ck0001683471-20220930
PROSPECTUS
Preferred-Plus ETF (IPPP)
Dividend Performers ETF
(IPDP)
Listed
on Cboe BZX Exchange, Inc.
January 31,
2023
The
U.S. Securities and Exchange Commission (the “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.
TABLE
OF CONTENTS
|
|
|
|
| |
Preferred-Plus
ETF - Fund Summary |
|
Dividend
Performers ETF - Fund Summary |
|
|
|
|
|
|
|
Temporary
Defensive Positions |
|
|
|
|
|
|
|
|
|
Other
Service Providers |
|
|
|
|
|
|
|
|
|
|
|
Investments
by Registered Investment Companies |
|
|
|
|
|
Taxes |
|
Taxes
on Distributions |
|
Taxes
When Shares are Sold on the Exchange |
|
Taxes
on Purchases and Redemptions of Creation Units |
|
Net
Investment Income Tax |
|
Foreign
Investments by a Fund |
|
Certain
Investments in Complex Securities |
|
|
|
|
|
|
|
|
|
|
| |
PREFERRED-PLUS
ETF - FUND SUMMARY |
Investment Objective
The Preferred-Plus ETF (the
“Fund”) seeks to provide income.
Fees and Expenses of the Fund
This
table describes the fees and expenses that 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.
|
|
|
|
|
|
|
| |
Shareholder
Fees
(fees paid directly from your investment) |
| None |
Annual
Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your
investment) |
|
| |
Management
Fees |
| 0.85% |
Distribution
and/or Service (12b-1) Fees |
| 0.00% |
Other
Expenses |
| 0.20% |
Interest
Expense |
0.20% |
|
Acquired
Fund Fees and Expenses1 |
| 0.01% |
Total
Annual Fund Operating Expenses2,3 |
| 1.06% |
1 Acquired Fund Fees and
Expenses (“AFFE”) are the indirect costs of investing in other investment
companies.
2 Restated to reflect the
Fund’s current unified management fee as if it had been in effect during the
previous fiscal year.
3 Total Annual Fund
Operating Expenses do not correlate to the expense ratios in the Fund’s
Financial Highlights because the Financial Highlights include only the direct
operating expenses incurred by the Fund and exclude AFFE and Interest
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1
Year: |
$108 |
3
Years: |
$337 |
5
Years: |
$585 |
10
Years: |
$1,294 |
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 the Total Annual Fund Operating Expenses
or in the Example, affect the Fund’s performance. For the fiscal year ended
September 30, 2022, the Fund’s portfolio turnover rate was 65% of the average value of its
portfolio.
Principal Investment Strategies
The
Fund’s investment strategy is two-fold: (1) preferred securities, and (2) credit
spread options on an S&P 500 ETF or Index; both of which are described in
detail below.
Preferred
Investment Strategy
The
Fund pursues its objective primarily by investing in issues of preferred
securities and debt securities that the Fund’s adviser, Innovative Portfolios,
LLC (the “Adviser”), believes to be undervalued. In making this determination,
the Adviser evaluates the fundamental characteristics of an issuer, including an
issuer’s creditworthiness, and also takes into account prevailing market
factors. In analyzing credit quality, the Adviser considers not only fundamental
analysis, but also an issuer’s corporate and capital structure and the placement
of the preferred or debt securities within that structure. In evaluating
relative value, the Adviser also takes into account call, conversion and other
structural security features, in addition to such factors as the likely
directions of credit ratings and relative value versus other fixed-income
security classes.
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus any
borrowings made for investment purposes) in a portfolio of preferred securities
issued by U.S. and non-U.S. companies, including traditional preferred
securities; hybrid preferred securities that have investment and economic
characteristics of both preferred stock and debt securities; floating rate
preferred securities; convertible preferred securities; and shares of other
open-end (including other exchange-traded funds (“ETFs”)) and
closed-
end
funds that invest primarily in preferred securities. The Fund may invest in
preferred securities of all issuer capitalizations. The Fund may also invest in
publicly-traded partnerships (“PTPs”).
The
Fund intends to focus its investments in the Financials Sector (including
securities issued by banks, diversified financials, and insurance companies). In
addition, the Fund also may focus its investments in other sectors such as (but
not limited to) energy, industrials, utilities, health care and
telecommunications. The Adviser retains broad discretion to allocate the Fund’s
investments across various sectors and industries.
The
Fund may invest in preferred equity or debt securities of any maturity or credit
rating, including investment grade securities, below investment grade securities
(commonly known as “junk bonds”) and unrated securities. The Fund generally
seeks to maintain a minimum weighted average senior debt rating of the issuing
companies in which it invests of BBB-, which the Fund considers to be investment
grade. Although a company’s senior debt rating may be BBB-, an underlying
security issued by such company in which the Fund invests may have a lower
rating than BBB-. A security must be rated no lower than B- or B3 in order to be
purchased by the Fund (or if unrated, of similar quality in the opinion of the
Adviser).
S&P
500 Options Investment Strategy
The
Fund intends to maintain approximately 10% asset exposure to a credit spread
options strategy, although market conditions may dictate additional exposure.
The Fund seeks to achieve a credit spread on an S&P 500 ETF or Index by
selling/writing an out-of-the-money (an out-of-the-money put option is one whose
strike price is lower than the market price of the underlying reference asset of
the option) short put option each month while simultaneously purchasing an
out-of-the-money long put option below the short option position. A credit
spread is an options strategy that involves the purchase of one option and a
sale of another option in the same class and with the same expiration but
different strike prices. Such a strategy results in a net credit for entering
the option position, and is profitable when the spreads narrow or expire. By
buying a protective long put option, the Fund seeks to hedge any significant
downside risk posed by the short put option. The short option premium is derived
from “implied volatility” — the expected level of volatility priced into an
option — and is higher, on average, than the volatility actually experienced on
the security underlying the option.
For
example, an option buyer typically pays a premium to an option seller, such as
the Fund, that is priced based on the expected amount by which the value of the
instrument underlying the option will move up or down. On average, this expected
amount of value movement (or implied volatility) is generally greater than the
amount by which the value of the underlying instrument actually moves (realized
volatility). By entering into derivatives contracts, the Fund is, in essence,
accepting a risk that its counterparty seeks to transfer in exchange for the
premium received by the Fund under the derivatives contract. By providing this
risk transfer service, the Fund seeks to benefit over the long-term from the
difference between the level of volatility priced into the options it sells and
the level of volatility realized on the securities underlying those options.
There can be no assurance that the variance risk premium will be positive for
the Fund’s investments at any time or on average and over time.
The
premium paid for a long put option is typically priced based on the expected
amount by which the value of the instrument underlying the option will move up
or down. On average, this expected amount of value movement (or implied
volatility) is generally greater than the amount by which the value of the
underlying instrument actually moves (realized volatility). By entering into
this derivative contract, the Fund is, in essence, transferring a risk that its
counterparty seeks to accept in exchange for the premium received by the
counterparty under the derivatives contract. By transferring this risk to a
counterparty, the Fund seeks to benefit over the long-term from the difference
in premium collected on the short put option premium above and the long option
premium paid herein. There can be no assurance that the variance risk premium
will be positive for the Fund’s investments at any time or on average and over
time.
A
put option typically gives the option buyer the right to sell, and obligates the
option seller to purchase, a security at an agreed-upon price. Generally, the
Fund intends to sell put options that are out-of-the-money. Options that are
more substantially out-of-the-money generally would pay lower premiums than
options that are at or slightly out-of-the-money. By selling put options, the
Fund will sell protection against depreciation below the option exercise price
to the option purchaser in exchange for an option premium. If an option is
exercised, the Fund will either purchase or sell the security at the strike
price or pay to the option holder the difference between the strike price and
the current price level of the underlying equity security, ETF or index,
depending on the terms of the option.
The
potential returns of the Fund are generally limited to the amount of cash
(premiums) the Fund receives when selling short puts, net of any cash (premiums)
paid by the Fund to purchase long puts, plus the returns of the underlying
Investments in which the Fund invests.
When
the Fund enters into derivatives transactions, it is typically required to post
collateral to secure its payment or delivery obligations. The Fund invests as
indicated above in preferred securities. These securities will be used to meet
margin requirements on the Fund’s option writing strategy. The Fund may write
put options in respect of an underlying security in which the Fund does not have
a short position (so-called “naked” put options). The Fund may hold positions in
equities and ETFs to the extent necessary to meet margin requirements.
Generally, the investment goal is to write options with a target of 10% spread
notional exposure however
market conditions may dictate more notional
exposure. The Fund may be considered to have created investment leverage;
leverage increases the volatility of the Fund and may result in losses greater
than if the Fund had not been leveraged.
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 those of 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 (“NAV”),
trading price, yield, total return and/or ability to meet its investment
objective. The following risks could affect the value of your investment in
the Fund:
•Below
Investment Grade Securities Risk. The
Fund’s investments in below investment grade securities are subject to a greater
risk of loss of income and principal than higher grade debt securities. The
Fund’s investments in below investment grade securities also subject the Fund to
greater levels of interest rate, credit and liquidity risk than funds that do
not invest in such securities. Issuers of below investment grade securities are
often highly leveraged and are more vulnerable to changes in the economy. These
securities are considered predominately speculative with respect to the issuer’s
continuing ability to make principal and interest payments.
•Cybersecurity
Risk.
Cybersecurity incidents may allow an unauthorized party to gain access to Fund
assets or proprietary information, or cause the Fund, the Adviser, and/or other
service providers (including custodians and financial intermediaries) to suffer
data breaches or data corruption. Additionally, cybersecurity failures or
breaches of the electronic systems of the Fund, the Adviser, or the Fund’s other
service providers, market makers, Authorized Participants (“APs”), the Fund’s
primary listing exchange, or the issuers of securities in which the Fund invests
have the ability to disrupt and negatively affect the Fund’s business
operations, including the ability to purchase and sell Fund Shares, potentially
resulting in financial losses to the Fund and its shareholders.
•Derivatives
Securities Risk.
The Fund invests in options that derive their performance from the performance
of the S&P 500®
Index. Derivatives, such as the options in which the Fund invests, can be
volatile and involve various types and degrees of risks, depending upon the
characteristics of a particular derivative. Derivatives may entail investment
exposures that are greater than their cost would suggest, meaning that a small
investment in a derivative could have a substantial impact on the performance of
the Fund. The Fund could experience a loss if its derivatives do not perform as
anticipated, or are not correlated with the performance of their underlying
asset or if the Fund is unable to purchase or liquidate a position because of an
illiquid secondary market. The market for many derivatives is, or suddenly can
become, illiquid. Changes in liquidity may result in significant, rapid, and
unpredictable changes in the prices for derivatives.
•Distribution
Policy Risk.
The Fund’s distributions in respect of any period may exceed the amount of the
Fund’s income and gains for that period. In that case, some or all of the Fund’s
distributions may constitute a return of capital to shareholders. It is possible
for the Fund to suffer substantial investment losses and simultaneously
experience additional asset reductions as a result of its distributions to
shareholders. A return of capital distribution generally will not be taxable but
will decrease the shareholder’s cost basis in the shares of the Fund and will
result in a higher capital gain or lower capital loss when those shares on which
the distribution was received are sold. Once a shareholder’s cost basis is
reduced to zero, further distributions will be treated as capital gain, if the
shareholder holds shares of the Fund as capital assets. A distribution
constituting a return of capital is not a distribution of income or capital
gains earned by the Fund and should not be confused with the Fund’s “yield” or
“income.”
•Equity
Market Risk. The
trading prices of equity securities and other instruments fluctuate in response
to a variety of factors. The Fund’s NAV and market price may fluctuate
significantly in response to these and other factors. As a result, an investor
could lose money over short or long periods of time.
•ETF
Risks.
The Fund is an ETF and invests in other ETFs, and, as a result of this
structure, is exposed directly or indirectly 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 APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. Shares may trade at a material discount to NAV and
possibly face delisting if either: (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 Risk.
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 Risk. 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
Risk. Although
Shares are listed for trading on the Cboe BZX Exchange, 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.
•Financials
Sector Risk. The
Fund’s investments are exposed to issuers conducting business in the Financials
Sector. The Fund is subject to the risk that the securities of such issuers will
underperform the market as a whole due to legislative or regulatory changes,
adverse market conditions and/or increased competition affecting the Financials
Sector. The performance of companies in the Financials Sector may be adversely
impacted by many factors, including, among others, government regulations,
economic conditions, credit rating downgrades, changes in interest rates, and
decreased liquidity in credit markets. The Financials Sector has experienced
significant losses in the recent past, and the impact of more stringent capital
requirements and of recent or future regulation on any individual financial
company or on the Financials Sector as a whole cannot be predicted.
•Fixed
Income Risk.
◦Call
Risk.
During periods of falling interest rates, an issuer of a callable bond held by
the Fund may “call” or repay the security before its stated maturity, and the
Fund may have to reinvest the proceeds at lower interest rates, resulting in a
decline in the Fund’s income.
◦Credit
Risk.
Debt issuers and other counterparties may not honor their obligations or may
have their debt downgraded by ratings agencies.
◦Extension
Risk.
During periods of rising interest rates, certain debt obligations will be paid
off substantially more slowly than originally anticipated and the value of those
securities may fall sharply, resulting in a decline in the Fund’s income and
potentially in the value of the Fund’s investments.
◦Interest
Rate Risk.
An increase in interest rates may cause the value of fixed-income securities
held by the Fund to decline. The Fund may be subject to a greater risk of rising
interest rates due to the recent historically low rates and the effect of
potential government fiscal policy initiatives and resulting market reaction to
those initiatives.
Variable
and floating rate securities may increase or decrease in value in response to
changes in interest rates, although generally to a lesser degree than
fixed-income securities.
◦Floating
Rate Notes Risk.
Securities with floating or variable interest rates can be less sensitive to
interest rate changes than securities with fixed interest rates, but may decline
in value if their interest rates do not rise as much, or as quickly, as interest
rates in general. Conversely, floating rate securities will not generally
increase in value if interest rates decline. A decline in interest rates may
result in a reduction of income received from floating rate securities held by
the Fund and may adversely affect the value of the Fund’s shares. Generally,
floating rate securities carry lower yields than fixed notes of the same
maturity. The interest rate for a floating rate note resets or adjusts
periodically by reference to a benchmark interest rate. The impact of interest
rate changes on floating rate investments is typically mitigated by the periodic
interest rate reset of the investments. Securities with longer durations tend to
be more sensitive to interest rate changes, usually making them more volatile
than securities with shorter durations. Floating rate notes generally are
subject to legal or contractual restrictions on resale, may trade infrequently,
and their value may be impaired when the Fund needs to liquidate such loans.
