ck0001572661-20230630
PRINCIPAL
EXCHANGE-TRADED FUNDS
("PETF"
or the "Trust")
Statement
of Additional Information
dated
November 1, 2023
This
Statement of Additional Information ("SAI") is not a prospectus. It contains
information in addition to the information in the Trust's Prospectus. The
Prospectus, which may be amended from time to time, contains the basic
information you should know before investing in a Fund. You should read this SAI
together with the Trust's Prospectus dated November 1, 2023.
Incorporation
by Reference:
The audited financial statements, schedules of investments, and auditor’s report
included in the Trust's Annual
Report to Shareholders,
for the fiscal year ended June 30, 2023 are hereby incorporated by reference
into and are legally a part of this SAI.
For
a free copy of the current Prospectus, Semi-Annual Report, or Annual Report,
call 1-800-222-5852 or write:
Principal
Exchange-Traded Funds
c/o
ALPS Distributors, Inc.
1290
Broadway, Suite 1000
Denver,
CO 80203
The
Prospectus may be viewed at www.PrincipalAM.com/ETFProspectuses.
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Fund |
Ticker
Symbol |
Principal
U.S. Listing Exchange |
Principal
Active High Yield ETF |
YLD |
NYSE
Arca |
Principal
Focused Blue Chip ETF |
BCHP |
Cboe
BZX |
Principal
Healthcare Innovators ETF |
BTEC |
Nasdaq |
Principal
Investment Grade Corporate Active ETF |
IG |
NYSE
Arca |
Principal
Quality ETF |
PSET |
Nasdaq |
Principal
Real Estate Active Opportunities ETF |
BYRE |
NYSE
Arca |
Principal
Spectrum Preferred Securities Active ETF |
PREF |
NYSE
Arca |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
PQDI |
NYSE
Arca |
Principal
U.S. Mega-Cap ETF |
USMC |
Nasdaq |
Principal
U.S. Small-Cap ETF (f/k/a Principal U.S. Small-Cap Multi-Factor
ETF) |
PSC |
Nasdaq |
Principal
Value ETF |
PY |
Nasdaq |
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TABLE
OF CONTENTS |
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GENERAL
DESCRIPTION OF TRUST AND FUNDS |
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EXCHANGE
LISTING AND TRADING |
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DESCRIPTION
OF THE FUNDS' INVESTMENTS AND RISKS |
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LEADERSHIP
STRUCTURE AND BOARD |
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INVESTMENT
ADVISORY AND OTHER SERVICES |
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INTERMEDIARY
COMPENSATION |
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BROKERAGE
ALLOCATION AND OTHER PRACTICES |
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PURCHASE
AND REDEMPTION OF CREATION UNITS |
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CALCULATION
OF NAV |
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TAX
CONSIDERATIONS |
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PORTFOLIO
HOLDINGS DISCLOSURE |
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FEATURES
SPECIFIC TO NON-TRANSPARENT ETFS |
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PROXY
VOTING POLICIES AND PROCEDURES |
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FINANCIAL
STATEMENTS |
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INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM |
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CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES |
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PORTFOLIO
MANAGER DISCLOSURE |
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APPENDIX
A – DESCRIPTION OF BOND RATINGS |
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APPENDIX
B – PROXY VOTING POLICIES |
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GENERAL
DESCRIPTION OF TRUST AND FUNDS
Principal
Exchange-Traded Funds (the "Trust") is a statutory trust organized under the
laws of the State of Delaware in 2013 and is authorized to have multiple series
or portfolios (each, a "Fund" and, together, the "Funds"). The Trust is an
open-end management investment company, registered under the Investment Company
Act of 1940, as amended (the "1940 Act"). The Trust currently consists of 11
Funds.
The
shares of the Funds are referred to herein as "Shares."
The
Trust issues and redeems Shares at net asset value ("NAV") only with Authorized
Participants ("APs") and only in aggregations of Shares in the amounts described
in the Prospectus (each, a "Creation Unit" or a "Creation Unit Aggregation"),
which is subject to change. Each Fund (other than the Principal Focused Blue
Chip ETF (the "Focused Blue Chip ETF") and the Principal Real Estate Active
Opportunities ETF (the "Real Estate ETF")) issues and redeems Creation Units in
exchange for portfolio securities and/or cash, plus a fixed and/or variable
transaction fee. The Focused Blue Chip ETF and the Real Estate ETF each issue
and redeem Creation Units in exchange for a Tracking Basket (as defined below)
plus a fixed and/or variable transaction fee.
The
Focused Blue Chip ETF and the Real Estate ETF are actively managed
exchange-traded funds ("ETFs") that operate pursuant to an exemptive order (the
"Non-Transparent Order") from the U.S. Securities and Exchange Commission (the
"SEC"). Unlike other actively managed ETFs that publish their portfolio holdings
on a daily basis, the Focused Blue Chip ETF and the Real Estate ETF do not
publicly disclose the composition of their portfolio each business day, which
may affect the price at which the ETF Shares trade in the secondary market. Each
of the Focused Blue Chip ETF and the Real Estate ETF instead publishes each
business day on its website a "Tracking Basket," which is designed to closely
track the respective daily performance of the ETF but is not the ETF's actual
portfolio. A Tracking Basket is comprised of: (1) select recently disclosed
portfolio holdings (Strategy Components); (2) liquid ETFs that convey
information about the types of instruments (that are not otherwise fully
represented by Strategy Components) in which a Fund invests (Representative
ETFs); and (3) cash and cash equivalents. Each of the Focused Blue Chip ETF and
the Real Estate ETF also publishes each business day on its website a "Tracking
Basket Weight Overlap," which is the percentage weight overlap between the
holdings of the prior days Tracking Basket compared to the respective holdings
of the ETF that formed the basis for the ETF’s calculation of NAV at the end of
the prior business day. A Tracking Basket Weight Overlap is designed to provide
investors with an understanding of how similar a Tracking Basket is to each of
the Focused Blue Chip ETF and the Real Estate ETF’s actual portfolio in
percentage terms and to help investors evaluate the risk that the performance of
a Tracking Basket may deviate from the performance of the portfolio holdings of
the respective ETF. A Tracking Basket also constitutes the names and quantities
of instruments to be exchanged with each of the Focused Blue Chip ETF and the
Real Estate ETF for both purchases and redemptions of ETF Shares, although each
ETF generally requires an AP to deposit or receive (as applicable) cash in lieu
of Representative ETFs.
EXCHANGE
LISTING AND TRADING
Shares
of each Fund are listed on a national securities exchange (generally, the
"Exchange") as set forth below. Shares trade on the Exchange at market prices
that may be below, at, or above NAV.
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Fund |
Principal
U.S. Listing Exchange |
Principal
Active High Yield ETF |
NYSE
Arca |
Principal
Focused Blue Chip ETF |
Cboe
BZX |
Principal
Healthcare Innovators ETF |
Nasdaq |
Principal
Investment Grade Corporate Active ETF |
NYSE
Arca |
Principal
Quality ETF |
Nasdaq |
Principal
Real Estate Active Opportunities ETF |
NYSE
Arca |
Principal
Spectrum Preferred Securities Active ETF |
NYSE
Arca |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
NYSE
Arca |
Principal
U.S. Mega-Cap ETF |
Nasdaq |
Principal
U.S. Small-Cap ETF |
Nasdaq |
Principal
Value ETF |
Nasdaq |
There
can be no assurance that a Fund will continue to meet the requirements of its
respective Exchange necessary to maintain the listing of its Shares. An Exchange
may, but is not required to, remove the Shares of a Fund from listing if: (i)
following the initial 12-month period beginning at the commencement of trading
of the Fund, there are fewer than 50 beneficial owners of the Shares of the
Fund; (ii) the Fund is no longer eligible to operate in reliance on Rule 6c-11
under the Investment Company Act of 1940, as amended (the "1940 Act"), to the
extent the Fund’s listing is conditioned upon reliance on Rule 6c-11; (iii) any
of the continued listing requirements set forth in the Exchange’s rules are not
continuously maintained; or (iv) such other event shall occur or condition shall
exist that, in the opinion of the Exchange, makes further dealings on such
Exchange inadvisable. Additionally, the Exchange will remove the Shares of a
Fund from listing and trading upon termination of the Fund.
As
in the case of other stocks traded on the Exchange, brokers' commissions on
transactions will be based on negotiated commission rates at customary
levels.
The
Trust reserves the right to adjust the price levels of the Shares in the future
to help maintain convenient trading ranges for investors. Any adjustments would
be accomplished through stock splits or reverse stock splits, which would have
no effect on the net assets of a Fund.
DESCRIPTION
OF THE FUNDS' INVESTMENTS AND RISKS
Fund
Policies
The
investment objective, principal investment strategies, and principal risks of
each Fund are described in the Prospectus. This SAI contains supplemental
information about those strategies and risks and the types of securities that
those managing the investments of each Fund can select. Additional information
is also provided about other strategies that each Fund may use to try to achieve
its objective.
The
composition of each Fund and the techniques and strategies that those managing a
Fund’s investments may use in selecting securities will vary over time. A Fund
is not required to use all of the investment techniques and strategies available
to it in seeking its goals.
Unless
otherwise indicated, with the exception of the percentage limitations on
borrowing, the restrictions apply at the time transactions are entered into.
Accordingly, any later increase or decrease beyond the specified limitation,
resulting from market fluctuations or in a rating by a rating service, does not
require elimination of any security from a Fund’s portfolio.
The
investment objective of each Fund and, except as described below as “fundamental
restrictions,” the investment strategies described in this SAI and the
Prospectus are not fundamental and may be changed by the Board without
shareholder approval.
With
the exception of the diversification test required by the Internal Revenue Code,
the Funds will not consider collateral held in connection with securities
lending activities when applying any of the following fundamental restrictions
or any other investment restriction set forth in the Prospectus or
SAI.
Under
the terms of the Non-Transparent Order, the investments of each of the Focused
Blue Chip ETF and the Real Estate ETF are limited to the following:
exchange-traded common stocks, excluding penny stocks, exchange-traded preferred
stocks, common stocks listed on a foreign exchange that trade on such exchange
contemporaneously with shares of the Focused Blue Chip ETF and the Real Estate
ETF, other ETFs, exchange-traded notes, exchange-traded American Depositary
Receipts (ADRs), exchange-traded real estate investment trusts (REITs),
exchange-traded commodity pools, exchange-traded metals trusts, exchange-traded
currency trusts, and exchange-traded futures that trade contemporaneously with
shares of the respective ETF, as well as cash and cash equivalents. Each of the
Focused Blue Chip ETF and the Real Estate ETF may not borrow for investment
purposes or hold short positions. Each of the Focused Blue Chip ETF and the Real
Estate ETF may not purchase any securities that are illiquid investments at the
time of purchase.
Fundamental
Restrictions
Except
as specifically noted, each Fund has adopted the following fundamental
restrictions. Each fundamental restriction is a matter of fundamental policy and
may not be changed without a vote of a majority of the outstanding voting
securities of the affected Fund, except as permitted by the 1940 Act or other
governing Statute and the Rules thereunder, the SEC, or other regulatory agency
with authority over the Funds. The 1940 Act provides that "a vote of a majority
of the outstanding voting securities" of a Fund means the affirmative vote of
the lesser of (1) more than 50% of the outstanding Fund shares or (2) 67% or
more of the Fund shares present at a meeting if more than 50% of the outstanding
Fund shares are represented at the meeting in person or by proxy. Each share has
one vote.
Each
Fund:
1) May
not issue senior securities, except as permitted under the 1940 Act, as amended,
and as interpreted, modified, or otherwise permitted by regulatory authority
having jurisdiction, from time to time.
2) May
not purchase or sell commodities, except as permitted by applicable law,
regulation, or regulatory authority having jurisdiction.
3) May
not purchase or sell real estate, which term does not include securities of
companies that deal in real estate or mortgages or investments secured by real
estate or interests therein, except that the Fund reserves freedom of action to
hold and to sell real estate acquired as a result of the Fund’s ownership of
securities.
4) May
not borrow money, except as permitted under the 1940 Act, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
5) May
not make loans, except as permitted under the 1940 Act, as amended, and as
interpreted, modified, or otherwise permitted by regulatory authority having
jurisdiction, from time to time.
6) Has
adopted a policy regarding diversification, as follows:
a. The
Principal Focused Blue Chip ETF and Principal Real Estate Active Opportunities
ETF have elected to be non-diversified.
b. All
other Funds have elected to be treated as a "diversified" investment company, as
that term is used in the 1940 Act, as amended, and as interpreted, modified, or
otherwise permitted by regulatory authority having jurisdiction, from time to
time.
7) Has
adopted a concentration policy as follows:
a.The
Principal Spectrum Preferred Securities Active ETF and Principal Spectrum
Tax-Advantaged Dividend Active ETF each concentrates its investments in
securities in the financial services (i.e., banking, insurance, and commercial
finance) industry.
b.The
Principal Healthcare Innovators ETF concentrates its investments in securities
in one or more industries within the healthcare sector.
c.The
Principal Real Estate Active Opportunities ETF concentrates its investments in
securities in the real estate industry.
d.The
remaining Funds may not concentrate, as that term is used in the 1940 Act, as
amended, and as interpreted, modified, or otherwise permitted by regulatory
authority having jurisdiction, from time to time, its investments in a
particular industry or group of industries.
8) May
not act as an underwriter of securities, except to the extent that the Fund may
be deemed to be an underwriter in connection with the sale of securities held in
its portfolio.
Non-Fundamental
Restrictions
Except
as specifically noted, each Fund has also adopted the following non-fundamental
restrictions. Non-fundamental restrictions are not fundamental policies and may
be changed without shareholder approval. It is contrary to each Fund’s present
policy to:
1) Invest
more than 15% of its net assets in illiquid securities and in repurchase
agreements maturing in more than seven days, except to the extent permitted by
applicable law or regulatory authority having jurisdiction, from time to
time.
2) Pledge,
mortgage, or hypothecate its assets, except to secure permitted borrowings. The
deposit of underlying securities and other assets in escrow and other collateral
arrangements in connection with transactions that involve any future payment
obligation, as permitted under the 1940 Act, as amended, and as interpreted,
modified, or otherwise permitted by any regulatory authority having
jurisdiction, from time to time, are not deemed to be pledges, mortgages,
hypothecations, or other encumbrances.
3)
Invest in companies for the purpose of exercising
control or management.
4) Acquire
securities of other investment companies in reliance on Section 12(d)(1)(F) or
(G) of the 1940 Act, invest more than 10% of its total assets in securities of
other investment companies, invest more than 5% of its total assets in the
securities of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in connection
with a merger, consolidation, or plan of reorganization and except as permitted
by the 1940 Act, SEC rules adopted under the 1940 Act, or exemptions granted by
the SEC. The Fund may purchase securities of closed-end investment companies in
the open market where no underwriter or dealer’s commission or profit, other
than a customary broker’s commission, is involved.
The
Principal Spectrum Preferred Securities Active ETF has also adopted the
following non-fundamental restriction. It is contrary to the Fund's present
policy to:
1) Invest
more than 5% of its total assets in real estate limited partnership
interests.
Non-Fundamental
Policy - Rule 35d-1 under the 1940 Act - Investment Company Names
With
the exception of the Principal Quality and Principal Value ETFs,
each Fund has also adopted a non-fundamental policy, pursuant to SEC Rule 35d-1,
which requires it, under normal circumstances, to invest at least 80% of its net
assets, plus any borrowings for investment purposes, in the type of investments,
industry, or geographic region (as described in the Prospectus) as suggested by
the name of the Fund.
This
policy applies at the time of purchase. A Fund will provide 60 days’ notice to
shareholders prior to implementing a change in this policy for the Fund. For
purposes of this non-fundamental policy, each Fund tests market capitalization
ranges monthly.
For
purposes of testing this requirement with respect to:
•Forward
foreign currency contracts and other investments that have economic
characteristics similar to foreign currency:
the value of such contracts and investments may include the Fund’s investments
in cash and/or cash equivalents to the extent such cash and/or cash equivalents
are maintained with respect to the Fund’s exposure under its forward foreign
currency contracts and similar investments.
•Derivatives
instruments:
each Fund will typically count the mark-to-market value of such derivatives.
However, a Fund may use a derivative contract’s notional value when it
determines that notional value is an appropriate measure of the Fund’s exposure
to investments. For example, with respect to single-name equity swaps that are
“fully paid” (equity swaps in which cash and/or cash equivalents are posted as
collateral for the purpose of covering the full notional value of the swap),
each Fund will count the value of such cash and/or cash
equivalents.
•Investments
in underlying funds (including ETFs):
each Fund will count all investments in an underlying fund toward the
requirement as long as 80% of the value of such underlying fund’s holdings focus
on the particular type of investment suggested by the Fund name.
Investment
Strategies and Risks Related to Borrowing and Senior Securities,
Commodity-Related Investments, Industry Concentration, and Loans
Borrowing
and Senior Securities
Under
the 1940 Act, a fund that borrows money is required to maintain continuous asset
coverage (that is, total assets including borrowings, less liabilities exclusive
of borrowings) of 300% of the amount borrowed, with an exception for borrowings
not in excess of 5% of the fund’s total assets made for temporary or emergency
purposes. If a fund invests the proceeds of borrowing, borrowing will tend to
exaggerate the effect on net asset value of any increase or decrease in the
market value of a fund’s portfolio. If a fund invests the proceeds of borrowing,
money borrowed will be subject to interest costs that may or may not be
recovered by earnings on the securities purchased. A fund also may be required
to maintain minimum average balances in connection with a borrowing or to pay a
commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest
rate.
Commodity-Related
Investments
Under
the 1940 Act, a fund's registration statement must recite the fund's policy
with regard to investing in commodities. Each Fund may invest in commodities to
the extent permitted by applicable law and under its fundamental and
non-fundamental policies and restrictions. Pursuant to a claim for exclusion
filed with the Commodity Futures Trading Commission ("CFTC") on behalf of each
of the Funds under Rule 4.5, PGI is not deemed to be a “commodity pool operator”
under the Commodity Exchange Act ("CEA") as it specifically relates to PGI's
operations with respect to the Funds, and the Funds, therefore, are not
considered regulated commodity pools and are not subject to registration or
regulation under the CEA.
The
CFTC amended the Rule 4.5 exclusions for certain otherwise regulated persons
from the definition of the term "commodity pool operator." Rule 4.5 provides
that an investment company does not meet the definition of “commodity pool
operator” if its use of futures contracts, options on futures contracts, and
swaps is sufficiently limited that the fund can fall within one of two
exclusions set out in Rule 4.5. Each Fund intends to limit its use of futures
contracts, options on futures contracts, and swaps to the degree necessary to
fall within one of the two exclusions. If a Fund is unable to do so, it may
incur expenses that are necessary to comply with the CEA and rules the CFTC has
adopted under it.
Industry
Concentration
"Concentration"
means a fund invests more than 25% of its net assets in a particular industry or
group of industries. To monitor compliance with the policy regarding industry
concentration, the Funds may use the industry classifications provided by
Bloomberg, L.P., the Morgan Stanley Capital International (MSCI)/Standard &
Poor's Global Industry Classification Standard (GICS), the Directory of
Companies Filing Annual Reports with the SEC, or any other reasonable industry
classification system. With respect to monitoring industry concentration, a Fund
concentrating in the "financial services industry" concentrates its investments
in one or more industries classified within the broader financial services
sector.
•Each
Fund interprets its policy with respect to concentration in a particular
industry to apply only to direct investments in the securities of issuers in a
particular industry.
•For
purposes of this restriction, government securities such as treasury securities
or mortgage-backed securities that are issued or guaranteed by the U.S.
government, its agencies, or instrumentalities are not subject to a Fund’s
industry concentration restrictions.
•Each
Fund views its investments in tax-exempt municipal securities as not
representing interests in any particular industry or group of industries. For
information about municipal securities, see the Municipal Obligations
section.
Loans
A
Fund may not make loans to other persons except as permitted by (i) the 1940 Act
and the rules and regulations thereunder, or other successor law governing the
regulation of registered investment companies, or interpretations or
modifications thereof by the SEC, SEC staff, or other authority of competent
jurisdiction, or (ii) pursuant to exemptive or other relief or permission from
the SEC, SEC staff, or other authority of competent jurisdiction. Generally,
this means the Funds are typically permitted to make loans, but must take into
account potential issues such as liquidity, valuation, and avoidance of
impermissible transactions. Examples of permissible loans include (a) the
lending of its portfolio securities, (b) the purchase of debt securities, loan
participations, and/or engaging in direct corporate loans in accordance with its
investment objectives and policies, (c) the entry into a repurchase agreement
(to the extent such entry is deemed to be a loan), and (d) loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom that may be granted by the SEC.
Other
Investment Strategies and Risks
Convertible
Securities
A
convertible security is a bond, debenture, note, preferred stock, or other
security that entitles the holder to acquire common stock or other equity
securities of the same or a different issuer. A convertible security generally
entitles the holder to receive interest paid or accrued until the convertible
security matures or is redeemed, converted or exchanged. Before conversion,
convertible securities have characteristics similar to non-convertible debt or
preferred securities, as applicable. Convertible securities rank senior to
common stock in a corporation’s capital structure and, therefore, generally
entail less risk than the corporation’s common stock, although the extent to
which such risk is reduced depends in large measure upon the degree to which the
convertible security sells above its value as a fixed income security.
Convertible securities are subordinate in rank to any senior debt obligations of
the issuer, and, therefore, an issuer’s convertible securities entail more risk
than its debt obligations. Convertible securities generally offer lower interest
or dividend yields than non-convertible debt securities of similar credit
quality because of the potential for capital appreciation. In addition,
convertible securities are often lower-rated securities.
Because
of the conversion feature, the price of the convertible security will normally
fluctuate in some proportion to changes in the price of the underlying asset,
and as such is subject to risks relating to the activities of the issuer and/or
general market and economic conditions. The income component of a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the income component of convertible securities causes
fluctuations based upon changes in interest rates and the credit quality of the
issuer.
If
the conversion value of a convertible security increases to a point that
approximates or exceeds its investment value, the value of the security will be
principally influenced by its conversion value. A convertible security will sell
at a premium over its conversion value to the extent investors place value on
the right to acquire the underlying common stock while holding an
income-producing security.
A
convertible security may be subject to redemption at the option of the issuer at
a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock, or would sell the
convertible security to a third party, which may have an adverse effect on the
fund’s ability to achieve its investment objective.
Corporate
Reorganizations
Funds
may invest in securities for which a tender or exchange offer has been made or
announced and in securities of companies for which a merger, consolidation,
liquidation, or reorganization proposal has been announced if, in the judgment
of those managing the fund’s investments, there is a reasonable prospect of
capital appreciation significantly greater than the brokerage and other
transaction expenses involved. The primary risk of such investments is that if
the contemplated transaction is abandoned, revised, delayed, or becomes subject
to unanticipated uncertainties, including, for example, new or revised laws or
regulations, the market price of the securities may decline below the purchase
price paid by a fund.
In
general, securities that are the subject of such an offer or proposal sell at a
premium to their historic market price immediately prior to the announcement of
the offer or proposal. However, the increased market price of such securities
may discount what the stated or appraised value of the security would be if the
contemplated transaction were approved or consummated. Such investments may be
advantageous when the discount: significantly overstates the risk of the
contingencies involved; significantly undervalues the securities, assets, or
cash to be received by shareholders of the prospective company as a result of
the contemplated transaction; or fails adequately to recognize the possibility
that the offer or proposal may be replaced or superseded by an offer or proposal
of greater value. The evaluation of such contingencies requires unusually broad
knowledge and experience on the part of those managing the fund’s investments,
which must appraise not only the value of the issuer and its component
businesses, but also the financial resources and business motivation of the
offer or proposal as well as the dynamics of the business climate when the offer
or proposal is in process.
Cyber
Security Issues
Each
Fund and its service providers may be subject to cyber security risks. Those
risks include, among others, theft, misuse or corruption of data maintained
online or digitally; denial of service attacks on websites; the loss or
unauthorized release of confidential and proprietary information; operational
disruption; or various other forms of cyber security breaches. Cyber-attacks
against or security breakdowns of a Fund or its service providers may harm the
Fund and its shareholders, potentially resulting in, among other things,
financial losses, the inability of Fund shareholders to transact business,
inability to calculate a fund’s NAV, violations of applicable privacy and other
laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, and/or additional compliance and remediation costs. Cyber
security risks may also affect issuers of securities in which a fund invests,
potentially causing the fund’s investment in such issuers to lose value. Despite
risk management processes, there can
be
no guarantee that a fund will avoid losses relating to cyber security risks or
other information security breaches.
Depositary
Receipts
Depositary
Receipts are generally subject to the same sort of risks as direct investments
in a foreign country, such as, currency risk, political and economic risk, and
market risk, because their values depend on the performance of a foreign
security denominated in its home currency.
Each
Fund may invest in foreign securities which means it may invest in:
• American
Depositary Receipts ("ADRs") - receipts issued by an American bank or trust
company evidencing ownership of underlying securities issued by a foreign
issuer. They are designed for use in U.S. securities markets.
• European
Depositary Receipts ("EDRs") and Global Depositary Receipts ("GDRs") - receipts
typically issued by a foreign financial institution to evidence an arrangement
similar to that of ADRs.
Depositary
Receipts may be issued by sponsored or unsponsored programs. In sponsored
programs, an issuer has made arrangements to have its securities traded in the
form of Depositary Receipts. In unsponsored programs, the issuer may not be
directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities of underlying unsponsored programs, and there may not be a
correlation between the availability of such information and the market value of
the Depositary Receipts.
Derivatives
Options
on Securities and Securities Indices
Funds
may write (sell) and purchase call and put options on securities and on
securities indices. Funds may engage in these transactions to hedge against a
decline in the value of securities owned or an increase in the price of
securities that the Fund plans to purchase, or to generate additional
revenue.
•Exchange-Traded
Options. An exchange-traded option may be closed out only on an exchange that
generally provides a liquid secondary market for an option of the same series.
If a liquid secondary market for an exchange-traded option does not exist, it
might not be possible to effect a closing transaction with respect to a
particular option, with the result that a Fund would have to exercise the option
in order to consummate the transaction.
•Over
the Counter (“OTC”) Options. OTC options differ from exchange-traded options in
that they are two-party contracts, with price and other terms negotiated between
buyer and seller, and generally do not have as much market liquidity as
exchange-traded options. An OTC option (an option not traded on an established
exchange) may be closed out only by agreement with the other party to the
original option transaction. With OTC options, a Fund is at risk that the other
party to the transaction will default on its obligations or will not permit the
Fund to terminate the transaction before its scheduled maturity. While a Fund
will seek to enter into OTC options only with dealers who agree to or are
expected to be capable of entering into closing transactions with a Fund, there
can be no assurance that a Fund will be able to liquidate an OTC option at a
favorable price at any time prior to its expiration. OTC options are not subject
to the protections afforded purchasers of listed options by the Options Clearing
Corporation or other clearing organizations. An exchange-traded option may be
closed out only on an exchange that generally provides a liquid secondary market
for an option of the same series. If a liquid secondary market for an
exchange-traded option does not exist, it might not be possible to effect a
closing transaction with respect to a particular option, with the result that a
fund would have to exercise the option in order to consummate the
transaction.
•FLexible
EXchange Options (“FLEX Options”). FLEX Options are customized options contracts
available through national securities exchanges that are guaranteed for
settlement by the Options Clearing Corporation (“OCC”), a market clearinghouse.
FLEX Options provide investors with the ability to customize terms of an option,
including exercise prices, exercise styles (European-style options, which are
exercisable only at the expiration date, versus American-style options, which
are exercisable any time prior to the expiration date), and expiration dates,
while achieving price discovery in competitive, transparent auction markets and
avoiding the counterparty exposure of the OTC option positions.
There
is no assurance that a liquid secondary market on an options exchange will exist
for any particular option, or at any particular time, and for some options no
secondary market on an exchange or elsewhere may exist. If a Fund is unable to
close out a call option on securities that it has written before the option is
exercised, the Fund may be required to purchase the optioned securities in order
to satisfy its obligation under the option to deliver such securities. If the
Fund is unable to effect a closing sale transaction with respect to options on
securities that it has purchased, it would have to exercise the option in order
to realize any profit and would incur transaction costs upon the purchase and
sale of the underlying securities. The writing and purchasing of options is a
highly specialized activity that involves investment techniques and risks
different from those associated with ordinary portfolio securities transactions.
Imperfect correlation between the options and securities markets may detract
from the effectiveness of attempted hedging. Options transactions may result in
significantly higher transaction costs and portfolio turnover for a
Fund.
Writing
Call and Put Options. When
a Fund writes a call option, it gives the purchaser of the option the right to
buy a specific security at a specified price at any time before the option
expires. When a Fund writes a put option, it gives the purchaser of the option
the right to sell to the Fund a specific security at a specified price at any
time before the option expires. In both situations, the Fund receives a premium
from the purchaser of the option.
The
premium received by a Fund reflects, among other factors, the current market
price of the underlying security, the relationship of the exercise price to the
market price, the time period until the expiration of the option and interest
rates. The premium generates additional income for the Fund if the option
expires unexercised or is closed out at a profit. By writing a call, a Fund
limits its opportunity to profit from any increase in the market value of the
underlying security above the exercise price of the option, but it retains the
risk of loss if the price of the security should decline. By writing a put, a
Fund assumes the risk that it may have to purchase the underlying security at a
price that may be higher than its market value at time of exercise.
A
Fund usually owns the underlying security covered by any outstanding call
option. With respect to an outstanding put option, a Fund deposits and maintains
with its custodian or segregates on the Fund’s records, cash, or other liquid
assets with a value at least equal to the market value of the option that was
written.
Once
a Fund has written an option, it may terminate its obligation before the option
is exercised. The Fund executes a closing transaction by purchasing an option of
the same series as the option previously written. The Fund has a gain or loss
depending on whether the premium received when the option was written exceeds
the closing purchase price plus related transaction costs.
Purchasing
Call and Put Options. When
a Fund purchases a call option, it receives, in return for the premium it pays,
the right to buy from the writer of the option the underlying security at a
specified price at any time before the option expires. A Fund purchases call
options in anticipation of an increase in the market value of securities that it
intends ultimately to buy. During the life of the call option, the Fund is able
to buy the underlying security at the exercise price regardless of any increase
in the market price of the underlying security. For a call option to result in a
gain, the market price of the underlying security must exceed the sum of the
exercise price, the premium paid, and transaction costs.
When
a Fund purchases a put option, it receives, in return for the premium it pays,
the right to sell to the writer of the option the underlying security at a
specified price at any time before the option expires. A Fund purchases put
options in anticipation of a decline in the market value of the underlying
security. During the life of the put option, the Fund is able to sell the
underlying security at the exercise price regardless of any decline in the
market price of the underlying security. In order for a put option to result in
a gain, the market price of the underlying security must decline, during the
option period, below the exercise price enough to cover the premium and
transaction costs.
Once
a Fund purchases an option, it may close out its position by selling an option
of the same series as the option previously purchased. The Fund has a gain or
loss depending on whether the closing sale price exceeds the initial purchase
price plus related transaction costs.
Options
on Securities Indices. Each
Fund may purchase and sell put and call options on any securities index based on
securities in which the Fund may invest. Securities index options are designed
to reflect price fluctuations in a group of securities or segment of the
securities market rather than price fluctuations in a single security. Options
on securities indices are similar to options on securities, except that the
exercise of securities index options requires cash payments and does not involve
the actual purchase or sale of securities. Each Fund engages in transactions in
put and call options on securities indices for the same purposes as they engage
in transactions in options on securities. When a Fund writes call options on
securities indices, it holds in its portfolio underlying securities which, in
the judgment of those managing the fund’s investments, correlate closely with
the securities index and which have a value at least equal to the aggregate
amount of the securities index options.
Risks
Associated with Option Transactions. An
option position may be closed out only on an exchange that provides a secondary
market for an option of the same series. A Fund generally purchases or writes
only those options for which there appears to be an active secondary market.
However, there is no assurance that a liquid secondary market on an exchange
exists for any particular option, or at any particular time. If a Fund is unable
to effect closing sale transactions in options it has purchased, it has to
exercise its options in order to realize any profit and may incur transaction
costs upon the purchase or sale of underlying securities. If the Fund is unable
to effect a closing purchase transaction for a covered option that it has
written, it is not able to sell the underlying securities until the option
expires or is exercised. A Fund’s ability to terminate option positions
established in the over-the-counter market may be more limited than for
exchange-traded options and may also involve the risk that broker-dealers
participating in such transactions might fail to meet their
obligations.
Futures
Contracts and Options on Futures Contracts
Funds
may purchase and sell futures contracts of many types, including for example,
futures contracts covering indexes, financial instruments, and foreign
currencies. Funds may purchase and sell financial futures contracts and options
on those contracts. Financial futures contracts are commodities contracts based
on financial instruments such as U.S. Treasury bonds or bills or on securities
indices such as the S&P 500 Index. The Commodity Futures Trading Commission
regulates futures contracts, options on futures contracts, and the commodity
exchanges on which they are traded. Through the purchase and sale of futures
contracts and related options, a Fund may seek to hedge against a decline in the
value of securities owned by the Fund or an increase in the price of securities
that the Fund plans to purchase. Funds may also purchase and sell futures
contracts and related options to maintain cash reserves while simulating full
investment in securities and to keep substantially all of its assets exposed to
the market. Funds may enter into futures contracts and related options
transactions both for hedging and non-hedging purposes.
Futures
Contracts. Funds
may purchase or sell a futures contract to gain exposure to a particular market
asset without directly purchasing that asset. When a Fund sells a futures
contract based on a financial instrument, the Fund is obligated to deliver that
kind of instrument at a specified future time for a specified price. When a Fund
purchases that kind of contract, it is obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date. The Fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the Fund usually liquidates futures contracts on
financial instruments, by entering into an offsetting transaction before the
settlement date, they may make or take delivery of the underlying securities
when it appears economically advantageous to do so.
A
futures contract based on a securities index provides for the purchase or sale
of a group of securities at a specified future time for a specified price. These
contracts do not require actual delivery of securities but result in a cash
settlement. The amount of the settlement is based on the difference in value of
the index between the time the contract was entered into and the time it is
liquidated (at its expiration or earlier if it is closed out by entering into an
offsetting transaction).
When
a Fund purchases or sells a futures contract, it pays a commission to the
futures commission merchant through which the Fund executes the transaction.
When entering into a futures transaction, the Fund does not pay the execution
price, as it does when it purchases a security, or a premium, as it does when it
purchases an option. Instead, the Fund deposits an amount of cash or other
liquid assets (generally about 5% of the futures contract amount) with its
futures commission merchant. This amount is known as “initial margin.” In
contrast to the use of margin account to purchase securities, the Fund’s deposit
of initial margin does not constitute the borrowing of money to finance the
transaction in the futures contract. The initial margin represents a good faith
deposit that helps assure the Fund’s performance of the transaction. The futures
commission merchant returns the initial margin to the Fund upon termination of
the futures contract if the Fund has satisfied all its contractual
obligations.
Subsequent
payments to and from the futures commission merchant, known as “variation
margin,” are required to be made on a daily basis as the price of the futures
contract fluctuates, a process known as “marking to market.” The fluctuations
make the long or short positions in the futures contract more or less valuable.
If the position is closed out by taking an opposite position prior to the
settlement date of the futures contract, a final determination of variation
margin is made. Any additional cash is required to be paid to or released by the
broker and the Fund realizes a loss or gain.
In
using futures contracts, a Fund may seek to establish with more certainty than
would otherwise be possible the effective price of or rate of return on
portfolio securities or securities that the Fund proposes to acquire. A Fund,
for example, sells futures contracts in anticipation of a rise in interest rates
that would cause a decline in the value of its debt investments. When this kind
of hedging is successful, the futures contract increases in value when the
Fund’s
debt
securities decline in value and thereby keeps the Fund’s net asset value from
declining as much as it otherwise would. A Fund may also sell futures contracts
on securities indices in anticipation of or during a stock market decline in an
endeavor to offset a decrease in the market value of its equity investments.
When a Fund is not fully invested and anticipates an increase in the cost of
securities it intends to purchase, it may purchase financial futures
contracts.
When
increases in the prices of equities are expected, a Fund may purchase futures
contracts on securities indices in order to gain rapid market exposure that may
partially or entirely offset increases in the cost of the equity securities it
intends to purchase.
Options
on Futures Contracts. Funds
may also purchase and write call and put options on futures contracts. A call
option on a futures contract gives the purchaser the right, in return for the
premium paid, to purchase a futures contract (assume a long position) at a
specified exercise price at any time before the option expires. A put option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a short position), for a specified exercise price, at any time
before the option expires.
Upon
the exercise of a call, the writer of the option is obligated to sell the
futures contract (to deliver a long position to the option holder) at the option
exercise price, which will presumably be lower than the current market price of
the contract in the futures market. Upon exercise of a put, the writer of the
option is obligated to purchase the futures contract (deliver a short position
to the option holder) at the option exercise price, which will presumably be
higher than the current market price of the contract in the futures market.
However, as with the trading of futures, most options are closed out prior to
their expiration by the purchase or sale of an offsetting option at a market
price that reflects an increase or a decrease from the premium originally paid.
Options on futures can be used to hedge substantially the same risks addressed
by the direct purchase or sale of the underlying futures contracts. For example,
if a Fund anticipates a rise in interest rates and a decline in the market value
of the debt securities in its portfolio, it might purchase put options or write
call options on futures contracts instead of selling futures
contracts.
If
a Fund purchases an option on a futures contract, it may obtain benefits similar
to those that would result if it held the futures position itself. But in
contrast to a futures transaction, the purchase of an option involves the
payment of a premium in addition to transaction costs. In the event of an
adverse market movement, however, the Fund is not subject to a risk of loss on
the option transaction beyond the price of the premium it paid plus its
transaction costs.
When
a Fund writes an option on a futures contract, the premium paid by the purchaser
is deposited with the Fund’s custodian. The Fund must maintain with its futures
commission merchant all or a portion of the initial margin requirement on the
underlying futures contract. It assumes a risk of adverse movement in the price
of the underlying futures contract comparable to that involved in holding a
futures position. Subsequent payments to and from the futures commission
merchant, similar to variation margin payments, are made as the premium and the
initial margin requirements are marked to market daily. The premium may
partially offset an unfavorable change in the value of portfolio securities, if
the option is not exercised, or it may reduce the amount of any loss incurred by
the Fund if the option is exercised.
Risks
Associated with Futures Transactions. There
are many risks associated with transactions in futures contracts and related
options. The value of the assets that are the subject of the futures contract
may not move in the anticipated direction. A Fund’s successful use of futures
contracts is subject to the ability of those managing the fund’s investments to
predict correctly the factors affecting the market values of the Fund’s
portfolio securities. For example, if a Fund is hedged against the possibility
of an increase in interest rates which would adversely affect debt securities
held by the Fund and the prices of those debt securities instead increases, the
Fund loses part or all of the benefit of the increased value of its securities
it hedged because it has offsetting losses in its futures positions. Other risks
include imperfect correlation between price movements in the financial
instrument or securities index underlying the futures contract, on the one hand,
and the price movements of either the futures contract itself or the securities
held by the Fund, on the other hand. If the prices do not move in the same
direction or to the same extent, the transaction may result in trading
losses.
Prior
to exercise or expiration, a position in futures may be terminated only by
entering into a closing purchase or sale transaction. This requires a secondary
market on the relevant contract market. A Fund enters into a futures contract or
related option only if there appears to be a liquid secondary market. There can
be no assurance, however, that such a liquid secondary market exists for any
particular futures contract or related option at any specific time. Thus, it may
not be possible to close out a futures position once it has been established.
Under such circumstances, the Fund continues to be required to make daily cash
payments of variation margin in the event of adverse price movements. In such
situations, if the Fund has insufficient cash, it may be required to sell
portfolio securities to meet daily variation margin requirements at a time when
it may be disadvantageous to do so. In addition, the Fund may be required to
perform under the terms of the futures contracts it holds. The inability to
close out futures positions also could have an adverse impact on the Fund’s
ability effectively to hedge its portfolio.
