ck0001540305-20220228
U.S. Diversified Real Estate
ETF
(PPTY)
Listed
on NYSE
Arca, Inc.
PROSPECTUS
June 30,
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.
U.S.
Diversified Real Estate ETF
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U.S.
DIVERSIFIED REAL ESTATE ETF SUMMARY |
Investment Objective
The U.S.
Diversified Real Estate ETF (the “Fund”) seeks to track the performance, before
fees and expenses, of the USREX – U.S. Diversified Real Estate 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.
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Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
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| Management
Fees |
0.53% |
| Distribution
and/or Service (12b-1) Fees |
0.00% |
| Other
Expenses |
0.00% |
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Total
Annual Fund Operating Expenses |
0.53% |
| Less
Fee Waiver |
0.04% |
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Total
Annual Fund Operating Expenses After Fee Waiver1 |
0.49% |
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1The
Fund’s investment adviser has agreed to waive four basis points (0.04%) of its
management fees for the Fund until at least June 30,
2023. This agreement may be terminated only by, or with the
consent of, the Fund’s Board of Trustees.
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:
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| 1
Year |
3
Years |
5
Years |
10
Years |
| $50 |
$166 |
$292 |
$661 |
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
February 28, 2022, the Fund’s portfolio turnover rate was 29% of the average value of its
portfolio.
Principal Investment Strategy
The
Fund uses a “passive management” – or indexing – investment approach to track
the performance, before fees and expenses, of the Index.
USREX
– U.S. Diversified Real Estate Index
The
Index uses a rules-based methodology to provide diversified exposure to the
liquid U.S. real estate market.
Construction
of the Index begins with the universe of U.S.-listed equity securities with a
market capitalization of at least $750 million and meeting certain liquidity
thresholds (the “Equity Universe”). Companies in the Equity Universe are then
screened to keep only those that derive at least 85% of their income from
ownership or management of real property. Companies that meet this criterion are
then screened to remove companies that are externally managed or that have a low
percentage of their shares directly or indirectly available to the public. The
companies remaining after the above screens constitute the Index’s investment
universe.
The
Index is designed to ensure diversification by property type and by location,
while favoring companies with prudent leverage (i.e., the
debt-to-enterprise value ratio of real estate investments). Companies in the
Index’s investment universe may not be included in the Index due to certain
leverage levels. Individual securities are subject to a maximum weighting of 4%
at the time of each reconstitution of the Index.
The
Index rules assign each company in the Index a classification (each, a “Property
Type”) based on the percentage of the company’s assets invested in a particular
property type. The Property Types included in the Index and the weight allocated
to each Property Type, as of each Index reconstitution date, are as follows:
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| Residential |
19.00% |
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Hotel |
7.50% |
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Self-Storage |
2.00% |
| Office |
17.50% |
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Health
Care |
7.50% |
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Manufactured
Home |
2.00% |
| Industrial |
14.50% |
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Data
Center |
7.50% |
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Student
Housing |
0.50% |
| Retail |
14.50% |
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Diversified |
7.50% |
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Alternative
and specialty Property Types not shown above, e.g.,
infrastructure, casinos, billboards, prisons, are excluded from the Index.
The
Index seeks to diversify the geographic exposure of each Property Type by
weighting each company within a Property Type based on the value and location of
each property owned by such company. For each of the Residential, Office,
Industrial, Retail, and Diversified Property Types, the Index calculates a
target weight for each of the largest metropolitan areas in the United States
based on factors related to population and productivity (each, a “Metro Area”),
generally assigning higher target weights to Metro Areas with larger populations
and greater productivity. The Index seeks to weight companies in each such
Property Type so as to allocate the target weight assigned to each Metro Area,
if any.
The
Index also establishes target leverage levels by Property Type. Allocations to a
company are reduced in proportion to the extent to which such company’s leverage
level exceeds the greater of (i) the target leverage level for the applicable
Property Type or (ii) the weighted average leverage level for the
applicable Property Type.
The
Index is reconstituted and rebalanced semi-annually in January and July. To
reduce turnover, lower market capitalization and liquidity thresholds apply to
companies included in the Index with respect to whether they are removed at the
time of a reconstitution.