Benchmark interest rates, such as the LIBOR, may not accurately track market
interest rates.
◦Income
Risk. The
Fund’s income may decline if interest rates fall. This decline in income can
occur because most of the debt instruments held by the Fund will have floating
or variable interest rates.
◦Prepayment
and Extension Risk: The
risk that changes in interest rates, credit spreads or other factors will result
in the call (repayment) of a debt instrument before it is expected. The Fund may
have to invest the proceeds in lower yielding securities or that expectations of
such early call will negatively impact the market price of the security.
Extension risk is the risk that changes in the interest rates or credit spreads
may result in lowering call expectations, which can cause prices to
fall.
•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 also
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 also is 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
Fund’s 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.
•Implied
Volatility Risk. When
the Fund sells an option, it gains the amount of the premium it receives, but
also incurs a liability representing the value of the option it has sold until
the option is either exercised and finishes “in the money,” meaning it has value
and can be sold, or the option expires worthless, or the expiration of the
option is “rolled,” or extended forward. The value of the options in which the
Fund invests is based partly on the volatility used by market participants to
price such options (i.e.,
implied volatility). Accordingly, increases in the implied volatility of such
options will cause the value of such options to increase (even if the prices of
the options’ underlying stocks do not change), which will result in a
corresponding increase in the liabilities of the Fund under such options and
thus decrease the Fund’s NAV.
•Large
Shareholder Risk. To
the extent a large proportion of the shares of the Fund are highly concentrated
or held by a small number of shareholders (or a single shareholder), including
funds or accounts over which the Adviser or an affiliate of the Adviser has
investment discretion, the Fund is subject to the risk that these shareholders
will redeem Fund Shares in large amounts rapidly or unexpectedly. In addition, a
third-party investor, the Adviser or an affiliate of the Adviser, an authorized
participant, a lead market maker, or another entity may invest in the Fund and
hold its investment solely to facilitate commencement of the Fund or to
facilitate the Fund’s achieving a specified size or scale (i.e., a seed
investor). In such case, an investor may own a majority of the Fund’s shares.
Similar to other large shareholders, there is a risk that such seed investors
may redeem all or a significant portion of their investment in the Fund with
little or no notice to the Fund. Any such redemptions could adversely affect the
ability of the Fund to conduct its investment program, including by causing the
Fund to dispose of investments at unfavorable times or increase its cash
holdings, diluting its investment returns. An unexpected large redemption also
may have an adverse effect on the market price of the Fund’s
Shares.
•Leveraging
Risk.
The use of leverage, such as that embedded in options, could magnify the Fund’s
gains or losses.
•LIBOR
Discontinuance or Unavailability Risk.
The CLO debt in which the Fund may invest bears interest based upon LIBOR
(London InterBank Offered Rate), which is intended to represent the rate at
which contributing banks may obtain short-term borrowings from each other in the
London interbank market. On March 5, 2021, the U.K. Financial Conduct
Authority (“FCA”) publicly announced that (i) immediately after
December 31, 2021, publication of the 1-week and 2-month U.S. Dollar LIBOR
settings will permanently cease (which took place as scheduled);
(ii) immediately after June 30, 2023, publication of the overnight and
12-month U.S. Dollar LIBOR settings will permanently cease; and
(iii) immediately after June 30, 2023, the 1-month, 3-month and
6-month U.S. Dollar LIBOR settings will cease to be provided or, subject to the
FCA’s consideration of the case, be provided on a synthetic basis and no longer
be representative of the underlying market and economic reality they are
intended to measure and that representativeness will not be restored. There is
no assurance that the dates announced by the FCA will not change or that the
administrator of LIBOR and/or regulators will not take further action that could
impact the availability, composition or characteristics of LIBOR or the
currencies and/or tenors for which LIBOR is published, and we recommend that you
consult your advisors to stay informed of any such developments. Public and
private sector industry initiatives are currently underway to implement new or
alternative reference rates to be used in place of LIBOR, such as the Secured
Overnight Financing Rate (SOFR). There is no assurance that any such alternative
reference rate will be similar to or produce the same value or economic
equivalence as LIBOR or that it will have the same volume or liquidity as did
LIBOR prior to its discontinuance or unavailability, which may affect the value
or liquidity or return on certain of the Fund’s investments and result in costs
incurred in connection with closing out positions and entering into new trades.
•Liquidity
Risk. Liquidity
risk refers to the possibility that the Fund may not be able to buy or sell a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash, or
decline an investment opportunity, any of which could have a negative effect on
the Fund’s performance. Infrequent trading of securities also may lead to an
increase in their price volatility.
•Management
Risk. The
Adviser continuously evaluates the Fund’s holdings, purchases and sales with a
view to achieving the Fund’s investment objective. However, achievement of the
stated investment objective cannot be guaranteed. The Adviser’s judgment about
the markets, the economy, or companies may not anticipate actual market
movements, economic conditions or company performance, and these factors may
affect the return on your investment.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing Risk.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization
companies
also may be unable to respond quickly to new competitive challenges, such as
changes in technology and consumer tastes.
◦Mid-Capitalization
Investing Risk.
The securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies. 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.
◦Small-Capitalization
Investing Risk.
The securities of small-capitalization companies may be more vulnerable to
adverse issuer, market, political, or economic developments than securities of
large- or mid-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than large- or mid-capitalization stocks or the
stock market as a whole. There is typically less publicly available information
concerning smaller-capitalization companies than for larger, more established
companies.
•Market
Risk. The
trading prices of securities and other instruments fluctuate in response to a
variety of factors. These factors include events impacting the entire market or
specific market segments, such as political, market and economic developments,
as well as events that impact specific issuers. The Fund’s NAV and market price,
like security and commodity prices generally, may fluctuate significantly in
response to these and other factors. As a result, an investor could lose money
over short or long periods of time. U.S. and international markets have
experienced significant periods of volatility in recent years due to a number of
these factors, including the impact of the COVID-19 pandemic and related public
health issues, growth concerns in the U.S. and overseas, uncertainties regarding
interest rates, trade tensions and the threat of tariffs imposed by the U.S. and
other countries. 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.
These developments as well as other events could result in further market
volatility and negatively affect financial asset prices, the liquidity of
certain securities and the normal operations of securities exchanges and other
markets. It is unknown how long circumstances related to the COVID-19 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.
•Options
Risk.
Selling (writing) and buying options are speculative activities and entail
greater than ordinary investment risks. The Fund’s use of put options can lead
to losses because of adverse movements in the price or value of the underlying
asset, which may be magnified by certain features of the options. When selling a
put option, the Fund will receive a premium; however, this premium may not be
enough to offset a loss incurred by the Fund if the price of the underlying
asset is below the strike price by an amount equal to or greater than the
premium. Purchasing of put options involves the payment of premiums, which may
adversely affect the Fund’s performance. Purchasing a put option gives the
purchaser of the option the right to sell a specified quantity of an underlying
asset at a fixed exercise price over a defined period of time. Purchased put
options may expire worthless resulting in the Fund’s loss of the premium it paid
for the option.
The
value of an option may be adversely affected if the market for the option
becomes less liquid or smaller, and will be affected by changes in the value or
yield of the option’s underlying asset, an increase in interest rates, a change
in the actual or perceived volatility of the stock market or the underlying
asset and the remaining time to expiration. Additionally, the value of an option
does not increase or decrease at the same rate as the underlying asset. The
Fund’s use of options may reduce the Fund’s ability to profit from increases in
the value of the underlying asset. If the price of the underlying asset of an
option is above the strike price of a written put option, the value of the
option, and consequently of the Fund, may decline significantly more than if the
Fund invested directly in the underlying asset instead of using options.
Positions
may be bought back for a gain or loss and rolled out in the future to create a
new spread, and this may occur outside of the normal systematic strategy
execution. In a strong market decline where the buyback involves an “in the
money” (i.e., an option with a strike price less than the current level of the
benchmark index) option, there may be a “debit” roll, whereby the cash needed to
close out the option position exceeds the new sale’s proceeds.
•Other
Investment Companies Risk. The
risks of investment in other investment companies, including ETFs, typically
reflect the risks of the types of instruments in which the investment companies
invest. By investing in another investment company, the Fund becomes a
shareholder of that investment company and bears its proportionate share of the
fees and expenses of the other investment company. Investments in ETFs also are
subject to the “ETF Risks” described above.
•Preferred
Securities Risk.
Preferred securities may pay fixed or adjustable rates of return and are subject
to many of the risks associated with debt securities (e.g.,
interest rate risk, call risk and extension risk). In addition, preferred
securities are subject to issuer-specific and market risks applicable generally
to equity securities. Because many preferred securities allow the issuer to
convert their preferred security into common stock, preferred securities are
often sensitive to declining common stock values. A company’s preferred
securities generally pay dividends only after the company makes required
payments to holders of its bonds
and
other debt. For this reason, the value of preferred securities will usually
react more strongly than bonds and other debt to actual or perceived changes in
the company’s financial condition or prospects. Preferred securities of smaller
companies may be more vulnerable to adverse developments than preferred stock of
larger companies. In addition, preferred securities are subject to other risks,
such as having no or limited voting rights, being subject to special redemption
rights, having distributions deferred or skipped, having floating interest rates
or dividends, which may result in a decline in value in a falling interest rate
environment, having limited liquidity, changing or unfavorable tax treatments
and possibly being issued by companies in heavily regulated industries.
Preferred securities that do not have a maturity date are considered to be
perpetual investments.
•Publicly
Traded Partnership Risk. Investing
in PTPs (including master limited partnerships) involves special risks in
addition to those typically associated with publicly traded companies. PTPs are
exposed to the risks of their underlying assets, which in many cases includes
the same types of risks as energy and natural resources companies, such as
commodity pricing risk, supply and demand risk and depletion and exploration
risk. PTPs are also subject to capital markets risk, which is the risk that they
may be unable to raise capital to execute their growth strategies. PTPs are also
subject to tax risk, which is the risk that PTPs may lose their partnership
status for tax purposes. The Fund’s ability to make investments in certain PTPs,
including master limited partnerships, can be limited by the Fund’s intention to
qualify as a regulated investment company, and if the Fund does not
appropriately limit such investments or if such investments are re-characterized
for U.S. federal income tax purposes, the Fund’s status as a regulated
investment company may be jeopardized.
•REIT
Risk. Investment
in real estate companies, including REITs, exposes the Fund to the risks of
owning real estate directly. Real estate is highly sensitive to general and
local economic conditions and developments. The U.S. real estate market may
experience and has, in the past, experienced a decline in value, with certain
regions experiencing significant losses in property values. 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.
Exposure to such real estate may adversely affect Fund performance. Further,
REITs are dependent upon specialized management skills, and their investments
may be concentrated in relatively few properties, or in a small geographic area
or a single property type. REITs also are subject to heavy cash flow dependency
and, as a result, are particularly reliant on the proper functioning of capital
markets. A variety of economic and other factors may adversely affect a lessee's
ability to meet its obligations to a REIT. In the event of a default by a
lessee, the REIT may experience delays in enforcing its rights as a lessor and
may incur substantial costs associated in protecting its investments. In
addition, a REIT could fail to qualify for favorable regulatory
treatment.
•Tax
Risk.
The
writing of options by the Fund may significantly reduce or eliminate its ability
to make distributions eligible to be treated as qualified dividend income or
eligible for the dividends received deduction for corporate shareholders.
Options entered into by the Fund may also be subject to the federal tax rules
applicable to straddles under the Internal Revenue Code of 1986, as amended (the
“Code”). If positions held by the Fund were treated as “straddles” for federal
income tax purposes, or the Fund’s risk of loss with respect to a position was
otherwise diminished as set forth in Treasury regulations, dividends on stocks
that are a part of such positions would not constitute qualified dividend income
subject to such favorable income tax treatment in the hands of non-corporate
shareholders or eligible for the dividends received deduction for corporate
shareholders. In addition, generally, straddles are subject to certain rules
that may affect the amount, character and timing of the Fund’s recognition of
gains and losses with respect to straddle positions.
•U.S.
Federal Reserve Policy Risk. In
the 1970 and early 1980s interest rates increased to combat inflation under
former Federal Reserve Chairman Paul Volker. Since peaking in 1981, interest
rates were on a downward trajectory creating a 40-year bull market in fixed
income with rates bottoming in 2020 during the COVID-19 crisis. Since the
Financial Crisis, the Federal Reserve began a program of Quantitative Easing to
increase cash in the economy and keep interest costs low. However, these
accommodative policies have changed materially in 2022. To combat inflation, the
Federal Reserve has been quickly increasing interest rates and has begun
Quantitative Tightening (QT) of its Balance Sheets. There has been limited
periods where interest rates increased rapidly and zero history of QT. As a
result, it is difficult to predict the impact of these changes in interest rates
and the slope of yield curve. These quickly changing conditions have materially
impacted the capital market with future developments still greatly unknown. The
weakening environment may cause decrease in valuations, increased volatility,
and lower liquidity, especially in fixed-income markets. While some of these
risks are limited to fixed-income securities, the interconnectedness of the
capital markets has and will likely continue causing an impact in other asset
classes such as equities, FX, and commodities. The ending of historically low
interest rate environment may heighten these
risks.
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. The Fund’s past performance,
before and after taxes, does not necessarily indicate how the Fund will perform
in the future. Updated performance information is available on
the Fund’s website at www.innovativeportfolios.com.
As
a result of a reorganization that occurred on March 7, 2022, the Fund acquired
all of the assets and liabilities of the Preferred-Plus (the “Preferred-Plus
Predecessor Fund”), a series of Collaborative Investment Series Trust, an
open-end investment company registered under the Investment Company Act of 1940
(the “1940 Act”) that had the same investment objective and strategies as the
Fund since the Preferred-Plus Predecessor Fund’s inception on December 24, 2018.
The Fund assumed the NAV and performance history of the Preferred-Plus
Predecessor Fund. Performance
shown in the bar chart and table for periods prior to March 7, 2022 is that of
the Preferred-Plus Predecessor Fund and is not the performance of the
Fund.
The Fund’s objective, policies, guidelines, and restrictions are in all material
respects equivalent to those of the Preferred-Plus Predecessor Fund, which was
created for reasons entirely unrelated to the establishment of a performance
record.
The
Preferred-Plus Predecessor Fund’s past performance is not necessarily an
indication of how the Fund will perform in the
future.
Calendar Year Total
Returns
During the period of time shown
in the bar chart, the highest quarterly return
was 14.08% for the quarter ended June 30, 2020, and the
lowest quarterly return was
-19.85% for the quarter ended March 31,
2020.
