The AB Active ETFs
PROSPECTUS | MAY 17,
2023
The
AB Active ETFs
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![LOGO](g12c59.jpg) AB US Large Cap Strategic Equities
ETF |
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(Ticker
Symbol: LRGC)
(Exchange:
NYSE Arca) |
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The
Securities and Exchange Commission has not approved or disapproved these
securities or passed upon the adequacy of this Prospectus. Any representation to
the contrary is a criminal offense.
Investment
Products Offered
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Ø Are Not
FDIC Insured
Ø May
Lose Value
Ø Are Not Bank Guaranteed |
TABLE
OF CONTENTS
SUMMARY
INFORMATION
AB
US Large Cap Strategic Equities ETF
INVESTMENT
OBJECTIVE
The
Fund’s investment objective is long-term growth of
capital.
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. You may be required to pay
commissions and/or other forms of compensation to a broker for transactions in
shares, which are not reflected in the tables or the examples
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)
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Management
Fees |
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.48% |
(a) |
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Distribution
and/or Service (12b‑1) Fees |
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None |
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Other
Expenses(b) |
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.00% |
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Total
Annual Fund Operating Expenses |
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.48% |
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(a) |
The Fund’s investment advisory agreement
provides that AllianceBernstein L.P. (the “Adviser”) will pay
substantially all expenses of the Fund (including expenses of AB Active
ETFs, Inc. relating to the Fund), except for the advisory fees, payments
under the Fund’s 12b‑1 plan (if any), interest expenses, taxes, acquired
fund fees and expenses (other than fees and expenses for funds advised by
the Adviser and/or its affiliates), and litigation and extraordinary
expenses not incurred in the ordinary course of the Fund’s business.
Additionally, the Fund shall be responsible for its non‑operating
expenses, including brokerage
commissions. |
(b) |
Total “Other Expenses” are
based on estimated
amounts. |
Examples
The
Examples are intended to help you compare the cost of investing in the Fund with
the cost of investing in other funds. The Examples assume that you invest
$10,000 in the Fund for the time periods indicated and then redeem all of your
shares at the end of those periods. The Examples also assume that your
investment has a 5% return each year and that the Fund’s operating expenses stay
the same. Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
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After
1 Year |
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49 |
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After
3 Years |
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$ |
154 |
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Portfolio
Turnover
The
Fund pays transaction costs, such as commissions, when it buys or sells
securities (or “turns over” its portfolio). A higher portfolio turnover rate may
indicate higher transaction costs and may result in higher taxes when Fund
shares are held in a taxable account. These transaction costs, which are not
reflected in the Annual Fund Operating Expenses or in the Examples, affect the
Fund’s performance. The Fund has no operating history and therefore has no
portfolio turnover information.
PRINCIPAL
STRATEGIES
The
Fund is an actively-managed exchange-traded fund (“ETF”). The Adviser seeks to
achieve the Fund’s investment objective by investing, under normal
circumstances, at least 80% of its net assets in the equity securities of
large-capitalization U.S. companies. For these purposes, “large-capitalization
companies” are those that, at the time of investment, have market
capitalizations within the range of market capitalizations of companies
appearing in the S&P 500 Index. While the market capitalizations of
companies in the S&P 500 Index ranged from approximately $4 billion to
$2.3 trillion as of November 30, 2022, the Fund normally will invest in
equity securities of companies with market capitalizations of at least
$5 billion at the time of purchase. A company is considered to be a U.S.
company if: (i) the company is domiciled or organized in the U.S.; (ii) the
company has securities that are traded principally in the U.S.; or
(iii) the company conducts a substantial part of its economic activities in
the U.S. The Fund may also invest to a lesser degree in the equity securities of
non‑U.S. companies and of small- and mid‑ capitalization companies.
The
Adviser utilizes both fundamental and quantitative research to determine the
securities in which the Fund invests and to manage risk. In applying its
quantitative analysis, the Adviser considers a number of metrics that, in its
opinion, have historically provided some indication
of favorable future returns, including metrics relating to valuation, quality,
investor behavior and corporate behavior. In assessing corporate behavior, the
Adviser focuses on a company’s capital allocation decisions, including share
repurchases, net equity issuances and balance sheet management.
4
The
Fund is “non‑diversified,” which means it may invest a greater portion of its
assets in fewer issuers than would otherwise be the
case.
PRINCIPAL
RISKS
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Market Risk: The value of the Fund’s
assets will fluctuate as the stock market fluctuates. The value of its
investments may decline, sometimes rapidly and unpredictably, simply
because of economic changes or other events, including public health
crises (including the occurrence of a contagious disease or illness),
interest rate levels, and regional and global conflicts, that affect large
portions of the market. It includes the risk that a particular style of
investing may be underperforming the market
generally. |
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Equity Securities Risk: The Fund invests
in publicly-traded equity securities, and their value may fluctuate,
sometimes rapidly and unpredictably, which means a security may be worth
more or less than when it was purchased. These fluctuations can be based
on a variety of factors including a company’s financial condition as well
as macro-economic factors such as interest rates, inflation rates, global
market conditions, and non‑economic factors such as market perceptions and
social or political
events. |
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Capitalization Risk: Investments in
small- and mid‑capitalization companies may be more volatile than
investments in large-capitalization companies. Investments in
small-capitalization companies may have additional risks because these
companies have limited product lines, markets or financial
resources. |
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Foreign (Non‑U.S.) Investments Risk:
Investments in securities of non‑U.S. issuers may involve more risk than
those of U.S. issuers. These securities may fluctuate more widely in price
and may be more difficult to trade than domestic securities due to adverse
market, economic, political, regulatory or other
factors. |
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Non‑Diversification Risk: The Fund may
have more risk because it is “non‑diversified”, meaning that it can invest
more of its assets in a smaller number of issuers. Accordingly, changes in
the value of a single security may have a more significant effect, either
negative or positive, on the Fund’s net asset value (“NAV”) than on the
NAV of a diversified
fund. |
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ETF Share Price and Net Asset Value Risk:
The Fund’s shares are listed for trading on the NYSE Arca, Inc. (the
“Exchange”). Shares are bought and sold in the secondary market at market
prices. The NAV of the Fund will fluctuate with changes in the market
value of the Fund’s holdings. The Fund’s NAV is calculated once per day,
at the end of the day. The market price of a share on the Exchange could
be higher than the NAV (premium), or lower than the NAV (discount) and may
fluctuate during the trading day. When all or a portion of the Fund’s
underlying securities trade in a market that is closed when the market for
the Fund’s shares is open, there may be differences between the current
value of a security and the last quoted price for that security in the
closed local market, which could lead to a deviation between the market
value of the Fund’s shares and the Fund’s NAV. Disruptions in the
creations and redemptions process or the existence of extreme market
volatility could result in the Fund’s shares trading above or below NAV.
As the Fund may invest in securities traded on foreign exchanges, Fund
shares may trade at a larger premium or discount to the Fund’s NAV than
shares of other ETFs. In addition, in stressed market conditions, the
market for Fund shares may become less liquid in response to deteriorating
liquidity in the markets for the Fund’s underlying portfolio
holdings. |
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Authorized Participant Risk: Only a
limited number of financial institutions that enter into an authorized
participant relationship with the Fund (“Authorized Participants”) may
engage in creation or redemption transactions. If the Fund’s Authorized
Participants decide not to create or redeem shares, Fund shares may trade
at a larger premium or discount to the Fund’s NAV, or the Fund could face
trading halts or
de‑listing. |
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Active Trading Market Risk: There is no
guarantee that an active trading market for Fund shares will exist at all
times. In times of market stress, markets can suffer erratic or
unpredictable trading activity, extraordinary volatility or wide bid/ask
spreads, which could cause some market makers and Authorized Participants
to reduce their market activity or “step away” from making a market in ETF
shares. Market makers and Authorized Participants are not obligated to
place or execute purchase and redemption orders. This could cause the
Fund’s market price to deviate, materially, from the NAV, and reduce the
effectiveness of the ETF arbitrage process. Any absence of an active
trading market for Fund shares could lead to a heightened risk that there
will be a difference between the market price of a Fund share and the
underlying value of the Fund
share. |
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Management Risk: The Fund is subject to
management risk because it is an actively-managed ETF. The Adviser will
apply its investment techniques and risk analyses in making investment
decisions, but there is no guarantee that its techniques will produce the
intended results. Some of these techniques may incorporate, or rely upon,
quantitative models, but there is no guarantee that these models will
generate accurate forecasts, reduce risk or otherwise perform as
expected. |
As
with all investments, you may lose money by investing in the
Fund.
BAR
CHART AND PERFORMANCE INFORMATION
No
performance information is presented for the Fund because it has not yet been in
operation for a full calendar year.
5
INVESTMENT
ADVISER
AllianceBernstein
L.P. is the investment adviser for the Fund.
PORTFOLIO
MANAGER
The
following table lists the person responsible for day‑to‑day management of the
Fund’s portfolio:
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Employee |
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Length of Service |
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Title |
Shri Singhvi |
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Since September 2023 |
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Senior Vice President of the
Adviser |
PURCHASE
AND SALE OF FUND SHARES
The
Fund is an actively managed ETF and does not seek to track the performance of an
index. Individual shares of the Fund are listed on the Exchange. Most investors
will buy and sell shares of the Fund through a broker-dealer. The price of Fund
shares is based on market price, and because ETF shares trade at market prices
rather than at NAV, shares may trade at a price greater than NAV (a premium) or
less than NAV (a discount). The Fund will only issue or redeem shares that have
been aggregated into blocks of 15,000 shares or multiples thereof (“Creation
Units”) to a limited number of Authorized Participants who have entered into
agreements with the Fund’s distributor. The Fund generally will issue or redeem
Creation Units in return for a designated basket of portfolio securities and/or
cash that the Fund specifies each day. To the extent the Fund’s Creation Units
are issued or redeemed for cash, the Fund may incur brokerage expenses,
transaction and other costs, and/or capital gains, which may or may not be
offset, in whole or in part, by a transaction fee paid by an Authorized
Participant.
Information
about the Fund’s NAV, market price, premiums and discounts, and bid‑ask spreads
are available on the Fund’s website at www.abfunds.com.
TAX
INFORMATION
The
Fund may pay income dividends or make capital gains distributions, which may be
subject to federal income taxes and taxable as ordinary income or capital gains,
and may also be subject to state and local taxes.
PAYMENTS
TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
The
Adviser and its affiliates make payments to brokers, dealers and other financial
intermediaries for the sale of Fund shares and other services. These payments
may create a conflict of interest by influencing the broker, dealer or other
financial intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediary’s website
for more information.
6
ADDITIONAL
INFORMATION ABOUT THE FUND’S STRATEGIES, RISKS AND INVESTMENTS
Below
is additional information about the Fund’s investment strategies, practices and
related risks, including principal and non‑principal strategies and risks. Most
of these investment practices are discretionary, which means that the Adviser
may or may not decide to use them. This section does not describe all of the
Fund’s investment practices that are non‑principal strategies or all of the
related risks of such strategies. The Fund’s principal strategies and risks are
described in its summary prospectus in the Summary Information section above,
and additional information about the Fund’s risks and investments can be found
in the Fund’s Statement of Additional Information (“SAI”).
ESG
Integration
The
Adviser integrates environmental, social and corporate governance (“ESG”)
considerations into its research and investments analysis with the goal of
maximizing return and considering risk within the Fund’s investment objective
and strategies. Combining third-party ESG data with its own views and research,
the Adviser analyzes the ESG practices of companies and issuers to identify
potentially material ESG factors that can vary across companies and issuers. ESG
considerations may include but are not limited to environmental impact,
corporate governance and ethical business practices. ESG considerations may not
be applicable to all types of instruments or investments.
Market
Risk
The
market value of a security may move up or down, sometimes rapidly and
unpredictably. These fluctuations may cause a security to be worth less than the
price originally paid for it, or less than it was worth at an earlier time.
Market risk may affect a single issuer, industry, sector of the economy or the
market as a whole. Global economies and financial markets are increasingly
interconnected, which increases the probabilities that conditions in one country
or region might adversely impact issuers in a different country or region.
Conditions affecting the general economy, including interest rate levels and
political, social, or economic instability at the local, regional, or global
level may also affect the market value of a security. Health crises, such as
pandemic and epidemic diseases, as well as other incidents that interrupt the
expected course of events, such as natural disasters, including fires,
earthquakes and flooding, war or civil disturbance, acts of terrorism, supply
chain disruptions, power outages and other unforeseeable and external events,
and the public response to or fear of such diseases or events, have had, and may
in the future have, an adverse effect on the Fund’s investments and net asset
value (“NAV”) and can lead to increased market volatility. For example, the
diseases or events themselves or any preventative or protective actions that
governments may take in respect of such diseases or events may result in periods
of business disruption, inability to obtain raw materials, supplies and
component parts, and reduced or disrupted operations for the Fund’s portfolio
companies. The occurrence and pendency of such diseases or events could
adversely affect the economies and financial markets either in specific
countries or worldwide. Rates of inflation have recently risen. The value of
assets or income from an investment may be worth less in the future as inflation
decreases the value of money. As inflation increases, the real value of the
Fund’s assets may decline.
Derivatives
The
Fund may, but is not required to, use derivatives for hedging or other risk
management purposes or as part of its investment strategies. Derivatives are
financial contracts whose value depends on, or is derived from, the value of an
underlying asset, reference rate or index. The Fund may use derivatives to earn
income and enhance returns, to hedge or adjust the risk profile of its
investments, to replace more traditional direct investments and to obtain
exposure to otherwise inaccessible markets.
