ck0001540305-20230430
Aptus
Drawdown Managed Equity ETF (ADME)
Aptus
Collared Investment Opportunity ETF (ACIO)
(formerly,
Aptus Collared Income Opportunity ETF)
Aptus
Defined Risk ETF (DRSK)
Opus
Small Cap Value ETF (OSCV)
Aptus
International Enhanced Yield ETF (IDUB)
(formerly,
International Drawdown Managed Equity ETF(IDME))
Aptus
Enhanced Yield ETF (JUCY)
each
a series of ETF Series Solutions
Listed
on Cboe BZX Exchange, Inc.
STATEMENT
OF ADDITIONAL INFORMATION
August 31,
2023
This
Statement of Additional Information (“SAI”) is not a prospectus and should be
read in conjunction with the Prospectus for the Aptus Drawdown Managed Equity
ETF, Aptus Collared Investment Opportunity ETF, Aptus Defined Risk ETF, Opus
Small Cap Value ETF, Aptus International Enhanced Yield ETF, and Aptus Enhanced
Yield ETF (each, a “Fund” and, collectively, the “Funds”), each a series of ETF
Series Solutions (the “Trust”), dated August 31, 2023, as may be
supplemented from time to time (the “Prospectus”). Capitalized terms used herein
that are not defined have the same meaning as in the Prospectus, unless
otherwise noted. A copy of the Prospectus may be obtained without charge, by
calling the Funds at 1-800-617-0004, visiting www.aptusetfs.com or
www.opusetfs.com/funds/oscv, or writing to the Funds, c/o U.S. Bank Global Fund
Services, P.O. Box 701, Milwaukee, Wisconsin 53201-0701.
The
Funds’ audited financial statements for the fiscal year/period ended
April 30, 2023 are incorporated into this SAI by reference to the Funds’
Annual
Report
dated April 30, 2023 (File No. 811-22668). A copy of the Funds’ Annual
Report may be obtained at no charge by contacting the Funds at the address or
phone number noted above.
TABLE
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Description
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GENERAL
DESCRIPTION OF THE TRUST
The
Trust is an open-end management investment company consisting of multiple
investment series. This SAI relates to the Funds. The Trust was organized as a
Delaware statutory trust on February 9, 2012. The Trust is registered with
the U.S. Securities and Exchange Commission (“SEC”) under the Investment Company
Act of 1940, as amended (together with the rules and regulations adopted
thereunder, as amended, the “1940 Act”), as an open-end management investment
company, and the offering of each Fund’s shares (“Shares”) is registered under
the Securities Act of 1933, as amended (the “Securities Act”). The Trust is
governed by its Board of Trustees (the “Board”). Aptus Capital Advisors, LLC
(“Aptus” or the “Adviser”) serves as investment adviser to the Funds. The
investment objective of each Fund is as stated in each Fund’s Prospectus under
“Investment Objective”.
Each
Fund’s ticker symbol appears on the cover of this SAI, and references to
specific Funds in the sections below will refer to such Funds by their ticker
symbol.
Each
Fund offers and issues Shares at its net asset value (“NAV”) only in
aggregations of a specified number of Shares (each, a “Creation Unit”). Each
Fund generally offers and issues Shares in exchange for a basket of securities
included in its portfolio (“Deposit Securities”) together with the deposit of a
specified cash payment (“Cash Component”). The Trust reserves the right to
permit or require the substitution of a “cash in lieu” amount (“Deposit Cash”)
to be added to the Cash Component to replace any Deposit Security. Shares are
listed on Cboe BZX Exchange, Inc. (the “Exchange”) and trade on the Exchange at
market prices that may differ from the Shares’ NAV. Shares are also redeemable
only in Creation Unit aggregations, primarily for a basket of Deposit Securities
together with a Cash Component. A Creation Unit of each Fund generally consists
of 25,000 Shares, though this may change from time to time for a Fund. As a
practical matter, only institutions or large investors purchase or redeem
Creation Units. Except when aggregated in Creation Units, Shares are not
redeemable securities.
