ck0001540305-20210831
Loncar Cancer
Immunotherapy ETF
(CNCR)
Loncar China
BioPharma ETF
(CHNA)
Each
listed on The Nasdaq Stock Market LLC
PROSPECTUS
December 31,
2021
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
of these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Loncar
Cancer Immunotherapy ETF
Loncar
China BioPharma ETF
TABLE
OF CONTENTS
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FUND
SUMMARY – LONCAR CANCER IMMUNOTHERAPY ETF |
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FUND
SUMMARY – LONCAR CHINA BIOPHARMA ETF |
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ADDITIONAL
INFORMATION ABOUT THE INDEXES |
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ADDITIONAL
INFORMATION ABOUT THE FUNDS |
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PORTFOLIO
HOLDINGS INFORMATION |
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MANAGEMENT |
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HOW
TO BUY AND SELL SHARES |
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DIVIDENDS,
DISTRIBUTIONS, AND TAXES |
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DISTRIBUTION |
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PREMIUM/DISCOUNT
INFORMATION |
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ADDITIONAL
NOTICES |
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FINANCIAL
HIGHLIGHTS |
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FUND
SUMMARY
– LONCAR
CANCER
IMMUNOTHERAPY
ETF |
Investment
Objective
The Loncar Cancer Immunotherapy ETF (the “Fund”) seeks to track
the total return performance, before fees and expenses, of the Loncar Cancer
Immunotherapy Index (the “Index”).
Fees and
Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
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Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.79% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.79% |
Expense
Example
This Example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other funds. The Example assumes that
you invest $10,000 in the Fund for the time periods indicated and then redeem
all of your Shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The Example does not take into account brokerage commissions
that you may pay on your purchases and sales of Shares.
Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
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1
Year: |
$81 |
3
Years: |
$252 |
5
Years: |
$439 |
10
Years: |
$978 |
Portfolio
Turnover
The Fund pays transaction costs, such as commissions, when it buys
and sells securities (or “turns over” its portfolio). A higher portfolio
turnover rate may indicate higher transaction costs and may result in higher
taxes when Shares are held in a taxable account. These costs, which are not
reflected in annual fund operating expenses or in the Example, affect the Fund’s
performance. For the fiscal year ended August 31, 2021, the Fund’s portfolio
turnover rate was 58% of the average value of its
portfolio.
Principal
Investment Strategies
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index.
Loncar
Cancer Immunotherapy Index
The
Index is composed of the common stock of approximately 30 pharmaceutical or
biotechnology companies identified by Loncar Investments, LLC (“Loncar” or the
“Index Provider”), the Fund’s index provider, as having a high strategic focus
on the development of drugs that harness the body’s own immune system to fight
cancer (“immunotherapy”). Loncar identifies companies with a high strategic
focus on cancer immunotherapy (“Immunotherapy Companies”) based on whether they
meet one or more of the following criteria:
(i)The
company has a cancer immunotherapy drug(s) approved by either the U.S. Food and
Drug Administration or the European Medicines Agency;
(ii)The
company has a cancer immunotherapy drug(s) in the human stage of testing;
(iii)The
company has announced intentions to begin human stage testing of a cancer
immunotherapy drug(s); or
(iv)The
company has announced an immunotherapy collaboration or partnership with a major
pharmaceutical company.
The
Index is constructed using an objective, rules-based methodology that begins
with an initial universe of all pharmaceutical and biotechnology companies whose
equity securities or American Depositary Receipts (“ADRs”) are listed on a U.S.
exchange. The initial universe is then narrowed to include only those companies
that have been determined by Loncar to be Immunotherapy Companies, that are not
known to be under investigation by the SEC or any other government or regulatory
entity, that have a minimum market capitalization of $100 million, and that meet
certain liquidity thresholds. The Index may include small-, mid-, and
large-capitalization companies.
From
the remaining companies, the Index Provider then selects (i) five of the largest
pharmaceutical Immunotherapy Companies, including the leading pharmaceutical
company in each of the three most established and recognized categories of
immunotherapy techniques (cell-based therapies, checkpoint inhibitors, and
targeted antibodies), plus the two other largest pharmaceutical Immunotherapy
Companies, and (ii) the twenty-five largest biotechnology Immunotherapy
Companies based on their market capitalization.
The
Index is equal-weighted and is rebalanced and reconstituted on the third Tuesday
of June and December. The Index was created by Loncar in March 2015 in
anticipation of the commencement of operations of the Fund. Additional
information about the Index is available on the Index Provider’s website at
www.loncarindex.com.
The
Fund’s Investment Strategy
The
Fund attempts to invest all, or substantially all, of its assets in the
component securities and ADRs that make up the Index. Under normal
circumstances, at least 80% of the Fund’s total assets (exclusive of any
collateral held from securities lending) will be invested in the component
securities of the Index. Exchange Traded Concepts, LLC (“ETC” or the “Adviser”),
the Fund’s investment adviser, expects that, over time, the correlation between
the Fund’s performance and that of the Index, before fees and expenses, will be
95% or better.
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning it generally will invest in all of the component securities
of the Index. However, the Fund may use a “representative sampling” strategy,
meaning it may invest in a sample of the securities in the Index whose risk,
return and other characteristics closely resemble the risk, return and other
characteristics of the Index as a whole, when the Fund’s sub-adviser believes it
is in the best interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
The
Fund generally may invest up to 20% of its total assets (exclusive of any
collateral held from securities lending) in securities or other investments not
included in the Index, but which the Fund’s sub-adviser believes will help the
Fund track the Index. For example, the Fund may invest in securities that are
not components of the Index to reflect various corporate actions and other
changes to the Index (such as reconstitutions, additions and deletions).
To
the extent the Index concentrates (i.e., holds more than 25% of its total assets)
in the securities of a particular industry or group of related industries, the
Fund will concentrate its investments to approximately the same extent as the
Index. The Fund is expected to concentrate in Immunotherapy
Companies.
Principal
Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any
investment, there is a risk that you could lose all or a portion of your
investment in the Fund. Some or all of these risks may adversely
affect the Fund’s net asset value per share (“NAV”), trading price, yield, total
return and/or ability to meet its objective. For more information about the
risks of investing in the Fund, see the section in the Fund’s Prospectus titled
“Additional Information About the Funds—Principal Investment Risks.”
•Depositary
Receipt Risk. Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally
have inferior rights to receive payment from issuers. In addition, local,
regional or global events such as war, acts of terrorism, spread of infectious
diseases or other public health issues, recessions, or other events could have a
significant negative impact on the Fund and its investments. For example, the
global pandemic caused by COVID-19, a novel coronavirus, and the aggressive
responses taken by many governments, including closing borders, restricting
international and domestic travel, and the imposition of prolonged quarantines
or similar restrictions, has had negative impacts, and in many cases severe
impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility or periods of steep market declines.
Because the Underlying Shares of certain securities held by the Fund trade on
foreign exchanges that are closed when the Fund’s primary listing exchange is
open, the Fund is likely to experience premiums and discounts greater than those
of domestic ETFs.
◦Trading. Although
Shares are listed for trading on The Nasdaq Stock Market LLC (the “Exchange”)
and may be traded on U.S. exchanges other than the Exchange, there can be no
assurance that Shares will trade with any volume, or at all, on any stock
exchange. In stressed market conditions, the liquidity of Shares may begin to
mirror the liquidity of the Fund’s underlying portfolio holdings, which can be
significantly less liquid than Shares, and this could lead to differences
between the market price of the Shares and the underlying value of those
Shares.
•Foreign
Companies Risk.
Investments in ADRs that provide exposure to securities traded in foreign
markets involve substantial risk due to limited information; different
accounting, auditing and financial reporting standards; or adverse political or
economic developments. The Fund may also invest in Variable Interest Entities
(“VIEs”). For purposes of raising capital offshore on exchanges outside of
China, including on U.S. exchanges, many Chinese-based operating companies are
structured as Variable Interest Entities (“VIEs”). In this structure, the
Chinese-based operating company is the VIE and establishes a shell company in a
foreign jurisdiction, such as the Cayman Islands. The shell company lists on a
foreign exchange and enters into contractual arrangements with the VIE. This
structure allows Chinese companies in which the government restricts foreign
ownership to raise capital from foreign investors. While the shell company has
no equity ownership of the VIE, these contractual arrangements permit the shell
company to consolidate the VIE’s financial statements with its own for
accounting purposes and provide for economic exposure to the performance of the
underlying Chinese operating company. Therefore, an investor in the listed shell
company, such as the Fund, will have exposure to the Chinese-based operating
company only through contractual arrangements and has no ownership in the
Chinese-based operating company. Furthermore, because the shell company only has
specific rights provided for in these service agreements with the VIE, its
abilities to control the activities at the Chinese-based operating company are
limited and the operating company may engage in activities that negatively
impact investment value.
•Immunotherapy
Companies Risk. Immunotherapy
Companies
are highly dependent on the development, procurement and marketing of drugs and
the protection and exploitation of intellectual property rights. A company’s
valuation can also be greatly affected if one of its products is proven or
alleged to be unsafe, ineffective or unprofitable. The stock prices of
Immunotherapy
Companies
have been and will likely continue to be very volatile.
The
costs associated with developing new drugs can be significant, and the results
are unpredictable. Newly developed drugs may be susceptible to product
obsolescence due to intense competition from new products and less costly
generic products. Moreover, the process for obtaining regulatory approval by the
U.S. Food and Drug Administration or other governmental regulatory authorities
is long and costly and there can be no assurance that the necessary approvals
will be obtained or maintained.
Certain
companies in which the Fund may invest are non-U.S. issuers whose securities or
ADRs are listed on U.S. exchanges. The international operations of many
Immunotherapy Companies expose them to risks associated with instability and
changes in economic and political conditions, foreign currency fluctuations,
changes in foreign regulations and other risks inherent to international
business.
•Non-Diversification
Risk.
The Fund is
considered to be non-diversified, which means that it may invest more of its
assets in the securities of a single issuer or a smaller number of issuers than
if it were a diversified fund. As a result, the Fund may be more exposed to the
risks associated with and developments affecting an individual issuer or a
smaller number of issuers than a fund that invests more widely. This may
increase the Fund’s volatility and cause the performance of a relatively smaller
number of issuers to have a greater impact on the Fund’s
performance.
•Passive
Investment Risk.
The Fund is not actively managed, and its sub-adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•Sector
Risk.
To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund’s investments will be concentrated in an industry
or group of industries to the extent the Index is so concentrated.
The
Fund may be susceptible to an increased risk of loss, including losses due to
adverse occurrences affecting the Fund more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities of a
particular industry, group of industries, or sector. A significant portion of
the Fund’s assets will be invested in the biotechnology and pharmaceutical
industries, which expose the Fund to the risks of the following
sector:
◦Health
Care Sector Risk. Companies
in the health care sector are subject to extensive government regulation and
their profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
an increased emphasis on the delivery of healthcare through outpatient services,
loss or impairment of intellectual property rights and litigation regarding
product or service liability.
•Smaller
Companies Risk.
The Fund may invest in the securities of smaller-capitalization companies. As a
result, the Fund may be more volatile than funds that invest in larger, more
established companies. The securities of smaller-capitalization companies
generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Smaller-capitalization companies may be particularly
sensitive to changes in interest rates, government regulation, borrowing costs
and earnings.