Most
United States futures exchanges limit the amount of fluctuation permitted in
futures contract prices during a single trading day. This daily limit
establishes the maximum amount that the price of a futures contract may vary
either up or down from the previous day’s settlement price at the end of a
trading session. Once the daily limit has been reached in a particular type of
contract, no more trades may be made on that day at a price beyond that limit.
The daily limit governs only price movements during a particular trading day and
therefore does not limit potential losses because the limit may prevent the
liquidation of unfavorable positions. Futures contract prices have occasionally
moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and
subjecting some futures traders to substantial losses.
Swap
Agreements and Options on Swap Agreements
Funds
may engage in swap transactions, including, but not limited to, swap agreements
on interest rates, security or commodity indexes, specific securities and
commodities, and credit and event-linked swaps, to the extent permitted by its
investment restrictions. To the extent a Fund may invest in foreign
currency-denominated securities, it may also invest in currency swap agreements
and currency exchange rate swap agreements. Funds may also enter into options on
swap agreements (“swap options”).
Funds
may enter into swap transactions for any legal purpose consistent with its
investment objectives and policies, such as for the purpose of attempting to
obtain or preserve a particular return or spread at a lower cost than obtaining
a return or spread through purchases and/or sales of instruments in other
markets; to protect against currency fluctuations; as a duration management
technique; to protect against any increase in the price of securities a Fund
anticipates purchasing at a later date; to gain exposure to one or more
securities, currencies, or interest rates; to take advantage of perceived
mispricing in the securities markets; or to gain exposure to certain markets in
the most economical way possible.
Swap
agreements are two party contracts entered into primarily by institutional
investors for periods ranging from a few weeks to more than one year. In a
standard “swap” transaction, two parties agree to exchange the returns (or
differentials in rates of return) earned or realized on particular predetermined
investments or instruments, which may be adjusted for an interest factor. The
gross returns to be exchanged or “swapped” between the parties are generally
calculated with respect to a “notional amount,” i.e., the return on or increase
in value of a particular dollar amount invested at a particular interest rate,
in a particular foreign currency, or in a “basket” of securities or commodities
representing a particular index.
•Interest
Rate Swaps. Interest rate swaps involve the exchange by a Fund with another
party of their respective commitments to pay or receive interest (for example,
an exchange of floating rate payments for fixed rate payments with respect to a
notional amount of principal). Forms of swap agreements also include interest
rate caps, under which, in return for a premium, one party agrees to make
payments to the other to the extent that interest rates exceed a specified rate,
or “cap”; interest rate floors, under which, in return for a premium, one party
agrees to make payments to the other to the extent that interest rates fall
below a specified rate, or “floor”; and interest rate collars, under which a
party sells a cap and purchases a floor or vice versa in an attempt to protect
itself against interest rate movements exceeding given minimum or maximum
levels.
•Currency
Swaps. A currency swap is an agreement to exchange cash flows on a notional
amount based on changes in the relative values of the specified
currencies.
•Index
Swaps. An index swap is an agreement to make or receive payments based on the
different returns that would be achieved if a notional amount were invested in a
specified basket of securities (such as the S&P 500 Index) or in some other
investment (such as U.S. Treasury Securities).
•Total
Return Swaps. A total return swap is an agreement to make payments of the total
return from a specified asset or instrument (or a basket of such instruments)
during the specified period, in return for payments equal to a fixed or floating
rate of interest or the total return from another specified asset or instrument.
Alternatively, a total return swap can be structured so that one party will make
payments to the other party if the value of the relevant asset or instrument
increases, but receive payments from the other party if the value of that asset
or instrument decreases.
•Commodity
Swap Agreements. Consistent with a Fund’s investment objectives and general
investment policies, certain of the Funds may invest in commodity swap
agreements. For example, an investment in a commodity swap agreement may involve
the exchange of floating-rate interest payments for the total return on a
commodity index. In a total return commodity swap, a Fund will receive the price
appreciation of a commodity index, a portion of the index, or a single commodity
in exchange for paying an agreed-upon fee. If the commodity swap is for one
period, a Fund may pay a fixed fee, established at the outset of the swap.
However, if the term of the commodity swap is for more than one period, with
interim swap payments, a Fund may pay an adjustable or floating fee. With a
“floating” rate, the fee may be pegged to a base rate, such as the London
InterBank Offered Rate (LIBOR), the Secured Overnight Financing Rate (SOFR), or
a similar reference rate, and is adjusted each period. Therefore, if interest
rates increase over the term of the swap contract, a Fund may be required to pay
a higher fee at each swap reset date.
•Credit
Default Swap Agreements. The “buyer” in a credit default contract is obligated
to pay the “seller” a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation has
occurred. If an event of default occurs, the seller must pay the buyer the full
notional value, or “par value,” of the reference obligation in exchange for the
reference obligation. A Fund may be either the buyer or seller in a credit
default swap transaction. If a Fund is a buyer and no event of default occurs,
the Fund will lose its investment and recover nothing. However, if an event of
default occurs, the Fund (if the buyer) will receive the full notional value of
the reference obligation that may have little or no value. As a seller, a Fund
receives a fixed rate of income throughout the term of the contract, which
typically is between six months and five years, provided that there is no
default event. If an event of default occurs, the seller must pay the buyer the
full notional value of the reference obligation. In addition, collateral posting
requirements are individually negotiated and there is no regulatory requirement
that a counterparty post collateral to secure its obligations or a specified
amount of cash, depending upon the terms of the swap, under a credit default
swap. Furthermore, there is no requirement that a party be informed in advance
when a credit default swap agreement is sold. Accordingly, a Fund may have
difficulty identifying the party responsible for payment of its claims. The
notional value of credit default swaps with respect to a particular investment
is often larger than the total par value of such investment outstanding and, in
event of a default, there may be difficulties in making the required deliveries
of the reference investments, possibly delaying payments.
Funds
may invest in derivative instruments that provide exposure to one or more credit
default swaps. For example, a Fund may invest in a derivative instrument known
as the Loan-Only Credit Default Swap Index (“LCDX”), a tradable index with 100
equally-weighted underlying single-name loan-only credit default swaps (“LCDS”).
Each underlying LCDS references an issuer whose loans trade in the secondary
leveraged loan market. A Fund can either buy the index (take on credit exposure)
or sell the index (pass credit exposure to a counterparty). While investing in
these types of derivatives will increase the universe of debt securities to
which a Fund is exposed, such investments entail additional risks that are not
typically associated with investments in other debt securities. Credit default
swaps and other derivative instruments related to loans are subject to the risks
associated with loans generally, as well as the risks of derivative
transactions.
•Investment
Pools. Funds may invest in publicly or privately issued interests in investment
pools whose underlying assets are credit default, credit-linked, interest rate,
currency exchange, equity-linked or other types of swap contracts and related
underlying securities or securities loan agreements. The pools’ investment
results may be designed to correspond generally to the performance of a
specified securities index or “basket” of securities, or sometimes a single
security. These types of pools are often used to gain exposure to multiple
securities with a smaller investment than would be required to invest directly
in the individual securities. They also may be used to gain exposure to foreign
securities markets without investing in the foreign securities themselves and/or
the relevant foreign market. To the extent that a Fund invests in pools of swaps
and related underlying securities or securities loan agreements whose return
corresponds to the performance of a foreign securities index or one or more
foreign securities, investing in such pools will involve risks similar to the
risks of investing in foreign securities. In addition to the risks associated
with investing in swaps generally, a Fund bears the risks and costs generally
associated with investing in pooled investment vehicles, such as paying the fees
and expenses of the pool and the risk that the pool or the operator of the pool
may default on its obligations to the holder of interests in the pool, such as a
Fund. Interests in privately offered investment pools of swaps may be considered
illiquid.
•Contracts
for Differences. “Contracts for differences” are swap arrangements in which a
Fund may agree with a counterparty that its return (or loss) will be based on
the relative performance of two different groups or “baskets” of securities. For
example, as to one of the baskets, a Fund’s return is based on theoretical long
futures positions in the securities comprising that basket, and as to the other
basket, a Fund’s return is based on theoretical short futures positions in the
securities comprising that other basket. The notional sizes of the baskets will
not necessarily be the same, which can give rise to investment leverage. Funds
may also use actual long and short futures positions to achieve the market
exposure(s) as contracts for differences. Funds may enter into swaps and
contracts for differences for investment return, hedging, risk management and
for investment leverage.
•Swaptions.
A swap option (also known as “swaptions”) is a contract that gives a
counterparty the right (but not the obligation) in return for payment of a
premium, to enter into a new swap agreement or to shorten, extend, cancel, or
otherwise modify an existing swap agreement, at some designated future time on
specified terms. The buyer and seller of the swap option agree on the strike
price, length of the option period, the term of the swap, notional amount,
amortization and frequency of settlement. Funds may engage in swap options for
hedging purposes or in an attempt to manage and mitigate credit and interest
rate risk. Funds may write (sell) and purchase put and call swap options. The
use of swap options involves risks, including, among others, imperfect
correlation between movements of the price of the swap options and the price of
the securities, indices or other assets serving as reference instruments for the
swap option, reducing the effectiveness of the instrument for hedging
or
investment
purposes.
Obligations
under Swap Agreements. The
swap agreements a Fund enters into settle in cash and, therefore, provide for
calculation of the obligations of the parties to the agreement on a “net basis.”
Consequently, a Fund's current obligations (or rights) under such a swap
agreement will generally be equal only to the net amount to be paid or received
under the agreement based on the relative values of the positions held by each
party to the agreement (the “net amount”). A Fund's current obligations under
such a swap agreement will be accrued daily (offset against any amounts owed to
the Fund).
Risks
Associated with Swap Agreements. Swaps
can be highly volatile and may have a considerable impact on a Fund’s
performance, as the potential gain or loss on any swap transaction is not
subject to any fixed limit. Whether a Fund’s use of swap agreements or swap
options will be successful in furthering its investment objective of total
return will depend on the ability of those managing the fund’s investments to
predict correctly whether certain types of investments are likely to produce
greater returns than other investments. Because they are two party contracts and
because they may have terms of greater than seven days, swap agreements may be
considered to be illiquid. Moreover, a Fund bears the risk of loss of the amount
expected to be received under a swap agreement in the event of the default or
bankruptcy of a swap agreement counterparty. The Funds will enter into swap
agreements only with counterparties that present minimal credit risks, as
determined by those managing the fund’s investments. Certain restrictions
imposed on each Fund by the Internal Revenue Code may limit a Fund’s ability to
use swap agreements.
Depending
on the terms of the particular option agreement, a Fund will generally incur a
greater degree of risk when it writes a swap option than it will incur when it
purchases a swap option. When a Fund purchases a swap option, it risks losing
only the amount of the premium it has paid should it decide to let the option
expire unexercised. However, when a Fund writes a swap option, upon exercise of
the option the Fund will become obligated according to the terms of the
underlying agreement.
Liquidity
of Swap Agreements. Some
swap markets have grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, these swap markets have
become relatively liquid. The liquidity of swap agreements will be determined by
those managing the fund’s investments based on various factors,
including:
• the
frequency of trades and quotations,
•the
number of dealers and prospective purchasers in the marketplace,
•dealer
undertakings to make a market,
•the
nature of the security (including any demand or tender features),
and
•the
nature of the marketplace for trades (including the ability to assign or offset
a portfolio's rights and obligations relating to the investment).
Such
determination will govern whether a swap will be deemed to be within each Fund’s
restriction on investments in illiquid securities.
Valuing
Swap Agreements. For
purposes of applying a fund’s investment policies and restrictions (as stated in
the Prospectuses and this SAI) swap agreements are generally valued by the funds
at market value. In the case of a credit default swap, however, in applying
certain of the funds’ investment policies and restrictions the fund will value
the credit default swap at its notional value or its full exposure value (i.e.,
the sum of the notional amount for the contract plus the market value), but may
value the credit default swap at market value for purposes of applying certain
of the funds’ other investment policies and restrictions. For example, a fund
may value credit default swaps at full exposure value for purposes of the fund’s
credit quality guidelines because such value reflects the fund’s actual economic
exposure during the term of the credit default swap agreement. In this context,
both the notional amount and the market value may be positive or negative
depending on whether the fund is selling or buying protection through the credit
default swap. The manner in which certain securities or other instruments are
valued by a fund for purposes of applying investment policies and restrictions
may differ from the manner in which those investments are valued by other types
of investors.
Permissible
Uses of Futures and Options on Futures Contracts
Each
Fund may enter into futures contracts and related options transactions, for
hedging purposes and for other appropriate risk management purposes, and to
modify the Fund’s exposure to various currency, commodity, equity, or
fixed-income markets. Each Fund may engage in futures trading in an effort to
generate returns. When using futures contracts and options on futures contracts
for hedging or risk management purposes, each Fund determines that the price
fluctuations in the contracts and options are substantially related to price
fluctuations in securities held by the Fund or which it expects to purchase. In
pursuing traditional hedging activities, each Fund may sell futures contracts or
acquire puts to protect against a decline in the price of securities that the
Fund owns. Each Fund may purchase futures contracts or calls on futures
contracts to protect the Fund against an increase in the price of securities the
Fund intends to purchase before it is in a position to do so.
Limitations
on the Use of Futures, Options on Futures Contracts, and Swaps
CFTC
Rule 4.5 provides that an investment company does not meet the definition of
"commodity pool operator" under the CEA if its use of futures contracts, options
on futures contracts, and swaps is sufficiently limited that the fund can fall
within one of two exclusions set out in Rule 4.5. Each Fund intends to limit its
use of futures contracts, options on futures contracts, and swaps to the degree
necessary to fall within one of the two exclusions. If a Fund is unable to do
so, it may incur expenses that are necessary to comply with the CEA and rules
the CFTC has adopted under it.
Risk
of Potential Government Regulation of Derivatives
It
is possible that additional government regulation of various types of derivative
instruments, including futures, options and swap agreements, may limit or
prevent a fund from using such instruments as a part of its investment strategy,
and could ultimately prevent a fund from being able to achieve its investment
objective. It is difficult to predict the effects future legislation and
regulation in this area, but the effects could be substantial and adverse. It is
possible that legislative and regulatory activity could limit or restrict the
ability of a fund to use certain instruments as a part of its investment
strategy.
Limits
or restrictions applicable to the counterparties with which the funds engage in
derivative transactions could also prevent the funds from using certain
instruments.
Environmental,
Social, and Governance Factors in the Selection of Portfolio
Securities
(Applicable
to all or portions of the following Funds: Principal Active High Yield ETF,
Principal Focused Blue Chip ETF, Principal Investment Grade Corporate Active
ETF, Principal Real Estate Active Opportunities ETF, Principal Spectrum
Preferred Securities Active ETF, and Principal Spectrum Tax-Advantaged Dividend
Active ETF.)
The
portfolio managers of the Funds consider one or more environmental, social,
and/or governance (“ESG”) factors along with other, non-ESG factors in making
investment decisions. The consideration of ESG factors is intended to further
the stated objective of the particular Funds. These ESG factors are generally no
more significant than other factors in the investment selection process, such
that ESG factors may not be determinative in deciding to include or exclude any
particular investment in the portfolio. By way of example, environmental factors
can include one or more of the following: climate change, natural resources,
pollution and waste, and environmental opportunities. Social factors can include
one or more of the following: human capital, product liability, stakeholder
opposition, and social opportunities. Governance factors can include corporate
governance and/or corporate behavior. Integration of ESG factors is qualitative
and subjective by nature. There is no guarantee that the criteria used, or
judgment exercised, will reflect the beliefs or values of any particular
investor. Further, there is no assurance that any strategy or integration of ESG
factors will be successful or profitable.
Fixed-Income
Securities
Inflation-Indexed
Bonds
Some
Funds may invest in inflation-indexed bonds or inflation protected debt
securities, which are fixed income securities whose value is periodically
adjusted according to the rate of inflation. Two structures are common. The U.S.
Treasury and some other issuers utilize a structure that accrues inflation into
the principal value of the bond. Most other issuers pay out the Consumer Price
Index accruals as part of a semi-annual coupon. Inflation-indexed securities
issued by the U.S. Treasury (Treasury Inflation Protected Securities or TIPS)
have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The
U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed
percentage of the inflation-adjusted principal amount. If the periodic
adjustment rate measuring inflation falls, the principal value of
inflation-indexed bonds will be adjusted downward, and consequently the interest
payable on these securities (calculated with respect to a smaller principal
amount) will be reduced. The value of inflation-indexed bonds is expected to
change in response to changes in real interest rates. Real interest rates in
turn are tied to the relationship between nominal interest rates and the rate of
inflation. Therefore, if the rate of inflation rises at a faster rate than
nominal interest rates, real interest rates might decline, leading to an
increase in value of inflation-indexed bonds. In contrast, if nominal interest
rates increase at a faster rate than inflation, real interest rates might rise,
leading to a decrease in value of inflation-indexed bonds. While these
securities are expected to be protected from long-term inflationary trends,
short-term increases in inflation may lead to a decline in value. If interest
rates rise due to reasons other than inflation (for example, due to changes in
currency exchange rates), investors in these securities may not be protected to
the extent that the increase is not reflected in the bond’s inflation
measure.
The
periodic adjustment of U.S. inflation-indexed bonds is tied to the Consumer
Price Index for Urban Consumers (CPI-U), which is calculated monthly by the U.S.
Bureau of Labor Statistics. The CPI-U is a measurement of changes in the cost of
living, made up of components such as housing, food, transportation and energy.
Inflation-indexed bonds issued by a foreign government are generally adjusted to
reflect a comparable inflation index calculated by that government. Any increase
in the principal amount of an inflation-indexed bond will be considered taxable
ordinary income, even though investors do not receive their principal until
maturity.
Step-Coupon
Securities
Each
Fund may invest in step-coupon securities. Step-coupon securities trade at a
discount from their face value and pay coupon interest. The coupon rate is low
for an initial period and then increases to a higher coupon rate thereafter.
Market values of these types of securities generally fluctuate in response to
changes in interest rates to a greater degree than conventional interest-paying
securities of comparable term and quality. Under many market conditions,
investments in such securities may be illiquid, making it difficult for a Fund
to dispose of them or determine their current value.
"Stripped"
Securities
Each
Fund may invest in stripped securities, which are usually structured with two or
more classes that receive different proportions of the interest and principal
distribution on a pool of U.S. government or foreign government securities or
mortgage assets. In some cases, one class will receive all of the interest (the
interest-only or “IO” class), while the other class will receive all of the
principal (the principal-only or “PO” class). Stripped securities commonly have
greater market volatility than other types of fixed-income securities. In the
case of stripped mortgage securities, if the underlying mortgage assets
experience greater than anticipated payments of principal, a Fund may fail to
recoup fully its investments in IOs. Stripped securities may be illiquid.
Stripped securities may be considered derivative securities.
Zero-Coupon
Securities
Each
Fund may invest in zero-coupon securities. Zero-coupon securities have no stated
interest rate and pay only the principal portion at a stated date in the future.
They usually trade at a substantial discount from their face (par) value.
Zero-coupon securities are subject to greater market value fluctuations in
response to changing interest rates than debt obligations of comparable
maturities that make distributions of interest in cash.
Foreign
Currency Transactions
Options
on Foreign Currencies
A
Fund may buy and write options on foreign currencies in a manner similar to that
in which futures or forward contracts on foreign currencies will be utilized.
Each Fund may use options on foreign currencies to hedge against adverse changes
in foreign currency conversion rates. For example, a decline in the U.S. dollar
value of a foreign currency in which portfolio securities are denominated will
reduce the U.S. dollar value of such securities, even if their value in the
foreign currency remains constant. In order to protect against such diminutions
in the value of the portfolio securities, a Fund may buy put options on the
foreign currency. If the value of the currency declines, a Fund will have the
right to sell such currency for a fixed amount in U.S. dollars, thereby
offsetting, in whole or in part, the adverse effect on its portfolio.
Conversely, when a rise in the U.S. dollar value of a currency in which
securities to be acquired are denominated is projected, thereby increasing the
cost of such securities, a Fund may buy call options on the foreign currency.
The purchase of such options could offset, at least partially, the effects of
the adverse movements in exchange rates. As in the case of other types of
options, however, the benefit to a Fund from purchases of foreign currency
options will be reduced by the amount of the premium and related transaction
costs. In addition, if currency exchange rates do not move in the direction or
to the extent desired, a Fund could sustain losses or lesser gains on
transactions in foreign currency options that would require a Fund to forgo a
portion or all of the benefits of advantageous changes in those
rates.
Each
Fund also may write options on foreign currencies. For example, to hedge against
a potential decline in the U.S. dollar due to adverse fluctuations in exchange
rates, a Fund could, instead of purchasing a put option, write a call option on
the relevant currency. If the decline expected by a Fund occurs, the option will
most likely not be exercised and the diminution in value of portfolio securities
will be offset at least in part by the amount of the premium received.
Similarly, instead of purchasing a call option to hedge against a potential
increase in the U.S. dollar cost of securities to be acquired, a Fund could
write a put option on the relevant currency which, if rates move in the manner
projected by a Fund, will expire unexercised and allow a Fund to hedge the
increased cost up to the amount of the premium. If exchange rates do not move in
the expected direction, the option may be exercised and a Fund would be required
to buy or sell the underlying currency at a loss, which may not be fully offset
by the amount of the premium. Through the writing of options on foreign
currencies, a Fund also may lose all or a portion of the benefits that might
otherwise have been obtained from favorable movements in exchange
rates.
Futures
on Currency
A
foreign currency future provides for the future sale by one party and purchase
by another party of a specified quantity of foreign currency at a specified
price and time. A public market exists in futures contracts covering a number of
foreign currencies. Currency futures contracts are exchange-traded and change in
value to reflect movements of a currency or a basket of currencies. Settlement
must be made in a designated currency.
Forward
Foreign Currency Exchange Contracts
Each
Fund may, but is not obligated to, enter into forward foreign currency exchange
contracts. Currency transactions include forward currency contracts and exchange
listed or over-the-counter options on currencies. A forward currency contract
involves a privately negotiated obligation to purchase or sell a specific
currency at a specified future date at a price set at the time of the
contract.
The
typical use of a forward contract is to “lock in” the price of a security in
U.S. dollars or some other foreign currency which a Fund is holding in its
portfolio. By entering into a forward contract for the purchase or sale, for a
fixed amount of dollars or other currency, of the amount of foreign currency
involved in the underlying security transactions, a Fund may be able to protect
itself against a possible loss resulting from an adverse change in the
relationship between the U.S. dollar or other currency which is being used for
the security purchase and the foreign currency in which the security is
denominated in or exposed to during the period between the date on which the
security is purchased or sold and the date on which payment is made or
received.
Those
managing the fund’s investments also may from time to time utilize forward
contracts for other purposes. For example, they may be used to hedge a foreign
security held in the portfolio or a security which pays out principal tied to an
exchange rate between the U.S. dollar and a foreign currency, against a decline
in value of the applicable foreign currency. They also may be used to lock in
the current exchange rate of the currency in which those securities anticipated
to be purchased are denominated in or exposed to. At times, each Fund may enter
into “cross-currency” hedging transactions involving currencies other than those
in which securities are held or proposed to be purchased are
denominated.
It
should be noted that the use of forward foreign currency exchange contracts does
not eliminate fluctuations in the underlying prices of the securities. It simply
establishes a rate of exchange between the currencies that can be achieved at
some future point in time. Additionally, although such contracts tend to
minimize the risk of loss due to a decline in the value of the hedged currency,
they also tend to limit any potential gain that might result if the value of the
currency increases.
Foreign
Securities
Investing
in foreign securities carries political and economic risks distinct from those
associated with investing in the United States. Investments in foreign
securities also involve the risk of possible adverse changes in investment or
exchange control regulations, expropriation or confiscatory taxation, limitation
on or delays in the removal of funds or other assets of a fund, political or
financial instability or diplomatic and other developments that could affect
such investments. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on U.S. investment or on the ability to repatriate assets
or to convert currency into U.S. Dollars. There may be a greater possibility of
default by foreign governments or foreign-government sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest or adverse diplomatic
developments.
Asia-Pacific
Countries
In
addition to the risks of foreign investing and the risks of investing in
emerging markets, the developing market Asia-Pacific countries in which a Fund
may invest are subject to certain additional or specific risks. In the
Asia-Pacific markets, there is a high concentration of market capitalization and
trading volume in a small number of issuers representing a limited number of
industries, as well as a high concentration of investors and financial
intermediaries. Many of these markets also may be affected by developments with
respect to more established markets in the region, such as Japan and Hong Kong.
Brokers in developing market Asia-Pacific countries typically are fewer in
number and less well capitalized than brokers in the United States.
Many
of the developing market Asia-Pacific countries may be subject to a greater
degree of economic, political and social instability than is the case in the
United States and Western European countries. Such instability may result from,
among other things: (i) authoritarian governments or military involvement in
political and economic decision- making, including changes in government through
extra-constitutional means; (ii) popular unrest associated with demands for
improved political, economic and social conditions; (iii) internal insurgencies;
(iv) hostile relations with neighboring countries; and/or (v) ethnic, religious
and racial disaffection. In addition, the governments of many of such countries,
such as Indonesia, have a heavy role in regulating and supervising the
economy.
An
additional risk common to most such countries is that the economy is heavily
export-oriented and, accordingly, is dependent upon international trade. The
existence of overburdened infrastructure and obsolete financial systems also
present risks in certain countries, as do environmental problems. Certain
economies also depend to a significant degree upon exports of primary
commodities and, therefore, are vulnerable to changes in commodity prices that,
in turn, may be affected by a variety of factors. The legal systems in certain
developing market Asia-Pacific countries also may have an adverse impact on a
Fund. The rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be
difficult or impossible to obtain and/or enforce a judgment in a developing
market Asia-Pacific country.
China
Investing
in China involves special considerations, including: the risk of nationalization
or expropriation of assets or confiscatory taxation; greater governmental
involvement in and control over the economy, interest rates and currency
exchange rates; controls on foreign investment and limitations on repatriation
of invested capital; greater social, economic and political uncertainty;
dependency on exports and the corresponding importance of international trade;
and currency exchange rate fluctuations. The government of China maintains
strict currency controls in support of economic, trade and political objectives
and regularly intervenes in the currency market. The government’s actions in
this respect may not be transparent or predictable. Furthermore, it is difficult
for foreign investors to directly access money market securities in China
because of investment and trading restrictions. These and other factors may
decrease the value and liquidity of a fund’s investments.
A
fund may obtain exposure to companies based or operated in China by investing
through legal structures known as variable interest entities (“VIEs”). VIEs are
not formally recognized under Chinese law and are subject to risks, such as the
risk that China could cease to allow VIEs, could impose new restrictions on
VIEs, or could deem the contractual arrangements of VIEs unenforceable. These
risks could limit or eliminate the remedies and rights available to VIEs and
their investors, such as a fund. If these risks materialize, the value of a
fund’s investments in VIEs could be adversely affected, and a fund could incur
significant losses with no available recourse.
Investments
in Stock Connect and Bond Connect
Funds
may invest in China A shares, which are shares of certain Chinese companies
listed and traded through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong
Kong Stock Connect programs (“Stock Connect”). Stock Connect is a securities
trading and clearing program established by Hong Kong Exchanges and Clearing
Limited, the Shanghai Stock Exchange (“SSE”), the Shenzhen Stock Exchange
(“SZSE”) and China Securities Depository and Clearing Corporation Limited, which
seeks to provide mutual stock market access between Mainland China and Hong
Kong. Trading through Stock Connect is subject to numerous restrictions and
risks that could impair the Fund’s ability to invest in or sell China A shares
and adversely affect the Fund’s performance, such as the following:
•China
A shares generally may not be sold, purchased or otherwise transferred other
than through Stock Connect in accordance with applicable rules, regulations, and
restrictions. Such securities may lose their eligibility, in which case they
presumably could be sold but could no longer be purchased through Stock Connect.
Market volatility and settlement difficulties in the China A share markets may
result in significant fluctuations in the prices and liquidity of the securities
traded on such markets. Further regulations or restrictions, such as limitations
on redemptions or suspension of trading, may adversely impact the
Fund.
•Stock
Connect is generally only available on business days when both the China and
Hong Kong markets are open and when banking services are available in both
markets on the corresponding settlement days. As a result, a Fund may not be
able trade when it would be otherwise attractive to do so, and the Fund may not
be able to dispose of its China A shares in a timely manner.
•Investing
in China A shares is subject to Stock Connect’s clearance and settlement
procedures, which could pose risks to the Fund. Certain requirements must be
completed before the market opening, or a Fund cannot sell the shares on that
trading day. Stock Connect also imposes quotas that limit aggregate net
purchases on an exchange on a particular day, and an investor cannot purchase
and sell the same security through Stock Connect on the same trading day. Once
the daily quota is reached, orders to purchase additional China A shares through
Stock Connect will be rejected. Such restrictions could limit a Fund’s ability
to sell its China A shares in a timely manner, or to sell them at
all.
•If
a Fund holds 5% or more of a China A share issuer’s total shares through Stock
Connect investments, the Fund must return any profits obtained from the purchase
and sale of those shares if both transactions occur within a six-month period.
All accounts managed by the Funds’ Advisor and/or its affiliates will be
aggregated for purposes of this 5% limitation, which makes it more likely that a
Fund’s profits may be subject to these limitations.
•Stock
Connect uses an omnibus clearing structure, and the Fund’s shares will be
registered in its custodian’s name on the Central Clearing and Settlement
System. This may limit the ability of the Fund’s advisor to effectively manage a
Fund, and may expose the Fund to the credit risk of its custodian or to greater
risk of expropriation. Investment in China A shares through Stock Connect may be
available only through a single broker that is an affiliate of the Fund’s
custodian, which may affect the quality of execution provided by such
broker.
•China
A shares purchased through Stock Connect will be held via a book entry omnibus
account in the name of Hong Kong Securities Clearing Company Limited (“HKSCC”),
Hong Kong’s clearing entity, and not the Fund’s name as the beneficial owner.
Therefore, a Fund’s ability to exercise its rights as a shareholder and to
pursue claims against the issuer of China A shares may be limited. While Chinese
regulations and the Hong Kong Stock Exchange have issued clarifications and
guidance supporting the concept of beneficial ownership through Stock Connect,
the interpretation of beneficial ownership in China by regulators and courts may
continue to evolve.
•The
Fund’s investments in China A shares through Stock Connect are generally subject
to Chinese securities regulations and listing rules, among other restrictions.
The Fund will not benefit from access to Hong Kong investor compensation funds,
which are set up to protect against defaults of trades, when investing through
Stock Connect. Investments in China A shares may not be covered by the
securities investor protection programs of the exchanges and, without the
protection of such programs, will be subject to the risk of default by the
broker. If the depository of the SSE and the SZSE defaulted, a Fund may not be
able to recover fully its losses from the depository or may be delayed in
receiving proceeds as part of any recovery process.
•Fees,
costs and taxes imposed on foreign investors (such as the Fund) may be higher
than comparable fees, costs and taxes imposed on owners of other securities that
provide similar investment exposure. Trades using Stock Connect may also be
subject to various fees, taxes and market charges imposed by Chinese market
participants and regulatory authorities. Uncertainties in China’s tax rules
related to the taxation of income and gains from investments in China A shares
could result in unexpected tax liabilities for the Fund, and the withholding tax
treatment of dividends and capital gains payable to overseas investors currently
is unsettled.
•Because
trades of eligible China A shares on Stock Connect must be settled in Renminbi
(RMB), the Chinese currency, Funds investing through Stock Connect will be
exposed to RMB currency risks. The ability to hedge RMB currency risks may be
limited. The RMB is subject to exchange control restrictions, and the Fund could
be adversely affected by delays in converting currencies into RMB and vice
versa.
•Because
Stock Connect is in its early stages, the effect on the market for trading China
A shares with the introduction of numerous foreign investors is currently
unknown. Stock Connect is relatively new and may be subject to further
interpretation and guidance. There can be no assurance as to Stock Connect’s
continued existence or whether future developments regarding the program may
restrict or adversely affect the Fund’s investments or returns.
•The
risks associated with investing through Stock Connect could lead to greater
market execution risk, valuation risks, liquidity risks and costs for a Fund, as
well as for Authorized Participants that create and redeem Creation Units. This
could cause a Fund to trade in the market at greater bid-ask spreads or greater
premiums or discounts to the Fund’s NAV. Because the China A share market is
considered volatile and unstable (with the risk of widespread trading
suspensions or government intervention), the creation and redemption of Creation
Units may also be disrupted.
Funds
may also invest in China Interbank bonds traded on the China Interbank Bond
Market (“CIBM”) through the China - Hong Kong Bond Connect program (“Bond
Connect”). In China, the Hong Kong Monetary Authority Central Money Markets Unit
holds Bond Connect securities on behalf of investors (such as the Fund) in
accounts maintained with maintained with a China-based custodian (either the
China Central Depository & Clearing Co. or the Shanghai Clearing House).
Investments using Bond Connect are subject to risks similar to those described
above with respect to Stock Connect.
Europe
The
economies and markets of European countries are often closely connected and
interdependent, and events in one European country can have an adverse impact on
other European countries. Certain funds may invest in securities of issuers that
are domiciled in, or have significant operations in, member countries of the
Economic and Monetary Union of the European Union (the “EU”), which requires
member countries to comply with restrictions on inflation rates, deficits,
interest rates, debt levels and fiscal and monetary controls. Decreasing imports
or exports, changes in governmental or EU regulations on trade, changes in the
exchange rate of the euro (the common currency of certain EU countries), the
default or threat of default by an EU member country on its sovereign debt,
and/or an economic recession in an EU member country may have a significant
adverse effect on the economies of EU member countries and their trading
partners, including some or all of the emerging markets countries. Although
certain European countries do not use the euro, many of these countries are
obliged to meet the criteria for joining the euro zone. Consequently, these
countries must comply with many of the restrictions noted above. The European
financial markets have experienced volatility and adverse trends in recent years
due to concerns about economic downturns, rising government debt levels and the
possible default of government debt in several European countries. Further
defaults or restructurings by governments and other entities of their debt could
have additional adverse effects on economies, financial markets and asset
valuations around the world. In addition, one or more countries may abandon the
euro and/or withdraw from the EU, including, with respect to the latter, the
United Kingdom (the “UK”), which is a significant market in the global economy.
The impact of these actions, especially if they occur in a disorderly fashion,
is not clear but could be significant and far-reaching and could adversely
impact the value of investments in the region.
The
UK’s departure from the EU (commonly referred to as “Brexit”) continues to cause
significant uncertainty and may adversely impact the financial results and
operations of various European companies and economies. The political,
regulatory, and economic consequences of Brexit are uncertain, and the ultimate
ramifications may not be known for some time. Brexit may continue to cause legal
and tax uncertainty and divergent national laws and regulations as the UK
determines which EU laws to replace or replicate. The UK may be less stable than
it has been in recent years and investments in the UK may be more volatile.
Additionally, Brexit could lead to global economic uncertainty and result in
significant volatility in the global stock markets and currency exchange rate
fluctuations. Brexit could adversely affect the value of a fund’s
investments.
Japan
Japanese
investments may be significantly affected by events influencing Japan’s economy
and the exchange rate between the Japanese yen and the U.S. Dollar. Japan’s
economy fell into a long recession in the 1990s. After a few years of mild
recovery in the mid-2000s, Japan’s economy fell into another recession as a
result of the recent global economic crisis. Japan is heavily dependent on
exports and foreign oil. Japan is located in a seismically active area, and in
2011 experienced an earthquake of a sizable magnitude and a tsunami that
significantly affected important elements of its infrastructure and resulted in
a nuclear crisis. Since these events, Japan’s financial markets have fluctuated
dramatically. The full extent of the impact of these events on Japan’s economy
and on foreign investment in Japan is difficult to estimate. Japan’s economic
prospects may be affected by the political and military situations of its near
neighbors, notably North and South Korea, China, and Russia.
Latin
America
Most
Latin American countries have experienced, at one time or another, severe and
persistent levels of inflation, including, in some cases, hyperinflation. This
has, in turn, led to high interest rates, extreme measures by governments to
keep inflation in check, and a generally debilitating effect on economic growth.
Although inflation in many countries has lessened, there is no guarantee it will
remain at lower levels. In addition, the political history of certain Latin
American countries has been characterized by political uncertainty, intervention
by the military in civilian and economic spheres, and political corruption. Such
developments, if they were to reoccur, could reverse favorable trends toward
market and economic reform, privatization, and removal of trade barriers, and
result in significant disruption in securities markets. Certain Latin American
countries may also have managed currencies which are maintained at artificial
levels to the U.S. Dollar rather than at levels determined by the market. This
type of system can lead to sudden and large adjustments in the currency which,
in turn, can have a disruptive and negative effect on foreign investors. There
is no significant foreign exchange market for many currencies and it would, as a
result, be difficult for the Fund to engage in foreign currency transactions
designed to protect the value of the Fund’s interests in securities denominated
in such currencies. Finally, a number of Latin American countries are among the
largest debtors of developing markets. There have been moratoria on, and
reschedulings of, repayment with respect to these debts. Such events can
restrict the flexibility of these debtor nations in the international markets
and result in the imposition of onerous conditions on their
economies.
High
Yield Securities
Each
Fund may invest a portion of its assets in bonds that are rated below investment
grade (sometimes called “high yield bonds” or “junk bonds”), which are rated at
the time of purchase Ba1 or lower by Moody’s and BB+ or lower by S&P Global
Ratings (if the bond has been rated by only one of those agencies, that rating
will determine whether the bond is below investment grade; if the bond has not
been rated by either of those agencies, those managing the fund’s investments
will determine whether the bond is of a quality comparable to those rated below
investment grade). Lower rated bonds involve a higher degree of credit risk,
which is the risk that the issuer will not make interest or principal payments
when due. In the event of an unanticipated default, a fund would experience a
reduction in its income and could expect a decline in the market value of the
bonds so affected. Issuers of high yield securities may be involved in
restructurings or bankruptcy proceedings that may not be successful. If an
issuer defaults, it may not be able to pay all or a portion of interest and
principal owed to the fund, it may exchange the high yield securities owned by
the fund for other securities, including equities, and/or the fund may incur
additional expenses while seeking recovery of its investment. Some funds may
also invest in unrated bonds of foreign and domestic issuers. Unrated bonds,
while not necessarily of lower quality than rated bonds, may not have as broad a
market. Because of the size and perceived demand of the issue, among other
factors, certain municipalities may not incur the expense of obtaining a rating.
Those managing the fund’s investments will analyze the creditworthiness of the
issuer, as well as any financial institution or other party responsible for
payments on the bond, in determining whether to purchase unrated bonds. Unrated
bonds will be included in the limitation each fund has with regard to high yield
bonds unless those managing the fund’s investments deem such securities to be
the equivalent of investment grade bonds. Some of the high yield securities
consist of Rule 144A securities. High yield securities may contain any type of
interest rate payment or reset terms, including fixed rate, adjustable rate,
zero coupon, contingent, deferred, payment-in-kind and those with auction rate
features.
Initial
Public Offerings ("IPOs")
An
IPO is a company’s first offering of stock to the public. IPO risk is that the
market value of IPO shares will fluctuate considerably due to factors such as
the absence of a prior public market, unseasoned trading, the small number of
shares available for trading, and limited information about the issuer. The
purchase of IPO shares may involve high transaction costs. IPO shares are
subject to market risk and liquidity risk. In addition, the market for IPO
shares can be speculative and/or inactive for extended periods. The limited
number of shares available for trading in some IPOs may make it more difficult
for a fund to buy or sell significant amounts of shares without an unfavorable
impact on prevailing prices. Investors in IPO shares can be affected by
substantial dilution in the value of their shares by sales of
additional
shares and by concentration of control in existing management and principal
shareholders.