There
are four principal types of derivatives—options, futures contracts, forwards and
swaps—each of which is described below. Derivatives include listed and cleared
transactions where the Fund’s derivatives trade counterparty is an exchange or
clearinghouse, and non‑cleared bilateral “over‑the‑counter” transactions that
are privately negotiated and where the Fund’s derivative trade counterparty is a
financial institution. Exchange-traded or cleared derivatives transactions tend
to be subject to less counterparty credit risk than those that are bilateral and
privately negotiated.
The
Fund’s use of derivatives may involve risks that are different from, or possibly
greater than, the risks associated with investing directly in securities or
other more traditional instruments. These risks include the risk that the value
of a derivative instrument may not correlate perfectly, or at all, with the
value of the assets, reference rates, or indices that they are designed to
track. Other risks include: the possible absence of a liquid secondary market
for a particular instrument and possible exchange-imposed price fluctuation
limits, either of which may make it difficult or impossible to close out a
position when desired; and the risk that the counterparty will not perform its
obligations. Certain derivatives may have a leverage component and involve
leverage risk. Adverse changes in the value or level of the underlying asset,
note or index can result in a loss substantially greater than the Fund’s
investment (in some cases, the potential loss is unlimited).
The
Fund’s investments in derivatives may include, but are not limited to, the
following:
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Forward Contracts. A forward contract is
an agreement that obligates one party to buy, and the other party to sell,
a specific quantity of an underlying commodity or other tangible asset for
an agreed-upon price at a future date. A forward contract generally is
settled by physical delivery of the commodity or tangible asset to an
agreed-upon location (rather than settled by cash) or is rolled forward
into a new forward contract or, in the case of a non‑deliverable forward,
by a cash |
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payment
at maturity. The Fund’s investments in forward contracts may include the
following: |
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Forward
Currency Exchange Contracts. The Fund may purchase or sell forward
currency exchange contracts for hedging purposes to minimize the risk from
adverse changes in the relationship between the U.S. Dollar and other
currencies or for non‑hedging purposes as a means of making direct
investments in foreign currencies, as described below under “Other
Derivatives and Strategies—Currency Transactions”. The Fund, for example,
may enter into a forward contract as a transaction hedge (to “lock in” the
U.S. Dollar price of a non‑U.S. Dollar security), as a position hedge
(to protect the value of securities the Fund owns that are denominated in
a foreign currency against substantial changes in the value of the foreign
currency) or as a cross-hedge (to protect the value of securities the Fund
owns that are denominated in a foreign currency against substantial
changes in the value of that foreign currency by entering into a forward
contract for a different foreign currency that is expected to change in
the same direction as the currency in which the securities are
denominated). |
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Futures Contracts and Options on Futures
Contracts. A futures contract is a standardized, exchange-traded
agreement that obligates the buyer to buy and the seller to sell a
specified quantity of an underlying asset (or settle for cash the value of
a contract based on an underlying asset, rate or index) at a specific
price on the contract maturity date. Options on futures contracts are
options that call for the delivery of futures contracts upon exercise. The
Fund may purchase or sell futures contracts and options thereon to hedge
against changes in interest rates, securities (through index futures or
options) or currencies. The Fund may also purchase or sell futures
contracts for foreign currencies or options thereon for non‑hedging
purposes as a means of making direct investments in foreign currencies, as
described below under “Other Derivatives and Strategies—Currency
Transactions”. |
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Options. An option is an agreement that,
for a premium payment or fee, gives the option holder (the buyer) the
right but not the obligation to buy (a “call option”) or sell (a “put
option”) the underlying asset (or settle for cash an amount based on an
underlying asset, rate or index) at a specified price (the exercise price)
during a period of time or on a specified date. Investments in options are
considered speculative. The Fund may lose the premium paid for them if the
price of the underlying security or other asset decreased or remained the
same (in the case of a call option) or increased or remained the same (in
the case of a put option). If a put or call option purchased by the Fund
were permitted to expire without being sold or exercised, its premium
would represent a loss to the Fund. The Fund’s investments in options
include the following: |
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Options
on Foreign Currencies. The Fund may invest in options on foreign
currencies that are privately negotiated or traded on U.S. or foreign
exchanges for hedging purposes to protect against declines in the
U.S. Dollar value of foreign currency denominated securities held by
the Fund and against increases in the U.S. Dollar cost of securities
to be acquired. The purchase of an option on a foreign currency may
constitute an effective hedge against fluctuations in exchange rates,
although if rates move adversely, the Fund may forfeit the entire amount
of the premium plus related transaction costs. The Fund may also invest in
options on foreign currencies for non‑hedging purposes as a means of
making direct investments in foreign currencies, as described below under
“Other Derivatives and Strategies—Currency Transactions”.
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Options
on Securities. The Fund may purchase or write a put or call option on
securities. The Fund will only exercise an option it purchased if the
price of the reference security is less (in the case of a put option) or
more (in the case of a call option) than the exercise price. If the Fund
does not exercise a purchased option, the premium it paid for the option
will be lost. The Fund may write covered options, which means writing an
option for securities the Fund owns, and uncovered options. The Fund may
also enter into options on the yield “spread” or yield differential
between two securities. In contrast to other types of options, this option
is based on the difference between the yields of designated securities,
futures or other instruments. In addition, The Fund may write covered
straddles. A straddle is a combination of a call and a put written on the
same underlying security. In purchasing an option on securities, the Fund
would be in a position to realize a gain if, during the option period, the
price of the underlying securities increased (in the case of a call) or
decreased (in the case of a put) by an amount in excess of the premium
paid; otherwise the Fund would experience a loss not greater than the
premium paid for the option. Thus, the Fund would realize a loss if the
price of the underlying security declined or remained the same (in the
case of a call) or increased or remained the same (in the case of a put)
or otherwise did not increase (in the case of a put) or decrease (in the
case of a call) by more than the amount of the premium. If a put or call
option purchased by the Fund were permitted to expire without being sold
or exercised, its premium would represent a loss to the Fund.
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If
the Fund purchases or writes privately-negotiated options on securities, it will
effect such transactions only with investment dealers and other financial
institutions (such as commercial banks or savings and loan institutions) deemed
creditworthy by the Adviser. The Adviser has adopted procedures for monitoring
the creditworthiness of such counterparties.
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Options
on Securities Indices. An option on a securities index is similar to an
option on a security except that, rather than taking or making delivery of
a security at a specified price, an option on a securities index gives the
holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the chosen index is greater than (in the case
of a call) or less than (in the case of a put) the exercise price of the
option. |
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Other
Option Strategies. In an effort to earn extra income, to adjust exposure
to individual securities or markets, or to protect all or a portion of its
portfolio from a decline in value, sometimes within certain ranges, the
Fund may use option strategies such as the concurrent purchase of a call
or put option, including on individual securities, stock indices, futures
contracts (including on individual securities and stock indices) or shares
of exchange-traded funds (“ETFs”) at one strike price and the writing of a
call or put option on the same individual security, stock index, futures
contract or ETF at a higher strike price in the case of a call option or
at a lower strike price in the case of a put option. The maximum profit
from this strategy would result for the call options from an increase in
the value of the individual security, stock index, futures contract or ETF
above the higher strike price or, for the put options, from the decline in
the value of the individual security, stock index, futures contract or ETF
below the lower strike price. If the price of the individual security,
stock index, futures contract or ETF declines, in the case of the call
option, or increases, in the case of the put option, the Fund has the risk
of losing the entire amount paid for the call or put options.
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Swap Transactions. A
swap is an agreement that obligates two parties to exchange a series of
cash flows at specified intervals (payment dates) based upon, or
calculated by, reference to changes in specified prices or rates (e.g., interest rates in the case of
interest rate swaps or currency exchange rates in the case of currency
swaps) for a specified amount of an underlying asset (the “notional”
principal amount). Generally, the notional principal amount is used solely
to calculate the payment stream, but is not exchanged. Most swaps are
entered into on a net basis (i.e.,
the two payment streams are netted out, with the Fund receiving or paying,
as the case may be, only the net amount of the two payments). Certain
standardized swaps, including certain interest rate swaps and credit
default swaps, are subject to mandatory central clearing and are required
to be executed through a regulated swap execution facility. Cleared swaps
are transacted through futures commission merchants (“FCMs”) that are
members of central clearinghouses with the clearinghouse serving as
central counterparty, similar to transactions in futures contracts. The
Fund posts initial and variation margin to support its obligations under
cleared swaps by making payments to its clearing member FCMs. Central
clearing is intended to reduce counterparty credit risks and increase
liquidity, but central clearing does not make swap transactions risk free.
The Securities and Exchange Commission (the “SEC”) may adopt similar
clearing and execution requirements in respect of certain security-based
swaps under its jurisdiction. Privately negotiated swap agreements are
two‑party contracts entered into primarily by institutional investors and
are not cleared through a third party, nor are these required to be
executed on a regulated swap execution facility. The Fund’s investments in
swap transactions include the following: |
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Interest
Rate Swaps, Swaptions, Caps and Floors. Interest rate swaps involve the
exchange by the Fund with another party of payments calculated by
reference to specified interest rates (e.g., an exchange of floating-rate
payments for fixed-rate payments). Unless there is a counterparty default,
the risk of loss to the Fund from interest rate swap transactions is
limited to the net amount of interest payments that the Fund is
contractually obligated to make. If the counterparty to an interest rate
swap transaction defaults, the Fund’s risk of loss consists of the net
amount of interest payments that the Fund contractually is entitled to
receive. |
An
option on a swap agreement, also called a “swaption”, is an option that gives
the buyer the right, but not the obligation, to enter into a swap on a future
date in exchange for paying a market-based “premium”. A receiver swaption gives
the owner the right to receive the total return of a specified asset, reference
rate, or index. A payer swaption gives the owner the right to pay the total
return of a specified asset, reference rate, or index. Swaptions also include
options that allow an existing swap to be terminated or extended by one of the
counterparties.
The
purchase of an interest rate cap entitles the purchaser, to the extent that a
specified index exceeds a predetermined interest rate, to receive payments of
interest on a contractually-based principal amount from the party selling the
interest rate cap. The purchase of an interest rate floor entitles the
purchaser, to the extent that a specified index falls below a predetermined
interest rate, to receive payments of interest on an agreed principal amount
from the party selling the interest rate floor. It may be more difficult for the
Fund to trade or close out interest rate caps and floors in comparison to other
types of swaps.
There
is no limit on the amount of interest rate transactions that may be entered into
by the Fund. The value of these transactions will fluctuate based on changes in
interest rates.
Interest
rate swap, swaption, cap and floor transactions may, for example, be used in an
effort to preserve a return or spread on a particular investment or a portion of
the Fund’s portfolio or to protect against an increase in the price of
securities the Fund anticipates purchasing at a later date. Interest rate swaps
may also be used to leverage the Fund’s investments by creating positions that
are functionally similar to purchasing a municipal or other fixed-income
security but may only require payments to a swap counterparty under certain
circumstances and allow the Fund to efficiently increase (or decrease) its
duration and income.
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Inflation
(CPI) Swaps. Inflation swap agreements are contracts in which one party
agrees to pay the cumulative percentage increase in a price index (the
Consumer Price Index with respect to CPI swaps) over the term of the swap
(with some lag on the inflation index), and the other pays a compounded
fixed rate. Inflation swap agreements may be used to protect the NAV of
the Fund against an |
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unexpected
change in the rate of inflation measured by an inflation index since the
value of these agreements is expected to increase if inflation increases.
The Fund will enter into inflation swaps on a net basis. The values of
inflation swap agreements are expected to change in response to changes in
real interest rates. Real interest rates are tied to the relationship
between nominal interest rates and the rate of inflation. If nominal
interest rates increase at a faster rate than inflation, real interest
rates may rise, leading to a decrease in value of an inflation swap
agreement. |
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Credit
Default Swap Agreements. The “buyer” in a credit default swap contract is
obligated to pay the “seller” a periodic stream of payments over the term
of the contract in return for a contingent payment upon the occurrence of
a credit event with respect to an underlying reference obligation.
Generally, a credit event means bankruptcy, failure to pay, obligation
acceleration or restructuring. The Fund may be either the buyer or seller
in the transaction. If the Fund is a seller, the Fund receives a fixed
rate of income throughout the term of the contract, which typically is
between one month and ten years, provided that no credit event occurs. If
a credit event occurs, the Fund, as seller, typically must pay the
contingent payment to the buyer, which will be either (i) the “par
value” (face amount) of the reference obligation, in which case the Fund
will receive the reference obligation in return or (ii) an amount
equal to the difference between the face amount and the current market
value of the reference obligation. As a buyer, if a credit event occurs,
the Fund would be the receiver of such contingent payments, either
delivering the reference obligation in exchange for the full notional
(face) value of a reference obligation that may have little or no value,
or receiving a payment equal to the difference between the face amount and
the current market value of the obligation. The current market value of
the reference obligation is typically determined via an auction process
sponsored by the International Swaps and Derivatives Association, Inc. The
periodic payments previously received by the Fund, coupled with the value
of any reference obligation received, may be less than the full amount it
pays to the buyer, resulting in a loss to the Fund. If the Fund is a buyer
and no credit event occurs, the Fund will lose its periodic stream of
payments over the term of the contract. However, if a credit event occurs,
the buyer typically receives full notional value for a reference
obligation that may have little or no value. |
Credit
default swaps may involve greater risks than if the Fund had invested in the
reference obligation directly. Credit default swaps are subject to general
market risk and credit risk and may be illiquid.
|
– |
Currency
Swaps. The Fund may invest in currency swaps for hedging purposes to
protect against adverse changes in exchange rates between the
U.S. Dollar and other currencies or for non‑hedging purposes as a
means of making direct investments in foreign currencies, as described
below under “Other Derivatives and Strategies—Currency Transactions”.
