ck0001540305-20210930
Distillate U.S. Fundamental Stability & Value
ETF (DSTL)
Distillate International Fundamental Stability &
Value ETF (DSTX)
Listed
on NYSE Arca, Inc.
PROSPECTUS
January 31,
2022
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
of these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Investment Objective
The Distillate U.S.
Fundamental Stability & Value ETF (the “Fund”) seeks to track the
performance, before fees and expenses, of the Distillate U.S. Fundamental
Stability & Value Index (the “Index”).
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
|
|
|
|
|
|
Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.39% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.39% |
Expense Example
This Example is
intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then continue to hold or redeem all of
your Shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The Example does not take into account brokerage commissions
that you may pay on your purchases and sales of Shares.
Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
|
|
|
|
|
|
|
|
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$40 |
$125 |
$219 |
$493 |
Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
Example, affect the Fund’s performance. For the fiscal year ended September 30,
2021, the Fund’s portfolio turnover rate was 73% of the average value of its
portfolio.
Principal Investment Strategy
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index. The Index was developed in
2018 by Distillate Capital Partners LLC, the Fund’s investment adviser and index
provider (the “Adviser”), and uses an objective, rules-based methodology to
measure the performance of U.S.-listed, large-capitalization equity securities,
selected based on certain fundamental factors, as described below.
Distillate
U.S. Fundamental Stability & Value Index
Index
construction begins with the 500 largest U.S.-listed companies based on
free-float market capitalization that satisfy the following criteria (the
“Equity Universe”): (i) have at least five years of cash flow per share
data; (ii) have reported a net profit in at least one of the last three
fiscal years; (iii) are headquartered in the United States or Ireland;
(iv) have an average daily traded value of USD50 million over the prior 90
days; and (v) for which a 12-month free cash flow estimate is available
from FactSet Research Systems Inc. The remaining companies, as well as any
companies that were included in the Index in the prior period, are then
evaluated based on the following three proprietary fundamental measures to
identify the companies that will be included in the Index:
|
|
|
|
|
|
Financial
Indebtedness |
Companies
with significant leverage (based on a proprietary debt-to-income
calculation) are excluded from the Index. |
Fundamental
Stability |
Each
company is scored based on a proprietary measure of the volatility of its
historical and projected cash flows as an indicator of fundamental
stability. The bottom 50% (i.e.,
the least stable) of the companies in the Equity Universe based on this
measure are excluded from the Index. |
Valuation |
Each
company is scored based on a proprietary measure of the company’s free
cash flow yield (a measure comparing a company’s normalized free cash flow
to its enterprise value). The top 100 companies (the most undervalued)
that meet the Index’s other criteria are included in the Index.
|
Although
the Index methodology seeks to select companies that demonstrate fundamental
stability, the value of such companies (and consequently the value of the Index
and of the Fund) may still be subject to volatility over short or long periods
of time.
The
Index is typically reconstituted based on the above criteria quarterly after the
close of trading on the 3rd
business day of each January, April, July, and October, utilizing data typically
from the last business day of the month preceding the reconstitution (the “Data
Date”). At the time of each reconstitution of the Index, each company is
weighted based on the sum of two-thirds of its equal weighting weight
(i.e.,
2/3 of 1%) and one-third of its proportion of the Index’s total normalized cash
flow, using data as of the Data Date. For example, for an Index constituent with
4% of the total normalized free cash flow of all 100 index constituents, its
weighting would be two-thirds of 1% plus one-third of 4%, which equals 2%. Any
stock that qualifies for inclusion in the Index, but ranks 81st to 100th of the
included securities based on the Index’s valuation score will be limited to a
weight of 2% at the time of reconstitution, with any excess weight redistributed
pro-rata to the unaffected positions.
As
of January 26, 2022, the Index had significant exposure to the information
technology, industrials, and health care sectors.
The
Fund’s Investment Strategy
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning it generally will invest in all of the component securities
of the Index in approximately the same proportions as in the Index. However, the
Fund may use a “representative sampling” strategy, meaning it may invest in a
sample of the securities in the Index whose risk, return and other
characteristics closely resemble the risk, return and other characteristics of
the Index as a whole, when the Fund’s sub-adviser believes it is in the best
interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable, or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
Under
normal circumstances, at least 80% of the Fund’s net assets, plus borrowings for
investment purposes, will be invested in U.S. assets. For purposes of this
policy, the Fund considers securities that are traded principally in the United
States to be “U.S. assets”.
To
the extent the Index concentrates (i.e., holds more than 25% of its total assets)
in the securities of a particular industry or group of related industries, the
Fund will concentrate its investments to approximately the same extent as the
Index.
Principal Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any investment, there is a risk that you could
lose all or a portion of your investment in the Fund. Some or
all of these risks may adversely affect the Fund’s net asset value per share
(“NAV”), trading price, yield, total return and/or ability to meet its
objectives. For more information about the risks of investing in the Fund, see
the section in the Fund’s Prospectus titled “Additional Information About the
Fund.”
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, acts of terrorism, spread of
infectious diseases or other public health issues, recessions, or other events
could have a significant negative impact on the Fund and its investments. For
example, the global pandemic caused by COVID-19, a novel coronavirus, and the
aggressive responses taken by many governments, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines or similar restrictions, has had negative impacts, and in many cases
severe impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant.
◦Trading. Although
Shares are listed for trading on the NYSE Arca, Inc. (the “Exchange”) and may be
traded on U.S. exchanges other than the Exchange, there can be no assurance that
Shares will trade with any volume, or at all, on any stock exchange. In stressed
market conditions, the liquidity of Shares may begin to mirror the liquidity of
the Fund’s underlying portfolio holdings, which can be significantly less liquid
than Shares, and this could lead to differences between the market price of the
Shares and the underlying value of those Shares.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Index Provider relies on an independent calculation
agent to calculate and disseminate the Index accurately. Any losses or costs
associated with errors made by the Index Provider or its agents generally will
be borne by the Fund and its shareholders.
•Large-Capitalization
Companies Risk.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion.
•Passive
Investment Risk.
The Fund is not actively managed, and its sub-adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•Sector
Risk. To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund may invest a significant portion of its assets in
the following sectors and, therefore, the performance of the Fund could be
negatively impacted by events affecting each of these sectors.
◦Health
Care Sector Risk. Companies
in the health care sector are subject to extensive government regulation and
their profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
an increased emphasis on the delivery of healthcare through outpatient services,
loss or impairment of intellectual property rights and litigation regarding
product or service liability.
◦Industrial
Sector Risk. The
industrial sector can be significantly affected by, among other things,
worldwide economic growth, supply and demand for specific products and services,
rapid technological developments, international political and economic
developments, environmental issues, tariffs and trade barriers, and tax and
governmental regulatory policies.
As the demand for, or prices of, industrials increase, the value of the Fund’s
investments generally would be expected to also increase. Conversely, declines
in the demand for, or prices of, industrials generally would be expected to
contribute to declines in the value of such securities. Such declines may occur
quickly and without warning and may negatively impact the value of the Fund and
your investment.
◦Information
Technology Sector Risk. Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect
profitability.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In
addition, the Fund may not be fully
invested in the securities of the Index at all times or may hold securities not
included in the Index.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for calendar
years ended December 31. The table illustrates how the Fund’s average annual
returns for the 1-year and since inception periods compare with those of a broad
measure of market performance and the Index. The Fund’s past performance,
before and after taxes, does not necessarily indicate how it will perform in the
future. Updated performance information is available on the
Fund’s website at www.distillatefunds.com/dstl.
Calendar Year Total
Returns
During the period of time shown
in the bar chart, the Fund’s highest quarterly return
was 22.57% for the quarter ended June 30, 2020, and the
lowest quarterly return was
-19.39% for the quarter ended March 31,
2020.
Average Annual Total Returns
For the Periods Ended December 31,
2021
|
|
|
|
|
|
|
|
|
|
|
|
Distillate
U.S. Fundamental Stability & Value ETF |
1
Year |
|
Since
Inception
(10/23/2018) |
Return Before
Taxes |
28.91% |
|
22.58% |
Return After Taxes on
Distributions |
28.56% |
|
22.28% |
Return After Taxes on Distributions and
Sale of Fund Shares |
17.31% |
|
17.96% |
Distillate
U.S. Fundamental Stability & Value Index
(reflects no deduction for
fees, expenses, or taxes) |
29.48% |
|
23.10% |
S&P
500® Index
(reflects
no deduction for fees, expenses, or taxes) |
28.71% |
|
21.08% |
After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates during the period covered by the table above and do not reflect the impact
of state and local taxes. Actual after-tax returns
depend on an investor’s tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their Shares through
tax-deferred arrangements such as an individual retirement account (“IRA”) or
other tax-advantaged accounts.
Management
|
|
|
|
|
|
Adviser |
Distillate
Capital Partners LLC |
Sub-Adviser |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
Portfolio
Managers |
Rafael
Zayas, CFA, SVP, Head of Portfolio Management and Trading of VIA, has been
a portfolio manager of the Fund since June 2020, and Austin Wen, CFA,
Portfolio Manager of VIA, has been a portfolio manager of the Fund since
its inception in October 2018. |
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.distillatefunds.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
Investment Objective
The Distillate International
Fundamental Stability & Value ETF (the “Fund”) seeks to track the
performance, before fees and expenses, of the Distillate International
Fundamental Stability & Value Index (the “Index”).
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
|
|
|
|
|
|
Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.55% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses
|
0.00% |
Total
Annual Fund Operating Expenses |
0.55% |
Expense Example
This Example is
intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then continue to hold or redeem all of
your Shares at the end of those periods. The Example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
|
|
|
|
|
|
|
|
|
|
|
|
1
Year |
3
Years |
5
Years |
10
Years |
$56 |
$176 |
$307 |
$689 |
Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
Example, affect the Fund’s performance. For the fiscal period December 14, 2020
(commencement of operations) through September 30, 2021, the Fund’s portfolio
turnover rate was 57% of the average value of its
portfolio.