The
Index is expected to be primarily composed of companies that qualify as real
estate investment trusts (“REITs”), but may also include real estate companies
that are not tax-qualified REITs.
The
Index was created on January 9, 2018 by Vident Financial, LLC, the Fund’s index
provider (the “Index Provider”), for use by the Fund.
The
Fund’s Investment Strategy
Under
normal circumstances, at least 80% of the Fund’s net assets, plus borrowings for
investment purposes, will be invested in real estate companies principally
traded on a U.S. exchange. The foregoing policy may be changed without
shareholder approval upon 60 days’ written notice to shareholders. For purposes
of the foregoing policy, the Fund defines “real estate companies” to mean
companies that (i) earn a majority of their revenue or income from or have a
majority of their assets invested in owning or managing real estate properties
or (ii) are structured as REITs.
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 proportion 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).
The
Fund generally may invest in securities or other investments not included in the
Index, but which the Fund’s sub-adviser believes will help the Fund track the
Index. For example, the Fund may invest in securities that are not components of
the Index to reflect various corporate actions and other changes to the Index
(such as reconstitutions, additions, and deletions).
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 Index, and consequently the Fund, is expected to generally be
concentrated in real estate-related
industries.
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.”
•Concentration
Risk. The
Fund’s investments will be concentrated in an industry or group of industries to
the extent that the Index is so concentrated, and the Index is expected to be
concentrated in real estate-related industries. Accordingly, the value of Shares
may rise and fall more than the value of shares of a fund that invests in
securities of companies in a broader range of industries. In addition, at times,
real estate-related industries may be out of favor and underperform other
industries or groups of industries or the market as a whole.
•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, including Russia’s invasion of
Ukraine, acts of terrorism, spread of infectious diseases or other public health
issues, recessions, rising inflation, 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 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.
•Models
and Data Risk. The
composition of the Index is heavily dependent on a proprietary quantitative
model as well as information and data supplied by third parties (“Models and
Data”).
When
Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon may lead to the inclusion or exclusion of securities from the
Index that would have been excluded or included had the Models and Data been
correct and complete. If the composition of the Index reflects such errors, the
Fund’s portfolio can be expected to reflect the errors, too.
•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.
•Real
Estate Investment Risk.
Investments in real estate companies involve unique risks. Real estate
companies, including REITs and real estate operating companies, may have limited
financial resources, may trade less frequently and in limited volume, and may be
more volatile than other securities. Investing in real estate companies entails
certain risks associated with the direct ownership of real estate, such as a
decrease in value of real estate, as well as the real estate industry in
general. Many factors may affect real estate values, including general, regional
and local economic conditions, fluctuations in interest rates and property tax
rates, the amount of new construction in a particular area, laws and regulations
affecting real estate (including zoning and tax laws, environmental regulations,
and other governmental action, such as the exercise of eminent domain), and the
costs of owning, maintaining and improving real estate. The availability of
mortgages may also affect real estate values. Real estate companies are also
subject to heavy cash flow dependency, increased operating expenses, the skill
of management, changes in property values and rental rates, overbuilding, losses
due to natural disasters, casualty or condemnation, defaults by borrowers, and
self-liquidation.
In
addition to these risks, property-owning REITs may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage-based REITs
may be affected by the quality of any credit extended. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and self-liquidation. In
addition, U.S. REITs could possibly fail to qualify for the beneficial tax
treatment available to REITs under the Internal Revenue Code of 1986, as amended
(the “Code”), or to maintain their exemptions from registration under the
Investment Company Act of 1940, as amended (the “1940 Act”). The Fund expects
that dividends received from a REIT and distributed to Fund shareholders
generally will be taxable to the shareholder as ordinary income. The above
factors may also adversely affect a borrower’s or a lessee’s ability to meet its
obligations to the REIT. In the event of a default by a borrower or lessee, the
REIT may experience delays in enforcing its rights as a mortgagee or lessor and
may incur substantial costs associated with protecting investments. In addition,
the Fund holds interests in REITs, and it is expected that investors in the Fund
will bear two layers of asset-based management fees and expenses (directly at
the Fund level and indirectly at the REIT level).