Shares
may be issued in advance of receipt of Deposit Securities subject to various
conditions, including a requirement to maintain on deposit with the Trust cash
at least equal to a specified percentage of the value of the missing Deposit
Securities, as set forth in the Participant Agreement (as defined below). The
Trust may impose a transaction fee for each creation or redemption. In all
cases, such fees will be limited in accordance with the requirements of the SEC
applicable to management investment companies offering redeemable securities. As
in the case of other publicly traded securities, brokers’ commissions on
transactions in the secondary market will be based on negotiated commission
rates at customary levels.
ADDITIONAL
INFORMATION ABOUT INVESTMENT OBJECTIVES, POLICIES, AND RELATED
RISKS
Each
Fund’s investment objective and principal investment strategies are described in
the Prospectus. The following information supplements, and should be read in
conjunction with, the Prospectus. For a description of certain permitted
investments, see “Description
of Permitted Investments”
in this SAI.
With
respect to each Fund’s investments, unless otherwise noted, if a percentage
limitation on investment is adhered to at the time of investment or contract, a
subsequent increase or decrease as a result of market movement or redemption
will not result in a violation of such investment limitation.
Diversification
(ADME,
ACIO, DRSK, OSCV, and JUCY only).
Each
Fund is “diversified” within the meaning of the 1940 Act. Under applicable
federal laws, to qualify as a diversified fund, each Fund, with respect to 75%
of its total assets, may not invest greater than 5% of its total assets in any
one issuer and may not hold greater than 10% of the securities of one issuer,
other than investments in cash and cash items (including receivables), U.S.
government securities, and securities of other investment companies. The
remaining 25% of each Fund’s total assets does not need to be “diversified” and
may be invested in securities of a single issuer, subject to other applicable
laws. The diversification of a fund’s holdings is measured at the time the fund
purchases a security. However, if a fund purchases a security and holds it for a
period of time, the security may become a larger percentage of the fund’s total
assets due to movements in the financial markets. If the market affects several
securities held by a fund, the fund may have a greater percentage of its assets
invested in securities of a single issuer or a small number of issuers. However,
each Fund intends to satisfy the asset diversification requirements for
qualification as a regulated investment company (“RIC”) under Subchapter M
of the Internal Revenue Code of 1986, as amended (the “Code”). See “Federal
Income Taxes”
below for details.
Non-Diversification
(IDUB
only).
The
Fund is classified as a non-diversified investment company under the 1940 Act. A
“non-diversified” classification means that the Fund is not limited by the 1940
Act with regard to the percentage of its total assets that may be invested in
the securities of a single issuer. This means that the Fund may invest a greater
portion of its total assets in the securities of a single issuer or a small
number of issuers than if it was a diversified fund. This may have an adverse
effect on the Fund’s performance or subject Shares to greater price volatility
than more diversified investment companies. Moreover, in pursuing its objective,
the Fund may hold the securities of a single issuer in an amount exceeding 10%
of the value of the outstanding securities of the issuer, subject to
restrictions imposed by the Code. In particular, as the Fund’s size grows and
its assets increase, it will be more likely to hold more than 10% of the
securities of a single issuer if the issuer has a relatively small public float.
Although
the Fund is non-diversified for purposes of the 1940 Act, the Fund intends to
maintain the required level of diversification and otherwise conduct its
operations so as to qualify as a RIC for purposes of the Code. Compliance with
the diversification requirements of the Code may limit the investment
flexibility of the Fund and may make it less likely that the Fund will meet its
investment objectives. To qualify as a RIC under the Code, among other
requirements, at the end of each quarter of the Fund’s taxable year, the Fund’s
assets must be diversified so that (a) at least 50% of the value of the Fund’s
total assets is represented by cash and cash items, U.S. government securities,
securities of other RICs, and other securities, with such other securities
limited, in respect to any one issuer, to an amount not greater in value than 5%
of the value of the Fund’s total assets and to not more than 10% of the
outstanding voting securities of such issuer, including the equity securities of
a qualified publicly traded partnership, and (b) not more than 25% of the value
of its total assets is invested, including through corporations in which the
Fund owns a 20% or more voting stock interest, in the securities (other than
U.S. government securities or securities of other RICs) of any one issuer, the
securities (other than securities of other RICs) of two or more issuers which
the Fund controls and which are engaged in the same, similar, or related trades
or businesses, or the securities of one or more qualified publicly traded
partnerships. See “Federal Income Taxes” in this SAI for further discussion.
