American
Energy Independence ETF
(USAI)
Listed
on NYSE Arca, Inc.
PROSPECTUS
March 31,
2019
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.
Beginning
on January 31, 2021, as permitted by regulations adopted by the SEC, paper
copies of the Fund’s shareholder reports will no longer be sent by mail, unless
you specifically request paper copies of the Fund’s reports from your financial
intermediary, such as a broker-dealer or bank. Instead, the reports will be made
available on a website, and you will be notified by mail each time a report is
posted and provided with a website link to access the report.
If you
already elected to receive shareholder reports electronically, you will not be
affected by this change and you need not take any action. Please contact your
financial intermediary to elect to receive shareholder reports and other Fund
communications electronically.
You may
elect to receive all future Fund reports in paper free of charge. Please contact
your financial intermediary to inform them that you wish to continue receiving
paper copies of Fund shareholder reports and for details about whether your
election to receive reports in paper will apply to all funds held with your
financial intermediary
American
Energy Independence ETF
TABLE
OF CONTENTS
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American Energy Independence
ETF Summary
The
American Energy Independence ETF (the “Fund”) seeks to track the performance,
before fees and expenses, of the American Energy Independence Index (the
“Index”).
This table
describes the fees and expenses that you may pay if you buy and hold shares of
the Fund (“Shares”). This table and the example below do not include the
brokerage commissions that investors may pay on their purchases and sales of
Shares.
Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.75% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.75% |
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. Although your actual costs may be higher or lower, based on
these assumptions your costs would be:
1
Year |
3
Years |
5
Years |
10
Years |
$77 |
$240 |
$417
|
$930
|
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 period
December 12, 2017 (commencement of operations) through November 30, 2018, the
Fund’s portfolio turnover rate was 61% of the average value of its
portfolio.
The Fund
uses a “passive management” (or indexing) approach to track the performance,
before fees and expenses, of the Index. The Index is based on a proprietary
methodology developed by SL
Advisors, LLC, the Fund’s investment adviser and index provider (the
“Adviser”).
American
Energy Independence Index
The
Index
uses a proprietary, rules-based methodology to measure the performance of a
portfolio of U.S. and Canadian exchange-listed equity securities of companies
that generate a majority of their cash flow from certain qualifying “midstream”
energy infrastructure activities. The companies in the Index are expected to
benefit from regulatory policies favoring and industry trends toward American
energy independence (i.e.,
a reduced or eliminated need for the United States to import fuels, such as
coal, crude oil, or natural gas).
Midstream
energy infrastructure refers to the processing, storage, transportation, and
distribution of crude oil, natural gas, refined products, and their related
products, as well as the transmission or storage of renewable energy. The
following activity segments are considered qualifying midstream energy
infrastructure activities: gathering & processing, compression,
fractionation, logistics, midstream services, pipeline transportation, storage
and terminaling of oil, gas, natural gas liquids, and refined products, as well
as liquid natural gas facilities. The following activity segments are not
qualifying activities: refining, shipping, exploration, production, retail
distribution, or oil services. The Index may include small-, mid-, and
large-capitalization companies.
The
Index includes securities across the following categories of midstream
companies. Such categories and the weight assigned to each category at the time
of each rebalance of the Index are as follows:
U.S.
& Canadian
Midstream
Companies
(80%)
|
U.S.-
or Canadian-listed companies that (i) have their principal place of
business in the United States or Canada, (ii) elect to be treated as a
corporation for U.S. or Canadian federal income tax purposes, and (iii)
generate a majority of their cash flow or revenue from midstream energy
infrastructure related activities. |
U.S. Midstream MLPs* (20%)
|
U.S.-listed
Midstream MLPs that (i) have their principal place of business in the
United States, (ii) elect to be treated as a partnership for U.S. federal
income tax purposes, (iii) do not pay incentive distribution rights
(“IDRs”), and (iv) are not affiliates of MLP GPs that are owned in the
Index. |
*If an MLP
that would be included in the Index has a tracking stock that is a corporation
or elects to be taxed as a corporation, then such tracking stock will be
included in the Index in place of the MLP and will use the MLP’s adjusted market
capitalization for calculating its weight.
MLPs
are publicly traded partnerships that receive at least 90% of their income from
certain qualifying sources, such as natural resource-based midstream energy
infrastructure activities. The equity interests, or units, of an MLP trade on
public securities exchanges exactly like the shares of a corporation, without
entity level taxation. An MLP typically consists of a general partner and
limited partners. The operations and management of the MLP are controlled by the
general partner, and the general partner typically has an ownership stake in the
MLP and may have certain preferential rights to income from the MLP, such as
IDRs. IDRs provide their owner with a larger share of the aggregate cash
distributions made by a company once such distributions increase to certain
specified levels
and are designed to provide the holder of the IDRs with a strong incentive to
increase the MLP’s aggregate cash distributions.
At
the time of each quarterly rebalance of the Index, each company meeting the
Index’s criteria for the above categories is included in the Index, provided
that the company has a minimum market capitalization of $500
million.
The
Index is rebalanced quarterly, effective on the last trading day of each
calendar quarter. Within each of the above categories, Index constituents are
weighted based on their free-float market capitalization (i.e., market
capitalization based on the number of shares available to the public), subject
to the following constraints as of the time of each rebalance. Each individual
constituent is limited to a weight of 7.25%, and any excess weight is
redistributed equally among the other companies in the same category first and
then to the remaining companies as needed.
Additionally,
the aggregate weight of companies with individual weights greater than 5% (“5%
Companies”) may not exceed 45% as of the time of each rebalance. If the
aggregate weight of the 5% Companies would exceed 45%, the excess weight will be
redistributed proportionally to companies with a weight of less than 4.25%. If
at the time of a rebalance a company’s weight would be between 4.25% and 5%, the
company’s weight will be reduced to 4.25% and the excess redistributed to
companies in the same category with a weight of less than 4.25%.
As of
January 31, 2019, the Index included securities of 31 companies.
The Index
was developed by the Adviser in 2017 in anticipation of the commencement of
operations of the Fund.
The
Fund’s Investment Strategy
The Fund
attempts to invest all, or substantially all, of its assets in the component
securities 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 and
depositary receipts representing foreign securities. The 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 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).
The
Fund is non-diversified and therefore may invest a larger percentage of its
assets in the securities of a single company than diversified
funds.
To the
extent the Index concentrates (i.e.,
holds more than 25% of its total assets) in the securities of a particular
industry or group of related industries, the Fund will concentrate its
investments to approximately the same extent as the Index. The Index, and
consequently the Fund, is expected to generally be concentrated in midstream
energy infrastructure companies.
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 they
appear. As with any investment, there is a risk that you could lose all or a
portion of your investment in the Fund. Some or all of these risks may adversely
affect the Fund’s net asset value per share (“NAV”), trading price, yield, total
return and/or ability to meet its objectives. For more information about the
risks of investing in the Fund, see the section in the Fund’s Prospectus, titled
“Additional Information About the Fund’s Principal Risks.”
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Concentration
Risk. The Fund’s investments will be concentrated in an industry or
group of industries to the extent the Index is so concentrated, and the
Index is expected to be concentrated in midstream energy infrastructure
companies. When the Fund focuses its investments in a particular industry
or sector, financial, economic, business, and other developments affecting
issuers in that industry, market, or economic sector will have a greater
effect on the Fund than if it had not done so.
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Currency
Exchange Rate Risk. The Fund invests a significant percentage of
its assets in investments denominated in Canadian dollars or in securities
that provide exposure to such currency. Changes in currency exchange rates
and the relative value of the Canadian dollar to the U.S. dollar 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. |
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Energy
Infrastructure Industry Risk. Companies in the energy
infrastructure industry are subject to many risks that can negatively
impact the revenues and viability of companies in this industry,
including, but not limited to risks associated with companies owning
and/or operating pipelines, gathering and processing assets, power
infrastructure, propane assets, as well as capital markets, terrorism,
natural disasters, climate change, operating, regulatory, environmental,
supply and demand, and price volatility risks. The volatility
of energy commodity prices can significantly affect energy companies due
to the impact of prices on the volume of commodities developed, produced,
gathered, and processed. Historically, energy commodity prices have been
cyclical and exhibited significant volatility, which may adversely impact
the value, operations, cash flows, and financial performance of energy
companies. The volatility of energy commodity prices can also indirectly
affect certain entities that operate in the midstream segment of the
energy industry due to the impact of prices on the volume of commodities
transported, processed, stored, or
distributed. |
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Trading. Although
Shares are listed for trading on the NYSE Arca, Inc. (the “Exchange”) and
may be traded on U.S. exchanges other than the Exchange, there can be no
assurance that Shares will trade with any volume, or at all, on any stock
exchange. In
stressed market conditions, the liquidity of Shares may begin to mirror
the liquidity of the Fund’s underlying portfolio holdings, which can be
significantly less liquid than
Shares. |
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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. |
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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.
