PACIFIC GLOBAL ETFs
NOTES TO FINANCIAL STATEMENTS (Continued)
NOTE 7—BENEFICIAL OWNERSHIP
The beneficial ownership, either directly or indirectly, of 25% or more of the voting securities of a fund creates a presumption of control of a fund, under section 2(a)(9) of the Investment Company Act of 1940. As of December 31, 2019, Pacific Life Insurance Company, the Adviser's indirect parent company, owned shares of each Fund as follows:
|
Fund
|
|
Shares Owned
|
|
Percent of Shares
Outstanding
|
|
|
Pacific Global US Equity Income ETF
|
|
|
1,046,850
|
|
|
|
95.17
|
%
|
|
|
Pacific Global International Equity Income ETF
|
|
|
992,851
|
|
|
|
99.29
|
%
|
|
|
Pacific Global Focused High Yield ETF
|
|
|
999,200
|
|
|
|
90.84
|
%
|
|
|
Pacific Global Senior Loan ETF
|
|
|
500,000
|
|
|
|
83.33
|
%
|
|
NOTE 8—PRINCIPAL RISKS
There is no assurance that the Funds will meet their investment objective. The value of your investment in the Funds, as well as the amount of return you receive on your investment in the Funds, may fluctuate significantly. You may lose part or all of your investment in the Funds or your investment may not perform as well as other similar investments. Therefore, you should consider carefully the following risks before investing in the Funds. An investment in the Funds is not a bank deposit and is not insured or guaranteed by the FDIC or any government agency. The following list describes certain risks of investing in the Funds but is not exhaustive. Refer to each Fund's current Prospectus for more detail regarding each Fund's risks.
Active Management Risk. The Funds are actively managed, which means that investment decisions are made based on investment views. There is no guarantee that the investment views will produce the desired results or expected returns, which may cause the Funds to fail to meet their investment objective or to underperform their benchmark index or funds with similar investment objectives and strategies. Furthermore, active trading that can accompany active management may result in high portfolio turnover, which may have a negative impact on performance. Active trading may result in higher brokerage costs or mark-up charges, which are ultimately passed on to shareholders of the Funds. Active trading may also result in adverse tax consequences.
Authorized Participant Concentration Risk. Only an Authorized Participant may engage in creation or redemption transactions directly with the Fund, and none of those Authorized Participants is obligated to engage in creation and/or redemption transactions. The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that Authorized Participants exit the business or are unable to proceed with creation or redemption orders with respect to the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units (as defined in the Purchase and Sale of Fund Shares section of the Prospectus), Fund shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts or delisting.
Bank Loan Risk. The market for bank loans may lack liquidity 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.
Credit Risk. Credit risk is the risk that an issuer or guarantor of debt instruments, is unable or unwilling to make timely interest and/or principal payments or to otherwise honor its obligations. The extent of each Funds' exposure to credit risk with respect to those financial assets is approximated by their value recorded in its Statement of Assets and Liabilities. High yield securities may also be subject to greater levels of credit or default risk than higher-rated securities and high yield securities may be less liquid and more difficult to sell at an advantageous time or price or to value than higher-rated securities. In particular, high yield securities are often issued by smaller, less creditworthy companies or by highly leveraged (indebted) companies, which are generally less able than more financially stable companies to make scheduled payments of interest and principal.
Currency Risk. If the Fund invests in securities that trade in, and receive revenues in, foreign currencies, it will be subject to the risk that those currencies will decline in value relative to the U.S. dollar, or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged. As a result, the Fund's investments in foreign currency-denominated securities may reduce the Fund's returns.
Dividend-Paying Stock Risk. While the Funds may hold securities of companies that have historically paid a high dividend yield, those companies may reduce or discontinue their dividends, reducing the yield of the Funds. Low priced securities in the Funds 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 perform worse than other investment strategies or the overall stock market. The Funds' emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend.
Emerging Markets Risk. Investing in emerging markets involves not only the risks described below with respect to investing in foreign securities, but also other risks, including exposure to economic structures that are generally less diverse and mature, and to political systems that can be expected to have less stability, than those of developed countries. The typically small size of the markets of securities of issuers located in emerging markets and the possibility of a low or nonexistent volume of trading in those securities may also result in a lack of liquidity and in price volatility of those securities.
Equity Risk. The net asset value of the Funds will fluctuate based on changes in the value of the U.S. equity securities held by the Funds. Equity prices can fall rapidly in response to developments affecting a specific company or industry, or to changing economic, political or market conditions.
D-6
PACIFIC GLOBAL ETFs
NOTES TO FINANCIAL STATEMENTS (Continued)
High Yield Securities Risk. The Fund's investments in high yield securities or "junk bonds" are subject to a greater risk of loss of income and principal than higher grade debt securities. Issuers of lower-quality debt securities may have substantially greater risk of default than higher quality debt securities. They can be illiquid, and their values can have significant volatility and may decline significantly over short periods of time. Lower-quality debt securities tend to be more sensitive to adverse news about the issuer, the market or the economy in general. These securities are considered predominately speculative with respect to the issuer's continuing ability to make principal and interest payments.
Issuer Risk. Fund performance depends on the performance of individual securities that the Funds hold. Changes in the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline.
Large Capitalization Company Risk. Larger, more established companies may be unable to attain the high growth rates of successful, smaller companies during periods of economic expansion.
Limited History of Operations Risk. USDY, IDY, and FJNK are new ETFs and have a limited history of operations for investors to evaluate.