•Tax
Risk.
To qualify for the favorable tax treatment generally available to a regulated
investment company (“RICs”), the Fund must satisfy, among other requirements
described in the SAI, certain diversification requirements. In particular, the
Fund generally may not acquire a security if, as a result of the acquisition,
more than 50% of the value of the Fund’s assets would be invested in (a) issuers
in which the Fund has, in each case, invested more than 5% of the Fund’s assets
or (b) issuers more than 10% of whose outstanding voting securities are owned by
the Fund. While the weighting of the Index is not inconsistent with these rules,
given the concentration of the Index in a relatively small number of securities,
it may not always be possible for the Fund to fully implement a replication
strategy or a representative sampling strategy while satisfying these
diversification requirements. The Fund’s efforts to satisfy the diversification
requirements may affect the Fund’s execution of its investment strategy and may
cause the Fund’s return to deviate from that of the Index, and the Fund’s
efforts to replicate or represent the Index may cause it inadvertently to fail
to satisfy the diversification requirements. If the Fund were to fail to satisfy
the diversification requirements, it could incur penalty taxes and be forced to
dispose of certain assets, or it could fail to qualify as a RIC. If the Fund
were to fail to qualify as a RIC, it would be taxed in the same manner as an
ordinary corporation, and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for calendar
years ended December 31. The table illustrates how the Fund’s average annual
returns for the 1-year, 5-year, and since inception periods compare with those
of a broad measure of market performance and the Index. The Fund’s
past performance, before and after taxes, does not necessarily indicate how it
will perform in the future. Updated performance information is
available on the Fund’s website at www.LoncarFunds.com.
Calendar Year
Total Returns
For the year-to-date
period ended September 30, 2021, the
Fund’s total return was -4.03%.
During the period of time shown in the bar
chart, the Fund’s highest
quarterly return was 36.76% for the quarter ended
June 30, 2020 and the
lowest
quarterly return was -23.94% for the quarter
ended December 31,
2018.
Average Annual Total Returns
For the Periods Ended December 31,
2020
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Loncar
Cancer Immunotherapy ETF |
1
Year |
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5
Years |
Since
Inception
(10/13/2015) |
Return
Before Taxes |
36.22% |
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2.61% |
5.20% |
Return
After Taxes on Distributions |
35.81% |
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2.44% |
5.00% |
Return
After Taxes on Distributions and Sale of Fund
Shares |
21.53% |
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1.94% |
3.97% |
Loncar
Cancer Immunotherapy Index
(reflects
no deduction for fees, expenses, or
taxes) |
37.26% |
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3.36% |
6.03% |
S&P
500 Index
(reflects
no deduction for fees, expenses, or taxes) |
18.40% |
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15.22% |
15.08% |
After-tax
returns are calculated using the historical highest individual federal marginal
income tax rates during the period covered by the table above and do not reflect
the impact of state and local taxes. Actual
after-tax returns depend on an investor’s tax situation and may differ from
those shown. After-tax returns shown are not relevant to investors who hold
their Shares through tax-deferred arrangements such as an individual retirement
account (“IRA”) or other tax-advantaged
accounts.
Portfolio
Management
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Adviser: |
Exchange
Traded Concepts, LLC |
Sub-Adviser: |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
Portfolio
Managers: |
Austin
Wen, CFA, Portfolio Manager of VIA, has been a portfolio manager of the
Fund since December 2018. |
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Rafael
Zayas, CFA, SVP, Head of Portfolio Management and Trading of VIA, has been
a portfolio manager of the Fund since June 2020.
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Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.LoncarFunds.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
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FUND
SUMMARY
– LONCAR
CHINA
BIOPHARMA
ETF |
Investment
Objective
The Loncar China BioPharma ETF (the “Fund”) seeks to track the
performance, before fees and expenses, of the Loncar China BioPharma Index (the
“Index”).
Fees and
Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
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Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.79% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.79% |
Expense
Example
This Example is intended to help you compare the cost of investing
in the Fund with the cost of investing in other funds. The Example assumes that
you invest $10,000 in the Fund for the time periods indicated and then redeem
all of your Shares at the end of those periods. The Example also assumes that
your investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The Example does not take into account brokerage commissions
that you may pay on your purchases and sales of Shares.
Although your
actual costs may be higher or lower, based on these assumptions your costs would
be:
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1
Year: |
$81 |
3
Years: |
$252 |
5
Years: |
$439 |
10
Years: |
$978 |
Portfolio
Turnover
The Fund pays transaction costs, such as commissions, when it buys
and sells securities (or “turns over” its portfolio). A higher portfolio
turnover rate may indicate higher transaction costs and may result in higher
taxes when Shares are held in a taxable account. These costs, which are not
reflected in annual fund operating expenses or in the Example, affect the Fund’s
performance. For the fiscal year ended August 31, 2021, the Fund’s portfolio
turnover rate was 44% of the average value of its
portfolio.
Principal
Investment Strategy
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index. The Index was developed in
2018 by Loncar Investments LLC, the Fund’s index provider (“Loncar” or the
“Index Provider”), and seeks to track the performance of a modified
equal-weighted portfolio of companies directly involved in the growth of China’s
pharmaceutical and biotech related industries (China’s “biopharma sector”). The
Index includes pharmaceutical companies, biotech companies, drug manufacturers,
diagnostics companies, wholesalers or distributors of biopharma products, and
biopharma service providers (“Biopharma Companies”).
Loncar
China BioPharma Index
The
Index is constructed from the universe of Nasdaq- or Hong Kong Stock
Exchange-listed companies identified by the Index methodology as Biopharma
Companies. To maintain a focus on innovation in the Chinese biopharma sector,
companies in the Index universe are screened to eliminate those that focus
strictly on manufacturing active pharmaceutical ingredients. The remaining
companies are then screened according to the Index rules to include only
companies (i) whose principal corporate headquarters is in China or (ii) for
which at least 51% of the value of their product revenue and pipeline is tied
directly to the Chinese market (such remaining companies, “China Biopharma
Companies”).
The
pool of China Biopharma Companies is then screened for investibility leaving
only companies having a market capitalization of at least USD$200 million,
meeting a minimum liquidity threshold, and that are not publicly known to
currently be under formal investigation by a government or regulatory entity.
At
the time of each reconstitution of the Index on the second Monday of each
February and August, each constituent is weighted equally, subject to the
following adjustments applied depending on a company’s market capitalization to
emphasize the role of larger companies in the Index:
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Market
Capitalization (USD$) |
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Weight
Adjustment Factor |
$10
billion or more |
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140% |
Between
$1 billion and $10 billion |
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100% |
From
$200 million to $1 billion |
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70% |
As
of November 15, 2021, the Index contained 66 companies, 10 of which were listed
on Nasdaq and 56 of which were listed on the Hong Kong Stock Exchange. As of
November 15, 2021 the three largest components of the Index were BeiGene, Ltd.
(2.88%), CARsgen Therapeutics Holdings Ltd. (2.87%) and Innovent Biologics, Inc.
(2.42%).
The
Fund’s Investment Strategy
The
Fund attempts to invest all, or substantially all, of its assets in the
component securities and depositary receipts that make up the Index. Exchange
Traded Concepts, LLC (“ETC” or the “Adviser”), the Fund’s investment adviser,
expects that, over time, the correlation between the Fund’s performance and that
of the Index, before fees and expenses, will be 95% or better.
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning it generally will invest in all of the component securities
of the Index in approximately the same proportion as in the Index. However, the
Fund may use a “representative sampling” strategy, meaning it may invest in a
sample of the securities in the Index whose risk, return, and other
characteristics closely resemble the risk, return, and other characteristics of
the Index as a whole, when the Fund’s sub-adviser believes it is in the best
interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
The
Fund generally may invest in securities or other investments not included in the
Index, but which the Fund’s sub-adviser believes will help the Fund track the
Index. For example, the Fund may invest in securities that are not components of
the Index to reflect various corporate actions and other changes to the Index
(such as reconstitutions, additions and deletions).
To
the extent the Index concentrates (i.e., holds more than 25% of its total assets)
in the securities of a particular industry or group of related industries, the
Fund will concentrate its investments to approximately the same extent as the
Index. The Adviser expects that the Index, and consequently the Fund, will
generally be concentrated in the securities of biotech and pharmaceutical
companies.
Principal
Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any
investment, there is a risk that you could lose all or a portion of your
investment in the Fund. Some or all of these risks may adversely
affect the Fund’s net asset value per share (“NAV”), trading price, yield, total
return and/or ability to meet its objective. For more information about the
risks of investing in the Fund, see the section in the Fund’s Prospectus titled
“Additional Information About the Funds—Principal Investment
Risks.”
•China
Biopharma Risk.
The biopharmaceutical industry in China is strictly regulated and changes in
such regulations, including banning or limiting certain products, may have a
material adverse effect on the operations, revenues, and profitability of
Biopharma Companies. The laws and regulations applicable to the process of
administrative approval of medicine and its production in China require entities
producing biopharma products to comply strictly with certain standards and
specifications promulgated by the government. In the event that a product is
discovered to be not compliant with the government’s standards and
specifications, the health department may revoke its approval of such product,
or otherwise limit the use of such product. Additionally, the process of
conducting research and various tests on new products before obtaining a new
medicine certificate from the National Medical Products Administration (“NMPA”)
and subsequent procedures may take several years, and the price of certain
biopharma products may be regulated in China. Changes in these laws and
regulations, including banning or limiting certain products, could have a
material adverse effect on the operations, revenues, and profitability of
Biopharma Companies held by the Fund.
•Currency
Exchange Rate Risk.
The Fund’s assets include investments denominated in non-U.S. currencies or in
securities that provide exposure to such currencies. Changes in currency
exchange rates and the relative value of non-U.S. currencies will affect the
value of the Fund’s investment and the value of your Shares. Currency exchange
rates can be very volatile and can change quickly and unpredictably. As a
result, the value of an investment in the Fund may change quickly and without
warning and you may lose money.
•Depositary
Receipt Risk. Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, acts of terrorism, spread of
infectious diseases or other public health issues, recessions, or other events
could have a significant negative impact on the Fund and its investments. For
example, the global pandemic caused by COVID-19, a novel coronavirus, and the
aggressive responses taken by many governments, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines or similar restrictions, has had negative impacts, and in many cases
severe impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility or periods of steep market declines.
Because certain securities held by the Fund trade on foreign exchanges that are
closed when the Fund’s primary listing exchange is open, the Fund is likely to
experience premiums and discounts greater than those of domestic
ETFs.
◦Trading. Although
Shares are listed for trading on The Nasdaq Stock Market LLC (the “Exchange”)
and may be traded on U.S. exchanges other than the Exchange, there can be no
assurance that Shares will trade with any volume, or at all, on any stock
exchange. In stressed market conditions, the liquidity of Shares may begin to
mirror the liquidity of the Fund’s underlying portfolio holdings, which can be
significantly less liquid than Shares, and this could lead to differences
between the market price of the Shares and the underlying value of those Shares.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. Investments in non-U.S. securities also
may be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational
risks.
These and other factors can make investments in the Fund more volatile and
potentially less liquid than other types of investments.
•Geographic
Investment Risk.
Because the Fund invests primarily in the securities of China Biopharma
Companies, it is more likely to be impacted by events or conditions affecting
China.
