ck0001540305-20210228
NETLease Corporate Real Estate
ETF
(NETL)
Listed
on NYSE Arca, Inc.
PROSPECTUS
June 30,
2021
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.
NETLease
Corporate Real Estate ETF
Investment Objective
The
NETLease Corporate Real Estate ETF (the “Fund”) seeks to track the performance,
before fees and expenses, of the
Fundamental
Income Net Lease 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”). This table and the Example below do not include the brokerage
commissions and other fees to financial intermediaries that investors may pay on
their purchases and sales of Shares.
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Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.60% |
Distribution
and/or Service (12b-1) Fees |
None |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.60% |
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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 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 |
$61 |
$192 |
$335 |
$750 |
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, 2021, the Fund’s portfolio turnover rate was 17% 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 is owned by
Fundamental Income Strategies, LLC (the “Index Provider”) and measures the
performance of the net lease real estate sector of the U.S. equity market. A
“net lease” is an arrangement, typically associated with commercial real estate,
that requires the tenant to pay all or a portion of the taxes, fees, and
maintenance costs for a property in addition to rent.
Fundamental
Income Net Lease Real Estate Index
The
Index is generally composed of the U.S.-listed equity securities of companies
that derive at least 85% of their earnings or revenues from real estate
operations in the net lease real estate sector (“Eligible Companies”). At the
time of each reconstitution of the Index, Eligible Companies with a market
capitalization of more than $200 million and average daily traded volume of at
least 10,000 shares are included in the Index (the “Index Constituents”). A
significant portion of the Index is expected to be composed of real estate
investment trusts (“REITs”). The Index may include American Depositary Receipts
(“ADRs”). The Index includes securities of companies with a diversified
customer, tenant, or obligor base (collectively, “Diversified Companies”), and
may also include securities of companies with more than half of their revenue
being generated from a single customer, tenant, or obligor (collectively,
“Non-Diversified Companies”).
The
real estate companies included in the Index may utilize leverage, and some may
be highly leveraged. Additionally, such companies may include significant
business operations outside of the United States. As of May 28, 2021, the Index
consisted of 25 securities, the three largest of which and their weights were
Vereit Inc. (8.90%), Realty Income Corporation (8.28%), and W.P. Carey Inc.
(8.03%).
The
Index is reconstituted and rebalanced quarterly as of the close of business on
the third Friday of each March, June, September, and December based on data as
of the end of the previous month (each, a “Reference Date”). Index Constituents
are weighted based on their free-float market capitalization (i.e.,
market capitalization based on the number of shares available to the public),
subject to the following constraints as of the time of each reconstitution of
the Index. The sum of all Non-Diversified Companies cannot exceed 12.5% of the
total Index weight, and each Non-Diversified Company cannot exceed 3.5% of the
total Index weight. Additionally, the five largest Diversified Companies in the
Index will have their weight capped at 8%, and the remaining Diversified
Companies are each capped at 4% of the total Index weight.
If
the foregoing limits would be exceeded at the time of a reconstitution of the
Index, the excess weight of Diversified Companies is proportionally
redistributed to all Diversified Companies with weights below such limits, and
the excess weight of Non-Diversified Companies is proportionally redistributed
to all Non-Diversified Companies with weights below such limits.
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 corporate real estate companies. 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 “corporate 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 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 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).
The
Fund is expected to concentrate (i.e., hold more than 25% of its total assets)
in securities of the real estate sector to approximately the same extent as the
Index. 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.
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.”
•ADR
Risk.
ADRs involve risks similar to those associated with investments in foreign
securities and certain additional risks. ADRs 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 ADRs as a substitute for an investment
directly in the Underlying Shares, the Fund is exposed to the risk that the ADRs
may not provide a return that corresponds precisely with that of the Underlying
Shares.
• Concentration
Risk.
The Index, and consequently the Fund, is expected to concentrate its investments
(i.e.,
hold more than 25% of its total assets) in real estate companies. As a result,
the value of the Fund’s 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, the real estate industry may be out of favor
and underperform other industries or groups of industries.