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Shares
May Trade at Prices Other Than NAV. As with all ETFs, Shares may be
bought and sold in the secondary market at market prices. Although it is
expected that the market price of Shares will approximate the Fund’s NAV,
there may be times when the market price of Shares is more than the NAV
intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This
risk is heightened in times of market volatility, periods of steep market
declines, and periods when there is limited trading activity for Shares in
the secondary market, in which case such premiums or discounts may be
significant. |
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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. The trading prices of equity securities and other
instruments fluctuate in response to a variety of factors. The Fund’s NAV
and market price may fluctuate significantly in response to these and
other factors. As a result, an investor could lose money over short or
long periods of time. |
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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. |
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Geographic
Investment Risk. To the extent the Fund invests a significant
portion of its assets in the securities of companies of a single country
or region, it is more likely to be impacted by events or conditions
affecting that country or
region. |
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Canada-Specific
Risk. The
Canadian economy is reliant on the sale of natural resources and
commodities, which can pose risks such as the fluctuation of prices and
the variability of demand for exportation of such products. Changes in
spending on Canadian products by the economies of other countries or
changes in any of these economies may cause a significant impact on the
Canadian economy. |
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MLP
Risk. MLP investment returns are enhanced during periods of
declining or low interest rates and tend to be negatively influenced when
interest rates are rising. In addition, most MLPs are fairly
leveraged and typically carry a portion of a “floating” rate debt. As
such, a significant upward swing in interest rates would also drive
interest expense higher. Furthermore, most MLPs grow by acquisitions
partly financed by debt, and higher interest rates could make it more
difficult to make acquisitions. MLP investments also entail many of
the general tax risks of investing in a partnership. Limited partners
in an MLP typically have limited control and limited rights to vote on
matters affecting the partnership. Additionally, there is always the
risk that an MLP will fail to qualify for favorable tax
treatment. |
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New
Fund Risk. The Fund is a recently organized, non-diversified
management investment company with no operating history. As a result,
prospective investors have no track record or history on which to base
their investment decision. |
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Non-Diversification
Risk. Although the Fund intends to invest in a variety of
securities and instruments, the Fund will be considered to be
non-diversified, which means that it may invest more of its assets in the
securities of a single issuer or a smaller number of issuers than if it
were a diversified fund. |
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Passive
Investment Risk. The Fund is not actively managed, and the Fund’s
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 of the Index in
accordance with the Index
methodology. |
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Small
and Mid-Sized Company Stock Risk. The Fund may invest in equity
securities of small- or mid-sized companies. Small to mid-sized company
securities have historically been subject to greater investment risk than
large company securities. The prices of small- to mid-sized company
securities tend to be more volatile and less liquid than large company
securities. |
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Tax Risk. The Fund intends to qualify for treatment as a
“regulated investment company” (a “RIC”) under Subchapter M of the
Internal Revenue Code of 1986, as amended (the “Code”), by meeting certain
source-of-income, asset diversification and annual distribution
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.
Additionally, to qualify for treatment as a RIC the Fund may not invest
more than 25% of its total assets in the securities of entities treated as
qualified publicly traded partnerships (“QPTPs”) for U.S. federal income
tax purposes, including certain MLPs. 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. |
If
the Fund were to fail to qualify as a RIC, the Fund would be subject to tax on
its taxable income at corporate rates, and distributions from earnings and
profits would generally be taxable to Fund shareholders as ordinary income. The
Fund is also subject to the risk that MLPs in which the Fund invest will be
classified as corporations rather than as partnerships for federal income tax
purposes, which may reduce the Fund’s return and negatively affect the Fund’s
net asset value. There is a risk of changes in tax laws or regulations, or
interpretations thereof, which could adversely affect the Fund or the MLPs in
which the Fund invests.
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MLP
Tax Risk. Depreciation or other cost recovery deductions passed
through to the Fund from investments in MLPs in a given year will
generally reduce the Fund’s taxable income, but those deductions may be
recaptured in the Fund’s income in one or more subsequent years. When
recognized and distributed, recapture income will generally be taxable to
shareholders at the time of the distribution at ordinary income tax rates,
even though those shareholders might not have held Shares at the time the
deductions were taken by the Fund, and even though those shareholders will
not have corresponding economic gain on their Shares at the time of the
recapture. To distribute recapture income or to fund redemption requests,
the Fund may need to liquidate
investments. |
MLPs taxed
as partnerships have historically made cash distributions to limited partners
that exceed the amount of taxable income allocable to limited partners or
members, due to a variety of factors, including significant non-cash deductions
such as depreciation and depletion. These excess cash distributions would not be
treated as income to the Fund but rather would be treated as a return of capital
to the extent of the Fund’s basis in the MLP. As a consequence, the Fund may
make distributions that exceed its earnings and profits, which would 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.
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Tracking
Error Risk. As with all index funds, the performance of the Fund
and its 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. |
The
following performance information indicates some of the risks of investing in
the Fund. The bar chart shows the Fund’s performance for the calendar year ended
December 31, 2018. 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 also available on the Fund’s website at
www.usaietf.com.
Calendar
Year Total Return
During
the period of time shown in the bar chart, the Fund’s highest quarterly return
was 15.96% for the quarter ended June 30, 2018 and the lowest quarterly return
was -17.90% for the quarter ended December 31, 2018.
Average
Annual Total Returns
For the
Periods Ended December 31, 2018
American
Energy Independence ETF |
1
Year |
|
Since
Inception (12/12/17)
|
Return
Before Taxes |
-17.27%
|
|
-13.12%
|
Return
After Taxes on Distributions |
-17.95%
|
|
-13.81%
|
Return
After Taxes on Distributions and Sale of Fund Shares |
-9.64%
|
|
-9.84%
|
American
Energy Independence Total Return Index
(reflects
no deduction for fees, expenses, or taxes) |
-16.50%
|
|
-12.19%
|
S&P
500 TR
(reflects
no deduction for fees, expenses, or taxes) |
-4.38%
|
|
-3.77%
|
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. In certain cases, the figure
representing “Return After Taxes on Distributions and Sale of Shares” may be
higher than the other return figures for the same period. A higher after-tax
return results when a capital loss occurs upon redemption and provides an
assumed tax deduction that benefits the investor. After-tax returns shown are
not relevant to investors who hold their Fund Shares through tax-deferred
arrangements such as an individual retirement account (“IRA”) or other
tax-advantaged accounts.
Investment
Adviser and Sub-Adviser
Adviser
|
SL
Advisors, LLC serves as investment adviser to the
Fund. |
Sub-Adviser
|
Penserra
Capital Management LLC (“Penserra” or the “Sub-Adviser”) serves as
sub-adviser to the Fund. |
Portfolio
Managers |
Dustin
Lewellyn, CFA, Managing Director of Penserra, Ernesto Tong, CFA, Managing
Director of Penserra, and Anand Desai, Associate of Penserra, have been
portfolio managers of the Fund since its inception in 2017.
|
Shares are
listed on a national securities exchange, such as the Exchange, and most
investors will buy and sell Shares 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. Creation
Units generally consist of 50,000 Shares, though this may change from time to
time. The Fund generally issues and redeems Creation Units in exchange for a
portfolio of securities closely approximating the holdings of the Fund (the
“Deposit Securities”) and/or a designated amount of U.S. cash.
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an
individual retirement account (“IRA”) or other tax-advantaged account.
Distributions 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.
Investment Objective. The
Fund investment objective has been adopted as a non-fundamental investment
policy and may be changed without shareholder approval upon written notice to
shareholders.
Manager
of Managers Structure. The Fund and the Adviser have received exemptive
relief from the SEC permitting the Adviser (subject to certain conditions and
the approval of the Fund’s Board of Trustees (the “Board”)) to select or change
sub-advisers without obtaining shareholder approval. The relief 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 the 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.
Additional
Information About the Index. The
Adviser provides the Index to the Fund. The Adviser created and is
responsible for maintaining and applying the rules-based methodology of the
Index. The Index is calculated by S&P Opco, LLC (the “Index Calculation
Agent”), an independent third-party
that is not affiliated with the Fund, the Adviser, the Sub-Adviser, the Fund’s
distributor, or any of their respective affiliates. The Index Calculation Agent
provides information to the Fund about the Index constituents and does not
provide investment advice with respect to the desirability of investing in,
purchasing, or selling securities.