Principal Investment Strategy
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index. The Index was developed in
2020 by Distillate Capital Partners LLC, the Fund’s investment adviser and index
provider (the “Adviser” or “Index Provider”), and measures the performance of
globally listed, large- and mid-capitalization equity securities and depositary
receipts of non-U.S. companies, selected based on certain fundamental factors,
as described below.
Distillate
International Fundamental Stability & Value Index
To
be eligible for inclusion in the Index, a company must meet the following
requirements: (1) have a minimum of five years of cash flow per share data
available, (2) have sufficient liquidity (e.g.,
a minimum average daily trading volume of US$20 million over the most recent
90-day period), (3) have a minimum market capitalization of US$5 billion, and
(4) sufficiently low minimum-lot requirements (the “Equity Universe”). The
Equity Universe is determined annually as of each December 15 and constitutes
the Equity Universe for each quarterly reconstitution of the Index until the
next December 15. Existing constituents of the Index as of December 15th are
included in the new Equity Universe regardless of the criteria listed above. The
companies in the Equity Universe are then evaluated based on the following three
proprietary fundamental measures (collectively, the “FSV Measures”) to identify
the companies that will be included in the Index:
|
|
|
|
|
|
Financial
Indebtedness |
Companies
with significant leverage (based on a proprietary debt-to-income
calculation) are excluded from the Index. |
Fundamental
Stability |
Each
company is scored based on a proprietary measure of the volatility of its
historical and projected cash flows as an indicator of fundamental
stability. The bottom two-thirds (i.e.,
the least stable) of the companies in the Equity Universe based on this
measure are excluded from the Index. |
Valuation |
Each
company is scored based on a proprietary measure of the company’s free
cash flow yield (a
measure
comparing a company’s normalized free cash flow to its enterprise value).
The top 100 companies (i.e.,
the most undervalued) based on such scoring that also meet the
Index’s other criteria are included in the Index.
|
The
Index is typically reconstituted quarterly from the companies in the Equity
Universe after the close of trading on the 5th business day of each January,
April, July, and October, based on FSV Measures typically as of the 1st business
day of that month (the “Data Date”). The Index Provider may adjust the specific
timing of reconstitutions to account for holidays and market closures in foreign
markets.
At
the time of each reconstitution of the Index, a company will not be removed from
the Index solely for falling out of the top 100 most undervalued companies as
determined by the Index methodology if it remains within the top 130 most
undervalued companies. Similarly, a company will not be removed from the Index
solely for having a market capitalization less than US$5 billion or average
daily trading volume of less than US$20 million if the company’s market
capitalization and average daily trading volume are at least 70% of such
thresholds (i.e.,
US$3.5 billion and US$14 million, respectively).
The
Index consists of companies in the following geographic regions: the Americas
(North America ex-United States & South America), Europe, the Middle East
& Africa, Japan, China/Hong Kong, and Asia & Australia
ex-Japan/China/Hong Kong. The Index excludes U.S. companies (i.e.,
those with their headquarters in the United States). At the time of each
reconstitution of the Index, the Index limits the weighting of each foregoing
region to a maximum of 150% of the weight of the total market capitalization of
large- and mid-capitalization stocks in such region relative to the total global
ex-U.S. market capitalization of large- and mid-capitalization stocks. A
separate limit of 8% will apply to the combined weights of securities trading on
exchanges in the following countries: Brazil, Malaysia, South Korea, Taiwan, and
Thailand.
The
Index Provider determines each country’s eligibility for inclusion in the Index
based on factors including the liquidity of the country’s stock markets,
accessibility to foreign investors, operational complexity, price transparency,
and capital controls, as well as the effect a country’s inclusion in the Index
would have on the Index’s investibility and the cost of trying to replicate the
Index’s constituents. The Index Provider may include a depositary receipt in
lieu of a foreign ordinary share, if such depositary receipt meets the Index
eligibility requirements described above. In addition, the Index may include
companies organized in emerging market nations or whose shares trade primarily
in emerging market nations.
Companies
in the real estate development and real estate investment trust industries, as
defined by the FactSet Revere Business Industry Classification Systems
(“RBICS”), are excluded from the Index.
At
the time of each reconstitution of the Index, each Index constituent is
initially weighted based on the sum of two-thirds of its equal weighting weight
(i.e., 2/3 of 1%) and one-third of its proportion of the Index’s total
normalized cash flow, using data as of the Data Date, subject to a maximum
weight of 3% for each individual constituent. For example, for an Index
constituent with 4% of the total normalized free cash flow of all 100 Index
constituents, its weighting would be two-thirds of 1% plus one-third of 4%,
which equals 2%. The new weight of each company may be adjusted upward or
downward by the Index methodology to minimize the turnover rate of positions
that would remain in the Index with weights that would otherwise change by less
than 0.25%.
Although
the Index methodology seeks to select companies that demonstrate fundamental
stability, the value of such companies (and consequently the value of the Index
and of the Fund) may still be subject to volatility over short or long periods
of time.
As
of January 26, 2022, the Index had significant exposure to companies in
China/Hong Kong, Europe, and Japan. The Index’s exposure may change
significantly with each reconstitution or based on market movements in between
reconstitutions. As of January 26, 2022, the Index had significant exposure to
the information technology, industrials, and consumer sectors.
The
Fund’s Investment Strategy
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning the Fund will generally invest in all of the component
securities of the Index in the same approximate proportions as in the
Index. However, the Fund may use a “representative sampling” strategy, meaning
it may invest in a sample of the securities in the Index whose risk, return, and
other characteristics closely resemble the risk, return, and other
characteristics of the Index as a whole, when the Fund’s sub-adviser believes it
is in the best interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an
Index constituent becomes
temporarily illiquid, unavailable, or less liquid, or as a result of legal
restrictions or limitations that apply to the Fund but not to the Index).
To
the extent the Index concentrates (i.e., holds more than 25% of its total assets)
in the securities of a particular industry or group of related industries, the
Fund will concentrate its investments to approximately the same extent as the
Index. The Fund is classified as non-diversified and therefore may invest a
larger percentage of its assets in the securities of a single company or a
smaller number of companies than diversified funds.
Principal Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any investment, there is a risk that you could
lose all or a portion of your investment in the Fund. Some or
all of these risks may adversely affect the Fund’s net asset value per share
(“NAV”), trading price, yield, total return and/or ability to meet its
objectives. For more information about the risks of investing in the Fund, see
the section in the Fund’s Prospectus titled “Additional Information About the
Funds.”
•Capital
Controls and Sanctions Risk.
Economic conditions, such as volatile currency exchange rates and interest
rates, political events, military action and other conditions may, without prior
warning, lead to foreign government intervention (including intervention by the
U.S. government with respect to foreign governments, economic sectors, foreign
companies and related securities and interests) and the imposition of capital
controls and/or sanctions, which may also include retaliatory actions of one
government against another government, such as seizure of assets. Capital
controls and/or sanctions include the prohibition of, or restrictions on, the
ability to transfer currency, securities or other assets. Capital controls
and/or sanctions may also impact the ability of the Fund to buy, sell or
otherwise transfer securities or currency, negatively impact the value and/or
liquidity of such instruments, adversely affect the trading market and price for
Shares, and cause the Fund to decline in value.
•Currency
Exchange Rate Risk.
The Fund invests primarily in investments denominated in non-U.S. currencies or
in securities that provide exposure to such currencies. Changes in currency
exchange rates and the relative value of non-U.S. currencies will affect the
value of the Fund’s investment and the value of your Shares. Currency exchange
rates can be very volatile and can change quickly and unpredictably. As a
result, the value of an investment in the Fund may change quickly and without
warning and you may lose money.
•Depositary
Receipt Risk. Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•Emerging
Markets Risk.
The Fund may invest in companies organized in emerging market nations.
Investments in securities and instruments traded in developing or emerging
markets, or that provide exposure to such securities or markets, can involve
additional risks relating to political, economic, or regulatory conditions not
associated with investments in U.S. securities and instruments or investments in
more developed international markets. Such conditions may impact the ability of
the Fund to buy, sell or otherwise transfer securities, adversely affect the
trading market and price for Shares and cause the Fund to decline in value.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, acts of terrorism, spread of
infectious diseases or other public health issues, recessions, or other events
could have a significant negative impact on the Fund and its investments. For
example, the global pandemic caused by COVID-19, a novel coronavirus, and the
aggressive responses taken by many governments, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines or similar restrictions, has had negative impacts, and in many cases
severe impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant. Because
securities held by the Fund may trade on foreign exchanges that are closed when
the Fund’s primary listing exchange is open, there are likely to be deviations
between the current price of a security and the security’s last quoted price
from the closed foreign market. This may result in premiums and discounts that
are greater than those experienced by domestic ETFs.
◦Trading. Although
Shares are listed for trading on the NYSE
Arca, Inc.
(the “Exchange”) and may be traded on U.S. exchanges other than the Exchange,
there can be no assurance that Shares will trade with any volume, or at all, on
any stock exchange. In stressed market conditions, the liquidity of Shares may
begin to mirror the liquidity of the Fund’s underlying portfolio holdings, which
can be significantly less liquid than Shares, and this could lead to differences
between the market price of the Shares and the underlying value of those Shares.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. Investments in non-U.S. securities also
may be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. These and other factors
can make investments in the Fund more volatile and potentially less liquid than
other types of investments. Companies in many foreign markets are not subject to
the same degree of regulatory requirements, accounting standards or auditor
oversight as companies in the U.S., and as a result, information about the
securities in which the Fund invests may be less reliable or complete. Foreign
markets often have less reliable securities valuations and greater risk
associated with the custody of securities than the U.S. There may be significant
obstacles to obtaining information necessary for investigations into or
litigation against companies and shareholders may have limited legal
remedies.
•Geographic
Investment Risk.
To the extent the Fund invests a significant portion of its assets in the
securities of companies of a single country or region, it is more likely to be
impacted by events or conditions affecting that country or region.