•Smaller
Companies Risk. The
equity securities of smaller companies have historically been subject to greater
investment risk than securities of larger companies. The prices of equity
securities of smaller companies tend to be more volatile and less liquid than
the prices of equity securities of larger companies.
•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.videntfunds.com/funds/ppty.
Calendar Year Total
Return
For the
year-to-date period ended
March 31, 2022, the
Fund’s total return was -3.79%.
During the period of time shown in the bar
chart, the Fund’s highest quarterly return
was 17.02% for the quarter ended March 31, 2019, and the
lowest quarterly return was
-25.49% for the quarter ended March 31,
2020.
Average
Annual Total Returns
For
the Periods Ended December 31, 2021
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| U.S.
Diversified Real Estate ETF |
1
Year |
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Since
Inception
(3/26/18) |
| Return Before
Taxes |
40.13% |
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16.64% |
| Return After Taxes on
Distributions |
39.48% |
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15.74% |
| Return After Taxes on Distributions and
Sale of Fund Shares |
23.87% |
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12.78% |
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USREX
– U.S. Diversified Real Estate Index™
(reflects
no deduction for fees, expenses, or taxes) |
41.20% |
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17.05% |
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MSCI
US REIT Gross Index
(reflects no deduction for
fees, expenses, or taxes) |
43.06% |
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16.53% |
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.
Portfolio
Management
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| Adviser |
Vident
Advisory, LLC (“Vident Advisory” or the “Adviser”) |
| Sub-Adviser |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
| Portfolio
Managers |
Austin
Wen, CFA, Portfolio Manager of VIA, has been a portfolio manager of the
Fund since its inception in March 2018. |
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Rafael
Zayas, CFA, SVP, Head of Portfolio Management and Trading of VIA, has been
a portfolio manager of the Fund since June 2020. |
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Ryan
Dofflemeyer, Senior Portfolio Manager of VIA, has been a portfolio manager
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.videntfunds.com/funds/ppty.
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 FUND
Investment
Objective.
The 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.
Additional
Information About the Index.
The Equity Universe excludes companies that do not meet the Index’s minimum
liquidity thresholds, which are based on the median daily dollar volume traded
for a security over the past 20 and 180 days and are designed to ensure the
investibility of the Index. As of May 31, 2022, there were 109 securities in the
Index.
The
Index uses the debt-to-enterprise value ratio of real estate investments to
determine a company’s leverage. A company’s enterprise value is the total market
value of its common shares, preferred equity, and short- and long-term
interest-bearing debt, less cash and equivalents.
Additional
Information About the Fund’s Principal Risks.
This section provides additional information regarding the principal risks
described in the Fund Summary. As in the 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 Fund, regardless of the order in which it
appears. Each of the factors below could have a negative impact on the Fund’s
performance and trading prices.
•Concentration
Risk. The
Fund’s investments will be concentrated in an industry or group of industries to
the extent that the Index is so concentrated, and the Index is expected to be
concentrated in real estate-related industries. Accordingly, the value of Shares
may rise and fall more than the value of shares of funds that invest in
securities of companies in a broader range of industries. In addition, at times,
real estate-related industries may be out of favor and underperform other
industries or groups of industries or the market as a whole.
•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; local, regional or global events
such
as acts of terrorism or war, including Russia’s invasion of Ukraine; 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. The
Fund is an ETF, and, as a result of an ETF’s structure, it 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.
◦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.
•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.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and earnings.
•Models
and Data Risk.
When Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon expose the Index and the Fund to potential risks. Some of the
models used to construct the Index are predictive in nature. The use of
predictive models has inherent risks. For example, such models may incorrectly
forecast future behavior, leading to potential losses. In addition, in
unforeseen or certain low-probability scenarios (often involving a market
disruption of some kind), such models may produce unexpected results, which can
result in losses for the Fund. Furthermore, because predictive models are
usually constructed based on historical data supplied by third parties, the
success of relying on such models may depend heavily on the accuracy and
reliability of the supplied historical data.
•Passive
Investment Risk.
The Fund invests in the securities included in, or representative of, its Index
regardless of their investment merit. The Fund does not attempt to outperform
its Index or take defensive positions in declining markets. As a result, the
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 the Fund invests may underperform returns from the various general
securities markets or different asset classes. This may cause the 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.