Average
Annual Total Returns
(for
periods ended December 31, 2022)
|
|
|
|
|
|
|
| |
Preferred-Plus
ETF |
1-Year |
Since
Inception* |
Return Before
Taxes |
-22.52% |
2.23% |
Return After Taxes on
Distributions |
-23.49% |
0.31% |
Return After Taxes on Distributions and
Sale of Shares |
-12.51% |
1.17% |
ICI
BofA Core Plus Fixed Rate Preferred Securities Index**
(reflects no deduction for
fees, expenses, or taxes) |
-20.71% |
1.31% |
S&P
U.S. Preferred Stock Total Return Index**
(reflects
no deduction for fees, expenses, or taxes) |
-18.93% |
2.97% |
*
The Preferred-Plus
Predecessor Fund commenced operations on December 24,
2018.
**
Effective March 7, 2022,
the Preferred-Plus Predecessor Fund changed its primary benchmark from the
S&P U.S. Preferred Stock Total Return Index, which does not impose minimum
credit ratings, to the ICE BofA Core Plus Fixed Rate Preferred Securities Index,
because its minimum credit rating was more appropriate to the strategy of the
Preferred-Plus Predecessor Fund and the Fund, which also imposes a minimum
credit rating.
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
|
|
|
|
| |
Adviser |
Innovative
Portfolios, LLC |
Portfolio
Managers |
JR
Humphreys, CFA, CAIA, Senior Portfolio Manager of the Adviser, has served
as a portfolio manager of the Fund since its inception in March 2022 and
previously served as a portfolio manager of the Preferred-Plus Predecessor
Fund from its inception on December 24, 2018 through March 7, 2022, when
the Preferred-Plus Predecessor Fund reorganized into the
Fund. |
|
Dave
Gilreath, CFP, Managing Director & Chief Investment Officer of the
Adviser, has served as a portfolio manager of the Fund since its inception
in March 2022 and previously served as a portfolio manager of the
Preferred-Plus Predecessor Fund from its inception on December 24, 2018
through March 7, 2022, when the Preferred-Plus Predecessor Fund
reorganized into the Fund. |
Purchase
and Sale of Shares
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.
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through a broker or dealer 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).
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares (the “bid” price) and the
lowest price a seller is willing to accept for Shares (the “ask” price) when
buying or selling Shares in the secondary market. The difference in the bid and
ask prices is referred to as the “bid-ask spread.”
Recent
information regarding the Fund’s NAV, market price, how often Shares traded on
the Exchange at a premium or discount, and bid-ask spreads can be found on the
Fund’s website at www.innovativeportfolios.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
individual retirement account (“IRA”) or other tax-advantaged account.
Distributions in excess of the Fund’s current and accumulated earnings and
profits are treated as a tax-free return of capital to the extent of your basis
in the shares and as capital gain thereafter. Distributions on investments made
through tax-deferred arrangements may be taxed later upon withdrawal of assets
from those accounts. See “Dividends, Distributions, and Taxes - Dividends and
Distributions” for more information.
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.
|
| |
DIVIDEND
PERFORMERS ETF - FUND SUMMARY |
Investment Objective
The Dividend Performers ETF’s
(the “Fund”) investment objective is to seek to provide income. The Fund’s
secondary objective is capital appreciation.
Fees and Expenses of the Fund
This
table describes the fees and expenses that 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.
|
|
|
|
|
|
|
| |
Shareholder
Fees
(fees
paid directly from your investment) |
| None |
Annual
Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your
investment) |
|
| |
Management
Fees |
| 0.85% |
Distribution
and/or Service (12b-1) Fees |
| 0.00% |
Other
Expenses |
| 0.37% |
Interest
Expense |
0.37% |
|
Total
Annual Fund Operating Expenses1,2 |
| 1.22% |
1
Restated to reflect the
Fund’s current unified management fee as if it had been in effect during the
previous fiscal year.
2
Total Annual Fund
Operating Expenses do not correlate to the expense ratios in the Fund’s
Financial Highlights because the Financial Highlights include only the direct
operating expenses incurred by the Fund and exclude Interest
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
1
Year: |
$124 |
3
Years: |
$387 |
5
Years: |
$670 |
10
Years: |
$1,477 |
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 the Total Annual Fund Operating Expenses
or in the Example, affect the Fund’s performance. For the fiscal year ended
September 30, 2022, the Fund’s portfolio turnover rate was 74% of the average value of its
portfolio.
Principal Investment Strategies
The
Fund’s investment strategy is twofold: (1) investing in dividend paying U.S.
equity securities, and (2) credit spread options on an S&P 500 ETF or Index;
both of which are described in detail below.
Dividend
Investment Strategy
The
Fund will invest in common stocks of dividend paying U.S. companies. The Fund
invests, generally, in large capitalization companies ($10 billion or higher)
but has the ability to invest in income-producing equity securities of all
capitalizations with ten years of rising dividend payments. The Fund may also
invest in equity real estate investment trusts (“REITs”). Under normal market
conditions, the Fund will invest at least 80% of its net assets (plus any
borrowings for investment purposes) in dividend-paying securities.
The
Fund’s adviser, Innovative Portfolios, LLC (the “Adviser”), invests the Fund’s
assets in companies that have a ten-year history of paying dividends, appear to
have the ability to continue to pay dividends, have a history of increasing
their dividends, and meet certain risk standards (as discussed in more detail
below). The Adviser will generally sell a security if the security is no longer
expected to meet the Adviser’s dividend or growth expectations or if the risk
characteristics place the equity in higher risk deciles.
The
selection of dividend-paying stocks is based on the universe of companies based
in the U.S. with a history of increasing dividends for 10 consecutive years
(Dividend Achievers). That list is further sorted by the companies with the best
downside risk (lowest) characteristics. Historically, the companies with lower
downside risk scores have potential for long-term growth and have exhibited
lower
volatility and lower downside risk. The downside risk score utilizes a
fundamental value approach, evaluating the security on certain factors
(e.g.,
free cash-flow, revenue stability, profitability changes and trend, leverage,
stock price volatility and correlation, and earning surprise persistency). These
variables are used to evaluate downside risk on the securities, meaning the risk
of the stock versus the potential return, with the objective to avoid downside
risk. The portfolio is periodically rebalanced where companies with higher risk
characteristics are exchanged for companies with lower risk characteristics. The
quantitative nature of this screening process can lead to sector over-or-under
weighting.
S&P
500 Options Strategy
The
Fund intends to maintain approximately 20% asset exposure to a credit spread
options strategy, although market conditions may dictate additional exposure.
The Fund seeks to achieve a credit spread on an S&P 500 ETF or Index by
selling/writing an out-of-the-money (an out-of-the-money put option is one whose
strike price is lower than the market price of the underlying reference asset of
the option) short put option each month while simultaneously purchasing an
out-of-the-money long put option below the short option position. A credit
spread is an options strategy that involves the purchase of one option and a
sale of another option in the same class and with the same expiration but
different strike prices. Such a strategy results in a net credit for entering
the option position, and is profitable when the spreads narrow or expire. By
buying a protective long put option, the Fund seeks to hedge any significant
downside risk posed by the short put option.
The
short option premium is derived from “implied volatility” — the expected level
of volatility priced into an option — and is higher, on average, than the
volatility actually experienced on the security underlying the option. For
example, an option buyer typically pays a premium to an option seller, such as
the Fund, that is priced based on the expected amount by which the value of the
instrument underlying the option will move up or down. On average, this expected
amount of value movement (or implied volatility) is generally greater than the
amount by which the value of the underlying instrument actually moves (realized
volatility). By entering into derivatives contracts, the Fund is, in essence,
accepting a risk that its counterparty seeks to transfer in exchange for the
premium received by the Fund under the derivatives contract. By providing this
risk transfer service, the Fund seeks to benefit over the long-term from the
difference between the level of volatility priced into the options it sells and
the level of volatility realized on the securities underlying those options.
There can be no assurance that the variance risk premium will be positive for
the Fund’s investments at any time or on average and over time.
The
premium paid for a long put option is typically priced based on the expected
amount by which the value of the instrument underlying the option will move up
or down. On average, this expected amount of value movement (or implied
volatility) is generally greater than the amount by which the value of the
underlying instrument actually moves (realized volatility). By entering into
this derivative contract, the Fund is, in essence, transferring a risk that its
counterparty seeks to accept in exchange for the premium received by the
counterparty under the derivatives contract. By transferring this risk to a
counterparty, the Fund seeks to benefit over the long-term from the difference
in premium collected on the short put option premium above and the long option
premium paid herein. There can be no assurance that the variance risk premium
will be positive for the Fund’s investments at any time or on average and over
time.
A
put option typically gives the option buyer the right to sell, and obligates the
option seller to purchase, a security at an agreed-upon price. Generally, the
Fund intends to sell put options that are out-of-the-money. Options that are
more substantially out-of-the-money generally would pay lower premiums than
options that are at or slightly out-of-the-money. By selling put options, the
Fund will sell protection against depreciation below the option exercise price
to the option purchaser in exchange for an option premium. If an option is
exercised, the Fund will either purchase or sell the security at the strike
price or pay to the option holder the difference between the strike price and
the current price level of the underlying equity security, ETF or index,
depending on the terms of the option.
The
potential returns of the Fund are generally limited to the amount of cash
(premiums) the Fund receives when selling short puts, net of any cash (premiums)
paid by the Fund to purchase long puts, plus the returns of the underlying
Investments in which the Fund invests.
When the Fund enters into derivatives
transactions, it is typically required to post collateral to secure its payment
or delivery obligations. The Fund invests as indicated above in common stocks of
dividend paying companies. These securities will be used to meet margin
requirements on the Fund’s option writing strategy. The Fund may write put
options in respect of an underlying security in which the Fund does not have a
short position (so-called “naked” put options). The Fund may hold positions in
equities and ETFs to the extent necessary to meet margin requirements.
Generally, the investment goal is to write options with a target of 20% spread
notional exposure however market conditions may dictate more notional exposure.
The Fund may be considered to have created investment leverage; leverage
increases the volatility of the Fund and may result in losses greater than if
the Fund had not been leveraged.
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 those of 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 (“NAV”), trading price, yield, total return and/or
ability to meet its investment objective. The following risks could affect
the value of your investment in the Fund:
•Cybersecurity
Risk.
Cybersecurity incidents may allow an unauthorized party to gain access to Fund
assets or proprietary information, or cause the Fund, the Adviser, and/or other
service providers (including custodians and financial intermediaries) to suffer
data breaches or data corruption. Additionally, cybersecurity failures or
breaches of the electronic systems of the Fund, the Adviser, or the Fund’s other
service providers, market makers, Authorized Participants (“APs”), the Fund’s
primary listing exchange, or the issuers of securities in which the Fund invests
have the ability to disrupt and negatively affect the Fund’s business
operations, including the ability to purchase and sell Fund Shares, potentially
resulting in financial losses to the Fund and its shareholders.
•Derivatives
Securities Risk.
The Fund invests in options that derive their performance from the performance
of the S&P 500®
Index. Derivatives, such as the options in which the Fund invests, can be
volatile and involve various types and degrees of risks, depending upon the
characteristics of a particular derivative. Derivatives may entail investment
exposures that are greater than their cost would suggest, meaning that a small
investment in a derivative could have a substantial impact on the performance of
the Fund. The Fund could experience a loss if its derivatives do not perform as
anticipated, or are not correlated with the performance of their underlying
asset or if the Fund is unable to purchase or liquidate a position because of an
illiquid secondary market. The market for many derivatives is, or suddenly can
become, illiquid. Changes in liquidity may result in significant, rapid, and
unpredictable changes in the prices for derivatives.
•Distribution
Policy Risk.
The Fund’s distributions in respect of any period may exceed the amount of the
Fund’s income and gains for that period. In that case, some or all of the Fund’s
distributions may constitute a return of capital to shareholders. It is possible
for the Fund to suffer substantial investment losses and simultaneously
experience additional asset reductions as a result of its distributions to
shareholders. A return of capital distribution generally will not be taxable but
will decrease the shareholder’s cost basis in the shares of the Fund and will
result in a higher capital gain or lower capital loss when those shares on which
the distribution was received are sold. Once a shareholder’s cost basis is
reduced to zero, further distributions will be treated as capital gain, if the
shareholder holds shares of the Fund as capital assets. A distribution
constituting a return of capital is not a distribution of income or capital
gains earned by the Fund and should not be confused with the Fund’s “yield” or
“income.”
•Equity
Market Risk. The
trading prices of equity securities and other instruments fluctuate in response
to a variety of factors. The Fund’s NAV and market price may fluctuate
significantly in response to these and other factors. As a result, an investor
could lose money over short or long periods of time.
•ETF
Risks.
The Fund is an ETF and invests in other ETFs, and, as a result of this
structure, is exposed directly or indirectly 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 APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. Shares may trade at a material discount to NAV and
possibly face delisting if either: (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 Risk.
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 Risk. 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
Risk. Although
Shares are listed for trading on the Cboe BZX Exchange, 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.
•Implied
Volatility Risk. When
the Fund sells an option, it gains the amount of the premium it receives, but
also incurs a liability representing the value of the option it has sold until
the option is either exercised and finishes “in the money,” meaning it has value
and can be sold, or the option expires worthless, or the expiration of the
option is “rolled,” or extended forward. The value
of
the options in which the Fund invests is based partly on the volatility used by
market participants to price such options (i.e.,
implied volatility). Accordingly, increases in the implied volatility of such
options will cause the value of such options to increase (even if the prices of
the options’ underlying stocks do not change), which will result in a
corresponding increase in the liabilities of the Fund under such options and
thus decrease the Fund’s NAV.
•Large
Shareholder Risk. To
the extent a large proportion of the shares of the Fund are highly concentrated
or held by a small number of shareholders (or a single shareholder), including
funds or accounts over which the Adviser or an affiliate of the Adviser has
investment discretion, the Fund is subject to the risk that these shareholders
will redeem Fund Shares in large amounts rapidly or unexpectedly. In addition, a
third-party investor, the Adviser or an affiliate of the Adviser, an authorized
participant, a lead market maker, or another entity may invest in the Fund and
hold its investment solely to facilitate commencement of the Fund or to
facilitate the Fund’s achieving a specified size or scale (i.e., a seed
investor). In such case, an investor may own a majority of the Fund’s shares.
Similar to other large shareholders, there is a risk that such seed investors
may redeem all or a significant portion of their investment in the Fund with
little or no notice to the Fund. Any such redemptions could adversely affect the
ability of the Fund to conduct its investment program, including by causing the
Fund to dispose of investments at unfavorable times or increase its cash
holdings, diluting its investment returns. An unexpected large redemption also
may have an adverse effect on the market price of the Fund’s
Shares.
