initial margin with a value of approximately 10% to 40% of the notional value of each Freight Futures
position at the time it is established. These margin requirements are established and subject to change from time to time by the relevant
exchanges, clearing houses or BDRY’s Futures Commission Merchant (“FCM”), ED&F Man Capital Markets, Inc. On a daily
basis, BDRY is obligated to pay, or entitled to receive, variation margin in an amount equal to the change in the daily settlement level
of its Freight Futures positions. Any assets not required to be posted as margin with the FCM may be held at BDRY’s custodian or
remain with the FCM in cash or cash equivalents, as discussed below.
BDRY was created to provide investors with a cost-effective
and convenient way to gain exposure to daily changes in the price of Freight Futures. BDRY is intended to be used as a diversification
opportunity as part of a complete portfolio, not a complete investment program.
The Fund will incur certain expenses in connection
with its operations. The Fund will hold cash or cash equivalents such as U.S. Treasuries or other high credit quality, short-term fixed-income
or similar securities for direct investment or as collateral for the Freight futures and for other liquidity purposes and to meet redemptions
that may be necessary on an ongoing basis. These expenses and income from the cash and cash equivalent holdings may cause imperfect correlation
between changes in the Fund’s net asset value (“NAV”) and changes in the Benchmark Portfolio, because the Benchmark
Portfolio does not reflect expenses or income.
The Fund seeks to trade its positions prior to
maturity; accordingly, natural market forces may cost the Fund while rebalancing. Each time the Fund seeks to reconstitute its positions,
barring movement in the underlying securities, the futures and option prices may be higher or lower. Such differences in price, barring
a movement in the price of the underlying security, will constitute “roll yield” and may inhibit the Fund’s ability
to achieve its respective investment objective.
Several factors determine the total return from
investing in a futures contract position. One factor that impacts the total return that will result from investing in near month futures
contracts and “rolling” those contracts forward each month is the price relationship between the current near month contract
and the next month contract.
The CTA will close existing positions when it
determines it would be appropriate to do so and reinvest the proceeds in other positions. Positions may also be closed out to meet orders
for redemption baskets.
(2) Summary of Significant Accounting Policies
(a) Basis of Accounting
The accompanying interim financial
statements of the Fund have been prepared in conformity with U.S. generally accepted accounting principles (“U.S.
GAAP”). The Fund qualifies as an investment company for financial reporting purposes under Topic 946 of the Accounting
Standard Codification of U.S. GAAP.
The accompanying interim financial
statements are unaudited, but in the opinion of management, contain all adjustments (which include normal recurring adjustments)
considered necessary to present fairly the interim financial statements. These interim financial statements should
be read in conjunction with BDRY’s annual report on Form 10-K for the year ended June 30, 2021 and BDRY’s prospectus
dated March 18, 2021 (the “BDRY Prospectus,”). Interim period results are not necessarily indicative of results for a
full-year period.
(b) Use of Estimates
The preparation of the interim financial
statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at the date of the interim financial statements and
accompanying notes. Actual results could differ from those estimates. There were no significant estimates used in the preparation of
the interim financial statements.
(c) Cash
Cash, when shown in the Statements of
Assets and Liabilities, represents non-segregated cash with the custodian and does not include short-term investments.
(d) Cash Held by Broker
Breakwave is registered as a “commodity
trading advisor” and acts as such for BDRY. The Fund’s arrangement with its FCM requires the Fund to meet its variation margin
requirement related to the price movements, both positive and negative, on futures contracts held by the Fund by keeping cash on deposit
with the Commodity Broker (as defined below). These amounts are shown as Segregated cash held by broker in the Statements of
Assets and Liabilities. The Fund deposits cash or United States Treasury Obligations, as applicable, with its FCM subject to the CFTC
regulations and various exchange and broker requirements. The combination of the Fund’s deposits with its FCM of cash and United
States Treasury Obligations, as applicable, and the unrealized gain or loss on open futures contracts (variation margin) represents the
Fund’s overall equity in its brokerage trading account. The Fund uses its cash held by its FCM to satisfy variation margin requirements.
The Fund earns interest on its cash deposited with its FCM and interest income is recorded on the accrual basis.
(e) Final Net Asset Value for Fiscal Period
The calculation time of the Fund’s final
net asset value for creation and redemption of Fund shares for the three months ended September 30, 2021 and 2020 was at 4:00 p.m. Eastern
Time on September 30, 2021 and 2020, respectively. RISE was liquidated on November 18, 2020 at its final net asset value as of that date.
Although the Fund’s shares may continue
to trade on secondary markets subsequent to the calculation of the final NAV, the 4:00 p.m. Eastern Time represented the final opportunity
to transact in creation or redemption baskets for the three months ended September 30, 2021 and 2020.
Fair value per share is determined at the close
of the NYSE Arca.