Currency swaps involve the exchange by the Fund with another party of a
series of payments in specified currencies. Currency swaps may be
bilateral and privately negotiated with the Fund expecting to achieve an
acceptable degree of correlation between its portfolio investments and its
currency swaps position. Currency swaps may involve the exchange of actual
principal amounts of currencies by the counterparties at the initiation,
and again upon the termination, of the transaction.
|
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– |
Total
Return Swaps. The Fund may enter into total return swaps, under which one
party agrees to pay the other the total return of a defined underlying
asset, such as a security or basket of securities, or non‑asset reference,
such as a securities index, during the specified period in return for
periodic payments based on a fixed or variable interest rate or the total
return from different underlying assets or references. Total return swaps
could result in losses if the underlying asset or reference does not
perform as anticipated. |
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– |
Variance
and Correlation Swaps. The Fund may enter into variance or correlation
swaps to hedge market risk or adjust exposure to the volatility of the
securities markets. Variance swaps are contracts in which two parties
agree to exchange cash payments based on the difference between the stated
level of variance and the actual variance realized on an underlying asset
or index. “Variance” as used here is defined as the sum of the square of
the returns on the reference asset or index (which in effect is a measure
of its “volatility”) over the length of the contract term. The parties to
a variance swap can be said to exchange actual volatility for a
contractually stated rate of volatility. Correlation swaps are contracts
in which two parties agree to exchange cash payments based on the
differences between the stated and the actual correlation realized on the
underlying securities within a given index. “Correlation” as used here is
defined as the weighted average of the correlations between the daily
returns of each pair of securities within a given index. If two assets are
said to be closely correlated, it means that their daily returns vary in
similar proportions or along similar trajectories.
|
• |
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Other Derivatives and Strategies
|
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Eurodollar
Instruments. Eurodollar instruments are essentially U.S.
Dollar-denominated futures contracts or options that are linked to the
London Interbank Offered Rate (LIBOR) or another reference rate.
Eurodollar futures contracts enable purchasers to obtain a fixed rate for
the lending of funds and sellers to obtain a fixed rate for borrowings. In
2017, the United Kingdom Financial Conduct Authority (“FCA”), which
regulates LIBOR, announced a desire to phase out the use of LIBOR by the
end of 2021. As announced by the FCA and LIBOR’s administrator, ICE
Benchmark Administration, most LIBOR settings (which reflect LIBOR rates
quoted in different currencies over various time periods) have not been
published since the end of 2021, but the most widely used U.S. Dollar
LIBOR settings are expected to |
10
|
continue
to be published until June 30, 2023. See “LIBOR Transition and
Associated Risk” below for additional information.
|
|
– |
Currency
Transactions. The Fund may invest in non‑U.S. Dollar-denominated
securities on a currency hedged or un‑hedged basis. The Adviser may
actively manage the Fund’s currency exposures and may seek investment
opportunities by taking long or short positions in currencies through the
use of currency-related derivatives, including forward currency exchange
contracts, futures contracts and options on futures contracts, swaps and
options. The Adviser may enter into transactions for investment
opportunities when it anticipates that a foreign currency will appreciate
or depreciate in value but securities denominated in that currency are not
held by the Fund and do not present attractive investment opportunities.
Such transactions may also be used when the Adviser believes that it may
be more efficient than a direct investment in a foreign
currency-denominated security. The Fund may also conduct currency exchange
contracts on a spot basis (i.e.,
for cash at the spot rate prevailing in the currency exchange market for
buying or selling currencies). |
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– |
Synthetic
Foreign Equity Securities. The Fund may invest in different types of
derivatives generally referred to as synthetic foreign equity securities.
These securities may include international warrants or local access
products. International warrants are financial instruments issued by banks
or other financial institutions, which may or may not be traded on a
foreign exchange. International warrants are a form of derivative security
that may give holders the right to buy or sell an underlying security or a
basket of securities representing an index from or to the issuer of the
warrant for a particular price or may entitle holders to receive a cash
payment relating to the value of the underlying security or index, in each
case upon exercise by the Fund. Local access products are similar to
options in that they are exercisable by the holder for an underlying
security or a cash payment based upon the value of that security, but are
generally exercisable over a longer term than typical options. These types
of instruments may be American style, which means that they can be
exercised at any time on or before the expiration date of the
international warrant, or European style, which means that they may be
exercised only on the expiration date. |
Other
types of synthetic foreign equity securities in which the Fund may invest
include covered warrants and low exercise price warrants. Covered warrants
entitle the holder to purchase from the issuer, typically a financial
institution, upon exercise, common stock of an international company or receive
a cash payment (generally in U.S. Dollars). The issuer of the covered warrants
usually owns the underlying security or has a mechanism, such as owning equity
warrants on the underlying securities, through which it can obtain the
underlying securities. The cash payment is calculated according to a
predetermined formula, which is generally based on the difference between the
value of the underlying security on the date of exercise and the strike price.
Low exercise price warrants are warrants with an exercise price that is very low
relative to the market price of the underlying instrument at the time of issue
(e.g., one cent or less). The buyer of a
low exercise price warrant effectively pays the full value of the underlying
common stock at the outset. In the case of any exercise of warrants, there may
be a time delay between the time a holder of warrants gives instructions to
exercise and the time the price of the common stock relating to exercise or the
settlement date is determined, during which time the price of the underlying
security could change significantly. In addition, the exercise or settlement
date of the warrants may be affected by certain market disruption events, such
as difficulties relating to the exchange of a local currency into
U.S. Dollars, the imposition of capital controls by a local jurisdiction or
changes in the laws relating to foreign investments. These events could lead to
a change in the exercise date or settlement currency of the warrants, or
postponement of the settlement date. In some cases, if the market disruption
events continue for a certain period of time, the warrants may become worthless,
resulting in a total loss of the purchase price of the warrants.
The
Fund will only acquire synthetic foreign equity securities issued by entities
deemed to be creditworthy by the Adviser, which will monitor the
creditworthiness of the issuers on an ongoing basis. Investments in these
instruments involve the risk that the issuer of the instrument may default on
its obligation to deliver the underlying security or cash in lieu thereof. These
instruments may also be subject to illiquid investments risk because there may
be a limited secondary market for trading the warrants. They are also subject,
like other investments in foreign securities, to foreign (non‑U.S.) risk and
currency risk.
Convertible
Securities
Prior
to conversion, convertible securities have the same general characteristics as
non‑convertible debt securities, which generally provide a stable stream of
income with generally higher yields than those of equity securities of the same
or similar issuers. The price of a convertible security will normally vary with
changes in the price of the underlying equity security, although the higher
yield tends to make the convertible security less volatile than the underlying
equity security. As with debt securities, the market value of convertible
securities tends to decrease as interest rates rise and increase as interest
rates decline. While convertible securities generally offer lower interest or
dividend yields than non‑convertible debt securities of similar quality, they
offer investors the potential to benefit from increases in the market prices of
the underlying common stock. Convertible debt securities that are rated Baa3 or
lower by Moody’s Investors Service, Inc. or BBB‑ or lower by S&P Global
Ratings or Fitch Ratings, or the equivalent rating by any other nationally
recognized statistical rating organization, and comparable unrated securities
may share some or all of the risks of debt securities with those ratings.
11
Forward
Commitments
Forward
commitments for the purchase or sale of securities may include purchases on a
when-issued basis or purchases or sales on a delayed delivery basis. In some
cases, a forward commitment may be conditioned upon the occurrence of a
subsequent event, such as approval and consummation of a merger, corporate
reorganization or debt restructuring or approval of a proposed financing by
appropriate authorities (i.e., a “when,
as and if issued” trade).
When
forward commitments with respect to fixed-income securities are negotiated, the
price, which is generally expressed in yield terms, is fixed at the time the
commitment is made, but payment for and delivery of the securities take place at
a later date. Securities purchased or sold under a forward commitment are
subject to market fluctuation and no interest or dividends accrue to the
purchaser prior to the settlement date. There is a risk of loss if the value of
either a purchased security declines before the settlement date or the security
sold increases before the settlement date. The use of forward commitments helps
the Fund to protect against anticipated changes in interest rates and prices.
Illiquid
Securities
The
Fund limits its investments in illiquid securities to 15% of its net assets.
Under Rule 22e‑4 under the Investment Company Act of 1940 (the “1940 Act”), the
term “illiquid securities” means any security or investment that the Fund
reasonably expects cannot be sold or disposed of in current market conditions in
seven calendar days or less without the sale or disposition significantly
changing the market value of the investment.
A
fund that invests in illiquid securities may not be able to sell such securities
and may not be able to realize their full value upon sale. Restricted securities
(securities subject to legal or contractual restrictions on resale) may be
illiquid. Some restricted securities (such as securities issued pursuant to Rule
144A (“Rule 144A Securities”) under the Securities Act of 1933 (“Securities
Act”) or certain commercial paper) may be more difficult to trade than other
types of securities.
Inflation-Indexed
Securities
Inflation-indexed
securities are fixed-income securities whose value is periodically adjusted
according to the rate of inflation. If the index measuring inflation falls, the
principal value of these securities will be adjusted downward, and consequently
the interest payable on these securities (calculated with respect to a smaller
principal amount) will be reduced.
The
value of inflation-indexed securities tends to react to changes in real interest
rates. In general, the price of inflation-indexed securities can fall when real
interest rates rise, and can rise when real interest rates fall. In addition,
the value of these securities can fluctuate based on fluctuations in
expectations of inflation. Interest payments on these securities can be
unpredictable and will vary as the principal and/or interest is adjusted for
inflation.
Investment
in Other Exchange-Traded Funds and Other Investment Companies
The
Fund may invest in other investment companies, such as closed‑end investment
companies, unit investment trusts, other ETFs and other open‑end investment
companies, provided that the investment is consistent with the Fund’s investment
policies and restrictions. The Fund’s investments in other investment companies
will not exceed 10% of the Fund’s total assets. As a shareholder of another
investment company, the Fund would bear, along with other shareholders, its pro
rata portion of the other investment company’s expenses, including advisory
fees. These expenses would be in addition to the management fee that the Fund
bears directly in connection with its own operations. The Fund’s investments in
other investment companies will comply with applicable 1940 Act rules.
The
Fund’s investments in other investment companies may include money market funds
managed by the Adviser, including the AB
Government Money Market Portfolio, a series of AB Fixed-Income Shares,
Inc. Investments in money market funds are not subject to the 10% limitation set
forth above.
Investments
in Initial Public Offering (“IPO”) Securities
The
Fund may invest in securities of companies that are offered pursuant to an IPO.
Investments in IPO securities involve greater risks than investments in shares
of companies that have traded publicly on an exchange for extended periods of
time. In addition to the risks associated with equity securities generally, IPO
securities may be subject to additional risk due to one or more factors such as
the absence of a prior public market, unseasoned trading in the securities, the
small number of securities available for trading, the lack of investor knowledge
of the company, the lack of an operating history of the company, dependence of
the company on key personnel, suppliers or a limited number of customers and
other factors. These factors may cause IPO shares to be volatile in price. While
the Fund may hold IPO securities for a period of time, it may sell them in the
aftermarket soon after the purchase, which could increase portfolio turnover and
lead to increased expenses such as commissions and transaction costs.
Investments in IPOs could have a dramatic impact on the Fund’s performance
(higher or lower) if the Fund’s assets are relatively small. In addition, as the
Fund increases in size, the impact of IPOs on the Fund’s performance will
generally decrease.
Investments
in Certain Types of Privately Placed Securities
The
Fund may invest in privately placed securities. Privately placed securities in
which the Fund invests are typically equity securities of privately held
companies that have not been offered to the public and are not publicly traded.
Investments in privately placed securities may include venture capital
investments, which are investments in new, early or late stage companies and are
often funded by, or in connection with, venture capital firms. Investments in
securities of privately held companies may present significant opportunities for
capital appreciation but involve a high degree of risk that may result in
significant decreases in the value of these investments. Privately held
companies may not have established products, experienced management or earnings
history. The Fund may not be able to sell such investments when the portfolio
managers and/or investment personnel deem it appropriate to do so because the
securities are not publicly traded. As such, these investments are generally
considered to be illiquid until a company’s
12
public
offering (which may never occur) and are often subject to additional contractual
restrictions on resale following any public offering that may prevent the Fund
from selling its shares of these companies for a period of time. Market
conditions, developments within a company, investor perception or regulatory
decisions may adversely affect a privately held company and delay or prevent a
privately held company from ultimately offering its securities to the public. If
the Fund invests in privately placed securities, it may incur additional
expenses, such as valuation-related expenses, in connection with such
investments. Public companies may also issue privately placed securities, which
may be illiquid and subject to contractual restrictions on resale.
Loans
of Portfolio Securities
For
the purpose of achieving income, the Fund may make loans of portfolio securities
to brokers, dealers and financial institutions (“borrowers”) to the extent
permitted under the 1940 Act or the rules and regulations thereunder (as such
statute, rules or regulations may be amended from time to time) or by guidance
regarding, interpretations of or exemptive orders under the 1940 Act. Under the
Fund’s securities lending program, all securities loans will be secured
continuously by cash collateral and/or non‑cash collateral. Non‑cash collateral
will include only securities issued or guaranteed by the U.S. Government or one
of its agencies or instrumentalities. The loans will be made only to borrowers
deemed by the Adviser to be creditworthy, and when, in the judgment of the
Adviser, the consideration that can be earned at that time from securities loans
justifies the attendant risk. If a loan is collateralized by cash, the Fund will
be compensated for the loan from a portion of the net return from the interest
earned on the collateral after a rebate paid to the borrower (in some cases this
rebate may be a “negative rebate” or fee paid by the borrower to the Fund in
connection with the loan). If the Fund receives non‑cash collateral, the Fund
will receive a fee from the borrower generally equal to a negotiated percentage
of the market value of the loaned securities. For its services, the securities
lending agent receives a fee from the Fund.