◦Risks
of Investing in China and Hong Kong: Investments
in the securities of Chinese issuers that trade on an exchange in Hong Kong
subject the Fund to risks specific to China and Hong Kong. China and Hong Kong
may be subject to considerable degrees of economic, political and social
instability. China and Hong Kong are developing markets and demonstrate
significantly higher volatility from time to time in comparison to developed
markets. Over the past 25 years, the Chinese government has undertaken reform of
economic and market practices and is expanding the sphere of private ownership
of property in China. However, Chinese markets generally continue to experience
inefficiency, volatility and pricing anomalies resulting from governmental
influence, a lack of publicly available information and/or political and social
instability. Internal social unrest or confrontations with other neighboring
countries, including military conflicts in response to such events, may also
disrupt economic development in China and result in a greater risk of currency
fluctuations, currency convertibility, interest rate fluctuations and higher
rates of inflation. Export growth continues to be a major driver of China’s
rapid economic growth. Reduction in spending on Chinese products and services,
institution of tariffs or other trade barriers, or a downturn in any of the
economies of China’s key trading partners may have an adverse impact on the
Chinese economy. China is also vulnerable economically to the impact of a public
health crisis, which could depress consumer demand, reduce economic output, and
potentially lead to market closures, travel restrictions, and quarantines, all
of which would negatively impact China’s economy and could affect the economies
of its trading partners. Further, any attempt by
China
to tighten its control over Hong Kong’s political, economic, legal or social
policies may result in an adverse effect on Hong Kong’s markets.
For
purposes of raising capital offshore on exchanges outside of China, including on
U.S. exchanges, many Chinese-based operating companies are structured as
Variable Interest Entities (“VIEs”). In this structure, the Chinese-based
operating company is the VIE and establishes a shell company in a foreign
jurisdiction, such as the Cayman Islands. The shell company lists on a foreign
exchange and enters into contractual arrangements with the VIE. This structure
allows Chinese companies in which the government restricts foreign ownership to
raise capital from foreign investors. While the shell company has no equity
ownership of the VIE, these contractual arrangements permit the shell company to
consolidate the VIE’s financial statements with its own for accounting purposes
and provide for economic exposure to the performance of the underlying Chinese
operating company. Therefore, an investor in the listed shell company, such as
the Fund, will have exposure to the Chinese-based operating company only through
contractual arrangements and has no ownership in the Chinese-based operating
company. Furthermore, because the shell company only has specific rights
provided for in these service agreements with the VIE, its abilities to control
the activities at the Chinese-based operating company are limited and the
operating company may engage in activities that negatively impact investment
value.
◦Risks
Related to Investing in Europe.
The economies and markets of European countries are often closely connected and
interdependent, and events in one country in Europe can have an adverse impact
on other European countries. The Fund makes investments in securities of issuers
that are domiciled in, or have significant operations in, member countries of
the European Union (“EU”) that are subject to economic and monetary controls
that can adversely affect the Fund’s investments. The European financial markets
have experienced volatility and adverse trends in recent years and these events
have adversely affected the exchange rate of the euro and may continue to
significantly affect other European countries. Decreasing imports or exports,
changes in governmental or EU regulations on trade, changes in the exchange rate
of the euro, 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 European countries in which the
Fund invests.
The
UK formally exited from the EU on January 31, 2020 (known as “Brexit”), and
effective December 31, 2020, the UK ended a transition period during which it
continued to abide by the EU’s rules and the UK’s trade relationships with the
EU were generally unchanged. Following this transition period, the impact on the
UK and European economies and the broader global economy could be significant,
resulting in negative impacts, such as increased volatility and illiquidity, and
potentially lower economic growth of markets in the UK, Europe and globally,
which may adversely affect the value of the Fund’s investments.
◦Risks
Related to Investing in Japan.
The Japanese economy may be subject to considerable degrees of economic,
political and social instability, which could have a negative impact on Japanese
securities. Since the year 2000, Japan’s economic growth rate has remained
relatively low and it may remain low in the future. In addition, Japan is
subject to the risk of natural disasters, such as earthquakes, volcanoes,
typhoons and tsunamis. Additionally, decreasing U.S. imports, new trade
regulations, changes in the U.S. dollar exchange rates, a recession in the
United States or continued increases in foreclosure rates may have an adverse
impact on the economy of Japan. Japan also has few natural resources, and any
fluctuation or shortage in the commodity markets could have a negative impact on
Japanese securities.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Index Provider relies on an independent calculation
agent to calculate and disseminate the Index accurately. Any losses or costs
associated with errors made by the Index Provider or its agents generally will
be borne by the Fund and its shareholders. Because the Index includes
international securities, the Index Provider may have limited information or may
be more prone to mistakes based on the data available and such mistakes may have
a greater impact on the Fund’s performance, which may increase the risks to the
Fund.
•Limited
Operating History. The
Fund is a recently organized investment company with a limited operating
history. As a result, prospective investors have a limited track record or
history on which to base their investment decision.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
•Non-Diversification
Risk. The Fund is considered to be non-diversified,
which means that it may invest more of its assets in the securities of a single
issuer or a smaller number of issuers than if it were a diversified fund. As a
result, the Fund may be more exposed to the risks associated with and
developments affecting an individual issuer or a smaller number of issuers than
a fund that invests more widely. This may increase the Fund’s volatility and
cause the performance of a relatively smaller number of issuers to have a
greater impact on the Fund’s performance. However, the Fund intends to satisfy
the diversification requirements for qualifying as a regulated investment
company (a “RIC”) under Subchapter M of the Internal Revenue Code of 1986, as
amended (the “Code”).
•Passive
Investment Risk.
The Fund is not actively managed, and its sub-adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•Sector
Risk. To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund may invest a significant portion of its assets in
the following sectors and, therefore, the performance of the Fund could be
negatively impacted by events affecting each of these sectors.
◦Consumer
Sectors Risk. The
success of consumer product manufacturers and retailers is tied closely to the
performance of domestic and international economies, interest rates, exchange
rates, competition, consumer confidence, tariffs and trade barriers, changes in
demographics, and consumer preferences. Companies in consumer-oriented sectors
depend heavily on disposable household income and consumer spending, and may be
strongly affected by social trends and marketing campaigns. These companies may
be subject to severe competition, which may have an adverse impact on their
profitability.
◦Industrial
Sector Risk. The
industrial sector can be significantly affected by, among other things,
worldwide economic growth, supply and demand for specific products and services,
rapid technological developments, international political and economic
developments, environmental issues, tariffs and trade barriers, and tax and
governmental regulatory policies.
As the demand for, or prices of, industrials increase, the value of the Fund’s
investments generally would be expected to also increase. Conversely, declines
in the demand for, or prices of, industrials generally would be expected to
contribute to declines in the value of such securities. Such declines may occur
quickly and without warning and may negatively impact the value of the Fund and
your investment.
◦Information
Technology Sector Risk. Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect
profitability.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for calendar
years ended December 31. The table illustrates how the Fund’s average annual
returns for the 1-year and since inception periods compare with those of a broad
measure of market performance and the Index. The Fund’s past performance,
before and after taxes, does not necessarily indicate how it will perform in the
future. Updated performance information is available on the
Fund’s website at www.distillatefunds.com/dstx.
Calendar Year Total
Returns
During the period of time shown
in the bar chart, the Fund’s highest quarterly return
was 4.48% for the quarter ended June 30, 2021, and the
lowest quarterly return was
-7.06% for the quarter ended September 30,
2021.
Average Annual Total Returns
For the Periods Ended December 31,
2021
|
|
|
|
|
|
|
|
|
|
|
|
Distillate
International Fundamental Stability & Value ETF |
1
Year |
|
Since
Inception
(12/14/2020) |
Return Before
Taxes |
1.67% |
|
4.71% |
Return After Taxes on
Distributions |
1.36% |
|
4.38% |
Return After Taxes on Distributions and
Sale of Fund Shares |
1.59% |
|
3.81% |
Distillate
International Fundamental Stability & Value Index
(reflects no deduction for
fees, expenses, or taxes) |
2.31% |
|
5.32% |
Morningstar
Global Markets ex-US Index
(reflects
no deduction for fees, expenses, or taxes) |
8.41% |
|
10.83% |
After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates during the period covered by the table above and do not reflect the impact
of state and local taxes. Actual after-tax returns
depend on an investor’s tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their Shares through
tax-deferred arrangements such as an individual retirement account (“IRA”) or
other tax-advantaged accounts.
Management
|
|
|
|
|
|
Adviser |
Distillate
Capital Partners LLC |
Sub-Adviser |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
Portfolio Managers |
Rafael
Zayas, CFA, SVP, Head of Portfolio Management and Trading of VIA, and
Austin Wen, CFA, Portfolio Manager of VIA, have been portfolio managers of
the Fund since December 2020. |
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.distillatefunds.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
ADDITIONAL
INFORMATION
ABOUT
THE FUNDS
Investment
Objective.
Each Fund’s investment objective has been adopted as a non-fundamental
investment policy and may be changed without shareholder approval upon written
notice to shareholders.
Manager
of Managers Structure. The
Distillate International Fundamental Stability & Value ETF (the
“International Fund”)
and
the Adviser have received exemptive relief from the SEC permitting the Adviser
(subject to certain conditions and the approval of the Funds’ Board of Trustees
(the “Board”)) to change or select sub-advisers without obtaining shareholder
approval. The relief also permits the Adviser to materially amend the terms of
agreements with a sub-adviser (including an increase in the fee paid by the
Adviser to the sub-adviser (and not paid by the International Fund)) or to
continue the employment of a sub-adviser after an event that would otherwise
cause the automatic termination of services with Board approval, but without
shareholder approval. Shareholders of the International Fund will be notified of
any sub-adviser changes.
Additional
Information About the Indexes.