For financial reporting purposes, the Fund values
its investment positions based upon the final closing price in their primary markets. Accordingly, the investment valuations in these
interim financial statements differ from those used in the calculations of the Fund’s final creation/redemption NAVs at
September 30, 2021 and 2020.
(f) Investment Valuation
Short-term investments, excluding U.S. Treasury
Bills, are carried at amortized cost, which approximates fair value. U.S. Treasury Bills are valued as determined by an independent pricing
service based on methods which include consideration of: yields or prices of securities of comparable quality, coupon, maturity and type;
indications as to values from dealers; and general market conditions.
Futures and options contracts are valued at the
last settled price on the applicable exchange on which that futures and/or options contract trades.
(g) Financial Instruments and Fair Value
The Fund discloses the fair value of its investments
in accordance with the Financial Accounting Standards Board (“FASB”) fair value measurement and disclosure guidance which
requires a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The disclosure requirements
establish a fair value hierarchy that distinguishes between: (1) market participant assumptions developed based on market data obtained
from sources independent to the Fund (observable inputs); and (2) the Fund’s own assumptions about market participant assumptions
developed based on the best information available under the circumstances (unobservable inputs). The three levels defined by the disclosure
requirements hierarchy are as follows:
Level
I:
|
Quoted
prices (unadjusted) in active markets for identical assets and liabilities that the reporting entity has the ability to access at
the measurement date.
|
Level
II:
|
Inputs
other than quoted prices included within Level I that are observable for the asset or liability, either directly or indirectly. Level
II inputs include the following: quoted prices for similar assets or liabilities in active markets, quoted prices for identical or
similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or
liability, and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market-corroborated
inputs).
|
Level
III:
|
Unobservable
pricing input at the measurement date for the asset or liability. Unobservable inputs shall be used to measure fair value to the
extent that observable inputs are not available.
|
In some instances, the inputs used to measure
fair value might fall in different levels of the fair value hierarchy. The level in the fair value hierarchy within which the fair value
measurement in its entirety falls shall be determined based on the lowest input level that is significant to the fair value measurement
in its entirety.
Fair value measurements also require additional
disclosure when the volume and level of activity for the asset or liability have significantly decreased, as well as when circumstances
indicate that a transaction is not orderly.
The following table summarizes BDRY’s valuation
of investments at September 30, 2021 and at June 30, 2021 using the fair value hierarchy:
|
|
September 30, 2021 (unaudited)
|
|
|
|
Short-Term
Investments
|
Futures
Contracts
|
Total
|
|
Level I – Quoted Prices
|
|
$
|
21,129,237
|
a
|
$
|
19,996,790
|
b
|
$
|
41,126,027
|
|
a – Included in Investments in securities
in the Statements of Assets and Liabilities.
b – Included in Receivable on open futures
contracts in the Statements of Assets and Liabilities.
|
|
June 30, 2021 (audited)
|
|
|
|
Short-Term
Investments
|
Futures
Contracts
|
Total
|
|
Level I – Quoted Prices
|
|
$
|
42,654,058
|
a
|
$
|
21,723,570
|
b
|
$
|
64,377,628
|
|
a – Included in Investments in securities
in the Statements of Assets and Liabilities.
b – Included in Receivable on open futures
contracts in the Statements of Assets and Liabilities.
Transfers between levels are recognized at the
end of the reporting period. During the three months ended September 30, 2021 and the year ended June 30, 2021, BDRY recognized no transfers
from Level 1, Level 2 or Level 3.
The inputs or methodology used for valuing investments
are not necessarily an indication of the risk associated with investing in those securities.
(h) Investment Transactions and Related Income
Investment transactions are recorded on the trade
date. All such transactions are recorded on the identified cost basis, and marked to market daily. Unrealized gain/loss on open futures
contracts is reflected in Receivable/Payable on open futures contracts in the Statements of Assets and Liabilities and the change in
the unrealized gain/loss between periods is reflected in the Statements of Operations. BDRY’s interest earned on short-term
securities and on cash deposited with ED & F Man Capital Markets Inc. is accrued daily and reflected as Interest Income, when applicable,
in the Statements of Operations.
(i) Federal Income Taxes
The Fund is registered as a Delaware statutory
trust and is treated as a partnership for U.S. federal income tax purposes. Accordingly, the Fund does not expect to incur U.S. federal
income tax liability; rather, each beneficial owner is required to take into account their allocable share of the Fund’s income,
gain, loss, deductions and other items for the Fund’s taxable year ending with or within the beneficial owner’s taxable year.
Management of the Fund has reviewed the open
tax years and major jurisdictions and concluded that there is no tax liability resulting from unrecognized tax benefits relating to uncertain
income tax positions taken or expected to be taken in future tax returns at September 30, 2021 and June 30, 2021. The Fund is also not
aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits will significantly
change in the next twelve months. On an ongoing basis, management will monitor its tax positions taken to determine if adjustments to
its conclusions are necessary based on factors including, but not limited to, further implementation of guidance expected from the FASB
and on-going analysis of tax law, regulation, and interpretations thereof. The Fund’s federal tax returns are subject to examination
by the Internal Revenue Service for a period of three years after they are filed.