•Leveraging
Risk.
The use of leverage, such as that embedded in options, could magnify the Fund’s
gains or losses.
•Liquidity
Risk. Liquidity
risk refers to the possibility that the Fund may not be able to buy or sell a
security at a favorable price or time. Consequently, the Fund may have to accept
a lower price to sell a security, sell other securities to raise cash, or
decline an investment opportunity, any of which could have a negative effect on
the Fund’s performance. Infrequent trading of securities also may lead to an
increase in their price volatility.
•Management
Risk. The
Adviser continuously evaluates
the Fund’s holdings, purchases and sales with a view to achieving the Fund’s
investment objectives. However, achievement of the stated investment objective
cannot be guaranteed. The Adviser’s judgment about the markets, the economy, or
companies may not anticipate actual market movements, economic conditions or
company performance, and these factors may affect the return on your investment.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing Risk.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies also may be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing Risk.
The securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies. 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.
◦Small-Capitalization
Investing Risk.
The securities of small-capitalization companies may be more vulnerable to
adverse issuer, market, political, or economic developments than securities of
large- or mid-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than large- or mid-capitalization stocks or the
stock market as a whole. There is typically less publicly available information
concerning smaller-capitalization companies than for larger, more established
companies.
•Market
Risk. The
trading prices of securities and other instruments fluctuate in response to a
variety of factors. These factors include events impacting the entire market or
specific market segments, such as political, market and economic developments,
as well as events that impact specific issuers. The Fund’s NAV and market price,
like security and commodity prices generally, may fluctuate significantly in
response to these and other factors. As a result, an investor could lose money
over short or long periods of time. U.S. and international markets have
experienced significant periods of volatility in recent years due to a number of
these factors, including the impact of the COVID-19 pandemic and related public
health issues, growth concerns in the U.S. and overseas, uncertainties regarding
interest rates, trade tensions and the threat of tariffs imposed by the U.S. and
other countries. 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.
These developments as well as other events could result in further market
volatility and negatively affect financial asset prices, the liquidity of
certain securities and the normal operations of securities exchanges and other
markets. It is unknown how long circumstances related to the COVID-19 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.
•Options
Risk.
Selling (writing) and buying options are speculative activities and entail
greater than ordinary investment risks. The Fund’s use of put options can lead
to losses because of adverse movements in the price or value of the underlying
asset, which may be magnified by certain features of the options. When selling a
put option, the Fund will receive a premium; however, this premium may not be
enough to offset a loss incurred by the Fund if the price of the underlying
asset is below the strike price by an amount equal to or greater than the
premium. Purchasing of put options involves the payment of premiums, which may
adversely affect the Fund’s performance. Purchasing a put option gives the
purchaser of the option the right to sell a specified quantity of an underlying
asset at a fixed exercise price over a defined period of time. Purchased put
options may expire worthless resulting in the Fund’s loss of the premium it paid
for the option.
The
value of an option may be adversely affected if the market for the option
becomes less liquid or smaller, and will be affected by changes in the value or
yield of the option’s underlying asset, an increase in interest rates, a change
in the actual or perceived volatility of the stock market or the underlying
asset and the remaining time to expiration. Additionally, the value of an option
does not increase or decrease at the same rate as the underlying asset. The
Fund’s use of options may reduce the Fund’s ability to profit from increases in
the value of the underlying asset. If the price of the underlying asset of an
option is above the strike price of a written put option, the value of the
option, and consequently of the Fund, may decline significantly more than if the
Fund invested directly in the underlying asset instead of using options.
Positions
may be bought back for a gain or loss and rolled out in the future to create a
new spread, and this may occur outside of the normal systematic strategy
execution. In a strong market decline where the buyback involves an “in the
money” (i.e., an option with a strike price less than the current level of the
benchmark index) option, there may be a “debit” roll, whereby the cash needed to
close out the option position exceeds the new sale’s proceeds.
•Other
Investment Companies Risk. The
risks of investment in other investment companies, including ETFs, typically
reflect the risks of the types of instruments in which the investment companies
invest. By investing in another investment company, the Fund becomes a
shareholder of that investment company and bears its proportionate share of the
fees and expenses of the other investment company. Investments in ETFs also are
subject to the “ETF Risks” described above.
•REIT
Risk. Investment
in real estate companies, including REITs, exposes the Fund to the risks of
owning real estate directly. Real estate is highly sensitive to general and
local economic conditions and developments. The U.S. real estate market may
experience and has, in the past, experienced a decline in value, with certain
regions experiencing significant losses in property values. 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.
Exposure to such real estate may adversely affect Fund performance. Further,
REITs are dependent upon specialized management skills, and their investments
may be concentrated in relatively few properties, or in a small geographic area
or a single property type. REITs also are subject to heavy cash flow dependency
and, as a result, are particularly reliant on the proper functioning of capital
markets. A variety of economic and other factors may adversely affect a lessee's
ability to meet its obligations to a REIT. In the event of a default by a
lessee, the REIT may experience delays in enforcing its rights as a lessor and
may incur substantial costs associated in protecting its investments. In
addition, a REIT could fail to qualify for favorable regulatory treatment.
•Sector
Risk. The
Fund’s investing approach may result in an emphasis on certain sectors or
sub-sectors of the market at any given time. To the extent the Fund invests more
heavily in one sector or sub-sector of the market, it thereby presents a more
concentrated risk and its performance will be especially sensitive to
developments that significantly affect those sectors or sub-sectors. In
addition, the value of Shares may change at different rates compared to the
value of shares of a fund with investments in a more diversified mix of sectors
and industries. An individual sector or sub-sector of the market may have
above-average performance during particular periods, but may also move up and
down more than the broader market. The several industries that constitute a
sector may all react in the same way to economic, political or regulatory
events. The Fund’s performance could also be affected if the sectors or
sub-sectors do not perform as expected. The quantitative nature of the screening
process can lead to sector over-or-under weighting, and the lack of exposure to
one or more sectors or sub-sectors may adversely affect performance.
•Tax
Risk.
The
writing of options by the Fund may significantly reduce or eliminate its ability
to make distributions eligible to be treated as qualified dividend income or
eligible for the dividends received deduction for corporate shareholders.
Options entered into by the Fund may also be subject to the federal tax rules
applicable to straddles under the Internal Revenue Code of 1986, as amended (the
“Code”). If positions held by the Fund were treated as “straddles” for federal
income tax purposes, or the Fund’s risk of loss with respect to a position was
otherwise diminished as set forth in Treasury regulations, dividends on stocks
that are a part of such positions would not constitute qualified dividend income
subject to such favorable income tax treatment in the hands of non-corporate
shareholders or eligible for the dividends received deduction for corporate
shareholders. In addition, generally, straddles are subject to certain rules
that may affect the amount, character and timing of the Fund’s recognition of
gains and losses with respect to straddle positions.
•U.S.
Federal Reserve Policy Risk. In
the 1970 and early 1980s interest rates increased to combat inflation under
former Federal Reserve Chairman Paul Volker. Since peaking in 1981, interest
rates were on a downward trajectory creating a 40-year bull
market in fixed income with rates bottoming
in 2020 during the COVID-19 crisis. Since the Financial Crisis, the Federal
Reserve began a program of Quantitative Easing to increase cash in the economy
and keep interest costs low. However, these accommodative policies have changed
materially in 2022. To combat inflation, the Federal Reserve has been quickly
increasing interest rates and has begun Quantitative Tightening (QT) of its
Balance Sheets. There has been limited periods where interest rates increased
rapidly and zero history of QT. As a result, it is difficult to predict the
impact of these changes in interest rates and the slope of yield curve. These
quickly changing conditions have materially impacted the capital market with
future developments still greatly unknown. The weakening environment may cause
decrease in valuations, increased volatility, and lower liquidity, especially in
fixed-income markets. While some of these risks are limited to fixed-income
securities, the interconnectedness of the capital markets has and will likely
continue causing an impact in other asset classes such as equities, FX, and
commodities. The ending of historically low interest rate environment may
heighten these risks.
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. The Fund’s past performance,
before and after taxes, does not necessarily indicate how the Fund will perform
in the future. Updated performance information is available on
the Fund’s website at www.innovativeportfolios.com.
As
a result of a reorganization that occurred on March 7, 2022, the Fund acquired
all of the assets and liabilities of the Dividend Performers (the “Dividend
Performers Predecessor Fund”), a series of Collaborative Investment Series
Trust, an open-end investment company registered under the Investment Company
Act of 1940 (the “1940 Act”) that has had the same investment objectives and
strategies as the Fund since the Dividend Performers Predecessor Fund’s
inception on December 24, 2018. The Fund assumed the NAV and performance history
of the Dividend Performers Predecessor Fund. Performance
shown in the bar chart and table for periods prior to March 7, 2022 is that of
the Dividend Performers Predecessor Fund and is not the performance of the
Fund.
The Fund’s objectives, policies, guidelines, and restrictions are in all
material respects equivalent to those of the Dividend Performers Predecessor
Fund, which was created for reasons entirely unrelated to the establishment of a
performance record.
The Dividend Performers Predecessor Fund’s
past performance is not necessarily an indication of how the Fund will perform
in the future.
Calendar Year Total
Returns
During the period of time shown
in the bar chart, the highest quarterly return
was 54.69% for the quarter ended June 30, 2020, and the
lowest quarterly return was
-44.54% for the quarter ended March 31,
2020.
Average
Annual Total Returns
(for
periods ended December 31, 2022)
|
|
|
|
|
|
|
| |
Dividend
Performers ETF |
1-Year |
Since
Inception* |
Return Before
Taxes |
-21.40% |
14.11% |
Return After Taxes on
Distributions |
-21.49% |
12.22% |
Return After Taxes on Distributions and
Sale of Shares |
-12.60% |
10.63% |
NASDAQ
U.S. Broad Dividend Achievers Index
(reflects no deduction for
fees, expenses, or taxes) |
-5.78% |
14.66% |
S&P
500 Index
(reflects
no deduction for fees, expenses, or taxes) |
-18.11% |
14.94% |
*
The Dividend Performers
Predecessor Fund commenced operations on December 24,
2018.
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
|
|
|
|
| |
Adviser |
Innovative
Portfolios, LLC |
Portfolio
Managers |
Dave
Gilreath, CFP, Managing Director & Chief Investment Officer of the
Adviser, has served as a portfolio manager of the Fund since its inception
in March 2022 and previously served as a portfolio manager of the Dividend
Performers Predecessor Fund from its inception on December 24, 2018
through March 7, 2022, when the Dividend Performers Predecessor Fund
reorganized into the Fund. |
|
Tom
Kaiser, CFA, Portfolio Manager of the Adviser, has served as a portfolio
manager of the Fund since its inception in March 2022 and previously
served as a portfolio manager of the Dividend Performers Predecessor Fund
from November 2021 through March 7, 2022, when the Dividend Performers
Predecessor Fund reorganized into the
Fund. |
Purchase
and Sale of Shares
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.
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through a broker or dealer 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).
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares (the “bid” price) and the
lowest price a seller is willing to accept for Shares (the “ask” price) when
buying or selling Shares in the secondary market. The difference in the bid and
ask prices is referred to as the “bid-ask spread.”
Recent
information regarding the Fund’s NAV, market price, how often Shares traded on
the Exchange at a premium or discount, and bid-ask spreads can be found on the
Fund’s website at www.innovativeportfolios.com.
Tax
Information
The
Fund’s distributions are generally taxable as ordinary income, qualified
dividend income, or capital gains (or a combination), unless your investment is
in an individual retirement account (“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. See “Dividends,
Distributions, and Taxes - Dividends and Distributions” for more
information.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange-traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
ADDITIONAL
INFORMATION ABOUT THE FUNDS
Investment
Objectives
Each
Fund’s investment objective has been adopted as a non-fundamental investment
policy and may be changed by the Board of Trustees (the “Board”) of Listed Funds
Trust (the “Trust”) without shareholder approval upon written notice to
shareholders.
Principal
Investment Risks
An
investment in a Fund entails risks. A Fund could lose money, or its performance
could trail that of other investment alternatives. The following provides
additional information about each Fund’s principal risks. It is important that
investors closely review and understand these risks before making an investment
in a Fund. Each risk applies to each Fund unless otherwise specified. Just as in
each Fund’s summary section above, the principal risks below are presented in
alphabetical order to facilitate finding particular risks and comparing them
with those of other funds. Each risk summarized below is considered a “principal
risk” of investing in a Fund, regardless of the order in which it appears.
•Below
Investment Grade Securities Risk (Preferred-Plus
ETF only).
Securities
rated “BB” or below by S&P or “Ba” or below by Moody’s are known as high
yield securities and are commonly referred to as “junk bonds.” Such securities
entail greater price volatility and credit and interest rate risk than
investment-grade securities. Analysis of the creditworthiness of high yield
issuers is more complex than for higher-rated securities, making it more
difficult for the Adviser to accurately predict risk. There is a greater risk
with high yield fixed income securities that an issuer will not be able to make
principal and interest payments when due. If the Fund pursues missed payments,
there is a risk that Fund expenses could increase. In addition, lower-rated
securities may not trade as often and may be less liquid than higher-rated
securities, especially during periods of economic uncertainty or change. As a
result of all of these factors, these securities are generally considered to be
speculative.
•Cybersecurity
Risk.
With the increased use of technologies such as the Internet and the dependence
on computer systems to perform business and operational functions, funds (such
as a Fund) and their service providers may be prone to operational and
information security risks resulting from cyber-attacks and/or technological
malfunctions. In general, cyber-attacks are deliberate, but unintentional events
may have similar effects. Cyber-attacks include, among others, stealing or
corrupting data maintained online or digitally, preventing legitimate users from
accessing information or services on a website, releasing confidential
information without authorization, and causing operational disruption.
Cybersecurity incidents may allow an unauthorized party to gain access to Fund
assets or proprietary information, or cause a Fund, the Adviser, and/or other
service providers (including custodians and financial intermediaries) to suffer
data breaches or data corruption. Additionally, cybersecurity failures or
breaches of the electronic systems of a Fund, the Adviser, or a Fund’s other
service providers, market makers, APs, a Fund’s primary listing exchange, or the
issuers of securities in which such Fund invests have the ability to disrupt and
negatively affect the Fund’s business operations, including the ability to
purchase and sell Fund Shares, potentially resulting in financial losses to the
Fund and its shareholders. For instance, cyber-attacks or technical malfunctions
may interfere with the processing of shareholder or other transactions, affect a
Fund’s ability to calculate its NAV, cause the release of private shareholder
information or confidential Fund information, impede trading, cause reputational
damage, and subject a Fund to regulatory fines, penalties or financial losses,
reimbursement or other compensation costs, and additional compliance costs.