• Corporate
Real Estate Investment Risk. The
Fund is expected to invest substantially all of its assets in real
estate-related companies which invest in properties leased to single tenants
primarily on a “triple-net” basis meaning the tenants are responsible for
property expenses such as property taxes, insurance and repairs and maintenance.
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. The risks of investing in real estate companies include certain
risks associated with the direct ownership of real estate and the real estate
industry in general. Securities in the real estate sector are subject to the
risk that the value of their underlying real estate may go down. Many factors
may affect real estate values, including occupancy, the general and local
economies, the amount of new construction in a particular area, the laws and
regulations (including zoning and tax laws) affecting real estate, and the costs
of owning, maintaining and improving real estate if the company is responsible
for those costs. The availability of mortgages and changes in interest rates may
also affect real estate values. Real estate companies are also subject to heavy
cash flow dependency, defaults by tenants or borrowers, and self-liquidation.
Because the Fund invests primarily in real estate companies, its performance
will be especially sensitive to developments that significantly affect real
estate companies.
Companies
in the Net Lease Real Estate sector may be affected by unique factors related to
leasing properties to single tenants including dependence on the financial
performance of their tenants and lease terms related to rent escalations based
on economic measurements. In the event a tenant defaults on its payment
obligations under a lease, the company’s rental revenue related to the property
could be significantly impacted or completely eliminated, which could also
result in a reduction in the value of the property. In these instances, the
company could experience difficulty or a significant delay in re-leasing or
selling the property, and the company would incur property expenses such as
property taxes, insurance, repairs and maintenance that were formerly paid by
the tenant. Re-leasing the property may also require capital expenditures. The
rental revenue of companies in the Net Lease Real Estate sector can also be
dependent on lease terms related to rent escalations that are based on factors
out of their control such as changes in CPI or the amount of sales from the
operations at the companies’ properties.
Companies
in the Net Lease Real Estate sector also may be affected by unique supply and
demand factors that do not apply to other real estate sectors particularly for
vacant properties and properties near the end of their lease terms. Net lease
real estate typically involves office, retail, or industrial real estate and
consequently may be affected by the risks associated with such real estate
sectors. These sectors may be more susceptible to changes in interest rates,
business capital expenditures, macroeconomic trends, government regulation, and
tax regulation than other real estate sectors.
Industrial
real estate may also be concentrated in logistics-related industries, which
could expose industrial real estate companies to the risks of a downturn
affecting logistics companies
and
could result in lower demand for vacant properties and give tenants significant
negotiating power in the event of tenant default under the lease or at the end
of the lease term.
Office
real estate companies are particularly subject to changes in financing costs,
economic conditions, and for vacant properties or properties subject to leases
near the end of their terms, changes in market rental rates, the costs of
repairing or renovating space, taxes, insurance and utility expenses. Office
real estate companies may have properties concentrated in key geographic
markets, and changes to the economic condition of one or more such markets may
significantly affect such companies’ profitability if the properties are vacant
or near the end of their lease terms. Retail companies are particularly subject
to changes in international, national, regional, and local economic conditions;
tenant bankruptcies; the increasing use of the Internet by retailers and
consumers; local real estate conditions; levels of consumer spending, changes in
consumer confidence, and fluctuations in seasonal spending; increased operating
costs; and perceptions by consumers of the safety, convenience, and
attractiveness of retail properties.
• 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 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.
• 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.
•International
Operations Risk. Investments
in companies with significant business operations outside of the United States
may involve certain risks that may not be present with investments in U.S.
companies. For example, international operations may be subject to risk of loss
due to foreign currency fluctuations; changes in foreign political and economic
environments, regionally, nationally, and locally; challenges of complying with
a wide variety of foreign laws, including corporate governance, operations,
taxes, and litigation; differing lending practices; differences in cultures;
changes in applicable laws and regulations in the United States that affect
international operations; changes in applicable laws and regulations in foreign
jurisdictions; difficulties in managing international operations; and obstacles
to the repatriation of earnings and cash. These and other factors can make an
investment in the Fund more volatile than other types of
investments.
• 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.
• 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.