Liquidity Risk. In certain circumstances, it may be difficult for the Fund to purchase and sell particular investments within a reasonable time at a fair price. To the extent that there is not an established retail market for instruments in which the Funds may invest, trading in such instruments may be relatively inactive. Trading in shares may be halted because of market conditions or for reasons that, in the view of the Exchange, make trading in shares inadvisable. In addition, trading in shares is subject to trading halts caused by extraordinary market volatility pursuant to ''circuit breaker'' rules. There can be no assurance that the requirements necessary to maintain the listing of the shares of the Funds will continue to be met or will remain unchanged.
Market Risk. Overall market risks may affect the value of the Funds. Factors such as U.S. economic growth and market conditions, interest rate levels and political events affect the securities markets.
Market Trading Risk. The Funds face numerous market trading risks, including the potential lack of an active market for the Shares, losses from trading in secondary markets, and disruption in the creation/redemption process of the Funds. Any of these factors may lead to the Shares trading at a premium or discount to the Funds' net asset value ("NAV").
Sector Risk. Sector risk is the possibility that securities within the same group of industries will decline in price due to sector-specific market or economic developments. If the Funds invest 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 Funds' share price may fluctuate more widely than the value of shares of a fund that invests in a broader range of industries.
Communications Sector Risk. Companies in the communications sector may be affected by industry competition, substantial capital requirements, government regulation, cyclicality of revenues and earnings, obsolescence of communications products and services due to technological advancement, a potential decrease in the discretionary income of targeted individuals and changing consumer tastes and interests.
Consumer Cyclical Sector Risk. Consumer cyclical companies rely heavily on the business cycle and economic conditions. Consumer cyclical companies may be adversely affected by domestic and international economic downturns, changes in exchange and interest rates, competition, consumers' disposable income and consumer preferences, social trends and marketing campaigns.
Consumer Discretionary Sector Risk. These companies may be adversely affected by changes in the worldwide economy, consumer spending, competition, demographics and consumer preferences, exploration and production spending. Companies in this sector are also affected by changes in government regulation, world events and economic conditions.
Consumer Staples Sector Risk. Companies engaged in the production and distribution of basic materials may be adversely affected by changes in world events, political 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.
Financial Services Sector Risk. Companies in the financial sector are often subject to extensive governmental regulation and, recently, government intervention and the potential for additional regulation, which may adversely affect the scope of their activities, the prices they can charge and the amount of capital they must maintain. Governmental regulation may change frequently and may have significant adverse consequences for companies in the financial sector, including effects not intended by such regulation.
Industrial Sector Risk. Industrial companies are affected by supply and demand both for their specific product or service and for industrial sector products in general. Government regulation, world events, exchange rates and economic conditions, technological developments and liabilities for environmental damage and general civil liabilities will likewise affect the performance of these companies.
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 product obsolescence due to rapid technological developments and frequent new product introduction, unpredictable changes in growth rates and competition for the services of qualified personnel.
Large Shareholder Risk. The risk that certain account holders, including an Adviser or funds or accounts over which an Adviser (or related parties of an Adviser) has investment discretion, may from time to time own or control a significant percentage of a Fund's shares. A Fund is subject to the risk that a redemption by those shareholders of all or a portion of their Fund shares, including as a result of an asset allocation decision made by an Adviser (or related parties of an Adviser), will adversely affect the Fund's performance if it is forced to sell portfolio securities
D-7
PACIFIC GLOBAL ETFs
NOTES TO FINANCIAL STATEMENTS (Continued)
or invest cash when the Adviser would not otherwise choose to do so. Redemptions of a large number of shares may affect the liquidity of a Fund's portfolio, increase a Fund's transaction costs, and accelerate the realization of taxable income and/or gains to shareholders.
Securities Lending Risk. The Fund may engage in securities lending. Securities lending involves the risk that the Fund may lose money because the borrower of the loaned securities fails to return the securities in a timely manner or at all. The Fund could also lose money in the event of a decline in the value of collateral provided for loaned securities or a decline in the value of any investments made with cash collateral. These events could also trigger adverse tax consequences for the Fund.
Small Fund Risk. When the Fund's size is small, the Fund may experience low trading volume and wide bid/ask spreads. In addition, the Fund may face the risk of being delisted if the Fund does not meet certain conditions of the listing exchange. Any resulting liquidation of the Fund could cause the Fund to incur elevated transaction costs for the Fund and negative tax consequences for its shareholders.
NOTE 9—BANK LOANS
FLRT invests in senior secured corporate loans or bank loans, some of which may be partially or entirely unfunded and purchased on a when-issued or delayed delivery basis, that pay interest at rates which are periodically reset by reference to a base lending rate plus a spread. Bank loans generally pay interest at rates which are periodically determined by reference to a base lending rate plus a premium. The majority of loans carry a variable rate of interest. These base lending rates are generally (i) the Prime Rate offered by one or more major United States banks, (ii) the lending rate offered by one or more European banks such as the London Interbank Offered Rate ("LIBOR") or (iii) the Certificate of Deposit rate. Bank Loans, while exempt from registration under the Securities Act of 1933, contain certain restrictions on resale and cannot be sold publicly. Floating rate bank loans often require prepayments from excess cash flow or permit the borrower to repay at its election. The degree to which borrowers repay, whether as a contractual requirement or at their election, cannot be predicted with accuracy. As a result, actual maturity may be substantially less than the stated maturity. Bank loans in which the Fund invests are generally readily marketable, but may be subject to certain restrictions on resale.