The Adviser is the Index Provider to each Fund. The Adviser created and is
responsible for maintaining and applying the rules-based methodology of the
Indexes. The Indexes are calculated by Solactive
AG (the
“Index Calculation Agent”),
an
independent third-party that is not affiliated with the Funds, the Adviser, the
Sub-Adviser, the Funds’ distributor, or any of their respective affiliates. The
Index Calculation Agent provides information to each Fund about the applicable
Index constituents and does not provide investment advice with respect to the
desirability of investing in, purchasing, or selling securities.
A
company’s “normalized” free cash flow reflects its estimated free cash flow,
adjusted to account for nonrecurring items. Such “normalized” values enable a
more accurate comparison of different companies’ regular free cash
flows.
A
company’s enterprise value is a calculation of a company’s value based primarily
on market capitalization and indebtedness.
Distillate
International Fundamental Stability & Value Index
To
reduce the turnover rate of the Index constituents, the Index applies a set of
“Weighting Adjustments” in conjunction with each reconstitution of the Index. As
part of the Weighting Adjustments, for each reconstitution of the Index, the new
weight of a company already included in the Index will be the same as the weight
immediately prior to the reconstitution unless the new weight would be at least
0.25% greater or less than such company’s weight immediately prior to such
reconstitution. Any net under- or over-allocated weight resulting from such
Weighting Adjustments will be equally distributed to companies in the Index not
affected by the Weighting Adjustments. If the Weighting Adjustment would result
in a total Index weight of less than 100%, additional weight (i.e.,
the amount needed to reach 100%) will be allocated to companies not affected by
the Weighting Adjustments and that are being added to the Index or whose weights
are already increasing by at least 0.25%. If the Weighting Adjustment would
result in a total Index weight of more than 100%, the excess weight will be
allocated to companies not affected by the Weighting Adjustments and whose
weights are already decreasing by at least 0.25%.
For
companies headquartered in China/Hong Kong, only such companies’ Hong
Kong-listed securities are eligible for inclusion in the Index.
Additional
Information About the Fund’s Principal Investment Strategies (Distillate
U.S. Fundamental Stability & Value ETF (the “U.S. Fund”) only).
The Fund has adopted the following policy to comply with Rule 35d-1 under the
Investment Company Act of 1940 (the “1940 Act”). Such policy has been adopted as
a non-fundamental investment policy and may be changed without shareholder
approval upon 60 days’ written notice to shareholders. Under normal
circumstances, at least 80% of the Fund’s net assets, plus borrowings for
investment purposes, will be invested in U.S. assets. For purposes of this
policy, the Fund considers securities that are traded principally
in the United States to be “U.S. assets”.
Additional Information About the Funds’ Principal
Risks.
This
section provides additional information regarding the principal risks described
in each Fund Summary. As in each Fund Summary, the principal risks below are
presented in alphabetical order to facilitate finding particular risks and
comparing them with other funds. Each risk described below is considered a
“principal risk” of investing in the applicable Fund, regardless of the order in
which it appears. Each of the factors below could have a negative impact on the
applicable Fund’s performance and trading prices.
•Capital
Controls and Sanctions Risk (International
Fund only).
Economic
conditions, such as volatile currency exchange rates and interest rates,
political events, military action and other conditions, may, without prior
warning, lead to government intervention (including intervention by the U.S.
government with respect to foreign governments, economic sectors, foreign
companies and related securities and interests) and the imposition of capital
controls and/or sanctions, which may also include retaliatory actions of one
government against another government, such as seizure of assets. Capital
controls and/or sanctions include the prohibition of, or restrictions on, the
ability to transfer currency, securities or other assets. Levies may be placed
on profits repatriated by foreign entities (such as the Fund). Capital controls
and/or sanctions may also impact the ability of the Fund to buy, sell or
otherwise transfer securities or currency, negatively impact the value and/or
liquidity of such instruments, adversely affect the trading market and price for
Shares, and cause the Fund to decline in value.
•Currency
Exchange Rate Risk (International
Fund only).
Changes
in currency exchange rates and the relative value of non-U.S. currencies will
affect the value of the Fund’s investments and the value of your Shares. Because
the Fund’s NAV is determined on the basis of U.S. dollars, the U.S. dollar value
of your investment in the Fund may go down if the value of the local currency of
the non-U.S. markets in which the Fund invests depreciates against the U.S.
dollar. This is true even if the local currency value of securities in the
Fund’s holdings goes up. Conversely, the dollar value of your investment in the
Fund may go up if the value of the local currency appreciates against the U.S.
dollar. The value of the U.S. dollar measured against other currencies is
influenced by a variety of factors. These factors include: national debt levels
and trade deficits, changes in balances of payments and trade, domestic and
foreign interest and inflation rates, global or regional political, economic or
financial events, monetary policies of governments, actual or potential
government intervention, and global energy prices. Political instability, the
possibility of government intervention and restrictive or opaque business and
investment policies may also reduce the value of a country’s currency.
Government monetary policies and the buying or selling of currency by a
country’s government may also influence exchange rates. Currency exchange rates
can be very volatile and can change quickly and unpredictably. As a result, the
value of an investment in the Fund may change quickly and without warning, and
you may lose money.
•Depositary
Receipt Risk
(International
Fund only).
Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•Emerging
Markets Risk
(International
Fund only).
Investments
in securities and instruments traded in developing or emerging markets, or that
provide exposure to such securities or markets, can involve additional risks
relating to political, economic, or regulatory conditions not associated with
investments in U.S. securities and instruments. For example, developing and
emerging markets may be subject to (i) greater market volatility,
(ii) lower trading volume and liquidity, (iii) greater social,
political and economic uncertainty, (iv) governmental controls on foreign
investments and limitations on repatriation of invested capital, (v) lower
disclosure, corporate governance, auditing and financial reporting standards,
(vi) fewer protections of property rights, (vii) fewer investor rights
and limited legal or practical remedies available to investors against emerging
market companies, (viii) restrictions on the transfer of securities or
currency, and (ix) settlement and trading practices that differ from those
in U.S. markets. Each of these factors may impact the ability of the Fund to
buy, sell or otherwise transfer securities, adversely affect the trading market
and price for Shares and cause the Fund to decline in value.
◦Capital
Controls and Sanctions Risk.
Economic
conditions, such as volatile currency exchange rates and interest rates,
political events, military action and other conditions may, without prior
warning, lead to government intervention (including intervention by the U.S.
government with respect to foreign governments, economic sectors, foreign
companies and related securities and interests) and the imposition of capital
controls and/or sanctions, which may also include retaliatory actions of one
government against another government, such as seizure of assets. Capital
controls and/or sanctions include the prohibition of, or restrictions on, the
ability to transfer currency, securities or other assets. Levies may be placed
on profits repatriated by foreign entities (such as the Fund). Capital controls
and/or sanctions may also impact the ability of the Fund to buy, sell or
otherwise transfer securities or currency, negatively impact the value and/or
liquidity of such instruments, adversely affect the trading market and price for
Shares, and cause the Fund to decline in value.
◦Geopolitical
Risk. Some
countries and regions in which the Fund invests have experienced security
concerns, war or threats of war and aggression, terrorism, economic uncertainty,
natural and environmental disasters and/or systemic market dislocations that
have led, and in the future may lead, to increased short-term market volatility
and may have adverse long-term effects on the U.S. and world economies and
markets generally. Such geopolitical and other events may also disrupt
securities markets and, during such market disruptions, the Fund’s exposure to
the other risks described herein will likely increase. Each of the foregoing may
negatively impact the Fund’s investments.
•Equity
Market Risk.
Common stocks are susceptible to general stock market fluctuations and to
volatile increases and decreases in value as market confidence in and
perceptions of their issuers change. These investor perceptions are based on
various and unpredictable factors including: expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional political, economic, public
health, and banking crises. If you held common stock, or common stock
equivalents, of any given issuer, you would generally be exposed to greater risk
than if you held preferred stocks and debt obligations of the issuer because
common stockholders, or holders of equivalent interests, generally have inferior
rights to receive payments from issuers in comparison with the rights of
preferred stockholders, bondholders, and other creditors of such issuers.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled
quarantines
of large populations, stressed healthcare systems, reduced or prohibited
domestic or international travel, and supply chain disruptions affecting the
United States and many other countries. Some sectors of the economy and
individual issuers have experienced particularly large losses as a result of
these disruptions, and such disruptions may continue for an extended period of
time or reoccur in the future to a similar or greater extent. In response, the
U.S. government and the Federal Reserve have taken extraordinary actions to
support the domestic economy and financial markets, resulting in very low
interest rates and in some cases negative yields. It is unknown how long
circumstances related to the pandemic will persist, whether they will reoccur in
the future, whether efforts to support the economy and financial markets will be
successful, and what additional implications may follow from the pandemic. The
impact of these events and other epidemics or pandemics in the future could
adversely affect Fund performance.
•ETF
Risks. Each
Fund is an ETF, and, as a result of an ETF’s structure, is exposed to the
following risks:
◦APs,
Market Makers, and Liquidity Providers Concentration Risk.
The Fund has a limited number of financial institutions that may act as APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. To the extent either of the following events
occur, Shares may trade at a material discount to NAV and possibly face
delisting: (i) APs exit the business or otherwise become unable to process
creation and/or redemption orders and no other APs step forward to perform these
services, or (ii) market makers and/or liquidity providers exit the business or
significantly reduce their business activities and no other entities step
forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Investors buying or selling Shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers, as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively small amounts
of Shares. In addition, secondary market investors will also incur the cost of
the difference between the price at which an investor is willing to buy Shares
(the “bid” price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid-ask spread.” The bid-ask spread varies over time for Shares
based on trading volume and market liquidity, and the spread is generally lower
if Shares have more trading volume and market liquidity and higher if Shares
have little trading volume and market liquidity. Further, a relatively small
investor base in the Fund, asset swings in the Fund, and/or increased market
volatility may cause increased bid-ask spreads. Due to the costs of buying or
selling Shares, including bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small
investments.
◦Shares
May Trade at Prices Other Than NAV.