• Passive
Investment Risk.
The Fund is not actively managed, and its 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.
• REIT
Investment Risk. Investments
in REITs involve unique risks. REITs may have limited financial resources, may
trade less frequently and in limited volume, and may be more volatile than other
securities. In addition, to the extent the Fund holds interests in REITs, 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). The risks of investing in REITs include certain risks associated
with the direct ownership of real estate and the real estate industry in
general. These include risks related to general, regional and local economic
conditions; fluctuations in interest rates and property tax rates; shifts in
zoning laws, environmental regulations and other governmental action such as the
exercise of eminent domain; cash flow dependency; increased operating expenses;
lack of availability of mortgage funds; losses due to natural disasters;
overbuilding; losses due to casualty or condemnation; changes in property values
and rental rates; and other factors.
In
addition to these risks, REITs are dependent upon management skills and
generally may not be diversified. REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, REITs are
subject to special U.S. federal tax requirements. A REIT that fails to comply
with such tax requirements may be subject to U.S. federal income taxation, which
may affect the value of the REIT and the characterization of the REIT’s
distributions. The U.S. federal tax requirement that a REIT distributes
substantially all of its net income to its shareholders may result in the REIT
having insufficient capital for future expenditures. A REIT that successfully
maintains its qualification may still become subject to U.S. federal, state and
local taxes, including excise, penalty, franchise, payroll, mortgage recording,
and transfer taxes, both directly and indirectly through its subsidiaries. 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.
• Small
and Mid-Sized Company Stock Risk.
Small to mid-sized company stocks have historically been subject to greater
investment risk than large company stocks. The prices of small- to mid-sized
company stocks tend to be more volatile and less liquid than large company
stocks.
• 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 the most
recent calendar year 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.netleaseetf.com.
Calendar Year Total
Return
For the year-to-date period ended
March 31,
2021, the Fund’s total return was 5.14%.
During the period of time shown in the bar
chart, the highest quarterly return
was 20.13% for the quarter ended June 30, 2020, and the
lowest quarterly return was
-30.65% for the quarter ended March 31,
2020.
Average
Annual Total Returns
(For
the Periods ended December 31, 2020)
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NETLease
Corporate Real Estate ETF |
1
Year |
Since
Inception
(3/21/2019) |
Return Before
Taxes |
-0.38% |
6.53% |
Return After Taxes on
Distributions |
-1.41% |
5.41% |
Return After Taxes on Distributions and
Sale of Shares |
-0.13% |
4.58% |
Fundamental
Income Net Lease Real Estate TR Index
(reflects
no deduction for fees, expenses, or taxes) |
0.43% |
7.34% |
S&P
500 TR Index
(reflects no deduction for
fees, expenses, or taxes) |
18.40% |
18.87% |
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. In certain cases, the figure
representing “Return After Taxes on Distributions and Sale of Shares” may be
higher than the other return figures for the same period. A
higher after-tax return results when a capital loss occurs upon redemption and
provides an assumed tax deduction that benefits the investor.
Management
Investment
Adviser: Exchange
Traded Concepts, LLC (the “Adviser”) serves as the Fund’s investment
adviser.
Portfolio
Managers: Andrew
Serowik, a Portfolio Manager of the Adviser, has served as a portfolio manager
of the Fund since its inception in March 2019.
Todd Alberico and Gabriel Tan, each a Portfolio Manager of the Adviser, have
served as portfolio managers of the Fund since June 2021.
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.netleaseetf.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 Fund’s 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
Index Provider created and is responsible for maintaining and applying the
rules-based methodology of the Index. The Index is calculated by NASDAQ Global
Indexes (the “Index Calculation Agent”), which is not affiliated with the Fund,
the Adviser, the Fund’s distributor, or any of their respective affiliates. The
Index Calculation Agent provides information to the Fund about the Index
constituents and does not provide investment advice with respect to the
desirability of investing in, purchasing, or selling securities.
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.
•ADR
Risk.