General
Risks
The
value of a Fund’s portfolio securities may fluctuate with changes in the
financial condition of an issuer or counterparty, changes in specific economic
or political conditions that affect a particular security or issuer and changes
in general economic or political conditions. An investor in a Fund could lose
money over short or long periods of time.
-
Cyber
Security Risk.
Investment
companies, such as the Funds, and their service providers may be subject to
operational and information security risks resulting from cyber attacks. Cyber
attacks include, among other behaviors, stealing or corrupting data maintained
online or digitally, denial of service attacks on websites, the unauthorized
release of confidential information or various other forms of cyber security
breaches. Cyber attacks affecting a Fund or the Adviser, custodian, transfer
agent, intermediaries and other third-party service providers may adversely
impact a Fund. For instance, cyber attacks may interfere with the processing of
shareholder transactions, impact a Fund’s ability to calculate its NAV, cause
the release of private shareholder information or confidential company
information, impede trading, subject a Fund to regulatory fines or financial
losses, and cause reputational damage. A Fund may also incur additional costs
for cyber security risk management purposes. Similar types of cyber security
risks are also present for issuers of securities in which a Fund invests, which
could result in material adverse consequences for such issuers, and may cause a
Fund’s investments in such portfolio companies to lose value.
Recent
Events
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and, in many cases, unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers experienced particularly large losses as a result of these disruptions.
Although the immediate effects of the COVID-19 pandemic have begun to dissipate,
global markets and economies continue to contend with the ongoing and long-term
impact of the COVID-19 pandemic and the resultant market volatility and economic
disruptions. It is unknown how long circumstances related to the pandemic will
persist, whether they will reoccur in the future, whether efforts to support the
economy and financial markets will be successful, and what additional
implications may follow from the pandemic. The impact of these events and other
epidemics or pandemics in the future could adversely affect Fund
performance.
Russia’s
military invasion of Ukraine in February 2022, the resulting responses by the
United States and other countries, and the potential for wider conflict could
increase volatility and uncertainty in the financial markets and adversely
affect regional and global economies. The United States and other countries have
imposed broad-ranging economic sanctions on Russia, certain Russian individuals,
banking entities and corporations, and Belarus as a response to Russia’s
invasion of Ukraine, and may impose sanctions on other countries that provide
military or economic support to Russia. The sanctions restrict companies from
doing business with Russia and Russian companies, prohibit transactions with the
Russian central bank and other key Russian financial institutions and entities,
ban Russian airlines and ships from using many other countries’ airspace and
ports, respectively, and place a freeze on certain Russian assets. The sanctions
also removed some Russian banks from the Society for Worldwide Interbank
Financial Telecommunications (SWIFT), the electronic network that connects banks
globally to facilitate cross-border payments. In addition, the United States and
the United Kingdom have banned oil and other energy imports from Russia, and the
European Union has banned most Russian crude oil imports and refined petroleum
products, with limited exceptions. The extent and duration of Russia’s military
actions and the repercussions of such actions (including any retaliatory actions
or countermeasures that may be taken by those subject to sanctions, including
cyber attacks) are impossible to predict, but could result in significant market
disruptions, including in certain industries or sectors, such as the oil and
natural gas markets, and may negatively affect global supply chains, inflation
and global growth. These and any related events could significantly impact the
Fund’s performance and the value of an investment in the Fund, even if the Fund
does not have direct exposure to Russian issuers or issuers in other countries
affected by the invasion.