•Real
Estate Investment Risk. The
Fund is expected to invest substantially all of its assets in real
estate-related companies. Investments in real estate companies involve unique
risks. Real estate companies, including REITs, may have limited financial
resources, may trade less frequently and in limited volume, and may be more
volatile than other securities. Investing in real estate companies entails
certain risks associated with the direct ownership of real estate, such as a
decrease in value of real estate, as well as the real estate industry in
general. Many factors may affect real estate values, including general, regional
and local economic conditions, the availability of mortgages, fluctuations in
interest rates and property tax rates, the amount of new construction in a
particular area, laws and regulations affecting real estate (including zoning
and tax laws, environmental regulations, and other governmental action, such as
the exercise of eminent domain), and the costs of owning, maintaining and
improving real estate. Real estate companies are also subject to heavy cash flow
dependency, increased operating expenses, the skill of management, changes in
property values and rental rates, overbuilding, losses due to natural disasters,
casualty or condemnation, defaults by borrowers, and self-liquidation. To the
extent that assets underlying the Fund’s investments are concentrated
geographically, by property type, or in certain other respects, the Fund may be
subject to certain of the foregoing risks to a greater extent.
In
addition to these risks, property-owning REITs may be affected by changes in the
value of the underlying property owned by the trusts, while mortgage-based REITs
may be affected by the quality of any credit extended. REITs are also subject to
heavy cash flow dependency, defaults by borrowers and self-liquidation. In
addition, U.S. REITs could possibly fail to qualify for the beneficial tax
treatment available to REITs under the Code, or to maintain their exemptions
from registration under the 1940 Act. The Fund expects that dividends received
from a REIT and distributed to Fund shareholders generally will be taxable to
the shareholder as ordinary income. The above factors may also adversely affect
a borrower’s or a lessee’s ability to meet its obligations to the REIT. In the
event of a default by a borrower or lessee, the REIT may experience delays in
enforcing its rights as a mortgagee or lessor and may incur substantial costs
associated with protecting investments. In addition, the Fund holds interests in
REITs, and it is expected that investors in the Fund will bear two layers of
asset-based management fees and expenses (directly at the Fund level and
indirectly at the REIT level).
•Tracking
Error Risk.
As with all index funds, the performance of the Fund and its Index may vary
somewhat for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by its Index. In addition,
the Fund may not be fully invested in the securities of its Index at all times
or may hold securities not included in its Index. The use of sampling techniques
may affect the Fund’s ability to achieve close correlation with its Index. The
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.
PORTFOLIO
HOLDINGS INFORMATION
Information
about the Fund’s daily portfolio holdings is available at
www.videntfunds.com/funds/ppty. A complete description of the Fund’s policies
and procedures with respect to the disclosure of the Fund’s portfolio holdings
is available in the Fund’s Statement of Additional Information (“SAI”).
MANAGEMENT
Investment
Adviser
Vident
Advisory, LLC serves as the investment adviser to the Fund. Vident Advisory is a
wholly-owned subsidiary of Vident Financial, LLC, was formed in 2016, and
commenced operations and registered with the SEC as an investment adviser in
2019. Its principal office is located at 1125 Sanctuary Parkway, Suite 515,
Alpharetta, Georgia 30009. Pursuant to the Investment Advisory Agreement, the
Fund pays the Adviser a unitary management fee, which is calculated daily and
paid monthly. For the fiscal year ended February 28, 2022, the Adviser was
entitled to receive from the Fund management fees of 0.53% of the Fund’s average
daily net assets. The Adviser has agreed to waive four basis points (0.04%) of
its management fees for the Fund until at least June 30, 2023. Net of such
waiver, the Fund paid the Adviser management fees of 0.49% of the Fund’s average
daily net assets for the fiscal year ended February 28, 2022. This agreement may
be terminated only by, or with the consent of, the Fund’s Board of
Trustees.
Out
of the unitary management fee, Vident Advisory has agreed to pay substantially
all expenses of the Fund, including the cost of transfer agency, custody, fund
administration, securities lending and other non-distribution related services
necessary for the Fund to operate, except for: the fee paid to Vident Advisory
pursuant to the Investment Advisory Agreement, interest charges on any
borrowings, dividends and other expenses on securities sold short, taxes and
related services, 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 Adviser, in turn,
compensates the Sub-Adviser from the management fee the Adviser
receives.