The
Fund will have the right to call a loan and obtain the securities loaned at any
time on notice to the borrower within the normal and customary settlement time
for the securities. While the securities are on loan, the borrower is obligated
to pay the Fund amounts equal to any income or other distributions from the
securities. The Fund will not have the right to vote any securities during the
existence of a loan, but will have the right to recall loaned securities in
order to exercise voting or other ownership rights. When the Fund lends
securities, its investment performance will continue to reflect changes in the
value of the securities loaned.
The
Fund will invest any cash collateral in shares of a money market fund approved
by the Fund’s Board of Directors or Trustees (the “Board”) and expected to be
managed by the Adviser. Any such investment will be at the Fund’s risk. The Fund
may pay reasonable finders’, administrative, and custodial fees in connection
with a loan.
Principal
risks of lending portfolio securities include that the borrower will fail to
return the loaned securities upon termination of the loan and that the value of
the collateral will not be sufficient to replace the loaned securities.
LIBOR
Transition and Associated Risk
The
Fund may be exposed to debt securities, derivatives or other financial
instruments that utilize the London Interbank Offered Rate, or “LIBOR,” as a
“benchmark” or “reference rate” for various interest rate calculations. In 2017,
the FCA announced a desire to phase out the use of LIBOR by the end of 2021. As
announced by the FCA and LIBOR’s administrator, ICE Benchmark Administration,
most LIBOR settings (which reflect LIBOR rates quoted in different currencies
over various time periods) have not been published since the end of 2021, but
the most widely used U.S. Dollar LIBOR settings are expected to continue to
be published until June 30, 2023. However, banks were strongly encouraged
to cease entering into agreements with counterparties referencing LIBOR by the
end of 2021. It is possible that a subset of LIBOR settings will be published
after these dates on a “synthetic” basis, but any such publications would be
considered non‑representative of the underlying market. Since 2018 the Federal
Reserve Bank of New York has published the Secured Overnight Financing Rate
(referred to as SOFR), which is intended to replace U.S. Dollar LIBOR. SOFR
is a broad measure of the cost of borrowing cash overnight collateralized by
U.S. Treasury securities in the repurchase agreement (repo) market and has been
used increasingly on a voluntary basis in new instruments and transactions. In
addition, on March 15, 2022, the Adjustable Interest Rate Act was signed
into law. This law provides a statutory fallback mechanism to replace LIBOR with
a benchmark rate that is selected by the Federal Reserve Board and based on SOFR
for certain contracts that reference LIBOR without adequate fallback provisions.
On December 16, 2022, the Federal Reserve Board adopted regulations
implementing the law by identifying benchmark rates based on SOFR that will
replace LIBOR in different categories of financial contracts after June 30,
2023. The regulations include provisions that (i) provide a safe harbor for
selection or use of a replacement benchmark rate selected by the Federal Reserve
Board; (ii) clarify who may choose the replacement benchmark rate selected
by the Federal Reserve Board; and (iii) ensure that contracts with a
replacement benchmark rate selected by the Federal Reserve Board will not be
interrupted or terminated following the replacement of LIBOR.
The
elimination of LIBOR or changes to other reference rates or any other changes or
reforms to the determination or supervision of reference rates could have an
adverse impact on the market for, or value of, any securities or payments linked
to those reference rates, which may adversely affect the Fund’s performance
and/or NAV. Uncertainty and risk also remain regarding the willingness and
ability of issuers and lenders to include revised provisions in new and existing
contracts or instruments. Consequently, the transition from LIBOR to other
reference rates may lead to increased volatility and illiquidity in markets that
are tied to LIBOR, fluctuations in values of LIBOR-related investments or
investments in issuers that utilize LIBOR, increased difficulty in borrowing or
refinancing and diminished effectiveness of hedging strategies, potentially
adversely affecting the Fund’s performance. Furthermore, the risks associated
with the expected discontinuation of LIBOR and transition may be exacerbated if
the work necessary to effect an orderly transition to an alternative reference
rate is not completed in a timely manner.
13
Neither
the effect of the LIBOR transition process nor its ultimate success can yet be
known.
Preferred
Stock
The
Fund may invest in preferred stock. Preferred stock is a class of capital stock
that typically pays dividends at a specified rate. Preferred stock is generally
senior to common stock, but is subordinated to any debt the issuer has
outstanding. Accordingly, preferred stock dividends are not paid until all debt
obligations are first met. Preferred stock may be subject to more fluctuations
in market value, due to changes in market participants’ perceptions of the
issuer’s ability to continue to pay dividends, than debt of the same issuer.
These investments include convertible preferred stock, which includes an option
for the holder to convert the preferred stock into the issuer’s common stock
under certain conditions, among which may be the specification of a future date
when the conversion must begin, a certain number of shares of common stock per
share of preferred stock, or a certain price per share for the common stock.
Convertible preferred stock tends to be more volatile than non‑convertible
preferred stock, because its value is related to the price of the issuer’s
common stock as well as the dividends payable on the preferred stock.
Real
Estate Investment Trusts (“REITs”)
REITs
are pooled investment vehicles that invest primarily in income-producing real
estate or real estate related loans or interests. REITs are generally classified
as equity REITs, mortgage REITs or a combination of equity and mortgage REITs.
Equity REITs invest the majority of their assets directly in real property and
derive income primarily from the collection of rents. Equity REITs can also
realize capital gains by selling properties that have appreciated in value.
Mortgage REITs invest the majority of their assets in real estate mortgages and
derive income from the collection of interest payments and principal. Similar to
investment companies such as the Fund, REITs are not taxed on income distributed
to shareholders provided they comply with several requirements of the U.S.
Internal Revenue Code of 1986, as amended (the “Code”). The Fund will indirectly
bear its proportionate share of expenses incurred by REITs in which the Fund
invests in addition to the expenses incurred directly by the Fund.
Repurchase
Agreements and Buy/Sell Back Transactions
The
Fund may enter into repurchase agreements. In a repurchase agreement transaction
the Fund buys a security and simultaneously agrees to sell it back to the
counterparty at a specified price in the future. However, a repurchase agreement
is economically similar to a secured loan, in that the Fund lends cash to a
counterparty for a specific term, normally a day or a few days, and is given
acceptable collateral (the purchased securities) to hold in case the
counterparty does not repay the loan. The difference between the purchase price
and the repurchase price of the securities reflects an agreed-upon “interest
rate”. Given that the price at which the Fund will sell the collateral back is
specified in advance, the Fund is not exposed to price movements on the
collateral unless the counterparty defaults. If the counterparty defaults on its
obligation to buy back the securities at the maturity date and the liquidation
value of the collateral is less than the outstanding loan amount, the Fund would
suffer a loss. In order to further mitigate any potential credit exposure to the
counterparty, if the value of the securities falls below a specified level that
is linked to the loan amount during the life of the agreement, the counterparty
must provide additional collateral to support the loan.
The
Fund may enter into buy/sell back transactions, which are similar to repurchase
agreements. In this type of transaction, the Fund enters a trade to buy
securities at one price and simultaneously enters a trade to sell the same
securities at another price on a specified date. Similar to a repurchase
agreement, the repurchase price is higher than the sale price and reflects
current interest rates. Unlike a repurchase agreement, however, the buy/sell
back transaction is considered two separate transactions.
Reverse
Repurchase Agreements and Dollar Rolls
The
Fund may enter into reverse repurchase agreements and dollar rolls, subject to
the Fund’s limitations on borrowings. The terms of reverse repurchase agreements
are essentially the reverse of “repurchase agreements” described above. In a
reverse repurchase agreement transaction, the Fund sells a security and
simultaneously agrees to repurchase it at a specified time and price. The
economic effect of a reverse repurchase agreement is that of the Fund borrowing
money on a secured basis, and reverse repurchase agreements may be considered a
form of borrowing for some purposes. Even though the Fund posts securities as
collateral, the Fund maintains exposure to price declines on these securities
since it has agreed to repurchase the securities at a fixed price. Accordingly,
reverse repurchase agreements create leverage risk for the Fund because the Fund
maintains exposure to price declines of both the securities it sells in the
reverse repurchase agreement and any securities it purchases with the cash it
receives under the reverse repurchase agreement. If the value of the posted
collateral declines, the counterparty would require the Fund to post additional
collateral. If the value of the collateral increases, the Fund may ask for some
of its collateral back. If the counterparty defaults and fails to sell the
securities back to the Fund at a time when the market purchase price of the
securities exceeds the agreed-upon repurchase price, the Fund would suffer a
loss.
Dollar
rolls involve sales by the Fund of securities for delivery in the current month
and the Fund’s simultaneously contracting to repurchase substantially similar
(same type and coupon) securities on a specified future date. During the roll
period, the Fund forgoes principal and interest paid on the securities. The Fund
is compensated by the difference between the current sales price and the lower
forward price for the future purchase (often referred to as the “drop”) as well
as by the interest earned on the cash proceeds of the initial sale.
Reverse
repurchase agreements and dollar rolls involve the risk that the market value of
the securities the Fund is obligated to repurchase under the agreement may
decline below the repurchase price. In the event the buyer of securities under a
reverse repurchase agreement or dollar roll files for bankruptcy or becomes
insolvent, the Fund’s use of the proceeds of the agreement may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce the Fund’s obligation to repurchase the securities.
14
Rights
and Warrants
Rights
and warrants are option securities permitting their holders to subscribe for
other securities. Rights are similar to warrants except that they have a
substantially shorter duration. Rights and warrants do not carry with them
dividend or voting rights with respect to the underlying securities, or any
rights in the assets of the issuer. As a result, an investment in rights and
warrants may be considered more speculative than certain other types of
investments. In addition, the value of a right or a warrant does not necessarily
change with the value of the underlying securities, and a right or a warrant
ceases to have value if it is not exercised prior to its expiration date.
Short
Sales
The
Fund may make short sales as a part of overall portfolio management or to offset
a potential decline in the value of a security. A short sale involves the sale
of a security that the Fund does not own, or if the Fund owns the security, is
not to be delivered upon consummation of the sale. When the Fund makes a short
sale of a security that it does not own, it must borrow from a broker-dealer the
security sold short and deliver the security to the broker-dealer upon
conclusion of the short sale.
If
the price of the security sold short increases between the time of the short
sale and the time the Fund replaces the borrowed security, the Fund will incur a
loss; conversely, if the price declines, the Fund will realize a short-term
capital gain. The potential for the price of a fixed-income security sold short
to rise is a function of the combination of the remaining maturity of the
obligation, its creditworthiness and its yield. Unlike short sales of equities
or other instruments, potential for the price of a fixed-income security to rise
may be limited due to the fact that the security will be no more than par at
maturity. However, the short sale of other instruments or securities generally,
including fixed-income securities convertible into equities or other
instruments, a fixed-income security trading at a deep discount from par or that
pays a coupon that is high in relative and/or absolute terms, or that is
denominated in a currency other than the U.S. Dollar, involves the
possibility of a theoretically unlimited loss since there is a theoretically
unlimited potential for the market price of the security sold short to increase.
Standby
Commitment Agreements
Standby
commitment agreements are similar to put options that commit the Fund, for a
stated period of time, to purchase a stated amount of a security that may be
issued and sold to the Fund at the option of the issuer. The price and coupon of
the security are fixed at the time of the commitment. At the time of entering
into the agreement, the Fund is paid a commitment fee, regardless of whether the
security ultimately is issued. The Fund will enter into such agreements only for
the purpose of investing in the security underlying the commitment at a yield
and price considered advantageous to the Fund and unavailable on a firm
commitment basis.
There
is no guarantee that a security subject to a standby commitment will be issued.
In addition, the value of the security, if issued, on the delivery date may be
more or less than its purchase price. Since the issuance of the security is at
the option of the issuer, the Fund will bear the risk of capital loss in the
event the value of the security declines and may not benefit from an
appreciation in the value of the security during the commitment period if the
issuer decides not to issue and sell the security to the Fund.
Structured
Products
The
Fund may invest in certain hybrid derivatives-type instruments that combine
features of a traditional stock or bond with those of, for example, a futures
contract or an option. These instruments include structured notes and indexed
securities, commodity-linked notes and commodity index-linked notes and
credit-linked securities. The performance of the structured product, which is
generally a fixed-income security, is tied (positively or negatively) to the
price or prices of an unrelated reference indicator such as a security or basket
of securities, currencies, commodities, a securities or commodities index or a
credit default swap or other kinds of swaps. The structured product may not pay
interest or protect the principal invested. The structured product or its
interest rate may be a multiple of the reference indicator and, as a result, may
be leveraged and move (up or down) more rapidly than the reference indicator.
Investments in structured products may provide a more efficient and less
expensive means of obtaining exposure to underlying securities, commodities or
other derivatives, but may potentially be more volatile and carry greater
trading and market risk than investments in traditional securities. The purchase
of a structured product also exposes the Fund to the credit risk of the issuer
of the structured product.
Structured
notes are derivative debt instruments. The interest rate or principal of these
notes is determined by reference to an unrelated indicator (for example, a
currency, security, or index thereof) unlike a typical note where the borrower
agrees to make fixed or floating interest payments and to pay a fixed sum at
maturity. Indexed securities may include structured notes as well as securities
other than debt securities, the interest or principal of which is determined by
an unrelated indicator.
Commodity-linked
notes and commodity index-linked notes provide exposure to the commodities
markets. These are derivative securities with one or more commodity-linked
components that have payment features similar to commodity futures contracts,
commodity options, commodity indices or similar instruments. Commodity-linked
products may be either equity or debt securities, leveraged or unleveraged, and
have both security- and commodity-like characteristics. A portion of the value
of these instruments may be derived from the value of a commodity, futures
contract, index or other economic variable.