When
a fund’s asset base is small, a significant portion of the fund’s performance
could be attributable to investments in IPOs because such investments would have
a magnified impact on the fund. As the fund’s assets grow, the effect of the
fund’s investments in IPOs on the fund’s performance probably will decline,
which could reduce the fund’s performance. Because of the price volatility of
IPO shares, a fund may choose to hold IPO shares for a very short period. This
may increase the turnover of the fund’s portfolio and lead to increased expenses
to the fund, such as commissions and transaction costs. By selling IPO shares,
the fund may realize taxable gains it will subsequently distribute to
shareholders.
Inverse
Floating Rate and Other Variable and Floating Rate Instruments
Each
Fund may purchase variable and floating rate instruments. These instruments may
include variable amount master demand notes that permit the indebtedness
thereunder to vary in addition to providing for periodic adjustments in the
interest rate. These instruments may also include leveraged inverse floating
rate debt instruments, or “inverse floaters”. The interest rate of an inverse
floater resets in the opposite direction from the market rate of interest on a
security or interest to which it is related. An inverse floater may be
considered to be leveraged to the extent that its interest rate varies by a
magnitude that exceeds the magnitude of the change in the index rate of interest
and is subject to many of the same risks as derivatives. The higher degree of
leverage inherent in inverse floaters is associated with greater volatility in
their market values. Certain of these investments may be illiquid. The absence
of an active secondary market with respect to these investments could make it
difficult for a Fund to dispose of a variable or floating rate note if the
issuer defaulted on its payment obligation or during periods that a Fund is not
entitled to exercise its demand rights, and a Fund could, for these or other
reasons, suffer a loss with respect to such instruments.
Investment
Company Securities
Securities
of other investment companies, including shares of closed-end investment
companies (including interval funds), unit investment trusts, various
exchange-traded funds (“ETFs”), and other open-end investment companies,
represent interests in professionally managed portfolios that may invest in a
variety of instruments. Certain types of investment companies, such as certain
closed-end investment companies, do not continuously offer their shares for sale
(like open-end investment companies) but instead issue a fixed number of shares
that trade on a stock exchange or over-the-counter at a premium or a discount to
their net asset value. An interval fund is a type of closed-end investment
company that is continuously offered at net asset value, is not listed on an
exchange, and only periodically offers to repurchase a limited amount of
outstanding shares from its shareholders. Investing in interval funds involves
liquidity risk, and the liquidity risk is even greater in interval funds that
invest in securities of companies with smaller market capitalizations,
derivatives, securities with substantial market and/or credit risk, or
securities that are themselves illiquid. Other types of investment companies,
such as ETFs, are continuously offered at net asset value but may also be traded
in the secondary market. ETFs are often structured to perform in a similar
fashion to a broad-based securities index. Investing in ETFs involves generally
the same risks as investing directly in the underlying instruments. Investing in
ETFs involves the risk that they will not perform in exactly the same fashion,
or in response to the same factors, as the index or underlying instruments.
Shares of ETFs may trade at prices other than NAV.
A
fund that invests in another investment company is subject to the risks
associated with direct ownership of the securities in which such investment
company invests. Fund shareholders indirectly bear their proportionate share of
the expenses of each such investment company, including its advisory and
administrative fees. The fund would also continue to pay its own advisory fees
and other expenses. Consequently, the fund and its shareholders would, in
effect, absorb two levels of fees with respect to investments in other
investment companies.
A
fund may invest in affiliated underlying funds, and those who manage such fund's
investments and their affiliates may earn different fees from different
underlying funds and may have an incentive to allocate more fund assets to
underlying funds from which they receive higher fees.
Leverage
If
a fund makes investments in futures contracts, forward contracts, swaps and
other derivative instruments, these instruments provide the economic effect of
financial leverage by creating additional investment exposure, as well as the
potential for greater loss. If a fund uses leverage through activities such as
borrowing, entering into short sales, purchasing securities on margin or on a
“when-issued” basis or purchasing derivative instruments in an effort to
increase its returns, the fund has the risk of magnified capital losses that
occur when losses affect an asset base, enlarged by borrowings or the creation
of liabilities, that exceeds the net assets of the fund. The net asset value of
a fund employing leverage will be more volatile and sensitive to market
movements. Leverage may involve the creation of a liability that requires the
fund to pay interest. Leveraging may cause a fund to liquidate portfolio
positions to satisfy its obligations when it may not be advantageous to do so.
To the extent that a fund is not able to close out a leveraged position because
of market illiquidity, a fund’s liquidity may be impaired.
Master
Limited Partnerships ("MLPs")
An
MLP is an entity that is generally taxed as a partnership for federal income tax
purposes and that derives each year at least 90% of its gross income from
“Qualifying Income”. Qualifying Income includes interest, dividends, real estate
rents, gain from the sale or disposition of real property, income and gain from
commodities or commodity futures, and income and gain from mineral or natural
resources activities that generate Qualifying Income. MLP interests (known as
units) are traded on securities exchanges or over-the-counter. An MLP’s
organization as a partnership and compliance with the Qualifying Income rules
generally eliminates federal tax at the entity level.
An
MLP has one or more general partners (who may be individuals, corporations, or
other partnerships) which manage the partnership, and limited partners, which
provide capital to the partnership but have no role in its management.
Typically, the general partner is owned by company management or another
publicly traded sponsoring corporation. When an investor buys units in an MLP,
the investor becomes a limited partner. Holders of MLP units have limited
control and voting rights on matters affecting the partnership and are exposed
to a remote possibility of liability for all of the obligations of that MLP in
the event that a court determines that the rights of the holders of MLP units to
vote to remove or replace the general partner of that MLP, to approve amendments
to that MLP’s partnership agreement, or to take other action under the
partnership agreement of that MLP would constitute “control” of the business of
that MLP, or a court or governmental agency determines that the MLP is
conducting business in a state without complying with the partnership statute of
that state. Holders of MLP units are also exposed to the risk that they will be
required to repay amounts to the MLP that are wrongfully distributed to
them.
The
business of certain MLPs is affected by supply and demand for energy commodities
because such MLPs derive revenue and income based upon the volume of the
underlying commodity produced, transported, processed, distributed, and/ or
marketed. Pipeline MLPs have indirect commodity exposure to oil and gas price
volatility because, although they do not own the underlying energy commodity,
the general level of commodity prices may affect the volume of the commodity the
MLP delivers to its customers and the cost of providing services such as
distributing natural gas liquids. The costs of natural gas pipeline MLPs to
perform services may exceed the negotiated rates under “negotiated rate”
contracts. Processing MLPs may be directly affected by energy commodity prices.
Propane MLPs own the underlying energy commodity, and therefore have direct
exposure to energy commodity prices. The MLP industry in general could be hurt
by market perception that MLP’s performance and valuation are directly tied to
commodity prices.
Pipeline
MLPs are common carrier transporters of natural gas, natural gas liquids
(primarily propane, ethane, butane and natural gasoline), crude oil or refined
petroleum products (gasoline, diesel fuel and jet fuel). Pipeline MLPs also may
operate ancillary businesses such as storage and marketing of such products.
Pipeline MLPs derive revenue from capacity and transportation fees.
Historically, pipeline output has been less exposed to cyclical economic forces
due to its low cost structure and government-regulated nature. In addition, most
pipeline MLPs have limited direct commodity price exposure because they do not
own the product being shipped.
Processing
MLPs are gatherers and processors of natural gas as well as providers of
transportation, fractionation and storage of natural gas liquids (“NGLs”).
Processing MLPs derive revenue from providing services to natural gas producers,
which require treatment or processing before their natural gas commodity can be
marketed to utilities and other end user markets. Revenue for the processor is
fee based, although it is not uncommon to have some participation in the prices
of the natural gas and NGL commodities for a portion of revenue.
Propane
MLPs are distributors of propane to homeowners for space and water heating.
Propane MLPs derive revenue from the resale of the commodity on a margin over
wholesale cost. The ability to maintain margin is a key to profitability.
Propane serves approximately 3% of the household energy needs in the United
States, largely for homes beyond the geographic reach of natural gas
distribution pipelines. Approximately 70% of annual cash flow is earned during
the winter heating season (October through March). Accordingly, volumes are
weather dependent, but have utility type functions similar to electricity and
natural gas.
MLPs
operating interstate pipelines and storage facilities are subject to substantial
regulation by the Federal Energy Regulatory Commission (“FERC”), which regulates
interstate transportation rates, services and other matters regarding natural
gas pipelines including: the establishment of rates for service; regulation of
pipeline storage and liquified natural gas facility construction; issuing
certificates of need for companies intending to provide energy services or
constructing and operating interstate pipeline and storage facilities; and
certain other matters. FERC also regulates the interstate transportation of
crude oil, including: regulation of rates and practices of oil pipeline
companies; establishing equal service conditions to provide shippers with equal
access to pipeline transportation; and establishment of reasonable rates for
transporting petroleum and petroleum products by pipeline. Certain MLPs
regulated by the FERC have the right, but are not obligated, to redeem common
units held by an investor who is not subject to U.S. federal income taxation.
The financial condition and results of operations of an MLP that redeems its
common units could be adversely impacted.
MLPs
are subject to various federal, state and local environmental laws and health
and safety laws as well as laws and regulations specific to their particular
activities. These laws and regulations address: health and safety standards for
the operation of facilities, transportation systems and the handling of
materials; air and water pollution requirements and standards; solid waste
disposal requirements; land reclamation requirements; and requirements relating
to the handling and disposition of hazardous materials. MLPs are subject to the
costs of compliance with such laws applicable to them, and changes in such laws
and regulations may adversely affect their results of operations.
MLPs
may be subject to liability relating to the release of substances into the
environment, including liability under federal “Superfund” and similar state
laws for investigation and remediation of releases and threatened releases of
hazardous materials, as well as liability for injury and property damage for
accidental events, such as explosions or discharges of materials causing
personal injury and damage to property. Such potential liabilities could have a
material adverse effect upon the financial condition and results of operations
of MLPs.
MLPs
are subject to numerous business related risks, including: deterioration of
business fundamentals reducing profitability due to development of alternative
energy sources, consumer sentiment with respect to global warming, changing
demographics in the markets served, unexpectedly prolonged and precipitous
changes in commodity prices and increased competition that reduces the MLP’s
market share; the lack of growth of markets requiring growth through
acquisitions; disruptions in transportation systems; the dependence of certain
MLPs upon the energy exploration and development activities of unrelated third
parties; availability of capital for expansion and construction of needed
facilities; a significant decrease in natural gas production due to depressed
commodity prices or otherwise; the inability of MLPs to successfully integrate
recent or future acquisitions; and the general level of the
economy.
Municipal
Obligations and AMT-Subject Bonds
Municipal
Obligations are obligations issued by or on behalf of states, territories, and
possessions of the United States and the District of Columbia and their
political subdivisions, agencies and instrumentalities, including municipal
utilities, or multi-state agencies or authorities. The interest on Municipal
Obligations is exempt from federal income tax in the opinion of bond counsel to
the issuer. Three major classifications of Municipal Obligations are: Municipal
Bonds, that generally have a maturity at the time of issue of one year or more;
Municipal Notes, that generally have a maturity at the time of issue of six
months to three years; and Municipal Commercial Paper, that generally has a
maturity at the time of issue of 30 to 270 days.
The
term “Municipal Obligations” includes debt obligations issued to obtain funds
for various public purposes, including the construction of a wide range of
public facilities such as airports, bridges, highways, housing, hospitals, mass
transportation, schools, streets, water and sewer works, and electric utilities.
Other public purposes for which Municipal Obligations are issued include
refunding outstanding obligations, obtaining funds for general operating
expenses, and lending such funds to other public institutions and facilities. To
the extent that a fund invests a significant portion of its assets in municipal
obligations issued in connection with a single project, the fund likely will be
affected by the economic, business or political environment of the
project.
AMT-Subject
Bonds are industrial development bonds issued by or on behalf of public
authorities to obtain funds to provide for the construction, equipment, repair
or improvement of privately operated housing facilities, sports facilities,
convention or trade show facilities, airport, mass transit, industrial, port or
parking facilities, air or water pollution control facilities, and certain local
facilities for water supply, gas, electricity, or sewage or solid waste
disposal. They are considered to be Municipal Obligations if the interest paid
thereon qualifies as exempt from federal income tax in the opinion of bond
counsel to the issuer, even though the interest may be subject to the federal
individual alternative minimum tax.
Municipal
Bonds
Municipal
Bonds may be either “general obligation” or “revenue” issues. General obligation
bonds are secured by the issuer’s pledge of its faith, credit, and taxing power
for the payment of principal and interest. Revenue bonds are payable from the
revenues derived from a particular facility or class of facilities or, in some
cases, from the proceeds of a special excise tax or other specific revenue
source (e.g., the user of the facilities being financed), but not from the
general taxing power. Industrial development bonds and pollution control bonds
in most cases are revenue bonds and generally do not carry the pledge of the
credit of the issuing municipality. The payment of the principal and interest on
industrial revenue bonds depends solely on the ability of the user of the
facilities financed by the bonds to meet its financial obligations and the
pledge, if any, of real and personal property so financed as security for such
payment. Funds may also invest in “moral obligation” bonds that are normally
issued by special purpose public authorities. If an issuer of moral obligation
bonds is unable to meet its obligations, the repayment of the bonds becomes a
moral commitment but not a legal obligation of the state or municipality in
question.
Municipal
Commercial Paper
Municipal
Commercial Paper refers to short-term obligations of municipalities that may be
issued at a discount and may be referred to as Short-Term Discount Notes.
Municipal Commercial Paper is likely to be used to meet seasonal working capital
needs of a municipality or interim construction financing. Generally they are
repaid from general revenues of the municipality or refinanced with long-term
debt. In most cases Municipal Commercial Paper is backed by letters of credit,
lending agreements, note repurchase agreements or other credit facility
agreements offered by banks or other institutions.
Municipal
Notes
Municipal
Notes usually are general obligations of the issuer and are sold in anticipation
of a bond sale, collection of taxes, or receipt of other revenues. Payment of
these notes is primarily dependent upon the issuer’s receipt of the anticipated
revenues. Other notes include “Construction Loan Notes” issued to provide
construction financing for specific projects, and “Bank Notes” issued by local
governmental bodies and agencies to commercial banks as evidence of borrowings.
Some notes (“Project Notes”) are issued by local agencies under a program
administered by the U.S. Department of Housing and Urban Development. Project
Notes are secured by the full faith and credit of the United
States.
•Bank
Notes are notes issued by local governmental bodies and agencies such as those
described above to commercial banks as evidence of borrowings. The purposes for
which the notes are issued are varied but they are frequently issued to meet
short-term working-capital or capital-project needs. These notes may have risks
similar to the risks associated with TANs and RANs.
•Bond
Anticipation Notes (“BANs”) are usually general obligations of state and local
governmental issuers which are sold to obtain interim financing for projects
that will eventually be funded through the sale of long-term debt obligations or
bonds. The ability of an issuer to meet its obligations on its BANs is primarily
dependent on the issuer’s access to the long-term municipal bond market and the
likelihood that the proceeds of such bond sales will be used to pay the
principal and interest on the BANs.
•Construction
Loan Notes are issued to provide construction financing for specific projects.
Permanent financing, the proceeds of which are applied to the payment of
construction loan notes, is sometimes provided by a commitment by the Government
National Mortgage Association (“GNMA”) to purchase the loan, accompanied by a
commitment by the Federal Housing Administration to insure mortgage advances
thereunder. In other instances, permanent financing is provided by commitments
of banks to purchase the loan.
•Revenue
Anticipation Notes (“RANs”) are issued by governments or governmental bodies
with the expectation that future revenues from a designated source will be used
to repay the notes. In general they also constitute general obligations of the
issuer. A decline in the receipt of projected revenues, such as anticipated
revenues from another level of government, could adversely affect an issuer’s
ability to meet its obligations on outstanding RANs. In addition, the
possibility that the revenues would, when received, be used to meet other
obligations could affect the ability of the issuer to pay the principal and
interest on RANs.
•Tax
Anticipation Notes (“TANs”) are issued by state and local governments to finance
the current operations of such governments. Repayment is generally to be derived
from specific future tax revenues. TANs are usually general obligations of the
issuer. A weakness in an issuer’s capacity to raise taxes due to, among other
things, a decline in its tax base or a rise in delinquencies, could adversely
affect the issuer’s ability to meet its obligations on outstanding
TANs.
Other
Municipal Obligations
Other
kinds of Municipal Obligations are occasionally available in the marketplace,
and the fund may invest in such other kinds of obligations to the extent
consistent with its investment objective and limitations. Such obligations may
be issued for different purposes and with different security than those
mentioned.
Stand-By
Commitments
Funds
may acquire stand-by commitments with respect to municipal obligations held in
their respective portfolios. Under a stand-by commitment, a broker-dealer,
dealer, or bank would agree to purchase, at the relevant funds’ option, a
specified municipal security at a specified price. Thus, a stand-by commitment
may be viewed as the equivalent of a put option acquired by a fund with respect
to a particular municipal security held in the fund’s portfolio.
The
amount payable to a fund upon its exercise of a stand-by commitment normally
would be 1) the acquisition cost of the municipal security (excluding any
accrued interest that the fund paid on the acquisition), less any amortized
market premium or plus any amortized market or original issue discount during
the period the fund owned the security, plus, 2) all interest accrued on the
security since the last interest payment date during the period the security was
owned by the fund. Absent unusual circumstances, the fund would value the
underlying municipal security at amortized cost. As a result, the amount payable
by the broker-dealer, dealer or bank during the time a stand-by commitment is
exercisable would be substantially the same as the value of the underlying
municipal obligation.
A
fund’s right to exercise a stand-by commitment would be unconditional and
unqualified. Although a fund could not transfer a stand-by commitment, it could
sell the underlying municipal security to a third party at any time. It is
expected that stand-by commitments generally will be available to the funds
without the payment of any direct or indirect consideration. The funds may,
however, pay for stand-by commitments if such action is deemed necessary. In any
event, the total amount paid for outstanding stand-by commitments held in a
fund’s portfolio would not exceed 0.50% of the value of a fund’s total assets
calculated immediately after each stand-by commitment is acquired.
The
funds intend to enter into stand-by commitments only with broker-dealers,
dealers, or banks that those managing the fund’s investments believe present
minimum credit risks. A fund’s ability to exercise a stand-by commitment will
depend upon the ability of the issuing institution to pay for the underlying
securities at the time the stand-by commitment is exercised. The credit of each
institution issuing a stand-by commitment to a fund will be evaluated on an
ongoing basis by those managing the fund’s investments.
A
fund intends to acquire stand-by commitments solely to facilitate portfolio
liquidity and does not intend to exercise its right thereunder for trading
purposes. The acquisition of a stand-by commitment would not affect the
valuation of the underlying municipal security. Each stand-by commitment will be
valued at zero in determining net asset value. Should a fund pay directly or
indirectly for a stand-by commitment, its costs will be reflected in realized
gain or loss when the commitment is exercised or expires. The maturity of a
municipal security purchased by a fund will not be considered shortened by any
stand-by commitment to which the obligation is subject. Thus, stand-by
commitments will not affect the dollar-weighted average maturity of a fund’s
portfolio.
Variable
and Floating Rate Obligations
Certain
Municipal Obligations, obligations issued or guaranteed by the U.S. government
or its agencies or instrumentalities, and debt instruments issued by domestic
banks or corporations may carry variable or floating rates of interest. Such
instruments bear interest at rates which are not fixed, but which vary with
changes in specified market rates or indices, such as a bank prime rate or
tax-exempt money market index. Variable rate notes are adjusted to current
interest rate levels at certain specified times, such as every 30 days. A
floating rate note adjusts automatically whenever there is a change in its base
interest rate adjustor, e.g., a change in the prime lending rate or specified
interest rate indices. Typically such instruments carry demand features
permitting the fund to redeem at par.
The
fund’s right to obtain payment at par on a demand instrument upon demand could
be affected by events occurring between the date the fund elects to redeem the
instrument and the date redemption proceeds are due which affects the ability of
the issuer to pay the instrument at par value. Those managing the fund’s
investments monitor on an ongoing basis the pricing, quality, and liquidity of
such instruments and similarly monitor the ability of an issuer of a demand
instrument, including those supported by bank letters of credit or guarantees,
to pay principal and interest on demand. Although the ultimate maturity of such
variable rate obligations may exceed one year, the fund treats the maturity of
each variable rate demand obligation as the longer of a) the notice period
required before the fund is entitled to payment of the principal amount through
demand or b) the period remaining until the next interest rate adjustment.
Floating rate instruments with demand features are deemed to have a maturity
equal to the period remaining until the principal amount can be recovered
through demand.
Funds
may purchase participation interests in variable rate Municipal Obligations
(such as industrial development bonds). A participation interest gives the
purchaser an undivided interest in the Municipal Obligation in the proportion
that its participation interest bears to the total principal amount of the
Municipal Obligation. A fund has the right to demand payment on seven days’
notice, for all or any part of the fund’s participation interest in the
Municipal Obligation, plus accrued interest. Each participation interest is
backed by an irrevocable letter of credit or guarantee of a bank. Banks will
retain a service and letter of credit fee and a fee for issuing repurchase
commitments in an amount equal to the excess of the interest paid on the
Municipal Obligations over the negotiated yield at which the instruments were
purchased by the fund.
Risks
of Municipal Obligations
The
yields on Municipal Obligations are dependent on a variety of factors, including
general economic and monetary conditions, money market factors, conditions in
the Municipal Obligations market, size of a particular offering, maturity of the
obligation, and rating of the issue. The fund’s ability to achieve its
investment objective also depends on the continuing ability of the issuers of
the Municipal Obligations in which it invests to meet their obligation for the
payment of interest and principal when due.
Municipal
Obligations are subject to the provisions of bankruptcy, insolvency, and other
laws affecting the rights and remedies of creditors, such as the Federal
Bankruptcy Act. They are also subject to federal or state laws, if any, which
extend the time for payment of principal or interest, or both, or impose other
constraints upon enforcement of such obligations or upon municipalities to levy
taxes. The power or ability of issuers to pay, when due, principal of and
interest on Municipal Obligations may also be materially affected by the results
of litigation or other conditions.
From
time to time, proposals have been introduced before Congress for the purpose of
restricting or eliminating the federal income tax exemption for interest on
Municipal Obligations. It may be expected that similar proposals will be
introduced in the future. If such a proposal was enacted, the ability of the
fund to pay “exempt interest” dividends may be adversely affected. The fund
would reevaluate its investment objective and policies and consider changes in
its structure.
Pay-in-Kind
Securities
Each
Fund may invest in pay-in-kind securities. Pay-in-kind securities pay dividends
or interest in the form of additional securities of the issuer, rather than in
cash. These securities are usually issued and traded at a discount from their
face amounts. The amount of the discount varies depending on various factors,
such as the time remaining until maturity of the securities, prevailing interest
rates, the liquidity of the security and the perceived credit quality of the
issuer. The market prices of pay-in-kind securities generally are more volatile
than the market prices of securities that pay interest periodically and are
likely to respond to changes in interest rates to a greater degree than are
other types of securities having similar maturities and credit
quality.
Portfolio
Turnover (Active Trading)
Portfolio
turnover is a measure of how frequently a portfolio’s securities are bought and
sold. The portfolio turnover rate is generally calculated as the dollar value of
the lesser of a portfolio’s purchases or sales of shares of securities during a
given year, divided by the monthly average value of the portfolio securities
during that year (excluding securities whose maturity or expiration at the time
of acquisition were less than one year). For example, a portfolio reporting a
100% portfolio turnover rate would have purchased and sold securities worth as
much as the monthly average value of its portfolio securities during the
year.
It
is not possible to predict future turnover rates with accuracy. Many variable
factors are outside the control of a portfolio manager. The investment outlook
for the securities in which a portfolio may invest may change as a result of
unexpected developments in securities markets, economic or monetary policies, or
political relationships. High market volatility may result in a portfolio
manager using a more active trading strategy than might otherwise be employed.
Each portfolio manager considers the economic effects of portfolio turnover but
generally does not treat the portfolio turnover rate as a limiting factor in
making investment decisions.
Sale
of shares by investors may require the liquidation of portfolio securities to
meet cash flow needs. In addition, changes in a particular portfolio’s holdings
may be made whenever the portfolio manager considers that a security is no
longer appropriate for the portfolio or that another security represents a
relatively greater opportunity. Such changes may be made without regard to the
length of time that a security has been held.
Higher
portfolio turnover rates generally increase transaction costs that are expenses
of the Fund. Active trading may generate short-term gains (losses) for taxable
shareholders.
The
following Funds had significant variation in portfolio turnover rates over the
two most recently completed fiscal years:
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Fund |
2023 Turnover |
2022 Turnover |
| Commentary |
Principal
Active High Yield ETF |
34.5% |
110.5% |
| Portfolio
turnover decreased in 2023 compared to 2022 as market volatility decreased
and cash flows stabilized in 2023. Turnover in 2023 is in line with the
Advisor's expectations. |
Principal
Quality ETF |
47.7% |
96.0% |
| Portfolio
turnover was higher in 2022 due to a change in the Fund’s investment
strategy from passive to active management. Turnover in 2023 is in line
with the Advisor’s expectations. |
Principal
Value ETF |
1.8% |
298.2% |
| Portfolio
turnover was higher in 2022 due to a change in the Fund’s investment
strategy from passive to active management and significant asset growth,
which resulted in large trades at the time of rebalancing. Turnover in
2023 is in line with the Advisor’s expectations.
|
Preferred
Securities
Preferred
securities can include: traditional preferred securities, hybrid-preferred
securities, $25 par hybrid preferred securities, baby bonds, U.S. dividend
received deduction (“DRD”) preferred stock, fixed rate and floating rate
adjustable preferred securities, step-up preferred securities, public and 144A
$1000 par capital securities including U.S. agency subordinated debt issues,
trust originated preferred securities, monthly income preferred securities,
quarterly income bond securities, quarterly income debt securities, quarterly
income preferred securities, corporate trust securities, public income notes,
and other trust preferred securities.
•Traditional
Preferred Securities. Traditional preferred securities may be issued by an
entity taxable as a corporation and pay fixed or floating rate dividends.
However, these claims are subordinated to more senior creditors, including
senior debt holders. “Preference” means that a company must pay dividends on its
preferred securities before paying any dividends on its common stock, and the
claims of preferred securities holders are ahead of common stockholders’ claims
on assets in a corporate liquidation. Holders of preferred securities usually
have no right to vote for corporate directors or on other matters. Preferred
securities share many investment characteristics with both common stock and
bonds.
•Hybrid
or Trust Preferred Securities. Hybrid-preferred securities are debt instruments
that have characteristics similar to those of traditional preferred securities
(characteristics of both subordinated debt and preferred stock). Hybrid
preferred securities may be issued by corporations, generally in the form of
interest-bearing instruments with preferred securities characteristics, or by an
affiliated trust or partnership of the corporation, generally in the form of
preferred interests in subordinated business trusts or similarly structured
securities. The hybrid-preferred securities market consists of both fixed and
adjustable coupon rate securities that are either perpetual in nature or have
stated maturity dates. Hybrid preferred holders generally have claims to assets
in a corporate liquidation that are senior to those of traditional preferred
securities but subordinate to those of senior debt holders. Certain subordinated
debt and senior debt issues that have preferred characteristics are also
considered to be part of the broader preferred securities market.
Preferred
securities may be issued by trusts (likely one that is wholly-owned by a
financial institution or other corporate entity, typically a bank holding
company) or other special purpose entities established by operating companies,
and are therefore not direct obligations of operating companies. The financial
institution creates the trust and owns the trust’s common securities. The trust
uses the sale proceeds of its preferred securities to purchase, for example,
subordinated debt issued by the financial institution. The financial institution
uses the proceeds from the subordinated debt sale to increase its capital while
the trust receives periodic interest payments from the financial institution for
holding the subordinated debt. The trust uses the funds received to make
dividend payments to the holders of the trust preferred securities. The primary
advantage of this structure may be that the trust preferred securities are
treated by the financial institution as debt securities for tax purposes and as
equity for the calculation of capital requirements.
Trust
preferred securities typically bear a market rate coupon comparable to interest
rates available on debt of a similarly rated issuer. Typical characteristics
include long-term maturities, early redemption by the issuer, periodic fixed or
variable interest payments, and maturities at face value. Holders of trust
preferred securities have limited voting rights to control the activities of the
trust and no voting rights with respect to the financial institution. The market
value of trust preferred securities may be more volatile than those of
conventional debt securities. Trust preferred securities may be issued in
reliance on Rule 144A under the 1933 Act and subject to restrictions on resale.
There can be no assurance as to the liquidity of trust preferred securities and
the ability of holders, such as a fund, to sell their holdings. The condition of
the financial institution can be looked to identify the risks of trust preferred
securities as the trust typically has no business operations other than to issue
the trust preferred securities. If the financial institution defaults on
interest payments to the trust, the trust will not be able to make dividend
payments to holders of its securities, such as a fund.
•Floating
Rate Preferred Securities. Floating rate preferred securities provide for a
periodic adjustment in the interest rate paid on the securities. The terms of
such securities provide that interest rates are adjusted periodically based upon
an interest rate adjustment index. The adjustment intervals may be regular, and
range from daily up to annually, or may be event-based, such as a change in the
short-term interest rate. Because of the interest rate reset feature, floating
rate securities provide the Fund with a certain degree of protection against
rising interest rates, although the interest rates of floating rate securities
will participate in any declines in interest rates as well.
If
a portion of a fund’s income consists of dividends paid by U.S. corporations, a
portion of the dividends paid by the fund may be eligible for the corporate
dividends-received deduction for corporate shareholders. In addition,
distributions reported by a fund as derived from qualified dividend income
(“QDI”) will be taxed in the hands of individuals at the reduced rates
applicable to net capital gains, provided certain holding period and other
requirements are met by both the shareholder and the fund. Dividend income that
a fund receives from REITs, if any, will generally not be treated as QDI and
will not qualify for the corporate dividends-received deduction. It is unclear
the extent to which distributions a fund receives from investments in certain
preferred securities will be eligible for treatment as QDI or for the corporate
dividends-received deduction. A fund cannot predict at this time what portion,
if any, of its dividends will qualify for the corporate dividends-received
deduction or be eligible for the reduced rates of taxation applicable to
QDI.
Real
Estate Investment Trusts (“REITs”)
REITs
are pooled investment vehicles that invest in income producing real estate, real
estate related loans, or other types of real estate interests. U.S. REITs are
allowed to eliminate corporate level federal tax so long as they meet certain
requirements of the Internal Revenue Code. Foreign REITs (“REIT-like”) entities
may have similar tax treatment in their respective countries. Equity real estate
investment trusts own real estate properties, while mortgage real estate
investment trusts make and/or invests in construction, development, and
long-term mortgage loans. Their value may be affected by changes in the
underlying property of the trusts, the creditworthiness of the issuer, property
taxes, interest rates, and tax and regulatory requirements, such as those
relating to the environment. Both types of trusts are not diversified, are
dependent upon management skill, are subject to heavy cash flow dependency,
defaults by borrowers, self-liquidation, and the possibility of failing to
qualify for tax-free status of income under the Internal Revenue Code and
failing to maintain exemption from the 1940 Act. In addition, foreign REIT-like
entities will be subject to foreign securities risks. (See “Foreign
Securities”).
Repurchase
and Reverse Repurchase Agreements, Mortgage Dollar Rolls, and
Sale-Buybacks
Each
Fund may invest in repurchase and reverse repurchase agreements. Repurchase
agreements typically involve the purchase of debt securities from a financial
institution such as a bank, savings and loan association, or broker-dealer. A
repurchase agreement provides that the fund sells back to the seller and that
the seller repurchases the underlying securities at a specified price on a
specific date. Repurchase agreements may be viewed as loans by a fund
collateralized by the underlying securities. This arrangement results in a fixed
rate of return that is not subject to market fluctuation while the fund holds
the security. In the event of a default or bankruptcy by a selling financial
institution, the affected fund bears a risk of loss. To minimize such risks, the
fund enters into repurchase agreements only with parties those managing the
fund’s investments deem creditworthy (those that are large, well-capitalized,
and well-established financial institutions). In addition, the value of the
securities collateralizing the repurchase agreement is, and during the entire
term of the repurchase agreement remains, at least equal to the acquisition
price the Funds pay to the seller of the securities.
In
a repurchase agreement, a Fund purchases a security and simultaneously commits
to resell that security to the seller at an agreed upon price on an agreed upon
date within a number of days (usually not more than seven) from the date of
purchase. The resale price consists of the purchase price plus an amount that is
unrelated to the coupon rate or maturity of the purchased security. A repurchase
agreement involves the obligation of the seller to pay the agreed upon price,
which obligation is in effect secured by the value (at least equal to the amount
of the agreed upon resale price and marked-to-market daily) of the underlying
security or “collateral.” A risk associated with repurchase agreements is the
failure of the seller to repurchase the securities as agreed, which may cause a
Fund to suffer a loss if the market value of such securities declines before
they can be liquidated on the open market. In the event of bankruptcy or
insolvency of the seller, a Fund may encounter delays and incur costs in
liquidating the underlying security. Repurchase agreements that mature in more
than seven days are subject to each Fund’s limit on illiquid investments. While
it is not possible to eliminate all risks from these transactions, it is the
policy of the Fund to limit repurchase agreements to those parties whose
creditworthiness has been reviewed and found satisfactory by those managing the
fund’s investments.
Each
Fund may use reverse repurchase agreements, mortgage dollar rolls, and
economically similar transactions to obtain cash to satisfy unusually heavy
redemption requests or for other temporary or emergency purposes without the
necessity of selling portfolio securities, or to earn additional income on
portfolio securities, such as Treasury bills or notes. In a reverse repurchase
agreement, a Fund sells a portfolio security to another party, such as a bank or
broker-dealer, in return for cash and agrees to repurchase the instrument at a
particular price and time. A Fund will enter into reverse repurchase agreements
only with parties that those managing the fund's investments deem creditworthy.
Using reverse repurchase agreements to earn additional income involves the risk
that the interest earned on the invested proceeds is less than the expense of
the reverse repurchase agreement transaction. This technique may also have a
leveraging effect on the Fund.
A
“mortgage dollar roll” is similar to a reverse repurchase agreement in certain
respects. In a “dollar roll” transaction a Fund sells a mortgage-related
security, such as a security issued by the Government National Mortgage
Association, to a dealer and simultaneously agrees to repurchase a similar
security (but not the same security) in the future at a pre-determined price. A
dollar roll can be viewed, like a reverse repurchase agreement, as a
collateralized borrowing in which a Fund pledges a mortgage-related security to
a dealer to obtain cash. Unlike in the case of reverse repurchase agreements,
the dealer with which a Fund enters into a dollar roll transaction is not
obligated to return the same securities as those originally sold by the Fund,
but only securities which are “substantially identical.” To be considered
“substantially identical,” the securities returned to a Fund generally must: 1)
be collateralized by the same types of underlying mortgages; 2) be issued by the
same agency and be part of the same program; 3) have a similar original stated
maturity; 4) have identical net coupon rates; 5) have similar market yields (and
therefore price); and 6) satisfy “good delivery” requirements, meaning that the
aggregate principal amounts of the securities delivered and received back must
be within 0.01% of the initial amount delivered.
Each
Fund also may effect simultaneous purchase and sale transactions that are known
as “sale-buybacks.” A sale-buyback is similar to a reverse repurchase agreement,
except that in a sale-buyback, the counterparty who purchases the security is
entitled to receive any principal or interest payments made on the underlying
security pending settlement of the Fund’s repurchase of the underlying security.
Restricted
and Illiquid Securities
A
Fund may experience difficulty in valuing and selling illiquid securities and,
in some cases, may be unable to value or sell certain illiquid securities for an
indefinite period of time. Illiquid securities may include a wide variety of
investments, such as (1) repurchase agreements maturing in more than seven days
(unless the agreements have demand/redemption features), (2) OTC options
contracts and certain other derivatives (including certain swap agreements), (3)
fixed time deposits that are not subject to prepayment or do not provide for
withdrawal penalties upon prepayment (other than overnight deposits), (4) loan
interests and other direct debt instruments, (5) certain municipal lease
obligations, (6) commercial paper issued pursuant to Section 4(a)(2) of the 1933
Act, (7) thinly-traded securities, and (8) securities whose resale is restricted
under the federal securities laws or contractual provisions (including
restricted, privately placed securities that, under the federal securities laws,
generally may be resold only to qualified institutional buyers). Generally,
restricted securities may be sold only in a public offering for which a
registration statement has been filed and declared effective or in a transaction
that is exempt from the registration requirements of the Securities Act of 1933.
When registration is required, a Fund that owns restricted securities may be
obligated to pay all or part of the registration expenses and a considerable
period may elapse between the time of the decision to sell and the time the Fund
may be permitted to sell a restricted security. If adverse market conditions
were to develop during such a period, the Fund might obtain a less favorable
price than existed when it decided to sell.
Illiquid
and restricted securities are priced at fair value as determined in good faith
by or under the direction of the Trustees. Each Fund has adopted investment
restrictions that limit its investments in illiquid securities to no more than
15% of its net assets.
Securitized
Products - Mortgage- and Asset-Backed Securities
The
yield characteristics of the mortgage- and asset-backed securities in which a
Fund may invest differ from those of traditional debt securities. Among the
major differences are that the interest and principal payments are made more
frequently on mortgage- and asset-backed securities (usually monthly) and that
principal may be prepaid at any time because the underlying mortgage loans or
other assets generally may be prepaid at any time. As a result, if a Fund
purchases those securities at a premium, a prepayment rate that is faster than
expected will reduce their yield, while a prepayment rate that is slower than
expected will have the opposite effect of increasing yield. If the Fund
purchases these securities at a discount, faster than expected prepayments will
increase their yield, while slower than expected prepayments will reduce their
yield. Amounts available for reinvestment by a Fund are likely to be greater
during a period of declining interest rates and, as a result, are likely to be
reinvested at lower interest rates than during a period of rising interest
rates.
In
general, the prepayment rate for mortgage-backed securities decreases as
interest rates rise and increases as interest rates fall. However, rising
interest rates will tend to decrease the value of these securities. In addition,
an increase in interest rates may affect the volatility of these securities by
effectively changing a security that was considered a short-term security at the
time of purchase into a long-term security. Long-term securities generally
fluctuate more widely in response to changes in interest rates than short- or
medium-term securities.
The
market for privately issued mortgage- and asset-backed securities is smaller and
less liquid than the market for U.S. government mortgage-backed securities. A
collateralized mortgage obligation (“CMO”) may be structured in a manner that
provides a wide variety of investment characteristics (yield, effective
maturity, and interest rate sensitivity). As market conditions change, and
especially during periods of rapid market interest rate changes, the ability of
a CMO to provide the anticipated investment characteristics may be greatly
diminished. Increased market volatility and/or reduced liquidity may
result.
Each
Fund may invest in each of collateralized bond obligations (“CBOs”),
collateralized loan obligations (“CLOs”), other collateralized debt obligations
(“CDOs”) and other similarly structured securities. CBOs, CLOs and other CDOs
are types of asset-backed securities. A CBO is a trust which is often backed by
a diversified pool of high risk, below investment grade fixed income securities.
The collateral can be from many different types of fixed income securities such
as high yield debt, residential privately issued mortgage-related securities,
commercial privately issued mortgage-related securities, trust preferred
securities and emerging market debt. A CLO is a trust typically collateralized
by a pool of loans, which may include, among others, domestic and foreign senior
secured loans, senior unsecured loans, and subordinate corporate loans,
including loans that may be rated below investment grade or equivalent unrated
loans. Other CDOs are trusts backed by other types of assets representing
obligations of various parties. CBOs, CLOs and other CDOs may charge management
fees and administrative expenses.
Short
Sales
A
short sale involves the sale by a fund of a security that it does not own with
the expectation of covering settlement by purchasing the same security at a
later date at a lower price. A fund may also enter into a short position by
using a derivative instrument, such as a future, forward, or swap agreement. If
the price of the security or derivative increases prior to the time the fund is
required to replace the borrowed security, then the fund will incur a loss equal
to the increase in price from the time that the short sale was entered into plus
any premiums and interest paid to the broker. Therefore, short sales involve the
risk that losses may be exaggerated, potentially losing more money than the
value of the investment.