NOTE 10—LIBOR RISK
The United Kingdom's Financial Conduct Authority, which regulates London Interbank Overnight Rates ("LIBOR"), has announced plans to phase out the use of LIBOR by the end of 2021. There remains uncertainty regarding the future use of LIBOR and the nature of any replacement rate. The transition process away from LIBOR may involve, among other things, increased volatility or illiquidity in markets for instruments that currently rely on LIBOR. The transition process may also result in a reduction in the value of certain instruments held by a Fund or reduce the effectiveness of related Fund transactions such as hedges. Volatility, the potential reduction in value, and/or the hedge effectiveness of financial instruments may be heightened for financial instruments that do not include fallback provisions that address the cessation of LIBOR. Any potential effects of the transition away from LIBOR on any of the Funds or on financial instruments in which a Fund invests, as well as other unforeseen effects, could result in losses to a Fund.
D-8
PACIFIC GLOBAL ETFs
EXPENSE EXAMPLES
For the Period Ended December 31, 2019 (Unaudited)
As a shareholder of one or more of the Funds, you incur two types of costs: (1) transaction costs, including brokerage commissions on purchases and sales of Funds shares, and (2) ongoing costs, reflected as a fixed unitary fee. This Example is intended to help you understand your ongoing costs (dollars) (excluding transaction costs) of investing in the Funds and to compare these costs with the ongoing costs of investing in other funds. The example is based on an investment of $1,000 invested at the beginning of the period and held for the entire six-month period (July 1, 2019-December 31, 2019).
ACTUAL EXPENSES
The first line of each table provides information about actual account values based on actual returns and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then, multiply the result by the number in the first line under the heading entitled "Expenses Paid During the Period" to estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of each table provides information about hypothetical account values based on a hypothetical return and hypothetical expenses based on the Funds' actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not the Funds' actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in the Funds and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in each table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Funds shares. Therefore, the second line of each table is useful in comparing ongoing costs only and will not help you determine the relative total costs of owning different funds. If these transactional costs were included, your costs would have been higher.
|
|
|
Beginning
Account
Value
|
|
Ending
Account
Value
December 31,
2019
|
|
Expenses
Paid During
the Period (1)
|
|
|
Pacific Global US Equity Income ETF
|
|
|
Actual
|
|
$
|
1,000.00
|
|
|
$
|
1,109.20
|
|
|
$
|
1.54
|
|
|
Hypothetical (5% annual
return before expenses)
|
|
$
|
1,000.00
|
|
|
$
|
1,023.68
|
|
|
$
|
1.48
|
|
|
|
|
|
Beginning
Account
Value
|
|
Ending
Account
Value
December 31,
2019
|
|
Expenses
Paid During
the Period (2)
|
|
|
Pacific Global International Equity Income ETF
|
|
|
Actual
|
|
$
|
1,000.00
|
|
|
$
|
1,052.60
|
|
|
$
|
0.77
|
|
|
Hypothetical (5% annual
return before expenses)
|
|
$
|
1,000.00
|
|
|
$
|
1,023.18
|
|
|
$
|
1.98
|
|
|
|
|
|
Beginning
Account
Value
|
|
Ending
Account
Value
December 31,
2019
|
|
Expenses
Paid During
the Period (2)
|
|
|
Pacific Global Focused High Yield ETF
|
|
|
Actual
|
|
$
|
1,000.00
|
|
|
$
|
1,018.40
|
|
|
$
|
0.75
|
|
|
Hypothetical (5% annual
return before expenses)
|
|
$
|
1,000.00
|
|
|
$
|
1,023.18
|
|
|
$
|
1.98
|
|
|
|
|
|
Beginning
Account
Value
|
|
Ending
Account
Value
December 31,
2019
|
|
Expenses
Paid During
the Period (3)
|
|
|
Pacific Global Senior Loan ETF
|
|
|
Actual
|
|
$
|
1,000.00
|
|
|
$
|
1,031.80
|
|
|
$
|
5.62
|
|
|
Hypothetical (5% annual
return before expenses)
|
|
$
|
1,000.00
|
|
|
$
|
1,019.61
|
|
|
$
|
5.58
|
|
|
(1) The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio, 0.29%, multiplied by the average account value during the six-month period, multiplied by 184/366 (to reflect the one-half year period).
(2) The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio, 0.39%, multiplied by the number of days in the six-month period, 184 days, and divided by the number of days in the most recent twelve-month period, 366 days. The actual dollar amounts shown as expenses paid during the period for the Fund are multiplied by 70/366, which is based on the date of inception (October 23, 2019).
(3) The dollar amounts shown as expenses paid during the period are equal to the annualized expense ratio of the Predecessor Fund, 1.10%, multiplied by the average account value during the six-month period, multiplied by 184/366 (to reflect the one-half year period).
E-1
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS
(Unaudited)
Pacific Global International Equity Income ETF
Pacific Global Focused High Yield ETF
Management Agreement—Pacific Global Advisors LLC
During the meeting of the Board of Trustees (the "Board") on June 28, 2019 (the "Meeting"), the Board reviewed and discussed the written materials that were provided by Pacific Global Advisors LLC (the "Adviser") in advance of the Meeting and deliberated on the approval of the Management Agreement between the Adviser and Pacific Global ETF Trust (the "Trust") on behalf of Pacific Global International Equity Income ETF ("IDY") and Pacific Global Focused High Yield ETF ("FJNK") (IDY and FJNK collectively referred to as the "Funds").