Index/Trademark
Licenses/Disclaimers. The Index is the exclusive property of the Adviser,
which has contracted with S&P Opco, LLC (a
subsidiary of S&P Dow Jones Indices) to calculate and maintain the Index.
The Index is not sponsored by S&P Dow Jones Indices or its affiliates or its
third party licensors. Neither S&P Dow Jones Indices, nor any of their
affiliates or third party licensors will be liable for any errors or omissions
in calculating the Index. “Calculated by S&P Dow Jones Indices” and the
related stylized mark(s) are service marks of Standard & Poor’s Financial
Services, LLC (“SPFS”) and have been licensed for use by S&P Dow Jones
Indices and sublicensed for certain purposes by the Adviser.
The Fund
is not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices, SPFS,
or any of their affiliates or third party licensors (collectively, “S&P Dow
Jones Indices Entities”). S&P Dow Jones Indices Entities do not make any
representation or warranty, express or implied, to the owners of the Fund or any
member of the public regarding the advisability of investing in securities
generally or in the Fund particularly or the ability of the Index to track
general market performance. S&P Dow Jones Indices Entities’ only
relationship to the Adviser with respect to the Index is the licensing of the
S&P 500, certain trademarks, service marks and trade names of S&P Dow
Jones Indices Entities, and the provision of the calculation and maintenance
services related to the Index. S&P Dow Jones Indices Entities are not
responsible for and have not participated in the determination of the prices and
amount of the Fund or the timing of the issuance or sale of the Fund or in the
determination or calculation of the equation by which the Fund may be converted
into cash or other redemption mechanics. S&P Dow Jones Indices Entities have
no obligation or liability in connection with the administration, marketing or
trading of the Fund. S&P Dow Jones Indices, LLC is not an investment
advisor. Inclusion of a security within the Index is not a recommendation by
S&P Dow Jones Indices Entities to buy, sell, or hold such security, nor is
it investment advice.
S&P
DOW JONES INDICES ENTITIES DO NOT GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS
AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA RELATED THERETO OR ANY
COMMUNICATION WITH RESPECT THERETO, INCLUDING BUT NOT LIMITED TO, ORAL, WRITTEN
OR ELECTRONIC COMMUNICATIONS. S&P DOW JONES INDICES ENTITIES SHALL NOT BE
SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS
THEREIN. S&P DOW JONES INDICES ENTITIES MAKE NO EXPRESS OR IMPLIED
WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS
FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE ADVISER,
OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR
WITH RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING,
IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES ENTITIES BE LIABLE FOR
ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING
BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN
IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN
CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE.
Additional
Information About the Fund’s Principal Risks. This
section provides additional information regarding the principal risks described
in the Fund Summary above. Each of the factors below could have a negative
impact on the Fund’s performance and trading prices.
Concentration
Risk. The Fund’s investments will be concentrated in an industry or group
of industries to the extent the Index is so concentrated, and the Index is
expected to be concentrated in midstream energy infrastructure
companies.When the
Fund focuses its investments in a particular industry or sector, it thereby
presents a more concentrated risk and its performance will be especially
sensitive to developments that significantly affect that industry or group of
industries. In addition, the value of Shares may change at different rates
compared to the value of shares of a fund with investments in a more diversified
mix of industries. An industry may have above-average performance during
particular periods, but may also move up and down more than the broader market.
The several industries that constitute a sector may all react in the same way to
economic, political or regulatory events. The Fund’s performance could also be
affected if the sectors, industries, or sub-sectors do not perform as expected.
Alternatively, the lack of exposure to one or more sectors or industries may
adversely affect performance.
Currency
Exchange Rate Risk.
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.
Energy
Infrastructure Industry Risk.
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Commodity
Price Volatility Risk. The volatility of energy commodity prices
can significantly affect energy companies due to the impact of prices on
the volume of commodities developed, produced, gathered, and processed.
Historically, energy commodity prices have been cyclical and exhibited
significant volatility, which may adversely impact the value, operations,
cash flows, and financial performance of energy companies. The volatility
of energy commodity prices can also indirectly affect certain entities
that operate in the midstream segment of the energy industry due to the
impact of prices on the volume of commodities transported, processed,
stored, or distributed. |
Commodity
price fluctuations may be swift and may occur for several reasons, including
changes in global and domestic energy markets, general economic conditions,
consumer demand, the price and level of foreign imports, the impact of weather
on demand, levels of domestic and worldwide supply, levels of production,
domestic and foreign governmental regulation, political instability, acts of war
and terrorism, the success and costs of exploration projects, conservation and
environmental protection efforts, the availability and price of alternative
energy, taxation, and the availability of local, intrastate and interstate
transportation systems.
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Supply
and Demand Risk. A decrease in the exploration, production or
development of natural gas, natural gas liquids (“NGLs”), crude oil,
refined petroleum products, or a decrease in the volume of such
commodities, may adversely impact the financial performance and
profitability of energy companies. Production declines and volume
decreases may be caused by various factors, including changes in commodity
prices, oversupply, depletion of resources, declines in estimates of
proven reserves, catastrophic events affecting production, labor
difficulties, political events, production variance from expectations,
Organization of the Petroleum Exporting Countries (“OPEC”) actions,
environmental proceedings, increased regulations, equipment failures and
unexpected maintenance problems or outages, the inability of energy
companies to obtain necessary permits or carry out new construction or
acquisitions, unanticipated expenses, import supply disruption, increased
competition from alternative energy sources, and other events. All of the
above is particularly true for new or emerging areas of supply in North
America that may have limited or no production history. Reductions in or
prolonged periods of low prices for natural gas and crude oil can cause a
given reservoir to become uneconomical for continued production earlier
than it would if prices were
higher. |
A
sustained decline in or varying demand for such commodities could also adversely
affect the financial performance of energy companies. Factors that could lead to
a decline in demand include economic recession or other adverse economic
conditions, political and economic conditions, including embargoes, in other
natural resource producing countries, hostilities in the Middle East, Eastern
Europe, or South America, military campaigns and terrorism, OPEC actions, higher
fuel taxes or governmental regulations, increases in fuel economy, consumer
shifts to the use of alternative fuel sources, exchange rates, changes in
commodity prices, and changes in weather.
In
addition, the profitability of companies engaged in processing and pipeline
activities may be materially impacted by the volume of natural gas or other
energy commodities available for transporting, processing, storing or
distributing. A significant decrease in the production of natural gas, oil, or
other energy commodities, due to a decline in production from existing
facilities, import supply disruption, depressed commodity prices or otherwise,
would reduce revenue and operating income of such entities.
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Reserve
& Depletion Risk. Energy companies’ estimates of proven
reserves and projected future net revenue are generally based on internal
reserve reports, engineering data, and reports of independent petroleum
engineers. The calculation of estimated reserves requires subjective
estimates of underground accumulations and utilizes assumptions concerning
future prices, production levels, and operating and development costs.
These estimates and assumptions may prove to be inaccurate. As a result,
estimated quantities of proved reserves, projections of future production
rates, and the timing of related expenditures may likewise prove to be
inaccurate. Any material negative inaccuracies in these reserve estimates
or underlying assumptions may materially lower the value of upstream
energy companies. Future natural gas, NGL, and oil production is highly
dependent upon the success in acquiring or finding additional reserves
that are economically recoverable. This is particularly true for new areas
of exploration and development, such as in North American oil and gas
reservoirs, including shale. A portion of any one upstream company’s
assets may be dedicated to crude oil or natural gas reserves that
naturally deplete over time, and a significant slowdown in the
identification or availability of reasonably priced and accessible proven
reserves for these companies could adversely affect their
business. |
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Midstream
and Power Infrastructure Company Risk. The Fund may be subject to
midstream and power infrastructure company risk through its investments in
pipeline-related companies. In addition to the other energy risks
described herein, pipeline companies are subject to particular risks,
including varying demand for crude oil, natural gas, NGLs, or refined
products in the markets served by the pipeline; changes in the
availability of products for gathering, transportation, processing or sale
due to natural declines in reserves and production in the supply areas
serviced by the companies’ facilities; sharp decreases in crude oil or
natural gas prices that cause producers to curtail production; reduced
capital spending for exploration activities; or re-contracting at lower
rates. Demand for gasoline, which accounts for a substantial portion of
refined product transportation, depends on price, prevailing economic
conditions in the markets served, and demographic and seasonal
factors. |
Gathering
and processing companies are subject to many risks, including declines in
production of crude oil and natural gas fields which utilize their gathering and
processing facilities, prolonged depression in the price of natural gas or crude
oil which curtails production due to lack of drilling activity, and declines in
the prices of natural gas liquids and refined petroleum products, resulting in
lower processing or refining margins. In addition, the development of, demand
for, and/or supply of competing forms of energy may negatively impact the
revenues of these companies.