◦Risks
of Investing in China. Investments
in Chinese issuers subject the Fund to risks specific to China. China may be
subject to considerable degrees of economic, political and social instability.
China is a developing market and demonstrates significantly higher volatility
from time to time in comparison to developed markets. Over the past 25 years,
the Chinese government has undertaken reform of economic and market practices
and is expanding the sphere of private ownership of property in China. However,
Chinese markets generally continue to experience inefficiency, volatility and
pricing anomalies resulting from governmental influence, a lack of publicly
available information and/or political and social instability. Internal social
unrest or confrontations with other neighboring countries, including military
conflicts in response to such events, may also disrupt economic development in
China and result in a greater risk of currency fluctuations, currency
convertibility, interest rate fluctuations and higher rates of inflation. Export
growth continues to be a major driver of China’s rapid economic growth.
Reduction in spending on Chinese products and services, institution of tariffs
or other trade barriers, or a downturn in any of the economies of China’s key
trading partners may have an adverse impact on the Chinese economy. China is
also vulnerable economically to the impact of a public health crisis, which
could depress consumer demand, reduce economic output, and potentially lead to
market closures, travel restrictions, and quarantines, all of which would
negatively impact China’s economy and could affect the economies of its trading
partners.
For
purposes of raising capital offshore on exchanges outside of China, including on
U.S. exchanges, many Chinese-based operating companies are structured as
Variable Interest Entities (“VIEs”). In this structure, the Chinese-based
operating company is the VIE and establishes a shell company in a foreign
jurisdiction, such as the Cayman Islands. The shell company lists on a foreign
exchange and enters into contractual arrangements with the VIE. This structure
allows Chinese companies in which the government restricts foreign ownership to
raise capital from foreign investors. While the shell company has no equity
ownership of the VIE, these contractual arrangements permit the shell company to
consolidate the VIE’s financial statements with its own for accounting purposes
and provide for economic exposure to the performance of the underlying Chinese
operating company. Therefore, an investor in the listed shell company, such as
the Fund, will have exposure to the Chinese-based operating company only through
contractual arrangements and has no ownership in the Chinese-based operating
company. Furthermore, because the shell company only has specific rights
provided for in these service agreements with the VIE, its abilities to control
the activities at the Chinese-based operating company are limited and the
operating company may engage in activities that negatively impact investment
value.
•Geopolitical
Risk.
Some countries and regions in which the Fund invests have experienced security
concerns, war or threats of war and aggression, terrorism, economic uncertainty,
natural and environmental disasters and/or systemic market dislocations that
have led, and in the future may lead, to increased short-term market volatility
and may have adverse long-term effects on the U.S. and world economies and
markets generally, each of which may negatively impact the Fund’s
investments.
•Market
Capitalization Risk
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing.
The securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies. The securities of mid-capitalization companies
generally trade in lower volumes and are subject to greater and more
unpredictable price changes than large capitalization stocks or the stock market
as a whole.
◦Small-Capitalization
Investing.
The securities of small-capitalization companies may be more vulnerable to
adverse issuer, market, political, or economic developments than securities of
large- or mid-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than large- or mid-capitalization stocks or the
stock market as a whole. There is typically less publicly available information
concerning smaller-capitalization companies than for larger, more established
companies.
•Passive
Investment Risk.
The Fund is not actively managed, and its sub-adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•Sector
Risk.
To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund’s investments will be concentrated in an industry
or group of industries to the extent the Index is so concentrated.
The
Fund may be susceptible to an increased risk of loss, including losses due to
adverse occurrences affecting the Fund more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities of a
particular industry, group of industries, or sector. A significant portion of
the Fund’s assets will be invested in the biotechnology and pharmaceutical
industries, which expose the Fund to the risks of the following
sector:
◦Health
Care Sector Risk. Companies
in the health care sector are subject to extensive government regulation and
their profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
an increased emphasis on the delivery of healthcare through outpatient services,
loss or impairment of intellectual property rights and litigation regarding
product or service liability.
The
costs associated with developing new drugs can be significant, and the results
are unpredictable. Newly developed drugs may be susceptible to product
obsolescence due to intense competition from new products and less costly
generic products. Moreover, the process for obtaining regulatory approval by the
U.S. Food and Drug Administration (“FDA”), NMPA, or other foreign or domestic
governmental regulatory authorities is long and costly and there can be no
assurance that the necessary approvals will be obtained or maintained. The
values of many companies in the health care sector are also dependent on the
development, protection and exploitation of intellectual property rights and
other proprietary information, and the profitability of these companies may be
significantly affected by such things as the expiration of patents or the loss
of, or the inability to enforce, intellectual property rights.
•Tax
Risk.
To qualify for the favorable tax treatment generally available to a regulated
investment company (“RICs”), the Fund must satisfy, among other requirements
described in the SAI, certain diversification requirements. In particular, the
Fund generally may not acquire a security if, as a result of the acquisition,
more than 50% of the value of the Fund’s assets would be invested in (a) issuers
in which the Fund has, in each case, invested more than 5% of the Fund’s assets
or (b) issuers more than 10% of whose outstanding voting securities are owned by
the Fund. While the weighting of the Index is not inconsistent with these rules,
given the concentration of the Index in a relatively small number of securities,
it may not always be possible for the Fund to fully implement a replication
strategy or a representative sampling strategy while satisfying these
diversification requirements. The Fund’s efforts to satisfy the diversification
requirements may affect the Fund’s execution of its investment strategy and may
cause the Fund’s return to deviate from that of the Index, and the Fund’s
efforts to replicate or represent the Index may cause it inadvertently to fail
to satisfy the diversification requirements. If the Fund were to fail to satisfy
the diversification requirements, it could incur penalty taxes and be forced to
dispose of certain assets, or it could fail to qualify as a RIC. If the Fund
were to fail to qualify as a RIC, it would be taxed in the same manner as an
ordinary corporation, and distributions to its shareholders would not be
deductible by the Fund in computing its taxable income.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for the most
recent calendar year ended December 31. The table illustrates how the Fund’s
average annual returns for the 1-year and since inception periods compare with
those of a broad measure of market performance and the Index. The Fund’s
past performance, before and after taxes, does not necessarily indicate how it
will perform in the future. Updated performance information is
available on the Fund’s website at www.LoncarFunds.com.
Calendar Year
Total Returns
For the year-to-date
period ended September 30, 2021,
the Fund’s total return was 13.86%.
During the period of time shown in the bar
chart, the Fund’s highest
quarterly return was 33.52% for the quarter ended
June 30, 2020 and the
lowest
quarterly return was -6.78% for the quarter
ended March 31,
2020.
Average Annual Total Returns
For the Periods Ended December 31,
2020
|
|
|
|
|
|
|
|
|
|
Loncar
China BioPharma ETF |
1
Year |
|
Since
Inception
(8/14/2018) |
Return
Before Taxes |
34.38% |
|
12.60% |
Return
After Taxes on Distributions |
34.27% |
|
12.54% |
Return
After Taxes on Distributions and Sale of Fund
Shares |
20.50% |
|
9.79% |
Loncar
China BioPharma Index
(reflects
no deduction for fees, expenses, or
taxes) |
35.58% |
|
13.60% |
NASDAQ
Biotech Index
(reflects
no deduction for fees, expenses, or taxes) |
25.69% |
|
11.28% |
After-tax
returns are calculated using the historical highest individual federal marginal
income tax rates during the period covered by the table above and do not reflect
the impact of state and local taxes. Actual
after-tax returns depend on an investor’s tax situation and may differ from
those shown. After-tax returns shown are not relevant to investors who hold
their Shares through tax-deferred arrangements such as an individual retirement
account (“IRA”) or other tax-advantaged
accounts.
Portfolio
Management
|
|
|
|
|
|
Adviser: |
Exchange
Traded Concepts, LLC |
Sub-Adviser: |
Vident
Investment Advisory, LLC (“VIA” or the “Sub-Adviser”) |
Portfolio
Managers: |
Austin
Wen, CFA, Portfolio Manager of VIA, has been a portfolio manager of the
Fund since June 2020. |
|
Rafael
Zayas, CFA, SVP, Head of Portfolio Management and Trading of VIA, has been
a portfolio manager of the Fund since June
2020. |
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.LoncarFunds.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
ADDITIONAL
INFORMATION
ABOUT
THE
INDEXES
From
time to time, each Index may include more or less than the expected number of
companies as a result of events such as acquisitions, spin-offs and other
corporate actions.
The
Index Calculation Agent is Indxx, LLC, which is not affiliated with either Fund,
the Adviser, the Sub-Adviser, the Index Provider, or the Funds’ distributor. The
Index Calculation Agent provides information to each Fund about the constituents
of the applicable Index and does not provide investment advice with respect to
the desirability of investing in, purchasing or selling securities.
If
shares of a constituent of the Loncar Cancer Immunotherapy Index are tendered or
discontinued due to a merger or acquisition, such security will generally be
replaced with the next eligible security at the same weighting as the tendered
or discontinued security if more than 30 calendar days remain until the next
reconstitution date. If there are not more than 30 calendar days remaining until
the next reconstitution date, funds received from the tendered or discontinued
security will be distributed to the remaining Index constituents pro
rata.
If
the shares of a constituent of the Loncar China BioPharma Index are tendered or
discontinued due to a merger or acquisition, any funds received from the
tendered or discontinued security will be distributed to the remaining
Index constituents pro rata.
ADDITIONAL
INFORMATION ABOUT THE FUNDS
Investment
Objective
Each
of the Loncar Cancer Immunotherapy ETF (“Cancer Immunotherapy Fund”) and the
Loncar China BioPharma ETF’s (“China BioPharma Fund”) (each, a “Fund” and,
collectively, the “Funds”) investment objective has been adopted as a
non-fundamental investment policy and may be changed without shareholder
approval upon written notice to shareholders.
Principal
Investment Strategy of the China BioPharma Fund
The
China BioPharma Fund has adopted the following policy to comply with Rule 35d-1
under the Investment Company Act of 1940. Such policy has been adopted as a
non-fundamental investment policy and may be changed without shareholder
approval upon 60 days’ written notice to shareholders. Under normal
circumstances, at least 80% of the China BioPharma Fund’s net assets, plus
borrowings for investment purposes, will be invested in companies in the
biotechnology or pharmaceutical sectors and economically tied to China (the
“35d-1 Policy”). For purposes of the China BioPharma Fund’s 35d-1 Policy, the
China BioPharma Fund considers companies that derive a majority of their revenue
or profits from products or services, or have a majority of their assets
invested in activities, that are predominantly tied to the development, sale, or
distribution of regulated biologic or pharmaceutical medicines intended for
human therapeutic use to be part of the biotechnology or pharmaceutical sectors.
Additionally, for purposes of the China BioPharma Fund’s 35d-1 Policy, the Fund
considers the following securities to be economically tied to China: (i)
securities of companies that are organized under the laws of China or that
maintain their principal place of business in China; (ii) securities that are
traded principally in China; and (iii) securities of issuers that derive at
least 50% of their revenues or profits from goods produced or sold, investments
made, or services performed in China, that have at least 50% of their assets in
China, or that have at least 50% of the value of their product pipeline tied
directly to the Chinese market.