DESCRIPTION
OF PERMITTED INVESTMENTS
The
following are descriptions of the Funds’ permitted investments and investment
practices and the associated risk factors. A Fund will only invest in any of the
following instruments or engage in any of the following investment practices if
such investment or activity is consistent with a Fund’s investment objective and
permitted by the Fund’s stated investment policies. Each of the permitted
investments described below applies to each Fund unless otherwise noted.
Borrowing.
Although the Funds do not intend to borrow money, a Fund may do so to the extent
permitted by the 1940 Act. Under the 1940 Act, a Fund may borrow up to one-third
(1/3) of its total assets. A Fund will borrow money only for short-term or
emergency purposes. Such borrowing is not for investment purposes and will be
repaid by the borrowing Fund promptly. Borrowing will tend to exaggerate the
effect on NAV of any increase or decrease in the market value of the borrowing
Fund’s portfolio. Money borrowed will be subject to interest costs that may or
may not be recovered by earnings on the securities purchased. A Fund also may be
required to maintain minimum average balances in connection with a borrowing or
to pay a commitment or other fee to maintain a line of credit; either of these
requirements would increase the cost of borrowing over the stated interest rate.
Corporate
Debt Securities (DRSK
only).
Corporate debt securities are long- and short-term debt obligations issued by
companies (such as publicly issued and privately placed bonds, notes and
commercial paper). The Adviser considers corporate debt securities to be of
investment grade quality if they are rated BBB or higher by Standard &
Poor’s (“S&P”), a division of the McGraw Hill Companies, or Baa or higher by
Moody’s Investors Service, Inc. (“Moody’s”), or if unrated, determined by the
Adviser to be of comparable quality. Investment grade debt securities generally
have adequate to strong protection of principal and interest payments. In the
lower end of this category, adverse economic conditions or changing
circumstances are more likely to lead to a weakened capacity to pay interest and
repay principal than in higher rated categories.
Depositary
Receipts. To
the extent a Fund invests in stocks of foreign corporations, a Fund’s investment
in securities of foreign companies may be in the form of depositary receipts or
other securities convertible into securities of foreign issuers. American
Depositary Receipts (“ADRs”) are dollar-denominated receipts representing
interests in the securities of a foreign issuer, which securities may not
necessarily be denominated in the same currency as the securities into which
they may be converted. ADRs are receipts typically issued by U.S. banks and
trust companies which evidence ownership of underlying securities issued by a
foreign corporation. Generally, ADRs in registered form are designed for use in
domestic securities markets and are traded on exchanges or over-the-counter in
the United States. Global Depositary Receipts (“GDRs”), European Depositary
Receipts (“EDRs”), and International Depositary Receipts (“IDRs”) are similar to
ADRs in that they are certificates evidencing ownership of shares of a foreign
issuer; however, GDRs, EDRs, and IDRs may be issued in bearer form and
denominated in other currencies and are generally designed for use in specific
or multiple securities markets outside the U.S. EDRs, for example, are designed
for use in European securities markets, while GDRs are designed for use
throughout the world. Depositary receipts will not necessarily be denominated in
the same currency as their underlying securities. The issuers of unsponsored
Depositary Receipts are not obligated to disclose material information in the
United States and, therefore, there may be less information available regarding
such issuers and there may not be a correlation between such information and the
value of the Depositary Receipts.
Derivative
Instruments
Generally,
derivatives are financial instruments whose value depends on or is derived from,
the value of one or more underlying assets, reference rates, or indices or other
market factors (a “reference instrument”) and may relate to stocks, bonds,
interest rates, credit, currencies, commodities or related indices. Derivative
instruments can provide an efficient means to gain or reduce exposure to the
value of a reference instrument without actually owning or selling the
instrument. Some common types of derivatives include options, futures, forwards
and swaps.
In
October 2020, the SEC adopted Rule 18f-4 under the 1940 Act (“Rule 18f‑4”),
which took effect on August 19, 2022, and imposed new limits on the amount of
leverage risk to which a fund may be exposed through derivatives that may oblige
the fund to make payments or incur additional obligations in the future. Rule
18f-4 imposed new requirements and restrictions on a fund’s use of derivatives,
including options, and eliminated the asset segregation framework previously
used by funds, including the Funds, to comply with Section 18 of the 1940 Act.