A
“short sale against the box” is a technique that involves selling either a
security owned by a fund, or a security equivalent in kind and amount to the
security sold short that the fund has the right to obtain, at no additional
cost, for delivery at a specified date in the future. Each fund may enter into a
short sale against the box to hedge against anticipated declines in the market
price of portfolio securities. If the value of the securities sold short against
the box increases prior to the scheduled delivery date, a fund will lose
money.
Special
Purpose Acquisition Companies ("SPACs")
Each
Fund may invest in securities of special purpose acquisition companies (“SPACs”)
or similar special purpose entities that pool funds to seek potential
acquisition opportunities. Unless and until an acquisition is completed, a SPAC
or similar entity generally maintains assets (less a portion retained to cover
expenses) in a trust account comprised of U.S. government securities, money
market securities, and cash, and similar investments whose returns or yields may
be significantly lower than those of the Fund’s other investments. Because SPACs
and similar entities are in essence blank-check companies without an operating
history or ongoing business other than seeking
acquisitions,
the value of their securities is particularly dependent on the ability of the
entity’s management to identify and complete a profitable acquisition, which may
not occur. For example, even if an acquisition or merger target is identified,
the Fund may elect not to participate in, or vote to approve, the proposed
transaction. Moreover, an acquisition or merger once effected may prove
unsuccessful and an investment in the SPAC may lose value.
SPACs
are also subject to the following additional risks:
•The
risk that, in the case of SPACs used as an opportunity for startups to go public
without going through the traditional IPO process, such startups may become
publicly traded with potentially less due diligence than what is typical in a
traditional IPO through an underwriter and may not be experienced in facing the
challenges, expenses and risks of being a public company, including the
increased regulatory and financial scrutiny and the need to comply with
applicable governance and accounting requirements.
•SPAC
sponsors may have a potential conflict of interest to complete a deal that may
be unfavorable for other investors in the SPAC. For example, SPAC sponsors often
own warrants to acquire additional shares of the company at a fixed price, and
the exercise by the SPAC sponsor of its warrants may dilute the value of the
equity interests of other investors in the SPAC.
•A
SPAC may allow shareholders to redeem their pro rata investment immediately
after the SPAC announces a proposed acquisition, sometimes including interest,
which may prevent the entity’s management from completing the transaction.
•Some
SPACs may pursue acquisitions only within certain industries or regions, which
may increase the volatility of their prices.
•Only
a thinly traded market for shares of or interests in a SPAC may develop, or
there may be no market at all, leaving the Fund unable to sell its interest in a
SPAC or to sell its interest only at a lower price. Investments in SPACs may
include private placements, including PIPEs, and, accordingly, may be considered
illiquid and/or be subject to restrictions on resale.
•Values
of investments in SPACs may be highly volatile and may depreciate significantly
over time.
•Changes
in regulatory oversight and/or requirements related to SPACs could adversely
affect the value of a Fund’s interest in a SPAC.
Supranational
Entities
Each
Fund may invest in obligations of supranational entities. A supranational entity
is an entity designated or supported by national governments to promote economic
reconstruction, development or trade amongst nations. Examples of supranational
entities include the International Bank for Reconstruction and Development (also
known as the World Bank) and the European Investment Bank. Obligations of
supranational entities are subject to the risk that the governments on whose
support the entity depends for its financial backing or repayment may be unable
or unwilling to provide that support. Obligations of a supranational entity that
are denominated in foreign currencies will also be subject to the risks
associated with investments in foreign currencies.
Temporary
Defensive Measures/Money Market Instruments
Each
Fund may make money market investments (cash equivalents), without limit,
pending other investment or settlement, for liquidity, or in adverse market
conditions. Following are descriptions of the types of money market instruments
that each Fund may purchase:
•U.S.
Government Securities - Securities issued or guaranteed by the U.S. government,
including treasury bills, notes, and bonds.
•U.S.
Government Agency Securities - Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government.
•U.S.
agency obligations include, but are not limited to, the Bank for Cooperatives,
Federal Home Loan Banks, and Federal Intermediate Credit Banks.
•U.S.
instrumentality obligations include, but are not limited to, the Export-Import
Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage
Association.
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities are supported by the full faith and credit of the U.S.
Treasury. Others, such as those issued by the Federal National Mortgage
Association, are supported by discretionary authority of the U.S. government to
purchase certain obligations of the agency or instrumentality. Still others,
such as those issued by the Student Loan Marketing Association, are supported
only by the credit of the agency or instrumentality.
•Bank
Obligations - Certificates of deposit, time deposits and bankers’ acceptances of
U.S. commercial banks having total assets of at least one billion dollars and
overseas branches of U.S. commercial banks and foreign banks, which in the
opinion of those managing the fund’s investments, are of comparable quality. A
Fund may acquire obligations of U.S. banks that are not members of the Federal
Reserve System or of the Federal Deposit Insurance Corporation.
Certificates
of deposit are negotiable certificates issued against funds deposited in a
commercial bank for a definite period of time and earning a specified return.
Bankers’ acceptances are negotiable drafts or bills of exchange, normally drawn
by an importer or exporter to pay for specific merchandise, which are “accepted”
by a bank, meaning, in effect, that the bank unconditionally agrees to pay the
face value of the instrument on maturity. Fixed time deposits are bank
obligations payable at a stated maturity date and bearing interest at a fixed
rate. Fixed time deposits may be withdrawn on demand by the investor, but may be
subject to early withdrawal penalties which vary depending upon market
conditions and the remaining maturity of the obligation. There are no
contractual restrictions on the right to transfer a beneficial interest in a
fixed time deposit to a third party, although there is no market for such
deposits.
Obligations
of foreign banks and obligations of overseas branches of U.S. banks are subject
to somewhat different regulations and risks than those of U.S. domestic banks.
For example, an issuing bank may be able to maintain that the liability for an
investment is solely that of the overseas branch which could expose a Fund to a
greater risk of loss. In addition, obligations of foreign banks or of overseas
branches of U.S. banks may be affected by governmental action in the country of
domicile of the branch or parent bank. Examples of adverse foreign governmental
actions include the imposition of currency controls, the imposition of
withholding taxes on interest income payable on such obligations, interest
limitations, seizure or nationalization of assets, or the declaration of a
moratorium. Deposits in foreign banks or foreign branches of U.S. banks are not
covered by the Federal Deposit Insurance Corporation and that the selection of
those obligations may be more difficult because there may be less publicly
available information concerning foreign banks or the accounting, auditing and
financial reporting standards, practices and requirements applicable to foreign
banks may differ from those applicable to United States banks. Foreign banks are
not generally subject to examination by any United States Government agency or
instrumentality. A Fund only buys short-term instruments where the risks of
adverse governmental action are believed by those managing the fund’s
investments to be minimal. A Fund considers these factors, along with other
appropriate factors, in making an investment decision to acquire such
obligations. It only acquires those which, in the opinion of management, are of
an investment quality comparable to other debt securities bought by the
Fund.
A
certificate of deposit is issued against funds deposited in a bank or savings
and loan association for a definite period of time, at a specified rate of
return. Normally they are negotiable. However, a Fund occasionally may invest in
certificates of deposit which are not negotiable. Such certificates may provide
for interest penalties in the event of withdrawal prior to their maturity. A
bankers’ acceptance is a short-term credit instrument issued by corporations to
finance the import, export, transfer, or storage of goods. They are termed
“accepted” when a bank guarantees their payment at maturity and reflect the
obligation of both the bank and drawer to pay the face amount of the instrument
at maturity.
•Commercial
Paper - Short-term promissory notes issued by U.S. or foreign
corporations.
•Short-term
Corporate Debt - Corporate notes, bonds, and debentures that at the time of
purchase have 397 days or less remaining to maturity, with certain exceptions
permitted by applicable regulations.
•Repurchase
Agreements - Instruments under which securities are purchased from a bank or
securities dealer with an agreement by the seller to repurchase the securities
at the same price plus interest at a specified rate.
•Taxable
Municipal Obligations - Short-term obligations issued or guaranteed by state and
municipal issuers which generate taxable income.
U.S.
Government and U.S. Government-Sponsored Securities
U.S.
government securities refers to a variety of debt securities issued by or
guaranteed by the U.S. Treasury, such as Treasury bills, notes, and bonds and
mortgage-backed securities guaranteed by the Government National Mortgage
Association (Ginnie Mae), and are supported by the full faith and credit of the
United States meaning that the U.S. government is required to repay the
principal in the event of default. Others are supported by the right of the
issuer to borrow from the U.S. Treasury; others are supported by the
discretionary authority of the U.S. government to purchase the agency’s
obligations; and still others are supported only by the credit of the issuing
agency, instrumentality, or enterprise. The U.S. government does not guarantee
the market price of any U.S. government security.
Although
U.S. government-sponsored enterprises such as the Federal Home Loan Mortgage
Corporation (Freddie Mac) and the Federal National Mortgage Association
(Fannie Mae) may be chartered or sponsored by Congress, they are not funded by
Congressional appropriations, and their securities are not issued by the U.S.
Treasury nor supported by the full faith and credit of the U.S.
government.
U.S.
government securities and U.S. government-sponsored securities may be adversely
impacted by changes in interest rates or a default by or decline in the credit
rating of the applicable government-sponsored entity. There is no assurance that
the U.S. government would provide financial support to its agencies and
instrumentalities if not required to do so. In addition, certain
governmental entities have been subject to regulatory scrutiny regarding their
accounting policies and practices and other concerns that may result in
legislation, changes in regulatory oversight, and/or other consequences that
could adversely affect the credit quality, availability, or investment character
of securities issued by these entities. The value and liquidity of U.S.
government securities may be affected adversely by changes in the ratings of
those securities.
LEADERSHIP
STRUCTURE AND BOARD
PETF’s
Board has overall responsibility for overseeing PETF’s operations in accordance
with the 1940 Act, other applicable laws, and PETF’s charter. Each Board Member
serves on the Boards of the following investment companies: Principal Funds,
Inc. ("PFI"), Principal Variable Contracts Funds, Inc. (“PVC”), Principal
Exchange-Traded Funds ("PETF"), and Principal Real Asset Fund ("PRA"), which are
collectively referred to in this SAI as the "Fund Complex." Board Members who
are affiliated persons of any investment advisor, the principal distributor, or
the principal underwriter of the Fund Complex are considered “interested
persons” of the Funds (as defined in the 1940 Act) and are referred to in this
SAI as "Interested Board Members." Board Members who are not Interested Board
Members are referred to as "Independent Board Members."
Each
Board Member generally serves until the next annual meeting of shareholders or
until such Board Member’s earlier death, resignation, or removal. Independent
Board Members have a 72-year age limit and, for Independent Board Members
elected on or after September 14, 2021, a 72-year age limit or a 15-year term
limit, whichever occurs first. The Board may waive the age or term limits in the
Board’s discretion. The Board elects officers to supervise the day-to-day
operations of the Fund Complex. Officers serve at the pleasure of the Board, and
each officer has the same position with each investment company in the Fund
Complex.
The
Board meets in regularly scheduled meetings eight times throughout the year.
Board meetings may occur in-person, by telephone, or virtually. In addition, the
Board holds special meetings or informal conference calls to discuss specific
matters that may arise or require action between regular meetings. Independent
Board Members also meet annually to consider renewal of advisory
contracts.
The
Chairman of the Board is an interested person of the Fund Complex. The
Independent Board Members have appointed a Lead Independent Board Member whose
role is to review and approve, with the Chairman, each Board meeting’s agenda
and to facilitate communication between and among the Independent Board Members,
management, and the full Board. The Board’s leadership structure is appropriate
for the Fund Complex given its characteristics and circumstances, including the
number of portfolios, variety of asset classes, net assets, and distribution
arrangements. The appropriateness of this structure is enhanced by the
establishment and allocation of responsibilities among the following Committees,
which report their activities to the Board on a regular basis.
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Committee
and Independent Board Members |
Primary
Purpose and Responsibilities |
Meetings
Held During the Last Fiscal Year |
15(c)
Committee Karen
McMillan, Chair Fritz S. Hirsch Padelford L. Lattimer Mary M.
VanDeWeghe
|
The
Committee’s primary purpose is to assist the Board in performing the
annual review of the Funds’ advisory and sub-advisory agreements pursuant
to Section 15(c) of the 1940 Act. The Committee is responsible for
requesting and reviewing related materials. |
6 |
Audit
Committee Victor
L. Hymes, Chair Leroy T. Barnes, Jr. Frances P. Grieb Elizabeth
A. Nickels Mary M. VanDeWeghe |
The
Committee’s primary purpose is to assist the Board by serving as an
independent and objective party to monitor the Fund Complex’s accounting
policies, financial reporting, and internal control system, as well as the
work of the independent registered public accountants. The Audit Committee
assists Board oversight of 1) the integrity of the Fund Complex’s
financial statements; 2) the Fund Complex’s compliance with certain legal
and regulatory requirements; 3) the independent registered public
accountants’ qualifications and independence; and 4) the performance of
the Fund Complex’s independent registered public accountants. The Audit
Committee also facilitates communication among the independent registered
public accountants, PGI’s internal auditors, Fund Complex management, and
the Board.
|
9 |
Executive
Committee Kamal
Bhatia, Chair Craig Damos Patrick G. Halter |
The
Committee’s primary purpose is to exercise certain powers of the Board
when the Board is not in session. When the Board is not in session, the
Committee may exercise all powers of the Board in the management of the
Fund Complex’s business except the power to 1) issue stock, except as
permitted by law; 2) recommend to the shareholders any action that
requires shareholder approval; 3) amend the bylaws; or 4) approve any
merger or share exchange that does not require shareholder
approval.
|
None |
Nominating
and
Governance
Committee Elizabeth
A. Nickels, Chair Craig Damos Fritz S. Hirsch Victor L.
Hymes |
The
Committee’s primary purpose is to oversee the structure and efficiency of
the Board and the committees. The Committee is responsible for evaluating
Board membership and functions, committee membership and functions,
insurance coverage, and legal matters. The Committee’s nominating
functions include selecting and nominating Independent Board Member
candidates for election to the Board. Generally, the Committee requests
nominee suggestions from Board Members and management. In addition, the
Committee considers candidates recommended by shareholders of the Fund
Complex. Recommendations should be submitted in writing to the Principal
Funds Complex Secretary, in care of the Principal Funds Complex, 711 High
Street, Des Moines, IA 50392. Such recommendations must include all
information specified in the Committee’s charter and must conform with the
procedures set forth in Appendix A thereto, which can be found at
https://secure02.principal.com/publicvsupply/GetFile?fm=MM13013&ty=VOP&EXT=.VOP.
Examples of such information include the nominee’s biographical
information; relevant educational and professional background of the
nominee; the number of shares of each Fund owned of record and
beneficially by the nominee and by the recommending shareholder; any other
information regarding the nominee that would be required to be disclosed
in a proxy statement or other filing required to be made in connection
with the solicitation of proxies for the election of board members;
whether the nominee is an “interested person” of the Funds as defined in
the 1940 Act; and the written consent of the nominee to be named as a
nominee and serve as a board member if elected.
When
evaluating a potential nominee for Independent Board Member, the Committee
may consider, among other factors: educational background; relevant
business and industry experience; whether the person is an “interested
person” of the Funds as defined in the 1940 Act; and whether the person is
willing to serve, and willing and able to commit the time necessary to
attend meetings and perform the duties of an Independent Board Member. In
addition, the Committee may consider whether a candidate’s background,
experience, skills and views would complement the background, experience,
skills and views of other Board Members and would contribute to the
diversity of the Board. The final decision is based on a combination of
factors, including the strengths and the experience an individual may
bring to the Board. The Board does not regularly use the services of
professional search firms to identify or evaluate potential candidates or
nominees.
|
5 |
Operations
Committee Padelford
L. Lattimer, Chair Craig Damos Katharin S. Dyer Karen
McMillan
|
The
Committee’s primary purpose is to review and oversee the provision of
administrative and distribution services to the Fund Complex,
communications with the Fund Complex’s shareholders, and the Fund
Complex’s operations. |
6 |
Risk
oversight forms part of the Board’s general oversight of the Fund Complex. The
Board has appointed a Chief Compliance Officer who oversees the implementation
and testing of the Funds' compliance program and reports to the Board regarding
compliance matters for the Funds and principal service providers. As part of its
regular oversight functions, the Board, directly or through a committee,
interacts with and reviews reports from, among others: Fund Complex management,
sub-advisors, the Chief Compliance Officer, the independent registered public
accounting firm, and internal auditors for PGI or its affiliates, as
appropriate. The Board, with the assistance of management and PGI, reviews
investment policies and risks in connection with its review of Fund Complex
performance. In addition, as part of the Board’s periodic review of advisory,
sub-advisory, and other service provider agreements, the Board may consider risk
management aspects of their operations and the functions for which they are
responsible. With respect to valuation, the Board has designated PGI as the
Funds’ valuation designee, as permitted by SEC Rule 2a-5, where PGI is
responsible for the day-to-day valuation and oversight responsibilities of the
Funds, subject to the Board’s oversight. PGI has established a Valuation
Committee to fulfill its oversight responsibilities as the Funds’ valuation
designee.
Each
Board Member has significant prior senior management and/or board experience.
Board Members are selected and retained based upon their skills, experience,
judgment, analytical ability, diligence, and ability to work effectively with
other Board Members, a commitment to the interests of shareholders, and, for
each Independent Board Member, a demonstrated willingness to take an independent
and questioning view of management. In addition to these general qualifications,
the Board seeks members who build upon the Board’s diversity. Below is a brief
discussion of the specific education, experience, qualifications, or skills that
led to the conclusion that each person identified below should serve as a Board
Member. As required by rules adopted under the 1940 Act, the Independent Board
Members select and nominate all candidates for Independent Board Member
positions.
Independent
Board Members
Leroy
T. Barnes, Jr. Mr.
Barnes has served as an Independent Board Member of the Fund Complex since 2012.
From 2001 to 2005, Mr. Barnes served as Vice President and Treasurer of PG&E
Corporation. From 1997 to 2001, Mr. Barnes served as Vice President and
Treasurer of Gap, Inc. Through his education, employment experience, and
experience as a board member, Mr. Barnes is experienced with financial,
accounting, regulatory, and investment matters.
Craig
Damos. Mr.
Damos has served as an Independent Board Member of the Fund Complex since 2008.
Since 2011, Mr. Damos has served as the President of C.P. Damos Consulting, LLC
(doing business as Craig Damos Consulting). He has also served as a director of
the employees’ stock ownership plan of the Baker Group since 2020. Mr. Damos
served as President and Chief Executive Officer of Weitz Company from 2006 to
2010; Vertical Growth Officer of Weitz Company from 2004 to 2006; and Chief
Financial Officer of Weitz Company from 2000 to 2004. From 2005 to 2008, Mr.
Damos served as a director of West Bank. Through his education, employment
experience, and experience as a board member, Mr. Damos is experienced with
financial, accounting, regulatory, and investment matters.
Katharin
S. Dyer. Ms.
Dyer has served as an Independent Board Member of the Fund Complex since 2023.
She is the founder and Chief Executive Officer of PivotWise, a firm providing
strategic advice focused on digital transformation. Ms. Dyer currently serves as
a director of Liquidity Services and the Grameen Foundation. She previously
served as a director of Providence Health from 2019 to 2021, Noora Health from
2018 to 2021, YWCA of Nashville and Middle Tennessee from 2016 to 2022, and CARE
from 2001 to 2013. She was formerly employed by IBM Global Services as a Global
Partner and a member of the senior leadership team from 2016 to 2018. Ms. Dyer
was a member of the Global Management Team at American Express Company from 2013
to 2015. Through her education, employment experience, and experience as a board
member, Ms. Dyer is experienced with financial, information and digital
technology, investment, and regulatory matters.
Frances
P. Grieb. Ms.
Grieb has served as an Independent Board Member of the Fund Complex since 2023.
Ms. Grieb currently serves as a director of First Interstate BancSystem, Inc.
and the National Advisory Board of the College of Business at the University of
Nebraska at Omaha. She is a member of the American Institute of Certified Public
Accountants and the National Association of Corporate Directors. From 2014 to
2022, she served as a director of Great Western Bancorp, Inc. Ms. Grieb is a
retired partner having served in various leadership roles at Deloitte LLP from
1982 to 2010. Ms. Grieb is a retired Certified Public Accountant. Through her
education, employment experience, and experience as a board member, Ms. Grieb is
experienced with financial, accounting, investment, and regulatory
matters.
Fritz
S. Hirsch. Mr.
Hirsch has served as an Independent Board Member of the Fund Complex since 2005.
From 2011 to 2015, Mr. Hirsch served as CEO of MAM USA. He served as President
and Chief Executive Officer of Sassy, Inc. from 1986 to 2009, and Chief
Financial Officer of Sassy, Inc. from 1983 to 1985. Through his education,
employment experience, and experience as a board member, Mr. Hirsch is
experienced with financial, accounting, regulatory, and investment
matters.
Victor
L. Hymes. Mr.
Hymes has served as an Independent Board Member of the Fund Complex since 2020.
He currently serves as Founder, Chief Executive Officer, and Chief Investment
Officer of Legato Capital Management, LLC. Over the past thirty years, Mr. Hymes
has served in the roles of CEO, COO, CIO, portfolio manager, and other senior
management positions with investment management firms, including Zurich Scudder
Investments, Inc., Goldman, Sachs & Co., and Kidder, Peabody & Co. Mr.
Hymes has served on numerous boards and has chaired four investment committees
over the past two decades. Through his education, employment experience, and
experience as a board member, Mr. Hymes is experienced with financial,
accounting, regulatory, and investment matters.
Padelford
L. Lattimer. Mr.
Lattimer has served as an Independent Board Member of the Fund Complex since
2020. He currently serves as Managing Partner for TBA Management Consulting LLC.
For more than twenty years, Mr. Lattimer served in various capacities at
financial services companies, including as a senior managing director for TIAA
Cref Asset Management (2004-2010), First Vice President at Mellon Financial
Corporation (2002-2004), and in product management roles at Citibank
(2000-2002). Through his education, employment experience, and experience as a
board member, Mr. Lattimer is experienced with financial, regulatory, and
investment matters.
Karen
McMillan. Ms.
McMillan has served as an Independent Board Member of the Fund Complex since
2014. Ms. McMillan is the founder and owner of Tyche Consulting LLC. She served
as a Managing Director of Patomak Global Partners, LLC from 2014 to 2021. From
2007 to 2014, Ms. McMillan served as general counsel to the Investment Company
Institute. Prior to that (from 1999-2007), she worked as an attorney in private
practice, specializing in the mutual fund industry. From 1991 to 1999, she
served in various roles as counsel at the SEC, Division of Investment
Management, including as Assistant Chief Counsel. Through her professional
education, experience as an attorney, and experience as a board member, Ms.
McMillan is experienced in financial, investment, and regulatory
matters.
Elizabeth
A. Nickels. Ms.
Nickels has served as an Independent Board Member of the Fund Complex since
2015. From 2000 to 2022, Ms. Nickels served as a director of SpartanNash. From
2008 to 2017, she served as a director of the not-for-profit Spectrum Health
System; from 2014 to 2016, she served as a director of Charlotte Russe; from
2014 to 2015, she served as a director of Follet Corporation; and from 2013 to
2015, she served as a director of PetSmart. Ms. Nickels was formerly employed by
Herman Miller, Inc. in several capacities: from 2012 to 2014, as the Executive
Director of the Herman Miller Foundation; from 2007 to 2012, as President of
Herman Miller Healthcare; and from 2000 to 2007, as Chief Financial Officer.
Through her education, employment experience, and experience as a board member,
Ms. Nickels is experienced with financial, accounting, and regulatory
matters.
Mary
M. VanDeWeghe. Ms.
VanDeWeghe has served as an Independent Board Member of the Fund Complex since
2018. She is CEO and President of Forte Consulting, Inc. and was previously
employed as a Finance Professor at Georgetown University from 2009 to 2016,
Senior Vice President - Finance at Lockheed Martin Corporation from 2006 to
2009, a Finance Professor at the University of Maryland from 1996 to 2006, and
in various positions at J.P. Morgan from 1983 to 1996. Ms. VanDeWeghe currently
serves as a director of Helmerich & Payne (2019-present) and previously
served as a director of Denbury Resources Inc. from 2019 to 2020, Brown Advisory
from 2003 to 2018, B/E Aerospace from 2014 to 2017, WP Carey from 2014 to 2017,
and Nalco (and its successor Ecolab) from 2009 to 2014. Through her education,
employment experience, and experience as a board member, Ms. VanDeWeghe is
experienced with financial, accounting, investment, and regulatory
matters.
Interested
Board Members
Kamal
Bhatia. Mr.
Bhatia has served as Chair of the Fund Complex since 2023. He has also served as
President and Chief Executive Officer of the Fund Complex since 2019. Mr. Bhatia
serves as Senior Executive Managing Director - Global Head of Investments for
Principal®
Asset Management. From 2019 to 2023, he served as a Senior Executive Director
and Chief Operating Officer of Principal®
Asset Management. Mr. Bhatia joined Principal®
in 2019 and serves as a director of numerous Principal®
affiliates.
From 2011 to 2019, he was a Senior Vice President for Oppenheimer Funds. Mr.
Bhatia is a CFA®
charter holder. Through his education and experience, Mr. Bhatia is experienced
with financial, marketing, regulatory, and investment matters.
Patrick
G. Halter. Mr.
Halter has served as a Board Member of the Fund Complex since 2017. Mr. Halter
also serves as President and Chief Executive Officer for Principal®
Asset Management. He also serves as a director of numerous Principal®
affiliates. Mr. Halter joined Principal®
in 1984 and has held various other positions since joining Principal®.
Through his education and employment experience, Mr. Halter is experienced with
financial, accounting, regulatory, and investment matters.
Kenneth
A. McCullum. Mr.
McCullum has served as a Board Member of the Fund Complex since 2023. Mr.
McCullum has served as Executive Vice President and Chief Risk Officer for
Principal®
since 2023. Prior to that, he served as Senior Vice President and Chief Risk
Officer for Principal®
from 2020 to 2023 and Vice President and Chief Actuary for Principal®
from 2015 to 2020. From 2013 to 2015, Mr. McCullum was an Executive Vice
President responsible for business development at Delaware Life Insurance
Company. He served as a Senior Vice President for the life annuity business at
Sun Life from 2010 to 2013. Mr. McCullum is a Fellow of the Society of Actuaries
and is a Member of the American Academy of Actuaries. Through his education and
experience, Mr. McCullum is experienced with financial, accounting, regulatory,
and investment matters.
Additional
Information Regarding Board Members and Officers
The
following tables present additional information regarding the Board Members and
Fund Complex officers, including their principal occupations, which, unless
specific dates are shown, are of more than five years duration. For each Board
Member, the tables also include information concerning other directorships held
in reporting companies under the Securities Exchange Act of 1934 or registered
investment companies under the 1940 Act.
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|
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|
| |
INDEPENDENT
BOARD MEMBERS |
Name,
Address, and Year of Birth |
Board
Positions Held with Fund Complex |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios Overseen in Fund Complex |
Other Directorships Held
During Past 5 Years |
Leroy
T. Barnes, Jr. 711 High Street Des Moines, IA
50392 1951 |
Director,
PFI and PVC (since 2012) Trustee, PETF (since 2014) Trustee, PRA
(since 2019) |
Retired
|
126 |
McClatchy
Newspapers, Inc. (2000-2020); Frontier Communications,
Inc. (2005-2019) |
Craig
Damos 711 High Street Des Moines, IA 50392 1954 |
Lead
Independent Board Member (since 2020) Director, PFI and
PVC (since 2008) Trustee, PETF (since 2014) Trustee, PRA (since
2019) |
President,
C.P. Damos Consulting, LLC (consulting services)
|
126 |
None |
Katharin
S. Dyer 711 High Street Des Moines, IA 50392 1957 |
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Founder
and Chief Executive Officer, PivotWise (consulting
services); Global Partner, IBM (technology company)
from 2016-2018 |
126 |
Liquidity
Services, Inc. (2020-present) |
Frances
P. Grieb 711 High Street Des Moines, IA 50392 1960 |
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Retired |
126 |
First
Interstate BancSystem, Inc. (2022-present); Great
Western Bancorp, Inc. and Great Western Bank
(2014-2022) |
Fritz
S. Hirsch 711 High Street Des Moines, IA 50392 1951 |
Director,
PFI and PVC (since 2005) Trustee, PETF (since 2014) Trustee, PRA
(since 2019) |
Interim
CEO, MAM USA (manufacturer of infant and juvenile products) from February
2020-October 2020 |
126 |
MAM
USA (2011-present)
|
Victor
L. Hymes 711 High Street Des Moines, IA 50392 1957 |
Director,
PFI and PVC (since 2020) Trustee, PETF and PRA (since
2020) |
Founder,
CEO, CIO, Legato Capital Management, LLC (investment management
company) |
126 |
None |
Padelford
L. Lattimer 711 High Street Des Moines, IA 50392 1961 |
Director,
PFI and PVC (since 2020) Trustee, PETF and PRA (since
2020) |
Managing
Partner, TBA Management Consulting LLC (management consulting and staffing
company) |
126 |
None |
Karen
McMillan 711 High Street Des Moines, IA 50392 1961 |
Director,
PFI and PVC (since 2014) Trustee, PETF (since 2014) Trustee, PRA
(since 2019) |
Founder/Owner,
Tyche Consulting LLC (consulting services); Managing
Director, Patomak Global Partners, LLC (financial
services consulting) from 2014-2021 |
126 |
None |
Elizabeth
A. Nickels 711 High Street Des Moines, IA 50392 1962 |
Director,
PFI and PVC (since 2015) Trustee, PETF (since 2015) Trustee, PRA
(since 2019) |
Retired |
126 |
SpartanNash
(2000-2022) |
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INDEPENDENT
BOARD MEMBERS |
Name,
Address, and Year of Birth |
Board
Positions Held with Fund Complex |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios Overseen in Fund Complex |
Other Directorships Held
During Past 5 Years |
Mary
M. VanDeWeghe 711 High Street Des Moines, IA 50392 1959 |
Director,
PFI and PVC (since 2018) Trustee, PETF (since 2018) Trustee, PRA
(since 2019) |
CEO
and President, Forte Consulting, Inc. (financial and management
consulting) |
126 |
Helmerich
& Payne (2019-present); Denbury Resources
Inc. (2019-2020) |
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INTERESTED
BOARD MEMBERS |
Name,
Address, and Year of Birth |
Positions
Held with Fund Complex |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios Overseen in Fund Complex |
Other Directorships Held
During Past 5 Years |
Kamal
Bhatia 711 High Street Des Moines, IA 50392 1972 |
Director
and Chair, PFI and PVC (since 2023) Trustee and Chair,
PETF and PRA (since 2023) Chief Executive Officer and
President (since 2019)
|
Principal
Financial Group*
Senior
Executive Managing Director - Global Head of Investments – Principal Asset
Management (since 2023)
Senior
Executive Director and Chief
Operating
Officer – Principal Asset
Management
(2019-2023)
President
– Principal Funds (2019-2020)
Oppenheimer
Funds
Senior
Vice President (2011-2019) |
126 |
None |
Patrick
G. Halter 711 High Street Des Moines, IA 50392 1959 |
Director,
PFI and PVC (since 2017) Trustee, PETF (since 2017) Trustee, PRA
(since 2019) |
Principal
Financial Group*
President
and Chief Executive Officer – Principal Asset Management (since
2022)
President
– Principal Global Asset Management (2020-2022)
Chief
Executive Officer and President – Principal Global Investors, LLC
(2018-2020) |
126 |
None |
Kenneth
A. McCullum 711 High Street Des Moines, IA
50392 1964
|
Director,
PFI and PVC (since 2023) Trustee, PETF and PRA (since
2023) |
Principal
Financial Group*
Executive
Vice President and Chief Risk
Officer
(since 2023)
Senior
Vice President and Chief Risk Officer (2020-2023)
Vice
President and Chief Actuary (2015-2020) |
126 |
None |
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FUND
COMPLEX OFFICERS |
Name,
Address, and Year of Birth |
Position(s)
Held with Fund Complex |
Principal
Occupation(s)
During
Past 5 Years |
Randy
D. Bolin 711 High Street Des Moines, IA
50392 1961 |
Assistant
Tax Counsel (since 2020) |
Principal
Financial Group* Vice
President/Associate General Counsel (since 2013) |
George
Djurasovic
711
High Street Des Moines, IA 50392
1971 |
General
Counsel (since 2023) |
Principal
Financial Group*
Vice
President and General Counsel – Principal Asset Management (since
2022)
Artisan
Partners Limited Partnership
Global
Chief Compliance Officer (2013-2022) |
Beth
Graff 711 High Street Des Moines, IA 50392 1968 |
Vice
President and Assistant Controller
(since
2021) |
Principal
Financial Group*
Director
– Fund Accounting (since 2016)
|
Gina
L. Graham 711 High Street Des Moines, IA
50392 1965 |
Treasurer
(since 2016) |
Principal
Financial Group*
Vice
President and Treasurer (since 2016)
|
Megan
Hoffmann 711 High Street Des Moines, IA
50392 1979 |
Vice
President and Controller (since 2021) |
Principal
Financial Group*
Director
– Accounting (since 2020)
Assistant
Director – Accounting (2017-2020)
|
|
|
|
|
|
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|
| |
FUND
COMPLEX OFFICERS |
Name,
Address, and Year of Birth |
Position(s)
Held with Fund Complex |
Principal
Occupation(s)
During
Past 5 Years |
Laura
B. Latham 711 High Street Des Moines, IA
50392 1986 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2018-2023) |
Principal
Financial Group*
Counsel
(since 2018)
|
Diane
K. Nelson 711 High Street Des Moines, IA
50392 1965 |
AML
Officer (since 2016) |
Principal
Financial Group*
Chief
Compliance Officer/AML Officer (since 2015)
|
Tara
Parks 711 High Street Des Moines, IA 50392 1983 |
Vice
President and Assistant Controller
(since
2021) |
Principal
Financial Group*
Director
– Accounting (since 2019)
Tax
Manager – ALPS Fund Services (2011-2019)
|
Deanna
Y. Pellack 711 High Street Des Moines, IA
50392 1987 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2022-2023) |
Principal
Financial Group*
Counsel
(since 2022)
The
Northern Trust Company
Vice
President (2019-2022)
Second
Vice President (2014-2019) |
Sara
L. Reece 711 High Street Des Moines, IA
50392 1975 |
Vice
President and Chief Operating Officer
(since
2021)
Vice
President and Controller (2016-2021) |
Principal
Financial Group*
Managing
Director – Global Fund Ops (since 2021)
Director
– Accounting (2015-2021)
|
Teri
R. Root 711 High Street Des Moines, IA 50392 1979 |
Chief
Compliance Officer (since 2018)
|
Principal
Financial Group*
Chief
Compliance Officer – Funds (since 2018)
Vice
President (since 2015)
|
Michael
Scholten 711 High Street Des Moines, IA
50392 1979 |
Chief
Financial Officer (since 2021) |
Principal
Financial Group*
Assistant
Vice President and Actuary (since 2021)
Chief
Financial Officer – Funds/Platforms (since 2015-2021)
|
Adam
U. Shaikh 711 High Street Des Moines, IA 50392
1972 |
Assistant
General Counsel (since 2023)
Assistant
Secretary (since 2022) Assistant Counsel (2006-2023) |
Principal
Financial Group*
Assistant
General Counsel (since 2018)
|
John
L. Sullivan 711 High Street Des Moines, IA
50392 1970 |
Counsel
and Assistant Secretary (since 2023)
Assistant
Counsel and Assistant Secretary
(2019-2023) |
Principal
Financial Group*
Assistant
General Counsel (since 2023)
Counsel
(2019-2023)
Prior
thereto, Attorney in Private Practice |
Dan
L. Westholm 711 High Street Des Moines, IA
50392 1966 |
Assistant
Treasurer (since 2006) |
Principal
Financial Group*
Assistant
Vice President-Treasury (since 2013)
|
Beth
C. Wilson 711 High Street Des Moines, IA
50392 1956 |
Vice
President and Secretary (since 2007) |
Principal
Financial Group*
Director
and Secretary-Funds (since 2007)
|
Jared
A. Yepsen 711 High Street Des Moines, IA
50392 1981 |
Assistant
Tax Counsel (since 2017) |
Principal
Financial Group*
Assistant
General Counsel (since 2023)
Counsel
(2015-2023)
|
|
| |
*The
reference to Principal Financial Group includes positions held by the
Interested Board Member / Fund Complex Officer, including as an officer,
employee, and/or director, with affiliates or subsidiaries of Principal
Financial Group. The titles set forth in this SAI are each Interested
Board Member's / Fund Complex Officer’s title with Principal Workforce,
LLC. |
Board
Member Ownership of Securities
The
following tables set forth the dollar range of the equity securities of Funds
included in this SAI, and aggregate dollar range of the equity securities of the
funds in the Fund Complex, that were beneficially owned by the Board Members as
of December 31, 2022. As of that date, Board Members did not own shares of the
Funds included in this SAI that are not listed.
For
the purpose of these tables, beneficial ownership means a direct or indirect
pecuniary interest. Only Interested Board Members are eligible to participate in
an employee benefit program that invests in the Fund Complex. Board Members who
beneficially owned shares of the series of PVC did so through variable life
insurance and variable annuity contracts. Please note that exact dollar amounts
of securities held are not listed. Rather, ownership is listed based on the
following dollar ranges:
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A |
$0 |
B |
$1
up to and including $10,000 |
C |
$10,001
up to and including $50,000 |
D |
$50,001
up to and including $100,000 |
E |
$100,001
or more |
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| Independent
Board Members |
Funds
in this SAI |
Barnes |
Damos |
Dyer(1) |
Grieb(1) |
Hirsch |
Hymes |
Lattimer |
McMillan |
Nickels |
VanDeWeghe |
Principal
U.S. Mega-Cap ETF |
A |
A |
A |
A |
A |
A |
A |
A |
A |
E |
Total
Fund Complex |
E |
E |
A |
A |
E |
E |
C |
E |
E |
E |
(1)
Appointment
effective January 26, 2023.
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Interested
Board Members |
Fund
in this SAI |
Bhatia(1) |
Halter |
McCullum(1) |
Principal
U.S. Mega-Cap ETF (2) |
D |
A |
A |
Total
Fund Complex |
E |
E |
E |
(1)
Appointment effective April 26, 2023.
(2)
Ownership through participation in an employee benefit plan.
Board
Member and Officer Compensation
The
Fund Complex does not pay any remuneration to its officers or to any Board
Members listed above as Interested Board Members. The Board annually considers a
proposal to reimburse PGI for certain expenses, including a portion of the Chief
Compliance Officer’s compensation. If the proposal is adopted, these amounts are
allocated across all Funds based on relative net assets of each
portfolio.
Each
Independent Board Member received compensation for service as a member of the
Boards of all investment companies in the Fund Complex based on a schedule that
takes into account an annual retainer amount, the number of meetings attended,
and expenses incurred. Board Member compensation and related expenses are
allocated to each of the Funds based on the net assets of each relative to
combined net assets of the Fund Complex.
The
following table provides information regarding the compensation received by the
Independent Board Members from the Funds included in this SAI and from the Fund
Complex during the fiscal year ended June 30, 2023. On that date, there were 4
investment companies in the Fund Complex. With respect to the Funds included in
this SAI, Board Member compensation is paid from the unitary fee that such Funds
pay to PGI. The Fund Complex does not provide retirement benefits or pensions to
any of the Board Members.
|
|
|
|
|
|
|
| |
Board
Member |
Funds
in this SAI |
Fund
Complex |
Leroy
T. Barnes, Jr. |
$3,918 |
$321,500 |
Craig
Damos |
$4,762 |
$392,250 |
Katharin
S. Dyer(1) |
$2,544 |
$219,250 |
Frances
P. Grieb(1) |
$2,556 |
$220,250 |
Fritz
S. Hirsch |
$4,089 |
$336,000 |
Victor
L. Hymes |
$4,263 |
$350,250 |
Padelford
L. Lattimer |
$4,176 |
$343,500 |
Karen
McMillan |
$4,222 |
$347,250 |
Elizabeth
A. Nickels |
$4,278 |
$351,500 |
Mary
M. VanDeWeghe |
$4,083 |
$335,250 |
(1)
Ms. Dyer and Ms. Grieb were both elected to the Board effective January 26,
2023.