The Fund may hold the securities of non-U.S. companies in the form of ADRs. ADRs
are negotiable certificates issued by a U.S. financial institution that
represent a specified number of shares in a foreign stock and trade on a U.S.
national securities exchange, such as the Exchange. Sponsored ADRs are issued
with the support of the issuer of the foreign stock underlying the ADRs and
carry all of the rights of common shares, including voting rights. The
underlying issuers of certain ADRs are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities. The
underlying securities of the ADRs in the Fund’s portfolio are usually
denominated or quoted in currencies other than the U.S. dollar. As a result,
changes in foreign currency exchange rates may affect the value of the Fund’s
portfolio. In addition, because the underlying securities of ADRs trade on
foreign exchanges at times when the U.S. markets are not open for trading, the
value of the securities underlying the ADRs may change materially at times when
the U.S. markets are not open for trading, regardless of whether there is an
active U.S. market for Shares.
•Concentration
Risk. The
Fund may be susceptible to an increased risk of loss, including losses due to
adverse occurrences affecting the Fund more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities of a
particular issuer or issuers, country, region, market, industry, group of
industries, sector, or asset class. In addition, at times, real estate companies
may be out of favor and underperform other industries or groups of
industries.
•Corporate
Real Estate Investment Risk. The
Fund invests in real estate companies, including REITs and real estate holdings
companies, which will expose investors to the risks of owning real estate
directly, as well as to the risks that relate specifically to the way in which
such companies are organized and operated. Real estate is highly sensitive to
general and local economic conditions and developments and is characterized by
intense competition and periodic overbuilding. Many real estate companies,
including REITs, utilize leverage (and some may be highly leveraged), which
increases investment risk and the risk normally associated with debt financing,
and could potentially increase the Fund’s volatility and losses. The U.S. real
estate market may, in the future, experience and has, in the past, experienced a
decline in value, with certain regions experiencing significant losses in
property values. Exposure to such real estate may adversely affect Fund
performance. In addition, many investors may already have exposure to
residential real estate through ownership of a home. So-called “Acts of God,”
such as hurricanes, earthquakes, tsunamis, and other natural disasters, as well
as the effects of climate change, terrorist activity, political unrest, or civil
strife may result in physical damage to properties or a decrease in demand,
which can affect profits.
Companies
in the Net Lease Real Estate sector may be affected by unique factors related to
leasing properties to single tenants including dependence on the financial
performance of their tenants and lease terms related to rent escalations based
on economic measurements. In the event a tenant defaults on its payment
obligations under a lease, the company’s rental revenue related to the property
could be significantly impacted or completely eliminated, which could also
result in a reduction in the value of the property. In these instances, the
company could experience difficulty or a significant delay in re-leasing or
selling the property, and the company would incur property expenses such as
property taxes, insurance, repairs and maintenance that were formerly paid by
the tenant. Re-leasing the property may also require capital expenditures. The
rental revenue of companies in the Net Lease Real Estate sector can also be
dependent on lease terms related to rent escalations that are based on factors
out of their control such as changes in CPI or the amount of sales from the
operations at the companies’ properties.
Companies
in the Net Lease Real Estate sector may also be affected by unique supply and
demand factors that do not apply to other real estate sectors. Net lease real
estate typically involves office, retail, or industrial real estate and
consequently may be affected by the risks associated with such real estate
sectors particularly for vacant properties and properties subject to leases near
the end of their lease terms. These sectors may be more susceptible to changes
in interest rates, business capital expenditures, macroeconomic trends,
government regulation, and tax regulation than other real estate sectors.
Industrial
real estate may also be concentrated in logistics-related industries, which
could expose industrial real estate companies to the risks of a downturn
affecting logistics companies and could result in lower demand for vacant
properties and give tenants significant negotiating power in the event of tenant
default under the lease or at the end of lease terms.
Office
real estate companies are particularly subject to changes in financing costs,
economic conditions, and for vacant properties or properties near the end of
their lease terms, changes in market rental rates, the costs of repairing or
renovating space, insurance, taxes and utility expenses. Office real estate
companies may have properties concentrated in key geographic markets, and
changes to the economic condition of one or more such markets may significantly
affect such companies’ profitability if the properties are vacant or near the
end of their lease terms. Significant job losses in the financial and
professional services industries could decrease demand for office space, causing
market rental rates and property values to be negatively impacted.