The
Fund may also invest in certain hybrid derivatives-type investments that combine
features of a traditional bond with those of certain derivatives such as a
credit default swap, an interest rate swap or other securities. These
investments include credit-linked securities. The issuers of these securities
frequently are limited purpose trusts or other special purpose vehicles that
invest in a derivative instrument or basket of derivative instruments in order
to provide exposure to certain fixed-income markets. For instance, the Fund may
invest in credit-linked securities as a
15
cash
management tool to gain exposure to a certain market or to remain fully invested
when more traditional income-producing securities are not available. The
performance of the structured product, which is generally a fixed-income
security, is linked to the receipt of payments from the counterparties to the
derivative instruments or other securities. The Fund’s investments in
credit-linked securities are indirectly subject to the risks associated with
derivative instruments, including among others, credit risk, default risk,
counterparty risk, interest rate risk and leverage risk. These securities are
generally structured as Rule 144A Securities so that they may be freely traded
among qualified institutional buyers. However, changes in the market for
credit-linked securities or the availability of willing buyers may result in
reduced liquidity for the securities.
Depositary
Receipts and Securities of Supranational Entities
The
Fund may invest in depositary receipts. American Depositary Receipts, or ADRs,
are depositary receipts typically issued by a U.S. bank or trust company that
evidence ownership of underlying securities issued by a foreign corporation.
Global Depositary Receipts, or GDRs, European Depositary Receipts, or EDRs, and
other types of depositary receipts are typically issued by non‑U.S. banks or
trust companies and evidence ownership of underlying securities issued by either
a U.S. or a non‑U.S. company. Depositary receipts may not necessarily be
denominated in the same currency as the underlying securities into which they
may be converted. In addition, the issuers of the stock underlying unsponsored
depositary receipts are not obligated to disclose material information in the
United States. Generally, depositary receipts in registered form are designed
for use in the U.S. securities markets, and depositary receipts in bearer form
are designed for use in securities markets outside of the United States. For
purposes of determining the country of issuance, investments in depositary
receipts of either type are deemed to be investments in the underlying
securities.
A
supranational entity is an entity designated or supported by the national
government of one or more countries to promote economic reconstruction or
development. Examples of supranational entities include the World Bank
(International Bank for Reconstruction and Development) and the European
Investment Bank. “Semi-governmental securities” are securities issued by
entities owned by either a national, state or equivalent government or are
obligations of one of such government jurisdictions that are not backed by its
full faith and credit and general taxing powers.
SPECIAL
RISKS OF EXCHANGE-TRADED SHARES
Fluctuation
of Net Asset Value and Share Price
The
NAV of the Fund’s shares will generally fluctuate with changes in the market
value of the Fund’s holdings. The Fund’s shares are listed on the NYSE Arca,
Inc. (the “Exchange”) and can be bought and sold in the secondary market at
market prices. Although a share’s market price is expected to approximate its
NAV, it is possible that the market price and NAV will vary significantly. As a
result, you may sustain losses if you pay more than the shares’ NAV when you
purchase shares, or receive less than the shares’ NAV when you sell shares, in
the secondary market. During periods of disruptions to creations and
redemptions, the existence of extreme market volatility, or lack of an active
trading market for the Fund’s shares, the market price of Fund shares is more
likely to differ significantly from the Fund’s NAV. During such periods, you may
incur significant losses if you sell your shares. There are various methods by
which investors can purchase and sell shares and various orders that may be
placed. Investors should consult their financial intermediary before purchasing
or selling shares of the Fund. Disruptions at market makers, Authorized
Participants or market participants may also result in significant differences
between the market price of the Fund’s shares and the Fund’s NAV. In addition,
in stressed market conditions, the market for shares may become less liquid in
response to deteriorating liquidity in the markets for the Fund’s underlying
portfolio holdings.
The
market price of shares during the trading day, like the price of any
exchange-traded security, includes a “bid/ask” spread, which can be greater
(wider) when there is little trading volume in Fund shares on the Exchange and
lower (narrower) when there is a lot of trading volume in Fund shares. In times
of severe market disruption, the bid/ask spread can increase significantly.
Non‑U.S.
Markets and Foreign Securities
Securities
held by the Fund may be traded in non‑U.S. markets that close at a different
time than the Exchange. During the time when the Exchange is open but after the
applicable local market closing, fixing or settlement times, bid‑ask spreads and
the resulting premium or discount to the Fund’s NAV may widen. The Adviser
expects that, under normal market conditions, large discounts or premiums to NAV
will not be sustained in the long term because of arbitrage opportunities.
During the time when the Exchange is open but after the applicable local market
has closed, the price of a foreign security that is included in the Fund’s
portfolio (and the Fund’s NAV) will be the closing price on that security’s
local market, updated for currency changes, until that local market opens again.
As a result, the Fund’s NAV may be calculated using “stale” prices of foreign
securities. This may contribute to the Fund’s NAV varying more widely from its
market price.
Information
about the premiums and discounts at which the Fund’s shares have traded is
available at www.abfunds.com.
Trading
Issues
Although
the Fund’s shares are listed on the Exchange, there can be no assurance that an
active trading market for the Fund’s shares will be maintained or that
requirements to remain listed will be met. Only an Authorized Participant may
engage in creation or redemption transactions directly with the Fund. The Fund
has a limited number of intermediaries that act as Authorized Participants.
There are no obligations of market makers to make a market in the Fund’s shares
or of Authorized Participants to submit purchase or redemption orders for
Creation Units. Decisions by market makers or Authorized Participants to reduce
their role with respect to market making or creation and redemption activities
during times of market stress, or a decline in the number of Authorized
Participants due to decisions to exit the business, bankruptcy, or other
factors, could inhibit the effectiveness of the arbitrage process in maintaining
the relationship
16
between
the underlying value of the Fund’s portfolio securities and the market price of
Fund shares. To the extent no other Authorized Participants step forward to
create or redeem Creation Units, Fund shares may trade at a discount to NAV and
possibly face delisting. This risk could be heightened if the Fund is investing
in non‑U.S. securities. In addition, trading of Fund shares in the secondary
market may be halted, for example, due to activation of individual or
market-wide “circuit breakers” affecting the Fund or its portfolio securities.
If trading halts or an unanticipated early closing of the Exchange occurs, a
shareholder may be unable to purchase or sell shares of the Fund. Foreside Fund
Services, LLC (“Foreside” or the “Distributor”), the distributor of the Fund’s
shares, does not maintain a secondary market in the shares.
If
the Fund’s shares are delisted from the Exchange, the Adviser may seek to list
the Fund shares on another market, merge the Fund with another ETF or
traditional mutual fund, or redeem the Fund shares at NAV.
Shares
of the Fund, similar to shares of other issuers listed on a stock exchange, may
be sold short and are therefore subject to the risk of increased volatility and
price decreases associated with being sold short.
ADDITIONAL
RISKS AND OTHER CONSIDERATIONS
Investments
in the Fund involve the risk considerations described below.
Borrowings
and Leverage
The
Fund may use borrowings for investment purposes subject to its investment
policies and procedures and to applicable statutory or regulatory requirements.
Borrowings by the Fund result in leveraging of the Fund’s shares. The Fund may
also use leverage for investment purposes by entering into transactions such as
reverse repurchase agreements, forward contracts, and dollar rolls or certain
other derivatives. This means that the Fund uses cash made available during the
term of these transactions to make investments in other securities.
Utilization
of leverage, which is usually considered speculative, involves certain risks to
the Fund’s shareholders. These include a higher volatility of the NAV of the
Fund’s shares of common stock and the relatively greater effect of changes in
the value of the Fund’s portfolio on the NAV of the shares caused by favorable
or adverse changes in market conditions or interest rates. In the case of
borrowings for investment purposes, so long as the Fund is able to realize a net
return on the leveraged portion of its investment portfolio that is higher than
the interest expense paid on borrowings, the effect of leverage will be to cause
the Fund’s shareholders to realize a higher net return than if the Fund were not
leveraged. If the interest expense on borrowings or other costs of leverage
approach the net return on the Fund’s investment portfolio or investments made
through leverage, as applicable, the benefit of leverage to the Fund’s
shareholders will be reduced. If the interest expense on borrowings or other
costs of leverage were to exceed the net return to the Fund, the Fund’s use of
leverage could result in a lower rate of net return than if the Fund were not
leveraged. Similarly, the effect of leverage in a declining market could
normally be a greater decrease in NAV than if the Fund were not leveraged.
The
SEC has adopted Rule 18f‑4 under the 1940 Act, which imposes limits on the
amount of derivatives and certain other forms of leverage into which a fund can
enter. Rule 18f‑4, among other things, permits a fund to treat certain financing
transactions either as borrowings (subject to asset coverage requirements under
the 1940 Act) or as “derivatives transactions” subject to certain risk-based
limits of Rule 18f‑4.
Foreign
(Non‑U.S.) Securities
Investing
in securities of foreign issuers involves special risks and considerations not
typically associated with investing in U.S. securities. The securities markets
of many foreign countries are relatively small, with the majority of market
capitalization and trading volume concentrated in a limited number of companies
representing a small number of industries. A fund that invests in securities of
foreign issuers may experience greater price volatility and significantly lower
liquidity than a portfolio invested solely in securities of U.S. companies.
These markets may be subject to greater influence by adverse events generally
affecting the market, and by large investors trading significant blocks of
securities, than is usual in the United States. Sanctions imposed by the U.S. or
a foreign country may restrict the Fund’s ability to purchase or sell foreign
securities or may require the Fund to divest its holdings in foreign securities,
which could adversely affect the value or liquidity of such holdings. The
imposition of sanctions could also adversely affect global sectors and economies
and thereby negatively affect the value of the Fund’s investments beyond any
direct exposure to the countries or regions subject to the sanctions.
In
addition, the securities markets of some foreign countries may be closed on
certain days when the Fund is open for business, including during normal trading
days and on certain days (e.g., local
holidays). When the Fund holds securities traded in foreign markets, the market
price for the Fund’s shares may be based on the last quoted price of securities
traded on a foreign exchange, which may cause a deviation between the market
price of the Fund’s share and the NAV per share, which could cause the Fund’s
shares to trade at a larger premium or discount. In addition, when a foreign
exchange is closed for trading, such as for local holidays, the Fund will be
unable to add to or exit its positions in certain foreign securities even though
it may otherwise be attractive to do so.
Securities
registration, custody, and settlement may in some instances be subject to delays
and legal and administrative uncertainties. Foreign investment in the securities
markets of certain foreign countries is restricted or controlled to varying
degrees. These restrictions or controls may at times limit or preclude
investment in certain securities and may increase the costs and expenses of the
Fund. In addition, the repatriation of investment income, capital or the
proceeds of sales of securities from certain countries is controlled under
regulations, including in some cases the need for certain advance government
notification or authority, and if a deterioration occurs in a country’s balance
of payments, the country could impose temporary restrictions on foreign capital
remittances. Income from
17
certain
investments held by the Fund could be reduced by foreign income taxes, including
withholding taxes.
The
Fund also could be adversely affected by delays in, or a refusal to grant, any
required governmental approval for repatriation, as well as by the application
to it of other restrictions on investment. Investing in local markets may
require the Fund to adopt special procedures or seek local governmental
approvals or other actions, any of which may involve additional costs to the
Fund. These factors may affect the liquidity of the Fund’s investments in any
country and the Adviser will monitor the effect of any such factor or factors on
the Fund’s investments. Transaction costs, including brokerage commissions for
transactions both on and off the securities exchanges, in many foreign countries
are generally higher than in the United States.
Issuers
of securities in foreign jurisdictions are generally not subject to the same
degree of regulation as are U.S. issuers with respect to such matters as insider
trading rules, restrictions on market manipulation, shareholder proxy
requirements, and timely disclosure of information. The reporting, accounting,
and auditing standards of foreign countries may differ, in some cases
significantly, from U.S. standards in important respects, and less information
may be available to investors in securities of foreign issuers than to investors
in U.S. securities. Substantially less information is publicly available about
certain non‑U.S. issuers than is available about most U.S. issuers.
The
economies of individual foreign countries may differ favorably or unfavorably
from the U.S. economy in such respects as growth of gross domestic product or
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency, and balance of payments position. Nationalization,
expropriation or confiscatory taxation, currency blockage, political changes,
government regulation, political or social instability, public health crises
(including the occurrence of a contagious disease or illness), revolutions, wars
or diplomatic developments could affect adversely the economy of a foreign
country. In the event of nationalization, expropriation, or other confiscation,
the Fund could lose its entire investment in securities in the country involved.
In addition, laws in foreign countries governing business organizations,
bankruptcy and insolvency may provide less protection to security holders such
as the Fund than that provided by U.S. laws.
The
United Kingdom (“U.K.”) formally withdrew from the European Union (“EU”) on
January 31, 2020. The U.K. and the EU negotiated an agreement governing
their future trading and security relationships. This agreement became effective
on a provisional basis on January 1, 2021 and entered into full force on
May 1, 2021. The U.K. and the EU also negotiated a Memorandum of
Understanding (“MoU”), which creates a framework for voluntary regulatory
cooperation in financial services between the U.K. and the EU. The impact on the
U.K. and European economies and the broader global economy of the uncertainties
associated with implementing the agreement and MoU are significant and could
have an adverse effect on the value of the Fund’s investments and its NAV. These
uncertainties include an increase in the regulatory and customs requirements
imposed on cross-border trade between the U.K. and the EU, the negotiation and
implementation of additional arrangements between the U.K. and the EU affecting
important parts of the economy (such as financial services), volatility and
illiquidity in markets, currency fluctuations, the renegotiation of other
existing trading and cross-border cooperation arrangements (whether economic,
tax, fiscal, legal, regulatory or otherwise) of the U.K. and the EU, and
potentially lower growth for companies in the U.K., Europe and globally.