Cyber-attacks or technical malfunctions may render records of Fund assets and
transactions, shareholder ownership of Fund Shares, and other data integral to
the functioning of a Fund inaccessible or inaccurate or incomplete. A Fund may
also incur substantial costs for cybersecurity risk management in order to
prevent cyber incidents in the future. A Fund and its respective shareholders
could be negatively impacted as a result.
•Derivatives
Securities Risk.
Each Fund invests in options that derive their performance from the performance
of the S&P 500®
Index. Derivatives, such as the options in which a Fund invests, can be volatile
and involve various types and degrees of risks, depending upon the
characteristics of a particular derivative. Derivatives may entail investment
exposures that are greater than their cost would suggest, meaning that a small
investment in a derivative could have a substantial impact on the performance of
the Fund. A Fund could experience a loss if its derivatives do not perform as
anticipated, or are not correlated with the performance of their underlying
asset or if the Fund is unable to purchase or liquidate a position because of an
illiquid secondary market. The market for many derivatives is, or suddenly can
become, illiquid. Changes in liquidity may result in significant, rapid, and
unpredictable changes in the prices for derivatives.
•Distribution
Policy Risk.
During periods of market decline or where the Fund has prolonged negative
returns, all or a portion of distributions to shareholders may consist of a
return of capital. A return of capital is essentially a return of all or a
portion of a shareholder’s investment. In addition, even if the Fund’s capital
grows over time, such growth may be insufficient to enable the Fund to maintain
the amount of its targeted cash distributions without making a return of capital
to shareholders. Shareholders should note that return of capital will reduce
each shareholder’s cost basis in the Fund and result in a higher capital gain or
lower capital loss when the Shares on which the distribution was received are
sold. After a shareholder’s basis in the Shares has been reduced to zero,
distributions in excess of earnings and profits will be treated as gain from the
sale of the shareholder’s Shares.
•Equity
Market Risk.
The
trading prices of equity securities and other instruments fluctuate in response
to a variety of factors. A Fund’s NAV and market price may fluctuate
significantly in response to these and other factors. As a result, an investor
could lose money over short or long periods of time.
•ETF
Risks.
Each Fund is an ETF and they invest in other ETFs, and, as a result of the
structure, is exposed directly or indirectly 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 APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. Shares may trade at a material discount to NAV and
possibly face delisting if either: (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 Risk.
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 also will 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 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 Risk.
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 or 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. The market price of Shares during the trading day, like the price
of any exchange-traded security, includes a “bid/ask” spread charged by the
exchange specialist, market makers or other participants that trade Shares. In
times of severe market disruption, the bid/ask spread can increase
significantly. At those times, Shares are most likely to be traded at a discount
to NAV, and the discount is likely to be greatest when the price of Shares is
falling fastest, which may be the time that you most want to sell your Shares.
The Adviser believes that, under normal market conditions, large market price
discounts or premiums to NAV will not be sustained because of arbitrage
opportunities. To the extent a Fund holds securities that trade on foreign
exchanges that are closed when such Fund’s primary listing exchange is open,
such Fund is likely to experience premiums and discounts greater than those of
domestic ETFs.
◦Trading
Risk.
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.
•Fixed
Income Risk
(Preferred-Plus ETF only).
◦Call
Risk.
During periods of falling interest rates, an issuer of a callable bond held by
the Fund may “call” or repay the security before its stated maturity, and the
Fund may have to reinvest the proceeds at lower interest rates, resulting in a
decline in the Fund’s income.
◦Credit
Risk. Debt
issuers and other counterparties may not honor their obligations or may have
their debt downgraded by ratings agencies. This risk may be especially acute
with respect to high yield securities, whose issuers are particularly
susceptible to failure to meet repayment obligations principal under current
conditions. An issuer may suffer adverse changes in its financial condition or
be adversely affected by economic, political or social conditions that could
lower the credit quality (or the market’s perception of the credit quality) of a
security, leading to greater volatility in the price of the security
and
the value of the Fund. A change in the credit quality rating of a security can
affect its liquidity and make it more difficult for the Fund to sell. Although
credit quality may not accurately reflect the true credit risk of a security, a
change in the credit quality rating of a security or an issuer can have a rapid,
adverse effect on the instrument’s liquidity and make it more difficult for the
Fund to sell at an advantageous price or time. The risk of the occurrence of
these types of events is especially heightened under current conditions. Any
applicable limitation on the credit quality of a security in which the Fund may
invest is applied at the time the Fund purchases the security.
Credit
quality is a measure of the issuer’s expected ability to make all required
interest and principal payments in a timely manner. An issuer with the highest
credit rating has a very strong capacity with respect to making all payments. An
issuer with the second highest credit rating has a strong capacity to make all
payments, but the degree of safety is somewhat less. An issuer with the lowest
credit quality rating may be in default or have extremely poor prospects of
making timely payment of interest and principal. Investment grade securities are
fixed-income securities that have been determined by a nationally recognized
statistical rating organization to have a medium to high probability of being
paid (although there is always a risk of default), or which, if unrated, have
been determined by the Adviser to be of comparable quality. If nationally
recognized statistical rating organizations assign different ratings to the same
security, the Fund will use the higher rating for purposes of determining the
security’s credit quality.
◦Extension
Risk. During
periods of rising interest rates, certain debt obligations will be paid off
substantially more slowly than originally anticipated and the value of those
securities may fall sharply, resulting in a decline in the Fund’s income and
potentially in the value of the Fund’s investments.
◦Interest
Rate Risk.
Longer term fixed income instruments and zero coupon bonds are generally more
sensitive to interest rate changes than shorter-term fixed income instruments.
Generally, the longer the average maturity of the fixed income investments in
the Fund, the more the Fund’s share price will fluctuate in response to interest
rate changes. If an issuer calls or redeems an investment during a time of
declining interest rates, the Fund might have to reinvest the proceeds in an
investment offering a lower yield, and therefore might not benefit from any
increase in value as a result of declining interest rates. Securities with
floating interest rates generally are less sensitive to interest rate changes,
but may decline in value if their interest rates do not rise as much or as fast
as interest rates in general. Changes in government or central bank policy,
including changes in tax policy or changes in a central bank’s implementation of
specific policy goals, may have a substantial impact on interest rates, and
could have an adverse effect on prices for fixed income securities and on the
performance of the Fund. In particular, interest rates in the U.S. are near
historically low levels and as a result, fixed income securities markets may
experience heightened levels of interest rate risk. Any unexpected or sudden
reversal of the fiscal policy underlying current interest rate levels could
adversely affect the value of the Fund. There can be no guarantee that any
particular government or central bank policy will be continued, discontinued or
changed, nor that any such policy will have the desired effect on interest
rates.
There
is a risk that interest rates across the financial system may change, sometimes
unpredictably, in response to a variety of factors, such as central bank
monetary policies, inflation rates and general economic conditions. Very low or
negative interest rates may magnify the Fund’s susceptibility to interest rate
risk and diminish yield and performance (e.g.,
during periods of very low or negative interest rates, the Fund may be unable to
maintain positive returns). Changes in fixed-income or related market
conditions, including the potential for changes to interest rates and negative
interest rates, may expose fixed-income or related markets to heightened
volatility and reduced liquidity for Fund investments, which may be difficult to
sell at favorable times or prices, causing the value of the Fund’s investments
and NAV per share to decline. A rise in general interest rates also may result
in increased redemptions from the Fund. Very low, negative or changing interest
rates also may have unpredictable effects on securities markets in general,
directly or indirectly affecting the Fund’s investments, yield and
performance.
In
response to the outbreak of COVID-19, as with other serious economic
disruptions, governmental authorities and regulators are enacting significant
fiscal and monetary policy changes, including providing direct capital infusions
into companies, creating new monetary programs and lowering interest rates
considerably. These actions present heightened risks to fixed-income and debt
instruments, and such risks could be even further heightened if these actions
are unexpectedly or suddenly reversed or are ineffective in achieving their
desired outcomes. In addition, the current environment is exposing fixed-income
and debt markets to significant volatility and reduced liquidity for Fund
investments.
◦Floating
Rate Notes Risk.
Securities with floating or variable interest rates can be less sensitive to
interest rate changes than securities with fixed interest rates, but may decline
in value if their interest rates do not rise as much, or as quickly, as interest
rates in general. Conversely, floating rate securities will not generally
increase in value if interest rates decline. A decline in interest rates may
result in a reduction of income received from floating rate securities held by
the Fund and may adversely affect the value of the Fund’s shares. Generally,
floating rate securities carry lower yields than fixed notes of the same
maturity. The interest rate for a floating rate note resets or adjusts
periodically by reference to a benchmark interest rate. The impact of interest
rate changes on floating rate investments is typically mitigated by the periodic
interest rate reset of the
investments.
Securities with longer durations tend to be more sensitive to interest rate
changes, usually making them more volatile than securities with shorter
durations. Floating rate notes generally are subject to legal or contractual
restrictions on resale, may trade infrequently, and their value may be impaired
when the Fund needs to liquidate such loans. Benchmark interest rates, such as
the LIBOR, may not accurately track market interest rates.
◦Income
Risk. The
Fund’s income may decline if interest rates fall. This decline in income can
occur because most of the debt instruments held by the Fund will have floating
or variable interest rates.
◦Prepayment
and Extension Risk. The
risk that changes in interest rates, credit spreads or other factors will result
in the call (repayment) of a debt instrument before it is expected. The Fund may
have to invest the proceeds in lower yielding securities or that expectations of
such early call will negatively impact the market price of the security.
Extension risk is the risk that changes in the interest rates or credit spreads
may result in lowering call expectations, which can cause prices to
fall.
•Foreign
Securities Risk (Preferred-Plus
ETF only).
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility of government intervention and expropriation
or nationalization of assets. Because legal systems differ, there also is 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
Fund’s 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.
•Implied
Volatility Risk.
When a Fund sells an option, it gains the amount of the premium it receives, but
also incurs a liability representing the value of the option it has sold until
the option is either exercised and finishes “in the money,” meaning it has value
and can be sold, or the option expires worthless, or the expiration of the
option is “rolled,” or extended forward. The value of the options in which a
Fund invests is based partly on the volatility used by market participants to
price such options (i.e.,
implied volatility). Accordingly, increases in the implied volatility of such
options will cause the value of such options to increase (even if the prices of
the options’ underlying stocks do not change), which will result in a
corresponding increase in the liabilities of a Fund under such options and thus
decrease such Fund’s NAV.
•Large
Shareholder Risk.
To the extent a large proportion of the shares of a Fund are highly concentrated
or held by a small number of shareholders (or a single shareholder), including
funds or accounts over which the Adviser or an affiliate of the Adviser has
investment discretion, the Fund is subject to the risk that these shareholders
will redeem Fund shares in large amounts rapidly or unexpectedly. In addition, a
third-party investor, the Adviser or an affiliate of the Adviser, an authorized
participant, a lead market maker, or another entity may invest in a Fund and
hold its investment solely to facilitate commencement of the Fund or to
facilitate the Fund’s achieving a specified size or scale (i.e., a seed
investor). In such case, an investor may own a majority of a Fund’s shares.
Similar to other large shareholders, there is a risk that such seed investors
may redeem all or a significant portion of their investment in a Fund with
little or no notice to the Fund. Any such redemptions could adversely affect the
ability of a Fund to conduct its investment program, including by causing the
Fund to dispose of investments at unfavorable times or increase its cash
holdings, diluting its investment returns. An unexpected large redemption also
may have an adverse effect on the market price of a Fund’s Shares.
•Leveraging
Risk.
The use of leverage, such as that embedded in options, could magnify a Fund’s
gains or losses.
•LIBOR
Discontinuance or Unavailability Risk (Preferred-Plus
ETF only).
The CLO debt in which the Fund may invest bears interest based upon LIBOR
(London InterBank Offered Rate). LIBOR is intended to represent the rate at
which contributing banks may obtain short-term borrowings from each other in the
London interbank market. On March 5, 2021, the U.K. Financial Conduct Authority
(“FCA”) publicly announced that (i) immediately after December 31, 2021,
publication of the 1-week and 2-month U.S. Dollar LIBOR settings will
permanently cease; (ii) immediately after June 30, 2023, publication of the
overnight and 12-month U.S. Dollar LIBOR settings will permanently cease; and
(iii) immediately after June 30, 2023, the 1-month, 3-month and 6-month U.S.
Dollar LIBOR settings will cease to be provided or, subject to the FCA’s
consideration of the case, be provided on a synthetic basis and no longer be
representative of the underlying market and economic reality they are intended
to measure and that representativeness will not be restored. There is no
assurance that the dates announced by the FCA will not change or that the
administrator of LIBOR and/or regulators will not take further action that could
impact the availability, composition or characteristics of LIBOR or the
currencies and/or tenors for which LIBOR is published, and we recommend that you
consult your advisors to stay informed of any such developments. Public and
private sector industry initiatives are currently underway to implement new or
alternative reference rates to be used in place of LIBOR. There is no assurance
that any such alternative reference rate will be similar to or produce the same
value or economic equivalence as LIBOR or that it will have the same
volume
or liquidity as did LIBOR prior to its discontinuance or unavailability, which
may affect the value or liquidity or return on certain of the Fund’s investments
and result in costs incurred in connection with closing out positions and
entering into new trades.
•Liquidity
Risk. Liquidity
risk refers to the possibility that the Fund may not be able to sell or buy a
security or close out an investment contract at a favorable price or time.
Consequently, the Fund may have to accept a lesser price to sell a security,
sell other securities to raise cash, or give up an investment opportunity, any
of which could have a negative effect on the Fund’s performance. Infrequent
trading of securities also may lead to an increase in their price volatility.
In
addition, during periods of reduced market liquidity or in the absence of
readily available market quotations for particular investments in the Fund’s
portfolio, the ability of the Fund to assign an accurate daily value to these
investments may be difficult and the Adviser may be required to fair value the
investments. Fair value determinations are inherently subjective and reflect
good faith judgments based on available information. Accordingly, there can be
no assurance that the determination of a security’s fair value in accordance
with the Fund’s valuation procedures will in fact approximate the price at which
the Fund could sell that security at that time (i.e.,
the sale price could differ, sometimes significantly, from the Fund’s last
valuation for the security). Investors who purchase or redeem shares of the Fund
on days when the Fund is holding fair valued securities may receive fewer or
more shares or lower or higher redemption proceeds than they would have received
if the Fund had not fair valued the securities or had used a different valuation
methodology. These risks may be magnified in a rising interest rate environment
and if the Fund holds a significant percentage of fair valued or otherwise
difficult to value securities, the Fund may be particularly susceptible to the
risks associated with valuation.