Propane
companies are subject to many risks, including earnings variability based upon
weather patterns in the locations where the company operates and the wholesale
cost of propane sold to end customers. In addition, propane companies are facing
increased competition due to the growing availability of natural gas, fuel oil
and alternative energy sources for residential heating.
Power
infrastructure companies are subject to many risks, including earnings
variability based upon weather patterns in the locations where the company
operates, the change in the demand for electricity, the cost to produce power,
and the regulatory environment. Further, share prices are partly based on the
interest rate environment, the sustainability and potential growth of the
dividend, and the outcome of various rate cases undertaken by the company or a
regulatory body.
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Operating
Risk. Energy companies are subject to many operating risks,
including: equipment failure causing outages; structural, maintenance,
impairment and safety problems; transmission or transportation
constraints, inoperability or inefficiencies; dependence on a specified
fuel source; changes in electricity and fuel usage; availability of
competitively priced alternative energy sources; changes in generation
efficiency and market heat rates; lack of sufficient capital to maintain
facilities; significant capital expenditures to keep older assets
operating efficiently; seasonality; changes in supply and demand for
energy; catastrophic and/or weather-related events such as spills, leaks,
well blowouts, uncontrollable flows, ruptures, fires, explosions, floods,
earthquakes, hurricanes, discharges of toxic gases and similar
occurrences; storage, handling, disposal and decommissioning costs; and
environmental compliance. Breakdown or failure of an energy company’s
operating assets may prevent it from performing under applicable sales
agreements, which in certain situations could result in termination of the
agreement or in the company incurring a liability for liquidated damages.
Because of these operating risks and other potential hazards, energy
companies may be exposed to significant liabilities for which they may not
have adequate insurance coverage. Any of the identified risks may have a
material adverse effect on the business, financial condition, results of
operations and cash flows of energy
companies. |
The energy
industry is cyclical and from time to time may experience a shortage of drilling
rigs, equipment, supplies, or qualified personnel, or, due to significant
demand, such services or equipment may not be available on commercially
reasonable terms. A company’s ability to complete capital improvements to
existing projects or invest in planned capital projects in a successful and
timely manner is dependent upon many variables. Should any such efforts be
unsuccessful, an energy company may be subject to additional costs and/or the
write-off of its investment in the project or improvement. The marketability of
oil and gas production depends in large part on the availability, proximity and
capacity of pipeline systems owned by third parties. Oil and gas properties are
subject to royalty interests, liens and other burdens, encumbrances, easements
or restrictions, all of which may impact the production of a particular energy
company. Oil and gas companies operate in a highly competitive and cyclical
industry, with intense price competition. A significant portion of their
revenues may depend on a relatively small number of customers, including
governmental entities and utilities.
Energy
companies engaged in interstate pipeline transportation of natural gas, refined
petroleum products and other products are subject to regulation by the Federal
Energy Regulatory Commission (“FERC”) with respect to the tariff rates that
these companies may charge for pipeline transportation services. An adverse
determination to an energy company by the FERC with respect to such tariff rates
may have a material adverse effect on that energy company’s business, financial
condition, results of operations and cash flows and on its ability to make cash
distributions to its equity owners.
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Regulatory
Risk. Energy companies are subject to regulation by governmental
authorities in various jurisdictions and may be adversely affected by the
imposition of special tariffs and changes in tax laws, regulatory
policies, and accounting standards. Regulation exists with respect to
multiple aspects of their operations, including: reports and permits
concerning exploration, drilling, and production; how facilities are
constructed, maintained, and operated; how wells are spaced; the
unitization and pooling of properties; environmental and safety controls,
including emissions release, the reclamation and abandonment of wells and
facility sites, remediation, protection of endangered species, and the
discharge and disposition of waste materials; offshore oil and gas
operations; and the prices energy companies may charge for the oil and gas
produced or transported under federal and state leases and for other
products and services. Various governmental authorities have the power to
enforce compliance both with these regulations and permits issued pursuant
to them, and violators may be subject to administrative, civil and
criminal penalties, including fines, injunctions or both. Stricter laws,
regulations, or enforcement policies may be enacted in the future which
increase compliance costs and adversely affect the financial performance
of energy companies. Additionally, legislation has been proposed that
would, if enacted into law, make significant changes to U.S. federal
income tax laws, including the elimination of certain U.S. federal income
tax benefits currently available to oil and gas exploration and production
companies. |
The use of
methods such as hydraulic fracturing (described in greater detail below) may be
subject to new or different regulation in the future. Any new state or federal
regulations that may be imposed on hydraulic fracturing could result in
additional permitting and disclosure requirements (including of substances used
in the fracturing process) and in additional operating restrictions. The
imposition of various conditions and restrictions on drilling and completion
operations could lead to operational delays and increased costs and, moreover,
could delay or effectively prevent the development of oil and gas from
formations that would not be economically viable without the use of hydraulic
fracturing.
Energy
infrastructure companies engaged in interstate pipeline transportation of
natural gas, refined petroleum products and other products are subject to
regulation by FERC with respect to tariff rates these companies may charge for
pipeline transportation services. An adverse determination by the FERC with
respect to the tariff rates of an energy infrastructure company could have a
material adverse effect on its business, financial condition, results of
operations and cash flows and its ability to make cash distributions to its
equity owners. Certain MLPs regulated by FERC have the right, but not the
obligation, to redeem all their common units held by an investor who is not
subject to U.S. federal income taxation at market value, with the purchase price
payable in cash or via a three-year interest-bearing promissory note. Prices for
certain electric power companies are regulated in the U.S. with the intention of
protecting the public while ensuring that the rate of return earned by such
companies is sufficient to attract growth capital and to provide appropriate
services. The rates assessed for these rate-regulated electric power companies
by state and local regulators are generally subject to cost-of-service
regulation and annual earnings oversight. This regulatory treatment does not
provide any assurance as to achievement of earnings levels. Changes in laws or
regulations or changes in the application or interpretation of regulatory
provisions in jurisdictions where electric power companies operate, particularly
utilities where electricity tariffs are subject to regulatory review or
approval, could adversely affect their business. The Fund could become subject
to FERC’s jurisdiction if it is deemed to be a holding company of a public
utility company or of a holding company of a public utility company, and the
Fund may be required to aggregate securities held by such Fund or other funds
and accounts managed by the Adviser, the Sub-Adviser, and their affiliates.
Accordingly, the Fund may be prohibited from buying securities of a public
utility company or of a holding company of any public utility company or may be
forced to divest itself of such securities because of other holdings by the Fund
or other funds or accounts managed by the Adviser, the Sub-Adviser, and their
affiliates.
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Environmental
Risk. Energy company activities are subject to stringent
environmental laws and regulation by many federal, state and local
authorities, international treaties and foreign governmental authorities.
A company’s failure to comply with such laws and regulations or to obtain
any necessary environmental permits pursuant to such laws and regulations
may result in the imposition of fines or other sanctions. Congress and
other domestic and foreign governmental authorities have either considered
or implemented various laws and regulations to restrict or tax certain
emissions, particularly those involving air and water emissions. Existing
environmental regulations may be revised or reinterpreted, new laws and
regulations may be adopted or become applicable, and future changes in
environmental laws and regulations may occur, each of which could impose
significant additional costs on energy companies. Energy companies have
made and will likely continue to make significant capital and other
expenditures to comply with these and other environmental laws and
regulations. There can be no assurance that such companies will be able to
recover all or any increased environmental costs from their customers or
that their business, financial condition or results of operations will not
be materially and adversely affected by such expenditures or by any
changes in domestic or foreign environmental laws and regulations, in
which case the value of these companies’ securities could be adversely
affected. Energy companies may not be able to obtain or maintain all
required environmental regulatory approvals. If there is a delay in
obtaining any required environmental regulatory approvals or if an energy
company fails to obtain, maintain or comply with any such approval, the
operation of its facilities could be stopped or become subject to
additional costs. In addition, energy companies may be responsible for
environmentally-related liabilities, including any on-site liabilities
associated with the environmental condition of facilities that it has
acquired, leased or developed, or liabilities from associated activities,
regardless of when the liabilities arose and whether they are known or
unknown. |
Hydraulic
fracturing is a common practice used to stimulate production of natural gas
and/or oil from dense subsurface rock formations such as shales that generally
exist several thousand feet below ground. Some energy companies commonly apply
hydraulic-fracturing techniques in onshore oil and natural gas drilling and
completion programs. The process involves the injection of water, sand, and
additives under pressure into a targeted subsurface formation. The water and
pressure create fractures in the rock formations, which are held open by grains
of sand, enabling the oil or natural gas to flow to the wellbore. The use of
hydraulic fracturing may produce certain wastes that may in the future be
designated as hazardous wastes and become subject to more rigorous and costly
compliance and disposal requirements. In addition, the Department of Energy is
conducting an investigation into practices the agency could recommend to better
protect the environment from drilling using hydraulic fracturing completion
methods, and the Department of the Interior has proposed disclosure, well
testing and monitoring requirements for hydraulic fracturing on federal lands.