(3) Investments
(a) Short-Term Investments
The Fund may purchase U.S. Treasury Bills, agency
securities, and other high-credit quality short-term fixed income or similar securities with original maturities of one year or less.
A portion of these investments may be used as margin for the Fund’s trading in futures contracts.
(b) Accounting for Derivative Instruments
In seeking to achieve the Fund’s investment
objective, the commodity trading advisor uses a mathematical approach to investing. Using this approach, the commodity trading advisor
determines the type, quantity and mix of investment positions that it believes in combination should produce returns consistent with
the Fund’s objective.
All open derivative positions at September 30,
2021 and at June 30, 2021, as applicable, are disclosed in the Schedules of Investments and the notional value of these open positions
relative to the shareholders’ capital of the Fund is generally representative of the notional value of open positions to shareholders’
capital throughout the reporting periods for the Fund. The volume associated with derivative positions varies on a daily basis as the
Fund transacts in derivative contracts in order to achieve the appropriate exposure, as expressed in notional value, in comparison to
shareholders’ capital consistent with the Fund’s investment objective.
Following is a description of the derivative
instruments used by the Fund during the reporting period, including the primary underlying risk exposures.
(c) Futures Contracts
The Fund enters into futures contracts to gain
exposure to changes in the value of the Benchmark Portfolio. A futures contract obligates the seller to deliver (and the purchaser to
accept) the future cash settlement of a specified quantity and type of a treasury futures contract at a specified time and place. The
contractual obligations of a buyer or seller of a treasury futures contract may generally be satisfied by making an offsetting sale or
purchase of an identical futures contract on the same or linked exchange before the designated date of delivery.
Upon entering into a futures contract, the Fund
is required to deposit and maintain as collateral at least such initial margin as required by the exchange on which the transaction is
affected. The initial margin is segregated as Cash held by broker, as disclosed in the Statements of Assets and Liabilities, and is restricted
as to its use. Pursuant to the futures contract, the Fund agrees to receive from or pay to the broker an amount of cash equal to the
daily fluctuation in value of the futures contract. Such receipts or payments are known as variation margin and are recorded by the Fund
as unrealized gains or losses. The Fund will realize a gain or loss upon closing a futures transaction.
Futures contracts involve, to varying degrees,
elements of market risk (specifically treasury price risk) and exposure to loss in excess of the amount of variation margin. The face
or contract amounts reflect the extent of the total exposure the Fund has in the particular classes of instruments. Additional risks
associated with the use of futures contracts include imperfect correlation between movements in the price of the futures contracts and
the market value of the underlying securities and the possibility of an illiquid market for a futures contract. With futures contracts,
there is minimal counterparty risk to the Fund since futures contracts are exchange-traded and the exchange’s clearinghouse, as
counterparty to all exchange-traded futures contracts, guarantees the futures contracts against default.
BREAKWAVE DRY BULK SHIPPING ETF
Fair Value of Derivative Instruments, as of September
30, 2021
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Derivatives
|
|
Statements of Assets and Liabilities
|
|
Fair
Value
|
Statements
of
Assets and Liabilities
|
Fair
Value
|
Interest Rate Risk
|
|
Receivable on open futures contracts
|
|
$
|
19,996,790
|
*
|
|
—
|
|
|
—
|
|
*
|
Represents
cumulative appreciation of futures contracts as reported in the Statements of Assets and Liabilities.
|
BREAKWAVE DRY BULK SHIPPING ETF
Fair Value of Derivative Instruments, as of June
30, 2021
|
|
Asset Derivatives
|
|
Liability Derivatives
|
|
Derivatives
|
|
Statements of Assets and Liabilities
|
|
Fair
Value
|
Statements
of
Assets and Liabilities
|
Fair
Value
|
Interest Rate Risk
|
|
Receivable on open futures contracts
|
|
$
|
21,723,570
|
*
|
|
—
|
|
|
—
|
|
*
|
Represents
cumulative appreciation of futures contracts as reported in the Statements of Assets and
Liabilities.
|
BREAKWAVE DRY BULK SHIPPING ETF
The Effect of Derivative Instruments on the
Statements of Operations
For the Three Months Ended September 30, 2021
Derivatives
|
|
Location of Gain (Loss) on Derivatives
|
|
Realized
Gain on
Derivatives
Recognized in
Income
|
Change in
Unrealized Gain
(Loss) on
Derivatives
Recognized in
Income
|
Interest Rate Risk
|
|
Net realized gain on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts
|
|
$
|
19,580,698
|
$
|
(1,726,780)
|
The futures contracts open at September 30, 2021
are indicative of the activity for the three months ended September 30, 2021.