INVESTMENT
ADVISORY AND OTHER SERVICES
Investment
Advisors
Principal
Global Investors, LLC (doing business as Principal®
Asset Management) (“PGI”), an indirect subsidiary of Principal Financial Group,
Inc. (“Principal®”),
serves as the manager for the Funds. Principal Management Corporation,
previously an affiliate of PGI, served as manager to the Funds prior to its
merger with and into PGI on May 1, 2017.
PGI
directly makes decisions to purchase or sell securities for each Fund, except
for those Funds or portions of Funds for which PGI has retained a sub-advisor to
provide such services, as described below.
PGI
has executed agreements with various sub-advisors. Under the sub-advisory
agreements, the sub-advisor agrees to assume the obligations of PGI to provide
investment advisory services to the portion of the assets of a specific Fund
allocated to it by PGI. For these services, PGI pays the sub-advisor a
fee.
Sub-Advisor: Principal
Real Estate Investors, LLC (doing
business as Principal Real Estate) ("Principal
- REI") is
an indirect subsidiary of Principal Financial Group, Inc.
Fund(s): Principal
Real Estate Active Opportunities ETF
Sub-Advisor: Spectrum
Asset Management, Inc. ("Spectrum")
is an indirect subsidiary of Principal Financial Group, Inc.
Fund(s): Principal
Spectrum Preferred Securities Active ETF and Principal Spectrum Tax-Advantaged
Dividend Active ETF
Affiliated
Persons of the Trust Who are Affiliated Persons of the Advisor
For
information about affiliated persons of the Trust who are also affiliated
persons of PGI or affiliated advisors, see the Interested Board Members and Fund
Complex Officers tables in the “Leadership Structure and Board”
section.
Codes
of Ethics
The
Trust,
PGI, and each of the sub-advisors have adopted Codes of Ethics ("Codes") under
Rule 17j-1 of the 1940 Act. PGI and the sub-advisors have each also adopted such
a Code under Rule 204A-1 of the Investment Advisers Act of 1940. These Codes are
designed to prevent, among other things, persons with access to information
regarding the portfolio trading activity of the Funds from using that
information for their personal benefit. Except in limited circumstances, the
Code for PGI and the Trust
prohibits portfolio managers from personally trading securities that are held or
traded in the actively managed portfolios for which they are responsible.
Certain sub-advisors have adopted Codes that do not permit personnel subject to
such Code to invest in securities that may be purchased or held by a Fund.
However, other sub-advisors' Codes do permit, subject to conditions, personnel
subject to the Code to invest in securities that may be purchased or held by a
Fund. The Trust's
Board reviews reports at least annually regarding the operation of the Code of
Ethics of the Trust,
PGI, and each sub-advisor. A copy of the Trust's
Code will be provided upon request, which may be made by contacting the
Trust.
Management
Agreement
Under
the terms of the Management Agreement with the Trust, PGI, the investment
advisor, is entitled to receive a fee computed and accrued daily and payable
monthly, at the following annual rates, for providing investment advisory
services and specified other services. The management fee schedule for each Fund
is as follows (expressed as a percentage of average net assets):
|
|
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|
|
|
|
|
|
|
| |
Fund |
First
$500
Million |
Next
$500
Million |
Next
$500
Million |
Over
$1.5
Billion |
Principal
Healthcare Innovators ETF |
0.42% |
0.40% |
0.38% |
0.37% |
|
|
|
|
| |
Fund |
All
Assets |
Principal
Active High Yield ETF |
0.39% |
Principal
Focused Blue Chip ETF |
0.58% |
Principal
Investment Grade Corporate Active ETF |
0.19% |
Principal
Quality ETF |
0.15% |
Principal
Real Estate Active Opportunities ETF |
0.65% |
Principal
Spectrum Preferred Securities Active ETF |
0.55% |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
0.60% |
Principal
U.S. Mega-Cap ETF |
0.15% |
Principal
U.S. Small-Cap ETF |
0.38% |
Principal
Value ETF |
0.15% |
Fund
Operating Expenses
The
Management Agreement between the Trust, on behalf of each Fund, and PGI provides
that PGI will pay all operating expenses of the Fund, except for the management
fee, payments made under each Fund's Rule 12b-1 plan, brokerage commissions and
other expenses connected to the execution of portfolio transactions, interest
expense, taxes, acquired fund fees and expenses, litigation expenses, and other
extraordinary expenses.
Contractual
Limits on Total Annual Fund Operating Expenses
PGI
has contractually agreed to limit Fund expenses (excluding interest expense,
expenses related to fund investments, acquired fund fees and expenses, and tax
reclaim recovery expenses and other extraordinary expenses) on certain share
classes of certain of the Funds. The reductions and reimbursements are in
amounts that maintain total operating expenses at or below certain limits. The
limits are expressed as a percentage of average daily net assets attributable to
each respective class on an annualized basis. Subject to applicable expense
limits, the Funds may reimburse PGI for expenses incurred during the current
fiscal year.
The
operating expense limits and the agreement terms are as follows:
|
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|
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|
|
|
| |
Contractual
Limits on Total Annual Fund Operating Expenses |
Fund |
Limit |
Expiration |
Principal
U.S. Mega-Cap ETF |
0.12% |
10/31/2024 |
Management
Fees Paid
Fees
paid for investment management services (before any waivers/reimbursements from
PGI) during the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management
Fees Paid for Periods Ended June 30 (amounts in thousands) |
| 2023 |
| 2022 |
| 2021 |
|
Principal
Active High Yield ETF (1) |
$680 |
|
| $948 |
|
| $1,155 |
| |
Principal
Focused Blue Chip ETF (2) |
N/A |
| N/A |
| N/A |
|
Principal
Healthcare Innovators ETF (3) |
239 |
|
| 429 |
|
| 581 |
| |
Principal
Investment Grade Corporate Active ETF |
168 |
|
| 852 |
|
| 829 |
| |
Principal
Quality ETF |
50 |
|
| 121 |
|
| 46 |
| |
Principal
Real Estate Active Opportunities ETF |
34 |
|
| 4 |
| (4) |
N/A |
|
Principal
Spectrum Preferred Securities Active ETF |
2,406 |
|
| 2,201 |
|
| 1,305 |
| |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
124 |
|
| 138 |
|
| 133 |
| |
Principal
U.S. Mega-Cap ETF |
1,805 |
|
| 2,690 |
|
| 2,590 |
| |
Principal
U.S. Small-Cap ETF (5) |
1,120 |
|
| 4,417 |
|
| 3,591 |
| |
Principal
Value ETF |
107 |
|
| 181 |
|
| 37 |
| |
|
|
|
|
|
| |
(1)
Effective September 1, 2021, Principal Active Income ETF changed its name
to Principal Active High Yield ETF. |
(2)
Principal Focused Blue Chip ETF commenced operations on July 10,
2023. |
(3)
Effective October 29, 2021, Principal Healthcare Innovators Index ETF
changed its name to Principal Healthcare Innovators
ETF. |
(4)
Period from May 18, 2022, date operations commenced, through June 30,
2022. |
(5)
Effective June 30, 2023, Principal U.S. Small-Cap Multi-Factor ETF changed
its name to Principal U.S. Small-Cap
ETF. |
Management
Fees Waived/Reimbursed
For
the following Funds, PGI waived/reimbursed a portion of the management fee
during the periods indicated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Management
Fees Waived/Reimbursed for Periods Ended June 30 (amounts in
thousands) |
| 2023 |
| 2022 |
| 2021 |
Principal
U.S. Mega-Cap ETF |
$361 |
| $538 |
| $518 |
Sub-Advisory
Agreements
PGI
(and not the Funds) pays the sub-advisors fees determined pursuant to a
sub-advisory agreement with each sub-advisor, including any sub-advisors that
are at least 95% owned, directly or indirectly, by PGI or its affiliates. Fees
paid to sub-advisors are individually negotiated between PGI and each
sub-advisor and may vary.
Distributor
ALPS
Distributors, Inc. (the "Distributor") is located at 1290 Broadway, Suite 1000,
Denver, Colorado 80203. The Distributor is a broker-dealer registered under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), and a member
of the Financial Industry Regulatory Authority ("FINRA").
Shares
will be continuously offered for sale by the Trust through the Distributor only
in whole Creation Units, as described in the section of this SAI entitled
"Purchase and Redemption of Creation Units." The Distributor also acts as an
agent for the Trust with respect to the continuous distribution of Creation
Units of the Funds. The Distributor will deliver the Prospectus to APs
purchasing Shares in Creation Units and will maintain records of both orders
placed with it and confirmations of acceptance furnished by it. The Distributor
has no role in determining the investment policies of the Funds or which
securities are to be purchased or sold by the Funds.
The
Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under
the 1940 Act. No Rule 12b-1 fees are currently paid by any of the Funds, and
there are no plans to impose these fees. However, in accordance with its Rule
12b-1 plan, each Fund is authorized to pay an amount up to 0.25% of its average
daily net assets each year to compensate the Distributor for providing certain
services to the Fund, including activities primarily intended to result in the
sale of Creation Units of the Fund or the provision of investor services. Under
the plan, the Funds would have no legal obligation to pay any amount that
exceeds the compensation limit. The Distributor would be entitled to retain any
such fees without regard to the expenses that it incurs. In the event Rule 12b-1
fees are charged in the future, they will be paid out of the respective Fund’s
assets, and over time, these fees will increase the cost of your investment and
they may cost you more than certain other types of sales charges.
Fund
Sub-Administrator, Custodian, and Transfer Agent
State
Street Bank and Trust Company ("State Street") serves as the Funds'
sub-administrator, custodian, and transfer agent. State Street is located at One
Congress Street, Suite 1, Boston, MA 02114-2016.
PGI
has entered into an Administration Agreement and an Accounting Services
Agreement with State Street, under which State Street provides necessary
administrative, treasury, and tax services, including financial reporting for
the maintenance and operations of the Funds. In addition, State Street makes
available the office space, equipment, personnel, and facilities required to
provide such services. State Street also provides fund accounting services and
is responsible for maintaining the books and records and calculating the daily
net asset value of the Funds. PGI is ultimately responsible for such services
pursuant to a Management Agreement with the Trust.
For
the fiscal year ended June 30, 2023, the Trust paid State Street a total of
$1,073,183 for these services.
Under
the Custody Agreement with the Trust, State Street maintains in separate
accounts cash, securities, and other assets of the Trust and each Fund, keeps
all necessary accounts and records, and provides other services. State Street is
required, upon order of the Trust, to deliver securities held by State Street
and to make payments for securities purchased by the Trust for each Fund. Under
the Custody Agreement, State Street is also authorized to appoint certain
foreign custodians or foreign custody managers for Fund investments outside the
United States.
Pursuant
to a Transfer Agency Services Agreement with the Trust, State Street acts as
transfer agent, dividend disbursing agent, and shareholder servicing agent to
the Funds.
Securities
Lending Agent
State
Street serves as the securities lending agent for the Funds. Information
regarding securities lending during the Funds' most recently ended fiscal year
is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Gross
income (including from cash collateral reinvestment) |
Fees
paid to securities lending agent from a revenue split |
Fees
paid for any cash collateral management service that are not included in
revenue split |
Administrative
fees not included in revenue split |
Indemnification
fees not included in revenue split |
Net
rebate paid to borrower |
Other
fees not included in revenue split |
Aggregate
fees/ compensation |
Net
income from securities lending |
|
|
|
|
|
|
|
|
| |
Principal
Active High Yield ETF |
$128,555 |
$3,473 |
$— |
$— |
$— |
$93,826 |
$— |
$97,299 |
$31,256 |
Principal
Focused Blue Chip ETF |
— |
| — |
| — |
— |
— |
— |
| — |
— |
| — |
|
Principal
Healthcare Innovators ETF |
103,261 |
| 8,057 |
| — |
— |
— |
22,647 |
| — |
30,704 |
| 72,557 |
|
Principal
Investment Grade Corporate Active ETF |
10,449 |
| 283 |
| — |
— |
— |
7,617 |
| — |
7,900 |
| 2,549 |
|
Principal
Quality ETF |
22 |
| — |
| — |
— |
— |
20 |
| — |
20 |
| 2 |
|
Principal
Real Estate Active Opportunities ETF |
— |
| — |
| — |
— |
— |
— |
| — |
— |
| — |
|
Principal
Spectrum Preferred Securities Active ETF |
272,178 |
| 3,769 |
| — |
— |
— |
234,483 |
| — |
238,252 |
| 33,926 |
|
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
— |
| — |
| — |
— |
— |
— |
| — |
— |
| — |
|
Principal
U.S. Mega-Cap ETF |
— |
| — |
| — |
— |
— |
— |
| — |
— |
| — |
|
Principal
U.S. Small-Cap ETF |
49,125 |
| 2,914 |
| — |
— |
— |
19,973 |
| — |
22,886 |
| 26,238 |
|
Principal
Value ETF |
117 |
| 6 |
| — |
— |
— |
53 |
| — |
60 |
| 57 |
|
The
services provided by State Street, as securities lending agent for the Funds,
include: coordinating, with the Funds, the selection of securities to be loaned;
negotiating loan terms; monitoring the value of securities loaned and
corresponding collateral, marking to market daily; coordinating collateral
movements; monitoring dividends; and transferring, recalling, and arranging the
return of loaned securities to the Funds upon loan termination.
INTERMEDIARY
COMPENSATION
Shares
of the Funds are sold primarily through intermediaries, such as brokers,
dealers, investment advisors, banks, trust companies, pension plan consultants,
retirement plan administrators, and insurance companies.
As
mentioned in the Prospectus, in the event Rule 12b-1 fees are paid by the Funds
to the Distributor in the future, the Distributor may pay some or all of those
fees to intermediaries.
Additional
Payments to Intermediaries
In
addition, PGI and its affiliates may, out of their own resources, pay amounts to
intermediaries that support the distribution or marketing of shares of the Funds
or provide services to Fund shareholders. The making of these payments could
create a conflict of interest for a financial intermediary receiving such
payments. These payments may be made from profits received by PGI from the
management fees paid to PGI by the Funds.
Numerous
factors may be considered in determining the amount of such additional payments,
including, but not limited to, the intermediary’s Fund sales and assets, and the
willingness and ability of the intermediary to give the Distributor access to
its Financial Professionals for educational and marketing purposes. Some such
arrangements may include an agreed upon minimum or maximum payment.
As
of October 2, 2023, PGI anticipates that the firms that will receive additional
payments as described above include, but are not necessarily limited to, the
following:
•Charles
Schwab & Co., Inc.
•E*TRADE
Securities, LLC
•Kestra
Investment Services
•Morgan
Stanley
•National
Financial Services, LLC
•TD
Ameritrade
•Wilshire
Associates
The
preceding list is subject to change at any time without notice. Any additions,
modifications, or deletions to the financial intermediaries identified in this
list that have occurred since October 2, 2023 are not reflected.
Ask
your Financial Professional or visit your intermediary’s website for more
information about the amounts paid to them by PGI and its affiliates, and by
sponsors of other investment companies your Financial Professional may recommend
to you.
BROKERAGE
ALLOCATION AND OTHER PRACTICES
Brokerage
on Purchases and Sales of Securities
All
orders for the purchase or sale of portfolio securities are placed on behalf of
a Fund by PGI or by the Fund’s sub-advisor pursuant to the terms of the
applicable sub-advisory agreement. In distributing brokerage business arising
out of the placement of orders for the purchase and sale of securities for any
Fund, the objective of PGI and of each Fund’s sub-advisor is to obtain the best
overall terms. In pursuing this objective, PGI or the sub-advisor considers all
matters it deems relevant, including the breadth of the market in the security,
the price of the security, the financial condition and executing capability of
the broker or dealer, confidentiality, including trade anonymity, and the
reasonableness of the commission, if any (for the specific transaction and on a
continuing basis). This may mean in some instances that PGI or a sub-advisor
will pay a broker commissions that are in excess of the amount of commissions
another broker might have charged for executing the same transaction when PGI or
the sub-advisor believes that such commissions are reasonable in light of a) the
size and difficulty of the transaction, b) the quality of the execution
provided, and c) the level of commissions paid relative to commissions paid by
other institutional investors. Such factors are viewed both in terms of that
particular transaction and in terms of all transactions that broker executes for
accounts over which PGI or the sub-advisor exercises investment discretion. The
Board has also adopted a policy and procedure designed to prevent each of the
Funds from compensating a broker/dealer for promoting or selling Fund shares by
directing brokerage transactions to that broker/dealer for the purpose of
compensating the broker/dealer for promoting or selling Fund shares. Therefore,
PGI or a sub-advisor may not compensate a broker/dealer for promoting or selling
Fund shares by directing brokerage transactions to that broker/dealer for the
purpose of compensating the broker/dealer for promoting or selling Fund shares.
PGI or a sub-advisor may purchase securities in the over-the-counter market,
utilizing the services of principal market makers unless better terms can be
obtained by purchases through brokers or dealers, and may purchase securities
listed on the NYSE from non-Exchange members in transactions off the
Exchange.
PGI
or a sub-advisor may give consideration in the allocation of business to
services performed by a broker (e.g., the furnishing of statistical data and
research generally consisting of, but not limited to, information of the
following types: analyses and reports concerning issuers, industries, economic
factors, and trends; portfolio strategy; performance of client accounts; and
access to research analysts, corporate management personnel, and industry
experts). If any such allocation is made, the primary criteria used will be to
obtain the best overall terms for such transactions or terms that are reasonable
in relation to the research or brokerage services provided by the broker or
dealer when viewed in terms of either a particular transaction or a
sub-advisor’s overall responsibilities to the accounts under its management. PGI
or a sub-advisor generally pays additional commission amounts for such research
services. Statistical data and research information received from brokers or
dealers as described above may be useful in varying degrees and PGI or a
sub-advisor may use it in servicing some or all of the accounts it
manages.
Subject
to the rules promulgated by the SEC, as well as other regulatory requirements,
the Board has approved procedures whereby a Fund may purchase securities that
are offered in underwritings in which an affiliate of a sub‑advisor, or PGI,
participates. These procedures prohibit a Fund from directly or indirectly
benefiting a sub‑advisor affiliate or PGI affiliate in connection with such
underwritings. In addition, for underwritings where a sub-advisor affiliate or
PGI participates as a principal underwriter, certain restrictions may apply that
could, among other things, limit the amount of securities that a Fund could
purchase in the underwritings. The sub-advisor shall determine the amounts and
proportions of orders allocated to the sub-advisor or affiliate. The Board will
receive quarterly reports on these transactions.
The
Board has approved procedures that permit a Fund to effect a purchase or sale
transaction between the Fund and any other affiliated investment company or
between a Fund and affiliated persons of the Fund under limited circumstances
prescribed by SEC Rules. Any such transaction must be effected without any
payment other than a cash payment for the securities, for which a market
quotation is readily available, at the current market price; must be consistent
with the investment objective, investment strategy, and risk profile of the
Fund; and no brokerage commission or fee (except for customary transfer fees),
or other remuneration may be paid in connection with the transaction. The Board
will receive quarterly reports on these transactions.
The
Board has also approved procedures that permit a Fund’s sub-advisor(s) to place
portfolio trades with an affiliated broker under circumstances prescribed by SEC
Rules 17e-1 and 17a-10. The procedures require that total commissions, fees, or
other remuneration received or to be received by an affiliated broker must be
reasonable and fair compared to the commissions, fees, or other remuneration
received by other brokers in connection with comparable transactions involving
similar securities being purchased or sold on a securities exchange during a
comparable time period. The Board will receive quarterly reports on these
transactions.
Purchases
and sales of debt securities and money market instruments usually are principal
transactions; portfolio securities are normally purchased directly from the
issuer or from an underwriter or marketmakers for the securities. Such
transactions are usually conducted on a net basis with a Fund paying no
brokerage commissions. Purchases from underwriters include a commission or
concession paid by the issuer to the underwriter, and the purchases from dealers
serving as marketmakers include the spread between the bid and asked
prices.
Commission
rates that PGI or a Sub-Advisor pays to brokers may vary and reflect such
factors as the trading volume placed with a broker, the type of security, the
market in which a security is traded and the trading volume of that security,
the types of services provided by the broker (i.e. execution services only or
additional research services) and the quality of a broker's
execution.
The
following table shows the brokerage commissions paid during the periods
indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
Brokerage Commissions Paid for Periods Ended June 30 |
Fund |
2023 |
| 2022 |
| 2021 |
|
|
|
|
|
|
| |
Principal
Active High Yield ETF |
$ |
— |
|
| $ |
14,167 |
|
| $ |
17,113 |
| |
Principal
Healthcare Innovators ETF |
48,626 |
|
| 47,810 |
|
| 46,767 |
| |
Principal
Investment Grade Corporate Active ETF |
1,703 |
|
| 7,812 |
|
| 3,536 |
| |
Principal
Quality ETF |
2,812 |
|
| 12,491 |
|
| 2,076 |
| |
Principal
Real Estate Active Opportunities ETF |
759 |
|
| 629 |
|
(1) |
N/A |
|
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
635 |
|
| 442 |
|
| 772 |
| |
Principal
U.S. Mega-Cap ETF |
66,282 |
|
| 200,132 |
|
| 149,105 |
| |
Principal
U.S. Small-Cap ETF |
166,927 |
|
| 585,176 |
|
| 757,553 |
| |
Principal
Value ETF |
3,844 |
|
| 137,346 |
|
| 5,890 |
| |
|
|
|
|
| |
(1) |
Period
from May 18, 2022, date operations commenced, through June 30,
2022. |
Primary
reasons for changes in several Funds’ brokerage commissions for the three years
were changes in commission rates; changes in Fund size; changes in market
conditions; and implementation of investment strategies. In some cases, such
events required substantial portfolio restructurings, resulting in increased
securities transactions and brokerage commissions.
In
particular, primary reasons for changes in brokerage commissions for those Funds
with relatively greater variations for the three years were, in part: for the
Principal Quality ETF and the Principal Value ETF, significant increases in
assets under management, with such increases resulting in higher commissions for
2022; and for the U.S. Mega-Cap ETF, increased commission rates for certain
trades in 2022.
Brokerage
commissions from the portfolio transactions effected for the Funds were paid to
brokers affiliated with PGI or such Fund's sub-advisors for the fiscal year(s)
ended June 30 as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker Receiving Commissions |
2023
Fund's Total Commissions
Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
|
Principal
Financial Group |
SAMI
Brokerage LLC |
$ |
387 |
|
| 76 |
% |
81 |
% |
Total |
$ |
387 |
| 76 |
% |
81 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker Receiving Commissions |
2022
Fund's Total Commissions
Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
|
Principal
Financial Group |
SAMI
Brokerage LLC |
$ |
306 |
|
| 88 |
% |
99 |
% |
Total |
$ |
306 |
| 88 |
% |
99 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Sub-Advisor
Employed by the Fund Complex |
Affiliated
Broker Receiving Commissions |
2021
Fund's Total Commissions
Paid |
%
of Fund's Total Commissions |
%
of Dollar Amount of Fund's Commissionable Transactions |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
|
Principal
Financial Group |
SAMI
Brokerage LLC |
$ |
772 |
|
|
100 |
% |
100 |
% |
Total |
$ |
772 |
|
100 |
% |
100 |
% |
The
following table indicates the value of each Fund's aggregate holdings, in
thousands, of the securities of its regular brokers or dealers for the fiscal
year ended June 30, 2023.
|
|
|
|
|
|
|
| |
Holdings
of Securities of Principal Exchange-Traded Funds Regular Brokers and
Dealers |
Principal
Active High Yield ETF |
JPMorgan
Chase & Co |
$ |
1,480 |
|
Principal
Investment Grade Corporate Active ETF |
Bank
of America |
1,967 |
|
| Deutsche
Bank AG |
463 |
|
| Goldman
Sachs Group, Inc. |
848 |
|
| JPMorgan
Chase & Co |
1,534 |
|
| Morgan
Stanley |
1,070 |
|
| State
Street Corp |
313 |
|
Principal
Spectrum Preferred Securities Active ETF |
Bank
of America |
23,857 |
|
| Goldman
Sachs Group, Inc. |
17,888 |
|
| JPMorgan
Chase & Co |
23,706 |
|
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
Bank
of America |
657 |
|
| Goldman
Sachs Group, Inc. |
351 |
|
| JPMorgan
Chase & Co |
97 |
|
| Morgan
Stanley |
522 |
|
| State
Street Corp |
163 |
|
Principal
U.S. Mega-Cap ETF |
Bank
of America |
28,791 |
|
| JPMorgan
Chase & Co |
31,020 |
|
Principal
Value ETF |
Bank
of America |
531 |
|
Conflicts
of Interest and Allocation of Trades
By
the Manager (PGI).
PGI has its own trading platform and personnel that perform trade-related
functions. Where applicable, PGI trades on behalf of its own clients. Such
transactions are executed in accordance with PGI’s trading policies and
procedures, including, but not limited to, trade allocations and order
aggregation, purchase of new issues, and directed brokerage. PGI acts as
discretionary investment advisor for a variety of individual accounts, ERISA
accounts, registered investment companies, insurance company separate accounts,
and public employee retirement plans and places orders to trade portfolio
securities for each of these accounts. Managing multiple accounts may give rise
to potential conflicts of interest including, for example, conflicts among
investment strategies and conflicts in the allocation of investment
opportunities. PGI has adopted and implemented policies and procedures that it
believes address the potential conflicts associated with managing accounts for
multiple clients and are designed to ensure that all clients are treated fairly
and equitably. These procedures include allocation policies and procedures and
internal review processes.
If,
in carrying out the investment objectives of its respective clients, occasions
arise in which PGI deems it advisable to purchase or sell the same equity
securities for two or more client accounts at the same or approximately the same
time, PGI may submit the orders to purchase or sell to a broker/dealer for
execution on an aggregate or “bunched” basis. PGI will not aggregate orders
unless it believes that aggregation is consistent with (1) its duty to seek best
execution and (2) the terms of its investment advisory agreements. In
distributing the securities purchased or the proceeds of sale to the client
accounts participating in a bunched trade, no advisory account will be favored
over any other account and each account that participates in an aggregated order
will participate at the average share price for all transactions of PGI relating
to that aggregated order on a given business day, with all transaction costs
relating to that aggregated order shared on a pro rata basis.
Because
of PGI's role as investment advisor to each of the Funds and discretionary
advisor to funds of funds and some underlying funds, conflicts may arise in
connection with the services PGI provides to funds of funds with respect to
asset class and target weights for each asset class and investments made in
underlying funds. Conflicts may arise in connection with the services PGI
provides to the funds of funds that it manages, in connection with the services
PGI provides to other funds of funds, because PGI serves as the investment
adviser to the underlying mutual funds in which the funds of funds invest,
sometimes as the discretionary advisor, and an affiliated investment adviser may
serve as sub-adviser to the mutual funds in which a fund of funds may invest.
This raises a potential conflict because PGI's or an affiliated company's profit
margin may vary depending upon the underlying fund in which the funds of funds
invest.
PGI
implements the following in an effort to limit the appearance of conflicts of
interest and the opportunity for events that could trigger an actual conflict of
interest:
•PGI
uses a process to select investment advisors that emphasizes the selection of
PGI or Principal-affiliated sub-advisors that are determined to be qualified
under PGI’s due diligence process. However, PGI will select an unaffiliated
sub-advisor to manage all or a portion of a Fund’s portfolio when deemed
necessary or appropriate based upon a consideration of the Fund’s objective and
investment strategies and available expertise and resources within the Principal
organization.
•PGI
provides ongoing oversight of the Funds’ investments to monitor adherence to
their investment program.
Additionally,
each Fund's portfolio managers manage a number of accounts other than the
applicable Fund's portfolio, including in some instances proprietary or personal
accounts. Managing multiple accounts may give rise to potential conflicts of
interest including, for example, conflicts among investment strategies,
allocating time and attention to account management, allocation of investment
opportunities, knowledge of and timing of fund trades, selection of brokers and
dealers, and compensation for the account. PGI has adopted and implemented
policies and procedures that it believes address the potential conflicts
associated with managing accounts for multiple clients and personal accounts and
are designed to ensure that all clients and client accounts are treated fairly
and equitably. These procedures include allocation policies and procedures,
personal trading policies and procedures, internal review processes and, in some
cases, review by independent third parties.
Investments
that PGI and its portfolio managers deem appropriate for a Fund's portfolio may
also be deemed appropriate by it for other accounts. Therefore, the same
security may be purchased or sold at or about the same time for both a Fund's
portfolio and other accounts. In such circumstances, PGI may determine that
orders for the purchase or sale of the same security for a Fund's portfolio and
one or more other accounts should be combined. In this event the transactions
will be priced and allocated in a manner deemed by PGI to be equitable and in
the best interests of a Fund’s portfolio and such other accounts. While in some
instances combined orders could adversely affect the price or volume of a
security, the Trust believes that its participation in such transactions on
balance will produce better overall results for the Funds.
By
the Sub-Advisor(s). The
portfolio managers of each sub-advisor manage a number of accounts other than
the Fund's portfolios, including in some instances proprietary or personal
accounts. Managing multiple accounts may give rise to potential conflicts of
interest including, for example, conflicts among investment strategies,
allocating time and attention to account management, allocation of investment
opportunities, knowledge of and timing of fund trades, selection of brokers and
dealers, and compensation for the account. Each has adopted and implemented
policies and procedures that it believes address the potential conflicts
associated with managing accounts for multiple clients and personal accounts and
are designed to ensure that all clients and client accounts are treated fairly
and equitably. These procedures include allocation policies and procedures,
personal trading policies and procedures, internal review processes and, in some
cases, review by independent third parties.
Investments
the sub-advisor deems appropriate for the Fund's portfolio may also be deemed
appropriate by it for other accounts. Therefore, the same security may be
purchased or sold at or about the same time for both the Fund's portfolio and
other accounts. In such circumstances, the sub-advisor may determine that orders
for the purchase or sale of the same security for the Fund's portfolio and one
or more other accounts should be combined. In this event, the transactions will
be priced and allocated in a manner deemed by the sub-advisor to be equitable
and in the best interests of the Fund’s portfolio and such other accounts. While
in some instances combined orders could adversely affect the price or volume of
a security, the Fund believes that its participation in such transactions on
balance will produce better overall results for the Fund.
PURCHASE
AND REDEMPTION OF CREATION UNITS
Book-Entry
Only System
The
Depository Trust Company ("DTC") acts as securities depository for the shares.
Shares of the Funds are represented by securities registered in the name of DTC
or its nominee and deposited with, or on behalf of, DTC. Certificates will not
be issued for shares.
DTC,
a limited-purpose trust company, was created to hold securities of its
participants and to facilitate the clearance and settlement of securities
transactions among DTC participants in such securities through electronic
book-entry changes in accounts of the DTC participants, thereby eliminating the
need for physical movement of securities certificates. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations,
and certain other organizations, some of whom (and/or their representatives) own
DTC. Access to the DTC system is also available to others such as banks,
brokers, dealers, and trust companies that clear through or maintain a custodial
relationship with a DTC participant, either directly or indirectly.
Beneficial
ownership of shares is limited to DTC participants and persons holding interests
through DTC participants. Ownership of beneficial interests in shares (owners of
beneficial interests are referred to herein as Beneficial Owners) is shown on,
and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC participants) and on the records of DTC participants
(with respect to indirect DTC participants and Beneficial Owners that are not
DTC participants). Beneficial Owners will receive from or through a DTC
participant a written confirmation relating to their purchase of shares.
Conveyance
of all notices, statements and other communications to Beneficial Owners is
effected as follows. Pursuant to the Depositary Agreement between the Trust and
DTC, DTC is required to make available to the Trust upon request and for a fee
to be charged to the trust a listing of the shares of the fund held by each DTC
participant. The Trust shall inquire of each such DTC participant as to the
number of Beneficial Owners holding fund shares, directly or indirectly, through
such DTC participant. The Trust shall provide each such DTC participant with
copies of such notice, statement or other communication, in such form, number
and at such place as such DTC participant may reasonably request, so that such
notice, statement or communication may be transmitted by such DTC participant,
directly or indirectly, to such Beneficial Owners. In addition, the Trust shall
pay to each such DTC participant a fair and reasonable amount as reimbursement
for the expenses attendant to such transmittal, all subject to applicable
statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC participants' accounts with payments
in amounts proportionate to their respective beneficial interests in shares of
the fund as shown on the records of DTC or its nominee. Payments by DTC
participants to indirect DTC participants and Beneficial Owners of shares held
through such DTC participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a "street name," and will be the
responsibility of such DTC participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in such shares, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests, or for any other
aspect of the relationship between DTC and the DTC participants or the
relationship between such DTC participants and the indirect DTC participants and
Beneficial Owners owning through such DTC participants.
DTC
may decide to discontinue providing its service with respect to shares at any
time by giving reasonable notice to the trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the trust shall take action either to find a replacement for DTC
to perform its functions at a comparable cost or, if such a replacement is
unavailable, to issue and deliver printed certificates representing ownership of
shares, unless the trust makes other arrangements with respect thereto
satisfactory to the Exchange.
Creation
Units
The
Funds sell, issue, and redeem through the Distributor, Shares in Creation Units
on a continuous basis, without a sales load, at the NAV next determined after
receipt of an order in proper form on any Business Day. As of the date of this
SAI, the NYSE observes the following holidays: New Year’s Day, Martin Luther
King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. The Funds will
not issue fractional Creation Units. Shares of the Funds will only be issued
against full payment, as further described in the Prospectus and this SAI.
Notwithstanding the foregoing, the Trust may, but is not required to, permit
orders until 4:00 p.m., Eastern time, or until the market close (in the event
the Exchange closes early).
A
Creation Unit is an aggregation of Shares in the amount described in the
Prospectus. The Board may declare a split or a consolidation in the number of
Shares outstanding of the Funds or Trust and make a corresponding change in the
number of Shares in a Creation Unit.
To
purchase or redeem any Creation Units from a Fund, you must be, or transact
through, an authorized participant (“AP”). To be an AP, you must be a member or
participant (“Participating Party”) in the Continuous Net Settlement System
(“Clearing Process”) of the National Securities Clearing Corporation (“NSCC”) or
a participant in DTC with access to the DTC system (“DTC Participant”), and you
must execute an agreement (“Participant Agreement”) with the Distributor, which
must be accepted by the Transfer Agent, that governs transactions in the Fund’s
Creation Units.
Transactions
by an AP that is a Participating Party using the NSCC system are referred to as
transactions “through the Clearing Process.” Transactions by an AP that is a DTC
Participant using the DTC system are referred to as transactions “outside the
Clearing Process.”
Investors
who are not APs but want to transact in Creation Units may contact the
Distributor for the names of APs. An AP may require investors to enter into a
separate agreement to transact through it for Creation Units and may require
orders for purchases of shares placed with it to be in a particular form.
Investors should be aware that their broker may not be an AP and, therefore, may
need to place any order to purchase or redeem Creation Units through another
broker or person that is an AP, which may result in additional charges. There
are expected to be a limited number of APs at any one time.
Orders
must be transmitted by an AP by electronic order entry system, telephone,
electronic mail, or other transmission method acceptable to the Distributor
pursuant to procedures set forth in the Participant Agreement. Market
disruptions and telephone or other communication failures may impede the
transmission of orders.
Purchasing
Creation Units
Fund
Deposit
The
consideration for a Creation Unit of a Fund is the Fund Deposit. The Fund
Deposit will consist of the In-Kind Creation Basket and Cash Component, or an
all cash payment (“Cash Value”), as determined by PGI to be permitted or
required by a Fund. Short portions in a Fund’s portfolio and any other financial
instruments that
cannot
be transferred in-kind, will be represented by cash in the Cash Component and
not in the In-Kind Creation Basket.
The
Cash Component will typically include a “Balancing Amount” reflecting the
difference, if any, between the NAV of a Creation Unit and the market value of
the securities in the In-Kind Creation Basket. If the NAV per Creation Unit
exceeds the market value of the securities in the In-Kind Creation Basket, the
purchaser pays the Balancing Amount to the Fund. By contrast, if the NAV per
Creation Unit is less than the market value of the securities in the In-Kind
Creation Basket, the Fund pays the Balancing Amount to the purchaser. The
Balancing Amount ensures that the consideration paid by an investor for a
Creation Unit is exactly equal to the value of the Creation Unit.
PGI,
in a portfolio composition file sent via the NSCC, generally makes available on
each Business Day, prior to the opening of business on the Exchange (currently
9:30 a.m., Eastern Time), a list of the names and the required number of shares
of each security in the In-Kind Creation Basket to be included in the current
Fund Deposit for the Fund (based on information about the Fund's portfolio at
the end of the previous Business Day subject to correction). If applicable, PGI,
through the NSCC, also makes available on each Business Day, the estimated Cash
Component or Cash Value, effective through and including the previous Business
Day, per Creation Unit.
The
announced Fund Deposit is applicable, subject to any adjustments as described
below, for purchases of Creation Units of a Fund until the next-announced Fund
Deposit is made available. From day to day, the composition of the In-Kind
Creation Basket may change as, among other things, corporate actions and
investment decisions by the Advisor are implemented with a view to the
investment objective to the Fund. All questions as to the composition of the
In-Kind Creation Basket and the validity, form, eligibility, and acceptance for
deposit of any securities shall be determined by the Fund, and the Fund’s
determination shall be final and binding. Each Fund reserves the right to accept
a nonconforming (i.e., custom) Fund Deposit. Payment of any stamp duty or the
like shall be the sole responsibility of the AP purchasing a Creation Unit. The
AP must ensure that all Deposit Securities properly denote change in beneficial
ownership.
Cash
in lieu
Each
Fund may, in its sole discretion, permit or require the substitution of an
amount of cash (“cash in lieu”) to be added to the Cash Component to replace any
security in the In-Kind Creation Basket. Circumstances in which the Funds may
permit or require cash in lieu include, without limitation:
•when
the Fund announces before the open of trading that all purchases, all
redemptions or all purchases and redemptions on that day will be made entirely
in cash;
•when
the securities in the In-Kind Creation Basket may not be available in sufficient
quantity for delivery or may not be eligible for transfer through the systems of
DTC or the Clearing Process; and
•when
the AP or its underlying investor is restricted under U.S. or local securities
laws or policies from transacting in one or more securities in the In-Kind
Creation Basket.
Each
Fund will comply with the federal securities laws in accepting securities in the
In-Kind Creation Basket, including the securities in the In-Kind Creation Basket
that are sold in transactions that would be exempt from registration under the
1933 Act.
Each
Fund expects to purchase the securities represented by the cash in lieu amount
in the secondary market (“Market Purchases”). PGI may charge a higher
transaction fee on the cash amount contributed in lieu of securities, which is
intended in part to cover all or a portion of any difference between the market
value at which the securities were purchased by the Fund and the cash in lieu
amount.
Order
Cut-Off Time
For
an order involving a Creation Unit to be effectuated at a Fund’s NAV on a
particular day, it must be received by the Distributor by or before the deadline
for such order (“Order Cut-Off Time”) in accordance with the procedures set
forth in the Participant Agreement. The Order Cut-Off Time for creation and
redemption orders for a Fund is generally expected to be 4:00 p.m. Eastern Time
for In-Kind Creation and Redemption Baskets, and 2:00 p.m. Eastern Time for
Custom Baskets (which includes cash value) transactions. Accordingly, In-Kind
Creation and Redemption Baskets are expected to be accepted until the close of
regular trading on the Exchange on each Business Day, which is usually 4:00 p.m.