Principal
Investment Risks
This
section provides additional information regarding the principal risks described
in each Fund Summary. As in each Fund Summary, the principal risks below are
presented in alphabetical order to facilitate finding particular risks and
comparing them with other funds. Each risk described below is considered a
“principal risk” of investing in the applicable Fund, regardless of the order in
which it appears. Each of the factors below could have a negative impact on the
applicable Fund’s performance and trading prices.
•China
Biopharma Risk (China
BioPharma Fund only).
The biopharmaceutical industry in China is strictly regulated and changes in
such regulations, including banning or limiting certain products, may have a
material adverse effect on the operations, revenues, and profitability of
Biopharma Companies. The laws and regulations applicable to the process of
administrative approval of medicine and its production in China require entities
producing biopharma products to comply strictly with certain standards and
specifications promulgated by the government. In the event that a product is
discovered to be not compliant with the government’s standards and
specifications, the health department may revoke its approval of such product,
or otherwise limit the use of such product. Additionally, the process of
conducting research and various tests on new products before obtaining a new
medicine certificate from the NMPA and subsequent procedures may take several
years, and the price of certain biopharma products may be regulated in China.
Changes in these laws and regulations, including banning or limiting certain
products, could have a material adverse effect on the operations, revenues, and
profitability of Biopharma Companies held by the Fund.
•Currency
Exchange Rate Risk (China
BioPharma Fund only).
Changes
in currency exchange rates and the relative value of non-U.S. currencies will
affect the value of the Fund’s investments and the value of your Shares. Because
the Fund’s NAV is determined on the basis of U.S. dollars, the U.S. dollar value
of your investment in the Fund may go down if the value of the local currency of
the non-U.S. markets in which the Fund invests depreciates against the U.S.
dollar. This is true even if the local currency value of securities in the
Fund’s holdings goes up. Conversely, the dollar value of your investment in the
Fund may go up if the value of the local currency appreciates against the U.S.
dollar. The value of the U.S. dollar measured against other currencies is
influenced by a variety of factors. These factors include: national debt levels
and trade deficits, changes in balances of payments and trade, domestic and
foreign interest and inflation rates, global or regional political, economic or
financial events, monetary policies of governments, actual or potential
government intervention, and global energy prices. Political instability, the
possibility of government intervention and restrictive or opaque business and
investment policies may also reduce the value of a country’s currency.
Government monetary policies and the buying or selling of currency by a
country’s government may also influence exchange rates. Currency exchange rates
can be very volatile and can change quickly and unpredictably. As a result, the
value of an investment in the Fund may change quickly and without warning, and
you may lose money.
•Depositary
Receipt
Risk.
The
China BioPharma Fund may hold the securities of non-U.S. companies in the form
of American Depositary Receipts (“ADRs”) and Global Depositary Receipts
(“GDRs”), and the Cancer Immunotherapy Fund may hold ADRs. ADRs are negotiable
certificates issued by a U.S. financial institution that represent a specified
number of shares in a foreign stock and trade on a U.S. national securities
exchange, such as the New York Stock Exchange. Sponsored ADRs are issued with
the support of the issuer of the foreign stock underlying the ADRs and carry all
of the rights of common shares, including voting rights. GDRs are similar to
ADRs, but may be issued in bearer form and are typically offered for sale
globally and held by a foreign branch of an international bank. The underlying
issuers of certain depositary receipts, particularly unsponsored or unregistered
depositary receipts, are under no obligation to distribute shareholder
communications to the holders of such receipts, or to pass through to them any
voting rights with respect to the deposited securities. Issuers of unsponsored
depositary receipts are not contractually obligated to disclose material
information in the U.S. and, therefore, such information may not correlate to
the market value of the unsponsored depositary receipt. The underlying
securities of the ADRs and GDRs in the Fund’s portfolio are usually denominated
or quoted in currencies other than the U.S. Dollar. As a result, changes in
foreign currency exchange rates may affect the value of the Fund’s portfolio. In
addition, because the underlying securities of ADRs and GDRs trade on foreign
exchanges at times when the U.S. markets are not open for trading, the value of
the securities underlying the ADRs and GDRs may change materially at times when
the U.S. markets are not open for trading, regardless of whether there is an
active U.S. market for Shares.
•Equity
Market Risk.
Common stocks are susceptible to general stock market fluctuations and to
volatile increases and decreases in value as market confidence in and
perceptions of their issuers change. These investor perceptions are based on
various and unpredictable factors including: expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional political, economic, public
health, and banking crises. If you held common stock, or common stock
equivalents, of any given issuer, you would generally be exposed to greater risk
than if you held preferred stocks and debt obligations of the issuer because
common stockholders, or holders of equivalent interests, generally have inferior
rights to receive payments from issuers in comparison with the rights of
preferred stockholders, bondholders, and other creditors of such issuers.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers have experienced particularly large losses as a result of these
disruptions, and such disruptions may continue for an extended period of time or
reoccur in the future to a similar or greater extent. In response, the U.S.
government and the Federal Reserve have taken extraordinary actions to support
the domestic economy and financial markets, resulting in very low interest rates
and in some cases negative yields. It is unknown how long circumstances related
to the pandemic will persist, whether they will reoccur in the future, whether
efforts to support the economy and financial markets will be successful, and
what additional implications may follow from the pandemic. The impact of these
events and other epidemics or pandemics in the future could adversely affect
Fund performance.
•ETF
Risks. Each
Fund is an ETF, and, as a result of an ETF’s structure, is exposed to the
following risks:
◦APs,
Market Makers, and Liquidity Providers Concentration Risk.
The Fund has a limited number of financial institutions that may act as APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. To the extent either of the following events
occur, Shares may trade at a material discount to NAV and possibly face
delisting: (i) APs exit the business or otherwise become unable to process
creation and/or redemption orders and no other APs step forward to perform these
services, or (ii) market makers and/or liquidity providers exit the business or
significantly reduce their business activities and no other entities step
forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Investors buying or selling Shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers, as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively small amounts
of Shares. In addition, secondary market investors will also incur the cost of
the difference between the price at which an investor is willing to buy Shares
(the “bid” price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid-ask spread.” The bid-ask spread varies over time for Shares
based on trading volume and market liquidity, and the spread is generally lower
if Shares have more trading volume and market liquidity and higher if Shares
have little trading
volume
and market liquidity. Further, a relatively small investor base in the Fund,
asset swings in the Fund, and/or increased market volatility may cause increased
bid-ask spreads. Due to the costs of buying or selling Shares, including bid-ask
spreads, frequent trading of Shares may significantly reduce investment results
and an investment in Shares may not be advisable for investors who anticipate
regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Fund shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of the shares of
the Fund will approximate the Fund’s NAV, there may be times when the market
price of the shares is more than the NAV intra-day (premium) or less than the
NAV intra-day (discount) due to supply and demand of the Fund’s shares or during
periods of market volatility. This risk is heightened in times of market
volatility or periods of steep market declines. The market price of Fund shares
during the trading day, like the price of any exchange-traded security, includes
a “bid/ask” spread charged by the exchange specialist, market makers or other
participants that trade the Fund shares. In times of severe market disruption,
the bid/ask spread can increase significantly. At those times, Fund shares are
most likely to be traded at a discount to NAV, and the discount is likely to be
greatest when the price of Fund shares is falling fastest, which may be the time
that you most want to sell your Fund shares. The Adviser believes that, under
normal market conditions, large market price discounts or premiums to NAV will
not be sustained because of arbitrage opportunities. Because the Underlying
Shares of securities held by the China BioPharma Fund trade on foreign exchanges
that are closed when the China BioPharma Fund’s primary listing exchange is
open, there are likely to be deviations between the current price of an
underlying security and the security’s last quoted price from the closed foreign
market. This may result in premiums and discounts that are greater than those
experienced by domestic ETFs.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to Exchange “circuit breaker”
rules, which temporarily halt trading on the Exchange when a decline in the
S&P 500®
Index during a single day reaches certain thresholds (e.g.,
7%, 13%, and 20%). Additional rules applicable to the Exchange may halt trading
in Shares when extraordinary volatility causes sudden, significant swings in the
market price of Shares. There can be no assurance that Shares will trade with
any volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio holdings, which can be significantly less liquid than Shares, and this
could lead to differences between the market price of the Shares and the
underlying value of those Shares.
•Foreign
Companies Risk
(Cancer
Immunotherapy Fund only).
Investments in ADRs that provide exposure to securities traded in foreign
markets involve substantial risk due to limited information; different
accounting, auditing and financial reporting standards; or adverse political or
economic developments. The securities markets of foreign countries may be
substantially smaller, less developed, less liquid and more volatile than the
major securities markets in the U.S.
•Foreign
Securities Risk
(China
BioPharma Fund only).
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility of government intervention and expropriation
or nationalization of assets. Because legal systems differ, there is also the
possibility that it will be difficult to obtain or enforce legal judgments in
certain countries. Since foreign exchanges may be open on days when the Fund
does not price its Shares, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell the
Shares. Conversely, Shares may trade on days when foreign exchanges are closed.
Each of these factors can make investments in the Fund more volatile and
potentially less liquid than other types of investments.
•Geographic
Investment Risk
(China
BioPharma Fund only). Because
the Fund’s Index invests a significant portion of its assets in the securities
of companies of a single country, it is more likely to be impacted by events or
conditions affecting that country. For example, political and economic
conditions and changes in regulatory, tax, or economic policy in a country could
significantly affect the market in that country and in surrounding or related
countries and have a negative impact on the Fund’s performance. Currency
developments or restrictions, political and social instability, and changing
economic conditions have resulted in significant market volatility.
◦Risks
of Investing in China. The
Chinese economy is subject to a considerable degree of economic, political and
social instability:
▪Political
and Social Risk: The
Chinese government is authoritarian and has periodically used force to suppress
civil dissent. Disparities of wealth and the pace of economic liberalization may
lead to social turmoil, violence and labor unrest. In addition, China continues
to experience disagreements related to integration with Hong Kong and religious
and nationalist disputes in Tibet and Xinjiang. There is also a greater risk in
China than in many other countries of currency fluctuations, currency
convertibility, interest rate fluctuations and higher rates of inflation as a
result of internal social unrest or conflicts with other countries.
Unanticipated political or social developments may result in sudden and
significant investment losses. China’s growing income inequality and worsening
environmental conditions also are factors that may affect the Chinese economy.
China is also vulnerable economically to the impact of a public health crisis,
which could depress consumer demand, reduce economic output, and potentially
lead to market closures, travel restrictions, and quarantines, all of which
would negatively impact China’s economy and could affect the economies of its
trading partners.
▪Government
Control and Regulations:
The Chinese government has implemented significant economic reforms in order to
liberalize trade policy, promote foreign investment in the economy, reduce
government control of the economy and develop market mechanisms. There can be no
assurance these reforms will continue or that they will be effective. Despite
recent reform and privatizations, significant regulation of investment and
industry is still pervasive, and the Chinese government may restrict foreign
ownership of Chinese corporations and/or repatriate assets. Chinese markets
generally continue to experience inefficiency, volatility and pricing anomalies
that may be connected to governmental influence, a lack of publicly-available
information and/or political and social instability.