BREAKWAVE DRY BULK SHIPPING ETF
The Effect of Derivative Instruments on the Combined
Statements of Operations
For the Three Months Ended September 30, 2020
Derivatives
|
|
Location of Gain (Loss) on Derivatives
|
|
Realized
Gain on
Derivatives
Recognized in
Income
|
Change in
Unrealized Gain
(Loss) on
Derivatives
Recognized in
Income
|
Interest Rate Risk
|
|
Net realized gain on investments and futures and/or Change in unrealized gain (loss) on investments and futures contracts
|
|
$
|
10,104,770
|
$
|
(7,066,400)
|
The futures contracts open at September 30, 2020
are indicative of the activity for the three months ended September 31, 2020.
SIT RISING RATE ETF
The Effect of Derivative Instruments on the Combined
Statements of Operations
For the Three Months Ended September 31, 2020
Derivatives
|
|
Location of Gain (Loss) on Derivatives
|
|
Realized
Loss on
Derivatives
Recognized in
Income
|
Change in
Unrealized Gain
(Loss) on
Derivatives
Recognized in
Income
|
Interest Rate Risk
|
|
Net realized loss on investments, futures and options contracts and/or Change in unrealized gain (loss) on investments, futures and options contracts
|
|
$
|
(34,256)
|
$
|
1,618
|
The futures and options contracts open at September
30, 2020 are indicative of the activity for the three months ended September 30, 2020.
(4) Agreements
(a) Management Fee
The Fund pays the Sponsor a sponsor fee (the
“Sponsor Fee”) in consideration of the Sponsor’s advisory services to the Fund. Additionally, the Fund pays its commodity
trading advisor a license and service fee (the “CTA fee”).
BDRY pays the Sponsor an annual Sponsor Fee,
monthly in arrears, in an amount calculated as the greater of 0.15% of its average daily net assets, or $125,000. BDRY also pays an annual
fee to Breakwave, monthly in arrears, in an amount equal to 1.45% of BDRY’s average daily net assets. Breakwave has agreed to waive
its CTA fee to the extent necessary, and the Sponsor has voluntarily agreed to correspondingly assume the remaining expenses of BDRY
such that Fund expenses do not exceed an annual rate of 3.50%, excluding brokerage commissions and interest expense, of the value of
BDRY’s average daily net assets through September 30, 2022 (the “BDRY Expense Cap,”). The assumption of expenses by
the Sponsor and waiver of BDRY’s CTA fee are contractual on the part of the Sponsor and Breakwave, respectively.
The waiver of BDRY’s CTA fees, pursuant
to the undertaking, amounted to $-0- and $-0-, for the three months ended September 30, 2021 and 2020, respectively, as disclosed in
the Statements of Operations.
BDRY (and, prior to its liquidation, RISE) currently
accrues its daily expenses up to the Expense Cap, or if less, at accrual estimates established by the Sponsor. At the end of each month,
the accrued amount is remitted to the Sponsor as the Sponsor has assumed, and is responsible for the payment of the routine operational,
administrative and other ordinary expenses of the Fund in excess of the Fund’s Expense Cap, which in the case of RISE, aggregated
$104,370 for the three months ended September 31, 2020, as disclosed in the Statements of Operations. In the case of BDRY, expenses
absorbed by the sponsor aggregated $-0- and $-0- for the three months ended September 30, 2021 and 2020, respectively, as disclosed in
the Statements of Operations.
(b) The Administrator, Custodian, Fund Accountant
and Transfer Agent
The Fund has appointed U.S. Bank, a national
banking association, with its principal office in Milwaukee, Wisconsin, as the custodian (the “Custodian”). Its affiliate,
U.S. Bancorp Fund Services, is the Fund accountant (“the Fund accountant”) of the Fund, transfer agent (the “Transfer
Agent”) for Fund shares and administrator for the Fund (the “Administrator”). It performs certain administrative and
accounting services for the Fund and prepares certain SEC, NFA and CFTC reports on behalf of the Fund. (U.S. Bank and U.S. Bancorp Fund
Services are referred to collectively hereinafter as “U.S. Bank”).
BDRY has agreed to pay U.S. Bank 0.05% of AUM,
with a $45,000 minimum annual fee payable for its administrative, accounting and transfer agent services and 0.01% of AUM, with an annual
minimum of $4,800 for custody services. BDRY paid U.S. Bank $16,297 and $16,284 for the three months ended September 30, 2021 and 2020,
respectively, as disclosed in the Statements of Operations.
Prior to its liquidation RISE paid U.S. Bank
$14,694 for the three months ended September 30, 2020, as disclosed in the Combined Statements of Operations.