Eastern Time. On days when the Exchange or bond markets close earlier than
normal (such as the day before a holiday), the Order Cut-Off Time is expected to
track the Exchange or bond markets closing and be similarly earlier than normal.
For
select International Funds, next day (also known as T-1 or T minus one)
international market orders are to be placed after the listing exchange closing
time and before the Fund’s established T-1 order window cut-off time, the latest
being 5:30 PM Eastern Standard Time on any Business Day. Such orders, if
accepted, will receive the next Business Day’s NAV per Creation Unit.
Certain
orders, such as custom orders, sometimes clear outside the Clearing Process and,
therefore, like other orders outside the Clearing Process, may need to be
transmitted early on the relevant Business Day to be effectuated at that day’s
NAV. A custom order may be placed when, for example, an AP cannot transact in a
security in the In-Kind Creation or Redemption Basket and additional cash is
included in the Fund Deposit or Fund Redemption in lieu of such security. Custom
orders may be required to be received by the Distributor by 3:00 p.m. Eastern
Time to be effectuated based on the Fund’s NAV on that Business
Day.
In
all cases, cash and securities should be transferred to the Fund by the
“Settlement Date,” which is generally the Business Day immediately following the
Business Day the order is placed (“Transmittal Date”) for cash and the second
Business Day following the Transmittal Date for securities. Persons placing
custom orders or orders involving Cash Value should be aware of time deadlines
imposed by intermediaries, such as DTC and/or the Federal Reserve Bank wire
system, which may delay the delivery of cash and securities by the Settlement
Date.
Placement
of Creation Orders
All
purchase orders must be placed by or through an AP. To order a Creation Unit, an
AP must submit an irrevocable purchase order to the Distributor in accordance
with the procedures set forth in the Participant Agreement. In-kind (portions
of) purchase orders will be processed through the Clearing Process when it is
available. The Clearing Process is an enhanced clearing process that is
available only for certain securities and only to DTC Participants that are also
participants in the Clearing Process of the NSCC. In-kind (portions of) purchase
orders not subject to the Clearing Process will go through a manual clearing
process run by DTC. Fund Deposits that include government securities must be
delivered through the Federal Reserve Bank wire transfer system (“Federal
Reserve System”). Fund Deposits that include cash may be delivered through the
Clearing Process or the Federal Reserve System. Certain orders for a Fund may be
made outside the Clearing Process. In-kind deposits of securities for such
orders must be delivered through the Federal Reserve System (for government
securities) or through DTC (for corporate securities).
Orders
Using Clearing Process
In
connection with creation orders made through the Clearing Process, the
Distributor transmits, on behalf of the AP, such trade instructions as are
necessary to effect the creation order. Pursuant to such trade instructions, the
AP agrees to deliver the requisite Fund Deposit to the Trust, together with such
additional information as may be required by the Distributor and the Transfer
Agent. An order to create Creation Units through the Clearing Process is deemed
received by the Distributor and the Transfer Agent on the Transmittal Date if
(i) such order is received by the Distributor by the order Cut-Off Time on such
Transmittal Date and (ii) all other procedures set forth in the Participant
Agreement are properly followed. Cash Components will be delivered using either
the Clearing Process or the Federal Reserve System, as described
below.
Orders
Outside Clearing Process
Fund
Deposits made outside the Clearing Process must state that the DTC Participant
is not using the Clearing Process and that the creation of Creation Units will
instead be effected through a transfer of securities and cash directly through
DTC. With respect to such orders, the Fund Deposit transfer must be ordered by
the DTC Participant on the Transmittal Date in a timely fashion so as to ensure
the delivery of the requisite number of securities in the In- Kind Creation
Basket (whether standard or custom) through DTC to the relevant Trust account by
11:00 a.m., Eastern Time, (the “DTC Cut-Off Time”) on the Business Day
immediately following the Transmittal Date. The amount of cash equal to the Cash
Component, along with any cash in lieu and Transaction Fee, must be transferred
directly to the Custodian through the Federal Reserve Bank wire transfer system
in a timely manner so as to be received by the Custodian no later than 12:00
p.m., Eastern Time, on the Business Day immediately following the Transmittal
Date. The delivery of corporate securities through DTC must occur by 3:00 p.m.,
Eastern Time, on the Business Day immediately following the Transmittal Date.
The delivery of government securities through the Federal Reserve System must
occur by 3:00 p.m., Eastern Time, on the Business Day immediately following the
Transmittal Date.
An
order to create Creation Units outside the Clearing Process is deemed received
by the Distributor on the Transmittal Date if (i) such order is received by the
Distributor by the Order Cut-Off Time on such Transmittal Date and (ii) all
other procedures set forth in the Participant Agreement are properly followed.
If the Custodian does not receive both the required In-Kind Creation Basket by
the DTC Cut-Off Time and the Cash Component by the appointed time, such order
may be canceled. Upon written notice to the Distributor and the Transfer Agent,
a canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then-current In-Kind Creation Basket
and Cash Component. Except as provided in the Participant Agreement and subject
to Foreign Market Holidays, the delivery of Creation Units so created will occur
no later than the second Business Day following the day on which the order is
deemed received by the Distributor. APs that submit a canceled order will be
liable to the Funds for any losses resulting therefrom.
Orders
involving foreign securities are expected to be settled outside the Clearing
Process. Thus, upon receipt of an irrevocable purchase order, the Distributor
will notify PGI and the Custodian of such order. The Custodian, who will have
caused the appropriate local sub-custodian(s) of the Fund to maintain an account
into which an AP may deliver the Fund Deposit (or cash in lieu), with
adjustments determined by the Fund, will then provide information of the order
to such local sub-custodian(s). The AP must also make available on or before the
Settlement, by means satisfactory to the Fund, immediately available or same day
funds in U.S. dollars estimated by the Fund to be sufficient to pay the Cash
Component and Transaction Fee.
While,
as stated above, Creation Units are generally delivered no later than the second
Business Day following the day on which the order is deemed received by the
Distributor, each Fund may settle Creation Unit transactions on a basis other
than the one described above to accommodate foreign market holiday schedules, to
account for different treatment among foreign and U.S. markets of dividend
record dates and ex-dividend dates (that is the last day the holder of a
security can sell the security and still receive dividends payable on the
security), and in certain other circumstances. Such settlement may take longer
than two Business Days. In such cases, the local market settlement procedures
will not commence until the end of local holiday periods.
Acceptance
of Orders for Creation Units
The
Trust reserves the absolute right to reject a creation order transmitted to it
by the Distributor in respect of a Fund if: (i) the order is not in proper form;
(ii) the investor(s), upon obtaining the Shares, would own 80% or more of the
currently outstanding Shares of the Fund; (iii) the securities delivered do not
conform to the In-Kind Creation Basket for the relevant date; (iv) acceptance of
the Fund Deposit would have adverse tax consequences to the Fund; (v) acceptance
of the Fund Deposit would, in the opinion of counsel, be unlawful; (vi)
acceptance of the Fund Deposit would otherwise, in the discretion of the Trust,
the Fund, or PGI, will have an adverse effect on the Trust, the Fund or the
rights of beneficial owners; or (vii) in the event that circumstances that are
outside the control of the Trust make it practically impossible to process
creation orders. Examples of such circumstances include acts of God; public
service or utility problems resulting in telephone, telecopy and computer
failures; fires, floods or extreme weather conditions; market conditions or
activities causing trading halts; systems failures involving computer or other
information systems affecting the Trust, PGI, a sub-advisor, the Transfer Agent,
the Distributor, DTC, NSCC, the Custodian or sub-custodian or any other
participant in the creation process; and similar extraordinary events. The
Distributor shall notify an AP of its rejection of the order. The Funds, the
Custodian, any sub-custodian, the Transfer Agent, and the Distributor are under
no duty, however, to give notification of any defects or irregularities in the
delivery of Fund Deposits, and they shall not incur any liability for the
failure to give any such notification.
Issuance
of a Creation Unit
Once
a Fund has accepted a creation order, upon next determination of the Fund’s NAV,
the Fund will confirm the issuance of a Creation Unit, against receipt of
payment, at such NAV. The Distributor will transmit a confirmation of acceptance
to the AP that placed the order.
Except
as provided below, a Creation Unit will not be issued until the Fund obtains
good title to the In-Kind Creation Basket securities and the Cash Component,
along with any cash in lieu and Transaction Fee. Except as described above with
respect to foreign markets, the delivery of Creation Units will generally occur
no later than the second Business Day following the Transmittal Date for
securities.
In
certain cases, APs will create and redeem Creation Units on the same trade date.
In these instances, the Trust reserves the right to settle these transactions on
a net basis.
With
respect to orders involving foreign securities, when the applicable local
sub-custodian(s) has confirmed to the Custodian that the In-Kind Creation Basket
(or cash in lieu) has been delivered to the Fund’s account at the applicable
sub-custodian(s), the Distributor and PGI shall be notified of such delivery,
and the Fund will issue and cause the delivery of the Creation
Unit.
Creation
Units may be created in advance of receipt by the Trust of all or a portion of
the applicable In-Kind Creation Basket, provided the purchaser tenders an
initial deposit consisting of any available securities in the In-Kind Creation
Basket and cash equal to the sum of the Cash Component and at least 115% of the
market value, as adjusted from time to time, of the In-Kind Creation Basket
securities not delivered (“Additional Cash Deposit”). Such initial deposit will
have a value greater than the NAV of the Creation Unit on the date the order is
placed. The order shall be deemed to be received on the Transmittal Date
provided that it is placed in proper form prior to 4:00 p.m., Eastern Time, on
such date, and federal funds in the appropriate amount are deposited with the
Custodian by the DTC Cut-Off Time the following Business Day. If the order is
not placed in proper form by 4:00 p.m., Eastern Time, or federal funds in the
appropriate amount are not received by the DTC Cut-Off Time the next Business
Day, then the order will be canceled or deemed unreceived and the AP
effectuating such transaction will be liable to the Fund for any losses
resulting therefrom.
To
the extent securities in the In-Kind Creation Basket remain undelivered, pending
delivery of such securities additional cash will be required to be deposited
with the Trust as necessary to maintain an Additional Cash Deposit equal to at
least 115% (as adjusted by PGI) of the daily marked-to-market value of the
missing securities. To the extent that either such securities are still not
received by 1:00 p.m., Eastern Time, on the second Business Day following the
day on which the purchase order is deemed received by the Distributor or a
marked-to- market payment is not made within one Business Day following
notification to the purchaser and/or AP that such a payment is required, the
Trust may use the cash on deposit to purchase the missing securities, and the AP
effectuating such transaction will be liable to the Fund for any costs incurred
therein or losses resulting therefrom, including any Transaction Fee, and any
amount by which the actual purchase price of the missing securities exceeds the
Additional Cash Deposit or the market value of such securities on the day the
purchase order was deemed received by the Distributor, as well as brokerage and
related transaction costs. The Trust will return any unused portion of the
Additional Cash Deposit once all of the missing securities have been received by
the Trust. The delivery of Creation Units so created will occur no later than
the second Business Day following the day on which the purchase order is deemed
received by the Distributor.
Transaction
Fees
To
compensate for costs incurred in connection with creation and redemption
transactions, investors will be required to pay a Transaction Fee as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Fund |
Standard
Creation Transaction Fee * |
Maximum
Variable Charge for Cash Portion of Creation ** |
Standard
Redemption Transaction Fee * |
Maximum
Variable Charge for Cash Portion of Redemptions ** |
Principal
Active High Yield ETF |
$500 |
3.00% |
$500 |
2.00% |
Principal
Focused Blue Chip ETF |
$125 |
3.00% |
$125 |
2.00% |
Principal
Healthcare Innovators ETF |
$600 |
3.00% |
$600 |
2.00% |
Principal
Investment Grade Corporate Active ETF |
$750 |
3.00% |
$750 |
2.00% |
Principal
Quality ETF |
$500 |
3.00% |
$500 |
2.00% |
Principal
Real Estate Active Opportunities ETF |
$125 |
3.00% |
$125 |
2.00% |
Principal
Spectrum Preferred Securities Active ETF |
$250 |
3.00% |
$250 |
2.00% |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
$400 |
3.00% |
$400 |
2.00% |
Principal
U.S. Mega-Cap ETF |
$200 |
3.00% |
$200 |
2.00% |
Principal
U.S. Small-Cap ETF |
$750 |
3.00% |
$750 |
2.00% |
Principal
Value ETF |
$500 |
3.00% |
$500 |
2.00% |
* Applicable
to in-kind purchases only.
** As
a percentage of the cash amount invested.
The
Standard Transaction Fee applies to in-kind purchases of the Funds effected
through the Clearing Process on any Business Day, regardless of the number of
Creation Units purchased or redeemed that day (assuming, in the case of multiple
orders on the same day, that the orders are received at or near the same time).
As shown in the table above, certain Fund Deposits consisting of a Cash Value
will be subject to a variable charge of up to 3% in addition to the standard
Transaction Fee. With cash received from the variable charge, PGI will purchase
the necessary securities for a Fund’s portfolio.
PGI
may adjust the Transaction Fee from time to time. The Standard
Creation/Redemption Transaction Fee is based, in part, on the number of holdings
in a Fund’s portfolio and may be adjusted on a quarterly basis if the number of
holdings increases. Investors will also be responsible for the costs associated
with transferring the securities in the In-Kind Creation (and Redemption)
Baskets to (and from) the account of the Trust. Further, investors who, directly
or indirectly, use the services of a broker or other intermediary to compose a
Creation Unit in addition to an AP to effect a transaction in Creation Units may
be charged an additional fee for such services.
Cash
Purchase Method
When
cash purchases of Creation Units are available or specified for a Fund, they
will be effected in essentially the same manner as in-kind purchases. In the
case of a cash purchase, the investor must pay the cash equivalent of the Fund
Deposit. In addition, cash purchases may be subject to Transaction
Fees.
Redeeming
Creation Units
Fund
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by the Distributor and only on a
Business Day. The redemption proceeds for a Creation Unit will consist of the
In-Kind Redemption Basket and a Cash Redemption Amount, or an all cash payment
(“Cash Value”), in all instances equal to the value of a Creation Unit. Short
positions and other instruments that cannot be transferred in kind will be
represented by cash in the Cash Redemption Amount and not in the In-Kind
Redemption Basket.
The
Cash Redemption Amount will typically include a Balancing Amount, reflecting the
difference, if any, between the NAV of a Creation Unit and the market value of
the securities in the In-Kind Redemption Basket. If the NAV per Creation Unit
exceeds the market value of the securities in the In-Kind Redemption Basket, the
Fund pays the Balancing Amount to the redeeming investor. By contrast, if the
NAV per Creation Unit is less than the market value of the securities in the
In-Kind Redemption Basket, the redeeming investor pays the Balancing Amount to
the Fund.
PGI,
in a portfolio composition file sent via the NSCC, generally makes available on
each Business Day, prior to the opening of business on the Exchange (currently
9:30 a.m., Eastern Time), a list of the names and the required number of shares
of each security in the In-Kind Redemption Basket to be included in the current
redemption proceeds for the Fund (based on information at the end of the
previous Business Day) (subject to correction). If applicable, PGI, through the
NSCC, also makes available on each Business Day, the estimated Cash Component or
Cash Value, effective through and including the previous Business Day, per
Creation Unit. Each Fund reserves the right to accept a nonconforming (i.e.,
custom) Fund Redemption.
In
lieu of an In-Kind Redemption Basket and Cash Redemption Amount, Creation Units
may be redeemed consisting solely of cash in an amount equal to the NAV of a
Creation Unit, which amount is referred to as the Cash Value. Such redemptions
for a Fund may be subject to a variable charge, as explained above. If
applicable, information about the Cash Value will be made available by
PGI.
From
day to day, the composition of the In-Kind Redemption Basket may change as,
among other things, corporate actions and investment decisions by the Advisor
are implemented with a view to the investment objective to the Fund. All
questions as to the composition of the In-Kind Redemption Basket and the
validity, form, eligibility, and acceptance for deposit of any securities shall
be determined by the Fund, and the Fund’s determination shall be final and
binding.
The
right of redemption may be suspended or the date of payment postponed: (i) for
any period during which the NYSE is closed (other than customary weekend and
holiday closings); (ii) for any period during which trading on the NYSE is
suspended or restricted; (iii) for any period during which an emergency exists
as a result of which disposal of the Shares or determination of the Fund’s NAV
is not reasonably practicable; or (iv) in such other circumstances as permitted
by the SEC, including as described below.
Cash
in lieu
Each
Fund may, in its sole discretion, permit or require the substitution of an
amount of cash (“cash in lieu”) to be added to the Cash Redemption Amount to
replace any security in the In-Kind Redemption Basket. A Fund may permit or
require cash in lieu when, for example, the securities in the In-Kind Redemption
Basket may not be available in sufficient quantity for delivery or may not be
eligible for transfer through the systems of DTC or the Clearing Process.
Similarly, a Fund may permit or require cash in lieu when, for example, the AP
or its underlying investor is restricted under U.S. or local securities law or
policies from transacting in one or more securities in the In-Kind Redemption
Basket or an underlying investor would be subject to unfavorable tax treatment
if the investor received redemption proceeds consisting of certain non-U.S.
securities. Each Fund will comply with the federal securities laws in satisfying
redemptions with the applicable In-Kind Redemption Basket, including the
securities in the In-Kind Redemption Basket that are sold in transactions that
would be exempt from registration under the 1933 Act. All redemption orders
involving cash in lieu are considered to be “custom redemptions.” PGI may charge
a higher transaction fee on the cash amount contributed in lieu of securities,
which is intended in part to cover all or a portion of any difference between
the market value of the securities and the cash in lieu amount.
Placement
of Redemption Orders
Redemptions
must be placed to the Distributor. In addition, redemption orders must be
processed either through the DTC process or the Clearing Process. To redeem a
Creation Unit, an AP must submit an irrevocable redemption order to the
Distributor in accordance with the procedures set forth in the Participant
Agreement.
An
AP submitting a redemption order is deemed to represent to the Fund that it is
in compliance with all applicable representations set forth in the Participant
Agreement. Each Fund reserves the absolute right, in its sole discretion, to
verify these representations, but will typically require verification in
connection with higher levels of redemption activity and/or short interest in
the Fund. If the AP, upon receipt of a verification report, does not provide
sufficient verification of the requested representations, the redemption order
will not be considered to be in proper form and may be rejected by the
Fund.
In
certain cases, APs will create and redeem Creation Units on the same trade date.
In these instances, the Trust reserves the right to settle these transactions on
a net basis.
For
select International Funds, next day (also known as T-1 or T minus one)
international market orders are to be placed after the listing exchange closing
time and before the Fund’s established T-1 order window cut-off time, the latest
being 5:30 PM Eastern Standard Time on any Business Day. Such orders, if
accepted, will receive the next Business Day’s NAV per Creation
Unit.
Placement
of Redemption Orders Using Clearing Process
Orders
to redeem Creation Units through the Clearing Process are deemed received by the
Trust on the Transmittal Date if (i) such order is received by the Distributor
not later than the Order Cut-Off Time on such Transmittal Date, and (ii) all
other procedures set forth in the Participant Agreement are properly followed.
Orders deemed received will be effectuated based on the NAV of the Fund as next
determined. An order to redeem Creation Units using the Clearing Process made in
proper form but received by the Trust after the Order Cut-Off Time will be
deemed received on the next Business Day and will be effected at the NAV next
determined on such next Business Day. In connection with such orders, the
Transfer Agent transmits on behalf of the AP such trade instructions as are
necessary to effect the redemption. Pursuant to such trade instructions, the AP
agrees to deliver the requisite Creation Unit(s) to the Fund, together with such
additional information as may be required by the Transfer Agent. Cash Redemption
Amounts will be delivered using either the Clearing Process or the Federal
Reserve System. The applicable In-Kind Redemption Basket and the Cash Redemption
Amount will be transferred to the investor by the second NSCC business day
following the date on which such request for redemption is deemed
received.
Placement
of Redemption Orders Outside Clearing Process
Orders
to redeem Creation Units outside the Clearing Process must state that the DTC
Participant is not using the Clearing Process and that redemption of Creation
Units will instead be effected through transfer of Shares directly through DTC.
Such orders are deemed received by the Trust on the Transmittal Date if: (i)
such order is received by the Transfer Agent not later than the Order Cut-Off
Time on the Transmittal Date; (ii) such order is accompanied or followed by the
delivery of both (a) the Creation Unit(s), which delivery must be made through
DTC to the Custodian no later than the DTC Cut-Off Time on the Business Day
immediately following the Transmittal Date and (b) the Cash Redemption Amount by
12:00 p.m., Eastern Time, on the Business Day immediately following the
Transmittal Date; and (iii) all other procedures set forth in the Participant
Agreement are properly followed. After the Trust has deemed such an order
received, the Trust will initiate procedures to transfer, and expect to deliver,
the requisite In-Kind Redemption Basket and/or any Cash Redemption Amount owed
to the redeeming party by the second Business Day following the Transmittal Date
on which such redemption order is deemed received by the Trust.
Orders
involving foreign securities are expected to be settled outside the Clearing
Process. Thus, upon receipt of an irrevocable redemption order, the Transfer
Agent will notify PGI and the Custodian. The Custodian will then provide
information of the redemption to the Fund’s local sub-custodian(s). The
redeeming AP, or the investor on whose behalf it is acting, will have
established appropriate arrangements with a broker-dealer, bank or other custody
provider in each jurisdiction in which the securities are customarily traded and
to which such securities (and any cash in lieu) can be delivered from the Fund’s
accounts at the applicable local sub-custodian(s).
The
calculation of the value of the In-Kind Redemption Basket and the Cash
Redemption Amount to be delivered/received upon redemption will be made by the
Custodian computed on the Business Day on which a redemption order is deemed
received by the Trust. Therefore, if a redemption order in proper form is
submitted to the Distributor by an AP with the ability to transact through the
Federal Reserve System, as applicable, not later than Order Cut-Off Time on the
Transmittal Date, and the requisite number of Shares of the relevant Fund are
delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the
In-Kind Redemption Basket and the Cash Redemption Amount to be
delivered/received will be determined by the Custodian on such Transmittal Date.
If, however, either: (i) the requisite number of Shares of the relevant Fund are
not delivered by the DTC Cut- Off-Time, as described above, or (ii) the
redemption order is not submitted in proper form, then the redemption order will
not be deemed received as of the Transmittal Date. In such case, the value of
the In-Kind Redemption Basket and the Cash Redemption Amount to be
delivered/received will be computed on the Business Day following the
Transmittal Date provided that the Fund Shares of the relevant Fund are
delivered through DTC to the Custodian by 11:00 a.m., Eastern Time, the
following Business Day pursuant to a properly submitted redemption
order.
If
it is not possible to effect deliveries of the securities in the In-Kind
Redemption Basket, the Trust may in its discretion exercise its option to redeem
Shares in cash, and the redeeming beneficial owner will be required to receive
its redemption proceeds in cash. In addition, an investor may request a
redemption in cash that each Fund may, in its sole discretion, permit. In either
case, the investor will receive a cash payment equal to the NAV of its Shares
based on the NAV of Shares of the Fund next determined after the redemption
request is received in proper form (minus a Transaction Fee, including a
variable charge, if applicable, as described above).
Redemptions
of Fund Shares for the In-Kind Redemption Basket will be subject to compliance
with applicable federal and state securities laws and each Fund (whether or not
it otherwise permits cash redemptions) reserves the right to redeem Creation
Units for cash to the extent that the Trust could not lawfully deliver specific
securities in the In-Kind Redemption Basket upon redemptions or could not do so
without first registering the securities in the In-Kind Redemption Basket under
such laws. An AP or an investor for which it is acting subject to a legal
restriction with respect to a particular security included in the In-Kind
Redemption Basket applicable to the redemption of a Creation Unit may be paid an
equivalent amount of cash. The AP may request the redeeming beneficial owner of
the Shares to complete an order form or to enter into agreements with respect to
such matters as compensating cash payment, beneficial ownership of shares or
delivery instructions.
Delivery
of Redemption Basket
Once
a Fund has accepted a redemption order, upon next determination of the Fund’s
NAV, the Fund will confirm the issuance of an In-Kind Redemption Basket, against
receipt of the Creation Unit(s) at such NAV, any cash in lieu and Transaction
Fee. A Creation Unit tendered for redemption and the payment of the Cash
Redemption Amount, any cash in lieu and Transaction Fee will be effected through
DTC. The AP, or the investor on whose behalf it is acting, will be recorded on
the book-entry system of DTC.
In
certain cases, APs will create and redeem Creation Units on the same trade date.
In these instances, the Trust reserves the right to settle these transactions on
a net basis.
Cash
Redemption Method
When
cash redemptions of Creation Units are available or specified for a Fund, they
will be effected in essentially the same manner as in-kind redemptions. In the
case of a cash redemption, the investor will receive the cash equivalent of the
In-Kind Redemption Basket minus any Transaction Fees.
Settlement
of Foreign Securities and Regular Foreign Holidays
Each
Fund generally intends to effect deliveries of Creation Units on a basis of the
Transmittal Date (“T”) plus two Business Days (i.e., days on which the national
securities exchange is open) ("T+2"). A Fund may effect deliveries of Creation
Units on a basis other than T+2 to accommodate local holiday schedules, to
account for different treatment among foreign and U.S. markets of dividend
record dates and ex- dividend dates or under certain other circumstances. Given
that foreign securities settle in accordance with the normal rules of settlement
of such securities in the applicable foreign market, coupled with foreign market
holiday schedules, the Settlement Date may be up to 15 calendar days after the
Transmittal Date in certain circumstances.
The
ability of the Trust to effect in-kind creations and redemptions within two
Business Days of receipt of an order in good form is subject, among other
things, to the condition that, within the time period from the date of the order
to the date of delivery of the securities, there are no days that are holidays
in the applicable foreign market. In such cases, the local market settlement
procedures will not commence until the end of the local holiday periods. For
every occurrence of one or more intervening holidays in the applicable foreign
market that are not holidays observed in the U.S. equity market, the redemption
settlement cycle will be extended by the number of such intervening holidays. In
addition to holidays, other unforeseeable closings in a foreign market due to
emergencies may also prevent the Trust from delivering securities within normal
settlement periods. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (e.g., days on which no or
limited securities transactions occur, as a result of substantially shortened
trading hours), the elimination of existing holidays or changes in local
securities delivery practices could affect the information set forth herein at
some time in the future.
Because
a Fund’s portfolio securities may trade on days that the Fund’s Exchange is
closed or on days that are not Business Days for the Fund, APs may not be able
to redeem their Shares, or to purchase and sell Shares on the Exchange, on days
when the NAV of the Fund could be significantly affected by events in the
relevant non-U.S. markets.
The
Trust offers, issues and sells Shares of the Funds to investors only in Creation
Units through the Distributor on a continuous basis at the NAV next determined
after an order in proper form is received. The NAV of each Fund is expected to
be determined as of 4:00 p.m. ET on each “Business Day,” which is defined to
include any day that the Trust is open for business as required by Section 22(e)
of the 1940 Act. The Trust will sell and redeem Creation Units of the Funds only
on a Business Day.
The
price of Shares trading on the Exchange will be based on a current bid-offer
market. No secondary sales will be made to Brokers at a concession by the
Distributor or by the Funds. Purchases and sales of Shares on the Exchange,
which will not involve the Funds, will be subject to customary brokerage
commissions and charges.
Custom
Baskets
Each
Fund may rely on Rule 6c-11 under the 1940 Act (except for the Principal Focused
Blue Chip ETF (the "Focused Blue Chip ETF") and the Principal Real Estate Active
Opportunities ETF (the "Real Estate ETF")) to use baskets of portfolio
securities that do not reflect a pro-rata representation of the Fund’s portfolio
or that differ from the initial basket used in transactions on the same business
day. Each of the Focused Blue Chip ETF and the Real Estate ETF may rely on its
Non‑Transparent Order to use baskets of securities that do not reflect its
Tracking Basket. These are referred to as “nonconforming” deposits and
redemptions or custom baskets.
CALCULATION
OF NAV
Each
Fund's NAV is calculated each day the New York Stock Exchange ("NYSE") is open,
as of the close of business of the Exchange (normally 4:00 p.m. Eastern Time).
The NAV of Fund shares is not determined in days the NYSE is closed (generally,
New Year's Day; Martin Luther King, Jr. Day; Washington’s Birthday/Presidents'
Day; Good Friday; Memorial Day; Juneteenth; Independence Day; Labor Day;
Thanksgiving Day; and Christmas). The Funds will not treat an intraday
unscheduled disruption in NYSE trading as a closure of the NYSE and will price
its shares as of 4:00 p.m. Eastern Time, if the particular disruption directly
affects only the NYSE. When an order to buy or sell shares is received, the
share price used to fill the order is the next price calculated after the order
is received in proper form.
A
Fund's NAV will be the value of a single Share. The NAV of Shares of a Fund will
be computed by adding the value of the Fund’s investments, cash, and other
assets, subtracting its liabilities, and dividing the result by the number of
Shares outstanding.
The
Board has designated PGI as the Funds' valuation designee, as permitted by SEC
Rule 2a-5, where PGI is responsible for the day-to-day valuation and oversight
responsibilities of the Funds, subject to the Board's oversight. PGI has
established a Valuation Committee ("Valuation Committee") to fulfill its
oversight responsibilities as the Funds' valuation designee.
Generally,
each Fund will value its portfolio securities and assets as
follows:
In
computing the Fund’s NAV, the Fund’s fixed income securities (including
defaulted debt and restricted securities (collectively, “OTC-Traded Securities”)
will be valued based on price quotations obtained from a third-party pricing
service or from a broker-dealer who makes markets in such securities. Any such
third-party pricing service may use a variety of methodologies to value some or
all such securities to determine the market price. For example, the prices of
securities with characteristics similar to those held by the Fund may be used to
assist with the pricing process. In addition, the pricing service may use
proprietary pricing models. The Fund’s OTC-Traded Securities will generally be
valued at bid prices.
Debt
securities with remaining maturities of sixty days or less for which market
quotations and information furnished by a third-party pricing service are not
readily available will be valued at amortized cost, which approximates current
value.
Exchange
traded equity securities, including ETFs, Depositary Receipts (including
unsponsored ADRs), exchange-traded REITs, exchange-traded preferred stock,
exchange-traded convertible bonds, and cleared swaps will be valued at market
value, which will generally be determined using the last reported official
closing or last trading price on the exchange or market on which the security is
primarily traded at the time of valuation or, if no sale has occurred, at the
last quoted bid price on the primary market or exchange on which they are
traded.
Investment
company securities (other than ETFs), including money market funds, closed end
investment companies, unit investment trusts and open-end investment companies
will be valued at NAV.
Exchange-traded
futures contracts will be valued at the settlement or closing price determined
by the applicable exchange.
Exchange-traded
option contracts, including options on futures and swaps, will be valued at
their most recent sale price. If no such sales are reported, these contracts
will be valued at their most recent bid price.
OTC-traded
derivative instruments, including options, swaps, will normally be valued on the
basis of quotes obtained from a third party broker-dealer who makes markets in
such securities or on the basis of quotes obtained from an independent
third-party pricing service. The Fund’s OTC-traded derivative instruments will
generally be valued at bid prices. Certain OTC-traded derivative instruments,
such as interest rate swaps and credit default swaps, will be valued at the mean
price.
Prices
described above will be obtained from pricing services that have been approved
by the Board. A number of independent third party pricing services are available
and the Funds may use more than one of these services. The Funds may also
discontinue the use of any pricing service at any time. PGI will engage in
oversight activities with respect to each Fund’s pricing services, which
includes, among other things, testing the prices provided by pricing services
prior to calculation of the Fund’s NAV, conducting periodic due diligence
meetings, and periodically reviewing the methodologies and inputs used by these
services.
Foreign
securities and instruments will be valued in their local currency following the
methodologies described above. Typically, foreign securities, instruments and
currencies will be translated to U.S. dollars, based on foreign currency
exchange rate quotations supplied by a pricing service as of the close of the
New York Stock Exchange (“NYSE”), which will use a proprietary model to
determine the exchange rate.
Forward
foreign currency exchange contracts will be valued at an interpolated rate based
on days to maturity between the closest preceding and subsequent settlement
period. Such interpolated rates are derived from foreign currency exchange rate
quotations reported by an independent third-party pricing service.
Other
portfolio securities and assets for which market quotations, official closing
prices, or information furnished by a pricing service are not readily available
or, in the opinion of the Valuation Committee, are deemed unreliable will be
fair valued in good faith by the Valuation Committee in accordance with
applicable fair value pricing policies. For example, if, in the opinion of the
Valuation Committee, a security’s value has been materially affected by events
occurring before the Fund’s pricing time but after the close of the exchange or
market on which the security is principally traded, that security will be fair
valued in good faith by the Valuation Committee in accordance with applicable
fair value pricing policies.
In
fair valuing a security, the Valuation Committee may consider factors including
price movements in futures contracts and ADRs, market and trading trends, the
bid/ask quotes of brokers, and off-exchange institutional trading.
TAX
CONSIDERATIONS
Taxation
of the Funds
It
is a policy of each Fund to make distributions of substantially all of its
respective investment income and any net realized capital gains. Each Fund
intends to qualify as a regulated investment company by satisfying certain
requirements prescribed by Subchapter M of the Internal Revenue Code. If a Fund
fails to qualify as a regulated investment company, it will be liable for taxes,
significantly reducing its distributions to shareholders and eliminating
shareholders' ability to treat distributions (as long or short-term capital
gains or qualifying dividends) of the Fund in the manner they were received by
the Fund.
Each
Fund may purchase securities of certain foreign corporations considered to be
passive foreign investment companies by the Internal Revenue Service. To avoid
taxes and interest that must be paid by the Fund if these instruments appreciate
in value, the Fund may make various elections permitted by the tax laws.
However, these elections could require that the Fund recognizes additional
taxable income, which in turn must be distributed.
Each
Fund is required in certain cases to withhold and remit to the U.S. Treasury 24%
of ordinary income dividends and capital gain dividends, and the proceeds of
redemption of shares, paid to any shareholder 1) who has provided either an
incorrect tax identification number or no number at all, 2) who is subject to
backup withholding by the Internal Revenue Service for failure to report the
receipt of interest or dividend income properly, or 3) who has failed to certify
to the Fund that it is not subject to backup withholding or that it is a
corporation or other "exempt recipient."
Taxation
of Shareholders
A
shareholder recognizes gain or loss on the sale or redemption of shares of a
Fund in an amount equal to the difference between the proceeds of the sales or
redemption and the shareholder's adjusted tax basis in the shares. All or a
portion of any loss so recognized may be disallowed if the shareholder purchases
other shares of the Fund within 30 days before or after the sale or redemption.
In general, any gain or loss arising from (or treated as arising from) the sale
or redemption of shares of the Fund is considered capital gain or loss
(long-term capital gain or loss if the shares were held for longer than one
year). However, any capital loss arising from the sales or redemption of shares
held for six months or less is disallowed to the extent of the amount of
exempt-interest dividends received on such shares and (to the extent not
disallowed) is treated as a long-term capital loss to the extent of the amount
of capital gain dividends received on such shares. Capital losses in any year
are deductible only to the extent of capital gains plus, in the case of a
noncorporate taxpayer, $3,000 of ordinary income under current
rules.
If
a shareholder a) incurs a sales charge in acquiring shares of a Fund, b)
disposes of such shares less than 91 days after they are acquired, and c)
subsequently acquires shares of a Fund or another fund at a reduced sales charge
pursuant to a right to reinvest at such reduced sales charge acquired in
connection with the acquisition of the shares disposed of, then the sales charge
on the shares disposed of (to the extent of the reduction in the sales charge on
the shares subsequently acquired) shall not be taken into account in determining
gain or loss on the shares disposed of but shall be treated as incurred on the
acquisition of the shares subsequently acquired.
Shareholders
should consult their own tax advisors as to the federal, state and local tax
consequences of ownership of shares of the Funds in its particular
circumstances.
Qualification
as a Regulated Investment Company
Each
Fund intends to qualify annually to be treated as a regulated investment company
("RIC") under the Internal Revenue Code of 1986, as amended (the "IRC"), by
satisfying certain requirements prescribed by Subchapter M of the IRC. To
qualify as a RIC, a Fund must invest in assets that produce types of income
specified in the IRC ("Qualifying Income"). Whether the income from derivatives,
swaps, commodity-linked derivatives, and other commodity/natural
resource-related securities is Qualifying Income is unclear under current law.
Accordingly, a Fund’s ability to invest in certain derivatives, swaps,
commodity-linked derivatives, and other commodity/natural resource-related
securities may be restricted. Further, if a Fund does invest in these types of
securities and the income is not determined to be Qualifying Income, it may
cause the Fund to fail to qualify as a RIC under the IRC for a given year. In
addition, a Fund must satisfy certain diversification tests under the IRC to
qualify as a RIC. If a Fund fails to qualify as a RIC, it will be liable for
taxes, significantly reducing its distributions to shareholders, and eliminating
shareholders' ability to treat distributions (as long or short-term capital
gains or qualifying dividends) of the Fund in the manner they were received by
the Fund.
International
Funds
Some
foreign securities purchased by the Funds may be subject to foreign taxes that
could reduce the yield on such securities. The amount of such foreign taxes is
expected to be insignificant. A Fund may from year to year make an election to
pass through such taxes to shareholders. If such election is not made, any
foreign taxes paid or accrued will represent an expense to the Fund that will
reduce its investment company taxable income.
Under
the Foreign Account Tax Compliance Act (FATCA), a Fund may be required to
withhold a 30% tax on (a) dividends paid by the Fund and (b) certain capital
gain distributions and/or the proceeds arising from the sale of the Fund shares
paid by the Fund after December 31, 2018, to certain foreign entities, referred
to as foreign financial institutions or non-financial foreign entities, that
fail to comply (or be deemed compliant) with extensive new reporting and
withholding requirements designed to inform the U.S. Department of the Treasury
of U.S.-owned foreign investment accounts. The IRS recently issued proposed
regulations indicating its intent to eliminate the 30% withholding tax on gross
proceeds. A Fund may disclose the information that it receives from its
shareholders to the IRS, non-U.S. taxing authorities or other parties as
necessary to comply with FATCA. Withholding also may be required if a foreign
entity that is a shareholder of a Fund fails to provide the Fund with
appropriate certifications or other documentation concerning its status under
FATCA.
Futures
Contracts and Options
As
previously discussed, some of the Funds invest in futures contracts or options
thereon, index options, or options traded on qualified exchanges. For federal
income tax purposes, capital gains and losses on futures contracts or options
thereon, index options or options traded on qualified exchanges are generally
treated as 60% long-term and 40% short-term. In addition, a Fund must recognize
any unrealized gains and losses on such positions held at the end of the fiscal
year. A Fund may elect out of such tax treatment, however, for a futures or
options position that is part of an "identified mixed straddle" such as a put
option purchased with respect to a portfolio security. Gains and losses on
futures and options included in an identified mixed straddle are considered 100%
short-term and unrealized gains or losses on such positions are not realized at
year-end. The straddle provisions of the Code may require the deferral of
realized losses to the extent that a Fund has unrealized gains in certain
offsetting positions at the end of the fiscal year. The Code may also require
recharacterization of all or a part of losses on certain offsetting positions
from short-term to long-term, as well as adjustment of the holding periods of
straddle positions.
PORTFOLIO
HOLDINGS DISCLOSURE
On
each Business Day, before commencement of trading in Shares on the Exchange,
each of the Principal Focused Blue Chip ETF (the "Focused Blue Chip ETF") and
the Principal Real Estate Active Opportunities ETF (the "Real Estate ETF") will
disclose on its website the Tracking Basket and Tracking Basket Weight Overlap.