In
addition, Russia launched a large-scale invasion of Ukraine on February 24,
2022. The extent and duration of the military action, and sanctions imposed
following the invasion, have resulted, and may continue to result, in market
disruptions in the region and globally. Future market disruptions are impossible
to predict, but could be significant and have a severe adverse effect on the
region and beyond, including significant negative impacts on the economy and the
markets for certain securities and commodities, such as oil and natural gas.
Investments
in securities of companies in emerging markets involve special risks. There are
approximately 100 countries identified by the World Bank as Low Income, Lower
Middle Income and Upper Middle Income countries that are generally regarded as
emerging markets. Emerging market countries that the Adviser currently considers
for investment include:
|
|
|
| |
Argentina
Bangladesh
Belize
Brazil
Bulgaria
Chile
China
Colombia
Croatia
Czech
Republic
Dominican
Republic
Ecuador
Egypt
El
Salvador
Gabon
Georgia
Ghana
Greece |
|
Hungary
India
Indonesia
Iraq
Ivory
Coast
Jamaica
Jordan
Kazakhstan
Kenya
Lebanon
Lithuania
Malaysia
Mexico
Mongolia
Nigeria
Pakistan
Panama
Peru |
|
Philippines
Poland
Qatar
Saudi
Arabia
Senegal
Serbia
South
Africa
South
Korea
Sri
Lanka
Taiwan
Thailand
Turkey
Ukraine
United
Arab Emirates
Uruguay
Venezuela
Vietnam |
Countries
may be added to or removed from this list at any time.
Investing
in emerging market securities involves risks different from, and greater than,
risks of investing in domestic securities or in the securities of issuers
domiciled in developed, foreign countries. These risks include: smaller market
capitalization of securities markets, which may suffer periods of relative
illiquidity; significant price volatility; restrictions on foreign investment;
and the imposition of capital controls, which may restrict the Fund’s ability to
repatriate investment income and capital. In addition, foreign investors may be
required to register the proceeds of sales and future economic or political
crises could lead to price controls, forced mergers, expropriation or
confiscatory taxation, seizure, nationalization, or creation of government
monopolies. The currencies of emerging market countries may experience
significant declines against the U.S. Dollar, and devaluation may occur
subsequent to investments in these currencies by the Fund.
18
Inflation
and rapid fluctuations in inflation rates have had, and may continue to have,
negative effects on the economies and securities markets of certain emerging
market countries.
Additional
risks of emerging market securities may include: greater social, economic and
political uncertainty and instability; more substantial governmental involvement
in the economy; less governmental supervision and regulation; unavailability of
currency hedging techniques; companies that are newly organized and small; less
developed legal systems with fewer security holder rights and practical remedies
to pursue claims, including class actions or fraud claims; the limited ability
of U.S. authorities to bring and enforce actions against non‑U.S. companies and
non‑U.S. persons; and differences in the nature and quality of financial
information, including (i) auditing and financial reporting standards,
which may result in unavailability or unreliability of material information
about issuers and (ii) the risk that the Public Company Accounting
Oversight Board (“PCAOB”) may not be able to inspect audit practices and work
conducted by PCAOB-registered audit firms in certain emerging market countries,
such as China. Thus there can be no assurance that the quality of financial
reporting or the audits conducted by such audit firms of U.S.-listed emerging
market companies meet PCAOB standards. Furthermore, in December 2021, the SEC
finalized rules to implement the Holding Foreign Companies Accountable Act,
which prohibits the trading of securities of foreign issuers (including those
based in China) on a national securities exchange or through any other method
regulated by the SEC (including through over‑the‑counter trading) if the PCAOB
is unable to inspect the work papers of the auditors of such companies for three
years. To the extent the Fund invests in the securities of a company whose
securities become subject to such a trading prohibition, the Fund’s ability to
transact in such securities, and the liquidity of the securities, as well as
their market price, would likely be adversely affected. The Fund would also have
to seek other markets in which to transact in such securities, which could
increase the Fund’s costs. In addition, emerging securities markets may have
different clearance and settlement procedures, which may be unable to keep pace
with the volume of securities transactions or otherwise make it difficult to
engage in such transactions. Settlement problems may cause the Fund to miss
attractive investment opportunities, hold a portion of its assets in cash
pending investment, or be delayed in disposing of a portfolio security. Such a
delay could result in possible liability to a purchaser of the security.
The
Fund may invest in securities of frontier market countries. Frontier market
countries generally have smaller, less diverse economies and even less developed
capital markets and legal, regulatory, and political systems than traditional
emerging markets. As a result, the risks of investing in emerging market
countries are magnified in frontier market countries. Frontier market risks
include the potential for extreme price volatility and illiquidity—economic or
political instability may cause larger price changes in frontier market
securities than in securities of issuers located in more developed markets. The
risks of investing in frontier market countries may also be magnified by:
government ownership or control of parts of the private sector and of certain
companies; trade barriers, exchange controls, managed adjustments in relative
currency values, impaired or limited access to issuer information and other
protectionist measures imposed or negotiated by the countries with which
frontier market countries trade; and the relatively new and unsettled securities
laws in many frontier market countries. The actions of a relatively few major
investors in these markets are more likely to result in significant changes in
local stock prices and the value of fund shares. The risk also exists that an
emergency situation may arise in one or more frontier market countries as a
result of which trading of securities may cease or may be substantially
curtailed and prices for investments in such markets may not be readily
available. All of these factors can make investing in frontier markets riskier
than investing in more developed emerging markets or other foreign markets.
Foreign
(Non‑U.S.) Currencies
Investing
in and exposure to foreign currencies involve special risks and considerations.
A fund that invests some portion of its assets in securities denominated in, and
receives revenues in, foreign currencies will be adversely affected by
reductions in the value of those currencies relative to the U.S. Dollar.
Foreign currency exchange rates may fluctuate significantly. They are determined
by supply and demand in the foreign exchange markets, the relative merits of
investments in different countries, actual or perceived changes in interest
rates, and other complex factors. Currency exchange rates also can be affected
unpredictably by intervention (or the failure to intervene) by U.S. or foreign
governments or central banks or by currency controls or political developments.
In light of these risks, the Fund may engage in certain currency hedging
transactions, as described above, which involve certain special risks.
The
Fund may also invest directly in foreign currencies for non‑hedging purposes on
a spot basis (i.e., cash) or through
derivatives transactions, such as forward currency exchange contracts, futures
contracts and options thereon, swaps and options as described above. These
investments will be subject to the same risks. In addition, currency exchange
rates may fluctuate significantly over short periods of time, causing the Fund’s
NAV to fluctuate.
Investment
in Smaller, Less-Seasoned Companies
Investment
in smaller, less-seasoned companies involves greater risks than are customarily
associated with securities of more established companies. Companies in the
earlier stages of their development often have products and management personnel
that have not been thoroughly tested by time or the marketplace; their financial
resources may not be as substantial as those of more established companies. The
securities of smaller, less-seasoned companies may have relatively limited
marketability and may be subject to more abrupt or erratic market movements than
securities of larger, more established companies or broad market indices. The
revenue flow of such companies may be erratic and their results of operations
may fluctuate widely and may also contribute to stock price volatility.
19
Management
Risk—Quantitative Models
The
Adviser may use investment techniques that incorporate, or rely upon,
quantitative models. These models may not work as intended and may not enable
the Fund to achieve its investment objective. In addition, certain models may be
constructed using data from external providers, and these inputs may be
incorrect or incomplete, thus potentially limiting the effectiveness of the
models. Finally, the Adviser may change, enhance and update its models and its
usage of existing models at its discretion.
Future
Developments
The
Fund may take advantage of other investment practices that are not currently
contemplated for use by the Fund, or are not available but may yet be developed,
to the extent such investment practices are consistent with the Fund’s
investment objective and legally permissible for the Fund. Such investment
practices, if they arise, may involve risks that exceed those involved in the
activities described above.
Changes
in Investment Objective and Policies
The
Fund’s Board of Directors (the “Board”) may change the Fund’s investment
objective without shareholder approval. The Fund will provide shareholders with
60 days’ prior written notice of any change to the Fund’s investment objective.
The Fund will not change its policy to invest at least 80% of its net assets in
securities indicated by its name without 60 days’ prior written notice to
shareholders. Unless otherwise noted, all other investment policies of the Fund
may be changed without shareholder approval.
Temporary
Defensive Position
For
temporary defensive purposes in an attempt to respond to adverse market,
economic, political or other conditions, the Fund may invest in certain types of
short-term, liquid, investment grade or high-quality (depending on the Fund)
debt securities. While the Fund is investing for temporary defensive purposes,
it may not meet its investment objective.
Portfolio
Holdings
A
description of the Fund’s policies and procedures with respect to the disclosure
of the Fund’s portfolio securities is available in the Fund’s SAI.
On
each business day, before commencement of trading on the Exchange, the Fund will
disclose on www.abfunds.com the
identities and quantities of the Fund’s portfolio holdings that will form the
basis for the Fund’s calculation of NAV at the end of the business day. Other
information concerning the Fund’s portfolio holdings may also be published on
the Fund’s website from time to time.
Website
Disclosures
The
following information about the Fund is available on the Fund’s website, www.abfunds.com, which is publicly
available and free of charge:
• |
|
Complete
portfolio holdings, including for each security, the ticker symbol, CUSIP
or other identifying symbol, description and the quantity and weight of
each security in the Fund; |
• |
|
The
names and quantities of securities that constitute the Fund’s Creation
Unit and estimated balancing amount (which will be posted before the
commencement of the trading day); |
• |
|
The
current NAV per share, market price, and premium/discount, each as of the
end of the prior business day; |
• |
|
A
table showing the number of days that the Fund shares traded at a premium
or discount during the most recently completed fiscal year and quarter (or
for the life of the Fund for new funds); |
• |
|
A
line graph showing the Fund’s premiums or discounts for the most recently
completed calendar year and calendar quarter (or for the life of the Fund
for new funds); |
• |
|
The
median bid/ask spread for the Fund on a rolling 30‑day basis; and
|
• |
|
If
the premium or discount is greater than 2% for more than seven consecutive
trading days, a statement that the premium/discount was greater than 2%
and a discussion of the factors that are reasonably believed to have
materially contributed to this premium/discount.
|
Cyber
Security Risk
As
the use of the Internet and other technologies has become more prevalent in the
course of business, the Fund and its service providers, including the Adviser,
have become more susceptible to operational and financial risks associated with
cyber security. Cyber security incidents can result from deliberate attacks such
as gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software
coding) for purposes of misappropriating assets or sensitive information,
corrupting data, or causing operational disruption, or from unintentional
events, such as the inadvertent release of confidential information. Cyber
security failures or breaches of the Fund or its service providers or the
issuers of securities in which the Fund invests have the ability to cause
disruptions and impact business operations, potentially resulting in financial
losses, the inability of Fund shareholders to transact business, violations of
applicable privacy and other laws, regulatory fines, penalties, reputational
damage, reimbursement or other compensation costs, and/or additional compliance
costs. While measures have been developed which are designed to reduce the risks
associated with cyber security incidents, there can be no assurance that those
measures will be effective, particularly since the Fund does not control the
cyber security defenses or plans of its service providers, financial
intermediaries and companies with which those entities do business and companies
in which the Fund invests.
20
Cyber
security incidents, both intentional and unintentional, may allow an
unauthorized party to gain access to Fund or shareholder assets, Fund or
customer data (including private shareholder information), or proprietary
information, or cause the Fund, the Adviser, and/or the Fund’s service providers
(including, but not limited to, fund accountants, custodians, sub‑custodians,
transfer agents and financial intermediaries) to suffer data breaches, data
corruption or lose operational functionality, or prevent Fund shareholders from
purchasing, redeeming, or exchanging shares or receiving distributions. The Fund
and the Adviser have limited ability to prevent or mitigate cyber security
incidents affecting third-party service providers. Cyber security incidents may
result in financial losses to the Fund and its shareholders, and substantial
costs may be incurred in seeking to prevent or minimize future cyber security
incidents.
21
INVESTING
IN THE FUND
This
section discusses how to buy, sell or redeem, or exchange shares of the Fund
that are offered through this Prospectus.
HOW
TO BUY SHARES
Shares
of the Fund may be acquired or redeemed directly from the Fund only in Creation
Units or multiples thereof. Only an Authorized Participant (as defined under
“Creations and Redemptions”) may engage in creation or redemption transactions
directly with the Fund. Once created, shares of the Fund generally trade in the
secondary market in amounts less than a Creation Unit.
Shares
of the Fund are listed and traded on the Exchange, and individual investors can
purchase or sell shares in the secondary market through a financial
intermediary. The Fund does not impose any minimum investment for shares of the
Fund purchased on an exchange or otherwise in the secondary market. The Fund’s
shares trade under the ticker symbol “LRGC.”
When
buying or selling shares of the Fund through a financial intermediary, you may
incur a brokerage commission and other charges. The commission is frequently a
fixed amount and may be a significant proportional cost for investors seeking to
buy or sell small amounts of shares. In addition, you may incur the cost of the
“spread,” that is, any difference between the bid price and the ask price. The
spread varies over time for shares of the Fund based on the Fund’s trading
volume and market liquidity, and is generally lower if the Fund has high trading
volume and market liquidity, and higher if the Fund has little trading volume
and market liquidity (which is often the case for funds that are newly launched
or small in size). The Fund’s spread may also be impacted by the liquidity of
the underlying securities held by the Fund, particularly for newly launched or
smaller funds or in instances of significant volatility of the underlying
securities.