▪Economic
Risk:
The Chinese economy has grown rapidly during the past several years and there is
no assurance that this growth rate will be maintained. In fact, the Chinese
economy may experience a significant slowdown as a result of, among other
things, a deterioration in global demand for Chinese exports, as well as
contraction in spending on domestic goods by Chinese consumers. In addition,
China may experience substantial rates of inflation or economic recessions,
which would have a negative effect on the economy and securities market. Delays
in enterprise restructuring, slow development of well-functioning financial
markets and widespread corruption have also hindered performance of the Chinese
economy. China continues to receive substantial pressure from trading partners
to liberalize official currency exchange rates. Chinese companies are subject to
the risk that the U.S. government or other governments may sanction Chinese
issuers or otherwise prohibit U.S. persons or funds from investing in certain
Chinese issuers and a lack of transparency with respect to economic activity and
transactions in China. Recent developments in relations between the United
States and China have heightened concerns of increased tariffs and restrictions
on trade between the two countries. It is unclear whether further tariffs and
sanctions may be imposed or other escalating actions may be taken in the future.
▪Expropriation
Risk: The
Chinese government maintains a major role in economic policymaking, and
investing in China involves risk of loss due to expropriation, nationalization,
confiscation of assets and property, or the imposition of restrictions on
foreign investments and on repatriation of capital invested.
▪Hong
Kong Political Risk:
Hong Kong reverted to Chinese sovereignty on July 1, 1997 as a Special
Administrative Region (SAR) of the PRC under the principle of “one country, two
systems.” Although China is obligated to maintain the current capitalist
economic and social system of Hong Kong through June 30, 2047, the
continuation of economic and social freedoms enjoyed in Hong Kong is dependent
on the government of China. Any attempt by China to tighten its control over
Hong Kong’s political, economic, legal or social policies may result in an
adverse effect on Hong Kong’s markets. In addition, the Hong Kong dollar trades
at a fixed exchange rate in relation to (or, is “pegged” to) the U.S. dollar,
which has contributed to the growth and stability of the Hong Kong economy.
However, it is uncertain how long the currency peg will continue or what effect
the establishment of an alternative exchange rate system would have on the Hong
Kong economy. Because the Fund’s NAV is denominated in U.S. dollars, the
establishment of an alternative exchange rate system could result in a decline
in the Fund’s NAV.
•Variable
Interest Entity Investments:
For
purposes of raising capital offshore on exchanges outside of China, including on
U.S. exchanges, many Chinese-based operating companies are structured as VIEs.
In this structure, the Chinese-based operating company is the VIE and
establishes a shell company in a foreign jurisdiction, such as the Cayman
Islands. The shell company lists on a foreign exchange and enters into
contractual arrangements with the VIE. This structure allows Chinese companies
in which the government restricts foreign ownership to raise capital from
foreign investors. While the shell company has no equity ownership of the VIE,
these
contractual
arrangements permit the shell company to consolidate the VIE’s financial
statements with its own for accounting purposes and provide for economic
exposure to the performance of the underlying Chinese operating company.
Therefore, an investor in the listed shell company, such as the Fund, will have
exposure to the Chinese-based operating company only through contractual
arrangements and has no ownership in the Chinese-based operating company.
Furthermore, because the shell company only has specific rights provided for in
these service agreements with the VIE, its abilities to control the activities
at the Chinese-based operating company are limited and the operating company may
engage in activities that negatively impact investment value.
While
the VIE structure has been widely adopted, it is not formally recognized under
Chinese law and therefore there is a risk that the Chinese government could
prohibit the existence of such structures or negatively impact the VIE’s
contractual arrangements with the listed shell company by making them invalid.
If these contracts were found to be unenforceable under Chinese law, investors
in the listed shell company, such as the Fund, may suffer significant losses
with little or no recourse available. If the Chinese government determines that
the agreements establishing the VIE structures do not comply with Chinese law
and regulations, including those related to restrictions on foreign ownership,
it could subject a Chinese-based issuer to penalties, revocation of business and
operating licenses, or forfeiture of ownership interest. In addition, the listed
shell company’s control over a VIE may also be jeopardized if a natural person
who holds the equity interest in the VIE breaches the terms of the agreement, is
subject to legal proceedings or if any physical instruments for authenticating
documentation, such as chops and seals, are used without the Chinese-based
issuer’s authorization to enter into contractual arrangements in China. Chops
and seals, which are carved stamps used to sign documents, represent a legally
binding commitment by the company. Moreover, any future regulatory action may
prohibit the ability of the shell company to receive the economic benefits of
the Chinese-based operating company, which may cause the value of the Fund’s
investment in the listed shell company to suffer a significant loss. For
example, in 2021, the Chinese government prohibited use of the VIE structure for
investment in after-school tutoring companies. There is no guarantee that the
government will not place similar restrictions on other industries.
•Geopolitical
Risk
(China
BioPharma Fund only). Some
countries and regions in which the Fund invests have experienced security
concerns, war or threats of war and aggression, terrorism, economic uncertainty,
natural and environmental disasters and/or systemic market dislocations that
have led, and in the future may lead, to increased short-term market volatility
and may have adverse long-term effects on the U.S. and world economies and
markets generally. Such geopolitical and other events may also disrupt
securities markets and, during such market disruptions, the Fund’s exposure to
the other risks described herein will likely increase. Each of the foregoing may
negatively impact the Fund’s investments.
•Immunotherapy
Companies Risk (Cancer
Immunotherapy Fund only).
The
success of Immunotherapy
Companies
is highly dependent on the development, procurement and marketing of drugs. The
values of such companies are also dependent on the development, protection and
exploitation of intellectual property rights and other proprietary information,
and profitability may be significantly affected by such things as the expiration
of patents or the loss of, or the inability to enforce, intellectual property
rights. There can be no assurance that the steps taken by
Immunotherapy
Companies
to protect their proprietary rights will be adequate to prevent misappropriation
of their proprietary rights or that competitors will not independently develop
products that are substantially equivalent or superior to such companies’
products. Immunotherapy
Companies
also rely on trade secrets, know-how and technology, which are not protected by
patents, to maintain their competitive position. If any trade secret, know-how
or other technology not protected by a patent were disclosed to, or
independently developed by, a competitor, that company’s business and financial
condition could be materially adversely affected.
The
research and other costs associated with developing or procuring new drugs and
the related intellectual property rights can be significant, and the results of
such research and expenditures are unpredictable. There can be no assurance that
those efforts or costs will result in the development of a profitable drug.
Immunotherapy
Companies
may be susceptible to product obsolescence and face intense competition from new
products and less costly generic products. Moreover, the process for obtaining
regulatory approval by the U.S. Food and Drug Administration or other
governmental regulatory authorities is long and costly and there can be no
assurance that the necessary approvals will be obtained or maintained.
Immunotherapy
Companies
are also subject to laws and regulations governing the protection of the
environment and occupational health and safety, including laws regulating air
emissions, wastewater discharges, the management and disposal of hazardous
materials and wastes, and the health and safety of employees. Failure to comply
with applicable domestic and/or foreign requirements can result in civil and
criminal fines or other enforcement actions, recall or seizure of products,
total or partial suspension of production, withdrawal of existing product
approvals or clearances, refusal to approve or clear new applications or
notifications, increased quality control costs, criminal
prosecution,
other penalties and, in some instances, exclusion of participation in government
sponsored programs such as Medicare, Medicaid and other government sponsored
programs.
There
can be no assurance that any individual cancer immunotherapy drug will be
effective or approved by the applicable regulatory agency. Consequently, there
may be companies included in the Index that do not (and may never) generate
significant revenue or profit from cancer immunotherapy products. Additionally,
because the pharmaceutical companies included in the Index may be dependent on
the sales of drugs other than cancer immunotherapy drugs, the performance of
such companies may be adversely affected by factors unrelated to the market for
cancer immunotherapy drugs.
Immunotherapy
Companies
are also subject to rapid and significant technological change and competitive
forces that may make drugs obsolete or make it difficult to raise prices and, in
fact, may result in price discounting. Immunotherapy
Companies
may also be subject to expenses and losses from extensive litigation based on
intellectual property, product liability and similar claims.
Immunotherapy
Companies
may be adversely affected by government regulation and changes in reimbursement
rates. The ability of many such companies to commercialize current and any
future products depends in part on the extent to which reimbursement for the
cost of such products and related treatments are available from third party
payors, such as Medicare, Medicaid and other government sponsored programs,
private health insurance plans and health maintenance organizations. Third-party
payors are increasingly challenging the price and cost-effectiveness of medical
products. Significant uncertainty exists as to the reimbursement status of
healthcare products, and there can be no assurance that adequate third-party
coverage will be available for companies to obtain satisfactory price levels for
their products.
The
international operations of many Immunotherapy
Companies
expose them to risks associated with instability and changes in economic and
political conditions, foreign currency fluctuations, changes in foreign
regulations and other risks inherent to international business. Additionally, a
company’s valuation can often be based largely on the potential or actual
performance of a limited number of products. A company’s valuation can also be
greatly affected if one of its products proves unsafe, ineffective or
unprofitable. Immunotherapy
Companies
also may be characterized by thin capitalization and limited markets, financial
resources or personnel, as well as dependence on wholesale distributors. The
stock prices of Immunotherapy
Companies
have been and will likely continue to be very volatile. Some of the companies in
the Index are engaged in other lines of business unrelated to immunotherapy, and
they may experience problems with these lines of business which could adversely
affect their operating results. The operating results of these companies may
fluctuate as a result of these additional risks and events in the other lines of
business. In addition, a company’s ability to engage in new activities may
expose it to business risks with which it has less experience than it has with
the business risks associated with its traditional businesses. Despite a
company’s possible success in immunotherapy activities, there can be no
assurance that the other lines of business in which these companies are engaged
will not have an adverse effect on a company’s business or financial
condition.
Certain
companies in which the Fund may invest are non-U.S. issuers whose securities or
ADRs are listed on U.S. exchanges. These securities involve risks beyond those
associated with investments in U.S. securities, including greater market
volatility, higher transactional costs, the possibility that the liquidity of
such securities could be impaired because of future political and/or economic
developments, taxation by foreign governments, political instability, the
possibility that foreign governmental restrictions may be adopted which might
adversely affect such securities and that the selection of such securities may
be more difficult because there may be less publicly available information
concerning such non-U.S. issuers or the accounting, auditing and financial
reporting standards, practices and requirements applicable to non-U.S. issuers
may differ from those applicable to U.S. issuers.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization
companies
have limited product lines, markets, financial resources, and management
personnel and tend to concentrate on fewer geographical markets relative to
large-capitalization companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and earnings.
•Non-Diversification
Risk (Cancer
Immunotherapy Fund only).
The
Fund is considered to be non-diversified, which means that it may invest more of
its assets in the securities of a single issuer or a smaller number of issuers
than if it were a diversified fund. As a result, the Fund may be more exposed to
the risks associated with and developments affecting an individual issuer or a
smaller number of issuers than a fund that invests more widely. This may
increase the Fund’s volatility and cause the performance of a relatively smaller
number of issuers to have a greater impact on the Fund’s performance. However,
the Fund intends to satisfy the diversification requirements for qualifying as a
regulated investment company (a “RIC”) under Subchapter M of the Internal
Revenue Code of 1986, as amended (the “Code”).
•Passive
Investment Risk.
The Funds are not actively managed and the Sub-Adviser would not sell shares of
an equity security due to current or projected underperformance of a security,
industry or sector, unless that security is removed from the a Fund’s Index or
the selling of shares of that security is otherwise required upon a
reconstitution of a Fund’s Index in accordance with the Index methodology. Each
Fund invests in securities included in, or representative of securities included
in, their respective Index, regardless of their investment merits. The Funds do
not take defensive positions under any market conditions, including conditions
that are adverse to the performance of such Fund.