The Board reviewed: (i) the nature and quality of the advisory services to be provided by the Adviser to each Fund, including the experience and qualifications of the personnel providing such services; (ii) the performance history of the Funds, noting that they had not yet launched; (iii) the proposed fees and expense of each Fund, including the proposed advisory fee to be paid by each Fund to the Adviser; and (iv) the anticipated profitability of each Fund to the Adviser. In considering the approval of the Management Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services
The Board reviewed materials provided by the Adviser related to the proposed approval of the Management Agreement, including a description of its oversight of each sub-adviser, a review of the professional personnel who will be performing services for the Funds, and how it will monitor each sub-adviser's investment process. The Board also noted the extensive responsibilities of the Adviser, including: the oversight of each sub-adviser's adherence to each Fund's respective investment strategy and restrictions, monitoring of the sub-advisers' buying and selling of securities and other transactions, review of sub-adviser performance, review of proxies voted by each sub-adviser and oversight of, and the provision of consultation to, each sub-adviser with respect to the creation of custom creation or redemption baskets for authorized participants; oversight of the daily valuation of each Fund's portfolio holdings; oversight of general Fund compliance with federal and state laws; and implementation of Board directives as they relate to the Funds. The Board also considered research support available to, and management capabilities of, the Funds' management personnel and that the Adviser will provide oversight of day-to-day Fund operations, including fund accounting, tax matters, administration, compliance and legal assistance in meeting disclosure and regulatory requirements. The Board discussed the extent of the Adviser's research capabilities, the quality of its compliance infrastructure and the experience of its fund management personnel.
Additionally, the Board received satisfactory responses from the representatives of the Adviser with respect to a series of questions, including: whether the Adviser was involved in any lawsuits or pending regulatory actions; whether the management of other accounts would conflict with its management of the Funds; and whether there are procedures in place to adequately allocate trades among its respective clients. The Board reviewed the description provided on the practices for monitoring compliance with each Fund's investment limitations, noting that the Adviser's CCO would periodically review the portfolio managers' performance of their duties to ensure compliance under the Adviser's compliance program.
The Board concluded that the Adviser had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the investment advisory agreement and that the nature, overall quality and extent of the management services to be provided by the Adviser to each Fund would be satisfactory.
Performance
Because the Funds had not yet commenced operations, the Trustees could not consider the Funds' past performance. It was noted that the performance of certain accounts with similar investment objectives were discussed in connection with the approval of each sub-advisory agreement.
Fees and Expenses
As to the costs of the services to be provided by the Adviser, the Board discussed the comparison of advisory fees and total operating expense data and reviewed each Fund's proposed advisory fee, each of which is a unitary fee, and overall expenses compared to a peer group comprised of funds constructed by the Adviser and the sub-advisers with similar investment objectives and strategies. The Board was aware that under the unitary fee arrangement, the Adviser is contractually obligated to pay the fees of each of the Funds' service providers, with the exception of the Adviser, and certain other expenses.
The Board noted that each Fund's management fee was not above the median peer group net expense ratio per Morningstar data, or above the average of the Peer Group or Broadridge/Lipper Strategic Insight category. It was noted that the fee was lower than the two largest ETFs in the Funds' peer group.
In considering whether to approve the investment advisory agreement on behalf of each Fund, the Trustees also considered and discussed information and analysis provided by the Adviser, based on data from Morningstar, an independent provider of investment company data. The Board concluded that based on the Adviser's services to be provided to the Trust and comparative fee and expense data, the advisory fee to be charged by the Adviser to each Fund and the estimated expenses for each Fund were reasonable.
Profitability
The Board considered the level of profits that could be expected to accrue to the Adviser with respect to each Fund based on profitability projections and analyses reviewed by the Board and the selected financial information of the Adviser provided by the Adviser to the Board. After review and discussion, the Board concluded the investment advisory relationship would initially be unprofitable to the Adviser for each Fund and, once the Funds had sufficient assets, the anticipated profit from the Adviser's relationship with the Funds would not be excessive.
E-2
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS (Continued)
(Unaudited)
Economies of Scale
As to the extent to which each Fund will realize economies of scale as it grows, and whether the fee levels reflect these economies of scale for the benefit of investors, the Board discussed the Adviser's expectations for growth of each Fund. The Board determined that because each Fund had not yet commenced operations, economies of scale were not a factor in either case. The Board further determined, however, that to the extent that material economies of scale were to be achieved in the future, and such economies of scale had not been shared with a Fund, the Board would seek to have those economies of scale shared with such Fund in connection with future renewals of the investment advisory agreement.
Fall-Out Benefits
The Board considered potential benefits to the Adviser from acting as investment adviser and sub-advisers, respectively.
Conclusion
Having requested and received such information from the Adviser as the Board believed to be reasonably necessary to evaluate the terms of the Management Agreement as appropriate, the Board, including a majority of the Independent Trustees, determined that approval of the Management Agreement for providing advisory services to IDY and FJNK was in the best interests of each such Fund and its respective shareholders.