(c) The Distributor
The Fund pays ETFMG Financial LLC. (the “Distributor”),
an affiliate of the Sponsor, an annual fee for statutory and wholesaling distribution services and related administrative services equal
to the greater of $15,000 or 0.02% of the Fund’s average daily net assets, payable monthly. Pursuant to the Marketing Agent Agreement
between the Sponsor, the Fund and the Distributor, the Distributor assists the Sponsor and the Fund with certain functions and duties
relating to distribution and marketing services to the Fund, including reviewing and approving marketing materials and certain regulatory
compliance matters. The Distributor also assists with the processing of creation and redemption orders.
BDRY incurred $3,959 and $3,959 for the three
months ended September 30, 2021 and 2020, respectively, as disclosed in the Statements of Operations.
Prior to its liquidation, RISE incurred
$3,858 in distribution and related administrative services for the three months ended September 30, 2020, as disclosed in the Combined
Statements of Operations.
BDRY pays the Sponsor an annual fee for wholesale
support services of $25,000 plus 0.12% of BDRY’s average daily net assets, payable monthly.
BDRY incurred $33,807 and $16,995 in
wholesale support fees for the three months ended September 30, 2021 and 2020, respectively, as disclosed in the Statements of
Operations.
Prior to its liquidation, RISE also paid the
Sponsor an annual fee for wholesale support services equal to 0.1% of RISE’s average daily net assets, payable monthly.Prior to
its liquidation, RISE incurred $1,273 in wholesale support fees for the three months ended September 30, 2020, respectively, as disclosed
in the Combined Statements of Operations.
(d) The Commodity Broker
ED&F Man Capital Inc., a Delaware limited
liability company, serves as BDRY’s clearing broker (the “Commodity Broker”). In its capacity as clearing broker, the
Commodity Broker executes and clear the Funds’ futures transactions and performs certain administrative services for the Funds.
The Fund pays respective brokerage commissions,
including applicable exchange fees, National Futures Association (“NFA”) fees, give–up fees, pit brokerage fees and
other transaction related fees and expenses charged in connection with trading activities in CFTC regulated investments. Brokerage commissions
on futures contracts are recognized on a half-turn basis.
The Sponsor does not expect brokerage commissions
and fees to exceed 0.40% (excluding the impact on the Fund of creation and/or redemption activity) for BDRY of the net asset value of
the Fund for execution and clearing services on behalf of the Fund, although the actual amount of brokerage commissions and fees in any
year or any part of any year may be greater. The effects of trading spreads, financing costs associated with financial instruments, and
costs relating to the purchase of U.S. Treasury Securities or similar high credit quality short-term fixed-income or similar securities
are not included in the foregoing analysis. BDRY incurred $177,793 and $75,212 in brokerage commissions and fees for the three months
ended September 30, 2021 and 2020, respectively, as disclosed in the Statements of Operations.
Prior to its liquidation, RISE incurred $1,243
in brokerage commissions and fees for the three months ended September 30, 2020, as disclosed in the Combined Statements of Operations.
(e) The Trustee
Under the respective Amended and Restated Declaration
of Trust and Trust Agreement (the “Trust Agreement”) for the Fund, Wilmington Trust Company, the Trustee of the Fund (the
“Trustee”) serves as the sole trustee of the Fund in the State of Delaware. The Trustee will accept service of legal process
on the Fund in the State of Delaware and will make certain filings under the Delaware Statutory Trust Act. Under the Trust Agreement
for the Fund, the Sponsor has the exclusive management and control of all aspects of the business of the Fund. The Trustee does not owe
any other duties to the Fund, the Sponsor or the Shareholders of the Fund. The Trustee has no duty or liability to supervise or monitor
the performance of the Sponsor, nor does the Trustee have any liability for the acts or omissions of the Sponsor. BDRY incurred $630
and $630 in trustee fees for the three months ended September 30, 2021 and 2020, respectively, which is included in Other Expenses in
the Statements of Operations.
Prior to its liquidation, RISE incurred $630
in trustee fees for the three months ended September 31, 2020 which is included in Other Expenses in the Combined Statements of Operations.
(f) Routine Offering, Operational, Administrative
and Other Ordinary Expenses
The Sponsor, in accordance with the BDRY Expense
Cap limitation paid, after the waiver of the CTA fee for BDRY by Breakwave, all of the routine offering, operational, administrative
and other ordinary expenses of BDRY in excess of 3.50% (excluding brokerage commissions and interest expense) of BDRY’s average
daily net assets, including, but not limited to, accounting and computer services, the fees and expenses of the Trustee, Administrator,
Custodian, Transfer Agent and Distributor, legal and accounting fees and expenses, tax return preparation expenses, filing fees, and
printing, mailing and duplication costs. BDRY incurred $795,900 and $384,414 for the three months ended September 30, 2021 and 2020,
respectively, in routine offering, operational, administrative or other ordinary expenses.
The CTA fee waiver for BDRY by Breakwave was
$-0- and $-0- for the three months ended September 30, 2021 and 2020, respectively.