Liquidity
risk also refers to the risk of unusually high redemption requests, redemption
requests by certain large shareholders such as institutional investors or asset
allocators, or other unusual market conditions that may make it difficult for
the Fund to sell investments within the allowable time period to meet
redemptions. Meeting such redemption requests could require the Fund to sell
securities at reduced prices or under unfavorable conditions or access
additional means of liquidity, which would reduce the value of the
Fund.
•Management
Risk.
The
Adviser continuously evaluates each Fund’s holdings, purchases and sales with a
view to achieving such Fund’s investment objective(s). However, achievement of a
stated investment objective cannot be guaranteed. The Adviser’s judgment about
the markets, the economy, or companies may not anticipate actual market
movements, economic conditions or company performance, and these factors may
affect the return on your investment. In fact, no matter how good a job the
Adviser does, you could lose money on your investment in a Fund, just as you
could with other investments. If the Adviser is incorrect in its assessment of
the income, growth or price realization potential of a Fund’s holdings or
incorrect in its assessment of general market or economic conditions, then the
value of such Fund’s shares may decline.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing Risk.
The
securities of large-capitalization companies may be relatively mature compared
to smaller companies and, therefore, subject to slower growth during times of
economic expansion. Large-capitalization companies also may be unable to respond
quickly to new competitive challenges, such as changes in technology and
consumer tastes.
◦Mid-Capitalization
Investing Risk.
The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies. 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. Some medium 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 Risk.
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.
•Market
Risk. The
trading prices of securities and other instruments fluctuate in response to a
variety of factors. These factors include events impacting the entire market or
specific market segments, such as political, market and economic developments,
as well as events that impact specific issuers. The Fund’s NAV and market price,
like security and commodity prices generally, may fluctuate significantly in
response to these and other factors. As a result, an investor could lose money
over short or long periods of time. U.S. and international markets have
experienced significant periods of volatility in recent years due to a number of
economic,
political and global macro factors, including public health issues, growth
concerns in the U.S. and overseas, uncertainties regarding interest rates, trade
tensions and the threat of tariffs imposed by the U.S. and other countries. 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. These developments
as well as other events could result in further market volatility and negatively
affect financial asset prices, the liquidity of certain securities and the
normal operations of securities exchanges and other markets, which could have an
adverse effect on the Fund.
The
COVID-19 pandemic has significantly impacted economies and markets around the
world, including the United States. 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. Financial markets have experienced extreme volatility and
severe losses, and trading in many instruments has been disrupted. 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. Liquidity for many instruments has
been greatly reduced for periods of time. In response to these disruptions, the
U.S. government and the Federal Reserve have taken extraordinary actions to
support the domestic economy and financial markets. It is unknown how long
circumstances related to the COVID-19 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.
•Options
Risk.
Selling (writing) and buying options are speculative activities and entail
greater than ordinary investment risks. The Funds’ use of put options can lead
to losses because of adverse movements in the price or value of the underlying
asset, which may be magnified by certain features of the options. When selling a
put option, a Fund will receive a premium; however, this premium may not be
enough to offset a loss incurred by the Fund if the price of the underlying
asset is below the strike price by an amount equal to or greater than the
premium. Purchasing of put options involves the payment of premiums, which may
adversely affect the Funds’ performance. Purchasing a put option gives the
purchaser of the option the right to sell a specified quantity of an underlying
asset at a fixed exercise price over a defined period of time. Purchased put
options may expire worthless resulting in a Fund’s loss of the premium it paid
for the option.
The
value of an option may be adversely affected if the market for the option
becomes less liquid or smaller, and will be affected by changes in the value of
the option’s underlying asset, an increase in interest rates, a change in the
actual or perceived volatility of the stock market or the underlying asset and
the remaining time to expiration. Additionally, the value of an option does not
increase or decrease at the same rate as the underlying asset. The Funds’ use of
options may reduce the Funds’ ability to profit from increases in the value of
the underlying asset. If the price of the underlying asset of an option is above
the strike price of a written put option, the value of the option, and
consequently of the Funds, may decline significantly more than if the Funds
invested directly in the underlying asset instead of using options.
Positions
may be bought back for a gain or loss and rolled out in the future to create a
new spread, and this may occur outside of the normal systematic strategy
execution. In a strong market decline where the buyback involves an “in the
money” (i.e., an option with a strike price less than the current level of the
benchmark index) option, there may be a “debit” roll, whereby the cash needed to
close out the option position exceeds the new sale’s proceeds.
•Other
Investment Companies Risk. The
risks of investment in other investment companies, including ETFs, typically
reflect the risks of the types of instruments in which the investment companies
invest. By investing in another investment company, the Fund becomes a
shareholder of that investment company and bears its proportionate share of the
fees and expenses of the other investment company. Investments in ETFs also are
subject to the “ETF Risks” described above.
•Preferred
Securities Risk (Preferred-Plus
ETF only).
Preferred securities may pay fixed or adjustable rates of return and are subject
to many of the risks associated with debt securities (e.g., interest rate risk,
call risk and extension risk). In addition, preferred securities are subject to
issuer-specific and market risks applicable generally to equity securities.
Because many preferred securities allow the issuer to convert their preferred
security into common stock, preferred securities are often sensitive to
declining common stock values. A company’s preferred securities generally pay
dividends only after the company makes required payments to holders of its bonds
and other debt. For this reason, the value of preferred securities will usually
react more strongly than bonds and other debt to actual or perceived changes in
the company’s financial condition or prospects. Preferred securities of smaller
companies may be more vulnerable to adverse developments than preferred stock of
larger companies. In addition, preferred securities are subject to other risks,
such as having no or limited voting rights, being subject to special redemption
rights, having distributions deferred or skipped, having floating interest rates
or dividends, which may result in a decline in value in a falling interest rate
environment, having limited liquidity, changing or unfavorable tax treatments
and possibly being issued by companies in heavily regulated industries.
Preferred securities that do not have a maturity date are considered to be
perpetual investments.
•Publicly
Traded Partnership Risk (Preferred-Plus
ETF only).
Investing in PTPs (including master limited partnerships) involves special risks
in addition to those typically associated with publicly traded companies. PTPs
are exposed to the risks of their underlying assets, which in many cases
includes the same types of risks as energy and natural resources companies, such
as commodity pricing risk, supply and demand risk and depletion and exploration
risk. PTPs are also subject to capital markets risk, which is the risk that they
may be unable to raise capital to execute their growth strategies. PTPs are also
subject to tax risk, which is the risk that PTPs may lose their partnership
status for tax purposes. The Fund’s ability to make investments in certain PTPs,
including master limited partnerships, can be limited by the Fund’s intention to
qualify as a regulated investment company, and if the Fund does not
appropriately limit such investments or if such investments are re-characterized
for U.S. federal income tax purposes, the Fund’s status as a regulated
investment company may be jeopardized.
•REITs
Risk.
Investment in real estate companies, including REITs, exposes the Fund to the
risks of owning real estate directly. 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; increased operating
expenses; lack of availability of mortgage funds or other limits to accessing
the credit or capital markets; losses due to natural disasters; overbuilding;
losses due to casualty or condemnation; changes in property values and rental
rates; and other factors. Real estate is highly sensitive to general and local
economic conditions and developments. 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. 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. Exposure to such real estate may adversely affect Fund
performance.
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). In addition, REITs are dependent upon management skills and
generally may not be diversified. REITs also are subject to heavy cash flow
dependency, defaults by borrowers or lessees and self-liquidation. In addition,
U.S. REITs are subject to special U.S. federal tax requirements. A U.S. 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.
•Sector
Risk. To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund may invest a significant portion of its assets in
the following sectors and, therefore, the performance of the Fund could be
negatively impacted by events affecting each of these sectors.
◦Financials
Sector Risk (Preferred-Plus ETF only).
To the extent the Fund’s investments are exposed to issuers conducting business
in the Financials Sector, the Fund is subject to legislative or regulatory
changes, adverse market conditions and/or increased competition affecting the
Financials Sector. The Financials Sector can be significantly affected by
changes in interest rates, government regulation, the rate of defaults on
corporate, consumer and government debt, the availability and cost of capital,
and fallout from the housing and sub-prime mortgage crisis. The Financials
Sector has experienced significant losses in the recent past. The impact of more
stringent capital requirements and of recent or future regulation on any
individual financial company, or on the Financials Sector as a whole, cannot be
predicted. In recent years, cyber-attacks and technology malfunctions and
failures have become increasingly frequent in this sector and have caused
significant losses.
•Tax
Risk.
If positions held by a Fund were treated as “straddles” for federal income tax
purposes, or a Fund’s risk of loss with respect to a position was otherwise
diminished as set forth in Treasury regulations, dividends on stocks that are a
part of such positions would not constitute qualified dividend income subject to
such favorable income tax treatment in the hands of non-corporate shareholders
or eligible for the dividends received deduction for corporate shareholders. In
addition, generally, straddles are subject to certain rules that may affect the
amount, character and timing of a Fund’s gains and losses with respect to
straddle positions by requiring, among other things, that: (1) any loss realized
on disposition of one position of a straddle may not be recognized to the extent
that the Fund has unrealized gains with respect to the other position in such
straddle; (2) the Fund’s holding period in straddle positions be suspended while
the straddle exists (possibly resulting in a gain being treated as short-term
capital gain rather than long-term capital gain); (3) the losses recognized with
respect to certain straddle positions that are part of a mixed straddle and that
are not subject to Section 1256 of the Code be treated as 60% long-term and 40%
short-term capital loss; (4) losses recognized with respect to certain straddle
positions that would otherwise constitute short-term capital losses be treated
as
long-term capital losses; and (5) the deduction of interest and carrying charges
attributable to certain straddle positions may be deferred.
•U.S.
Federal Reserve Policy Risk. In
the 1970 and early 1980s interest rates increased to combat inflation under
former Federal Reserve Chairman Paul Volker. Since peaking in 1981, interest
rates were on a downward trajectory creating a 40-year bull market in fixed
income with rates bottoming in 2020 during the COVID-19 crisis. Since the
Financial Crisis, the Federal Reserve began a program of Quantitative Easing to
increase cash in the economy and keep interest costs low. However, these
accommodative policies have changed materially in 2022. To combat inflation, the
Federal Reserve has been quickly increasing interest rates and has begun
Quantitative Tightening (QT) of its Balance Sheets. There has been limited
periods where interest rates increased rapidly and zero history of QT. As a
result, it is difficult to predict the impact of these changes in interest rates
and the slope of yield curve. These quickly changing conditions have materially
impacted the capital market with future developments still greatly unknown. The
weakening environment may cause decrease in valuations, increased volatility,
and lower liquidity, especially in fixed-income markets. While some of these
risks are limited to fixed-income securities, the interconnectedness of the
capital markets has and will likely continue causing an impact in other asset
classes such as equities, FX, and commodities. The ending of historically low
interest rate environment may heighten these risks.
Temporary
Defensive Positions
To
respond to adverse market, economic, political, or other conditions, each Fund
may invest up to 100% of its assets in a temporary defensive manner by holding
all or a substantial portion of its assets in cash, cash equivalents, or other
high quality short-term investments. Temporary defensive investments generally
may include short-term U.S. government securities, commercial paper, bank
obligations, repurchase agreements, money market fund shares, and other money
market instruments. The Adviser also may invest in these types of securities or
hold cash while looking for suitable investment opportunities or to maintain
liquidity. In these circumstances, a Fund may be unable to achieve its
investment objective.
PORTFOLIO
HOLDINGS INFORMATION
Information
about each Fund’s daily portfolio holdings is available at
www.innovativeportfolios.com. A complete description of the Funds’ policies and
procedures with respect to the disclosure of the Funds’ portfolio holdings is
available in the Funds’ Statement of Additional Information (the “SAI”).
MANAGEMENT
Investment
Adviser
Innovative
Portfolios, LLC, an Indiana limited liability company located at 8801 River
Crossing Boulevard, Suite 100, Indianapolis, Indiana, 46240, serves as the
investment adviser for each Fund. The Adviser, subject to the oversight of the
Board, provides an investment management program for each Fund and manages the
day-to-day investment of each Fund’s assets. The Adviser also arranges for
transfer agency, custody, fund administration, distribution and all other
services necessary for each Fund to operate. The Adviser is an SEC-registered
investment adviser.
For
the services it provides to the Funds, the Adviser is entitled to a unified
management fee, which is calculated daily and paid monthly, at an annual rate
based on each Fund’s average daily net assets as set forth in the table below.
|
|
|
|
| |
Fund |
Management
Fee |
Preferred-Plus
ETF |
0.85% |
Dividend
Performers ETF |
0.85% |
Pursuant
to an investment advisory agreement between the Trust, on behalf of each Fund,
and the Adviser (the “Advisory Agreement”), the Adviser has agreed to pay all
expenses of the Funds except the fee payable to the Adviser under the Advisory
Agreement, interest charges on any borrowings, dividends, and other expenses on
securities sold short, taxes, brokerage commissions and other expenses incurred
in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, accrued deferred tax liability,
extraordinary expenses, and distribution (12b-1) fees and expenses (if
any).
Portfolio
Managers
The
table below reflects the individuals who are jointly and primarily responsible
for the day-to-day management of each respective Fund.
|
|
|
|
| |
Fund |
Portfolio
Managers |
Preferred-Plus
ETF |
JR
Humphreys, CFA, CAIA and Dave Gilreath, CFP |
Dividend
Performers ETF |
Dave
Gilreath, CFP and Tom Kaiser, CFA |
JR
Humphreys, CFA, CAIA, Senior Portfolio Manager
Mr.
Humphreys has been with the Adviser since 2018 and Sheaff Brock Investment
Advisors, LLC (“SBIA”) since 2015. SBIA, an affiliate of the Adviser, is an SEC
registered investment adviser. Prior to joining SBIA, Mr. Humphreys worked at
BKD Wealth Advisors, LLC as a Senior Portfolio Manager from October 2003 to June
2015. Mr. Humphreys holds a Bachelor of Business Administration degree in
Finance from Marshall University in Huntington, West Virginia, where he was also
a member of Omicron Delta Epsilon, International Honor Society for Economics.
Dave
Gilreath, CFP, Managing Director & Chief Investment Officer
Mr.