Under Rule 18f-4, a fund’s investment in such derivatives is limited through a
value-at-risk (“VaR”) test. Rule 18f-4 requires funds whose use of derivatives
is more than a limited specified exposure, including ADME, ACIO and DRSK, to
establish and maintain a derivatives risk management program, subject to
oversight by a fund’s board of trustees, and appoint a derivatives risk manager.
It is not currently clear what impact, if any, the new rule will have on the
availability, liquidity or performance of derivatives, including options. To the
extent a Fund’s compliance with Rule 18f-4 changes how the Fund uses options,
the new rule may adversely affect the Fund’s performance and/or increase costs
related to the Fund’s use of options.
Derivative
instruments may be used to modify the effective duration of a Fund’s portfolio
investments. Derivative instruments may also be used for “hedging,” which means
that they may be used when the Adviser seeks to protect a Fund’s investments
from a decline in value resulting from changes to interest rates, market prices,
currency fluctuations, or other market factors. Derivative instruments may also
be used for other purposes, including to seek to increase liquidity, provide
efficient portfolio management, broaden investment opportunities (including
taking short or negative positions), implement a tax or cash management
strategy, gain exposure to a particular security or segment of the market and/or
enhance total return. However derivative instruments are used, their successful
use is not assured and will depend upon, among other factors, the Adviser’s
ability to gauge relevant market movements.
Derivative
instruments may be used for purposes of direct hedging. Direct hedging means
that the transaction must be intended to reduce a specific risk exposure of a
portfolio security or its denominated currency and must also be directly related
to such security or currency. A Fund’s use of derivative instruments may be
limited from time to time by policies adopted by the Board.
Equity-Linked
Notes (“ELNs”) —
ELNs are hybrid derivative-type instruments that are specially designed to
combine the characteristics of one or more reference securities (usually a
single stock, a stock index or a basket of stocks (underlying securities)) and a
related equity derivative, such as a put or call option, in a single note form.
Generally, when purchasing an ELN, a Fund pays the counterparty (usually a bank
or brokerage firm) the current value of the underlying securities plus a
commission. Upon the maturity of the note, the Fund generally receives the par
value of the note plus a return based on the appreciation of the underlying
securities. If the underlying securities have depreciated in value or if their
price fluctuates outside of a preset range, depending on the type of ELN in
which the Fund invested, the Fund may receive only the principal amount of the
note, or may lose the principal invested in the ELN entirely. A Fund only
invests in ELNs for which the underlying securities are permissible investments
pursuant to the Fund’s investment policies and restrictions. For purposes of
each Fund's fundamental concentration policy, the Fund applies the restriction
by reference to the industry of the issuer of the underlying reference
securities and not the industry of the issuer of an ELN.
ELNs
are available with an assortment of features, such as periodic coupon payments
(e.g.,
monthly, quarterly or semi-annually); varied participation rates (the rate at
which the Fund participates in the appreciation of the underlying securities);
limitations on the appreciation potential of the underlying securities by a
maximum payment or call right; and different protection levels on the Fund’s
principal investment. In addition, when the underlying securities are foreign
securities or indices, an ELN may be priced with or without currency exposure. A
Fund may engage in all types of ELNs, including those that: (1) provide for
protection of the Fund’s principal in exchange for limited participation in the
appreciation of the underlying securities, and (2) do not provide for such
protection and subject the Fund to the risk of loss of the Fund’s principal
investment.
ELNs
can provide a Fund with an efficient investment tool that may be less expensive
than investing directly in the underlying securities and the related equity
derivative. ELNs also may enable the Fund to obtain a return (the coupon
payment) without risk to principal (in principal-protected ELNs) if the general
price movement of the underlying securities is correctly
anticipated.