The
basis for the Board of Trustees’ approval of the Fund’s Investment Advisory
Agreement is available in the Fund’s Annual
Report
to Shareholders for the period ended February 28, 2022.
Sub-Adviser
The
Adviser has retained Vident Investment Advisory, LLC to serve as sub-adviser for
the Fund. VIA is responsible for the day-to-day management of the Fund. 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 Fund. The Sub-Adviser is responsible
for trading portfolio securities for the Fund, including selecting
broker-dealers to execute purchase and sale transactions or in connection with
any rebalancing or reconstitution of the Index, subject to the supervision of
the Adviser and the Board. For its services, VIA is paid a fee by the Adviser,
which fee is calculated daily and paid monthly, at an annual rate of the Fund’s
average daily net assets of 0.05%, subject to a minimum annual fee of
$20,000.
The
basis for the Board of Trustees’ approval of the Fund’s Sub-Advisory Agreement
is available in the Fund’s Semi-Annual
Report to
Shareholders for the period ended August 31, 2021.
Portfolio
Managers
The
Fund is managed by VIA’s portfolio management team. The individual members of
the team responsible for the day-to-day management of the Fund’s portfolios are
listed below.
Austin
Wen, CFA, is a portfolio manager for the Fund. Mr. Wen has been a Portfolio
Manager of 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 CFA designation.
Rafael
Zayas, CFA, is a portfolio manager for the Fund. Mr. Zayas has over 15 years of
trading and portfolio management experience in global equity products and ETFs.
He is SVP, Head of Portfolio Management and Trading. Mr. Zayas specializes in
managing and trading of developed, emerging, and frontier market portfolios.
Prior to joining VIA in 2017, he was a Portfolio Manager at Russell Investments
for over $5 billion in quantitative strategies across global markets, including
emerging, developed, and frontier markets and listed alternatives. Before that,
he was an equity Portfolio Manager at BNY Mellon Asset Management, where he was
responsible for $150 million in internationally listed global equity ETFs and
assisted in managing $3 billion of global ETF assets. Mr. Zayas holds a BS in
Electrical Engineering from Cornell University. He also holds the Chartered
Financial Analyst designation.
Ryan
Dofflemeyer is a portfolio manager for the Fund. Mr. Dofflemeyer has over 16
years of trading and portfolio management experience across various asset
classes including both ETFs and mutual funds. He is Senior Portfolio Manager for
VIA, specializing in managing and trading of global equity and multi-asset
portfolios. Prior to joining VIA in August 2020, he was a Senior Portfolio
Manager at ProShare Advisors LLC (“ProShare”) for over $3 billion in ETF assets
across global equities, commodities, and volatility strategies. Mr. Dofflemeyer
held various positions with ProShare from October 2003 until August 2020. From
2001 to 2003, he was a Research Analyst at the Investment Company Institute in
Washington DC. Mr. Dofflemeyer holds a BA from the University of Virginia and an
MBA from the University of Maryland.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts managed by the Portfolio Managers, and
the Portfolio Managers’ ownership of Shares.
HOW
TO BUY AND SELL SHARES
The
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from the Fund, and only APs may tender their Shares for
redemption directly to the 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 the 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 bid-ask spread on
your transactions. 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.
Book
Entry
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.
Frequent
Purchases and Redemptions of Shares
The
Fund imposes 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 the Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Fund accommodates
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 Fund employs fair value pricing and may impose transaction
fees on purchases and redemptions of Creation Units to cover the custodial and
other costs incurred by the Fund in effecting trades. In addition, the Fund and
the Adviser reserve the right to reject any purchase order at any
time.
Determination
of NAV
The
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 is calculated by dividing the Fund’s net
assets by its Shares outstanding.
In
calculating its NAV, the 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. If such information is
not available for a security held by the 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).
Fair
Value Pricing
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 Fund 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.
Investments
by Registered Investment Companies
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 the 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 the Fund.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Fund. 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 Fund 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,
DISTRIBUTIONS, AND TAXES
Dividends
and Distributions
The
Fund expects to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least quarterly. The 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 Fund. Your investment
in the 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.