Your
ownership of Fund shares will be shown on the records of the financial
intermediary through which you hold the shares. The Fund will not have any
record of your ownership. Your account information will be maintained by your
financial intermediary, which will provide you with account statements,
confirmations of your purchases and sales of Fund shares, and tax information.
Your financial intermediary also will be responsible for ensuring that you
receive income and capital gains distributions, as well as shareholder reports
and other communications from the Fund whose shares you own. You will receive
other services (e.g., dividend
reinvestment and average cost information) only if your financial intermediary
offers these services.
BOOK
ENTRY
Shares
are held in book-entry form, which means that no share certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding shares of the Fund and is recognized as the owner of all shares for
all purposes.
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.
Participants in DTC 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 share 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 stocks that you hold in
book-entry or “street name” form.
SHARE
TRADING PRICE
The
trading prices of the Fund’s shares in the secondary market generally differ
from the Fund’s daily NAV and are affected by market forces such as the supply
of and demand for ETF shares and underlying securities held by the Fund,
economic conditions and other factors.
The
trading price of the Fund’s shares on the Exchange may differ from the Fund’s
daily NAV. The Exchange disseminates the approximate value of shares of the Fund
every fifteen seconds. This approximate value should not be viewed as a
“real-time” update of the NAV per share of the Fund because the approximate
value may not be calculated in the same manner as the NAV, which is computed
only once a day. The approximate value is generally determined by using both
current market quotations and/or price quotations obtained from broker-dealers
and other market intermediaries that may trade in the portfolio securities held
by the Fund. As the respective international local markets close, the
approximate value will continue to be updated for foreign exchange rates for the
remainder of the U.S. trading day at the prescribed 15‑second interval, but
certain holdings may not be updated otherwise if such holdings do not trade in
the United States. The Fund is not involved in, or responsible for, the
calculation or dissemination of the approximate value, and the Fund does not
make any representation or warranty as to its accuracy.
FREQUENT
PURCHASES AND REDEMPTIONS OF FUND SHARES
The
Fund’s Board has not adopted a policy of monitoring for frequent purchases and
redemptions of Fund shares (“frequent trading”) that appear to attempt to take
advantage of potential arbitrage opportunities presented by a lag between a
change in the value of the Fund’s portfolio securities after the close of the
primary markets for the Fund’s portfolio securities and the reflection of that
change in the Fund’s NAV (“market timing”). The Board believes this is
appropriate because an ETF, such as the Fund, is intended to be attractive to
arbitrageurs, as trading activity is critical to ensuring that the market price
of Fund shares remains at or close to NAV. Since the Fund issues and redeems
Creation Units at NAV plus applicable transaction
22
fees,
and the Fund’s shares may be purchased and sold on the Exchange at prevailing
market prices, the risks of frequent trading are limited.
Although
the Fund does not impose any restrictions on the frequency of purchases and
redemptions, the Fund reserve the right to reject or limit purchases at any time
as described in the SAI.
PREMIUM
AND DISCOUNT INFORMATION
Most
investors will buy and sell shares of the Fund in secondary market transactions
through brokers at market prices, and the Fund’s shares will trade at market
prices. The market price of shares may be greater than, equal to, or less than
NAV. Market forces of supply and demand, economic conditions and other factors
may affect the trading prices of shares of the Fund.
Information
about the Fund’s daily market price and how often shares of the Fund traded on
the Exchange are at a price above (i.e.,
at a premium) or below (i.e., at a
discount) the NAV of the Fund (during the Fund’s four previous calendar quarters
(or for the life of the Fund, if shorter)) can be found at www.abfunds.com.
CREATIONS
AND REDEMPTIONS
Prior
to trading in the secondary market, shares of the Fund are “created” at NAV by
Authorized Participants for market makers, large investors and institutions only
in block‑size Creation Units (15,000 shares) or multiples thereof. Each
“creator” or Authorized Participant has entered into an agreement with the
Distributor.
A
creation transaction, which is subject to acceptance by the Distributor and the
Fund, generally takes place when an Authorized Participant deposits into the
Fund a designated portfolio of securities (including any portion of such
securities for which cash may be substituted) and a specified amount of cash
approximating the holdings of the Fund in exchange for a specified number of
Creation Units. To the extent practicable, the composition of such portfolio
generally corresponds pro rata to the holdings of the Fund. However, Creation
Units will generally correspond to the price and yield performance of the Fund.
The Fund may, in certain circumstances, offer Creation Units partially or solely
for cash.
Similarly,
shares can be redeemed only in Creation Units, generally for a designated
portfolio of securities (including any portion of such securities for which cash
may be substituted) held by the Fund and a specified amount of cash. Except when
aggregated in Creation Units, shares are not redeemable by the Fund.
The
prices at which creations and redemptions occur are based on the next
calculation of NAV after a creation or redemption order is received in an
acceptable form under the authorized participant agreement.
Only
an Authorized Participant may create or redeem Creation Units with the Fund.
Authorized Participants may create or redeem Creation Units for their own
accounts or for customers, including, without limitation, affiliates of the
Fund.
In
the event of a system failure or other interruption, including disruptions at
market makers or Authorized Participants, orders to purchase or redeem Creation
Units either may not be executed according to the Fund’s instructions or may not
be executed at all, or the Fund may not be able to place or change orders.
To
the extent the Fund engages in in‑kind transactions, the Fund intends to comply
with the U.S. federal securities laws in accepting securities for deposit and
satisfying redemptions with portfolio securities by, among other means, assuring
that any securities accepted for deposit and any securities used to satisfy
redemption requests will be sold in transactions that would be exempt from
registration under the Securities Act. Further, an Authorized Participant that
is not a “qualified institutional buyer,” as such term is defined in Rule 144A
under the Securities Act, will not be able to receive restricted securities
eligible for resale under Rule 144A.
Creations
and redemptions must be made through a firm that is either a member of the
Continuous Net Settlement System of the National Securities Clearing Corporation
or a DTC participant that has executed an agreement with the Distributor with
respect to creations and redemptions of Creation Unit aggregations. Information
about the procedures regarding creation and redemption of Creation Units
(including the cut‑off times for receipt of creation and redemption orders) is
included in the Fund’s SAI.
COSTS
ASSOCIATED WITH CREATIONS AND REDEMPTIONS
The
Fund may impose a creation transaction fee and a redemption transaction fee to
offset transfer and other transaction costs associated with the issuance and
redemption of Creation Units of shares. The creation and redemption transaction
fees applicable to the Fund have both fixed and variable components. The
standard creation transaction fee, which is fixed, is charged to the Authorized
Participant on the day such Authorized Participant creates a Creation Unit, and
is the same regardless of the number of Creation Units purchased by the
Authorized Participant on the applicable business day. Similarly, the standard
redemption transaction fee, which is a fixed fee, is charged to the Authorized
Participant on the day such Authorized Participant redeems a Creation Unit, and
is the same regardless of the number of Creation Units redeemed by the
Authorized Participant on the applicable business day. Creations and redemptions
for cash are also subject to a variable additional fee (up to the maximum amount
of 3% of the amount of a creation transaction and 2% of the amount of a
redemption transaction). This fee is intended to compensate for transaction,
foreign exchange, execution, market impact and other costs and expenses related
to cash transactions. From time to time, the transaction fees may be waived when
believed to be in the best interests of the Fund.
The
Distributor may refuse any order to purchase shares. The Fund reserves the right
to suspend the sale of its shares to the public in response to conditions in the
securities markets or for other reasons.
23
DISTRIBUTION
PLAN
The
Fund has adopted a Distribution Plan pursuant to Rule 12b‑1 of the 1940 Act
which permits the Fund to pay Rule 12b‑1 fees not to exceed 0.25% per year of
the Fund’s average daily net assets. No such fee is currently paid, and the
Board has not approved the commencement of payments under the Rule 12b‑1
Distribution Plan. The Fund does not plan to make payments under the Rule 12b‑1
Plan within one year of the Fund’s effective date. The Fund will provide 60
days’ notice to shareholders before making payments under the Rule 12b‑1 Plan.
The Rule 12b‑1 Distribution Plan covers materials that may be furnished, at the
Adviser’s expense, to financial intermediaries and other service providers that
relate to the Fund.
ADDITIONAL
PAYMENTS TO BROKERS, DEALERS AND OTHER FINANCIAL INTERMEDIARIES
In
addition to the commissions paid to or charged by financial intermediaries at
the time of sale of Fund shares, the Adviser and its affiliates, at their own
expense, provide additional payments to brokers, dealers or other financial
intermediaries and service providers for distribution, marketing, promotional,
educational and other services. These payments are often referred to as “revenue
sharing” payments. In some circumstances, these payments may relate to
information provided by brokers, dealers and financial intermediaries about
investors in the Fund. In other circumstances, these payments may relate to
intermediaries making Fund shares available to their customers, including
through technology platforms, “preferred fund” programs, reduced commission
programs or to defray or reduce all or a portion of “ticket” or other
transactional charges imposed by the intermediary. These types of payments may
be viewed as an incentive for a broker, dealer or financial intermediary or its
representatives to recommend or offer shares of the Fund to its customers. You
should ask your broker, dealer or financial intermediary for more details about
any such payments it receives.
The
Fund may use brokers and dealers that are also Authorized Participants to
effectuate portfolio transactions. The Fund does not consider Authorized
Participants’ activities as a factor when selecting brokers or dealers to effect
portfolio transactions.
The
Adviser or an affiliate may pay fees to an exchange as part of a program to
provide compensation to market makers for liquidity and secondary market support
services. These fees are provided to market makers that meet certain liquidity
and other market quality standards with respect to the Fund. These fees are
subject to approval by the SEC and are not paid by the Fund.
HOW
THE FUND VALUES ITS SHARES
The
Fund’s NAV is calculated on any day the New York Stock Exchange is open at the
close of regular trading (ordinarily, 4:00 p.m., Eastern time, but sometimes
earlier, as in the case of scheduled half-day trading or unscheduled suspensions
of trading). To calculate NAV, the Fund’s assets are valued and totaled,
liabilities are subtracted, and the balance, called net assets, is divided by
the number of shares outstanding. If the Fund invests in securities that are
primarily traded in non-U.S. markets which trade on weekends or other days when
the Fund does not price its shares, the NAV of the Fund’s shares may change on
days when shareholders will not be able to purchase or redeem their shares in
the Fund.
The
Fund values its securities at market value determined on the basis of market
quotations or, if market quotations are not readily available or are unreliable,
at “fair value” as determined in accordance with procedures approved by the
Fund’s Board.
Foreign
markets normally close earlier in the day than U.S. markets. The Fund generally
determines the value of a security that is primarily traded on a non-U.S.
exchange as of the close of trading on that exchange. The value of that security
is then converted to its U.S. dollar equivalent at the foreign exchange rate in
effect at 4:00 p.m., London time, on the day the value of the security is
determined.
Pursuant
to the valuation procedures, the Adviser, as the Fund’s valuation designee
pursuant to Rule 2a-5 of the 1940 Act, is responsible for making all fair value
determinations relating to the Fund’s portfolio investments, subject to the
oversight of the Fund’s Board. When making a fair value determination, the
Adviser may take into account any factors it deems appropriate. The Adviser may
determine fair value based upon developments related to a specific security,
current valuations of foreign stock indices (as reflected in U.S. futures
markets) and/or U.S. sector or broader stock market indices. The prices of
securities used by the Fund to calculate its NAV may differ from quoted or
published prices for the same securities. Making a fair value determination
involves subjective judgments, and it is possible that the fair value determined
for a security is materially different than the value that could be realized
upon the sale of that security.
The
Fund expects to use fair value pricing for securities primarily traded on U.S.
exchanges under certain circumstances, such as the early closing of the exchange
on which a security is traded or suspension of trading in the security, or for
securities for which market prices are not readily available or deemed
unreliable (including restricted securities). Factors considered in fair value
pricing may include, but are not limited to, information obtained by contacting
the issuer or analysts, or by analysis of the issuers’ financial statements. The
Fund may value its securities using fair value prices based on independent
pricing services.
The
Fund may use fair value pricing for securities primarily traded in non-U.S.
markets because, among other things, most foreign markets close well before the
Fund ordinarily values its securities at 4:00 p.m., Eastern time. The earlier
close of these foreign markets gives rise to the possibility that significant
events may have occurred in the interim. The Adviser monitors for significant
events following the close of trading in foreign markets.
The
Adviser has established a valuation committee of senior officers and employees
(“Valuation Committee”) to fulfill the Adviser’s responsibilities as the Fund’s
valuation designee, which operates under the policies and procedures approved by
the Board, to value the Fund’s assets on behalf of the Fund. The Valuation
Committee values Fund assets as described above. More information about the
valuation of the Fund’s assets is available in the Fund’s SAI.
24
MANAGEMENT
OF THE FUND
INVESTMENT
ADVISER
The
Fund’s investment adviser is AllianceBernstein L.P., 501 Commerce Street,
Nashville, TN 37203. The Adviser, which is a controlled indirect subsidiary of
Equitable Holdings, Inc., is a leading global investment adviser supervising
client accounts with assets as of March 31, 2023 totaling approximately
$676 billion (of which over $129 billion represented assets of
registered investment companies sponsored by the Adviser). As of March 31,
2023, the Adviser managed retirement assets for many of the largest public and
private employee benefit plans (including 16 of the nation’s FORTUNE 100
companies), for public employee retirement funds in 33 of the 50 states, for
investment companies, and for foundations, endowments, banks and insurance
companies worldwide. The 28 registered investment companies managed by the
Adviser, comprising approximately 93 separate investment portfolios, had as of
March 31, 2023 approximately 2.6 million shareholder accounts.