A
Fund’s successful use of ELNs will usually depend on the Adviser’s ability to
accurately forecast movements in the underlying securities. Should the prices of
the underlying securities move in an unexpected manner, the Fund may not achieve
the anticipated benefits of the investment in the ELN, and it may realize
losses, which could be significant and could include the Fund’s entire principal
investment. If the Adviser is not successful in anticipating such price
movements, the Fund’s performance may be worse than if the Adviser did not use
an ELN at all.
In
addition, an investment in an ELN possesses the risks associated with the
underlying securities, such as management risk, market risk and, as applicable,
foreign securities and currency risks. In addition, since ELNs are in note form,
ELNs are also subject to certain debt securities risks, such as interest rate
and credit risk. An investment in an ELN also bears the risk that the issuer of
the ELN will default or become bankrupt. In such an event, the Fund may have
difficulty being repaid, or fail to be repaid, the principal amount of, or
income from, its investment. A downgrade or impairment to the credit rating of
the issuer may also negatively impact the price of the ELN, regardless of the
price of the underlying securities.
A
Fund may also experience liquidity issues when investing in ELNs, as ELNs are
generally designed for the over-the-counter institutional investment market. The
secondary market for ELNs may be limited, and the lack of liquidity in the
secondary market may make ELNs difficult to sell and value. However, as the
market for ELNs has grown, there are a growing number of exchange-traded ELNs
available, although these products may be thinly traded.
ELNs
may exhibit price behavior that does not correlate with the underlying
securities or a fixed-income investment. In addition, performance of an ELN is
the responsibility only of the issuer of the ELN and not the issuer of the
underlying securities. As the holder of an ELN, the Fund generally has no rights
to the underlying securities, including no voting rights or rights to receive
dividends, although the amount of expected dividends to be paid during the term
of the instrument are factored into the pricing and valuation of the underlying
securities at inception.
Options
— Each Fund may utilize options contracts. A Fund will provide margin or
collateral, as applicable, with respect to its use of options contracts in such
amounts as determined under applicable law, regulatory guidance or related
interpretations.
Each
Fund may purchase and sell put and call options. Such options may relate to
particular securities and may or may not be listed on a national securities
exchange and issued by the Options Clearing Corporation. Options trading is a
highly specialized activity that entails greater than ordinary investment risk.
Options on particular securities may be more volatile than the underlying
securities, and therefore, on a percentage basis, an investment in options may
be subject to greater fluctuation than an investment in the underlying
securities themselves.
To
the extent a Fund invests in derivative instruments subject to regulation by the
CFTC, it will seek to do so in reliance upon and in accordance with CFTC Rule
4.5. Specifically, pursuant to CFTC Rule 4.5, the Trust may claim exclusion from
the definition of CPO, and thus from having to register as a CPO, with regard to
the Fund that enters into commodity futures, commodity options or swaps solely
for “bona fide hedging purposes,” or that limits its investment in commodities
to a “de minimis” amount, as defined in CFTC rules, so long as Shares are not
marketed as interests in a commodity pool or other vehicle for trading in
commodity futures,
commodity
options or swaps. The Trust, on behalf of the Fund, has filed a notice of
eligibility for exclusion from the definition of the term “commodity pool
operator” in accordance with CFTC Rule 4.5. Therefore, neither the Trust nor the
Fund is deemed to be a “commodity pool” or “commodity pool operator” under the
Commodity Exchange Act (“CEA”), and they are not subject to registration or
regulation as such under the CEA. It is expected that the Fund will be able to
operate pursuant to the limitations under CFTC Rule 4.5 without materially
adversely affecting its ability to achieve its investment objective. If,
however, these limitations were to make it difficult for the Fund to achieve its
investment objective in the future, the Trust may determine to operate the Fund
as a regulated commodity pool pursuant to the Trust’s CPO registration or to
reorganize or close the Fund or to materially change the Fund’s investment
objective and strategy. In addition, as of the date of this SAI, the Adviser is
not deemed to be a “commodity pool operator” or “commodity trading adviser” with
respect to the advisory services it provides to the Fund.
Equity
Securities. Equity
securities, such as the common stocks of an issuer, are subject to stock market
fluctuations and therefore may experience volatile changes in value as market
conditions, consumer sentiment or the financial condition of the issuers change.