In addition, the assumption of Fund expenses
above the BDRY Expense Cap by the Sponsor, pursuant to the undertaking (as discussed in Note 4a), amounted to $-0- and $-0- for the three
months ended September 30, 2021 and 2020, respectively.
Prior to its liquidation, RISE incurred $118,530
for the three months ended September 31, 2020 in routine offering, operational, administrative or other ordinary expenses.
Prior to its liquidation, the assumption of Fund
expenses above the RISE Expense Cap by the Sponsor, pursuant to the undertaking (as discussed in Note 4a), amounted to $104,370 (including
$194 in interest expense) for the three months ended September 31, 2020.
(g) Organizational and Offering Costs
Expenses incurred in connection with organizing
BDRY and up to the offering of its Shares upon commencement of its investment operations on March 22, 2018, were paid by the Sponsor
and Breakwave without reimbursement.
Accordingly, all such expenses are not reflected
in the Statements of Operations. The Fund will bear the costs of its continuous offering of Shares and ongoing offering expenses.
Such ongoing offering costs will be included as a portion of the Routine Offering, Operational, Administrative and Other Ordinary Expenses.
These costs will include registration fees for regulatory agencies and all legal, accounting, printing and other expenses associated
therewith. These costs will be accounted for as a deferred charge and thereafter amortized to expense over twelve months on a straight-line
basis or a shorter period if warranted. For the three months ended September 30, 2021 and 2020, BDRY incurred no such expenses.
During the year ended June 30, 2021 the Sponsor,
in order to maintain the continuous offering of Shares, undertook to register additional Shares of the Fund, the costs of which were
be borne by the Fund and aggregated $28,997, of which $12,235 was amortized to expense at September 30, 2021. Amortization of offering
costs amounted to $7,309 for the three months ended September 30, 2021.
(h) Extraordinary Fees and Expenses
The Fund will pay all extraordinary fees and
expenses, if any. Extraordinary fees and expenses are fees and expenses which are nonrecurring and unusual in nature, such as legal claims
and liabilities, litigation costs or indemnification or other unanticipated expenses. Such extraordinary fees and expenses, by their
nature, are unpredictable in terms of timing and amount. For the three months ended September 30, 2021 and 2020, respectively, BDRY did
not incur such expenses.
(5) Creations and Redemptions
The Fund issues and redeems Shares from time
to time, but only in one or more Creation Baskets. A Creation Basket is a block of 25,000 Shares of each Fund. Baskets may be created
or redeemed only by Authorized Participants.
Except when aggregated in Creation Baskets,
the Shares are not redeemable securities. Retail investors, therefore, generally will not be able to purchase or redeem Shares
directly from or with the Fund. Rather, most retail investors will purchase or sell Shares in the secondary market with the
assistance of a broker. Thus, some of the information contained in these Notes to Interim Financial Statements – such as
references to the Transaction Fee imposed on creations and redemptions – is not relevant to retail investors.
(a) Transaction Fees on Creation and Redemption
Transactions
In connection with orders to create and redeem
one or more Creation Baskets, an Authorized Participant is required to pay a transaction fee, or AP Transaction Fee, of $250 per order,
which goes directly to the Custodian. The AP Transaction Fees are paid by the Authorized Participants and not by the Fund.
(b) Share Transactions
BREAKWAVE DRY BULK SHIPPING ETF
Summary of Share Transactions for the Three Months Ended September 30, 2021
|
|
|
Shares
|
|
|
Net Assets
Increase
(Decrease)
|
|
Shares Sold
|
|
|
650,000
|
|
|
$
|
20,531,325
|
|
Shares Redeemed
|
|
|
(1,500,000
|
)
|
|
|
(41,230,842
|
)
|
Net Decrease
|
|
|
(850,000
|
)
|
|
$
|
(20,699,517
|
)
|
Summary of Share Transactions for the Three Months Ended September 30, 2020
|
|
|
Shares
|
|
|
Net Assets
Increase
(Decrease)
|
|
Shares Sold
|
|
|
175,000
|
|
|
$
|
1,447,553
|
|
Shares Redeemed
|
|
|
(2,250,000
|
)
|
|
|
(18,122,633
|
)
|
Net Decrease
|
|
|
(2,075,000
|
)
|
|
$
|
(16,675,080
|
)
|
SIT RISING RATE ETF (PRIOR TO LIQUIDATION ON
NOVEMBER 18, 2020)
Summary of Share Transactions for the Three Months Ended September 30, 2020
|
|
|
Shares
|
|
|
Net Assets
Decrease
|
|
Shares Sold
|
|
|
—
|
|
|
$
|
—
|
|
Shares Redeemed
|
|
|
(100,000)
|
|
|
|
(2,008,450)
|
|
Net Decrease
|
|
|
(100,000)
|
|
|
$
|
(2,008,450)
|
|
(6) Risk
(a) Investment Related Risk
The NAV of BDRY’s shares relates directly
to the value of the futures portfolio, cash and cash equivalents held by BDRY. Fluctuations in the prices of these assets could materially
adversely affect the value and performance of an investment in BDRY’s shares. Past performance is not necessarily indicative of
future results; all or substantially all of an investment in BDRY could be lost.