If applicable, each of the Focused Blue Chip ETF and the Real Estate ETF will
also disclose the composition of any portfolio of securities exchanged with an
Authorized Participant on the previous Business Day that differed from such
Business Day’s Tracking Basket other than with respect to cash. The Tracking
Basket published on each of the Focused Blue Chip ETF and the Real Estate ETF’s
website each Business Day will include the following information for each
portfolio holding in the Tracking Basket: (i) ticker symbol; (ii) CUSIP or other
identifier; (iii) description of holding; (iv) quantity of each security or
other asset held; and (v) percentage weight of the holding in the Tracking
Basket. Each of the Focused Blue Chip ETF and the Real Estate ETF will also
disclose its complete portfolio holdings, including the name, identifier, market
value, and weight of each security and instrument in the portfolio, on
www.PrincipalAM.com on the thirteenth business day of the following
month.
The
portfolio holdings of each Fund (excluding the Focused Blue Chip ETF and the
Real Estate ETF) are publicly disseminated each day the Fund is open for
business through financial reporting and news services, including publicly
accessible Internet websites. In addition, for in-kind creations for the Funds
(including the Focused Blue Chip ETF and the Real Estate ETF), a basket
composition file, which includes the security names and share quantities to
deliver in exchange for Shares, together with estimates and actual cash
components, will be publicly disseminated daily prior to the opening of the
Exchange via the National Securities Clearing Corporation ("NSCC"). The basket
represents one Creation Unit of the Funds.
Certain
Entities may receive information regarding the creation unit portfolio not
available to other current or prospective Fund shareholders in connection with
the dissemination of information necessary for transactions in Creation Units.
For this purpose, “Entities” are generally limited to NSCC members,
subscribers to various fee-based subscription services, large institutional
investors (known as “Authorized Participants”) that have been authorized by the
Distributor to purchase and redeem large blocks of shares pursuant to legal
requirements, market makers, and other institutional market participants and
entities that provide information or transactional services.
Access
to information concerning the Funds' portfolio holdings may be permitted at
other times to personnel of third party service providers, including the Funds'
custodian, transfer agent, auditors and counsel, as may be necessary to conduct
business in the ordinary course in a manner consistent with such service
providers’ agreements with the Trust, on behalf of the Funds.
In
addition to the permitted disclosures described above, each Fund is required to
file its portfolio holdings with the SEC for each fiscal quarter on Form N-CSR
(with respect to each annual period and semi-annual period) and Form N-PORT
(with respect to the first and third quarters of the Fund's fiscal year).
Shareholders may obtain a Fund's Forms N-CSR and N-PORT filings on the SEC's
website at www.sec.gov. The Fund will also provide such documents without charge
upon request.
Further,
each of the Focused Blue Chip ETF and the Real Estate ETF and persons acting on
behalf of each ETF will comply with Regulation Fair Disclosure as if it applied
to them.
FEATURES
SPECIFIC TO NON-TRANSPARENT ETFs
Monitoring
of Thresholds
PGI
will monitor on an on-going basis how shares of each of the Focused Blue Chip
ETF and the Real Estate ETF trade, including the level of any premium/discount
to NAV and the bid/ask spreads on market transactions. For at least the first
three years after the launch of each ETF, PGI will promptly call a meeting of
the Board or a designated committee thereof (and will present to the Board or
committee for its consideration, recommendations for appropriate remedial
measures) (1) if the tracking error exceeds 1%; or (2) if, for 30 or more days
in any quarter or 15 days in a row (a) the absolute difference between either
the closing price or the bid/ask price, on one hand, and NAV, on the other,
exceeds 2%; or (b) the bid/ask spread exceeds 2%. In such a circumstance, the
Board or committee will consider the continuing viability of the Fund, whether
shareholders are being harmed, and what, if any, corrective measures would be
appropriate to, among other things, narrow the tracking error, premium/discount,
or bid/ask spread, as applicable. Potential corrective measures include the
following, among others: (a) changing lead market makers; (b) listing the ETF on
a different exchange; (c) changing the size of an ETF’s Creation Units; (d)
changing the ETF’s investment objective or strategy; or (e) modifying the
Tracking Basket process. Should PGI conclude that a particular threshold remains
persistently high, PGI could recommend to the Board that it liquidate the ETF or
authorize PGI to pursue the potential conversion of the ETF to a fully
transparent, active ETF or a mutual fund. For at least the first three years
after launch of each ETF, the Board or committee will also undertake these
considerations on an
annual
basis regardless of whether the ETF’s preset thresholds have been
crossed.
Lack
of Readily Available Market Quotations
A
security held in the Fund portfolio but not in the Tracking Basket might not
have readily available market quotations, which could be the situation when, for
example, the applicable listing exchange institutes an extended trading halt in
a portfolio security, leading to a potential increase in the difference between
the value of the Fund portfolio and the Tracking Basket. If the trading of a
security held in the Fund’s portfolio is halted or otherwise does not have
readily available market quotations and PGI believes that the lack of any such
readily available market quotations may affect the reliability of the Tracking
Basket as an arbitrage vehicle or otherwise determines it is in the best
interest of the Fund, PGI promptly will disclose on the Fund’s website the
identity and weighting of such security for so long as such security’s trading
is halted or otherwise does not have readily available market quotations and
remains in the Fund portfolio. The disclosure of this information is intended to
allow sufficient market information so that market participants can continue to
engage in share arbitrage and hedging transactions effectively. If securities
representing 10% or more of the Fund’s portfolio do not have readily available
market quotations, PGI would promptly request that the Fund’s primary listing
exchange halt trading in the Fund’s shares.
PGI
believes that in situations where a security in the Tracking Basket does not
have a readily available market quotation, the effectiveness of the Tracking
Basket as an arbitrage vehicle is unlikely to be materially affected. If,
however, PGI believes that the lack of any such readily available market
quotations may affect the reliability of the Tracking Basket as an arbitrage
vehicle or otherwise determines it is in the best interest of the Fund, PGI will
promptly take any remedial steps it believes necessary and
appropriate.
PROXY
VOTING POLICIES AND PROCEDURES
The
Board has delegated responsibility for decisions regarding proxy voting for
securities held by each Fund to PGI or the Fund's sub-advisor, if applicable.
PGI and the sub-advisor will vote such proxies in accordance with its proxy
policies and procedures, which have been reviewed by the Board, and which are
found in Appendix B. Any material changes to the proxy policies and procedures
will be submitted to the Board for approval.
For
Funds that participate in a securities lending program, the voting rights for
securities that are loaned are transferred to the borrower. Therefore, the
lender (i.e., a Fund) is not entitled to vote the loaned securities, unless it
recalls those securities. Those managing the Fund’s investments may recall
securities for voting purposes when they reasonably believe the ability to vote
such securities outweighs the additional revenue received if such securities
were not recalled.
Information
regarding how the Funds voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30, 2023, is available, without
charge, upon request, by calling 1-800-222-5852 or by accessing the Funds' most
recently filed Form N-PX on the SEC website at www.sec.gov.
FINANCIAL
STATEMENTS
The
financial statements of the Trust at June 30, 2023, are incorporated by
reference to the Trust's most recent Annual
Report to Shareholders,
filed with the SEC on Form N-CSR.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Ernst
& Young LLP, 700 Nicollet Mall, Suite 500, Minneapolis, Minnesota 55402, is
the independent registered public accounting firm for the Fund Complex.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Although
the Trust does not have information concerning its beneficial ownership held in
the names of DTC participants, as of September 30, 2023, the names, addresses,
and percentage ownership of each DTC participant that owned of record 5% or more
of the outstanding Shares of each Fund are listed below. It is presumed that a
person who owns more than 25% of the voting securities of a Fund controls the
Fund. A control person could control the outcome of proposals presented to
shareholders for approval. The information is listed in alphabetical order by
Fund.
|
|
|
|
|
|
|
|
|
|
| |
ETF |
Percent
of
Ownership |
Name
of Owner |
Address
of Owner |
Principal
Active High Yield |
36.88% |
Bank
of New York Mellon |
225
Liberty Street |
|
|
|
New
York, NY 10286 |
|
|
| |
Principal
Active High Yield |
30.05% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Active High Yield |
9.75% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
|
|
| |
Principal
Active High Yield |
9.00% |
UMB
Bank NA |
10010
Grand Blvd |
|
|
| Kansas
City, MO 64106 |
|
|
| |
Principal
Focused Blue Chip ETF |
94.28% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Healthcare Innovators |
56.43% |
State
Street Bank and Trust Company |
John
Hancock Tower |
|
|
|
200
Clarendon St |
|
|
|
Boston,
MA 02116 |
|
|
| |
Principal
Healthcare Innovators |
11.14% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Healthcare Innovators |
7.78% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
|
|
| |
Principal
Investment Grade Corporate Active |
46.75% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Investment Grade Corporate Active |
32.63% |
Raymond
James & Associates, Inc. |
880
Carillon Parkway |
|
|
| St.
Petersburg, FL 33716 |
|
|
| |
Principal
Investment Grade Corporate Active |
9.16% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
ETF |
Percent
of
Ownership |
Name
of Owner |
Address
of Owner |
Principal
Quality |
45.87% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Quality |
18.11% |
Pershing
LLC |
One
Pershing Plaza |
|
|
|
Jersey
City, NJ 07399 |
|
|
| |
Principal
Quality |
7.16% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
|
|
| |
Principal
Quality |
6.59% |
Morgan
Stanley Smith Barney LLC |
1585
Broadway |
|
|
| New
York, NY 10036 |
|
|
| |
Principal
Quality |
6.18% |
Bank
of New York Mellon |
225
Liberty Street |
|
|
|
New
York, NY 10286 |
|
|
| |
Principal
Quality |
6.10% |
LPL
Financial LLC |
4707
Executive Drive |
|
|
| San
Diego, CA 92121 |
|
|
| |
Principal
Quality |
5.32% |
BOFA
Securities Inc. |
1
Bryant Park |
|
|
| New
York, NY 10036 |
|
|
| |
Principal
Real Estate Active Opportunities |
96.33% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
18.53% |
UBS
Financial Services Inc. |
1285
Avenue of the Americas |
|
|
| New
York, NY 10019 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
13.54% |
Wells
Fargo Clearing Services, LLC |
One
North Jefferson Ave |
|
|
|
St.
Louis, MO 63103 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
13.03% |
Merrill
Lynch, Pierce, Fenner & Smith |
One
Bryant Park |
|
|
Incorporated |
New
York, NY 10036 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
11.18% |
Morgan
Stanley Smith Barney LLC |
1585
Broadway |
|
|
| New
York, NY 10036 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
7.17% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
6.18% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Spectrum Preferred Securities Active |
5.17% |
Bank
of America, NA/GWIM Trust |
2
World Financial Center |
|
| Operations |
225
Liberty Street, 41st Floor |
|
|
| New
York, NY 10281 |
|
|
|
|
|
|
|
|
|
|
| |
ETF |
Percent
of
Ownership |
Name
of Owner |
Address
of Owner |
|
|
| |
Principal
Spectrum Tax-Advantaged Dividend Active |
89.38% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
U.S. Mega-Cap |
81.06% |
Bank
of New York Mellon |
225
Liberty Street |
|
|
|
New
York, NY 10286 |
|
|
| |
Principal
U.S. Mega-Cap |
5.60% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
U.S. Small-Cap |
82.35% |
Bank
of New York Mellon |
225
Liberty Street |
|
|
|
New
York, NY 10286 |
|
|
| |
Principal
U.S. Small-Cap |
9.74% |
Apex
Clearing Corporation |
350
N. St. Paul St, Suite 1300 |
|
|
| Dallas,
TX 75201 |
|
|
| |
Principal
Value |
52.39% |
National
Financial Services, LLC |
200
Liberty St. |
|
|
|
One
World Financial Center |
|
|
|
New
York, NY 10281-1003 |
|
|
| |
Principal
Value |
33.50% |
Charles
Schwab & Co., Inc. |
211
Main Street |
|
|
|
San
Francisco, CA 94105 |
The
Trust's Bylaws set the quorum requirement (a quorum must be present at a meeting
of shareholders for business to be transacted). Those Bylaws state that a quorum
is the presence in person or by proxy of the holders of one-third of the shares
of the capital stock of the Trust, or when the meeting relates to a certain
Fund, that Fund, issued and outstanding and entitled to vote on the record
date.
Certain
proposals presented to shareholders for approval require the vote of a "majority
of the outstanding voting securities," which is a term defined in the 1940 Act
to mean, with respect to a Fund, the affirmative vote of the lesser of 1) 67% or
more of the voting securities of the Fund present at the meeting of that Fund,
if the holders of more than 50% of the outstanding voting securities of the Fund
are present in person or by proxy, or 2) more than 50% of the outstanding voting
securities of the Fund.
Management
Ownership
As
of September 30, 2023, the Board Members and officers of the Trust, as a group,
owned less than 1% of the outstanding shares of any of the Funds.
PORTFOLIO
MANAGER DISCLOSURE
This
section contains information about portfolio managers and the other accounts
they manage, their compensation, and their ownership of securities. The
“Ownership of Securities” tables reflect the portfolio managers’ beneficial
ownership, which means a direct or indirect pecuniary interest. For information
about potential material conflicts of interest, see Brokerage Allocation and
Other Practices - Conflicts of Interest and Allocation of Trades.
This
section lists information about PGI's portfolio managers first. Next, the
section includes information about the sub-advisors' portfolio managers, which
is provided by the sub-advisors.
Information
in this section is as of June 30, 2023, unless otherwise noted.
Advisor:
Principal Global Investors, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Other
Accounts Managed |
Portfolio
Manager and ETFs |
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of
the Accounts
that
base the
Advisory
Fee
on
Performance |
Jonathan
S. Curran: Principal
Investment Grade Corporate Active ETF |
|
| |
Registered
investment companies |
7 |
$1.2
billion |
1 |
$545.8
million |
Other
pooled investment vehicles |
12 |
$3.3
billion |
0 |
$0 |
Other
accounts |
25 |
$7.2
billion |
4 |
$1.0
billion |
Mark
P. Denkinger: Principal
Active High Yield ETF |
|
|
| |
Registered
investment companies |
7 |
$2.5
billion |
0 |
$0 |
Other
pooled investment vehicles |
8 |
$498.3
million |
0 |
$0 |
Other
accounts |
34 |
$3.2
billion |
2 |
$731,400 |
Christopher
Ibach:
Principal Healthcare Innovators, Principal Quality, Principal U.S.
Mega-Cap, Principal U.S. Small-Cap, and Principal Value
ETFs |
Registered
investment companies |
3 |
$1.5
billion |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$57.2
million |
0 |
$0 |
Other
accounts |
5 |
$1.1
billion |
0 |
$0 |
K.
William Nolin: Principal
Focused Blue Chip ETF |
Registered
investment companies |
6 |
$31.3
billion |
0 |
$0 |
Other
pooled investment vehicles |
4 |
$2.9
billion |
0 |
$0 |
Other
accounts |
71 |
$13.4
billion |
0 |
$0 |
Joshua
Rank: Principal
Active High Yield ETF |
|
|
| |
Registered
investment companies |
7 |
$2.5
billion |
0 |
$0 |
Other
pooled investment vehicles |
8 |
$498.3
million |
0 |
$0 |
Other
accounts |
34 |
$3.2
billion |
2 |
$731,400 |
Tom
Rozycki: Principal
Focused Blue Chip ETF |
Registered
investment companies |
6 |
$31.3
billion |
0 |
$0 |
Other
pooled investment vehicles |
4 |
$2.9
billion |
0 |
$0 |
Other
accounts |
71 |
$13.4
billion |
0 |
$0 |
Aaron
J. Siebel: Principal
Healthcare Innovators, Principal Quality, Principal U.S. Mega-Cap,
Principal U.S. Small-Cap, and Principal Value ETFs |
Registered
investment companies |
20 |
$17.0
billion |
0 |
$0 |
Other
pooled investment vehicles |
3 |
$43.0
billion |
0 |
$0 |
Other
accounts |
2 |
$2.1
billion |
0 |
$0 |
Darrin
E. Smith: Principal
Active High Yield ETF |
|
|
| |
Registered
investment companies |
7 |
$2.5
billion |
0 |
$0 |
Other
pooled investment vehicles |
8 |
$498.3
million |
0 |
$0 |
Other
accounts |
34 |
$3.2
billion |
2 |
$731,400 |
Darryl
Trunnel: Principal
Investment Grade Corporate Active ETF |
|
| |
Registered
investment companies |
13 |
$6.2
billion |
1 |
$545.8
million |
Other
pooled investment vehicles |
19 |
$14.9
billion |
0 |
$0 |
Other
accounts |
34 |
$10.7
billion |
4 |
$681.2
million |
Compensation
PGI
offers the Funds' investment team a competitive compensation structure that is
evaluated annually relative to other global asset management firms to ensure its
continued competitiveness and alignment with industry best practices. The
objective of the structure is to offer market competitive compensation that
aligns individual and team contributions with firm and client performance
objectives in a manner that is consistent with industry standards and business
results.
Compensation
for each Funds' investment team is comprised of base salary and variable
incentive components. As team members advance in their careers, the variable
component increases in its proportion commensurate with responsibility levels.
The variable component is designed to reinforce delivery of investment
performance, firm performance, team collaboration, regulatory compliance,
operational excellence, client retention, and client satisfaction. Investment
performance is measured on a pre-tax basis against relative client benchmarks
and peer groups over one-year, three-year, and five-year periods, calculated
quarterly, reinforcing a longer-term orientation.
Payments
under the variable incentive plan may be in the form of cash or a combination of
cash and deferred compensation. The amount of variable compensation delivered in
the form of deferred compensation depends on the size of an individual’s
incentive award as it relates to a tiered deferral scale. Deferred compensation
is required to be invested into Principal Financial Group ("PFG") restricted
stock units and the funds managed by the team via a co-investment program. Both
payment vehicles are subject to a three-year vesting schedule. The overall
measurement framework and the deferred component are well aligned with our
desired focus on clients’ objectives (e.g. co-investment), alignment with PFG
stakeholders, and talent retention.
In
addition to deferred compensation obtained through their compensation
programming, team members have investments acquired through their participation
in PFG's employee stock purchase plan, retirement plans, and direct personal
investments. It should be noted that PFG's retirement plans and deferred
compensation plans generally utilize its non-registered group separate accounts
or commingled vehicles rather than the traditional mutual funds. However, in
each instance these vehicles are managed in lockstep alignment with the mutual
funds (i.e. "clones").
Ownership
of Securities
|
|
|
|
|
|
|
| |
Portfolio
Manager |
ETFs
Managed by Portfolio Manager |
Dollar
Range of Securities Owned by the Portfolio Manager |
Jonathan
S. Curran |
Principal
Investment Grade Corporate Active ETF |
$100,001
- $500,000 |
Mark
P. Denkinger |
Principal
Active High Yield ETF |
$50,001
- $100,000 |
Christopher
Ibach |
Principal
Healthcare Innovators ETF |
None |
Christopher
Ibach |
Principal
Quality ETF |
None |
Christopher
Ibach |
Principal
U.S. Mega-Cap ETF |
None |
Christopher
Ibach |
Principal
U.S. Small-Cap ETF |
$50,001
- $100,000 |
Christopher
Ibach |
Principal
Value ETF |
None |
K.
William Nolin (1) |
Principal
Focused Blue Chip ETF |
None |
Joshua
Rank |
Principal
Active High Yield ETF |
$10,001
- $50,000 |
Tom
Rozycki (1) |
Principal
Focused Blue Chip ETF |
None |
Aaron
J. Siebel |
Principal
Healthcare Innovators ETF |
$1
- $10,000 |
Aaron
J. Siebel |
Principal
Quality ETF |
$1
- $10,000 |
Aaron
J. Siebel |
Principal
U.S. Mega-Cap ETF |
$1
- $10,000 |
Aaron
J. Siebel |
Principal
U.S. Small-Cap ETF |
$1
- $10,000 |
Aaron
J. Siebel |
Principal
Value ETF |
$1
- $10,000 |
Darrin
E. Smith |
Principal
Active High Yield ETF |
$1
- $10,000 |
Darryl
Trunnel |
Principal
Investment Grade Corporate Active ETF |
$100,001
- $500,000 |
(1)
Information
as of July 10, 2023.
Sub-Advisor:
Principal Real Estate Investors, LLC
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Other
Accounts Managed |
|
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of
the Accounts
that
base the
Advisory
Fee
on
Performance |
Keith
Bokota:
Principal Real Estate Active Opportunities ETF |
Registered
investment companies |
3 |
$6.1
billion |
0 |
$0 |
Other
pooled investment vehicles |
2 |
$1.2
billion |
0 |
$0 |
Other
accounts |
43 |
$3.1
billion |
1 |
$100.8
million |
Anthony
Kenkel:
Principal Real Estate Active Opportunities ETF |
|
| |
Registered
investment companies |
10 |
$9.2
billion |
0 |
$0 |
Other
pooled investment vehicles |
5 |
$2.6
billion |
0 |
$0 |
Other
accounts |
81 |
$8.4
billion |
5 |
$459.1
million |
Kelly
D. Rush:
Principal Real Estate Active Opportunities ETF |
|
| |
Registered
investment companies |
10 |
$9.2
billion |
0 |
$0 |
Other
pooled investment vehicles |
5 |
$2.6
billion |
0 |
$0 |
Other
accounts |
82 |
$8.5
billion |
5 |
$459.1
million |
Compensation
Principal
Real Estate Investors, LLC offers the Funds’ investment team a competitive
compensation structure that is evaluated annually relative to other global asset
management firms to ensure its continued competitiveness and alignment with
industry best practices. The objective of the structure is to offer market
competitive compensation that aligns individual and team contributions with firm
and client performance objectives in a manner that is consistent with industry
standards and business results.
Compensation
for each Fund’s investment team is comprised of base salary and variable
incentive components. As team members advance in their careers, the variable
component increases in its proportion commensurate with responsibility levels.
The variable component is designed to reinforce delivery of investment
performance, firm performance, team collaboration, regulatory compliance,
operational excellence, client retention, and client satisfaction. Investment
performance is measured on a pre-tax basis against relative client benchmarks
and peer groups over one-year, three-year, and five-year periods, calculated
quarterly, reinforcing a longer-term orientation.
Payments
under the variable incentive plan may be in the form of cash or a combination of
cash and deferred compensation. The amount of variable compensation delivered in
the form of deferred compensation depends on the size of an individual’s
incentive award as it relates to a tiered deferral scale. Deferred compensation
is required to be partially invested in Principal Financial Group (“PFG”)
restricted stock units and funds managed by the team, via a co-investment
program. Both payment vehicles are subject to a three-year vesting schedule. The
overall measurement framework and the deferred component are well aligned with
our desired focus on clients’ objectives, alignment with PFG stakeholders, and
talent retention.
In
addition to deferred compensation obtained through their compensation
programming, team members have investments acquired through their participation
in PFG’s employee stock purchase plan, retirement plans and direct personal
investments. It should be noted that PFG’s retirement plans and deferred
compensation plans generally utilize its non-registered group separate accounts
or commingled vehicles rather than the traditional mutual funds. However, in
each instance these vehicles are managed in lockstep alignment with the mutual
funds (i.e. “clones”).
Ownership
of Securities
|
|
|
|
|
|
|
| |
Portfolio
Manager |
ETFs
Managed by Portfolio Manager |
Dollar
Range of Securities Owned by the Portfolio Manager |
Keith
Bokota |
Principal
Real Estate Active Opportunities ETF |
$1
- $10,000 |
Anthony
Kenkel |
Principal
Real Estate Active Opportunities ETF |
$1
- $10,000 |
Kelly
D. Rush |
Principal
Real Estate Active Opportunities ETF |
None |
Sub-Advisor:
Spectrum Asset Management, Inc.
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Other
Accounts Managed |
|
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of
the Accounts
that
base the
Advisory
Fee
on
Performance |
Fernando
Diaz:
Principal Spectrum Tax-Advantaged Dividend Active ETF |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Roberto
Giangregorio:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
L.
Phillip Jacoby, IV:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Manu
Krishnan:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Mark
A. Lieb:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Kevin
Nugent:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Satomi
Yarnell:
Principal Spectrum Preferred Securities Active and Principal Spectrum
Tax-Advantaged Dividend Active ETFs |
Registered
investment companies |
8 |
$9.6
billion |
0 |
$0 |
Other
pooled investment vehicles |
7 |
$4.2
billion |
0 |
$0 |
Other
accounts |
69 |
$6.7
billion |
0 |
$0 |
Compensation
Spectrum
Asset Management offers investment professionals a competitive compensation
structure that is evaluated relative to other asset management firms to ensure
its continued competitiveness and alignment with industry best practices. The
objective of the structure is to align individual and team contributions with
client performance objectives in a manner that is consistent with industry
standards and business results.
Compensation
for investment professionals at all levels is comprised of base salary and
variable incentive components. As team members advance in their careers, the
variable component increases in its proportion commensurate with responsibility
levels. The incentive component is aligned with performance and goals of the
firm. Salaries are established based on a benchmark of salary levels of relevant
asset management firms, taking into account each portfolio manager’s position
and responsibilities, experience, contribution to client servicing, compliance
with firm and/or regulatory policies and procedures, work ethic, seniority and
length of service, and contribution to the overall functioning of the
organization.
Spectrum
attempts to award all compensation in a manner that promotes sound risk
management principles.
Base salaries are fixed, but are subject to periodic adjustments, usually on an
annual basis.
The
variable incentive is in the form of a discretionary bonus and may represent a
significant proportion of an individual’s total annual compensation.
Discretionary bonuses are determined quarterly and are based on a methodology
used by senior management that takes into consideration several factors,
including but not necessarily limited to those listed below:
1.Changes
in overall firm assets under management, including those assets in the Fund.
(Portfolio managers are not directly incentivized to increase assets ("AUM"),
although they are indirectly compensated as a result of an increase in
AUM)
2.Portfolio
performance (on a pre-tax basis) relative to benchmarks measured
annually.
3.Contribution
to client servicing
4.Compliance
with firm and/or regulatory policies and procedures
5.Work
ethic
6.Seniority
and length of service
7.Contribution
to overall functioning of organization
Ownership
of Securities
|
|
|
|
|
|
|
| |
Portfolio
Manager |
ETFs
Managed by Portfolio Manager |
Dollar
Range of Securities Owned by the Portfolio Manager |
Fernando
Diaz |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
Roberto
Giangregorio |
Principal
Spectrum Preferred Securities Active ETF |
None |
Roberto
Giangregorio |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
L.
Phillip Jacoby, IV |
Principal
Spectrum Preferred Securities Active ETF |
None |
L.
Phillip Jacoby, IV |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
Manu
Krishnan |
Principal
Spectrum Preferred Securities Active ETF |
None |
Manu
Krishnan |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
Mark
A. Lieb |
Principal
Spectrum Preferred Securities Active ETF |
$100,001-
$500,000 |
Mark
A. Lieb |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
Kevin
Nugent |
Principal
Spectrum Preferred Securities Active ETF |
$100,001-
$500,000 |
Kevin
Nugent |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
Satomi
Yarnell |
Principal
Spectrum Preferred Securities Active ETF |
None |
Satomi
Yarnell |
Principal
Spectrum Tax-Advantaged Dividend Active ETF |
None |
|
| |
APPENDIX
A – DESCRIPTION OF BOND RATINGS
Moody’s
Investors Service, Inc. Rating Definitions:
Long-Term
Obligation Ratings
Ratings
assigned on Moody’s global long-term obligation rating scales are
forward-looking opinions of the relative credit risk of financial obligations
issued by non-financial corporates, financial institutions, structured finance
vehicles, project finance vehicles, and public sector entities. Long-term
ratings are assigned to issuers or obligations with an original maturity of one
year or more and reflect both on the likelihood of a default or impairment on
contractual financial obligations and the expected financial loss suffered in
the event of default or impairment.1
1
For
certain structured finance, preferred stock and hybrid securities in which
payment default events are either not defined or do not match investor’s
expectations for timely payment, the ratings reflect the likelihood of
impairment and the expected financial loss in the event of
impairment.
|
|
|
|
| |
Aaa: |
Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest
level of credit risk. |
Aa: |
Obligations
rated Aa are judged to be of high quality and are subject to very low
credit risk. |
A: |
Obligations
rated A are considered upper-medium grade and are subject to low credit
risk. |
Baa: |
Obligations
rated Baa are subject to moderate credit risk. They are considered
medium-grade and as such may possess certain speculative
characteristics. |
Ba: |
Obligations
rated Ba are judged to be speculative and are subject to substantial
credit risk. |
B: |
Obligations
rated B are considered speculative and are subject to high credit
risk. |
Caa: |
Obligations
rated Caa are judged to be speculative of poor standing and are subject to
very high credit risk. |
Ca: |
Obligations
rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and
interest. |
C: |
Obligations
rated C are the lowest rated class of bonds and are typically in default,
with little prospect for recovery of principal or
interest. |
|
|
|
|
| |
NOTE: |
Moody’s
appends numerical modifiers, 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the
obligation ranks in the higher end of its generic rating category, the
modifier 2 indicates a mid-range ranking, and the modifier 3 indicates a
ranking in the lower end of that generic rating category. Additionally, a
“(hyb)” indicator is appended to all ratings of hybrid securities issued
by banks, issuers, financial companies, and securities
firms.* |
*By
their terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together the
hybrid indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that
security.
SHORT-TERM
NOTES: Short-term ratings are assigned to obligations with an original maturity
of thirteen months or less and reflect both on the likelihood of a default or
impairment on contractual financial obligations and the expected financial loss
suffered in the event of default. Moody’s employs the following three
designations, all judged to be investment grade, to indicate the relative
repayment ability of rated issuers:
Issuers
rated Prime-1 (or related supporting institutions) have a superior ability to
repay short-term debt obligations.
Issuers
rated Prime-2 (or related supporting institutions) have a strong ability to
repay short-term debt obligations.
Issuers
rated Prime-3 (or related supporting institutions) have an acceptable ability to
repay short-term obligations.
Issuers
rated Not Prime do not fall within any of the Prime rating
categories.
US
MUNICIPAL SHORT-TERM DEBT: The Municipal Investment Grade (MIG) scale is used to
rate US municipal bonds of up to three years maturity. MIG ratings are divided
into three levels - MIG 1 through MIG 3 - while speculative grade short-term
obligations are designated SG.
MIG
1 denotes superior credit quality, afforded excellent protection from
established cash flows, highly reliable liquidity support, or demonstrated
broad-based access to the market for refinancing.
MIG
2 denotes strong credit quality with ample margins of protection, although not
as large as in the preceding group.
MIG
3 notes are of acceptable credit quality. Liquidity and cash-flow protection may
be narrow and market access for refinancing is likely to be less
well-established.
SG
denotes speculative-grade credit quality and may lack sufficient margins of
protection.
Description
of S&P Global Ratings’ Credit Rating Definitions:
S&P
Global’s credit rating, both long-term and short-term, is a forward-looking
opinion of the creditworthiness of an obligor with respect to a specific
obligation. This assessment takes into consideration the creditworthiness of
guarantors, insurers, or other forms of credit enhancement on the
obligation.
The
credit rating is not a recommendation to purchase, sell or hold a security,
inasmuch as it does not comment as to market price or suitability for a
particular investor.
The
ratings are statements of opinion as of the date they are expressed furnished by
the issuer or obtained by S&P Global Ratings from other sources S&P
Global Ratings considers reliable. S&P Global Ratings does not perform an
audit in connection with any rating and may, on occasion, rely on unaudited
financial information. The ratings may be changed, suspended, or withdrawn as a
result of changes in, or unavailability of, such information, or for other
circumstances.
The
ratings are based, in varying degrees, on the following
considerations:
•Likelihood
of payment - capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the
obligation;
•Nature
of and provisions of the financial obligation;
•Protection
afforded by, and relative position of, the financial obligation in the event of
bankruptcy, reorganization, or other arrangement under the laws of bankruptcy
and other laws affecting creditor’s rights.
LONG-TERM
CREDIT RATINGS:
|
|
|
|
| |
AAA: |
Obligations
rated ‘AAA’ have the highest rating assigned by S&P Global Ratings.
The obligor’s capacity to meet its financial commitment on the obligation
is extremely strong. |
AA: |
Obligations
rated ‘AA’ differ from the highest-rated issues only in small degree. The
obligor’s capacity to meet its financial commitment on the obligation is
very strong. |
A:
|
Obligations
rated ‘A’ have a strong capacity to meet financial commitment on the
obligation although they are somewhat more susceptible to the adverse
effects of changes in circumstances and economic conditions than
obligations in higher-rated categories. |
BBB: |
Obligations
rated ‘BBB’ exhibit adequate protection parameters; however, adverse
economic conditions or changing circumstances are more likely to lead to a
weakened capacity to meet financial commitment on the
obligation. |
BB,
B, CCC,
CC
and C:
|
Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded, on balance, as having
significant speculative characteristics. ‘BB’ indicates the lowest degree
of speculation and ‘C’ the highest degree of speculation. While such
obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major risk exposures to
adverse conditions. |
BB: |
Obligations
rated ‘BB’ are less vulnerable to nonpayment than other speculative
issues. However it faces major ongoing uncertainties or exposure to
adverse business, financial, or economic conditions which could lead to
the obligor’s inadequate capacity to meet its financial commitment on the
obligation. |
B: |
Obligations
rated ‘B’ are more vulnerable to nonpayment than ‘BB’ but the obligor
currently has the capacity to meet its financial commitment on the
obligation. Adverse business, financial, or economic conditions will
likely impair this capacity. |
CCC: |
Obligations
rated ‘CCC’ are currently vulnerable to nonpayment and is dependent upon
favorable business, financial, and economic conditions for the obligor to
meet its financial commitment on the obligation. If adverse business,
financial, or economic conditions occur, the obligor is not likely to have
the capacity to meet its financial commitment on the
obligation. |
CC: |
Obligations
rated ‘CC’ are currently highly vulnerable to nonpayment. The ‘CC’ rating
is used when a default has not yet occurred but S&P Global Ratings
expects default to be a virtual certainty, regardless of anticipated time
to default. |
C:
|
The
rating ‘C’ is highly vulnerable to nonpayment, the obligation is expected
to have lower relative seniority or lower ultimate recovery compared to
higher rated obligations. |
D:
|
Obligations
rated ‘D’ are in default, or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category is used when
payments on an obligation are not made on the date due, unless S&P
Global Ratings believes that such payments will be made within five
business days in the absence of a stated grace period or within the
earlier of the stated grace period or 30 calendar days. The rating will
also be used upon filing for bankruptcy petition or the taking of similar
action and where default is a virtual certainty. If an obligation is
subject to a distressed exchange offer the rating is lowered to
‘D’. |
Plus
(+) or Minus (-): The ratings from ‘AA’ to ‘CCC’ may be modified by the addition
of a plus or minus sign to show relative standing within the major rating
categories.
|
|
|
|
| |
NR: |
Indicates
that no rating has been requested, that there is insufficient information
on which to base a rating or that S&P Global Ratings does not rate a
particular type of obligation as a matter of
policy. |
SHORT-TERM
CREDIT RATINGS: Ratings are graded into four categories, ranging from ‘A-1’ for
the highest quality obligations to ‘D’ for the lowest.
|
|
|
|
| |
A-1:
|
This
is the highest category. The obligor’s capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor’s capacity to meet its financial commitment on these obligations
is extremely strong. |
A-2:
|
Issues
carrying this designation are somewhat more susceptible to the adverse
effects of the changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity
to meet its financial commitment on the obligation is
satisfactory. |
A-3:
|
Issues
carrying this designation exhibit adequate capacity to meet their
financial obligations. However, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity of the
obligor to meet it financial commitment on the
obligation. |
B:
|
Issues
rated ‘B’ are regarded as vulnerable and have significant speculative
characteristics. The obligor has capacity to meet financial commitments;
however, it faces major ongoing uncertainties which could lead to
obligor’s inadequate capacity to meet its financial
obligations. |
C:
|
This
rating is assigned to short-term debt obligations that are currently
vulnerable to nonpayment and is dependent upon favorable business,
financial, and economic conditions to meet its financial commitment on the
obligation. |
D:
|
This
rating indicates that the issue is either in default or in breach of an
imputed promise. For non-hybrid capital instruments, the ‘D’ rating
category is used when payments on an obligation are not made on the date
due, unless S&P Global Ratings believes that such payments will be
made within any stated grace period. However, any stated grace period
longer than five business days will be treated as five business days. The
rating will also be used upon filing for bankruptcy petition or the taking
of similar action and where default is a virtual certainty. If an
obligation is subject to a distressed debt restructuring the rating is
lowered to ‘D’. |
MUNICIPAL
SHORT-TERM NOTE RATINGS: S&P Global Ratings rates U.S. municipal notes with
a maturity of less than three years as follows:
|
|
|
|
| |
SP-1:
|
A
strong capacity to pay principal and interest. Issues that possess a very
strong capacity to pay debt service is given a “+”
designation. |
SP-2:
|
A
satisfactory capacity to pay principal and interest, with some
vulnerability to adverse financial and economic changes over the terms of
the notes. |
SP-3:
|
A
speculative capacity to pay principal and interest. |
D: |
Assigned
upon failure to pay the note when due, completion of a distressed debt
restructuring, or the filing of a bankruptcy petition or the taking of
similar action and where default on an obligation is a virtual certainty.
|
APPENDIX
B – PROXY VOTING POLICIES
The
proxy voting policies applicable to each Fund appear in the following order:
The
proxy voting policy for the Fund Complex is first, followed by PGI’s proxy
voting policy, and followed by the proxy voting policies for the sub-advisors,
alphabetically.
Proxy
Voting Policies and Procedures For
Principal
Funds, Inc.
Principal
Variable Contracts Funds, Inc.
Principal
Exchange-Traded Funds
Principal
Diversified Select Real Asset Fund (and other Principal interval
funds)
(each
a “Fund” and together “the Funds”)
(March
9, 2015)
Revised
June 11, 2019
It
is each Fund's policy to delegate authority to its advisor or sub-advisor, as
appropriate, to vote proxy ballots relating to the Fund's portfolio securities
in accordance with the adviser's or sub-adviser's voting policies and
procedures.
The
adviser or sub-adviser must provide, on a quarterly basis:
1.Written
affirmation that all proxies voted during the preceding calendar quarter, other
than those specifically identified by the adviser or sub-adviser, were voted in
a manner consistent with the adviser's or sub-adviser's voting policies and
procedures. In order to monitor the potential effect of conflicts of interest of
an adviser or sub-adviser, the adviser or sub-adviser will identify any proxies
the adviser or sub-adviser voted in a manner inconsistent with its policies and
procedures. The adviser or sub-adviser shall list each vote, explain why the
adviser or sub-adviser voted in a manner contrary to its policies and
procedures, state whether the adviser or sub-adviser’s vote was consistent with
the recommendation to the adviser or sub-adviser of a third-party and, if so,
identify the third-party; and
2.Written
notification of any material changes to the adviser's or sub-adviser's proxy
voting policies and procedures made during the preceding calendar
quarter.
The
adviser or sub-adviser must provide, no later than July 31 of each year, the
following information regarding each proxy vote cast during the 12-month period
ended June 30 for each Fund portfolio or portion of Fund portfolio for which it
serves as investment adviser, in a format acceptable to Fund
management:
1.Identification
of the issuer of the security;
2.Exchange
ticker symbol of the security;
3.CUSIP
number of the security;
4.The
date of the shareholder meeting;
5.A
brief description of the subject of the vote;
6.Whether
the proposal was put forward by the issuer or a shareholder;
7.Whether
and how the vote was cast; and
8.Whether
the vote was cast for or against management of the issuer.
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PRINCIPAL
GLOBAL INVESTORS, LLC
|
Proxy
Voting Policies and Procedures |
Introduction
Principal
Global Investors1
(“PGI”) is an investment adviser registered with the U.S. Securities and
Exchange Commission (“SEC”) pursuant to the Investment Advisers Act of 1940 (the
“Advisers Act”). As a registered investment adviser, PGI has a fiduciary duty to
act in the best interests of its clients. PGI recognizes that this duty requires
it to vote client securities, for which it has voting power on the applicable
record date, in a timely manner and make voting decisions that are in the best
interests of its clients. This document, Principal Global Investors’ Proxy
Voting Policies and Procedures (the “Policy”) is intended to comply with the
requirements of the Investment Advisers Act of 1940, the Investment Company Act
of 1940 and the Employee Retirement Income Security Act of 1974 applicable to
the voting of the proxies of both US and non-US issuers on behalf of PGI’s
clients who have delegated such authority and discretion.