A decrease in value of the equity securities in a Fund’s portfolio may also
cause the value of a Fund’s Shares to decline.
An
investment in the Funds should be made with an understanding of the risks
inherent in an investment in equity securities, including the risk that the
financial condition of issuers may become impaired or that the general condition
of the stock market may deteriorate (either of which may cause a decrease in the
value of a Fund’s portfolio securities and therefore a decrease in the value of
Shares). Common stocks are susceptible to general stock market fluctuations and
to volatile increases and decreases in value as market confidence and
perceptions change. These investor perceptions are based on various and
unpredictable factors, including expectations regarding government, economic,
monetary and fiscal policies; inflation and interest rates; economic expansion
or contraction; and global or regional political, economic, public health, or
banking crises.
Holders
of common stocks incur more risk than holders of preferred stocks and debt
obligations because common stockholders, as owners of the issuer, generally have
inferior rights to receive payments from the issuer in comparison with the
rights of creditors or holders of debt obligations or preferred stocks. Further,
unlike debt securities, which typically have a stated principal amount payable
at maturity (whose value, however, is subject to market fluctuations prior
thereto), or preferred stocks, which typically have a liquidation preference and
which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are
subject to market fluctuations as long as the common stock remains outstanding.
When-Issued
Securities:
A
when-issued security is one whose terms are available and for which a market
exists, but which has not been issued. When a Fund engages in when-issued
transactions, it relies on the other party to consummate the sale. If the other
party fails to complete the sale, a Fund may miss the opportunity to obtain the
security at a favorable price or yield.
When
purchasing a security on a when-issued basis, a Fund assumes the rights and
risks of ownership of the security, including the risk of price and yield
changes. At the time of settlement, the value of the security may be more or
less than the purchase price. The yield available in the market when the
delivery takes place also may be higher than those obtained in the transaction
itself. Because a Fund does not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other investments.
Decisions
to enter into “when-issued” transactions will be considered on a case-by-case
basis when necessary to maintain continuity in a company’s index membership. A
Fund will segregate cash or liquid securities equal in value to commitments for
the when-issued transactions. A Fund will segregate additional liquid assets
daily so that the value of such assets is equal to the amount of the
commitments.
Types
of Equity Securities:
Common
Stocks
— Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are
described below, dividends on common stocks are not fixed but are declared at
the discretion of the company’s board of directors.
Preferred
Stocks
— Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the
liquidation of the company. However, in all other respects, preferred stocks are
subordinated to the liabilities of the issuer. Unlike common stocks, preferred
stocks are generally not entitled to vote on corporate matters. Types of
preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred stock.
Generally,
the market values of preferred stock with a fixed dividend rate and no
conversion element vary inversely with interest rates and perceived credit risk.
Rights
and Warrants
— A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights
normally have a short life of usually two to four weeks, are freely transferable
and entitle the holder to buy the new common stock at a lower price than the
public offering price. Warrants are securities that are usually issued together
with a debt security or preferred stock and that give the holder the right to
buy proportionate amount of common stock at a specified price. Warrants are
freely transferable and are traded on major exchanges. Unlike rights, warrants
normally have a life that is
measured
in years and entitles the holder to buy common stock of a company at a price
that is usually higher than the market price at the time the warrant is issued.
Corporations often issue warrants to make the accompanying debt security more
attractive.
An
investment in warrants and rights may entail greater risks than certain other
types of investments. Generally, rights and warrants do not carry the right to
receive dividends or exercise voting rights with respect to the underlying
securities, and they do not represent any rights in the assets of the issuer. In
addition, their value does not necessarily change with the value of the
underlying securities, and they cease to have value if they are not exercised on
or before their expiration date. Investing in rights and warrants increases the
potential profit or loss to be realized from the investment as compared with
investing the same amount in the underlying securities.