The NAV of BDRY’s shares relates directly
to the value of futures investments held by BDRY which are materially impacted by fluctuations in changes in spot charter rates. Charter
rates for dry bulk vessels are volatile and have increased significantly in the recent past and may remain at high levels or increase
further or decrease in the future.
Futures and options contracts have expiration
dates. Before or upon the expiration of a contract, BDRY may be required to enter into a replacement contract that is priced higher or
that have less favorable terms than the contract being replaced (see “Negative Roll Risk,” below). The Freight Futures market
settles in cash against published indices, so there is no physical delivery against the futures contracts.
Similar to other futures contracts, the Freight
Futures curve shape could be either in “contango” (where the futures curve is upward sloping with next futures price higher
than the current one) or “backwardation” (where each the next futures price is lower than the current one). Contango curves
are generally characterized by negative roll cost, as the expiring contract value is lower that the next prompt contract value, assuming
the same lot size. That means there could be losses incurred when the contracts are rolled each period and such losses are independent
of the Freight Futures price level.
(b) Liquidity Risk
In certain circumstances, such as the disruption
of the orderly markets for the futures contracts or Financial Instruments in which the Fund invests, the Fund might not be able to dispose
of certain holdings quickly or at prices that represent what the market value may have been in an orderly market. Futures and option positions
cannot always be liquidated at the desired price. It is difficult to execute a trade at a specific price when there is a relatively small
volume of buy and sell orders in a market. A market disruption can also make it difficult to liquidate a position. The large size of the
positions that the Fund may acquire increases the risk of illiquidity both by making its positions more difficult to liquidate and by
potentially increasing losses while trying to do so. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving
a high correlation with the Benchmark Portfolio.
(c) Natural Disaster/Epidemic Risk
Natural or environmental disasters, such as earthquakes,
fires, floods, hurricanes, tsunamis and other severe weather-related phenomena generally, and widespread disease, including pandemics
and epidemics (for example, the novel coronavirus COVID-19), have been and can be highly disruptive to economies and markets and have
recently led, and may continue to lead, to increased market volatility and significant market losses. Such natural disaster and health
crises could exacerbate political, social, and economic risks previously mentioned, and result in significant breakdowns, delays, shutdowns,
social isolation, and other disruptions to important global, local and regional supply chains affected, with potential corresponding results
on the operating performance of the Fund and its investments. A climate of uncertainty and panic, including the contagion of infectious
viruses or diseases, may adversely affect global, regional, and local economies and reduce the availability of potential investment opportunities,
and increases the difficulty of performing due diligence and modeling market conditions, potentially reducing the accuracy of financial
projections. Under these circumstances, the Fund may have difficulty achieving its investment objective which may adversely impact performance.
Further, such events can be highly disruptive to economies and markets, significantly disrupt the operations of individual companies (including,
but not limited to, the Fund’s Sponsor and third party service providers), sectors, industries, markets, securities and commodity
exchanges, currencies, interest and inflation rates, credit ratings, investor sentiment, and other factors affecting the value of the
Fund’s investments. These factors can cause substantial market volatility, exchange trading suspensions and closures and can impact
the ability of the Fund to complete redemptions and otherwise affect Fund performance and Fund trading in the secondary market. A widespread
crisis may also affect the global economy in ways that cannot necessarily be foreseen at the present time. How long such events will last
and whether they will continue or recur cannot be predicted. Impacts from these events could have significant impact on the Fund’s
performance, resulting in losses to the Fund.
(d) Risk that Current Assumptions and Expectations
Could Become Outdated as a result of Global Economic Shocks
The onset of the novel coronavirus (COVID-19)
has caused significant shocks to global financial markets and economies, with many governments taking extreme actions to slow and contain
the spread of COVID-19. These actions have had, and likely will continue to have, a severe economic impact on global economies as economic
activity in some instances has essentially ceased at times. Financial markets across the globe have experienced, and may continue to experience,
severe distress at least equal to what was experienced during the global financial crisis in 2008.
The global economic shocks being experienced as
of the date hereof may cause the underlying assumptions and expectations of the Fund to become outdated quickly or inaccurate, resulting
in significant losses.
(7) Profit and Loss Allocations and Distributions
Pursuant to the Trust Agreement, income and expenses
are allocated pro rata among the Shareholders monthly based on their respective percentage interests as of the close of the last
trading day of the preceding month. Any losses allocated to the Sponsor which are in excess of the Sponsor’s capital balance are
allocated to the Shareholders in accordance with their respective interest in the Fund as a percentage of total Shareholders’ capital.