•Sector
Risk.
To the extent the Fund invests more heavily in particular sectors of the
economy, its performance will be especially sensitive to developments that
significantly affect those sectors. The Fund’s investments will be concentrated
in an industry or group of industries to the extent the Index is so
concentrated.
The
Fund may be susceptible to an increased risk of loss, including losses due to
adverse occurrences affecting the Fund more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities of a
particular industry, group of industries, or sector. A significant portion of
the Fund’s assets will be invested in the biotechnology and pharmaceutical
industries, which expose the Fund to the risks of the following
sector:
◦Health
Care Sector Risk.
Companies in the health care sector are subject to extensive government
regulation and their profitability can be significantly affected by restrictions
on government reimbursement for medical expenses, rising costs of medical
products and services, pricing pressure (including price discounting), limited
product lines and an increased emphasis on the delivery of healthcare through
outpatient services. Companies in the health care sector are heavily dependent
on obtaining and defending patents, which may be time consuming and costly, and
the expiration of patents may also adversely affect the profitability of these
companies. Healthcare companies are also subject to extensive litigation based
on product liability and similar claims. In addition, their products can become
obsolete due to industry innovation, changes in technologies or other market
developments. Many new products in the health care sector require significant
research and development and may be subject to regulatory approvals, all of
which may be time consuming and costly with no guarantee that any product will
come to market.
Health
care companies may rely on trade secrets, know-how, and technology that are not
protected by patents, to maintain their competitive position. If any trade
secret, know-how, or other technology not protected by a patent were disclosed
to, or independently developed by, a competitor, that company’s business and
financial condition could be materially adversely affected.
The
research and other costs associated with developing or procuring new drugs and
the related intellectual property rights can be significant, and the results of
such research and expenditures are unpredictable. There can be no assurance that
those efforts or costs will result in the development of a profitable drug.
Moreover, the process for obtaining regulatory approval by the FDA, NMPA, or
other foreign or domestic governmental regulatory authorities, as applicable, is
long and costly and there can be no assurance that the necessary approvals will
be obtained or maintained. Such companies are also subject to laws and
regulations governing the protection of the environment and occupational health
and safety, including laws regulating air emissions, wastewater discharges, the
management and disposal of hazardous materials and wastes, and the health and
safety of employees. Failure to comply with
applicable
domestic and/or foreign requirements can result in civil and criminal fines or
other enforcement actions, recall or seizure of products, total or partial
suspension of production, withdrawal of existing product approvals or
clearances, refusal to approve or clear new applications or notifications,
increased quality control costs, criminal prosecution, other penalties and, in
some instances, exclusion of participation in government sponsored programs such
as Medicare, Medicaid and other government sponsored programs.
The
international operations of many healthcare companies expose them to risks
associated with instability and changes in economic and political conditions,
foreign currency fluctuations, changes in foreign regulations and other risks
inherent to international business. Additionally, a company’s valuation can
often be based largely on the potential or actual performance of a limited
number of products. A company’s valuation can also be greatly affected if one of
its products proves unsafe, ineffective or unprofitable. The stock prices of
biotech and pharmaceutical companies have been and will likely continue to be
very volatile.
•Tax
Risk.
To qualify for the favorable tax treatment generally available to RICs, a Fund
must satisfy, among other requirements described in the SAI, certain
diversification requirements. In particular, at the close of each quarter of a
Fund’s taxable year: (A) at least 50% of the value of its total assets must be
represented by cash and cash items, U.S. government securities, securities of
other RICs and other securities, with such other securities limited, in respect
to any one issuer, to an amount not greater than 5% of the value of the Fund’s
total assets and that does not represent more than 10% of the outstanding voting
securities of such issuer, including the equity securities of a qualified
publicly traded partnership, and (B) not more than 25% of the value of its total
assets is invested, including through corporations in which the Fund owns a 20%
or more voting stock interest, in the securities (other than U.S. government
securities or securities of other RICs) of any one issuer or the securities
(other than the securities of another RIC) of two or more issuers that the Fund
controls and which are engaged in the same or similar trades or businesses or
related trades or businesses, or the securities of one or more qualified
publicly traded partnerships. While the weighting of an Index is not
inconsistent with these rules, given the concentration of an Index in a
relatively small number of securities, it may not always be possible for a Fund
to fully implement a replication strategy or a representative sampling strategy
while satisfying these diversification requirements. Each Fund’s efforts to
satisfy the diversification requirements may affect the Fund’s execution of its
investment strategy and may cause the Fund’s return to deviate from that of its
Index, and the Fund’s efforts to replicate or represent the Index may cause it
inadvertently to fail to satisfy the diversification requirements. If a Fund
were to fail to satisfy the diversification requirements, it could be eligible
for relief provisions if the failure is due to reasonable cause and not willful
neglect and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. Additionally, relief is provided for certain de minimis
failures of the diversification requirements where the Fund corrects the failure
within a specified period. If a Fund were to fail to qualify as a RIC for a tax
year, and the relief provisions are not available, it would be taxed in the same
manner as an ordinary corporation, and distributions to its shareholders would
not be deductible by the Fund in computing its taxable income. In such case, the
Fund’s shareholders would be taxed as if they received ordinary dividends,
although corporate shareholders could be eligible for the dividends received
deduction (subject to certain limitations) and individuals may be able to
benefit from the lower tax rates available to qualified dividend income. In
addition, the Fund could be required to recognize unrealized gains, pay
substantial taxes and interest, and make substantial distributions before
requalifying as a RIC.
•Tracking
Error Risk.
As
with all index funds, the performance of each Fund and its respective Index may
differ from each other for a variety of reasons. For example, the Funds incur
operating expenses and portfolio transaction costs not incurred by an Index. In
addition, the Funds may not be fully invested in the securities of their
respective Index at all times or may hold securities not included in the Index.
A Fund may use a representative sampling strategy to achieve its investment
objective, if the Fund’s Sub-Adviser believes it is in the best interest of the
Fund, which generally can be expected to produce a greater non-correlation
risk.
PORTFOLIO
HOLDINGS
INFORMATION
Information
about the Funds’ daily portfolio holdings is available at www.LoncarFunds.com. A
description of the Funds’ policies and procedures with respect to the disclosure
of the Funds’ portfolio holdings is available in the Funds’ Statement of
Additional Information (“SAI”).
MANAGEMENT
Investment
Adviser
Exchange
Traded Concepts, LLC, serves as the investment adviser and has overall
responsibility for the general management and administration of the Funds. The
Adviser also arranges for sub-advisory, transfer agency, custody, fund
administration, and all other non-distribution related services necessary for
the Funds to operate. The Adviser has provided investment
advisory
services to individual and institutional accounts since 2009. The Adviser is an
Oklahoma limited liability company and is located at 10900 Hefner Pointe Drive,
Suite 400, Oklahoma City, Oklahoma 73120.
The
Adviser provides oversight of the Sub-Adviser, monitoring of the Sub-Adviser’s
buying and selling of securities for the Fund, and review of the Sub-Adviser’s
performance. For the services it provides to the Funds, each Fund pays ETC a
unified management fee, which is calculated daily and paid monthly, at an annual
rate of 0.79% of the Fund’s average daily net assets.
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Funds except for the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, taxes, brokerage
commissions and other expenses incurred in placing orders for the purchase and
sale of securities and other investment instruments, acquired fund fees and
expenses, accrued deferred tax liability, extraordinary expenses, and
distribution fees and expenses paid by the Trust under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act (collectively, “Excluded
Expenses”). The Adviser has entered into a license agreement with Loncar, with
respect to each Fund, pursuant to which the Adviser pays a fee to use each
Index, which is calculated daily and paid monthly, based on a percentage of the
average daily net assets of such Fund. As part of the arrangement between Loncar
and the Adviser, Loncar has agreed to assume the obligation of the Adviser to
pay all expenses of each Fund (except the Excluded Expenses) and, to the extent
applicable, pay the Adviser’s minimum fee under the arrangement.
The
Adviser compensates the Sub-Adviser from the management fee it receives.
The
basis for the Board of Trustees’ approval of the Investment Advisory Agreement
is available in the Funds’ Semi-Annual
Report
to Shareholders for the period ended February 28, 2021.
Sub-Adviser
The
Adviser has retained Vident Investment Advisory, LLC to serve as sub-adviser for
the Funds. VIA is responsible for the day-to-day management of the Funds. VIA, a
registered investment adviser, is a wholly-owned subsidiary of Vident Financial,
LLC. Its principal office is located at 1125 Sanctuary Parkway, Suite 515,
Alpharetta, Georgia 30009. VIA was formed in 2014 and provides investment
advisory services to ETFs, including the Funds. The Sub-Adviser is responsible
for trading portfolio securities for the Funds, including selecting
broker-dealers to execute purchase and sale transactions or in connection with
any rebalancing or reconstitution of the Indexes, subject to the supervision of
the Adviser and the Board. For its services, the Sub-Adviser is paid a fee by
the Adviser, which fee is calculated daily at an annual rate based on the
average daily net assets of each Fund and subject to a minimum annual fee as
follows:
|
|
|
|
|
|
|
|
|
Fund |
Minimum
Annual Fee |
Asset-Based
Fee |
Cancer
Immunotherapy Fund |
$15,000 |
0.05% |
China
BioPharma Fund |
$25,000 |
0.06% |
The
basis for the Board of Trustees’ approval of the Sub-Advisory Agreement is
available in the Funds’ Annual
Report to
Shareholders for the period ended August 31, 2021.
Management
of the Funds’ Sub-Adviser
The
Funds and the Adviser have received an exemptive order from the SEC permitting
the Adviser (subject to certain conditions and the Board’s approval) to select
or change sub-advisers without obtaining shareholder approval. The order also
permits the Adviser to materially amend the terms of agreements with a
sub-adviser (including an increase in the fee paid by the Adviser to the
sub-adviser (and not paid by a Fund)) or to continue the employment of a
sub-adviser after an event that would otherwise cause the automatic termination
of services with Board approval, but without shareholder approval. Shareholders
will be notified of any sub-adviser changes.
Portfolio
Managers
The
Funds are managed by VIA’s portfolio management team. The individual members of
the team jointly responsible for the day to day management of each Fund’s
portfolio are listed below.
Rafael
Zayas, CFA, became SVP, Head of Portfolio Management and Trading ETF at VIA in
June 2020. From 2017 to 2020, he was Senior Portfolio Manager –
International Equity at VIA and has over 15 years of experience that includes
managing international equity portfolios, including in emerging and frontier
markets. Prior to joining VIA, he was a Portfolio Manager – Direct Investments
for seven years at Russell Investments, a global asset manager, where he
co-managed more than $4 billion in quantitative strategies across global
markets, including the Russell Strategic Call Overwriting Fund, a mutual fund.
Mr. Zayas also helped Russell Investments launch its sponsored ETF initiative
and advised on index methodologies. Prior to joining Russell Investments, Mr.
Zayas was a Portfolio Manager – Equity Indexing at Mellon Capital
Management,
where he managed assets for internationally listed global equity ETFs. Mr. Zayas
graduated with a B.S. in Electrical Engineering from Cornell University and
obtained a Certificate in Computational Finance and Risk Management from the
University of Washington. He also attained the Chartered Financial Analyst
designation in 2010.