The
Fund has elected and intends to qualify each year for treatment as a regulated
investment company (“RIC”) under the Code. If it 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, the 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, you need to be aware of the possible tax consequences
when the 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
The
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 the Fund owned the investments that generated them,
rather than how long a shareholder has owned his or her Shares. Sales of assets
held by the Fund for more than one year generally result in long-term capital
gains and losses, and sales of assets held by the Fund for one year or less
generally result in short-term capital gains and losses. Distributions of the
Fund’s net capital gain (the excess of net long-term capital gains over net
short-term capital losses) that are reported by the 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), provided that
certain capital gain dividends attributable to dividends the Fund receives from
REITs (i.e.,
“unrecaptured section 1250 gain”) may be taxable to non-corporate shareholders
at a rate of 25%. 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 the 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 the 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 the
Fund from an ETF, a REIT, or an underlying fund taxable as a RIC may be treated
as qualified dividend income generally only to the extent so reported by such
ETF, REIT or underlying fund. Corporate shareholders may be entitled to a
dividends received deduction for the portion of dividends they receive from the
Fund that are attributable to dividends received by the Fund from U.S.
corporations, subject to certain limitations.
Due
to the Fund’s investments in REITs, it is expected that a significant amount of
the Fund’s distributions will not qualify to be treated as qualified dividend
income and will not qualify for the dividends received deduction. See “Taxation
of REIT Investments” below for additional information regarding the taxation of
dividends received from REITs.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from the Fund.
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 the Fund before
your investment (and thus were included in the Shares’ NAV when you purchased
your Shares).
You
may wish to avoid investing in the 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
the Fund’s distributions exceed its current and accumulated 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
the 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
Shares by non-U.S. shareholders 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. The 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.
Non-U.S.
persons are generally subject to U.S. tax on a disposition of a “United States
real property interest” (a “USRPI”). Gain on such a disposition is generally
referred to as “FIRPTA gain.” The Code provides a look-through rule for
distributions of so-called FIRPTA gain by the Fund if certain requirements are
met. If the look-through rule applies, certain distributions attributable to
income received by the Fund, from a REIT, may be treated as gain from the
disposition of a USRPI, causing distributions to be subject to U.S. withholding
tax at rates of up to 21%, and requiring non-U.S. investors to file nonresident
U.S. income tax returns. Also, gain may be subject to a 30% branch profits tax
in the hands of a foreign stockholder that is treated as a corporation for
federal income tax purposes. Under certain circumstances, Fund shares may
qualify as USRPIs, which could result in 15% withholding on certain
distributions and gross redemption proceeds paid to certain non-U.S.
shareholders.
The
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 the shareholder 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 the 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 the 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 its 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
sales rules apply and when a loss might be deductible.
The
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. The Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause the 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, the Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Taxation
of REIT Investments
The
Fund invests in U.S. REITs. “Qualified REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are eligible for a 20% deduction by non-corporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6%
(37% top rate applied to income after 20% deduction). Pursuant to proposed
Treasury regulations on which the Fund may rely, distributions by the Fund to
its shareholders that are attributable to qualified REIT dividends received by
the Fund and which the Fund properly reports as “section 199A dividends,” are
treated as “qualified REIT dividends” in the hands of non-corporate
shareholders. A section 199A dividend is treated as a qualified REIT dividend
only if the shareholder receiving such dividend holds the dividend-paying RIC
shares for at least 46 days of the 91-day period beginning 45 days before the
shares become ex-dividend, and is not under an obligation to make related
payments with respect to a position in substantially similar or related
property. The Fund is permitted to report such part of its dividends as section
199A dividends as are eligible, but is not required to do so.
REITs
in which the Fund invests often do not provide complete and final tax
information to the Fund until after the time that the Fund issues a tax
reporting statement.
As
a result, the Fund may at times find it necessary to reclassify the amount and
character of its distributions to you after it issues your tax reporting
statement. When such reclassification is necessary, the Fund (or a financial
intermediary, such as a broker, through which a shareholder owns Shares) will
send you a corrected, final Form 1099-DIV to reflect the reclassified
information. If you receive a corrected Form 1099-DIV, use the information on
this corrected form, and not the information on the previously issued tax
reporting statement, in completing your tax returns.