Distributions (other than redemption of units) may be made at the sole discretion of the Sponsor on a pro rata basis in accordance
with the respective interests of the Shareholders.
(8) Indemnifications
The Sponsor, either in its own capacity or in
its capacity as the Sponsor and on behalf of the Fund, has entered into various service agreements that contain a variety of representations,
or provide indemnification provisions related to certain risks service providers undertake in performing services which are in the best
interests of the Fund. As of September 30, 2021, the Fund had not received any claims or incurred any losses pursuant to these agreements
and expects the risk of such losses to be remote.
(9) Termination
The term of the Fund is perpetual unless terminated
earlier in certain circumstances as described in the Prospectus.
On October 16, 2020, the Sponsor announced that
it would close and liquidate the SIT RISING RATE ETF (“RISE”) because of current market conditions and the Fund’s asset
size. The last day the liquidated fund accepted creation orders was on October 30, 2020. Trading in RISE was suspended after the close
of the NYSE Arca on October 30, 2020. Proceeds of the liquidation were sent to shareholders on November 18, 2020 (the “Distribution
Date”). From October 30, 2020 through the distribution date, shares of RISE did not trade on the NYSE Arca nor was there a secondary
market for the shares. Any shareholders that remained in RISE on the Distribution Date automatically had their shares redeemed for cash
at the current net asset value on November 18, 2020.
(10) Net Asset Value and Financial Highlights
The Funds are presenting, as applicable, the following
net asset value and financial highlights related to investment performance for a Share outstanding throughout the three months ended September
30, 2021 and September 30, 2020, respectively. The net investment income and total expense ratios are calculated using average net assets.
The net asset value presentation is calculated by dividing each Fund’s net assets by the average daily number of Shares outstanding.
The net investment income (loss) and expense ratios have been annualized. The total return is based on the change in net asset value and
market value of the Shares during the period. An individual investor’s return and ratios may vary based on the timing of their transactions
in Fund Shares.
|
|
THREE MONTHS
ENDED
SEPTEMBER 30,
2021
|
|
|
THREE MONTHS ENDED
SEPTEMBER 30,
2020
|
|
|
|
BREAKWAVE
DRY BULK
SHIPPING
ETF
|
|
|
BREAKWAVE
DRY BULK
SHIPPING
ETF
|
|
|
SIT
RISING
RATE ETF
|
|
Net Asset Value
|
|
|
|
|
|
|
|
|
|
Net asset value per Share, beginning of period
|
|
$
|
28.88
|
|
|
$
|
7.70
|
|
|
$
|
20.27
|
|
Net investment income (loss)
|
|
|
(0.25
|
)
|
|
|
(0.08
|
)
|
|
|
(0.04
|
)
|
Net realized and unrealized gain (loss)
|
|
|
6.99
|
|
|
|
0.62
|
|
|
|
(0.11
|
)
|
Net Income (Loss)
|
|
|
6.74
|
|
|
|
0.54
|
|
|
|
(0.15
|
)
|
Net Asset Value per Share, end of period
|
|
$
|
35.62
|
|
|
$
|
8.24
|
|
|
$
|
20.12
|
|
Market Value per Share, end of period
|
|
$
|
36.01
|
|
|
$
|
8.24
|
|
|
$
|
20.11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ratios to Average Net Assets*
|
|
|
|
|
|
|
|
|
|
|
|
|
Expense Ratio***
|
|
|
3.47
|
%
|
|
|
3.92
|
%
|
|
|
1.13
|
%
|
Expense Ratio*** before Waiver/Assumption
|
|
|
3.47
|
%
|
|
|
3.92
|
%
|
|
|
9.42
|
%
|
Net Investment Income (Loss)
|
|
|
(3.47
|
%)
|
|
|
(3.91
|
%)
|
|
|
(0.69
|
%)
|
Total Return, at Net Asset Value**
|
|
|
23.34
|
%
|
|
|
7.01
|
%
|
|
|
(0.74
|
%)
|
Total Return, at Market Value**
|
|
|
22.69
|
%
|
|
|
11.50
|
%
|
|
|
(0.77
|
%)
|
*
|
Percentages are annualized
|
**
|
Percentages are not annualized
|
***
|
For Breakwave Dry Bulk Shipping ETF, Fund expenses have been capped at 3.50% of average daily net assets, plus brokerage commissions, interest expense, and extraordinary expenses, if any. Prior to the liquidation of Sit Rising Rate ETF, Fund expenses had been capped at 1.00% of average daily net assets, plus brokerage commissions, interest expense, and extraordinary expenses.
|
(11) Subsequent Events
In preparing these interim financial
statements, the Fund has evaluated events and transactions for potential recognition or disclosure through the date the interim
financial statements were issued. This evaluation did not result in any subsequent events that necessitated disclosures and/or
adjustments to the interim financial statements.