As with all ETFs, Shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of Shares will
approximate the Fund’s NAV, there may be times when the market price of Shares
is more than the NAV intra-day (premium) or less than the NAV intra-day
(discount) due to supply and demand of Shares or during periods of market
volatility. This risk is heightened in times of market volatility, periods of
steep market declines, and periods when there is limited trading activity for
Shares in the secondary market, in which case such premiums or discounts may be
significant. Because securities held by the International Fund may trade on
foreign exchanges that are closed when the International Fund’s primary listing
exchange is open, there are likely to be deviations between the current price of
a security and the security’s last quoted price from the closed foreign market.
This may result in premiums and discounts for the International Fund that are
greater than those experienced by domestic ETFs.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to Exchange “circuit breaker”
rules, which temporarily halt trading on the Exchange when a decline in the
S&P 500®
Index during a single day reaches certain thresholds (e.g.,
7%, 13%, and 20%). Additional rules applicable to the Exchange may halt trading
in Shares when extraordinary volatility causes sudden, significant swings in the
market price of Shares. There can be no assurance that Shares will trade with
any volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio holdings, which can be significantly less liquid than Shares, and this
could lead to differences between the market price of the Shares and the
underlying value of those Shares.
•Foreign
Securities Risk (International
Fund only).
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility
of
government intervention and expropriation or nationalization of assets. Because
legal systems differ, there is also the possibility that it will be difficult to
obtain or enforce legal judgments in certain countries. Since foreign exchanges
may be open on days when the Fund does not price its Shares, the value of the
securities in the Fund’s portfolio may change on days when shareholders will not
be able to purchase or sell the Shares. Conversely, Shares may trade on days
when foreign exchanges are closed. Each of these factors can make investments in
the Fund more volatile and potentially less liquid than other types of
investments. Foreign markets often have less reliable securities valuations and
greater risk associated with the custody of securities than the U.S. There may
be significant obstacles to obtaining information necessary for investigations
into or litigation against companies and shareholders may have limited legal
remedies.
•Geographic
Investment Risk (International
Fund only).
To
the extent that the Fund invests a significant portion of its assets in the
securities of companies of a single country or region, it is more likely to be
impacted by events or conditions affecting that country or region. For example,
political and economic conditions and changes in regulatory, tax, or economic
policy in a country could significantly affect the market in that country and in
surrounding or related countries and have a negative impact on the Fund’s
performance. Currency developments or restrictions, political and social
instability, and changing economic conditions have resulted in significant
market volatility.
◦Risks
of Investing in China and Hong Kong: The
economies of China and Hong Kong are subject to a considerable degree of
economic, political and social instability:
▪Political
and Social Risk: The
Chinese government is authoritarian and has periodically used force to suppress
civil dissent. Disparities of wealth and the pace of economic liberalization may
lead to social turmoil, violence and labor unrest. In addition, China continues
to experience disagreements related to integration with Hong Kong and religious
and nationalist disputes in Tibet and Xinjiang. There is also a greater risk in
China than in many other countries of currency fluctuations, currency
convertibility, interest rate fluctuations and higher rates of inflation as a
result of internal social unrest or conflicts with other countries.
Unanticipated political or social developments may result in sudden and
significant investment losses. China’s growing income inequality and worsening
environmental conditions also are factors that may affect the Chinese economy.
▪Government
Control and Regulations:
The Chinese government has implemented significant economic reforms in order to
liberalize trade policy, promote foreign investment in the economy, reduce
government control of the economy and develop market mechanisms. There can be no
assurance these reforms will continue or that they will be effective. Despite
recent reform and privatizations, significant regulation of investment and
industry is still pervasive, and the Chinese government may restrict foreign
ownership of Chinese corporations and/or repatriate assets. Chinese markets
generally continue to experience inefficiency, volatility and pricing anomalies
that may be connected to governmental influence, a lack of publicly-available
information and/or political and social instability.
▪Economic
Risk:
The Chinese economy has grown rapidly during the past several years and there is
no assurance that this growth rate will be maintained. In fact, the Chinese
economy may experience a significant slowdown as a result of, among other
things, a deterioration in global demand for Chinese exports, as well as
contraction in spending on domestic goods by Chinese consumers. In addition,
China may experience substantial rates of inflation or economic recessions,
which would have a negative effect on the economy and securities market. Delays
in enterprise restructuring, slow development of well-functioning financial
markets and widespread corruption have also hindered performance of the Chinese
economy. China continues to receive substantial pressure from trading partners
to liberalize official currency exchange rates. Chinese companies are subject to
the risk that the U.S. government or other governments may sanction Chinese
issuers or otherwise prohibit U.S. persons or funds from investing in certain
Chinese issuers and a lack of transparency with respect to economic activity and
transactions in China. Recent developments in relations between the United
States and China have heightened concerns of increased tariffs and restrictions
on trade between the two countries. It is unclear whether further tariffs and
sanctions may be imposed or other escalating actions may be taken in the future.
▪Expropriation
Risk: The
Chinese government maintains a major role in economic policymaking, and
investing in China involves risk of loss due to expropriation, nationalization,
confiscation of assets and property, or the imposition of restrictions on
foreign investments and on repatriation of capital invested.
▪Hong
Kong Political Risk:
Hong Kong reverted to Chinese sovereignty on July 1, 1997 as a Special
Administrative Region (SAR) of the PRC under the principle of “one country, two
systems.” Although China is obligated to maintain the current capitalist
economic and social system of Hong Kong through June 30, 2047, the
continuation of economic and social freedoms enjoyed in Hong Kong is dependent
on the government of China. Any attempt by China to tighten its control over
Hong Kong’s political, economic, legal or social policies may result in an
adverse effect on Hong Kong’s markets. In addition, the Hong Kong dollar trades
at a fixed exchange rate in relation to (or, is “pegged” to) the U.S. dollar,
which has contributed to the growth and stability of the Hong Kong economy.
However, it is uncertain how long
the
currency peg will continue or what effect the establishment of an alternative
exchange rate system would have on the Hong Kong economy. Because the Fund’s NAV
is denominated in U.S. dollars, the establishment of an alternative exchange
rate system could result in a decline in the Fund’s NAV.
▪Variable
Interest Entity Investments:
For purposes of raising capital offshore on exchanges outside of China,
including on U.S. exchanges, many Chinese-based operating companies are
structured as VIEs. In this structure, the Chinese-based operating company is
the VIE and establishes a shell company in a foreign jurisdiction, such as the
Cayman Islands. The shell company lists on a foreign exchange and enters into
contractual arrangements with the VIE. This structure allows Chinese companies
in which the government restricts foreign ownership to raise capital from
foreign investors. While the shell company has no equity ownership of the VIE,
these contractual arrangements permit the shell company to consolidate the VIE’s
financial statements with its own for accounting purposes and provide for
economic exposure to the performance of the underlying Chinese operating
company. Therefore, an investor in the listed shell company, such as the Fund,
will have exposure to the Chinese-based operating company only through
contractual arrangements and has no ownership in the Chinese-based operating
company. Furthermore, because the shell company only has specific rights
provided for in these service agreements with the VIE, its abilities to control
the activities at the Chinese-based operating company are limited and the
operating company may engage in activities that negatively impact investment
value.
While
the VIE structure has been widely adopted, it is not formally recognized under
Chinese law and therefore there is a risk that the Chinese government could
prohibit the existence of such structures or negatively impact the VIE’s
contractual arrangements with the listed shell company by making them invalid.
If these contracts were found to be unenforceable under Chinese law, investors
in the listed shell company, such as the Fund, may suffer significant losses
with little or no recourse available. If the Chinese government determines that
the agreements establishing the VIE structures do not comply with Chinese law
and regulations, including those related to restrictions on foreign ownership,
it could subject a Chinese-based issuer to penalties, revocation of business and
operating licenses, or forfeiture of ownership interest. In addition, the listed
shell company’s control over a VIE may also be jeopardized if a natural person
who holds the equity interest in the VIE breaches the terms of the agreement, is
subject to legal proceedings or if any physical instruments for authenticating
documentation, such as chops and seals, are used without the Chinese-based
issuer’s authorization to enter into contractual arrangements in China. Chops
and seals, which are carved stamps used to sign documents, represent a legally
binding commitment by the company. Moreover, any future regulatory action may
prohibit the ability of the shell company to receive the economic benefits of
the Chinese-based operating company, which may cause the value of the Fund’s
investment in the listed shell company to suffer a significant loss. For
example, in 2021, the Chinese government prohibited use of the VIE structure for
investment in after-school tutoring companies. There is no guarantee that the
government will not place similar restrictions on other industries.
◦Risks
Related to Investing in Europe.
The economies of Europe are highly dependent on each other, both as key trading
partners and as in many cases as fellow members maintaining the euro. Reduction
in trading activity among European countries may cause an adverse impact on each
nation’s individual economies. European countries that are part of the Economic
and Monetary Union of the EU are required to comply with restrictions on
inflation rates, deficits, interest rates, debt levels, and fiscal and monetary
controls, each of which may significantly affect every country in Europe.
Decreasing imports or exports, changes in governmental or EU regulations on
trade, changes in the exchange rate of the euro, the default or threat of
default by an EU member country on its sovereign debt, and recessions in an EU
member country may have a significant adverse effect on the economies of EU
member countries and their trading partners. Recent market events affecting
several of the EU member countries have adversely affected the sovereign debt
issued by those countries, and ultimately may lead to a decline in the value of
the euro. A significant decline in the value of the euro may produce
unpredictable effects on trade and commerce generally and could lead to
increased volatility in financial markets worldwide.