E-3
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS (Continued)
(Unaudited)
Sub-Advisory Agreement—Cadence Capital Management LLC (Pacific Global International Equity Income ETF)
During the meeting of the Board of Trustees (the "Board") on June 28, 2019 (the "Meeting"), the Board reviewed and discussed the written materials that were provided by Cadence Capital Management LLC ("Cadence") in advance of the Meeting and deliberated on the approval of the Sub-Advisory Agreement between Pacific Global Advisors LLC (the "Adviser) and Cadence on behalf of Pacific Global International Equity Income ETF ("IDY"), a series of the Pacific Global ETF Trust. The Board reviewed: (i) the nature and quality of the advisory services to be provided by Cadence, including the experience and qualifications of the personnel providing such services; (ii) the performance history of IDY, noting that it had not yet launched; (iii) the proposed fees and expense of IDY, including the proposed sub-advisory fee to be paid by the Adviser to Cadence; and (iv) the anticipated profitability of IDY to Cadence. In considering the approval of the Sub-Advisory Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services
As to the nature, quality and extent of the services to be provided by Cadence, the Board noted the experience of the portfolio management and research personnel of Cadence, including their experience in the investment field, education and industry credentials. The Board reviewed the presentation materials prepared by Cadence describing its investment process. The Board received satisfactory responses from Cadence with respect to a series of questions, including: whether Cadence is involved in any lawsuits or pending regulatory actions. The Board discussed Cadence's compliance structure and broker-dealer selection process noting that IDY would be an actively managed equity fund. In consideration of the compliance policies and procedures for Cadence included in the Board Materials, the Board concluded that Cadence had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing their duties under the Sub-Advisory Agreement and that the nature, overall quality and extent of investment management services to be provided to IDY would be satisfactory.
Performance
As IDY had not yet commenced operations, the Board was not able to review its performance. However, the Trustees considered the performance of a composite representing accounts with investment objectives similar to the investment objective of IDY, noting the strong performance of those accounts while recognizing that they were not subject to the investment constraints of a registered investment company.
Fees and Expenses
As to the costs of the services to be provided by Cadence, the Board discussed the sub-advisory fee payable by the Adviser to Cadence, pursuant to the Sub-Advisory Agreement. The Board considered that Cadence was to be paid by the Adviser and not by IDY. The Adviser confirmed to the Board that the Adviser was of the opinion that the sub-advisory fees to be paid to Cadence were reasonable in light of the anticipated quality of the services to be performed by Cadence and the proposed division of services between the Adviser and Cadence. It was noted that the Adviser and Cadence were affiliated companies. The Trustees discussed the total fees expected to be paid to Cadence, and noted that Cadence will receive no other compensation from IDY or the Adviser, except the sub-advisory fee earned pursuant to the Sub-Advisory Agreement and payable by the Adviser. Based on the representations of the Adviser and Cadence and the materials provided, the Board concluded that the sub-advisory fee to be paid to Cadence was reasonable.
Profitability
As to profits to be realized by Cadence, the Trustees noted that all sub-advisory fees will be paid by the Adviser, and not directly paid by IDY. Consequently, the Board did not consider the costs of services provided by Cadence or its profitability to be significant factors.
Economies of Scale.
The Board determined that because IDY had not yet commenced operations, economies of scale were not a factor. The Board further determined, however, that to the extent that material economies of scale were to be achieved in the future, and such economies of scale had not been shared with IDY, the Board would seek to have those economies of scale shared with IDY in connection with future renewals of the Sub-Advisory Agreement.
Fall-Out Benefits.
The Board considered potential benefits to Cadence from acting as sub-adviser to IDY.
Conclusion
Having requested and received such information from Cadence as the Board believed to be reasonably necessary to evaluate the terms of the Sub-Advisory Agreement as appropriate, the Board, including a majority of the Independent Trustees, determined that approval of the Sub-Advisory Agreement for providing sub-advisory services to IDY was in the best interests of such Fund and its shareholders.
E-4
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS (Continued)
(Unaudited)
Sub-Advisory Agreement—Pacific Asset Management (Pacific Global Focused High Yield ETF)
During the meeting of the Board of Trustees (the "Board") on June 28, 2019 (the "Meeting"), the Board reviewed and discussed the written materials that were provided by Pacific Life Fund Advisors LLC, doing business as Pacific Asset Management ("PAM") in advance of the Meeting and deliberated on the approval of the Sub-Advisory Agreement between Pacific Global Advisors LLC (the "Adviser") and PAM on behalf of Pacific Global Focused High Yield ETF ("FJNK"), a series of the Pacific ETF Trust. The Board reviewed: (i) the nature and quality of the advisory services to be provided by PAM, including the experience and qualifications of the personnel providing such services; (ii) the performance history of FJNK, noting that it had not yet launched; (iii) the proposed fees and expense of FJNK, including the proposed sub-advisory fee to be paid by the Adviser to PAM; and (iv) the anticipated profitability of FJNK to PAM. In considering the approval of the Sub-Advisory Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services
As to the nature, quality and extent of the services to be provided by PAM, the Board noted the experience of the portfolio management and research personnel of PAM, including their experience in the investment field, education and industry credentials. The Board reviewed the presentation materials prepared by PAM describing its investment process. The Board received satisfactory responses from PAM with respect to a series of questions, including: whether PAM is involved in any lawsuits or pending regulatory actions. The Board discussed PAM's compliance structure and broker-dealer selection process noting that FJNK would be an actively managed equity fund. In consideration of the compliance policies and procedures for PAM included in the Board Materials, the Board concluded that PAM had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing their duties under the Sub-Advisory Agreement and that the nature, overall quality and extent of investment management services to be provided to FJNK would be satisfactory.