Retail
real estate companies are particularly subject to changes in international,
national, regional, and local economic conditions; tenant bankruptcies; the
increasing use of the Internet by retailers and consumers; local real estate
conditions; levels of consumer spending, changes in consumer confidence, and
fluctuations in seasonal spending; increased operating costs; and perceptions by
consumers of the safety, convenience, and attractiveness of retail properties.
Retail properties leased to anchor stores (e.g.,
department stores) or other major tenants (e.g.,
“big box” stores) or properties in close proximity to such stores could be
adversely affected by the loss of one or more of such anchor stores or major
tenants. Certain department stores and other national retailers have
experienced, and may continue to experience for the foreseeable future given
current macroeconomic uncertainty and less-than-desirable levels of consumer
confidence, considerable decreases in customer traffic in their retail stores,
increased competition from alternative retail options such as those accessible
via the Internet and other forms of pressure on their business models. As
pressure on these department stores and national retailers increases, their
ability to maintain their stores, meet their lease and lending obligations,
withstand takeover attempts by investors or rivals, or avoid bankruptcy and/or
liquidation may be impaired and result in closures of their stores or lead the
retailer to seek out more favorable lease terms.
Man-made
disasters in recent years as well as the potential spread of contagious diseases
in locations where office real estate companies own significant properties could
cause a decline in rental rates and reduce demand for occupancy. Actual or
threatened war, terrorist activity, political unrest, or civil strife, and other
geopolitical uncertainty could have a similar effect. Any one or more of these
events may reduce the overall demand for office space or limit rental prices,
both of which could adversely affect company profits.
•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, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The
fall-out from these disruptions has included the rapid closure of businesses
deemed “non-essential” by federal, state, or local governments and rapidly
increasing unemployment, as well as greatly reduced liquidity for certain
instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. 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.
•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. 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.
•International
Operations Risk. Investments
in companies with significant business operations outside of the United States
may involve certain risks that may not be present with investments in U.S.
companies. For example, international operations may be subject to risk of loss
due to foreign currency fluctuations; changes in foreign political and economic
environments, regionally, nationally, and locally; challenges of complying with
a wide variety of foreign laws, including corporate governance, operations,
taxes, and litigation; differing lending practices; differences in cultures;
changes in applicable laws and regulations in the United States that affect
international operations; changes in applicable laws and regulations in foreign
jurisdictions; difficulties in managing international operations; and obstacles
to the repatriation of earnings and cash. These and other factors can make an
investment in the Fund more volatile than other types of
investments.
•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.
•Non-Diversification
Risk.
Although the Fund intends to invest in a variety of securities and instruments,
the Fund will be 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.
•Passive
Investment Risk.
The Fund invests in the securities included in, or representative of, the Index
regardless of their investment merit. The Fund does not attempt to outperform
the 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 the 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.
•REIT
Investment Risk. Investments
in REITs involve unique risks. REITs may have limited financial resources, may
trade less frequently and in limited volume, and may be more volatile than other
securities. In addition, to the extent the Fund holds interests in REITs, 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). The risks of investing in REITs include certain risks associated
with the direct ownership of real estate and the real estate industry in
general. These include risks related to general, regional and local economic
conditions; fluctuations in interest rates and property tax rates; shifts in
zoning laws, environmental regulations and other governmental action such as the
exercise of eminent domain; cash flow dependency; increased operating expenses;
lack of availability of mortgage funds; losses due to natural disasters;
overbuilding; losses due to casualty or condemnation; changes in property values
and rental rates; and other factors.