The
Adviser provides investment advisory services and order placement facilities for
the Fund. The Adviser is paid an annual unitary management fee by the Fund as
set forth below and is responsible for the Fund’s expenses, including the cost
of transfer agency, custody, fund administration, legal, audit and other
services as well as acquired fund fees and expenses for affiliated money market
funds, but excluding fee payments under the Fund’s investment advisory
agreement, interest, taxes, acquired fund fees and expenses for unaffiliated
funds, if any, brokerage commissions and other expenses connected with the
execution of portfolio transactions, distribution and service fees payable
pursuant to a Rule 12b‑1 plan, if any, litigation, and extraordinary expenses.
|
|
|
|
| |
Fund |
|
Fee as a Percentage of Average
Daily Net Assets |
AB
US Large Cap Strategic Equities ETF |
|
|
|
.48 |
% |
A
discussion regarding the basis for the Board’s approval of the Fund’s investment
advisory agreement will be available in the Fund’s annual report to shareholders
for the fiscal period ending November 30, 2023.
The
Adviser acts as an investment adviser to other persons, firms, or corporations,
including investment companies, hedge funds, pension funds, and other
institutional investors. The Adviser may receive management fees, including
performance fees, that may be higher or lower than the advisory fees it receives
from the Fund. Certain other clients of the Adviser have investment objectives
and policies similar to those of the Fund. The Adviser may, from time to time,
make recommendations that result in the purchase or sale of a particular
security by its other clients simultaneously with the Fund. If transactions on
behalf of more than one client during the same period increase the demand for
securities being purchased or the supply of securities being sold, there may be
an adverse effect on price or quantity. It is the policy of the Adviser to
allocate advisory recommendations and the placing of orders in a manner that is
deemed equitable by the Adviser to the accounts involved, including the Fund.
When two or more of the clients of the Adviser (including the Fund) are
purchasing or selling the same security on a given day from the same broker or
dealer, such transactions are averaged as to price. The securities are then
allocated to participating accounts using automated algorithms designed to
achieve a fair, equitable and objective distribution of the securities over
time.
PORTFOLIO
MANAGER
The
management of, and investment decisions for, the Fund are made by the Adviser’s
US Strategic Equities Investment Team. The US Strategic Equities Investment Team
relies heavily on the fundamental analysis and research of the Adviser’s large
internal research staff. No one person is principally responsible for
coordinating the Fund’s investments.
The
following table lists the person within the US Strategic Equities Investment
Team with the most significant responsibility for day‑to‑day management of the
Fund’s portfolio, the length of time that the person has been jointly and
primarily responsible for the Fund, and the person’s principal occupation during
the past five years:
|
| |
Employee; Year; Title |
|
Principal Occupation(s) During the Past Five
(5) Years |
Shri Singhvi; since September 2023; Senior
Vice President of the Adviser |
|
Senior Vice President of the Adviser,
with which he has been associated in a substantially similar capacity to
his current position since prior to 2018. |
The
Fund’s SAI provides additional information about the portfolio manager’s
compensation, other accounts managed by the portfolio manager, and the portfolio
manager’s ownership of securities in the Fund.
25
DIVIDENDS,
DISTRIBUTIONS AND TAXES
DIVIDENDS
AND DISTRIBUTIONS INFORMATION
Dividends
from net investment income from the Fund, if any, are declared and paid annually
by the Fund. The Fund distributes its net realized capital gains, if any, to
shareholders at least annually. During the fourth quarter of the calendar year,
typically in early November, an estimate of the Fund’s capital gains
distribution, if any, will be made available at www.alliancebernstein.com/investments/us/tax‑center.htm.
If you purchased your shares in the secondary market, your broker is responsible
for distributing the income and capital gain distributions to you.
Distributions
in cash may be reinvested automatically in additional whole shares only if the
broker through whom you purchased shares makes such option available. Such
shares will generally be reinvested by the broker based upon the market price of
those shares and investors may be subject to customary brokerage commissions
charged by the broker.
TAX
INFORMATION
Any
investment in the Fund typically involves several tax considerations. The
information below is intended as a general summary for U.S. citizens and
residents. Please see the SAI for additional information. Because each person’s
tax situation is different, you are encouraged to consult your tax adviser about
the tax implications of an investment in the Fund in your particular situation.
You also can visit the Internal Revenue Service (IRS) website at www.irs.gov for more information about
applicable tax rates and other information.
Taxation
of Distributions
While
it is the intention of the Fund to distribute to its shareholders substantially
all of each fiscal year’s net income and net realized capital gains, if any, the
amount and timing of any dividend or distribution will depend on the realization
by the Fund of income and capital gains from investments. There is no fixed
dividend rate and there can be no assurance that the Fund will pay any
distributions or realize any capital gains. The final determination of the
amount of the Fund’s return of capital distributions for the period will be made
after the end of each calendar year.
The
distributions you receive from the Fund are taxable, whether you take the
distributions in cash or reinvest them in additional shares. The Fund’s
distributions may be treated either as ordinary income or as long-term capital
gain.
Distributions
of net capital gains from the sale of investments that the Fund owned for more
than one year and that are properly designated as capital gains distributions
are taxable as long-term capital gains, taxable at a maximum rate of 20% for
individuals, trusts and estates. The Fund may also make distributions that are
treated as “qualified dividend income”, which is taxed at the same rates as
long-term capital gains, to the extent such distributions are attributable to,
and properly designated by the Fund as, “qualified dividend income”. “Qualified
dividend income” generally is income derived from dividends from U.S.
corporations and “qualified foreign corporations”. The Fund will notify you as
to how much of the Fund’s distributions, if any, qualify for these reduced tax
rates.
Other
distributions by the Fund are generally taxable to you as ordinary income.
Dividends
declared in October, November, or December and paid in January of the following
year are taxable as if they had been paid the previous December.
Under
certain circumstances, if the Fund realizes losses (e.g., from fluctuations in currency exchange
rates) after paying a dividend, all or a portion of the dividend may
subsequently be characterized as a return of capital. Returns of capital are
generally nontaxable, but will reduce your tax basis in your Fund shares (which
will increase the capital gain or reduce the capital loss that you subsequently
realize on a sale of your shares). If that basis is reduced to zero (which could
happen if you do not reinvest distributions and returns of capital are
significant), any further returns of capital will be taxable to you as a capital
gain.
Taxation
of Sales of Shares
If
you sell your Fund shares in the secondary market on an exchange, you may
realize gain (or loss). The amount of your gain (or loss) will be the difference
between the proceeds of the sale (the market price per share on the date of sale
times the number Fund shares sold reduced by the expenses of the sale, if any)
and your adjusted basis in those Fund shares sold. Any capital gain or loss is
generally treated as long-term capital gain or loss if the shares have been held
for more than one year and as short-term capital gain or loss if the shares have
been held for one year or less. Long-term capital gains are taxable at a maximum
rate of 20% for individuals, trusts and estates. Capital loss realized on the
sale or exchange of shares held for six months or less will be treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholder. The ability to deduct capital losses may be limited.
Taxation
of Creation Units
If
an Authorized Participant exchanges securities for Creation Units, the
Authorized Participant will generally recognize capital gain or capital loss
from the exchange. The gain or loss will be equal to the difference between the
market value of the Creation Units at the time of the exchange and the
Authorized Participant’s aggregate tax basis in the securities surrendered plus
any cash paid for the Creation Units. If the Authorized Participant exchanges
Creation Units for securities, the Authorized Participant will generally
recognize capital gain or capital loss equal to the difference between the
Authorized Participant’s tax basis in the Creation Units and the aggregate
market value of the securities and the amount of cash received.
26
Net
Investment Income Tax
Individuals,
trusts, and estates whose income exceeds certain threshold amounts are subject
to a 3.8% tax on “net investment income.” Net investment income takes into
account distributions paid by the Fund and capital gains from any sale of
shares.
Foreign
Taxes and Foreign Tax Credit
Investment
income received by the Fund from sources within foreign countries may be subject
to foreign income taxes withheld at the source. To the extent that the Fund is
liable for foreign income taxes withheld at the source, the Fund may be eligible
to “pass through” to the Fund’s shareholders credits for foreign income taxes
paid (or to permit shareholders to claim a deduction for such foreign taxes),
but there can be no assurance that the Fund will be so eligible, and a fund that
invests primarily in U.S. securities will not be so eligible. Furthermore, a
shareholder’s ability to claim a foreign tax credit or deduction for foreign
taxes paid by the Fund may be subject to certain limitations imposed by the
Code, as a result of which a shareholder may not be permitted to claim a credit
or deduction for all or a portion of the amount of such taxes.
General
If
you purchase shares before the Fund deducts a distribution from its NAV, you
will pay the full price for the shares and then receive a portion of the price
back as a distribution, which may be taxable.
Each
year shortly after December 31, the Fund will send you tax information
stating the amount and type of all its distributions for the year. You are
encouraged to consult your tax adviser about the federal, state, and local tax
consequences in your particular circumstances, as well as about any possible
foreign tax consequences.
Dividend
distributions and capital gains distributions that you receive, as well as your
gains or losses from any sale of shares, may be subject to state and local
income taxes.
Non‑U.S.
Shareholders
If
you are a nonresident alien individual or a foreign corporation for federal
income tax purposes, please see the Fund’s SAI for information on how you will
be taxed as a result of holding shares in the Fund.
27
GENERAL
INFORMATION
Under
unusual circumstances, the Fund may suspend redemptions or postpone payment for
up to seven days or longer, as permitted by federal securities law.
Householding. Householding is an
option available to certain investors. Householding is a method of delivery,
based on the preference of the individual investor, in which a single copy of
certain shareholder documents can be delivered to investors who share the same
address, even if their accounts are registered under different names.
Householding for the Fund is available through certain broker-dealers. Please
contact your broker-dealer if you are interested in enrolling in householding
and receiving a single copy of prospectuses and other shareholder documents, or
if you are currently enrolled in householding and wish to change your
householding status.
28
GLOSSARY
OF INVESTMENT TERMS
Equity securities include (i) common
stocks, partnership interests, business trust shares and other equity or
ownership interests in business enterprises and (ii) securities convertible
into, and rights and warrants to subscribe for the purchase of, such stocks,
shares and interests.
Fixed-income securities are investments, such
as bonds, that pay a fixed rate of return.
Nationally Recognized Statistical Rating
Organizations, or NRSROs, are credit rating agencies registered with the
SEC. NRSROs assess the creditworthiness of an obligor as an entity or with
respect to specific securities or money market instruments. A list of credit
rating agencies currently registered as NRSROs can be found on the SEC’s website
(http://www.sec.gov).
Non‑U.S. company or non‑U.S. issuer is an
entity that (i) is organized under the laws of a foreign country and
conducts business in a foreign country, (ii) derives 50% or more of its
total revenue from business in foreign countries, or (iii) issues equity or
debt securities that are traded principally on an exchange in a foreign country.
S&P 500 Index is a stock market index
containing the stocks of 500 U.S. large-capitalization corporations. Widely
regarded as the best single gauge of the U.S. equities market, the S&P 500
Index includes a representative sample of 500 leading companies in leading
industries of the U.S. economy.
U.S. Government securities are securities
issued or guaranteed by the U.S. Government, its agencies or instrumentalities,
including obligations that are issued by private issuers that are guaranteed as
to principal or interest by the U.S. Government, its agencies or
instrumentalities, or by certain government-sponsored entities (entities
chartered by or sponsored by Act of Congress). These securities include
securities backed by the full faith and credit of the United States, those
supported by the right of the issuer to borrow from the U.S. Treasury, and those
backed only by the credit of the issuing agency or entity itself. The first
category includes U.S. Treasury securities (which are U.S. Treasury bills,
notes, and bonds) and certificates issued by the Government National Mortgage
Association. U.S. Government securities not backed by the full faith and credit
of the United States or a right to borrow from the U.S. Treasury include
certificates issued by the Federal National Mortgage Association and the Federal
Home Loan Mortgage Corporation.
29
FINANCIAL
HIGHLIGHTS
Financial
highlights information is not available because the Fund has not yet commenced
operations as of the date of this Prospectus.
30
For
more information about the Fund, the following documents are available upon
request:
• |
|
ANNUAL/SEMI-ANNUAL
REPORTS TO SHAREHOLDERS |
The
Fund’s annual and semi-annual reports to shareholders, once available, will
contain additional information on the Fund’s investments. In the annual report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Fund’s performance during its last fiscal year.
• |
|
STATEMENT
OF ADDITIONAL INFORMATION (SAI) |
The
Fund has an SAI, which contains more detailed information about the Fund,
including its operations and investment policies. The Fund’s SAI is incorporated
by reference into (and is legally part of) this Prospectus.
You
may request a free copy of the current annual/semi-annual report, once
available, or the SAI, or make inquiries concerning the Fund, by contacting your
broker or other financial intermediary, or by contacting the Adviser:
|
| |
By Mail: |
|
c/o Foreside Fund Services, LLC |
| |
Three Canal Plaza, Suite 100 |
| |
Portland, Maine 04101 |
| |
By Phone: |
|
For Information and Literature: |
| |
(800) 243‑5994 |
| |
On the Internet: |
|
www.abfunds.com |
You
may also view reports and other information about the Fund, including the SAI,
by visiting the EDGAR database on the Securities and Exchange Commission’s
website (
http://www.sec.gov).
Copies of this information can be obtained, for a duplicating fee, by electronic
request at the following e‑mail address:
[email protected].
You
also may find these documents and more information about the Adviser and the
Fund on the Internet at: www.abfunds.com.
The
[A/B] Logo is a service mark of AllianceBernstein and AllianceBernstein® is a registered trademark
used by permission of the owner, AllianceBernstein L.P.
|
|
|
|
| |
Fund |
|
SEC File No. |
AB
US Large Cap Strategic Equities ETF |
|
|
|
811‑23799 |
|
PRO-ETF04-0423