Investments
in REIT equity securities may require the Fund to accrue and distribute income
not yet received. To generate sufficient cash to make the requisite
distributions, the Fund may be required to sell securities in its portfolio
(including when it is not advantageous to do so) that it otherwise would have
continued to hold. The Fund’s investments in REIT equity securities may at other
times result in the Fund’s receipt of cash in excess of the REIT’s earnings; if
the Fund distributes these amounts, these distributions could constitute a
return of capital to the Fund’s shareholders for federal income tax purposes.
Dividends paid by a REIT, other than capital gain distributions, will generally
be taxable as ordinary income up to the amount of the REIT’s current and
accumulated earnings and profits. Capital gain dividends paid by a REIT to the
Fund will be treated as long-term capital gains by the Fund and, in turn, may be
distributed by the Fund to shareholders as a capital gain distribution.
Dividends received by the Fund from a REIT generally will not constitute
qualified dividend income or qualify for the dividends received deduction. If a
REIT is operated in a manner such that it fails to qualify as a REIT, an
investment in the REIT would become subject to double taxation, meaning the
taxable income of the REIT would be subject to federal income tax at the regular
corporate rate without any deduction for dividends paid to shareholders and the
dividends would be taxable to shareholders as ordinary income (or possibly as
qualified dividend income) to the extent of the REIT’s current and accumulated
earnings and profits.
Net
Investment Income Tax
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.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in the 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, ALPS Distributors, Inc., is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Fund on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is 1290 Broadway, Suite
1000, Denver, Colorado 80203.
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, the 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 Fund, 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 the Fund’s assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often Shares trade on the Exchange at a price above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV of the Fund is available on the Fund’s website at
www.videntfunds.com/funds/ppty.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the ability of the Fund to track the total return
performance of the Index or the ability of the Index identified herein to track
the performance of its constituent securities. The Exchange is not responsible
for, nor has it participated in, the determination of the compilation or the
calculation of the Index, nor in the determination of the timing, prices, or
quantities of Shares to be issued, nor in the determination or calculation of
the equation by which Shares are redeemable. The Exchange has no obligation or
liability to owners of 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 Index or
the data included therein. The Exchange makes no warranty, express or implied,
as to results to be obtained by the Fund, owners of Shares, or any other person
or entity from the use of the Index 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 Index 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 Sub-Adviser, and the Fund 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 Fund
particularly. The Fund does not guarantee the accuracy, completeness, or
performance of the Index or the data included therein and shall have no
liability in connection with the Index or Index calculation. The Index Provider,
an affiliate of the Sub-Adviser, owns the Index and the Index methodology, and
the Adviser is a licensee of the Index from the Index Provider and a
sub-licensor of the Index to the index receipt agent. The Index Provider has
contracted with the Index Calculation Agent to maintain and calculate the Index
used by the Fund. The Index Calculation Agent shall have no liability for any
errors or omissions in calculating the Index.
FINANCIAL
HIGHLIGHTS
The
financial highlights table is intended to help you understand the Fund’s
financial performance for the Fund’s five most recent fiscal years (or the life
of the Fund, if shorter). Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Cohen & Company, Ltd., the Fund’s independent registered public
accounting firm, whose report, along with the Fund’s financial statements, is
included in the Fund’s annual report, which is available upon request.