In
addition to these risks, REITs are dependent upon management skills and
generally may not be diversified. REITs are also subject to heavy cash flow
dependency, defaults by borrowers and self-liquidation. In addition, REITs are
subject to special U.S. federal tax requirements. A REIT that fails to comply
with such tax requirements may be subject to U.S. federal income taxation, which
may affect the value of the REIT and the characterization of the REIT’s
distributions. The U.S. federal tax requirement that a REIT distributes
substantially all of its net income to its shareholders may result in the REIT
having insufficient capital for future expenditures. A REIT that successfully
maintains its qualification may still become subject to U.S. federal, state and
local taxes, including excise, penalty, franchise, payroll, mortgage recording,
and transfer taxes, both directly and indirectly through its subsidiaries. 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.
•Small
and Mid-Sized Company Stock Risk.
Small and mid-sized companies may be more vulnerable to adverse issuer, market,
political, or economic developments than securities of larger-capitalization
companies. The securities of small-and mid-sized 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 smaller 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. Smaller-capitalization companies also
may be particularly sensitive to changes in interest rates, government
regulation, borrowing costs, and earnings.
•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 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 Fund’s daily portfolio holdings is available at www.netleaseetf.com. 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”).
Exchange
Traded Concepts, LLC, serves as the investment adviser and has overall
responsibility for the general management and administration of the Fund. The
Adviser also arranges for transfer agency, custody, fund administration, and all
other non-distribution related services necessary for the Fund to operate. The
Adviser has provided investment advisory services to individual and
institutional accounts since 2009. The Adviser is an Oklahoma limited liability
company and is located at 10900 Hefner Pointe Drive, Suite 400, Oklahoma City,
Oklahoma 73120. For the services it provides to the Fund, the Fund pays the
Adviser a unified management fee, which is calculated daily and paid monthly, at
an annual rate of 0.60% of the Fund’s average daily net assets.
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Fund except for the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, 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 fees and expenses paid by the Trust under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act.
The
basis for the Board of Trustees’ approval of the continuation of the Fund’s
Investment Advisory Agreement is available in the Fund’s Annual Report to
Shareholders for the period ending February 28, 2021.
Andrew
Serowik, Todd Alberico, and Gabriel Tan are primarily responsible for the
day-to-day management of the Fund.
Mr.
Serowik joined the Adviser from Goldman Sachs. He began his career at Spear,
Leeds & Kellogg (“SLK”), continuing with Goldman after its acquisition of
SLK. During his career of more than 19 years at the combined companies, he held
various roles, including managing the global Quant ETF Strats team and One Delta
ETF Strats. He designed and developed systems for portfolio risk calculation,
algorithmic ETF trading, and execution monitoring, with experience across all
asset classes. He graduated from the University of Michigan with a Bachelor of
Business Administration degree in Finance.
Mr.
Alberico joined the Adviser in November 2020, having spent the past 14 years in
ETF trading at Goldman Sachs, Cantor Fitzgerald, and, most recently, Virtu
Financial. He spent most of that time focused on the Trading and Portfolio Risk
Management of ETFs exposed to international and domestic equity. He has worked
on several different strategies including lead market-making and electronic
trading, to customer facing institutional business developing models for block
trading as well as transitional trades. Mr. Alberico graduated from St. John’s
University in NY with a Bachelor of Science degree in Finance.
Mr.
Tan joined the Adviser in May 2019 as an Associate Portfolio Manager and was
promoted to Portfolio Manager in December 2020. He began his career at UBS and
BBR Partners where he worked as a financial planning analyst and a portfolio
strategist for over four years. During his time there, he developed
comprehensive wealth management solutions focused on portfolio optimization,
trust and estate planning, and tax planning.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts that the Portfolio Managers manage and
the Portfolio Managers’ ownership of Shares.
Fundamental
Income Strategies, LLC (the “Index Provider”) was founded by Chris Burbach and
Alexi Panagiotakopoulos in 2018 to identify and create investment strategies
rooted in solid, understandable fundamentals that are expected to generate
sustainable income along with growth. The Index Provider created the Index, its
inaugural index, to help define and track the rapidly expanding publicly-traded
Net Lease Real Estate sector. The Index Provider is not affiliated with the
Fund, the Adviser, or the Distributor (defined below).
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.
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
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.
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).
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 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 the Fund beyond the limits set
forth in section 12(d)(1), subject to certain terms and conditions set forth in
an SEC exemptive order issued to the Adviser or rule under the 1940 Act,
including that such investment companies enter into an agreement with the
Fund.