Austin
Wen, CFA, has been a Portfolio Manager of VIA since 2016 and has seven years of
investment management experience. His focus at VIA is on portfolio management
and trading, risk monitoring and investment analysis. Previously, he was an
analyst for Vident Financial beginning in 2014, working on the development and
review of investment solutions. He began his career in 2011 as a State Examiner
for the Georgia Department of Banking and Finance. Mr. Wen obtained a BA in
Finance from the University of Georgia and holds the Chartered Financial Analyst
designation.
The
Funds’ SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts managed by the Portfolio Managers, and
the Portfolio Managers’ ownership of Shares of each Fund.
Index
Provider
Loncar
Investments, LLC, the Index Provider for each Fund, is not affiliated with ETF
Series Solutions (the “Trust”), the Adviser, the Funds’ administrator,
custodian, transfer agent or the Distributor (defined below), or any of their
respective affiliates. Loncar provides information to each Fund about the
constituents of the applicable Index and does not make investment decisions,
provide investment advice, or otherwise act in the capacity of an investment
adviser to the Funds. The Adviser has entered into a licensing agreement with
Loncar pursuant to which the Adviser pays a fee to use each Index. The Adviser
is sub-licensing rights to each Index to the applicable Fund at no charge. As
part of the arrangement between the Adviser and Loncar, Loncar assists with the
development of the Funds and provides marketing support for the Funds, including
distributing marketing materials related to the Funds.
HOW
TO
BUY
AND
SELL
SHARES
Each
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from a Fund, and only APs may tender their Shares for
redemption directly to a Fund, at NAV. APs must be a member or participant of a
clearing agency registered with the SEC and must execute a Participant Agreement
that has been agreed to by the Distributor (defined below), and that has been
accepted by a Fund’s transfer agent, with respect to purchases and redemptions
of Creation Units. Once created, Shares trade in the secondary market in
quantities less than a Creation Unit.
Most
investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange and can be
bought and sold throughout the trading day like other publicly traded
securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread between the
bid and the offer price in the secondary market on each leg of a round trip
(purchase and sale) transaction. In addition, because secondary market
transactions occur at market prices, you may pay more than NAV when you buy
Shares and receive less than NAV when you sell those Shares.
Book
Entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly
maintain a custodial relationship with DTC. As a beneficial owner of Shares, you
are not entitled to receive physical delivery of stock certificates or to have
Shares registered in your name, and you are not considered a registered owner of
Shares. Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are the same
as those that apply to any other securities that you hold in book entry or
“street name” through your brokerage account.
Frequent
Purchases and Redemptions of Shares
The
Funds impose no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly with a Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Funds accommodate
frequent purchases and redemptions by APs. However, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and redemptions, the Funds employ fair value pricing and may impose
transaction
fees on purchases and redemptions of Creation Units to cover the custodial and
other costs incurred by a Fund in effecting trades. In addition, the Funds and
the Adviser reserve the right to reject any purchase order at any
time.
Determination
of NAV
Each
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, each day
the NYSE is open for business. Each NAV for a Fund is calculated by dividing the
applicable Fund’s net assets by its Shares outstanding.
In
calculating its NAV, each Fund generally values its assets on the basis of
market quotations, last sale prices, or estimates of value furnished by a
pricing service or brokers who make markets in such instruments. If such
information is not available for a security held by a Fund or is determined to
be unreliable, the security will be valued at fair value estimates under
guidelines established by the Board (as described below).
In
calculating its NAV, each Fund generally values equity securities (including
preferred stock) traded on any recognized U.S. or non-U.S. exchange at the last
sale price or official closing price on the exchange or system on which they are
principally traded. In addition, each Fund may invest in money market funds that
are valued at their NAV per share.
Fair
Value Pricing
The
Board has adopted procedures and methodologies to fair value Fund securities
whose market prices are not “readily available” or are deemed to be unreliable.
For example, such circumstances may arise when: (i) a security has been
de-listed or has had its trading halted or suspended; (ii) a security’s primary
pricing source is unable or unwilling to provide a price; (iii) a security’s
primary trading market is closed during regular market hours; or (iv) a
security’s value is materially affected by events occurring after the close of
the security’s primary trading market. Generally, when fair valuing a security,
the Funds will take into account all reasonably available information that may
be relevant to a particular valuation including, but not limited to, fundamental
analytical data regarding the issuer, information relating to the issuer’s
business, recent trades or offers of the security, general and/or specific
market conditions and the specific facts giving rise to the need to fair value
the security. Fair value determinations are made in good faith and in accordance
with the fair value methodologies included in the Board-adopted valuation
procedures. Due to the subjective and variable nature of fair value pricing,
there can be no assurance that the Adviser or Sub-Adviser will be able to obtain
the fair value assigned to the security upon the sale of such security.
Investments
by Registered Investment Companies
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in a Fund beyond the limits set
forth in section 12(d)(1) subject to certain terms and conditions set forth in
an SEC exemptive order issued to the Adviser or rule under the 1940 Act,
including that such investment companies enter into an agreement with a
Fund.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Funds. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Funds is available through certain broker-dealers.
If you are interested in enrolling in householding and receiving a single copy
of prospectuses and other shareholder documents, please contact your
broker-dealer. If you are currently enrolled in householding and wish to change
your householding status, please contact your broker-dealer.
DIVIDENDS,
DISTRIBUTIONS,
AND
TAXES
Dividends
and Distributions
Each
Fund intends to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least annually. Each Fund will declare and
pay capital gain distributions, if any, in cash. Distributions in cash may be
reinvested automatically in additional whole Shares only if the broker through
whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in a Fund. Your investment in
a Fund may have other tax implications. Please consult your tax advisor about
the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
The
Tax Cuts and Jobs Act (the “Tax Act”) made significant changes to the U.S.
federal income tax rules for taxation of individuals and corporations, generally
effective for taxable years beginning after December 31, 2017. Many of the
changes applicable to individuals are temporary and only apply to taxable years
beginning after December 31, 2017 and before January 1, 2026. There are
only minor changes with respect to the specific rules applicable to a RIC under
the Internal Revenue Code of 1986, as amended, such as a Fund. The Tax Act,
however, made numerous other changes to the tax rules that may affect
shareholders and the Funds. You are urged to consult with your own tax advisor
regarding how the Tax Act affects your investment in the Funds.
Each
Fund has elected or intends to elect and intends to qualify each year for
treatment as a RIC. If a Fund meets certain minimum distribution requirements, a
RIC is not subject to tax at the fund level on income and gains from investments
that are timely distributed to shareholders. However, a Fund’s failure to
qualify as a RIC or to meet minimum distribution requirements would result (if
certain relief provisions were not available) in fund-level taxation and,
consequently, a reduction in income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when a Fund makes distributions, when you sell your Shares listed
on the Exchange, and when you purchase or redeem Creation Units (APs
only).
Taxes
on Distributions
Each
Fund intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For federal income tax purposes,
distributions of investment income are generally taxable as ordinary income or
qualified dividend income. Taxes on distributions of capital gains (if any) are
determined by how long a Fund owned the investments that generated them, rather
than how long a shareholder has owned his or her Shares. Sales of assets held by
a Fund for more than one year generally result in long-term capital gains and
losses, and sales of assets held by a Fund for one year or less generally result
in short-term capital gains and losses. Distributions of a Fund’s net capital
gain (the excess of net long-term capital gains over net short-term capital
losses) that are reported by such Fund as capital gain dividends (“Capital Gain
Dividends”) will be taxable as long-term capital gains, which for non-corporate
shareholders are subject to tax at reduced rates of up to 20% (lower rates apply
to individuals in lower tax brackets). Distributions of short-term capital gain
will generally be taxable as ordinary income. Dividends and distributions are
generally taxable to you whether you receive them in cash or reinvest them in
additional Shares.
Distributions
reported by a Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that a Fund received in respect of stock of certain foreign
corporations may be qualified dividend income if that stock is readily tradable
on an established U.S. securities market. Corporate shareholders may be entitled
to a dividends-received deduction for the portion of dividends they receive from
a Fund that are attributable to dividends received by the Fund from U.S.
corporations, subject to certain limitations. Since the China BioPharma Fund
invests primarily in securities of non-U.S. issuers, it is not expected that a
significant portion of the dividends received from the Fund will qualify for the
dividends-received deduction for corporations.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from a Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8% tax
on all or a portion of their “net investment income,” which includes interest,
dividends, and certain capital gains (generally including capital gains
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by a Fund before your
investment (and thus were included in the Shares’ NAV when you purchased your
Shares).
You
may wish to avoid investing in a Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your investment.
If
a Fund’s distributions exceed its earnings and profits, all or a portion of the
distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in Shares and result in a
higher capital gain or lower capital loss when the Shares are
sold.
After a shareholder’s basis in Shares has been reduced to zero, distributions in
excess of earnings and profits in respect of those Shares will be treated as
gain from the sale of the Shares.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
a Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
your Shares generally are not subject to U.S. taxation, unless you are a
nonresident alien individual who is physically present in the U.S. for 183 days
or more per year. A Fund may, under certain circumstances, report all or a
portion of a dividend as an “interest-related dividend” or a “short-term capital
gain dividend,” which would generally be exempt from this 30% U.S. withholding
tax, provided certain other requirements are met. Different tax consequences may
result if you are a foreign shareholder engaged in a trade or business within
the United States or if a tax treaty applies.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
a Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that are foreign entities and that fail to meet prescribed
information reporting or certification requirements.
Each
Fund (or a financial intermediary, such as a broker, through which a shareholder
owns Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who fails to properly furnish a correct taxpayer identification
number, who has underreported dividend or interest income, or who fails to
certify that he, she or it is not subject to such withholding.
Taxes
When Shares are Sold on the Exchange
Any
capital gain or loss realized upon a sale of Shares generally is treated as a
long-term capital gain or loss if Shares have been held for more than one year
and as a short-term capital gain or loss if Shares have been held for one year
or less. However, any capital loss on a sale of Shares held for six months or
less is treated as long-term capital loss to the extent of Capital Gain
Dividends paid with respect to such Shares. Any loss realized on a sale will be
disallowed to the extent Shares of a Fund are acquired, including through
reinvestment of dividends, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of Shares. The ability to deduct capital
losses may be limited.
The
cost basis of Shares of a Fund acquired by purchase will generally be based on
the amount paid for the Shares and then may be subsequently adjusted for other
applicable transactions as required by the Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your
account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market their
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether wash sale rules apply and when a loss might be deductible.