The White House Council on Environmental Quality and a committee of the US House
of Representatives are reviewing hydraulic-fracturing practices, and legislation
has been introduced in Congress to provide for federal regulation of hydraulic
fracturing and to require disclosure of the chemicals used in the fracturing
process. Some states have also adopted, and other states are considering
adopting, regulations that impose more stringent permitting, disclosure and well
construction requirements on hydraulic fracturing operations. Additional
regulations may be imposed that would, among other things, limit injection of
oil and gas well wastewater into underground disposal wells, because of concerns
about the possibility of minor earthquakes being linked to such injection, an
indirect byproduct to drilling unique to certain geographic regions. If new laws
or regulations that significantly restrict hydraulic fracturing or associated
activity are adopted, such laws may make it more difficult or costly for energy
companies to perform fracturing to stimulate production from tight formations,
which might adversely affect their production levels, operations, and cash flow,
as well as the value of such companies’ securities.
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Climate
Change Regulation Risk. Climate change regulation may result in
increased operations and capital costs for the companies in which the Fund
invests. Voluntary initiatives and mandatory controls have been adopted or
are being discussed both in the U.S. and worldwide to reduce emissions of
“greenhouse gases” such as carbon dioxide, a by-product of burning fossil
fuels, which some scientists and policymakers believe contribute to global
climate change. These current and future measures may result in certain
companies in which the Fund invests incurring increased costs to operate
and maintain facilities and to administer and manage a greenhouse gas
emissions program, which in turn may reduce demand for fuels that generate
greenhouse gases that are produced or managed or produced by such
companies. |
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Terrorism
Risk. Energy companies, and the market for their securities, are
subject to disruption as a result of terrorism-related risks. These
include terrorist activities, such as the September 11, 2001 terrorist
attacks; wars, such as the wars in Afghanistan and Iraq and their
aftermath; and other geopolitical events, including upheaval in the Middle
East and other energy producing regions. Cyber hacking may also cause
significant disruption and harm to energy companies. The U.S. government
has issued warnings that energy industry assets, including exploration and
production facilities as well as pipelines and transmission and
distribution facilities, may be specific targets for terrorist activity.
Such events have led, and in the future may lead, to short-term market
volatility, and may also have long-term effects on companies in the energy
industry and the market price of their securities. Such events may also
adversely affect the business and financial condition of particular
companies in which the Fund invests.
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Natural
Disaster Risk. Natural risks, such as earthquakes, flood,
lightning, hurricanes, tsunamis, tornadoes and wind, are inherent risks in
energy company operations. Such natural disasters have in the past
resulted in and may in the future cause substantial damage to the
facilities of certain companies located in the affected areas, created
significant volatility in the supply of energy, and adversely impacted the
prices of certain energy company securities. Future natural disasters, or
even the threat thereof, may result in similar volatility and may
adversely affect commodity prices and earnings of energy companies in
which the Fund invests. |
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Capital
Markets Risk. Global financial markets and economic conditions have
been, and may continue to be, volatile due to a variety of factors,
including significant write-offs in the financial services sector. In
volatile times, the cost of raising capital in the debt and equity capital
markets, and the ability to raise capital, may be impacted. In particular,
concerns about the general stability of financial markets and specifically
the solvency of lending counterparties, may impact the cost of raising
capital from the credit markets through increased interest rates, tighter
lending standards, difficulties in refinancing debt on existing terms or
at all and reduced, or in some cases ceasing to provide, funding to
borrowers. In addition, lending counterparties under existing revolving
credit facilities and other debt instruments may be unwilling or unable to
meet their funding obligations. As a result of any of the foregoing,
energy companies may be unable to obtain new debt or equity financing on
acceptable terms. If funding is not available when needed, or is available
only on unfavorable terms, energy companies may not be able to meet
obligations as they come due. Moreover, without adequate funding, energy
companies may be unable to execute their growth strategies, complete
future acquisitions, take advantage of other business opportunities or
respond to competitive pressures, any of which could have a material
adverse effect on their revenues and results of
operations. |
Rising
interest rates could limit the capital appreciation of equity units of energy
companies as a result of the increased availability of alternative investments
at competitive yields. Rising interest rates may increase the cost of capital
for energy companies. A higher cost of capital or an inflationary period may
lead to inadequate funding, which could limit growth from acquisition or
expansion projects, the ability of such entities to make or grow dividends or
distributions or meet debt obligations, the ability to respond to competitive
pressures, all of which could adversely affect the prices of their
securities.
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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. |
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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 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. |
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Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The Fund has a limited number of financial institutions
that may act as APs. In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. 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. |
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Shares
May Trade at Prices Other Than NAV. As with all ETFs, Shares may be
bought and sold in the secondary market at market prices. Although it is
expected that the market price of Shares will approximate the Fund’s NAV,
there may be times when the market price of Shares is more than the NAV
intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This
risk is heightened in times of market volatility, periods of steep market
declines, and periods when there is limited trading activity for Shares in
the secondary market, in which case such premiums or discounts may be
significant. |
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 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.
Foreign
Securities Risk. Investments in foreign securities involve certain risks
that may not be present with investments in U.S. securities. For example,
investments in foreign 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 foreign issuer than a U.S. issuer.
Foreign issuers may be subject to different accounting, auditing, financial
reporting and investor protection standards than U.S. issuers. Investments in
foreign 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
foreign securities or an Underlying ETF holding foreign securities may change on
days when shareholders will not be able to purchase or sell 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. To the extent that the Fund’s Index invests a
significant portion of its assets in the securities of companies of a single
country or region, it is more likely to be impacted by events or conditions
affecting that country or region. 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.
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Canada-Specific
Risk. The Canadian economy is reliant on the sale of natural
resources and commodities, which can pose risks such as the fluctuation of
prices and the variability of demand for exportation of such products.
Changes in spending on Canadian products by the economies of other
countries or changes in any of these economies may cause a significant
impact on the Canadian
economy. |
Limited
Operating History Risk. The Fund is a recently organized, diversified
management investment company with a limited operating history. As a result,
prospective investors have a limited track record or history on which to base
their investment decision.
Market
Capitalization Risk
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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. |
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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. Some
medium capitalization companies have limited product lines, markets,
financial resources, and management personnel and tend to concentrate on
fewer geographical markets relative to large-capitalization
companies. |
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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. |
MLP
Risk. MLPs involve risks related to limited control and limited rights to
vote on matters affecting the MLP, risks related to potential conflicts of
interest between the MLP and the MLP’s general partner, and cash flow risks. MLP
common units and other equity securities can be affected by macroeconomic and
other factors affecting the stock market in general, expectations of interest
rates, investor sentiment towards MLPs or the energy sector, changes in a
particular issuer’s financial condition or unfavorable or unanticipated poor
performance of a particular issuer (in the case of MLPs, generally measured in
terms of distributable cash flow). Prices of common units of individual MLPs and
other equity securities also can be affected by fundamentals unique to the
partnership or company, including earnings power and coverage
ratios.
MLPs
typically do not pay U.S. federal income tax at the partnership level. Instead,
each partner is allocated a share of the partnership’s income, gains, losses,
deductions and expenses. A change in current tax law or in the underlying
business mix of a given MLP could result in an MLP being treated as a
corporation for U.S. federal income tax purposes, which would result in such MLP
being required to pay U.S. federal income tax on its taxable income. The
classification of an MLP as a corporation for U.S. federal income tax purposes
would have the effect of reducing the amount of cash available for distribution
by the MLP. Thus, if any MLP owned by the Fund were treated as a corporation for
U.S. federal income tax purposes, the result could be a reduction of the value
of your investment in the Fund and lower income, as compared to if the MLP were
not taxed as a corporation.