The
United Kingdom (“UK”) formally exited from the EU on January 31, 2020 (known as
“Brexit”), and effective December 31, 2020, the UK ended a transition period
during which it continued to abide by the EU’s rules and the UK’s trade
relationships with the EU were generally unchanged. Following this transition
period, the impact on the UK and European economies and the broader global
economy could be significant, resulting in negative impacts, such as increased
volatility and illiquidity, potentially lower economic growth on markets in the
UK, Europe, and globally, and changes in legal and regulatory regimes to which
certain Fund assets are or become subject, any of which may adversely affect the
value of Fund investments.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, including, but not limited to, current trade and
finance agreements. Brexit could lead to legal and tax uncertainty and
potentially divergent national laws and regulations, as the UK determines which
EU laws to replace or replicate. The extent of the impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of a Fund investments. If one or more other
countries
were
to exit the EU or abandon the use of the euro as a currency, the value of
investments tied to those countries or the euro could decline significantly and
unpredictably.
◦Risks
Related to Investing in Japan.
The Japanese economy may be subject to considerable degrees of economic,
political and social instability, which could have a negative impact on Japanese
securities. Since the year 2000, Japan’s economic growth rate has remained
relatively low and it may remain low in the future. In addition, Japan is
subject to the risk of natural disasters, such as earthquakes, volcanoes,
typhoons and tsunamis. Additionally, decreasing U.S. imports, new trade
regulations, changes in the U.S. dollar exchange rates, a recession in the
United States or continued increases in foreclosure rates may have an adverse
impact on the economy of Japan. Japan also has few natural resources, and any
fluctuation or shortage in the commodity markets could have a negative impact on
Japanese securities.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile a Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Index Provider relies on an independent calculation
agent to calculate and disseminate each Index accurately. Any losses or costs
associated with errors made by the Index Provider or its agents generally will
be borne by the applicable Fund and its shareholders. Because the International
Fund’s Index includes international securities, the Index Provider may have
limited information or may be more prone to mistakes based on the data available
and such mistakes may have a greater impact on the International Fund’s
performance, which may increase the risks to the International
Fund.
•Limited
Operating History (International
Fund only).
The Fund is a recently organized investment company with a limited operating
history. As a result, prospective investors have a limited track record or
history on which to base their investment decision.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing (International
Fund only). The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
•Non-Diversification
Risk (International
Fund only).
The
Fund is considered to be non-diversified, which means that it may invest more of
its assets in the securities of a single issuer or a smaller number of issuers
than if it were a diversified fund. As a result, the Fund may be more exposed to
the risks associated with and developments affecting an individual issuer or a
smaller number of issuers than a fund that invests more widely. This may
increase the Fund’s volatility and cause the performance of a relatively smaller
number of issuers to have a greater impact on the Fund’s performance. However,
the Fund intends to satisfy the diversification requirements for qualifying as a
regulated investment company (a “RIC”) under Subchapter M of the Internal
Revenue Code of 1986, as amended (the “Code”).
•Passive
Investment Risk.
Each Fund invests in the securities included in, or representative of, its Index
regardless of their investment merit. Each Fund does not attempt to outperform
its Index or take defensive positions in declining markets. As a result, a
Fund’s performance may be adversely affected by a general decline in the market
segments relating to its Index. The returns from the types of securities in
which a Fund invests may underperform returns from the various general
securities markets or different asset classes. This may cause a Fund to
underperform other investment vehicles that invest in different asset classes.
Different types of securities (for example, large-, mid- and
small-capitalization stocks) tend to go through cycles of doing better – or
worse – than the general securities markets. In the past, these periods have
lasted for as long as several years.
•Sector
Risk.
Each Fund’s investing approach may result in an emphasis on certain sectors or
sub-sectors of the market at any given time. To the extent a Fund invests more
heavily in one sector or sub-sector of the market, it thereby presents a more
concentrated risk and its performance will be especially sensitive to
developments that significantly affect those sectors or sub-sectors. In
addition, the value of a Fund’s shares may change at different rates compared to
the value of shares of a fund with investments in a more diversified mix of
sectors and industries. An individual sector or sub-sector of the market may
have above-average performance during particular periods but may also move up
and down more than the broader market. The several industries that constitute a
sector may all react in the same way to economic, political or regulatory
events. A Fund’s performance
could
also be affected if the sectors or sub-sectors do not perform as expected.
Alternatively, the lack of exposure to one or more sectors or sub-sectors may
adversely affect performance.
◦Health
Care Sector Risk (U.S. Fund only).
Companies in the health care sector are subject to extensive government
regulation and their profitability can be significantly affected by restrictions
on government reimbursement for medical expenses, rising costs of medical
products and services, pricing pressure (including price discounting), limited
product lines and an increased emphasis on the delivery of healthcare through
outpatient services. Companies in the health care sector are heavily dependent
on obtaining and defending patents, which may be time consuming and costly, and
the expiration of patents may also adversely affect the profitability of these
companies. Health care companies are also subject to extensive litigation based
on product liability and similar claims. In addition, their products can become
obsolete due to industry innovation, changes in technologies or other market
developments. Many new products in the health care sector require significant
research and development and may be subject to regulatory approvals, all of
which may be time consuming and costly with no guarantee that any product will
come to market.
◦Consumer
Sectors Risk (International Fund only). The
success of consumer product manufacturers and retailers is tied closely to the
performance of domestic and international economies, interest rates, exchange
rates, competition, consumer confidence, tariffs and trade barriers, changes in
demographics, and consumer preferences. Companies in consumer-oriented sectors
depend heavily on disposable household income and consumer spending, and may be
strongly affected by social trends and marketing campaigns. These companies may
be subject to severe competition, which may have an adverse impact on their
profitability.
◦Industrial
Sector Risk. The
industrial sector can be significantly affected by, among other things,
worldwide economic growth, supply and demand for specific products and services,
rapid technological developments, international political and economic
developments, environmental issues, tariffs and trade barriers, and tax and
governmental regulatory policies. As the demand for, or prices of, industrials
increase, the value of the Fund’s investments generally would be expected to
also increase. Conversely, declines in the demand for, or prices of, industrials
generally would be expected to contribute to declines in the value of such
securities. Such declines may occur quickly and without warning and may
negatively impact the value of the Fund and your investment.
◦Information
Technology Sector Risk.
Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect profitability.
Additionally, companies in the technology sector may face dramatic and often
unpredictable changes in growth rates and competition for the services of
qualified personnel.
•Tracking
Error Risk.
As
with all index funds, the performance of each Fund and its respective Index may
differ from each other for a variety of reasons. For example, the Funds incur
operating expenses and portfolio transaction costs not incurred by an Index. In
addition, the Funds may not be fully invested in the securities of their
respective Index at all times or may hold securities not included in the Index.
A Fund may use a representative sampling strategy to achieve its investment
objective, if the Fund’s Sub-Adviser believes it is in the best interest of the
Fund, which generally can be expected to produce a greater non-correlation
risk.
Information
about the Funds’ daily portfolio holdings is available at
www.distillatefunds.com. A description of the Funds’ policies and procedures
with respect to the disclosure of the Funds’ portfolio holdings is available in
the Funds’ Statement of Additional Information (“SAI”).
MANAGEMENT
Distillate Capital Partners LLC serves as the investment adviser
and index provider and has overall responsibility for the general management and
administration of each Fund. The Adviser is a recently registered investment
adviser, founded in 2018 and is controlled by each of Matthew T. Swanson, Jacob
A. Beidler, and Thomas M. Cole, with offices at 53 West Jackson Blvd.,
Suite 530, Chicago, Illinois 60604. The Adviser arranges for sub-advisory,
transfer agency, custody, fund administration, and all other related services
necessary for the Funds to operate.
The
Adviser provides oversight of the Sub-Adviser, monitoring of the Sub-Adviser’s
buying and selling of securities for each Fund, and review of the Sub-Adviser’s
performance. For the services it provides to the Funds, each Fund pays the
Adviser a unified management fee, which is calculated daily and paid monthly, at
an annual rate based on the applicable Fund’s average daily net assets as set
forth in the table below.
|
|
|
|
|
|
Name
of Fund |
Management
Fee |
Distillate
U.S. Fundamental Stability & Value ETF |
0.39% |
Distillate
International Fundamental Stability & Value ETF |
0.55% |
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Funds, except for: the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, dividends and other
expenses on securities sold short, taxes, brokerage commissions and other
expenses incurred in placing orders for the purchase and sale of securities and
other investment instruments, acquired fund fees and expenses, accrued deferred
tax liability, extraordinary expenses, and distribution (12b‑1) fees and
expenses.
The
basis for the Board’s approval of the U.S. Fund’s Investment Advisory Agreement
is available in the Funds’ Annual
Report
to Shareholders for the year ending September 30, 2021. The basis for the
Board’s approval of the International Fund’s Investment Advisory Agreement is
available in the Funds’ Semi-Annual
Report
to Shareholders for the period ending March 31, 2021.
Sub-Adviser
The
Adviser has retained Vident Investment Advisory, LLC to serve as sub-adviser for
the Funds. VIA is responsible for the day-to-day management of the Funds. VIA, a
registered investment adviser, is a wholly-owned subsidiary of Vident Financial,
LLC. Its principal office is located at 1125 Sanctuary Parkway, Suite 515,
Alpharetta, Georgia 30009. VIA was formed in 2014 and provides investment
advisory services to ETFs, including the Funds. The Sub-Adviser is responsible
for trading portfolio securities for the Funds, including selecting
broker-dealers to execute purchase and sale transactions or in connection with
any rebalancing or reconstitution of the Indexes, subject to the supervision of
the Adviser and the Board. For its services, VIA is paid a fee by the Adviser,
which is calculated daily and paid monthly, at an annual rate based on the
applicable Fund’s average daily net assets as follows:
|
|
|
|
|
|
|
|
|
Name
of Fund |
Minimum
Fee |
Sub-Advisory
Fee |
Distillate
U.S. Fundamental Stability & Value ETF |
$25,000 |
0.030%
on the first $250 million; 0.025% on the next $250 million;
and 0.020% on net assets in excess of $500 million |
Distillate
International Fundamental Stability & Value ETF |
$12,500 |
0.040%
on the first $250 million; 0.035% on the next $250 million;
and 0.030% on net assets in excess of $500
million |
The
basis for the Board’s approval of the U.S. Fund’s Investment Sub-Advisory
Agreement is available in the Funds’ Annual
Report
to Shareholders for the year ending September 30, 2021. The basis for the
Board’s approval of the International Fund’s Investment Sub-Advisory Agreement
is available in the Funds’ Semi-Annual
Report
to Shareholders for the period ending March 31, 2021.