Gilreath is a founding principal and Chief Investment Officer for the Adviser
and SBIA. As Chief Investment Officer, he shares responsibility for setting
investment policy, asset allocation, and security selection for the Adviser. He
has more than 30 years of experience in the financial services industry,
beginning with Bache Halsey Stuart Shields and later with Morgan Stanley/Dean
Witter. Mr. Gilreath has been with the Adviser since 2015 and SBIA since 2001.
Mr. Gilreath attended Miami University in Oxford, Ohio, where he earned a
Bachelor of Science degree.
Tom
Kaiser, CFA, Portfolio Manager
Mr.
Kaiser has been with the Adviser since 2021 and with SBIA since 2020. As a
portfolio manager, he helps with the security selection process, asset
allocation, and portfolio analytics. Mr. Kaiser performs similar duties for the
Adviser’s various other strategies and at SBIA. He has more than 10 years of
experience in the financial services industry beginning with Northern Trust,
then with Fitch Ratings, and most recently with 40|86 Advisors from 2016 to
2020. Mr. Kaiser attended Indiana University’s Kelley School of Business, where
he earned Bachelor of Science degrees in finance, business economics, and public
policy analysis.
Other
Service Providers
Foreside
Fund Services, LLC (the “Distributor”) serves as the principal underwriter and
distributor of each Fund’s Shares. The Distributor’s principal address is Three
Canal Plaza, Suite 100, Portland, Maine 04101. The Distributor will not
distribute shares in less than whole Creation Units, and it does not maintain a
secondary market in the Shares. The Distributor is a broker-dealer registered
under the Securities Exchange Act of 1934, as amended, and a member of the
Financial Industry Regulatory Authority, Inc. (“FINRA”). The Distributor has no
role in determining the policies of the Funds or the securities that are
purchased or sold by a Fund and is not affiliated with the Adviser or any of its
affiliates.
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services,
located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the
administrator and transfer agent for the Funds.
U.S.
Bank National Association, located at 1555 N. Rivercenter Drive, Suite 302,
Milwaukee, Wisconsin 53212, serves as the custodian for the Funds.
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue, N.W., Washington,
D.C. 20004, serves as legal counsel to the Trust.
Cohen
& Company, Ltd., located at 1350 Euclid Avenue, Suite 800, Cleveland, Ohio
44115, serves as the Funds’ independent registered public accounting firm. The
independent registered public accounting firm is responsible for auditing the
annual financial statements of the Funds.
HOW
TO BUY AND SELL SHARES
Each
Fund issues and redeems Shares only in Creation Units at the NAV per share next
determined after receipt of an order from an AP. Only APs may acquire Shares
directly from a Fund, and only APs may tender their Shares for redemption
directly to a Fund, at NAV. APs must be a member or participant of a clearing
agency registered with the SEC and must execute a Participant Agreement that has
been agreed to by the Distributor, and that has been accepted by the Funds’
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.
Individual Shares are listed for trading on the secondary market on the Exchange
and can be bought and sold throughout the trading day like other publicly traded
securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread between the
bid and the offer price in the secondary market on each leg of a round trip
(purchase and sale) transaction. In addition, because secondary market
transactions occur at market prices, you may pay more than NAV when you buy
Shares and receive less than NAV when you sell those Shares.
Book
Entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (the “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
Funds impose no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly from the Funds, are an essential part of the ETF process and
help keep Share trading prices in line with NAV. As such, the Funds accommodate
frequent purchases and redemptions by APs. However, frequent purchases and
redemptions for cash may increase tracking error and portfolio transaction costs
and lead to the realization of capital gains. The Funds’ fair valuation of their
holdings consistent with the 1940 Act and Rule 2a-5 thereunder and their ability
to impose transaction fees on purchases and redemptions of Creation Units to
cover the custodial and other costs incurred by the Funds in effecting trades
help to minimize the potential adverse consequences of frequent purchases and
redemptions.
Determination
of Net Asset Value
Each
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (the “NYSE”), generally 4:00 p.m. Eastern time, each day the
NYSE is open for business. The NAV for a Fund is calculated by dividing the
applicable Fund’s net assets by its Shares outstanding.
In
calculating its NAV, each Fund generally values its assets on the basis of
market quotations, last sale prices, or estimates of value furnished by a
pricing service or brokers who make markets in such instruments. In particular,
a Fund generally values equity securities at their readily available market
quotations. If such information is not available for a security held by a Fund
or is determined to be unreliable, the security will be valued by the Adviser at
fair value pursuant to procedures established by the Adviser and approved by the
Board (as described below).
Fair
Value Pricing
The
Adviser has been designated by the Board as the valuation designee for the Funds
pursuant to Rule 2a-5 under the 1940 Act. In its capacity as valuation designee,
the Adviser 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 an
investment held by a Fund, the Adviser 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
established by the Adviser. Due to the subjective and variable nature of
determining the fair value of a security or other investment, there can be no
assurance that the Adviser’s determined fair value will match or closely
correlate to any market quotation that subsequently becomes available or the
price quoted or published by other sources. In addition, a Fund may not be able
to obtain the fair value assigned to an investment if the Fund were to sell such
investment at or near the time its fair value is determined.
Investments
by Registered Investment Companies
Section
12(d)(1) of the 1940 Act and the rules thereunder restrict investments by
registered investment companies in the securities of other investment companies.
Registered investment companies are permitted to invest in a Fund beyond the
limits set forth in section 12(d)(1), subject to certain terms and conditions,
including that such investment companies enter into an agreement with the
Funds.
DIVIDENDS,
DISTRIBUTIONS, AND TAXES
Dividends
and Distributions
Each
Fund intends to distribute substantially all of its net investment income and
net capital gains to its shareholders at least annually. Each Fund seeks to
maintain relatively stable quarterly distributions, although the amount of
income earned by a Fund varies from period to period. As a result of such
distribution strategy, each Fund’s distributions are expected to exceed its
earnings and profits in some or all tax years, and consequently, all or a
portion of the distributions made for a taxable year may be characterized 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 the
applicable Fund and result in a higher capital gain or lower capital loss when
the Shares on which the distribution was received are sold. After a
shareholder’s basis in the Shares has been reduced to zero, distributions in
excess of earnings and profits will be treated as gain from the sale of the
shareholder’s Shares.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Funds. Your investment
in a Fund may have other tax implications. Please consult your tax advisor about
the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws. This summary does not apply
to Shares held in an IRA or other tax-qualified plans, which are generally not
subject to current tax. Transactions relating to Shares held in such accounts
may, however, be taxable at some time in the future. This summary is based on
current tax laws, which may change.
Each
Fund intends to elect to qualify each year for treatment as a regulated
investment company (a “RIC”). 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, a Fund’s
failure to qualify as a RIC or to meet minimum distribution requirements would
result (if certain relief provisions were not available) in fund-level taxation
and, consequently, a reduction in income available for distribution to
shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA, you need to be aware of the possible tax consequences
when a Fund makes distributions, when you sell your Shares listed on the
Exchange, and when you purchase or redeem Creation Units (APs only).
Taxes
on Distributions
Each
Fund intends to distribute quarterly, and, in any event, at least annually,
substantially all of its net investment income and net capital gains income. For
federal income tax purposes, distributions of investment income are generally
taxable as ordinary income or qualified dividend income. Taxes on distributions
of capital gains (if any) are determined by how long a Fund owned the
investments that generated them, rather than how long a shareholder has owned
his or her Shares. Sales of assets held by a Fund for more than one year
generally result in long-term capital gains and losses, and sales of assets held
by a Fund for one year or less generally result in short-term capital gains and
losses. Distributions of a Fund’s net capital gain (the excess of net long-term
capital gains over net short-term capital losses) that are reported by such Fund
as capital gain dividends (“Capital Gain Dividends”) will be taxable as
long-term capital gains, which for non-corporate shareholders are subject to tax
at reduced rates of up to 20% (lower rates apply to individuals in lower tax
brackets). Distributions of short-term capital gain will generally be taxable as
ordinary income. Dividends and distributions are generally taxable to you
whether you receive them in cash or reinvest them in additional
Shares.
Distributions
reported by a Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that the Fund receives 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. Distributions that a Fund
receives from an underlying fund taxable as a RIC or from a REIT will be treated
as qualified dividend income only to the extent so designated by such underlying
fund or REIT. Corporate shareholders may be entitled to a dividends received
deduction for the portion of dividends they receive from a Fund that are
attributable to dividends received by the Fund from U.S. corporations, subject
to certain limitations. Certain of the Funds’ investment strategies may limit
their ability to make distributions eligible for the reduced rates applicable to
qualified dividend income or to report distributions as eligible for the
dividends received deduction for corporate shareholders.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from a 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 a Fund before your
investment (and thus were included in the Shares’ NAV when you purchased your
Shares).
You
may wish to avoid investing in a Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your
investment.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
a Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
your Shares from 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. A Fund may, under certain
circumstances, report all or a portion of a dividend as an “interest-related
dividend” or a “short-term capital gain dividend,” which would generally be
exempt from this 30% U.S. withholding tax, provided certain other requirements
are met. Different tax consequences may result if you are a foreign shareholder
engaged in a trade or business within the United States or if a tax treaty
applies.
A
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 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
Provided
that a shareholder holds Shares as capital assets, 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, as amended. 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.
A
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. A Fund may sell
portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause a 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, a Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
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.
Foreign
Investments by a Fund
Interest
and other income received by a Fund with respect to foreign securities may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If as of the close of a taxable year more than 50% of the
value of a Fund’s assets consists of certain foreign stock or securities, each
such Fund will be eligible to elect to “pass through” to investors the amount of
foreign income and similar taxes (including withholding taxes) paid by such Fund
during that taxable year. This means that investors would be considered to have
received as additional income their
respective
shares of such foreign taxes, but may be entitled to either a corresponding tax
deduction in calculating taxable income, or, subject to certain limitations, a
credit in calculating federal income tax. If a Fund does not so elect, each such
Fund will be entitled to claim a deduction for certain foreign taxes incurred by
such Fund. A Fund (or a financial intermediary, such as a broker, through which
a shareholder owns Shares) will notify you if it makes such an election and
provide you with the information necessary to reflect foreign taxes paid on your
income tax return.
Foreign
tax credits, if any, received by a Fund as a result of an investment in another
RIC (including an ETF which is taxable as a RIC) will not be passed through to
you unless the Fund qualifies as a “qualified fund-of-funds” under the Code. If
a Fund is a “qualified fund-of-funds” it will be eligible to file an election
with the Internal Revenue Service that will enable the Fund to pass along these
foreign tax credits to its shareholders. A Fund will be treated as a “qualified
fund-of-funds” under the Code if at least 50% of the value of the Fund’s total
assets (at the close of each quarter of the Fund’s taxable year) is represented
by interests in other RICs.
Certain
Investments in Complex Securities
Each
Fund may invest in complex securities. These investments may be subject to
numerous special and complex tax rules. These rules could affect the ability of
a Fund to qualify as a RIC, affect whether gains and losses recognized by a Fund
are treated as ordinary income or capital gain, accelerate the recognition of
income to a Fund and/or defer a Fund’s ability to recognize losses. In turn,
those rules may affect the amount, timing or character of the income distributed
to you by a Fund.
A
Fund may invest in options that are considered “section 1256 contracts.” Code
section 1256 generally will require any gain or loss arising from the lapse,
closing out or exercise of such positions to be treated as 60% long-term and 40%
short-term capital gain or loss. In addition, a Fund generally will be required
to “mark to market” (i.e.,
treat as sold for fair market value) each outstanding option position that is a
section 1256 contract at the close of each taxable year (and on October 31 of
each year for excise tax purposes). If a “section 1256 contract” held by a Fund
at the end of a taxable year is sold in the following year, the amount of any
gain or loss realized on such sale will be adjusted to reflect the gain or loss
previously taken into account under the “mark to market” rules. In addition,
“section 1256 contracts” under the Code include certain regulated futures
contracts and certain other financial contracts.
A
Fund’s investment in options that do not qualify as section 1256 contracts under
the Code generally will be treated as equity options governed by Code section
1234. Pursuant to Code section 1234, if a written option expires unexercised,
the premium received is short-term capital gain to the Fund. If a Fund enters
into a closing transaction, the difference between the premium received for
writing the option, and the amount paid to close out its position generally is
short-term capital gain or loss.
Offsetting
positions held by a Fund involving certain derivative instruments, such as
options, forward, and futures, as well as its long and short positions in
portfolio securities, may be considered, for U.S. federal income tax purposes,
to constitute “straddles.” Straddles are defined to include “offsetting
positions” in actively traded personal property. For instance, a straddle can
arise if a Fund writes a certain covered call option on a stock (i.e.,
a call on a stock owned by the Fund), or writes a call option on a stock index
to the extent the Fund’s stockholdings (and any subset thereof) and the index on
which it has written a call overlap sufficiently to constitute a straddle under
applicable Treasury Regulations. The tax treatment of “straddles” is governed by
section 1092 of the Code which, in certain circumstances, overrides or modifies
the provisions of section 1256 described above. If a Fund is treated as entering
into a “straddle” and at least one (but not all) of the Fund’s positions in
derivative contracts comprising a part of such straddle is a section 1256
contract, described above, then such straddle could be characterized as a “mixed
straddle.” A Fund may make one or more elections with respect to “mixed
straddles.” Depending upon which election is made, if any, the results with
respect to the Fund may differ. Generally, to the extent the straddle rules
apply to positions established by a Fund, losses realized by the Fund may be
deferred to the extent of unrealized gain in any offsetting positions. Moreover,
as a result of the straddle rules, short-term capital loss on straddle positions
may be recharacterized as long-term capital loss, and long-term capital gain may
be characterized as short-term capital gain. In addition, the existence of a
straddle can cause the holding periods to be tolled on the offsetting positions.
As a result, the straddle rules could cause distributions that would otherwise
constitute “qualified dividend income” or qualify for the dividends-received
deduction to fail to satisfy the applicable holding period requirements
described above. Furthermore, a Fund may be required to capitalize, rather than
deduct currently, any interest expense and carrying charges applicable to a
position that is part of a straddle, including any interest on indebtedness
incurred or continued to purchase or carry any positions that are part of a
straddle. The application of the straddle rules to certain offsetting Fund
positions can therefore affect the amount, timing and/or character of
distributions to shareholders, and may result in significant differences from
the amount, timing and/or character of distributions that would have been made
by a Fund if it had not entered into offsetting positions in respect of certain
of its portfolio securities.
A
Fund may invest in master limited partnerships (“MLPs”) taxed as partnerships.