Non-Diversification
Risk. Although the Fund intends to invest in a variety of securities and
instruments, the Fund will be considered to be non-diversified, which means that
it may invest more of its assets in the securities of a single issuer or a
smaller number of issuers than if it were a diversified fund. As a result, the
Fund may be more exposed to the risks associated with and developments affecting
an individual issuer or a smaller number of issuers than a fund that invests
more widely. This may increase the Fund’s volatility and cause the performance
of a relatively smaller number of issuers to have a greater impact on the Fund’s
performance.
Passive
Investment Risk. The Fund invests in the securities included in, or
representative of, its Index regardless of their investment merit. The Fund does
not attempt to outperform its Index or take defensive positions in declining
markets. As a result, the Fund’s performance may be adversely affected by a
general decline in the market segments relating to its Index. The returns from
the types of securities in which the Fund invests may underperform returns from
the various general securities markets or different asset classes. This may
cause the Fund to underperform other investment vehicles that invest in
different asset classes. Different types of securities (for example, large-,
mid- and small-capitalization stocks) tend to go through cycles of doing better
– or worse – than the general securities markets. In the past, these periods
have lasted for as long as several years.
Tax
Risk. The
Fund intends to qualify for treatment as a RIC under Subchapter M of the Code.
RICs are generally subject to favorable tax treatment under the Code. To qualify
for treatment as a RIC, the Fund must meet certain source-of-income, asset
diversification and annual distribution 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. Additionally,
to qualify for treatment as a RIC the
Fund may not invest more than 25% of its total assets in the securities of
entities treated as QPTPs for U.S. federal income tax purposes, including
certain MLPs. 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 fails to qualify for treatment as a RIC for any taxable year, and was
ineligible to or otherwise did not cure such failure, the Fund would be subject
to tax on its taxable income at corporate rates, and all distributions from the
Fund’s earnings and profits, including any distributions of net long-term
capital gains, would be taxable to shareholders as dividend income. The Fund’s
failure to qualify for treatment as a RIC could significantly reduce
shareholders’ returns on their investments in the Fund. Under certain
circumstances, the Fund could cure a failure to qualify as a RIC, but in order
to do so, the Fund could incur significant Fund-level taxes and could be forced
to dispose of certain assets.
Depreciation
or other cost recovery deductions passed through to the Fund from investments in
MLPs in a given year will generally reduce the Fund’s taxable income, but those
deductions may be recaptured in the Fund’s income in one or more subsequent
years. When recognized and distributed, recapture income will generally be
taxable to shareholders at the time of the distribution at ordinary income tax
rates, even though those shareholders might not have held Shares at the time the
deductions were taken by the Fund, and even though those shareholders will not
have corresponding economic gain on their Shares at the time of the recapture.
To distribute recapture income or to fund redemption requests, the Fund may need
to liquidate investments.
Tracking
Error Risk. As with all index funds, the performance of the Fund and its
Index may vary somewhat for a variety of reasons. For example, the Fund incurs
operating expenses and portfolio transaction costs not incurred by its Index. In
addition, the Fund may not be fully invested in the securities of its Index at
all times or may hold securities not included in its Index. The use of sampling
techniques may affect the Fund’s ability to achieve close correlation with its
Index. The Fund may use a representative sampling strategy to achieve its
investment objective, if the Sub-Adviser believes it is in the best interest of
the Fund, which generally can be expected to produce a greater non-correlation
risk.
Information
about the Fund’s daily portfolio holdings is available at www.usaietf.com. A
complete description of the Fund’s policies and procedures with respect to the
disclosure of the Fund’s portfolio holdings is available in the Fund’s Statement
of Additional Information (“SAI”).
SL
Advisors, LLC, serves as the investment adviser and index provider and has
overall responsibility for the general management and administration of the
Fund. The Adviser has been in business since September 2009 and is a registered
investment adviser with offices located at 220 Lenox Avenue, Suite 303,
Westfield, New Jersey 07090. The Adviser offers portfolio management and
investment supervisory services to individuals and charitable organizations, a
mutual fund, and the Fund.
The
Adviser also arranges for sub-advisory, transfer agency, custody, fund
administration, distribution, and all other services necessary for the Fund to
operate. 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 Fund, the Fund
pays the Adviser a unified management fee, which is calculated daily and paid
monthly, at an annual rate of 0.75% of the Fund’s average daily net
assets.
Under the
Investment Advisory Agreement (the “Advisory Agreement”), the Adviser has agreed
to pay all expenses of the Fund, except for: the fee paid to the Adviser
pursuant to the Advisory Agreement, interest charges on any borrowings,
dividends, and other expenses on securities sold short, taxes, brokerage
commissions and other expenses incurred in placing orders for the purchase and
sale of securities and other investment instruments, expenses associated with
the purchase, sale, or ownership of securities, acquired fund fees and expenses,
accrued deferred tax liability, extraordinary expenses, and distribution (12b‑1)
fees and expenses. The Adviser, in turn, compensates the Sub-Adviser from the
management fee the Adviser receives.
The basis
for the Board of Trustees’ approval of the Advisory Agreement is available in
the Fund’s Semi-Annual Report to Shareholders for the period ended May 31,
2018.
The
Adviser has retained Penserra Capital Management, LLC to serve as sub-adviser
for the Fund. The Sub-Adviser is responsible for the day-to-day management of
the Fund. The Sub-Adviser is a registered investment adviser and New York
limited liability company whose principal office is located at 4 Orinda Way,
Suite 100-A, Orinda, California 94563. The Sub-Adviser provides investment
management services to investment companies and other investment advisers. The
Sub-Adviser is responsible for trading portfolio securities for the Fund,
including selecting broker-dealers to execute purchase and sale transactions or
in connection with any rebalancing or reconstitution of the Index, subject to
the supervision of the Adviser and the Board. For its services, the Sub-Adviser
is paid a fee by the Adviser, which fee is calculated daily and paid monthly, at
an annual rate of the Fund’s average daily net assets of 0.05% on the first $100
million; 0.04% on the next $150 million; 0.03% on the next $250 million; and
0.02% on net assets in excess of $500 million, all subject to a minimum annual
fee of $18,000.
The basis
for the Board of Trustees’ approval of the Fund’s Sub-Advisory Agreement will be
available in the Fund’s Semi-Annual Report to Shareholders for the period ending
May 31, 2018.
Dustin
Lewellyn, CFA, Managing Director of the Sub-Adviser, Ernesto Tong, CFA, Managing
Director of the Sub-Adviser, and Anand Desai, Associate of the Sub-Adviser, are
the Fund’s portfolio managers (the “Portfolio Managers”) and are jointly
responsible for the day to day management of the Fund. The Portfolio Managers
are responsible for various functions related to portfolio management,
including, but not limited to, investing cash inflows, implementing investment
strategy, researching and reviewing investment strategy, and overseeing members
of their portfolio management team with more limited
responsibilities.
Mr.
Lewellyn has been a Managing Director with the Sub-Adviser
since 2012. He was President and Founder of Golden Gate Investment Consulting
LLC from 2011 through 2015. Prior to that, Mr. Lewellyn was a managing director
at Charles Schwab Investment Management, Inc. (“CSIM”), which he joined in 2009,
and head of portfolio management for Schwab ETFs. Prior
to joining CSIM, he worked for two years as director of ETF product management
and development at a major financial institution focused on asset and wealth
management. Prior to that, he was a portfolio manager for institutional clients
at a financial services firm for three years. In addition, he held roles in
portfolio accounting and portfolio management at a large asset management firm
for more than 6 years.
Mr. Tong
has been a Managing Director with the Sub-Adviser since 2015. Prior to joining
the Sub-Adviser, Mr. Tong spent seven years as a vice president at Blackrock,
where he was a portfolio manager for a number of the iShares ETFs, and prior to
that, he spent two years in the firm’s index research group.
Mr. Desai
has been an Associate with the Sub-Adviser since 2015. Prior to joining the
Sub-Adviser, Mr. Desai spent five years as a portfolio fund accountant at State
Street.
The Fund’s
SAI provides additional information about each Portfolio Manager’s compensation
structure, other accounts managed by each Portfolio Manager, and each Portfolio
Manager’s ownership of Shares.
The Fund
issues and redeems Shares at NAV only in Creation Units. Only APs may acquire
Shares directly from the Fund, and only APs may tender their Shares for
redemption directly to the Fund, at NAV. APs must be (i) a broker-dealer or
other participant in the clearing process through the Continuous Net Settlement
System of the NSCC, a clearing agency that is registered with the SEC; or
(ii) a DTC participant (as discussed below). In addition, each AP must
execute a Participant Agreement that has been agreed to by the Distributor, and
that has been accepted by the 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.