Performance
As FJNK had not yet commenced operations, the Board was not able to review its performance. However, the Trustees considered the performance of another registered fund with a similar investment strategy managed by PAM.
Fees and Expenses
As to the costs of the services to be provided by PAM, the Board discussed the sub-advisory fee payable by the Adviser to PAM, pursuant to the Sub-Advisory Agreement. The Board considered that PAM is to be paid by the Adviser and not by FJNK. The Adviser confirmed to the Board that the Adviser was of the opinion that the sub-advisory fees to be paid to PAM were reasonable in light of the anticipated quality of the services to be performed by PAM and the proposed division of services between the Adviser and PAM. It was noted that the Adviser and PAM were affiliated companies. The Trustees discussed the total fees expected to be paid to PAM, and noted that PAM will receive no other compensation from FJNK or the Adviser, except the sub-advisory fee earned pursuant to the Sub-Advisory Agreement and payable by the Adviser. Based on the representations of the Adviser and PAM and the materials provided, the Board concluded that the sub-advisory fee to be paid to PAM was reasonable.
Profitability
As to profits to be realized by PAM, the Trustees noted that all sub-advisory fees will be paid by the Adviser, and not directly paid by FJNK. Consequently, the Board did not consider the costs of services provided by PAM or its profitability to be significant factors.
Economies of Scale.
The Board determined that because FJNK had not yet commenced operations, economies of scale were not a factor. The Board further determined, however, that to the extent that material economies of scale were to be achieved in the future, and such economies of scale had not been shared with I FJNK, the Board would seek to have those economies of scale shared with FJNK in connection with future renewals of the Sub-Advisory Agreement.
Fall-Out Benefits.
The Board considered potential benefits to PAM from acting as sub-adviser to FJNK.
Conclusion
Having requested and received such information from PAM as the Board believed to be reasonably necessary to evaluate the terms of the Sub-Advisory Agreement as appropriate, the Board, including a majority of the Independent Trustees, determined that approval of the Sub-Advisory Agreement for providing sub-advisory services to FJNK was in the best interests of such Fund and its shareholders.
E-5
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS
(Unaudited)
Pacific Global Senior Loan ETF
Management Agreement—Pacific Global Advisors LLC
During the meeting of the Board of Trustees (the "Board") on March 29, 2019 (the "Meeting"), the Board reviewed and discussed the written materials that were provided by Pacific Global Advisors LLC (the "Adviser") in advance of the Meeting and deliberated on the approval of the Management Agreement between Pacific Global ETF Trust (the "Trust") on behalf of the Pacific Global Senior Loan ETF (the "Fund") and the Adviser. The Board reviewed: (i) the nature and quality of the advisory services to be provided by the Adviser, including the experience and qualifications of the personnel providing such services; (ii) the performance history of the Fund, nothing that it had not yet launched; (iii) the proposed fees and expense of the Fund, including the proposed advisory fee to be paid by the Fund to the Adviser; and (iv) the anticipated profitability of the Fund to the Adviser. In considering the approval of the Management Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services
The Board reviewed materials provided by the Adviser related to the proposed approval of the Management Agreement, including a description of its oversight of Pacific Life Fund Advisors LLC, doing business as Pacific Asset Management ("PAM"), the Fund's sub-adviser, a review of the professional personnel who will be performing services for the Trust, and how it will monitor PAM's investment process. The Board also noted the extensive responsibilities that the Adviser will have as investment adviser to the Fund, including: the oversight of PAM's adherence to the Fund's investment strategy and restrictions, monitoring of PAM's buying and selling of securities and other transactions, review of PAM's performance, review of proxies voted by PAM and oversight of, and the provision of consultation to, PAM with respect to the creation of custom creation or redemption baskets for authorized participants; oversight of the daily valuation of the Fund's portfolio holdings; oversight of general Fund compliance with federal and state laws; and implementation of Board directives as they relate to the Fund. The Board also considered research support available to, and management capabilities of, the Fund's management personnel and that the Adviser will provide oversight of day-to-day Fund operations, including fund accounting, tax matters, administration, compliance and legal assistance in meeting disclosure and regulatory requirements. The Board discussed the extent of the Adviser's research capabilities, the quality of its compliance infrastructure and the experience of its fund management personnel.
Additionally, the Board received satisfactory responses from the representatives of the Adviser with respect to a series of questions, including: whether the Adviser was involved in any lawsuits or pending regulatory actions; whether the management of other accounts would conflict with its management of the Trust; and whether there are procedures in place to adequately allocate trades among its respective clients.
The Board reviewed the description provided on the practices for monitoring compliance with the Trust's investment limitations, noting that the Adviser's CCO would periodically review the portfolio managers' performance of their duties to ensure compliance under the Adviser's compliance program. The Board concluded that the Adviser had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing its duties under the Advisory Agreement and that the nature, overall quality and extent of the management services to be provided by the Adviser to the Trust would be satisfactory.
Performance
Because the Fund had not yet commenced operations, the Trustees could not consider the Fund's past performance. However, the Trustees considered the performance of another registered fund with a slightly different investment strategy previously managed by PAM. The Trustees also considered PAM's performance composite for the strategy provided in connection with PAM's responses to the Board's requests for information related to the Board's consideration of the sub-advisory agreement.