Portfolio
Managers
The
below individuals are the Funds’ Portfolio Managers and are jointly and
primarily responsible for day-to-day management of each Fund’s portfolio.
Rafael
Zayas, CFA, is a portfolio manager for the Fund. Mr. Zayas became SVP, Head of
Portfolio Management and Trading at VIA in June 2020. From 2017 to 2020, he was
Senior Portfolio Manager – International Equity at VIA and has over 15 years of
experience that includes managing international equity portfolios, including in
emerging and frontier markets. Prior to joining VIA, he was a Portfolio Manager
– Direct Investments for seven years at Russell Investments, a global asset
manager, where he co-managed more than $4 billion in quantitative strategies
across global markets, including the Russell Strategic Call Overwriting Fund, a
mutual fund. Mr. Zayas also helped Russell Investments launch its sponsored ETF
initiative and advised on index methodologies. Prior to joining Russell
Investments, Mr. Zayas was a Portfolio Manager – Equity Indexing at Mellon
Capital Management, where he managed assets for internationally listed global
equity ETFs. Mr. Zayas graduated with a B.S. in Electrical Engineering from
Cornell University and obtained a Certificate in Computational Finance and Risk
Management from the University of Washington. He also attained the Chartered
Financial Analyst designation in 2010.
Austin
Wen, CFA, has been a Portfolio Manager for the Sub-Adviser since 2016 and has
eight years of investment management experience. His focus at VIA is on
portfolio management and trading, risk monitoring and investment analysis.
Previously, he was an analyst for Vident Financial beginning in 2014, working on
the development and review of investment solutions. He began his career in 2011
as a State Examiner for the Georgia Department of Banking and Finance. Mr. Wen
obtained a BA in Finance from the University of Georgia and holds the Chartered
Financial Analyst designation.
The
Funds’ SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts managed by the Portfolio Managers, and
the Portfolio Managers’ ownership of Shares of each Fund.
Each
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from a Fund, and only APs may tender their Shares for
redemption directly to a Fund, at NAV. APs must be a member or participant of a
clearing agency registered with the SEC and must execute a Participant Agreement
that has been agreed to by the Distributor (defined below), and that has been
accepted by a Fund’s transfer agent, with respect to purchases and redemptions
of Creation Units. Once created, Shares trade in the secondary market in
quantities less than a Creation Unit.
Most
investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange and can be
bought and sold throughout the trading day like other publicly traded
securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread between the
bid and the offer price in the secondary market on each leg of a round trip
(purchase and sale) transaction. In addition, because secondary market
transactions occur at market prices, you may pay more than NAV when you buy
Shares and receive less than NAV when you sell those Shares.
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly
maintain a custodial relationship with DTC. As a beneficial owner of Shares, you
are not entitled to receive physical delivery of stock certificates or to have
Shares registered in your name, and you are not considered a registered owner of
Shares. Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are the same
as those that apply to any other securities that you hold in book entry or
“street name” through your brokerage account.
The
Funds impose no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly with a Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Funds accommodate
frequent purchases and redemptions by APs. However, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and redemptions, the Funds employ fair value pricing and may impose transaction
fees on purchases and redemptions of Creation Units to cover the custodial and
other costs incurred by a Fund in effecting trades. In addition, the Funds and
the Adviser reserve the right to reject any purchase order at any time.
Each
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, each day
the NYSE is open for business. The NAV for each Fund is calculated by dividing
the Fund’s net assets by its Shares outstanding.
In
calculating its NAV, each Fund generally values its assets on the basis of
market quotations, last sale prices, or estimates of value furnished by a
pricing service or brokers who make markets in such instruments. The values of
non-U.S. dollar denominated securities are converted to U.S. dollars using
foreign currency exchange rates generally determined as of 4:00 p.m., London
time. If such information is not available for a security held by a Fund or is
determined to be unreliable, the security will be valued at fair value estimates
under guidelines established by the Board (as described below).
The
Board has adopted procedures and methodologies to fair value Fund securities
whose market prices are not “readily available” or are deemed to be unreliable.
For example, such circumstances may arise when: (i) a security has been
de-listed or has had its trading halted or suspended; (ii) a security’s primary
pricing source is unable or unwilling to provide a price; (iii) a security’s
primary trading market is closed during regular market hours; or (iv) a
security’s value is materially affected by events occurring after the close of
the security’s primary trading market. Generally, when fair valuing a security,
the Funds will take into account all reasonably available information that may
be relevant to a particular valuation including, but not limited to, fundamental
analytical data regarding the issuer, information relating to the issuer’s
business, recent trades or offers of the security, general and/or specific
market conditions and the specific facts giving rise to the need to fair value
the security. Fair value determinations are made in good faith and in accordance
with the fair value methodologies included in the Board-adopted valuation
procedures. Due to the subjective and variable nature of fair value pricing,
there can be no assurance that the Adviser or Sub-Adviser will be able to obtain
the fair value assigned to the security upon the sale of such security.
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in a Fund beyond the limits set
forth in section 12(d)(1) subject to certain terms and conditions set forth in a
rule under the 1940 Act, including that such investment companies enter into an
agreement with a Fund.
Householding
is an option available to certain investors of the Funds. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Funds is available through certain broker-dealers.
If you are interested in enrolling in householding and receiving a single copy
of prospectuses and other shareholder documents, please contact your
broker-dealer. If you are currently enrolled in householding and wish to change
your householding status, please contact your broker-dealer.
Dividends
and Distributions
The
Funds intend to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least annually. Each Fund will declare and
pay capital gain distributions, if any, in cash. Distributions in cash may be
reinvested automatically in additional whole Shares only if the broker through
whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Funds. Your investment
in a Fund may have other tax implications. Please consult your tax advisor about
the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
Each
Fund intends to elect and to qualify each year for treatment as a RIC under the
Code. If a Fund meets certain minimum distribution requirements, a RIC is not
subject to tax at the fund level on income and gains from investments that are
timely distributed to shareholders. However, a Fund’s failure to qualify as a
RIC or to meet minimum distribution requirements would result (if certain relief
provisions were not available) in fund-level taxation and, consequently, a
reduction in income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when a Fund makes distributions, when you sell your Shares listed
on the Exchange, and when you purchase or redeem Creation Units (APs only).
Taxes
on Distributions
Each
Fund intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For federal income tax purposes,
distributions of investment income are generally taxable as ordinary income or
qualified dividend income. Taxes on distributions of capital gains (if any) are
determined by how long a Fund owned the investments that generated them, rather
than how long a shareholder has owned his or her Shares. Sales of assets held by
a Fund for more than one year generally result in long-term capital gains and
losses, and sales of assets held by a Fund for one year or less generally result
in short-term capital gains and losses. Distributions of a Fund’s net capital
gain (the excess of net long-term capital gains over net short-term capital
losses) that are reported by such Fund as capital gain dividends (“Capital Gain
Dividends”) will be taxable as long-term capital gains, which for
non-
corporate
shareholders are subject to tax at reduced rates of up to 20% (lower rates apply
to individuals in lower tax brackets). Distributions of short-term capital gain
will generally be taxable as ordinary income. Dividends and distributions are
generally taxable to you whether you receive them in cash or reinvest them in
additional Shares.
Distributions
reported by a Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that a Fund received in respect of stock of certain foreign
corporations may be qualified dividend income if that stock is readily tradable
on an established U.S. securities market. Dividends received by a Fund from an
ETF or underlying fund taxable as a RIC may be treated as qualified dividend
income generally only to the extent so reported by such ETF or underlying fund.
Corporate shareholders may be entitled to a dividends received deduction for the
portion of dividends they receive from a Fund that are attributable to dividends
received by the Fund from U.S. corporations, subject to certain limitations.
Certain of a Fund’s investment strategies may limit its ability to make
distributions eligible for the reduced rates applicable to qualified dividend
income. Since the International Fund invests primarily in securities of non-U.S.
issuers, it is not expected that a significant portion of the dividends received
from the International Fund will qualify for the dividends-received deduction
for corporations.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from a Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8% tax
on all or a portion of their “net investment income,” which includes interest,
dividends, and certain capital gains (generally including capital gains
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by a Fund before your
investment (and thus were included in the Shares’ NAV when you purchased your
Shares).
You
may wish to avoid investing in a Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your investment.
If
a Fund’s distributions exceed its earnings and profits, all or a portion of the
distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in Shares and result in a
higher capital gain or lower capital loss when the Shares are sold. After a
shareholder’s basis in Shares has been reduced to zero, distributions in excess
of earnings and profits in respect of those Shares will be treated as gain from
the sale of the Shares.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
a Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
your Shares generally are not subject to U.S. taxation, unless you are a
nonresident alien individual who is physically present in the U.S. for 183 days
or more per year. A Fund may, under certain circumstances, report all or a
portion of a dividend as an “interest-related dividend” or a “short-term capital
gain dividend,” which would generally be exempt from this 30% U.S. withholding
tax, provided certain other requirements are met. Different tax consequences may
result if you are a foreign shareholder engaged in a trade or business within
the United States or if a tax treaty applies.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
a Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that are foreign entities and that fail to meet prescribed
information reporting or certification requirements.
Each
Fund (or a financial intermediary, such as a broker, through which a shareholder
owns Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who fails to properly furnish a correct taxpayer identification
number, who has underreported dividend or interest income, or who fails to
certify that he, she or it is not subject to such withholding.