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.
Trading
prices of Shares on the Exchange may differ from the Fund’s daily NAV. Market
forces of supply and demand, economic conditions and other factors may affect
the trading prices of Shares. To provide additional information regarding the
indicative value of Shares, the Exchange or a market data vendor disseminates
information every 15 seconds through the facilities of the Consolidated Tape
Association, or other widely disseminated means, an updated “intraday indicative
value” (“IIV”) for Shares as calculated by an information provider or market
data vendor. The Fund is not involved in or responsible for any aspect of the
calculation or dissemination of the IIVs and makes no representation or warranty
as to the accuracy of the IIVs. If the calculation of the IIV is based on the
basket of Deposit Securities, and/or a designated amount of U.S. cash, such IIV
may not represent the best possible valuation of the Fund’s portfolio because
the basket of Deposit Securities does not necessarily reflect the precise
composition of the current Fund portfolio at a particular point in time and does
not include a reduction for the fees, operating expenses, or transaction costs
incurred by the Fund. The IIV should not be viewed as a “real-time” update of
the Fund’s NAV because the IIV may not be calculated in the same manner as the
NAV, which is computed only once a day, typically at the end of the business
day. The IIV is generally determined by using both current market quotations
and/or price quotations obtained from broker-dealers that may trade in the
Deposit Securities.
The Fund
imposes no restrictions on the frequency of purchases and redemptions of Shares.
In determining not to approve a written, established policy, the Board evaluated
the risks of market timing activities by Fund shareholders. Purchases and
redemptions by APs, who are the only parties that may purchase or redeem Shares
directly with the Fund, are an essential part of the ETF process and help keep
Share trading prices in line with NAV. As such, the Fund accommodates frequent
purchases and redemptions by APs. However, the Board has also determined that
frequent purchases and redemptions for cash may increase tracking error and
portfolio transaction costs and may lead to the realization of capital gains. To
minimize these potential consequences of frequent purchases and redemptions, the
Fund employs fair value pricing and may impose transaction fees on purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by
the Fund in effecting trades. In addition, the Fund and the Adviser reserve the
right to reject any purchase order at any time.
The Fund’s
NAV is calculated as of the scheduled close of regular trading on the New York
Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, each day the NYSE is
open for business. The NAV is calculated by dividing the Fund’s net assets by
its Shares outstanding.
In
calculating its NAV, the Fund generally values its assets on the basis of market
quotations, last sale prices, or estimates of value furnished by a pricing
service or brokers who make markets in such instruments. If such information is
not available for a security held by the Fund or is determined to be unreliable,
the security will be valued at fair value estimates under guidelines established
by the Board (as described below).
The Board
has adopted procedures and methodologies to fair value Fund securities whose
market prices are not “readily available” or are deemed to be unreliable. For
example, such circumstances may arise when: (i) a security has been de-listed or
has had its trading halted or suspended; (ii) a security’s primary pricing
source is unable or unwilling to provide a price; (iii) a security’s primary
trading market is closed during regular market hours; or (iv) a security’s value
is materially affected by events occurring after the close of the security’s
primary trading market. Generally, when fair valuing a security, the Fund will
take into account all reasonably available information that may be relevant to a
particular valuation including, but not limited to, fundamental analytical data
regarding the issuer, information relating to the issuer’s business, recent
trades or offers of the security, general and/or specific market conditions and
the specific facts giving rise to the need to fair value the security. Fair
value determinations are made in good faith and in accordance with the fair
value methodologies included in the Board-adopted valuation procedures. Due to
the subjective and variable nature of fair value pricing, there can be no
assurance that the Adviser or Sub-Adviser will be able to obtain the fair value
assigned to the security upon the sale of such security.
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in the Fund beyond the limits set
forth in section 12(d)(1), subject to certain terms and conditions set forth in
an SEC exemptive order issued to the Adviser, including that such investment
companies enter into an agreement with the Fund.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Fund. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Fund is available through certain broker-dealers. If
you are interested in enrolling in householding and receiving a single copy of
prospectuses and other shareholder documents, please contact your broker-dealer.
If you are currently enrolled in householding and wish to change your
householding status, please contact your broker-dealer.
The Fund
intends to pay out dividends, if any, and distribute any net realized capital
gains to its shareholders at least annually. The Fund will declare and pay
capital gain distributions, if any, in cash. Distributions in cash may be
reinvested automatically in additional whole Shares only if the broker through
whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Fund. Your investment
in the Fund may have other tax implications. Please consult your tax advisor
about the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
The Fund
intends to qualify each year for treatment as a regulated investment company (a
“RIC”). If it meets certain minimum distribution requirements, a RIC is not
subject to tax at the fund level on income and gains from investments that are
timely distributed to shareholders. However, the Fund’s failure to qualify as a
RIC or to meet minimum distribution requirements would result (if certain relief
provisions were not available) in fund-level taxation and, consequently, a
reduction in income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when the Fund makes distributions, when you sell your Shares listed
on the Exchange; and when you purchase or redeem Creation Units (institutional
investors only).
The tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”)
makes 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 would apply only to taxable years beginning after December 31,
2017 and before January 1, 2026. There are only minor changes with respect to
the specific rules only applicable to RICs, such as the Fund. The Tax Act,
however, makes numerous other changes to the tax rules that may affect
shareholders and the Fund. You are urged to consult with your own tax advisor
regarding how the Tax Act affects your investment in the Fund.
The Fund
intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For
federal income tax purposes, distributions of investment income are generally
taxable as ordinary income or qualified dividend income. Taxes on distributions
of capital gains (if any) are determined by how long the Fund owned the
investments that generated them, rather than how long a shareholder has owned
his or her Shares. Sales of assets held by the Fund for more than one year
generally result in long-term capital gains and losses, and sales of assets held
by the Fund for one year or less generally result in short-term capital gains
and losses. Distributions of the Fund’s net capital gain (the excess of net
long-term capital gains over net short-term capital losses) that are reported by
the Fund as capital gain dividends (“Capital Gain Dividends”) will be taxable as
long-term capital gains, which for non-corporate shareholders are subject to tax
at reduced rates of up to 20% (lower rates apply to individuals in lower tax
brackets). Distributions of short-term capital gain will generally be taxable as
ordinary income. Dividends and distributions are generally taxable to you
whether you receive them in cash or reinvest them in additional Shares.
Distributions
reported by the Fund as “qualified dividend income” are generally taxed to
noncorporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified
dividend income” generally is income derived from dividends paid by U.S.
corporations or certain foreign corporations that are either incorporated in a
U.S. possession or eligible for tax benefits under certain U.S. income tax
treaties. In addition, dividends that the Fund received in respect of stock of
certain foreign corporations may be qualified dividend income if that stock is
readily tradable on an established U.S. securities market.
The Fund’s
investment in MLPs and certain entities classified as corporations for U.S.
federal income tax purposes that invest in MLPs may result in the Fund receiving
return of capital distributions from such entities. The Fund’s receipt of
return of capital distributions will affect the Fund’s ability to distribute
dividends. If the 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 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.
Shortly
after the close of each calendar year, you will be informed of the character of
any distributions received from the Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8%
Medicare contribution tax on all or a portion of their “net investment income,”
which includes interest, dividends, and certain capital gains (generally
including capital gains distributions and capital gains realized on the sale of
Shares). This 3.8% tax also applies to all or a portion of the undistributed net
investment income of certain shareholders that are estates and
trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by the Fund before
your investment (and thus were included in the Shares’ NAV when you purchased
your Shares).
You may
wish to avoid investing in the Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your
investment.
If you are
neither a resident nor a citizen of the United States or if you are a foreign
entity, distributions (other than Capital Gain Dividends) paid to you by the
Fund will generally be subject to a U.S. withholding tax at the rate of 30%
unless a lower treaty rate applies. The Fund may, under certain circumstances,
report all or a portion of a dividend as an “interest-related dividend” or a
“short-term capital gain dividend,” which would generally be exempt from this
30% U.S. withholding tax, provided certain other requirements are
met.
The Fund
(or a financial intermediary, such as a broker, through which a shareholder owns
Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who fails to properly furnish a correct taxpayer identification
number, who has underreported dividend or interest income, or who fails to
certify that he, she or it is not subject to such withholding.
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. The ability to deduct capital
losses may be limited.