Fees and Expenses
As to the costs of the services to be provided by the Adviser, the Board discussed the comparison of advisory fees and total operating expense data and reviewed the Trust's advisory fee, which is a unitary fee, and overall expenses compared to a peer group comprised of funds constructed by the Adviser and PAM with similar investment objectives and strategies. The Board was aware that under the unitary fee arrangement, the Adviser is contractually obligated to pay the fees of each of the Fund's service providers, with the exception of the Adviser, and certain other expenses. The Board noted the Fund's management fee is not above the median peer group net expense ratio per Morningstar data, nor will the Fund's advisory fee be above the average of the Peer Group or Broadridge/Lipper Strategic Insight category. In considering whether to approve the Agreements, the Trustees also considered and discussed information and analysis provided by the Adviser, based on data from Morningstar, an independent provider of investment company data. The Board concluded that based on the Adviser's services to be provided to the Trust and comparative fee and expense data, the advisory fee charged by the Adviser and the estimated expenses for the Trust were reasonable.
Profitability
The Board considered the level of profits that could be expected to accrue to the Adviser with respect to the Trust based on profitability projections and analyses reviewed by the Board and the selected financial information of the Adviser provided by the Adviser to the Board. After review and discussion, the Board concluded the investment advisory relationship would initially be unprofitable to the Adviser and, once the Trust had sufficient assets, the anticipated profit from the Adviser's relationship with the Trust would not be excessive.
Economies of Scale
As to the extent to which the Trust will realize economies of scale as it grows, and whether the fee levels reflect these economies of scale for the benefit of investors, the Board discussed the Adviser's expectations for growth of the Trust. The Board determined that because the Fund had not yet commenced operations, economies of scale were not a factor. The Board further determined, however, that to the extent that material economies of scale were to be achieved in the future, and such economies of scale had not been shared with the Fund, the Board would seek to have those economies of scale shared with the Fund in connection with future renewals of the Management Agreement.
E-6
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS (Continued)
(Unaudited)
Fall-Out Benefits
The Board considered potential benefits to the Adviser and PAM from acting as investment adviser and sub-adviser, respectively.
Conclusion
Having requested and received such information from the Adviser as the Board believed to be reasonably necessary to evaluate the terms of the Management Agreement as appropriate, the Board, including a majority of the Independent Trustees, determined that approval of the Management Agreement for providing advisory services to the Fund was in the best interests of the Fund and its shareholders.
E-7
PACIFIC GLOBAL ETFs
APPROVAL OF ADVISORY AGREEMENT
AND BOARD CONSIDERATIONS
(Unaudited)
Sub-Advisory Agreement—Pacific Asset Management
During the meeting of the Board of Trustees (the "Board") on March 29, 2019 (the "Meeting"), the Board reviewed and discussed the written materials that were provided by Pacific Life Fund Advisors LLC, doing business as Pacific Asset Management ("PAM") in advance of the Meeting and deliberated on the approval of the Sub-Advisory Agreement between Pacific Global Advisors LLC (the "Adviser") and PAM with respect to Pacific Global Senior Loan ETF (the "Fund"). The Board reviewed: (i) the nature and quality of the advisory services to be provided by PAM, including the experience and qualifications of the personnel providing such services; (ii) the performance history of the Fund, noting that it had not yet launched; (iii) the proposed fees and expense of the Fund, including the proposed sub-advisory fee to be paid by the Adviser to PAM; and (iv) the anticipated profitability of the Fund to PAM. In considering the approval of the Sub-Advisory Agreement, the Board reviewed and analyzed various factors that they determined were relevant, including the factors enumerated below.
Nature, Extent and Quality of Services
As to the nature, quality and extent of the services to be provided by PAM, the Board noted the experience of the portfolio management and research personnel of PAM, including their experience in the investment field, education and industry credentials. The Board reviewed the presentation materials prepared by PAM describing its investment process. The Board received satisfactory responses from PAM with respect to a series of questions, including: whether PAM is involved in any lawsuits or pending regulatory actions. The Board discussed the PAM's compliance structure and broker-dealer selection process noting that the Fund would be an actively managed equity fund. In consideration of the compliance policies and procedures for PAM included in the Board Materials, the Board concluded that PAM had sufficient quality and depth of personnel, resources, investment methods and compliance policies and procedures essential to performing their duties under the Sub-Advisory Agreement and that the nature, overall quality and extent of investment management services to be provided to the Trust would be satisfactory.
Performance
As the Fund had not yet commenced operations, the Board was not able to review the Fund's performance. However, the Trustees considered the performance of another registered fund with a slightly different investment strategy previously managed by PAM and the PAM's performance composite for the strategy. The Board discussed with PAM representatives the portfolio management team and the investment strategies to be employed in the management of the Fund's assets. The Board noted the reputation and experience of PAM. The Board recognized the skill and successful management of the other registered fund by PAM.
Fees and Expenses
As to the costs of the services to be provided by PAM, the Board discussed the sub-advisory fee payable by the Adviser to PAM, pursuant to the Sub-Advisory Agreement. The Board considered that PAM is to be paid by the Adviser and not by the Trust. The Adviser confirmed to the Board that the Adviser was of the opinion that the sub-advisory fees to be paid to PAM were reasonable in light of the anticipated quality of the services to be performed by PAM and the proposed division of services between the Adviser and PAM. It was noted that the Adviser and PAM were affiliated companies. The Trustees discussed the total fees expected to be paid to PAM, and noted that PAM will receive no other compensation from the Trust or the Adviser, except the sub-advisory fee earned pursuant to the Sub-Advisory Agreement and payable by the Adviser. Based on the representations of the Adviser and PAM and the materials provided, the Board concluded that the sub-advisory fee to be paid to PAM was reasonable.