Effective
January 1, 2021 Finisterre Investment Teams adopted the policies and procedures
in the Adviser’s compliance manual except for the following proxy policies and
procedures. Finisterre Investment Teams will continue to follow the previously
adopted proxy policies and procedures until amended. Please see the Appendix to
the compliance manual for Finisterre specific proxy policies and
procedures.
Relationship
between Investment Strategy, ESG and Proxy Voting
PGI
has a fiduciary duty to make investment decisions that are in its clients’ best
interests by maximizing the value of their shares. Proxy voting is an important
part of this process through which PGI can support strong corporate governance
structures, shareholder rights and transparency. PGI also believes a company’s
positive environmental, social and governance (“ESG”) practices may influence
the value of the company, leading to long-term shareholder value. PGI may take
these factors into considerations when voting proxies in its effort to seek the
best outcome for its clients. PGI believes that the integration of consideration
of ESG practices in PGI’s investment process helps identify sources of risk that
could erode the long-term investment results it seeks on behalf of its clients.
From time to time, PGI may work with various ESG-related organizations to engage
issuers or advocate for greater levels of disclosure.
Roles
and Responsibilities
Role
of the Proxy Voting Committee
PGI’s
Proxy Voting Committee (the “Proxy Voting Committee”) shall (i) oversee the
voting of proxies and the Proxy Advisory Firm, (ii) where necessary, make
determinations as to how to instruct the vote on certain specific proxies, (iii)
verify ongoing compliance with the Policy, (iv) review the business practices of
the Proxy Advisory Firm and (v) evaluate, maintain, and review the Policy on an
annual basis.
The
Proxy Voting Committee is comprised of representatives of each investment team
and a representative from PGI Risk, Legal, Operations, and Compliance will be
available to advise the Proxy Voting Committee but are non-voting members. The
Proxy Voting Committee may designate one or more of its members to oversee
specific, ongoing compliance with respect to the Policy and may designate
personnel to instruct the vote on proxies on behalf the PGI’s clients
(collectively, “Authorized Persons”).
1
These policies and procedures apply to Principal Global Investors, LLC,
Principal Real Estate Investors, LLC, Principal Global Investors (Hong Kong)
Limited and any affiliates which have entered into participating affiliate
agreements with the aforementioned mangers.
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The
Proxy Voting Committee shall meet at least four times per year, and as necessary
to address special situations.
Role
of Portfolio Management
While
the Proxy Voting Committee establishes the Guidelines and Procedures, the Proxy
Voting Committee does not direct votes for any client except in certain cases
where a conflict of interest exists. Each investment team is responsible for
determining how to vote proxies for those securities held in the portfolios
their team manages. While investment teams generally vote consistently with the
Guidelines, there may be instances where their vote deviates from the
Guidelines. In those circumstances, the investment team will work within the
Exception Process. In some instances, the same security may be held by more than
one investment team. In these cases, PGI may vote differently on the same matter
for different accounts as determined by each investment team.
Proxy
Voting Guidelines
The
Proxy Voting Committee, on an annual basis, or more frequently as needed, will
direct each investment team to review draft proxy voting guidelines recommended
by the Committee (“Draft Guidelines”). The Proxy Voting Committee will collect
the reviews of the Draft Guidelines to determine whether any investment teams
have positions on issues that deviate from the Draft Guidelines. Based on this
review, PGI will adopt proxy voting guidelines. Where an investment team has a
position which deviates from the Draft Guidelines, an alternative set of
guidelines for that investment team may be created. Collectively, these
guidelines will constitute PGI’s current Proxy Voting Guidelines and may change
from time to time (the “Guidelines”). The Proxy Voting Committee has the
obligation to determine that, in general, voting proxies pursuant to the
Guidelines is in the best interests of clients. Exhibit A (Base) and Exhibit B
(Sustainable) to the Policy sets forth the current Guidelines.
There
may be instances where proxy votes will not be in accordance with the
Guidelines. Clients may instruct PGI to utilize a different set of guidelines,
request specific deviations, or directly assume responsibility for the voting of
proxies. In addition, PGI may deviate from the Guidelines on an exception basis
if the investment team or PGI has determined that it is the best interest of
clients in a particular strategy to do so, or where the Guidelines do not direct
a particular response and instead list relevant factors. Any such a deviation
will comply with the Exception Process which shall include a written record
setting out the rationale for the deviation.
The
subject of the proxy vote may not be covered in the Guidelines. In situations
where the Guidelines do not provide a position, PGI will consider the relevant
facts and circumstances of a particular vote and then vote in a manner PGI
believes to be in the clients’ bests interests. In such circumstance, the
analysis will be documented in writing and periodically presented to the Proxy
Voting Committee. To the extent that the Guidelines do not cover potential
voting issues, PGI may consider the spirit of the Guidelines and instruct the
vote on such issues in a manner that PGI believes would be in the best interests
of the client.
Use
of Proxy Advisory Firms
PGI
has retained one or more third-party proxy service provider(s) (the “Proxy
Advisory Firm”) to provide recommendations for proxy voting guidelines,
information on shareholder meeting dates and proxy materials, translate proxy
materials printed in a foreign language, provide research on proxy proposals,
operationally process votes in accordance with the Guidelines on behalf of the
clients for whom PGI has proxy voting responsibility, and provide reports
concerning the proxies voted (“Proxy Voting Services”). Although PGI has
retained the Proxy Advisory Firm for Proxy Voting Services, PGI remains
responsible for proxy voting decisions. PGI has designed the Policy to oversee
and evaluate the
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Proxy
Advisory Firm, including with respect to the matters described below, to support
the PGI’s voting in accordance with this Policy.
Oversight
of Proxy Advisory Firms
Prior
to the selection of any new Proxy Advisory Firm and annually thereafter or more
frequently if deemed necessary by PGI, the Proxy Voting Committee will consider
whether the Proxy Advisory Firm: (a) has the capacity and competency to
adequately analyze proxy issues and provide the Proxy Voting Services the Proxy
Advisory Firm has been engaged to provide and (b) can make its recommendations
in an impartial manner, in consideration of the best interests of PGI’s clients,
and consistent with the PGI’s voting policies. Such considerations may include,
depending on the Proxy Voting Services provided, the following: (i) periodic
sampling of votes pre-populated by the Proxy Advisory Firm’s systems as well as
votes cast by the Proxy Advisory Firm to review that the Guidelines adopted by
PGI are being followed; (ii) onsite visits to the Proxy Advisory Firm office
and/or discussions with the Proxy Advisory Firm to determine whether the Proxy
Advisory Firm continues to have the capacity and competency to carry out its
proxy obligations to PGI; (iii) a review of those aspects of the Proxy Advisory
Firm’s policies, procedures, and methodologies for formulating voting
recommendations that PGI consider material to Proxy Voting Services provided to
PGI, including factors considered, with a particular focus on those relating to
identifying, addressing and disclosing potential conflicts of interest
(including potential conflicts related to the provision of Proxy Voting
Services, activities other than Proxy Voting Services, and those presented by
affiliation such as a controlling shareholder of the Proxy Advisory Firm) and
monitoring that materially current, accurate, and complete information is used
in creating recommendations and research; (iv) requiring the Proxy Advisory Firm
to notify PGI if there is a substantive change in the Proxy Advisory Firm’s
policies and procedures or otherwise to business practices, including with
respect to conflicts, information gathering and creating voting recommendations
and research, and reviewing any such change(s); (v) a review of how and when the
Proxy Advisory Firm engages with, and receives and incorporates input from,
issuers, the Proxy Advisory Firm’s clients and other third-party information
sources; (vi) assessing how the Proxy Advisory Firm considers factors unique to
a specific issuer or proposal when evaluating a matter subject to a shareholder
vote; (vii) in case of an error made by the Proxy Advisory Firm, discussing the
error with the Proxy Advisory Firm and determining whether appropriate
corrective and preventive action is being taken; and (viii) assessing whether
the Proxy Advisory Firm appropriately updates its methodologies, guidelines, and
voting recommendations on an ongoing basis and incorporates input from issuers
and Proxy Advisory Firm clients in the update process. In evaluating the Proxy
Advisory Firm, PGI may also consider the adequacy and quality of the Proxy
Advisory Firm’s staffing, personnel, and/or technology.
Procedures
for Voting Proxies
To
increase the efficiency of the voting process, PGI utilizes the Proxy Advisory
Firm to act as its voting agent for its clients’ holdings. Issuers initially
send proxy information to the clients’ custodians. PGI instructs these
custodians to direct proxy related materials to the Proxy Advisory Firm. The
Proxy Advisory Firm provides PGI with research related to each resolution.
PGI
analyzes relevant proxy materials on behalf of their clients and seek to
instruct the vote (or refrain from voting) proxies in accordance with the
Guidelines. A client may direct PGI to vote for such client’s account
differently than what would occur in applying the Policy and the Guidelines. PGI
may also agree to follow a client’s individualized proxy voting guidelines or
otherwise agree with a client on particular voting considerations.
PGI
seeks to vote (or refrain from voting) proxies for its clients in a manner that
PGI determines is in the best interests of its clients, which may include both
considering both the effect on the value of the client’s investments and ESG
factors. In some cases, PGI may determine that it is in the best interests of
clients to refrain from exercising the clients’ proxy voting rights. PGI may
determine that voting is not in
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the
best interests of a client and refrain from voting if the costs, including the
opportunity costs, of voting would, in the view of PGI, exceed the expected
benefits of voting to the client.
Procedures
for Proxy Issues within the Guidelines
Where
the Guidelines address the proxy matter being voted on, the Proxy Advisor Firm
will generally process all proxy votes in accordance with the Guidelines. The
applicable investment team may provide instructions to vote contrary to the
Guidelines in their discretion and with sufficient rationale documented in
writing to seek to maximize the value of the client’s investments or is
otherwise in the client’s best interest. This rationale will be submitted to PGI
Compliance to approve and once approved administered by PGI Operations. This
process will follow the Exception Process. The Proxy Voting Committee will
receive and review a quarterly report summarizing all proxy votes for securities
for which PGI exercises voting authority. In certain cases, a client may have
elected to have PGI administer a custom policy which is unique to the Client. If
PGI is also responsible for the administration of such a policy, in general,
except for the specific policy differences, the procedures documented here will
also be applicable, excluding reporting and disclosure procedures.
Procedures
for Proxy Issues Outside the Guidelines
To
the extent that the Guidelines do not cover potential voting issues, the Proxy
Advisory Firm will seek direction from PGI. PGI may consider the spirit of the
Guidelines and instruct the vote on such issues in a manner that PGI believes
would be in the best interests of the client. Although this not an exception to
the Guidelines, this process will also follow the Exception Process. The Proxy
Voting Committee will receive and review a quarterly report summarizing all
proxy votes for securities for which PGI exercises voting discretion, which
shall include instances where issues fall outside the Guidelines.
Securities
Lending
Some
clients may have entered into securities lending arrangements with agent lenders
to generate additional revenue. If a client participates in such lending, the
client will need to inform PGI as part of their contract with PGI if they
require PGI to take actions in regard to voting securities that have been lent.
If not commemorated in such agreement, PGI will not recall securities and as
such, they will not have an obligation to direct the proxy voting of lent
securities.
In
the case of lending, PGI maintains one share for each company security out on
loan by the client. PGI will vote the remaining share in these circumstances.
In
cases where PGI does not receive a solicitation or enough information within a
sufficient time (as reasonably determined by PGI) prior to the proxy-voting
deadline, PGI or the Proxy Advisory Firm may be unable to vote.
Regional
Variances in Proxy Voting
PGI
utilizes the Policy and Guidelines for both US and non-US clients, and there are
some significant differences between voting U.S. company proxies and voting
non-U.S. company proxies. For U.S. companies, it is usually relatively easy to
vote proxies, as the proxies are typically received automatically and may be
voted by mail or electronically. In most cases, the officers of a U.S. company
soliciting a proxy act as proxies for the company’s shareholders.
With
respect to non-U.S. companies, we make reasonable efforts to vote most proxies
and follow a similar process to those in the U.S. However, in some cases it may
be both difficult and costly to vote proxies due to local regulations, customs
or other requirements or restrictions, and such circumstances and expected costs
may outweigh any anticipated economic benefit of voting. The major difficulties
and
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costs
may include: (i) appointing a proxy; (ii) obtaining reliable information about
the time and location of a meeting; (iii) obtaining relevant information about
voting procedures for foreign shareholders; (iv) restrictions on trading
securities that are subject to proxy votes (share-blocking periods); (v)
arranging for a proxy to vote locally in person; (vi) fees charged by custody
banks for providing certain services with regard to voting proxies; and (vii)
foregone income from securities lending programs. In certain instances, it may
be determined by PGI that the anticipated economic benefit outweighs the
expected cost of voting. PGI intends to make their determination on whether to
vote proxies of non-U.S. companies on a case-by-case basis. In doing so, PGI
shall evaluate market requirements and impediments, including the difficulties
set forth above, for voting proxies of companies in each country. PGI
periodically reviews voting logistics, including costs and other voting
difficulties, on a client by client and country by country basis, in order to
determine if there have been any material changes that would affect PGI’s
determinations and procedures.
Conflicts
of Interest
PGI
recognizes that, from time to time, potential conflicts of interest may exist.
In order to avoid any perceived or actual conflict of interest, the procedures
set forth below have been established for use when PGI encounters a potential
conflict to ensure that PGI’s voting decisions are based on maximizing
shareholder value and are not the product of a conflict.
Addressing
Conflicts of Interest – Exception Process
Prior
to voting contrary to the Guidelines, the relevant investment team must complete
and submit a report to PGI Compliance setting out the name of the security, the
issue up for vote, a summary of the Guidelines’ recommendation, the vote changes
requested and the rational for voting against the Guidelines’ recommendation.
The member of the investment team requesting the exception must attest to
compliance with Principal’s Code of Conduct and the has an affirmative
obligation to disclose any known personal or business relationship that could
affect the voting of the applicable proxy. PGI Compliance will approve or deny
the exception in consultation, if deemed necessary, with the Legal.
If
PGI Compliance determines that there is no potential material conflict exists,
the Guidelines may be overridden. If PGI Compliance determines that there exists
or may exist a material conflict, it will refer the issue to the Proxy Voting
Committee. The Proxy Voting Committee will consider the facts and circumstances
of the pending proxy vote and the potential or actual material conflict and
decide by a majority vote as to how to vote the proxy – i.e., whether to permit
or deny the exception.
In
considering the proxy vote and potential material conflict of interest, the
Proxy Voting Committee may review the following factors:
•The
percentage of outstanding securities of the issuer held on behalf of clients by
PGI;
•The
nature of the relationship of the issuer with the PGI, its affiliates or its
executive officers;
•Whether
there has been any attempt to directly or indirectly influence the investment
team’s decision;
•Whether
the direction of the proposed vote would appear to benefit PGI or a related
party; and/or
•Whether
an objective decision to vote in a certain way will still create a strong
appearance of a conflict.
In
the event that the Proxy Advisor Firm itself has a conflict and thus is unable
to provide a recommendation, the investment team may vote in accordance with the
recommendation of another independent service provider, if available. If a
recommendation from an independent service provider other than the Proxy Advisor
Firm is not available, the investment team will follow the Exception Process.
PGI Compliance will review the form and if it determines that there is no
potential material conflict mandating a voting recommendation from the Proxy
Voting Committee, the investment team may instruct the Proxy Advisory Firm to
vote the proxy issue as it determines is in the best interest of clients. If PGI
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determines that there exists or may exist a material conflict, it will refer the
issue to the Proxy Voting Committee for consideration as outlined
above.
Availability
of Proxy Voting Information and Recordkeeping
Disclosure
On
a quarterly basis, PGI publicly discloses on our website https://www.principalglobal.com/eu/about-us/responsible-investing
a
voting report setting forth the manner in which votes were cast, including
details related to (i) votes against management, and (ii)
abstentions.
Form
more information, Clients may contact PGI for more information related to how
PGI has voted with respect to securities held in the Client’s
account.
On
request, PGI will provide clients with a summary of PGI’s proxy voting
guidelines, process and policies and will inform the clients how they can obtain
a copy of the complete Proxy Voting Policies and Procedures upon request. PGI
will also include such information described in the preceding two sentences in
Part 2A of its Form ADV.
Recordkeeping
PGI
will keep records of the following items: (i) the Guidelines, (ii) the Proxy
Voting Policies and Procedures; (iii) proxy statements received regarding client
securities (unless such statements are available on the SEC’s Electronic Data
Gathering, Analysis, and Retrieval (EDGAR) system); (iv) records of votes they
cast on behalf of clients, which may be maintained by a Proxy Advisory Firm if
it undertakes to provide copies of those records promptly upon request; (v)
records of written client requests for proxy voting information and PGI’s
responses (whether a client’s request was oral or in writing); (vi) any
documents prepared by PGI that were material to making a decision how to vote,
or that memorialized the basis for the decision; (vii) a record of any testing
conducted on any Proxy Advisory Firm’s votes; (viii) materials collected and
reviewed by PGI as part of its due diligence of the Proxy Advisory Firm; (ix) a
copy of each version of the Proxy Advisory Firm’s policies and procedures
provided to PGI; and (x) the minutes of the Proxy Voting Committee meetings. All
of the records referenced above will be kept in an easily accessible place for
at least the length of time required by local regulation and custom, and, if
such local regulation requires that records are kept for less than six years
from the end of the fiscal year during which the last entry was made on such
record, we will follow the US rule of six years. If the local regulation
requires that records are kept for more than six years, we will comply with the
local regulation. We maintain the vast majority of these records electronically.
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Appendix
- Proxy Voting Policy and Procedures
I. STATEMENT
OF POLICY
Proxy
voting is an important right of investors and reasonable care and diligence must
be undertaken to ensure that such rights are properly and timely exercised. The
Firm generally retains proxy-voting authority with respect to securities
purchased for its clients. Under such circumstances, the Firm votes proxies in
the best interest of its clients and in accordance with these policies and
procedures.
II. USE
OF THIRD-PARTY PROXY VOTING SERVICE
The
Firm has entered into an agreement with Broadridge Investor Communication
Solutions, Inc. (referred to as “Broadridge”
and the “Proxy
Voting Service”)
acting with Glass Lewis & Co, to enable it to fulfill its proxy voting
obligations.
Broadridge
executes, monitors and records the proxies according to the instructions of the
Firm. The Firm relies on the recommendations of Glass Lewis & Co, LLC to
provide recommendations as to how any proxy should be voted in the best
interests of the Clients. These recommendations are integrated into the voting
platform set up by the Proxy Voting Service, and the Firm has instructed the
Proxy Voting Service to execute all proxies in accordance with such
recommendation unless instructed otherwise by the Firm.
The
SEC has expressed its view that although the voting of proxies remains the duty
of a registered adviser, an adviser may contract with service providers to
perform certain functions with respect to proxy voting so long as the adviser is
comfortable that the proxy voting service is independent from the issuer
companies on which it completes its proxy research.
In
assessing whether a proxy voting service is independent (as defined by the SEC),
the SEC counsels investment advisers that they should not follow the
recommendations of an independent proxy voting service without first
determining, among other things, that the proxy voting service (a) has the
capacity and competence to analyze proxy issues and (b) is in fact independent
and can make recommendations in an impartial manner in the best interests of the
adviser's clients.
At
a minimum annually, or more frequently as deemed necessary, Compliance will
ensure that a review of the independence and impartiality of the Proxy Voting
Service is carried out, including obtaining certification or other information
from the Proxy Voting Service to enable the Firm to make such an
assessment.
Compliance
will also monitor any new SEC interpretations regarding the voting of proxies
and the uses of third-party proxy voting services and revise the Firm’s policies
and procedures as necessary.
Proxies
relating to securities held in client accounts will be sent directly to the
Proxy Voting Service. If a proxy is received by anyone in the Firm, they must
immediately inform the Compliance and work with Compliance to ensure that it is
promptly forwarded to the Proxy Voting Service. In the event that the Proxy
Voting Service is unable to complete/provide its research regarding a security
on a timely basis or the Firm has made a determination that it is in the best
interests of the Firm’s clients for the Firm to vote the proxy, the Firm’s
general proxy-voting procedures are required to be followed, as follows.
Compliance
will require that:
1. the
recipient of the proxy will forward a copy to Compliance, who will keep a copy
of each proxy received;
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2. f
the recipient is not the Portfolio Manager responsible for voting the proxy on
behalf of the Firm, s/he will forward a copy to such Portfolio
manager;
3. the
Portfolio Manager will determine how to vote the proxy promptly in order to
allow enough time for the completed proxy to be returned to the issuer prior to
the vote taking place; and provide evidence of such to Compliance;
4. Absent
material conflicts (see Section V), the Portfolio Manager will determine whether
the Firm will follow the Proxy Voting Service’s recommendation or vote the proxy
directly. The Portfolio Manager will send his/her decision on how the Firm
should vote a proxy to the Proxy Voting Service, in a timely and appropriate
manner. It is desirable to have the Proxy Voting Service complete the actual
voting so there exists one central source for the documentation of the Firm’s
proxy voting records.
III. VOTING
GUIDELINES
To
the extent that the Firm is voting a proxy itself and not utilizing the Proxy
Voting Service, the Firm will consider the proxy on a case by case basis and
require that the relevant investment professional vote the proxy in a manner
consistent with the Firm’s duty. Investment professionals of the Firm each have
the duty to vote proxies in a way that, in their best judgment, is in the best
interest of the Firm’s clients.
IV. DISCLOSURE
A.The
Firm will disclose in its Form ADV Part 2 that clients may contact the Chief
Compliance Officer via e-mail or telephone in order to obtain information on how
the Firm voted such client’s proxies, and to request a copy of these policies
and procedures. If a client requests this information, the Chief Compliance
Officer will prepare a written response to the client that lists, with respect
to each voted proxy that the client has inquired about, (1) the name of the
issuer; (2) the proposal voted upon and (3) how the Firm voted the client’s
proxy.
B.
A concise summary of these Proxy Voting Policies and Procedures will be included
in the Firm’s Form ADV Part 2 and will be updated whenever these policies and
procedures are updated. Compliance will arrange for a copy of this summary to be
sent to all existing clients.
V. POTENTIAL
CONFLICTS OF INTEREST
A.
In
the event that the Firm is directly voting a proxy, Compliance will examine
conflicts that exist between the interests of the Firm and its clients. This
examination will include a review of the relationship of the Firm, its personnel
and its affiliates with the issuer of each security and any of the issuer’s
affiliates to determine if the issuer is a client of the Firm or an affiliate of
the Firm or has some other relationship with the Firm, its personnel or a client
of the Firm.
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| B. |
If,
as a result of Compliance’s examination, a determination is made that a
material conflict of interest exists, the Firm will determine whether
voting in accordance with the voting guidelines and factors described
above is in the best interests of the client. If the proxy involves a
matter covered by the voting guidelines and factors described above, the
Firm will generally vote the proxy as specified above. Alternatively, the
Firm may vote the proxy in accordance with the recommendation of the Proxy
Voting Service.
|
| The
Firm may disclose the conflict to the affected clients and, except in the
case of clients that are subject to the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), give the clients the
opportunity to vote their proxies themselves In the case of ERISA clients,
if the Investment Management Agreement reserves to the ERISA client the
authority to vote proxies when the Firm determines it has a material
conflict that affects its best judgment as an ERISA fiduciary, the Firm
will give the ERISA client the opportunity to vote the proxies
themselves. |
|
Absent
the client reserving voting rights, the Firm will either vote the proxies
in accordance with the policies outlined in Section III “Voting
Guidelines”
above or vote the proxies in accordance with the recommendation of the
Proxy Voting Service. |
VI. |
| PROXY
RECORDKEEPING |
|
| Compliance
will maintain files relating to the Firm’s proxy voting procedures in an
easily accessible place. (Under the services contract between the Firm and
its Proxy Voting Service, the Proxy Voting Service will maintain the
Firm’s proxy-voting records). Records will be maintained and preserved for
five years from the end of the fiscal year during which the last entry was
made on a record, with records for the most recent two years kept in the
offices of the Firm. Records of the following will be included in the
files: |
| 1 |
Copies
of these proxy voting policies and procedures, and any amendments
thereto; |
| 2 |
A
copy of each proxy statement that the Firm receives regarding client
securities (the Firm may rely on third parties or EDGAR); |
| 3 |
A
record of each vote that the Firm casts; |
| 4 |
A
copy of any document the Firm created that was material to making a
decision how to vote proxies, or that memorializes that decision. (For
votes that are inconsistent with the Firm’s general proxy voting polices,
the reason/rationale for such an inconsistent vote is required to be
briefly documented and maintained); and |
| 5 |
A
copy of each written client request for information on how the Firm voted
such client’s proxies, and a copy of any written response to any (written
or oral) client request for information on how the Firm voted its
proxies. |
Principal
Global Investors
PGI
Global Compliance Manual
POLICY
ON PROXY VOTING
SPECTRUM
ASSET MANAGEMENT, INC.
FOR
INVESTMENT ADVISORY CLIENTS:
GENERAL
POLICY
Spectrum,
an investment adviser registered with the Securities and Exchange Commission,
acts as investment advisor for various types of client accounts (e.g. employee
benefit plans, governmental plans, mutual funds, insurance company separate
accounts, corporate pension plans, endowments and foundations). While
Spectrum receives few proxies for the preferred shares it manages, Spectrum
nonetheless will, when delegated the authority by a client, vote these shares
per the following policy voting standards and processes:
STANDARDS:
Spectrum’s
standards aim to ensure the following in keeping with the best interests of its
clients:
•That
Spectrum act solely in the interest of its clients in providing for ultimate
long-term stockholder value.
•That
Spectrum act without undue influence from individuals or groups who may have an
economic interest in the outcome of a proxy vote.
•That
the custodian bank is aware of our fiduciary duty to vote proxies on behalf of
others – Spectrum relies on the best efforts of the custodian bank to deliver
all proxies we are entitled to vote.
•That
Spectrum will exercise its right to vote all proxies on behalf of its clients
(or permit clients to vote their interest, as the case(s) may be).
•That
Spectrum will implement a reasonable and sound basis to vote
proxies.
PROCESSES:
A.Following
ISS’ Recommendations
Spectrum
has selected Institutional Shareholder Services (ISS) to assist it with its
proxy voting responsibilities. Spectrum follows ISS Standard Proxy
Voting guidelines (the “Guidelines”). The Guidelines embody the
positions and factors Spectrum generally considers important in casting proxy
votes. They address a wide variety of individual topics, including, among other
matters, shareholder voting rights, anti-takeover defenses, board structures,
the election of directors, executive and director compensation, reorganizations,
mergers, and various shareholder proposals. Recognizing the complexity and
fact-specific nature of many corporate governance issues, the Guidelines often
do not direct a particular voting outcome, but instead identify factors ISS
considers in determining how the vote should be cast.
In
connection with each proxy vote, ISS prepares a written analysis and
recommendation (an "ISS Recommendation") that reflects ISS's application of
Guidelines to the particular proxy issues. Where the Guidelines do not direct a
particular response and instead list relevant factors, the ISS Recommendation
will reflect ISS's own evaluation of the factors. Spectrum may on any particular
proxy vote decide to diverge from the Guidelines or an ISS Recommendation. In
such cases, our procedures require: (i) the requesting Portfolio Manager to set
forth the reasons for their decision; (ii) the approval of the Chief Investment
Officer; (iii) notification to the Compliance Department and other appropriate
Principal Global Investors personnel; (iv) a determination that the decision is
not influenced by any conflict of interest; and (v) the creation of a written
record reflecting the process.
Spectrum
generally votes proxies in accordance with ISS’ recommendations. When
Spectrum follows ISS’ recommendations, it need not follow the conflict of
interest procedures in Section B, below.
From
time to time ISS may have a business relationship or affiliation with one or
more issuers held in Spectrum client accounts, while also providing voting
recommendations on these issuers’ securities. Because this practice
may present a conflict of interest for ISS, Spectrum’s Chief Compliance Officer
will require from ISS at least annually additional information, or a
certification that ISS has adopted policies and procedures to detect and
mitigate such conflicts of interest in issuing voting
recommendations. Spectrum may obtain voting recommendations from two
proxy voting services as an additional check on the independence of the ISS’
voting recommendations.
B.Disregarding
ISS’ Recommendations
Should
Spectrum determine not to follow ISS’ recommendation for a particular proxy,
Spectrum will use the following procedures for identifying and resolving a
material conflict of interest and will use the Proxy Voting Guidelines (below)
in determining how to vote. The Report for Proxy Vote(s) against ISS
Recommendation(s), Exhibit A hereto, shall be completed in each such
instance.
Spectrum
will classify proxy vote issues into three broad categories: Routine
Administrative Items, Special Interest Issues, and Issues Having the Potential
for Significant Economic Impact. Once the Senior Portfolio Manager
has analyzed and identified each issue as belonging in a particular category and
disclosed the conflict of interests to affected clients and obtained their
consents prior to voting, Spectrum will cast the client’s vote(s) in accordance
with the philosophy and decision guidelines developed for that
category. New and unfamiliar issues are constantly appearing in the
proxy voting process. As new issues arise, we will make every effort
to classify them among the three categories below. If we believe it
would be informative to do so, we may revise this document to reflect how we
evaluate such issues.
Due
to timing delays, logistical hurdles and high costs associated with procuring
and voting international proxies, Spectrum has elected to approach international
proxy voting on the basis of achieving “best efforts at a reasonable
cost.”
As
a fiduciary, Spectrum owes its clients an undivided duty of
loyalty. We strive to avoid even the appearance of a conflict that
may compromise the trust our clients have placed in it. This is true
with respect to proxy voting and thus Spectrum has adopted the following
procedures for addressing potential or actual conflicts of interest.
Identifying
a Conflict of Interest. There
may be a material conflict of interest when Spectrum votes a proxy solicited by
an issuer whose retirement plan or fund we manage or with whom Spectrum, an
affiliate, or an officer or director of Spectrum or of an affiliate has any
other material business or personal relationship that may affect how we vote the
issuer’s proxy. To avoid any perceived material conflict of interest,
the following procedures have been established for use when Spectrum encounters
a potential material conflict to ensure that voting decisions are based on a
clients’ best interest and are not the product of a material
conflict.
Monitoring
for Conflicts of Interest. All
employees of Spectrum are responsible for monitoring for conflicts of interest
and referring any that may be material to the CCO for resolution. At
least annually, the CCO will take reasonable steps to evaluate the nature of
Spectrum’s material business relationships (and those of its affiliates) with
any company whose preferred securities are held in client accounts (a “portfolio
company”) to assess which, if any, could give rise to a conflict of
interest. CCO’s review will focus on the following three
categories:
•Business
Relationships – The CCO will consider whether Spectrum (or an affiliate) has a
substantial business relationship with a portfolio company or a proponent of a
proxy proposal relating to the portfolio company (e.g., an employee group), such
that failure to vote in favor of management (or the proponent) could harm the
adviser’s relationship with the company (or proponent). For example,
if Spectrum manages money for the portfolio company or an employee group,
manages pension assets, leases office space from the company, or provides other
material services to the portfolio company, the CCO will review whether such
relationships may give rise to a conflict of interest.
•Personal
Relationships – The CCO will consider whether any senior executives or portfolio
managers (or similar persons at Spectrum’s affiliates) have a personal
relationship with other proponents of proxy proposals, participants in proxy
contests, corporate directors, or candidates for directorships that might give
rise to a conflict of interest.
•Familial
Relationships – The CCO will consider whether any senior executives or portfolio
managers (or similar persons at Spectrum’s affiliates) have a familial
relationship relating to a portfolio company (e.g., a spouse or other relative
who serves as a director of a portfolio company, is a candidate for such a
position, or is employed by a portfolio company in a senior
position).
In
monitoring for conflicts of interest, the CCO will consider all information
reasonably available to it about any material business, personal, or familial
relationship involving Spectrum (and its affiliates) and a portfolio company,
including the following:
•A
list of clients that are also public companies, which is prepared and updated by
the Operations Department and retained in the Compliance
Department.
•Publicly
available information.
•Information
generally known within Spectrum.
•Information
actually known by senior executives or portfolio managers. When considering a
proxy proposal, investment professionals involved in the decision-making process
must disclose any potential material conflict that they are aware of to the CCO
prior to any substantive discussion of a proxy matter.
•Information
obtained periodically from those persons whom the CCO reasonably believes could
be affected by a conflict arising from a personal or familial relationship
(e.g., portfolio managers, senior management).
The
CCO may, at his discretion, assign day-to-day responsibility for monitoring for
conflicts to a designated person. With respect to monitoring of
affiliates, the CCO in conjunction with PGI’s CCO may rely on information
barriers between Spectrum and its affiliates in determining the scope of its
monitoring of conflicts involving affiliates.
Determining
Whether a Conflict of Interest is “Material”
– On a regular basis, CCO will monitor conflicts of interest to determine
whether any may be “material” and therefore should be referred to PGI for
resolution. The SEC has not provided any specific guidance as to what
types of conflicts may be “material” for purposes of proxy voting, so therefore
it would be appropriate to look to the traditional materiality analysis under
the federal securities laws, i.e., that a “material” matter is one that is
reasonably likely to be viewed as important by the average
shareholder.
Whether
a conflict may be material in any case will, of course, depend on the facts and
circumstances. However, in considering the materiality of a conflict, Spectrum
will use the following two-step approach:
1.Financial
Materiality – The most likely indicator of materiality in most cases will be the
dollar amount involved with the relationship in question. For
purposes of proxy voting, it will be presumed that a conflict is not material
unless it involves at least 5% of Spectrum’s annual revenues or a minimum dollar
amount of $1,000,000. Different percentages or dollar amounts may be
used depending on the nature and degree of the conflict (e.g., a higher number
if the conflict arises through an affiliate rather than directly with
Spectrum).
2.Non-Financial
Materiality – A non-financial conflict of interest might be material (e.g.,
conflicts involving personal or familial relationships) and should be evaluated
based on the facts and circumstances of each case.
If
the CCO has any question as to whether a particular conflict is material, it
should presume the conflict to be material and refer it to the PGI’s CCO for
resolution. As in the case of monitoring conflicts, the CCO may
appoint a designated person or subgroup of Spectrum’s investment team to
determine whether potential conflicts of interest may be material.
Resolving
a Material Conflict of Interest
– When an employee of Spectrum refers a potential material conflict of interest
to the CCO, the CCO will determine whether a material conflict of interest
exists based on the facts and circumstances of each particular
situation. If the CCO determines that no material conflict of
interest exists, no further action is necessary and the CCO will notify
management accordingly. If the CCO determines that a material
conflict exists, CCO must disclose the conflict to affected clients and obtain
consent from each as to the manner in which Spectrum proposes to
vote.
Clients
may obtain information about how we voted proxies on their behalf by contacting
Spectrum’s Compliance Department.
PROXY
VOTING GUIDELINES
CATEGORY
I: Routine
Administrative Items
Philosophy: Spectrum
is willing to defer to management on matters of a routine administrative
nature. We feel management is best suited to make those decisions
which are essential to the ongoing operation of the company and which do not
have a major economic impact on the corporation and its
shareholders. Examples of issues on which we will normally defer to
management’s recommendation include:
1.selection
of auditors
2.increasing
the authorized number of common shares
3.election
of unopposed directors
CATEGORY
II: Special
Interest Issues
Philosophy: While
there are many social, political, environmental and other special interest
issues that are worthy of public attention, we do not believe the corporate
proxy process is the appropriate arena in which to achieve gains in these
areas. Our primary responsibility in voting proxies is to provide for
the greatest long-term value for Spectrum’s clients. We are opposed
to proposals which involve an economic cost to the corporation, or which
restrict the freedom of management to operate in the best interest of the
corporation and its shareholders. However, in general we will abstain
from voting on shareholder social, political and environmental proposals because
their long-term impact on share value cannot be calculated with any reasonable
degree of confidence.
CATEGORY
III: Issues
Having the Potential for Significant Economic Impact
Philosophy: Spectrum
is not willing to defer to management on proposals which have the potential for
major economic impact on the corporation and the value of its
shares. We believe such issues should be carefully analyzed and
decided by the owners of the corporation. Presented below are
examples of issues which we believe have the potential for significant economic
impact on shareholder value.
1.Classification
of Board of Directors.
Rather than electing all directors annually, these provisions
stagger a board, generally into three annual classes, and call for only
one-third to be elected each year. Staggered boards may help to
ensure leadership continuity, but they also serve as defensive
mechanisms. Classifying the board makes it more difficult to change
control of a company through a proxy contest involving election of
directors. In general, we vote on a case by case basis on proposals
for staggered boards, but generally favor annual elections of all
directors.
2.Cumulative
Voting of Directors. Most
corporations provide that shareholders are entitled to cast one vote for each
director for each share owned - the one share, one vote standard. The
process of cumulative voting, on the other hand, permits shareholders to
distribute the total number of votes they have in any manner they wish when
electing directors. Shareholders may possibly elect a minority
representative to a corporate board by this process, ensuring representation for
all sizes of shareholders. Outside shareholder involvement can
encourage management to maximize share value. We generally support
cumulative voting of directors.
3.Prevention
of Greenmail. These
proposals seek to prevent the practice of “greenmail”, or targeted share
repurchases by management of company stock from individuals or groups seeking
control of the company. Since only the hostile party receives
payment, usually at a substantial premium over the market value of its shares,
the practice discriminates against all other shareholders. By making
greenmail payments, management transfers significant sums of corporate cash to
one entity, most often for the primary purpose of saving their
jobs. Shareholders are left with an asset-depleted and often less
competitive company. We think that if a corporation offers to buy
back its stock, the offer should be made to all shareholders, not just to a
select group or individual. We are opposed to greenmail and will
support greenmail prevention proposals.
4.Supermajority
Provisions. These
corporate charter amendments generally require that a very high percentage of
share votes (70-81%) be cast affirmatively to approve a merger, unless the board
of directors has approved it in advance. These provisions have the
potential to give management veto power over merging with another company, even
though a majority of shareholders favor the merger. In most cases we
believe requiring supermajority approval of mergers places too much veto power
in the hands of management and other minority shareholders, at the expense of
the majority shareholders, and we oppose such provisions.
5.Defensive
Strategies. These
proposals will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the proposal
enhances long-term economic value.
6.Business
Combinations or Restructuring. These
proposals will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the proposal
enhances long-term economic value.
7.Executive
and Director Compensation. These
proposals will be analyzed on a case by case basis to determine the effect on
shareholder value. Our decision will be based on whether the proposal
enhances long-term economic value.
|
| |
Exhibit
A to Proxy Policy |
|
Report
for Proxy Vote(s) Against ISS Recommendation(s) |
|
This
form should be completed in instances in which Spectrum Portfolio
Manager(s) decide to vote against ISS recommendations. |
|
1.
Security Name / Symbol: |
|
|
| |
3.
Summary of ISS recommendation (see attached full ISS
recommendation: |
|
|
|
| |
4.
Reasons for voting against ISS recommendation (supporting documentation
may be attached): |
|
|
|
| |
5.
Determination of potential conflicts (if any): |
|
|
|
|
|
|
|
|
|
| |
6.
Contacted Compliance Department: Yes / No |
Name
of individual contacted: |
| |
Date: |
| |
|
|
|
|
|
|
|
| |
7.
Contacted other Spectrum portfolio managers who have position in same
security: Yes / No |
Name
of individual contacted: |
| |
Date: |
| |
|
|
|
|
|
|
|
|
|
|
| |
8.
Portfolio Manager Signature: |
|
Date: |
| |
Portfolio
Manager Name: |
| |
|
| |
Portfolio
Manager Signature*: |
| |
Date: |
| |
Portfolio
Manager Name: |
| |
*Note:
All Portfolio Managers who manage portfolios that hold relevant security must
sign.