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
and Distributions
Dividends
from net investment income, if any, are generally declared and paid monthly by
the Fund. Distributions of net realized securities gains, if any, generally are
declared annually. 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 intends to elect and 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 plan, 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 form 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 a REIT may be treated as qualified dividend income generally only to
the extent so reported by such REIT. Due to the Fund’s investments in REITs it
is expected that a significant portion of the Fund’s distributions will not
qualify to be treated as qualified dividend income.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from the 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 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
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. 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.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the 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.
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 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 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 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
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.
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 may invest in 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.
Foreign
Taxes
To
the extent the Fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the Fund received from
sources in foreign countries.
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.
The
Distributor, Quasar Distributors, LLC, 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 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, 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.
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 for the Fund, free of charge, on
the Fund’s website at www.netleaseetf.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 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 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 owns the Index and the Index methodology
and is a licensor of the Index to the Adviser and 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.
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.
For
a capital share outstanding throughout the year/period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended February 28, 2021 |
|
Period
Ended February 29,
2020(1) |
|
Net
asset value, beginning of year/period |
$ |
26.31 |
|
|
$ |
25.00 |
|
|
|
|
|
|
|
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
Net
investment income (loss)(2) |
0.68 |
|
|
0.71 |
|
|
Net
realized and unrealized gain (loss) on investments |
1.00 |
|
|
1.29 |
|
|
Total
from investment operations |
1.68 |
|
|
2.00 |
|
|
|
|
|
|
|
DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
From
net investment income |
(0.69) |
|
|
(0.63) |
|
|
From
net realized gains |
— |
|
|
(0.06) |
|
|
Tax
return of capital to shareholders |
(0.35) |
|
|
— |
|
|
Total
distributions |
(1.04) |
|
|
(0.69) |
|
|
|
|
|
|
|
CAPITAL
SHARE TRANSACTIONS |
|
|
|
|
Transaction
fees |
0.00 |
(3) |
0.00 |
(3) |
|
|
|
|
|
Net
asset value, end of year/period |
$ |
26.95 |
|
|
$ |
26.31 |
|
|
|
|
|
|
|
Total
return |
7.29 |
% |
|
7.96 |
% |
(4) |
|
|
|
|
|
SUPPLEMENTAL
DATA: |
|
|
|
|
Net
assets at end of year/period (000’s) |
$ |
70,082 |
|
|
$ |
44,067 |
|
|
|
|
|
|
|
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
Expenses
to average net assets |
0.60 |
% |
|
0.60 |
% |
(5) |
Net
investment income (loss) to average net assets |
2.93 |
% |
|
2.75 |
% |
(5) |
|
|
|
|
|
Portfolio
turnover rate(6) |
17 |
% |
|
11 |
% |
(4) |
(1)
Commencement of operations on March 21, 2019.
(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.
NETLEASE
CORPORATE REAL ESTATE ETF
|
|
|
|
|
|
|
|
|
|
|
|
Adviser
|
Exchange
Traded Concepts, LLC
10900
Hefner Pointe Drive, Suite 400
Oklahoma
City, Oklahoma 73120 |
Index
Provider |
Fundamental
Income Strategies, LLC
2425
E. Camelback Rd., Ste. 700
Phoenix,
AZ 85016 |
Index
Calculation Agent |
The
Nasdaq Stock Market LLC
One
Liberty Plaza
165
Broadway
New
York, NY 10006 |
Distributor |
Quasar
Distributors, LLC
111
East Kilbourn Avenue, Suite 2200
Milwaukee,
Wisconsin 53202 |
Custodian |
U.S.
Bank, N.A.
1555
N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212 |
Transfer
Agent, Fund Accountant and Fund Administrator |
U.S.
Bancorp Fund Services, LLC,
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004-2541 |
Independent
Registered Public Accounting Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
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, 2021 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 is 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
NETLease
Corporate 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 website at www.netleaseetf.com;
or
(SEC
Investment Company Act File No. 811-22668)