FINANCIAL
HIGHLIGHTS
For
a capital share outstanding throughout each year/period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended February 28, |
|
Year
Ended February 29, 2020 |
|
Period
Ended
February
28,
2019(1) |
|
2022 |
|
2021 |
|
| Net
asset value, beginning of year/period |
$ |
30.41 |
|
|
$ |
30.19 |
|
|
$ |
29.23 |
|
|
$ |
25.00 |
|
|
|
|
|
|
|
|
|
|
|
| INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
|
|
|
|
|
Net
investment income (loss)(2) |
0.52 |
|
|
0.52 |
|
|
0.65 |
|
|
0.58 |
|
|
| Net
realized and unrealized gain (loss) on investments |
6.22 |
|
|
0.70 |
|
|
1.38 |
|
|
4.21 |
|
|
| Total
from investment operations |
6.74 |
|
|
1.22 |
|
|
2.03 |
|
|
4.79 |
|
|
|
|
|
|
|
|
|
|
|
| DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
|
|
|
|
| Distributions
from: |
|
|
|
|
|
|
|
|
| Net
investment income |
(0.52) |
|
|
(0.52) |
|
|
(0.67) |
|
|
(0.48) |
|
|
| Realized
gains |
— |
|
|
— |
|
|
(0.05) |
|
|
(0.08) |
|
|
| Tax
return of capital to shareholders |
(0.61) |
|
|
(0.48) |
|
|
(0.35) |
|
|
— |
|
|
| Total
distributions to shareholders |
(1.31) |
|
|
(1.00) |
|
|
(1.07) |
|
|
(0.56) |
|
|
|
|
|
|
|
|
|
|
|
| CAPITAL
SHARES TRANSACTIONS: |
|
|
|
|
|
|
|
|
| Transaction
fees |
— |
|
|
— |
|
|
— |
|
(3) |
— |
|
(3) |
| Net
asset value, end of year/period |
$ |
36.02 |
|
|
$ |
30.41 |
|
|
$ |
30.19 |
|
|
$ |
29.23 |
|
|
| Total
return |
22.23 |
% |
|
4.67 |
% |
|
6.86 |
% |
|
19.32 |
% |
(4) |
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL
DATA: |
|
|
|
|
|
|
|
|
| Net
assets at end of year/period (000’s) |
$ |
147,694 |
|
|
$ |
121,626 |
|
|
$ |
119,236 |
|
|
$ |
105,215 |
|
|
|
|
|
|
|
|
|
|
|
| RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
|
|
|
|
| Expenses
to average net assets |
|
|
|
|
|
|
|
|
| (before
management fees waived) |
0.53 |
% |
|
0.53 |
% |
|
0.53 |
% |
|
0.53 |
% |
(5) |
| Expenses
to average net assets |
|
|
|
|
|
|
|
|
| (after
management fees waived) |
0.49 |
% |
|
0.49 |
% |
|
0.53 |
% |
|
0.53 |
% |
(5) |
| Net
investment income (loss) to average net assets |
|
|
|
|
|
|
|
|
| (before
management fees waived) |
1.41 |
% |
|
1.88 |
% |
|
2.05 |
% |
|
2.26 |
% |
(5) |
| Net
investment income (loss) to average net assets |
|
|
|
|
|
|
|
|
| (after
management fees waived) |
1.45 |
% |
|
1.92 |
% |
|
2.05 |
% |
|
2.26 |
% |
(5) |
|
Portfolio
turnover rate(6) |
29 |
% |
|
42 |
% |
|
18 |
% |
|
22 |
% |
(4) |
(1)Commencement
of operations on March 26, 2018.
(2)Calculated
based on average shares outstanding during the period.
(3)Less
than $0.005.
(4)Not
annualized.
(5)Annualized.
(6)Excludes
impact of in-kind transactions.
U.S.
Diversified Real Estate ETF
|
|
|
|
|
|
|
|
|
|
|
|
| Adviser |
Vident
Advisory, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
Index
Provider |
Vident
Financial, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
| Sub-Adviser |
Vident
Investment Advisory, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
Transfer
Agent, Index Receipt Agent, and 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 |
ALPS
Distributors, Inc.
1290
Broadway, Suite 1000
Denver,
Colorado 80203 |
| 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 Fund in the following documents:
Statement
of Additional Information: The
Fund’s SAI provides additional details about the investments and techniques of
the Fund and certain other additional information. A current SAI dated
June 30, 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 the Fund’s investments will be available in the Fund’s 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 the Fund’s performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Fund by contacting the Fund at U.S. Diversified Real
Estate ETF, c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee,
Wisconsin 53201-0701 or calling 1-800-617-0004.
Shareholder
reports and other information about the Fund 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 Fund’s Internet web site at www.videntfunds.com/funds/ppty
or
• For
a fee, by e-mail request to publicinfo@sec.gov.
(SEC
Investment Company Act File No. 811-22668)