Any
gain or loss realized upon a creation or redemption of Creation Units will be
treated as capital or ordinary gain or loss, depending on the circumstances. Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
A
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. Such Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause such Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, such Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Foreign
Investments
Interest
and other income received by a Fund with respect to foreign securities may give
rise to withholding and other taxes imposed by foreign countries. Tax
conventions between certain countries and the United States may reduce or
eliminate such taxes. If as of the close of a taxable year more than 50% of the
value of a Fund’s assets consists of certain foreign stock or securities, each
such Fund will be eligible to elect to “pass through” to investors the amount of
foreign income and similar taxes (including withholding taxes) paid by such Fund
during that taxable year. This means that investors would be considered to have
received as additional income their respective Shares of such foreign taxes, but
may be entitled to either a corresponding tax deduction in calculating taxable
income, or, subject to certain limitations, a credit in calculating federal
income tax. If a Fund does not so elect, each such Fund will be entitled to
claim a deduction for certain foreign taxes incurred by such Fund. A Fund (or
its administrative agent) will notify you if it makes such an election and
provide you with the information necessary to reflect foreign taxes paid on your
income tax return.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in each Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares
under
all applicable tax laws. For more information, please see the section entitled
“Federal Income Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Quasar Distributors, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Funds on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Funds or the securities that are purchased or
sold by the Funds. The Distributor’s principal address is 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized
to pay an amount up to 0.25% of its average daily net assets each year for
certain distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Funds, and there are no plans to
impose these fees. However, in the event Rule 12b-1 fees are charged in the
future, because the fees are paid out of Fund assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often Shares of each Fund trade on the Exchange at a price above
(i.e.,
at a premium) or below (i.e.,
at a discount) the NAV of such Fund is available, free of charge, on the Funds’
website at www.LoncarFunds.com.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of the Shares or
any member of the public regarding the ability of the Funds to track the total
return performance of their respective Index or the ability of the Indexes
identified herein to track the performance of their constituent securities. The
Exchange is not responsible for, nor has it participated in, the determination
of the compilation or the calculation of the Indexes, nor in the determination
of the timing of, prices of, or quantities of the Shares to be issued, nor in
the determination or calculation of the equation by which the Shares are
redeemable. The Exchange has no obligation or liability to owners of the Shares
in connection with the administration, marketing, or trading of the Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Indexes
or the data included therein. The Exchange makes no warranty, express or
implied, as to results to be obtained by the Funds, owners of the Shares, or any
other person or entity from the use of the Indexes or the data included therein.
The Exchange makes no express or implied warranties, and hereby expressly
disclaims all warranties of merchantability or fitness for a particular purpose
with respect to the Indexes or the data included therein. Without limiting any
of the foregoing, in no event shall the Exchange have any liability for any lost
profits or indirect, punitive, special, or consequential damages even if
notified of the possibility thereof.
The
Adviser, the Index Provider, and the Funds make no representation or warranty,
express or implied, to the owners of Shares or any member of the public
regarding the advisability of investing in securities generally or in the Funds
particularly. The Index Provider is a licensor of certain trademarks, service
marks and trade names of each Fund. The Index Provider has no obligation to take
the needs of the Funds or the owners of Shares into consideration in
determining, composing, or calculating the Indexes. The Index Provider is not
responsible for, and has not participated in, the determination of the timing
of, prices of, or quantities of Shares to be issued or in the determination or
calculation of the equation by which Shares are redeemable. Each Fund and the
Adviser do not guarantee the accuracy, completeness, or performance of the
Indexes or the data included therein and shall have no liability in connection
with the Indexes or Index calculations. The Index Calculation Agent maintains
and calculates the Indexes used by the Funds. The Index Calculation Agent shall
have no liability for any errors or omissions in calculating the
Indexes.
FINANCIAL
HIGHLIGHTS
The
financial highlights tables are intended to help you understand each Fund’s
financial performance for each Fund’s five most recent fiscal years (or the life
of the Fund, if shorter). Certain information reflects financial results for a
single Share. The total returns in the tables represent the rate that an
investor would have earned or lost on an investment in a Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Cohen & Company, Ltd., the Funds’ independent registered public
accounting firm, whose report, along with the Funds’ financial statements, is
included in the Funds’ annual report, which is available upon
request.
Loncar
Cancer Immunotherapy ETF
FINANCIAL
HIGHLIGHTS
For
a capital share outstanding throughout each year
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Year
Ended |
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Year
Ended |
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Year
Ended |
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Year
Ended |
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Year
Ended |
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August
31, |
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August
31, |
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August
31, |
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August
31, |
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August
31, |
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2021 |
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2020 |
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2019 |
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2018 |
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2017 |
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Net
asset value, |
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beginning
of year |
$ |
26.86 |
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$ |
19.54 |
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$ |
25.73 |
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$ |
25.69 |
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$ |
24.08 |
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INCOME
(LOSS) FROM |
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INVESTMENT
OPERATIONS: |
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Net
investment income (loss) (1) |
(0.11) |
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|
(0.07) |
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(0.05) |
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(0.09) |
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|
(0.06) |
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Net
realized and unrealized |
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gain
(loss) on investments |
4.19 |
|
|
7.39 |
|
|
(6.14) |
|
|
0.48 |
|
|
1.67 |
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|
|
|
Total
income (loss) from investment operations |
4.08 |
|
|
7.32 |
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|
(6.19) |
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|
0.39 |
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|
1.61 |
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DISTRIBUTIONS
TO SHAREHOLDERS: |
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Distributions
from: |
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Net
investment income |
(0.29) |
|
|
— |
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|
— |
|
|
(0.35) |
|
|
— |
|
|
|
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Total
distributions |
(0.29) |
|
|
— |
|
|
— |
|
|
(0.35) |
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— |
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Net
asset value, |
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|
|
|
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|
end
of year |
$ |
30.65 |
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|
$ |
26.86 |
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|
$ |
19.54 |
|
|
$ |
25.73 |
|
|
$ |
25.69 |
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Total
return |
15.11 |
% |
|
37.47 |
% |
|
-24.05 |
% |
|
1.63 |
% |
|
6.65 |
% |
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SUPPLEMENTAL
DATA: |
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Net
assets at end |
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of
year (000’s) |
$ |
44,439 |
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|
$ |
40,293 |
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|
$ |
34,195 |
|
|
$ |
59,172 |
|
|
$ |
41,097 |
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RATIOS
TO AVERAGE NET ASSETS: |
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Expenses
to average |
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net
assets |
0.79 |
% |
|
0.79 |
% |
|
0.79 |
% |
|
0.79 |
% |
|
0.79 |
% |
|
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|
Net
investment income (loss) |
|
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|
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to
average net assets |
(0.37) |
% |
|
(0.32) |
% |
|
(0.26) |
% |
|
(0.34) |
% |
|
(0.25) |
% |
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Portfolio
turnover rate (2) |
58 |
% |
|
53 |
% |
|
58 |
% |
|
78 |
% |
|
34 |
% |
|
|
|
(1)Calculated
based on average shares outstanding during the period.
(2)Excludes
the impact of in-kind transactions.
Loncar
China BioPharma ETF
FINANCIAL
HIGHLIGHTS
For
a capital share outstanding throughout each year/period
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Year
Ended |
|
Year
Ended |
|
Year
Ended |
|
Period
Ended |
|
|
August
31, |
|
August
31, |
|
August
31, |
|
August
31, |
|
|
2021 |
|
2020 |
|
2019 |
|
2018(1) |
|
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|
|
|
|
|
|
|
|
Net
asset value, beginning of year/period |
$ |
31.93 |
|
|
$ |
22.92 |
|
|
$ |
25.00 |
|
|
$ |
25.00 |
|
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|
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|
|
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|
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
|
|
|
|
Net
investment income (loss) (2) |
(0.02) |
|
|
0.10 |
|
|
0.14 |
|
|
(0.01) |
|
|
Net
realized and unrealized gain (loss) on investments and foreign
currency |
6.46 |
|
|
8.95 |
|
|
(2.23) |
|
|
0.01 |
|
|
Total
income (loss) from investment operations |
6.44 |
|
|
9.05 |
|
|
(2.09) |
|
|
— |
|
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|
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DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
|
|
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Distributions
from: |
|
|
|
|
|
|
|
|
Net
investment income |
(0.15) |
|
|
(0.04) |
|
|
— |
|
|
— |
|
|
Total
distributions |
(0.15) |
|
|
(0.04) |
|
|
— |
|
|
— |
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CAPITAL
SHARE TRANSACTIONS: |
|
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Transaction
fees |
0.00 |
|
(3) |
0.00 |
|
(3) |
0.01 |
|
— |
|
|
Net
asset value, end of year/period |
$ |
38.22 |
|
|
$ |
31.93 |
|
|
$ |
22.92 |
|
|
$ |
25.00 |
|
|
|
|
|
|
|
|
|
|
|
Total
return |
20.26 |
% |
|
39.56 |
% |
|
-8.33 |
% |
|
0.01 |
% |
(4) |
|
|
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|
|
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SUPPLEMENTAL
DATA: |
|
|
|
|
|
|
|
|
Net
assets at end of year/period (000’s) |
$ |
15,287 |
|
|
$ |
11,974 |
|
|
$ |
6,875 |
|
|
$ |
2,500 |
|
|
|
|
|
|
|
|
|
|
|
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
|
|
|
|
Expenses
to average net assets |
0.79 |
% |
|
0.79 |
% |
|
0.79 |
% |
|
0.79 |
% |
(5) |
Net
investment income (loss) to average net assets |
(0.05) |
% |
|
0.40 |
% |
|
0.64 |
% |
|
(0.78) |
% |
(5) |
|
|
|
|
|
|
|
|
|
Portfolio
turnover rate (6) |
44 |
% |
|
54 |
% |
|
35 |
% |
|
0 |
% |
(4) |
(1)Commencement
of operations on August 14, 2018.
(2)Calculated
based on average shares outstanding during the period.
(3)Less
than $0.005.
(4)Not
annualized.
(5)Annualized.
(6)Excludes
the impact of in-kind transactions
LONCAR
CANCER IMMUNOTHERAPY ETF
LONCAR
CHINA BIOPHARMA ETF
|
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Adviser |
Exchange
Traded Concepts, LLC
10900
Hefner Pointe Drive, Suite 400
Oklahoma
City, Oklahoma 73120 |
Sub-Adviser |
Vident
Investment Advisory, LLC
1125
Sanctuary Parkway, Suite 515
Alpharetta,
Georgia 30009 |
Transfer
Agent, Fund Accountant and Fund Administrator |
U.S.
Bancorp Fund Services, LLC
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Index
Provider |
Loncar
Investments, LLC
P.O.
Box 15072
Lenexa,
Kansas 66285 |
Custodian |
U.S.
Bank National Association
1555
N. Rivercenter Drive, Suite 302
Milwaukee,
Wisconsin 53212 |
Distributor |
Quasar
Distributors, LLC
111
East Kilbourn Avenue, Suite 2200
Milwaukee,
Wisconsin 53202 |
Independent Registered
Public Accounting Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004 |
Investors
may find more information about the Funds in the following documents:
Statement
of Additional Information: The
Funds’ SAI provides additional details about the investments and techniques of
the Funds and certain other additional information. A current SAI dated December
31, 2021 is on file with the SEC and is herein incorporated by reference into
this Prospectus. It is legally considered a part of this Prospectus.
Annual/Semi-Annual
Reports: Additional
information about each Fund’s investments is available in the Funds’ annual and
semi-annual reports to shareholders. In the annual
report
you will find a discussion of the market conditions and investment strategies
that significantly affected the Funds’ performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Funds by contacting the Funds at:
Loncar
ETFs
c/o
U.S. Bank Global Fund Services
P.O.
Box 701
Milwaukee,
Wisconsin 53201-0701
1-800-617-0004
Shareholder
reports and other information about the Funds are also available:
•Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or
•Free
of charge from the Funds’ Internet web site at www.LoncarFunds.com;
or
(SEC
Investment Company Act File No. 811-22668)