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. Persons exchanging securities should consult their own tax
advisor with respect to whether wash sale rules apply and when a loss might be
deductible.
Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
The Fund
may include a payment of cash in addition to, or in place of, the delivery of a
basket of securities upon the redemption of Creation Units. The Fund may sell
portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, the Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
In
general, for purposes of satisfying the source of income test for qualifying as
a RIC, income derived from a partnership will be treated as qualifying income
only to the extent such income is attributable to items of income of the
partnership that would be qualifying income if realized directly by the Fund.
However, 100% of the net income derived from an interest in a QPTP (generally, a
partnership (i) interests in which are traded on an established securities
market or are readily tradable on a secondary market or the substantial
equivalent thereof, (ii) that derives at least 90% of its income from the
passive income sources specified in Code section 7704(d), and (iii) that
derives less than 90% of its income from the same sources as described in the
source of RIC Qualifying Income Test described in the SAI) will be treated as
qualifying income. In addition, although in general the passive loss rules of
the Code do not apply to RICs, such rules do apply to a RIC with respect
to items attributable to an interest in a QPTP.
The Fund
may invest in certain MLPs which may be treated as QPTPs. Income from
QPTPs is qualifying income for purposes of the source of income test for
qualifying as a RIC, but the Fund’s investment in one or more of such QPTPs is
limited under the asset diversification test for qualifying as a RIC to no more
than 25% of the value of the Fund’s assets. The Fund will monitor its
investment in such QPTPs in order to ensure compliance with the source of income
and asset diversifiction tests for qualifying as a RIC. MLPs and other
partnerships that the Fund may invest in will deliver Form K-1s to the Fund to
report its share of income, gains, losses, deductions and credits of the MLP or
other partnership. These Form K-1s may be delayed and may not be received
until after the time that the Fund issues its tax reporting statements. As
a result, the Fund may at times find it necessary to reclassify the amount and
character of its distributions to you after it issues you your tax reporting
statement.
The Fund
invests in partnerships that elect to be classified as corporations for U.S.
federal income tax purposes. Such entities are required to pay U.S.
federal income tax on its taxable income. This has the effect of reducing
the amount of cash available for distribution to the Fund, which may result in a
reduction of the value of your investment in the Fund, as compared to if such
entity were not taxed as a corporation.
To the
extent the Fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the Fund received from
sources in foreign countries.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in the Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares under
all applicable tax laws. For more information, please see the section entitled
“Federal Income Taxes” in the SAI.
The
Distributor, Quasar Distributors, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Fund on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is 777 East Wisconsin
Avenue, 6th
Floor, Milwaukee, Wisconsin 53202.
The Board
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1
under the 1940 Act. In accordance with the Plan, the Fund is authorized to pay
an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No Rule
12b-1 fees are currently paid by the Fund, and there are no plans to impose
these fees. However, in the event Rule 12b-1 fees are charged in the future,
because the fees are paid out of the Fund’s assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
Information
regarding how often Shares traded on the Exchange at a price above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV per Share is available, free of charge, on the Fund’s
website at www.usaietf.com.
Shares are
not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the ability of the Fund to track the total return
performance of the Index or the ability of the Index identified herein to track
the performance of its constituent securities. The Exchange is not responsible
for, nor has it participated in, the determination of the compilation or the
calculation of the Index, nor in the determination of the timing of, prices of,
or quantities of Shares to be issued, nor in the determination or calculation of
the equation by which Shares are redeemable. The Exchange has no obligation or
liability to owners of Shares in connection with the administration, marketing,
or trading of Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Index or
the data included therein. The Exchange makes no warranty, express or implied,
as to results to be obtained by the Fund, owners of Shares, or any other person
or entity from the use of the Index or the data included therein. The Exchange
makes no express or implied warranties, and hereby expressly disclaims all
warranties of merchantability or fitness for a particular purpose with respect
to the Index or the data included therein. Without limiting any of the
foregoing, in no event shall the Exchange have any liability for any lost
profits or indirect, punitive, special, or consequential damages even if
notified of the possibility thereof.
The
Adviser, the Sub-Adviser, and the Fund make no representation or warranty,
express or implied, to the owners of Shares or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly. The Fund does not guarantee the accuracy, completeness, or
performance of the Index or the data included therein and shall have no
liability in connection with the Index or Index calculation. The Adviser owns
the Index and the Index methodology and is a licensor of the Index to the index
receipt agent. The Adviser has contracted with the Index Calculation Agent to
maintain and calculate the Index used by the Fund. The Index Calculation Agent
shall have no liability for any errors or omissions in calculating the
Index.
The
financial highlights table is intended to help you understand the Fund’s
financial performance for the period of the Fund’s operations. Certain
information reflects financial results for a single Fund share. The total return
in the table represents the rate that an investor would have earned or lost on
an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Cohen & Company,
Ltd., the
Fund’s independent registered public accounting firm, whose report, along with
the Fund’s financial statements, is included in the Fund’s annual report, which
is available upon request.
American
Energy Independence ETF
For a
capital share outstanding throughout the period
|
|
Period
Ended November
30, 2018
(a)
|
|
Net
Asset Value, Beginning of Period |
|
$
|
25.00
|
|
|
|
|
|
|
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
Net
Investment Income (Loss) (b)
|
|
|
0.55
|
|
Net
Realized and Unrealized Gain (Loss) on Investments |
|
|
(1.51
|
)(f)
|
Total
from Investment Operations |
|
|
(0.96
|
)
|
|
|
|
|
|
DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
Net
Investment Income |
|
|
(0.50
|
)
|
Return
of Capital |
|
|
(0.33
|
)
|
Total
Distributions |
|
|
(0.83
|
)
|
|
|
|
|
|
Net
Asset Value, End of Period |
|
$
|
23.21
|
|
|
|
|
|
|
Total
Return |
|
|
(4.06
|
)%(c)
|
|
|
|
|
|
SUPPLEMENTAL
DATA: |
|
|
|
|
Net
Assets at End of Period (000’s) |
|
$
|
9,284
|
|
|
|
|
|
|
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
Expenses
to Average Net Assets |
|
|
0.75
|
%(d)
|
Net
Investment Income (Loss) to Average Net Assets |
|
|
2.25
|
%(d)
|
|
|
|
|
|
Portfolio Turnover Rate
(e)
|
|
|
61
|
%(c)
|
(a)
|
Inception date of
December 12, 2017. |
(b)
|
Calculated based on
average shares outstanding during the period. |
(c)
|
Not annualized.
|
(d)
|
Annualized.
|
(e)
|
Excludes impact of
in-kind transactions. |
(f)
|
Net realized and
unrealized gain (loss) per share in this caption are balancing amounts
necessary to reconcile the change in net asset value per share for the
period, and may not reconcile with the aggregate gain (loss) in the
Statement of Operations due to share transactions for the period.
|
American
Energy Independence ETF
Adviser
and
Index Provider
|
SL
Advisors, LLC
220
Lenox Avenue, Suite 303
Westfield,
New Jersey 07090-5119 |
Administrator
|
U.S.
Bancorp Fund Services, LLC
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Sub-Adviser
|
Penserra
Capital Management LLC
4
Orinda Way, Suite 100-A Orinda,
California 94563 |
Transfer
Agent
and
Index
Receipt
Agent
|
U.S.
Bancorp Fund Services, LLC
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Custodian
|
U.S.
Bank National Association
1555
N. Rivercenter Drive, Suite 302
Milwaukee,
Wisconsin 53212
|
Distributor
|
Quasar
Distributors, LLC
777
East Wisconsin Avenue, 6th
Floor
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 20004-2541
|
Investors
may find more information about the Fund in the following
documents:
Statement
of Additional Information: The Fund’s SAI provides additional details
about the investments and techniques of the Fund and certain other additional
information. A current SAI dated March 31, 2019, as supplemented from time to
time, is on file with the SEC and is herein incorporated by reference into this
Prospectus. It is legally considered a part of this Prospectus.
Annual/Semi-Annual
Reports: Additional information about the Fund’s investments is available
in the Fund’s annual and semi-annual reports to shareholders. In the annual
report you will find a discussion of the market conditions and investment
strategies that significantly affected the Fund’s performance.
You can
obtain free copies of these documents, request other information or make general
inquiries about the Fund by contacting the Fund at c/o U.S. Bank Global Fund
Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701 or by calling
1-800-617-0004.
Shareholder
reports and other information about the Fund are also available:
|
· |
Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or |
|
· |
Free
of charge from the Fund’s Internet web site at www.usaietf.com;
or |
(SEC Investment Company Act
File No. 811-22668)