Taxes
When Shares are Sold on the Exchange
Any
capital gain or loss realized upon a sale of Shares generally is treated as a
long-term capital gain or loss if Shares have been held for more than one year
and as a short-term capital gain or loss if Shares have been held for one year
or less. However, any capital loss on a sale of Shares held for six months or
less is treated as long-term capital loss to the extent of Capital Gain
Dividends paid with respect to such Shares. Any loss realized on a sale will be
disallowed to the extent Shares of a Fund are acquired, including through
reinvestment
of dividends, within a 61-day period beginning 30 days before and ending 30 days
after the disposition of Shares. The ability to deduct capital losses may be
limited.
The
cost basis of Shares of a Fund acquired by purchase will generally be based on
the amount paid for the Shares and then may be subsequently adjusted for other
applicable transactions as required by the Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market their
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether wash sale rules apply and when a loss might be deductible.
Any
gain or loss realized upon a creation or redemption of Creation Units will be
treated as capital or ordinary gain or loss, depending on the circumstances. Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
A
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. Such Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause such Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, such Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Foreign
Investments by the Fund (International
Fund only)
Interest
and other income received by the Fund with respect to foreign securities may
give rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If as of the close of a taxable year more than 50% of the
value of the Fund’s assets consists of certain foreign stock or securities, the
Fund will be eligible to elect to “pass through” to investors the amount of
foreign income and similar taxes (including withholding taxes) paid by the Fund
during that taxable year. This means that investors would be considered to have
received as additional income their respective Shares of such foreign taxes, but
may be entitled to either a corresponding tax deduction in calculating taxable
income, or, subject to certain limitations, a credit in calculating federal
income tax. If the Fund does not so elect, the Fund will be entitled to claim a
deduction for certain foreign taxes incurred by the Fund. The Fund (or its
administrative agent) will notify you if it makes such an election and provide
you with the information necessary to reflect foreign taxes paid on your income
tax return.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in each Fund. It is not a substitute for
personal tax advice. You also may be subject to state and
local tax on Fund distributions and sales of Shares. Consult your personal
tax advisor about the potential tax consequences of an investment in
Shares
under
all applicable tax laws. For more information, please see the section entitled
“Federal Income Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Quasar Distributors, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Funds on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Funds or the securities that are purchased or
sold by the Funds. The Distributor’s principal address is 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized
to pay an amount up to 0.25% of its average daily net assets each year for
certain distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Funds, and there are no plans to
impose these fees. However, in the event Rule 12b-1 fees are charged in the
future, because the fees are paid out of Fund assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
Information
regarding how often Shares traded on the Exchange at a price above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV per Share is available, free of charge, on the Funds’
website at www.distillatefunds.com.
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of the Shares or
any member of the public regarding the ability of the Funds to track the total
return performance of their respective Index or the ability of the Indexes
identified herein to track the performance of their constituent securities. The
Exchange is not responsible for, nor has it participated in, the determination
of the compilation or the calculation of the Indexes, nor in the determination
of the timing of, prices of, or quantities of the Shares to be issued, nor in
the determination or calculation of the equation by which the Shares are
redeemable. The Exchange has no obligation or liability to owners of the Shares
in connection with the administration, marketing, or trading of the Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Indexes
or the data included therein. The Exchange makes no warranty, express or
implied, as to results to be obtained by the Funds, owners of the Shares, or any
other person or entity from the use of the Indexes or the data included therein.
The Exchange makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular purpose
with respect to the Indexes or the data included therein. Without limiting any
of the foregoing, in no event shall the Exchange have any liability for any lost
profits or indirect, punitive, special, or consequential damages even if
notified of the possibility thereof.
The
Adviser, the Exchange, and the Funds make no representation or warranty, express
or implied, to the owners of Shares or any member of the public regarding the
advisability of investing in securities generally or in the Funds particularly
or the ability of the Indexes to track general stock market performance. The
Funds and the Adviser do not guarantee the accuracy, completeness, or
performance of the Indexes or the data included therein and shall have no
liability in connection with the Indexes or Index calculation. The index
calculation agent maintains and calculates the Indexes used by the Funds. The
index calculation agent shall have no liability for any errors or omissions in
calculating the Indexes.
FINANCIAL
HIGHLIGHTS
Distillate
U.S. Fundamental Stability & Value ETF
For
a capital share outstanding throughout the year/period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended September 30, |
|
Period
Ended
September
30, |
|
|
2021 |
|
2020 |
|
2019(1) |
|
Net
asset value, beginning of year/period |
$ |
32.61 |
|
|
$ |
27.86 |
|
|
$ |
25.00 |
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
|
|
|
|
Net
investment income (loss) (2) |
|
0.46 |
|
|
|
0.44 |
|
|
0.38 |
|
|
Net
realized and unrealized gain (loss) on investments |
|
8.51 |
|
|
|
4.61 |
|
|
2.58 |
|
|
Total
from investment operations |
|
8.97 |
|
|
|
5.05 |
|
|
2.96 |
|
|
|
|
|
|
|
|
|
|
|
DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
|
|
|
|
Distributions
from: |
|
|
|
|
|
|
|
|
Net
investment income |
|
(0.62) |
|
|
|
(0.30) |
|
|
(0.10) |
|
|
Total
distributions to shareholders |
|
(0.62) |
|
|
|
(0.30) |
|
|
(0.10) |
|
|
|
|
|
|
|
|
|
|
|
Net
asset value, end of year/period |
$ |
40.96 |
|
|
$ |
32.61 |
|
|
$ |
27.86 |
|
|
|
|
|
|
|
|
|
|
|
Total
return |
|
27.68 |
% |
|
|
18.20 |
% |
|
11.93 |
% |
(3) |
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DATA: |
|
|
|
|
|
|
|
|
Net
assets at end of year/period (000’s) |
$ |
373,774 |
|
|
$ |
179,355 |
|
|
$ |
43,874 |
|
|
|
|
|
|
|
|
|
|
|
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
|
|
|
|
Expenses
to average net assets |
|
0.39 |
% |
|
|
0.39 |
% |
|
0.39 |
% |
(4) |
Net
investment income (loss) to average net assets |
|
1.17 |
% |
|
|
1.45 |
% |
|
1.55 |
% |
(4) |
Portfolio
turnover rate
(5) |
|
73 |
% |
|
|
58 |
% |
|
69 |
% |
(3) |
|
|
|
|
|
|
(1) |
Commencement
of operations on October 23, 2018. |
(2) |
Calculated
based on average shares outstanding during the period. |
(3) |
Not
annualized. |
(4) |
Annualized. |
(5) |
Excludes
the impact of in-kind transactions. |
Distillate
International Fundamental Stability & Value ETF
For
a capital share outstanding throughout the period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
Ended
September
30, 2021(1) |
|
Net
asset value, beginning of period |
|
$ |
25.05 |
|
|
|
|
|
|
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
Net
investment income (loss) (2) |
|
0.59 |
|
|
Net
realized and unrealized gain (loss) on investments and foreign
currency |
|
(0.12) |
|
|
Total
from investment operations |
|
0.47 |
|
|
|
|
|
|
DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
Distributions
from: |
|
|
|
Net
investment income |
|
(0.44) |
|
|
Total
distributions to shareholders |
|
(0.44) |
|
|
|
|
|
|
CAPITAL
SHARE TRANSACTIONS: |
|
|
|
|
Transaction
fees |
|
0.00 |
|
(3) |
|
|
|
|
|
Net
asset value, end of period |
|
$ |
25.08 |
|
|
|
|
|
|
Total
return |
|
1.78 |
% |
(4) |
|
|
|
|
SUPPLEMENTAL
DATA: |
|
|
|
Net
assets at end of period (000’s) |
|
$ |
22,568 |
|
|
|
|
|
|
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
Expenses
to average net assets |
|
0.55 |
% |
(5) |
Net
investment income (loss) to average net assets |
|
2.78 |
% |
(5) |
Portfolio
turnover rate
(6) |
|
57 |
% |
(4) |
|
|
|
|
|
|
(1) |
Commencement
of operations on December 14, 2020. |
(2) |
Calculated
based on average shares outstanding during the period. |
(3) |
Represents
less than $0.005 per share. |
(4) |
Not
annualized. |
(5) |
Annualized. |
(6) |
Excludes
the impact of in-kind transactions. |
Distillate
U.S. Fundamental Stability & Value ETF
Distillate
International Fundamental Stability & Value ETF
|
|
|
|
|
|
|
|
|
|
|
|
Adviser
and Index Provider |
Distillate
Capital Partners LLC
53
West Jackson Boulevard, Suite 530
Chicago,
Illinois 60604 |
Transfer
Agent and Index Receipt Agent |
U.S.
Bancorp Fund Services, LLC
d/b/a/
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Sub-Adviser |
Vident
Investment Advisory, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
Administrator |
U.S.
Bancorp Fund Services, LLC
d/b/a/
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Custodian |
U.S.
Bank National Association
1555
N. Rivercenter Drive, Suite 302
Milwaukee,
Wisconsin 53212 |
Distributor |
Quasar
Distributors, LLC
111
East Kilbourn Avenue, Suite 2200
Milwaukee,
Wisconsin 53202 |
Independent Registered
Public Accounting Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue NW
Washington,
DC 20004-2541 |
Investors
may find more information about the Funds in the following documents:
Statement
of Additional Information:
The Funds’ SAI provides additional details about the investments and techniques
of the Funds and certain other additional information. A current SAI dated
January 31, 2022 is on file with the SEC and is herein incorporated by
reference into this Prospectus. It is legally considered a part of this
Prospectus.
Annual/Semi-Annual
Reports:
Additional information about each Fund’s investments is available in the Funds’
annual and semi-annual reports to shareholders. In the annual
report,
you will find a discussion of the market conditions and investment strategies
that significantly affected each Fund’s performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Funds by contacting the Funds at Distillate ETFs,
c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701 or by calling 1-800-617-0004.
Shareholder
reports and other information about the Funds are also available:
•Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or
•Free
of charge from the Funds’ Internet web site at www.distillatefunds.com;
or
(SEC
Investment Company Act File No. 811-22668)