Profitability
As to profits to be realized by PAM, the Trustees noted that all sub-advisory fees will be paid by the Adviser, and not directly paid by the Trust. Consequently, the Board did not consider the costs of services provided by PAM or its profitability to be significant factors.
Economies of Scale.
The Board determined that because the Fund had not yet commenced operations, economies of scale were not a factor. The Board further determined, however, that to the extent that material economies of scale were to be achieved in the future, and such economies of scale had not been shared with the Fund, the Board would seek to have those economies of scale shared with the Fund in connection with future renewals of the Sub-Advisory Agreement.
Fall-Out Benefits.
The Board considered potential benefits to PAM from acting as sub-adviser to the Fund.
Conclusion
Having requested and received such information from PAM as the Board believed to be reasonably necessary to evaluate the terms of the Sub-Advisory Agreement as appropriate, the Board, including a majority of the Independent Trustees, determined that approval of the Sub-Advisory Agreement for providing sub-advisory services to the Fund was in the best interests of such Fund and its shareholders.
E-8
PACIFIC GLOBAL ETFs
FEDERAL TAX INFORMATION
(Unaudited)
For the period ended June 30, 2019, certain dividends paid by the Funds may be subject to a maximum tax rate of 15% (20% for taxpayers with taxable income greater than $425,800 for single individuals and $479,000 for married couples filling jointly), as provided for by the Jobs and Growth Tax Relief Reconciliation Act of 2003 and The Tax Cuts and Jobs Act of 2017. The Percentage of dividends declared from ordinary income designated as qualified dividend income was as follows:
|
Pacific Global US Equity Income ETF
|
|
|
47.94
|
%
|
|
|
Pacific Global Senior Loan ETF
|
|
|
0.00
|
%
|
|
For corporate shareholders, the percent of ordinary income distributions qualifying for the corporate dividends received deduction for the period ended June 30, 2019 was as follows:
|
Pacific Global US Equity Income ETF
|
|
|
47.72
|
%
|
|
|
Pacific Global Senior Loan ETF
|
|
|
0.00
|
%
|
|
The percentage of taxable ordinary income distributions that are designated as short-term capital gain distributions under Internal Revenue Section 871(k)(2) was as follows:
|
Pacific Global US Equity Income ETF
|
|
|
0.00
|
%
|
|
|
Pacific Global Senior Loan ETF
|
|
|
0.00
|
%
|
|
E-9
PACIFIC GLOBAL ETFs
ADDITIONAL INFORMATION
(Unaudited)
Information About Portfolio Holdings
The Funds file the complete schedule of portfolio holdings for the first and third fiscal quarters with the SEC on Part F of Form N-PORT. When available, Part F of Form N-PORT is available on the SEC's website at www.sec.gov. The Funds' portfolio holdings are posted on its website, at www.pacificglobaletfs.com, daily.
Information About Proxy Voting
A description of the policies and procedures the Funds use to determine how to vote proxies relating to portfolio securities is provided in the Statement of Additional Information ("SAI"). The SAI is available without charge, upon request, by calling toll-free at (866) 933-2398, by accessing the SEC's website at www.sec.gov, or by accessing the Funds' website at www.pacificglobaletfs.com.
Information regarding how the Funds voted proxies relating to portfolio securities during the most recent period ending June 30 is available no later than the following August 31st by calling toll-free at (866) 933-2398 or by accessing the SEC's website at www.sec.gov.
Frequency Distribution of Premiums and Discounts
Information regarding how often shares of the Funds trade on the exchange at a price above (i.e., at a premium) or below (i.e., at a discount) to their daily net asset value (NAV) is available, without charge, on the Funds' website at www.pacificglobaletfs.com.
Information about Trustees and Officers
The Statement of Additional Information ("SAI") includes additional information about the Funds' Trustees and is available without charge, upon request, by calling (866) 933-2398. Furthermore, you can obtain the SAI by accessing the SEC's website at www.sec.gov or by accessing the Funds' website at www.pacificglobaletfs.com.
E-10
Investment Adviser
Pacific Global Advisors LLC
840 Newport Center Drive, 7th Floor
Newport Beach, CA 92660
Sub-Advisers
Cadence Capital Management LLC
265 Franklin Street, 4th Floor
Boston, MA 02110
Pacific Asset Management
840 Newport Center Drive, 7th Floor
Newport Beach, CA 92660
Custodian
U.S. Bank, N.A.
1555 N. Rivercenter Drive
Milwaukee, WI 53212
Administrator/Transfer Agent
U.S. Bancorp Fund Services, LLC
615 East Michigan Street
Milwaukee, WI 53202
Distributor
Foreside Fund Services, LLC
Three Canal Plaza, Suite 100
Portland, ME 04101
Independent Registered Public Accounting Firm
Deloitte & Touche, LLP
695 Town Center Drive, Suite 1000
Costa Mesa, CA 92626
Legal Counsel
Thompson Hine LLP
1919 M Street, N.W., Suite 700
Washington, D.C. 20036
Pacific Global US Equity Income ETF
Symbol—USDY
CUSIP—69434K106
Pacific Global International Equity Income ETF
Symbol—IDY
CUSIP—69434K304
Pacific Global Focused High Yield ETF
Symbol—FJNK
CUSIP—69434K205
Pacific Global Senior Loan ETF
Symbol—FLRT
CUSIP—69434K403