Due to a variety of factors, including significant non-cash deductions such as
depreciation and depletion, MLPs have historically made cash distributions to
limited partners that exceed the amount of taxable income allocable to such
limited partners or members. These excess cash distributions would not be
treated as income to a Fund but rather would be treated as a return of capital
to the extent of the Fund’s basis in the MLP. As a consequence, a Fund may make
distributions that exceed its earnings and profits, which would be characterized
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 Fund
shares and result in a higher capital gain or lower capital loss when the Fund
shares are sold. After a shareholder’s basis in Fund shares
has
been reduced to zero, distributions in excess of earnings and profits in respect
of those Fund shares will be treated as gain from the sale of the Fund
shares.
“Qualified
publicly traded partnership income” within the meaning of section 199A(e)(5) of
the Code is eligible for a 20% deduction by non-corporate taxpayers. “Qualified
publicly traded partnership income” is generally income of a “publicly traded
partnership” that is not treated as a corporation for U.S. federal income tax
purposes that is effectively connected with such entity’s trade or business, but
does not include certain investment income. This deduction, if allowed in full,
equates to a maximum effective federal income tax rate of 29.6% (37% top rate
applied to income after 20% deduction). The Code does not contain a provision
permitting a RIC, such as a Fund, to pass the special character of this income
through to its shareholders. Currently, direct investors in entities that
generate “qualified publicly traded partnership income” will enjoy the lower
rate, but investors in RICs that invest in such entities will not.
MLPs
and other partnerships that a Fund may invest in will deliver Schedules K-1 to
the Fund to report their share of income, gains, losses, deductions and credits
of the MLP or other partnership. These Schedules K-1 may be delayed and may not
be received until after the time that a Fund issues its tax reporting
statements. As a result, a Fund may at times find it necessary to reclassify the
amount and character of its distributions to you after it issues you your Form
1099 tax reporting statement and, accordingly, send you a corrected Form
1099.
A
Fund may invest 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). Distributions by a 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. A 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 a Fund invests often do not provide complete and final tax information
to such Fund until after the time that the Fund issues a tax reporting
statement. As a result, a 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, a Fund (or its
administrative agent) 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.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in each Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares
under
all applicable tax laws. For more information, please see the section entitled
“Federal Income Taxes” in the SAI.
DISTRIBUTION
PLAN
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized
to pay an amount up to 0.25% of its average daily net assets each year for
certain distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Funds, and there are no plans to
impose these fees. However, in the event Rule 12b-1 fees are charged in the
future, because the fees are paid out of Fund assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often each Fund’s Shares traded on the Exchange at a price above
(i.e.,
at a premium) or below (i.e.,
at a discount) its NAV is available on the Funds’ website at
www.innovativeportfolios.com.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange is not
responsible for, nor has it participated in the determination of, the timing,
prices, or quantities of the Funds’ 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 the Funds’ Shares in
connection with the administration, marketing, or trading of the Funds’
Shares.
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 Funds make no representation or warranty, express or implied, to
the owners of the Funds’ Shares or any member of the public regarding the
advisability of investing in securities generally or in the Funds’ Shares
particularly.
FINANCIAL
HIGHLIGHTS
On
March 7, 2022, the Preferred-Plus ETF and Dividend Performers ETF acquired all
of the assets and liabilities of the Preferred-Plus Predecessor Fund and
Dividend Performers Predecessor Fund (each, a “Predecessor Fund” and together,
the “Predecessor Funds”), respectively, in exchange for shares of beneficial
interest of the applicable Fund (the “Reorganization”). As a result of the
Reorganization, each Fund adopted the financial and performance history of their
respective Predecessor Fund.
The
following financial highlights tables show the financial performance information
for each Fund’s five most recent fiscal years (or the life of a Fund, if
shorter). Certain information reflects financial results for a single share of a
Fund. The total returns in the table represent the rate that you would have
earned or lost on an investment in a Fund (assuming you reinvested all
distributions). The financial information for the fiscal years ended September
30, 2022, 2021 and 2020 has been audited by Cohen & Company, Ltd., the
independent registered public accounting firm of each Fund and Predecessor Fund,
whose report, along with each Fund’s financial statements, is included in the
Funds’ Annual
Report,
which is available upon request. The Predecessor Funds’ financial information,
including their financial highlights, for the period ended September 30, 2019,
was audited by another public accounting firm whose report is available upon
request.
Preferred-Plus
ETF
Financial
Highlights
For
a Share Outstanding Throughout Each Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Year
Ended September 30, 2022 |
| Year
Ended September 30, 2021 |
| Year
Ended September 30, 2020 |
|
Period
Ended
September
30, 2019(1) |
|
Net
Asset Value, Beginning of Period |
$ |
12.04 |
|
| $ |
11.09 |
|
| $ |
11.21 |
|
| $ |
10.00 |
| |
|
|
|
|
|
|
|
| |
Income
(Loss) from Investment operations: |
|
|
|
|
|
|
| |
Net
investment income(2) |
0.49 |
|
| 0.40 |
|
| 0.41 |
|
| 0.34 |
| |
Net
realized and unrealized gain (loss) |
(2.66) |
|
| 1.25 |
|
| — |
|
(7) |
1.24 |
| |
Total
from investment operations |
(2.17) |
|
| 1.65 |
|
| 0.41 |
|
| 1.58 |
| |
|
|
|
|
|
|
|
| |
Less
distributions paid: |
|
|
|
|
|
|
| |
From
net investment income |
(0.38) |
|
| (0.38) |
|
| (0.41) |
|
| (0.29) |
| |
From
net realized and unrealized gain (loss) |
(0.23) |
|
| (0.32) |
|
| (0.05) |
|
| (0.08) |
| |
From
return of capital |
(0.07) |
|
| — |
|
| (0.07) |
|
| — |
| |
Total
distributions paid |
(0.68) |
|
| (0.70) |
|
| (0.53) |
|
| (0.37) |
| |
|
|
|
|
|
|
|
| |
Net
Asset Value, End of Period |
$ |
9.19 |
|
| $ |
12.04 |
|
| $ |
11.09 |
|
| $ |
11.21 |
| |
|
|
|
|
|
|
|
| |
Total
return, at NAV(3) |
-18.64 |
% |
| 15.01 |
% |
| 3.95 |
% |
| 15.97 |
% |
(4) |
Total
return, at Market(3) |
-18.88 |
% |
| N/A |
| N/A |
| N/A |
|
|
|
|
|
|
|
|
| |
Supplemental
Data and Ratios: |
|
|
|
|
|
|
| |
Net
assets, end of period (000’s) |
$ |
12,383 |
|
| $ |
13,993 |
|
| $ |
10,595 |
|
| $ |
7,270 |
| |
Ratio
of expenses to average net assets before reimbursements (excluding
interest expense)(8) |
1.37 |
% |
| 2.13 |
% |
| 2.43 |
% |
| 2.70 |
% |
|
Ratio
of expenses to average net assets before reimbursements (including
interest expense)(8) |
1.48 |
% |
| 2.15 |
% |
| 2.48 |
% |
| 2.76 |
% |
|
Ratio
of expenses to average net assets after reimbursements (excluding interest
expense)(8) |
1.14 |
% |
| 1.50 |
% |
| 1.50 |
% |
| 1.50 |
% |
|
Ratio
of expenses to average net assets after reimbursements (including interest
expense)(8) |
1.25 |
% |
| 1.52 |
% |
| 1.55 |
% |
| 1.56 |
% |
|
Ratio
of net investment income to average net assets after
reimbursement(8)
(9) |
4.45 |
% |
| 3.31 |
% |
| 3.90 |
% |
| 3.96 |
% |
(5) |
Portfolio
Turnover(6) |
65 |
% |
(10) |
27 |
% |
| 70 |
% |
| 6 |
% |
(4) |
(1) The
Fund commenced operations on December 24, 2018.
(2) Per
share net investment income (loss) was calculated using average shares
outstanding.
(3) Total
return in the table represents the rate that the investor would have earned or
lost on an investment in the Fund, assuming reinvestment of
dividends.
(4) Not
annualized for periods less than one year.
(5) Annualized
for periods less than one year.
(6) Excludes
in-kind transactions associated with creations and redemptions of the
Fund.
(7) The
amount of net realized and unrealized gain on investment per share for the
period does not accord with the amounts in the Statement of Operations due to
share transactions for the period.
(8) Expense
waived or reimbursed reflect reductions to total expenses, as discussed in the
notes to the financial statements. These amounts would increase the net
investment loss ratio or decrease the net investment income ratio, as
applicable, had such reductions not occurred.
(9) Does
not include income and expenses of investment companies in which the Fund
invests.
(10) The
proceeds from sales of securities incurred by the Fund related to the alignment
of the Predecessor Fund’s portfolio with the Fund’s investment style are
excluded from the portfolio turnover rate calculation. See Notes 6 and 8 of the
Notes to Financial Statements for further information. If such amounts had not
been excluded, the portfolio turnover rate would have been 114% for the year
ended September 30, 2022.
Dividend
Performers ETF
Financial
Highlights
For
a Share Outstanding Throughout Each Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Year
Ended September 30, 2022 |
| Year
Ended September 30, 2021 |
| Year
Ended September 30, 2020 |
|
Period
Ended
September
30, 2019(1) |
|
Net
Asset Value, Beginning of Period |
$ |
16.93 |
|
| $ |
12.91 |
|
| $ |
12.16 |
|
| $ |
10.00 |
| |
|
|
|
|
|
|
|
| |
Income
(Loss) from Investment operations: |
|
|
|
|
|
|
| |
Net
investment income(2) |
0.14 |
|
| 0.07 |
|
| 0.12 |
|
| 0.07 |
| |
Net
realized and unrealized gain (loss) |
(3.45) |
|
| 5.06 |
|
| 1.06 |
|
(7) |
2.23 |
| |
Total
from investment operations |
(3.31) |
|
| 5.13 |
|
| 1.18 |
|
| 2.30 |
| |
|
|
|
|
|
|
|
| |
Less
distributions paid: |
|
|
|
|
|
|
| |
From
net investment income |
(0.24) |
|
| (0.07) |
|
| (0.13) |
|
| (0.06) |
| |
From
net realized and unrealized gain (loss) |
(1.08) |
|
| (1.04) |
|
| (0.23) |
|
| (0.08) |
| |
From
return of capital |
(0.77) |
|
| — |
|
| (0.07) |
|
| — |
| |
Total
distributions paid |
(2.09) |
|
| (1.11) |
|
| (0.43) |
|
| (0.14) |
| |
|
|
|
|
|
|
|
| |
Net
Asset Value, End of Period |
$ |
11.53 |
|
| $ |
16.93 |
|
| $ |
12.91 |
|
| $ |
12.16 |
| |
|
|
|
|
|
|
|
| |
Total
return, at NAV(3) |
-22.92 |
% |
| 39.80 |
% |
| 10.08 |
% |
| 23.04 |
% |
(4) |
Total
return, at Market(3) |
-23.31 |
% |
| N/A |
| N/A |
| N/A |
|
|
|
|
|
|
|
|
| |
Supplemental
Data and Ratios: |
|
|
|
|
|
|
| |
Net
assets, end of period (000’s) |
$ |
12,667 |
|
| $ |
15,174 |
|
| $ |
9,581 |
|
| $ |
11,749 |
| |
Ratio
of expenses to average net assets before reimbursements (excluding
interest expense)(8) |
1.30 |
% |
| 2.08 |
% |
| 2.50 |
% |
| 2.48 |
% |
|
Ratio
of expenses to average net assets before reimbursements (including
interest expense)(8) |
1.52 |
% |
| 2.12 |
% |
| 2.66 |
% |
| 2.56 |
% |
|
Ratio
of expenses to average net assets after reimbursements (excluding interest
expense)(8) |
1.13 |
% |
| 1.50 |
% |
| 1.50 |
% |
| 1.50 |
% |
|
Ratio
of expenses to average net assets after reimbursements (including interest
expense)(8) |
1.35 |
% |
| 1.54 |
% |
| 1.66 |
% |
| 1.56 |
% |
|
Ratio
of net investment income to average net assets after
reimbursement(8)
(9) |
0.86 |
% |
| 0.41 |
% |
| 1.04 |
% |
| 0.80 |
% |
(5) |
Portfolio
Turnover(6) |
74 |
% |
| 58 |
% |
| 129 |
% |
| 15 |
% |
(4) |
(1) The
Fund commenced operations on December 24, 2018.
(2) Per
share net investment income (loss) was calculated using average shares
outstanding.
(3) Total
return in the table represents the rate that the investor would have earned or
lost on an investment in the Fund, assuming reinvestment of
dividends.
(4) Not
annualized for periods less than one year.
(5) Annualized
for periods less than one year.
(6) Excludes
in-kind transactions associated with creations and redemptions of the
Fund.
(7) The
amount of net realized and unrealized gain on investment per share for the
period does not accord with the amounts in the Statement of Operations due to
share transactions for the period.
(8) Expense
waived or reimbursed reflect reductions to total expenses, as discussed in the
notes to the financial statements. These amounts would increase the net
investment loss ratio or decrease the net investment income ratio, as
applicable, had such reductions not occurred.
(9) Does
not include income and expenses of investment companies in which the Fund
invests.
PREFERRED-PLUS
ETF
DIVIDEND
PERFORMERS ETF
|
|
|
|
|
|
|
|
|
|
| |
Adviser |
Innovative
Portfolios, LLC
8801
River Crossing Boulevard,
Suite
100
Indianapolis,
Indiana 46240 |
Transfer
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 |
Foreside
Fund Services, LLC
Three
Canal Plaza, Suite 100
Portland,
Maine 04101 |
Independent
Registered Public Accounting Firm |
Cohen
& Company, Ltd.
1350
Euclid Avenue, Suite 800
Cleveland,
Ohio 44115 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004-2541 |
Investors
may find more information about the Funds in the following
documents:
Statement
of Additional Information: The
Funds’ SAI provides additional details about the investments of each Fund and
certain other additional information. The SAI 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 a Fund’s investments will be available in the Funds’ annual
and semi-annual reports to shareholders. In the annual report, when available,
you will find a discussion of the market conditions and investment strategies
that significantly affected a Fund’s performance after the first fiscal year the
Fund is in operation.
You
can obtain free copies of these documents, request other information or make
general inquiries about a Fund by contacting the Fund at c/o U.S. Bank Global
Fund Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 or by calling
1-866-704-6857.
Shareholder
reports and other information about a Fund are also available:
◦Free
of charge from the SEC’s EDGAR database on the SEC’s website at www.sec.gov;
or
◦Free
of charge from the Fund’s Internet web site at www.innovativeportfolios.com;
or
(SEC
Investment Company Act File No. 811-23226)