Real
Estate Investment Trusts
(“REITs”)
—
A U.S. REIT is a corporation or business trust (that would otherwise be taxed as
a corporation) which meets the definitional requirements of the Code. The Code
permits a qualifying REIT to deduct from taxable income the dividends paid,
thereby effectively eliminating corporate level federal income tax. To meet the
definitional requirements of the Code, a REIT must, among other things: invest
substantially all of its assets in interests in real estate (including mortgages
and other REITs), cash and government securities; derive most of its income from
rents from real property or interest on loans secured by mortgages on real
property; and, in general, distribute annually 90% or more of its taxable income
(other than net capital gains) to shareholders.
REITs
are sometimes informally characterized as Equity REITs and Mortgage REITs. An
Equity REIT invests primarily in the fee ownership or leasehold ownership of
land and buildings (e.g.,
commercial equity REITs and residential equity REITs); a Mortgage REIT invests
primarily in mortgages on real property, which may secure construction,
development or long-term loans.
REITs
may be affected by changes in underlying real estate values, which may have an
exaggerated effect to the extent that REITs in which a Fund invests may
concentrate investments in particular geographic regions or property types.
Additionally, rising interest rates may cause investors in REITs to demand a
higher annual yield from future distributions, which may in turn decrease market
prices for equity securities issued by REITs. Rising interest rates also
generally increase the costs of obtaining financing, which could cause the value
of a Fund’s investments to decline. During periods of declining interest rates,
certain Mortgage REITs may hold mortgages that the mortgagors elect to prepay,
which prepayment may diminish the yield on securities issued by such Mortgage
REITs. In addition, Mortgage REITs may be affected by the ability of borrowers
to repay when due the debt extended by the REIT and Equity REITs may be affected
by the ability of tenants to pay rent.
Certain
REITs have relatively small market capitalization, which may tend to increase
the volatility of the market price of securities issued by such REITs.
Furthermore, REITs are dependent upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
operating and financing a limited number of projects. By investing in REITs
indirectly through a Fund, a shareholder will bear not only his or her
proportionate share of the expenses of such Fund, but also, indirectly, similar
expenses of the REITs. REITs depend generally on their ability to generate cash
flow to make distributions to shareholders.
In
addition to these risks, Equity REITs may be affected by changes in the value of
the underlying property owned by the trusts, while Mortgage REITs may be
affected by the quality of any credit extended. Further, Equity and Mortgage
REITs are dependent upon management skills and generally may not be diversified.
Equity and Mortgage REITs are also subject to heavy cash flow dependency
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage
REITs could possibly fail to qualify for the favorable U.S. federal income tax
treatment generally available to REITs under the Code or fail to maintain their
exemptions from registration under the 1940 Act. The above factors may also
adversely affect a borrower’s or a lessee’s ability to meet its obligations to
the REIT. In the event of default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting its investments.
Smaller
Companies
— The securities of small- and mid-capitalization companies may be more
vulnerable to adverse issuer, market, political, or economic developments than
securities of larger-capitalization companies. The securities of small- and
mid-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- or mid-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
small- and mid-capitalization companies than for larger, more established
companies. Small- and mid-capitalization companies also may be particularly
sensitive to changes in interest rates, government regulation, borrowing costs,
and earnings.
Tracking
Stocks —
The
Funds may invest in tracking stocks. A tracking stock is a separate class of
common stock whose value is linked to a specific business unit or operating
division within a larger company and which is designed to “track” the
performance of such business unit or division. The tracking stock may pay
dividends to shareholders independent of the parent company. The parent company,
rather than the business unit or division, generally is the issuer of tracking
stock. However, holders of the tracking stock may not have the same rights as
holders of the company’s common stock.
Exchange-Traded
Funds (“ETFs”). The
Funds may invest in shares of other investment companies (including ETFs). As
the shareholder of another ETF, a Fund would bear, along with other
shareholders, its pro rata portion of the other ETF’s expenses,
including advisory fees. Such expenses are in addition to the expenses each Fund
pays in connection with its own operations. A Fund’s investments in other ETFs
may be limited by applicable law.
Disruptions
in the markets for the securities underlying ETFs purchased or sold by a Fund
could result in losses on investments in ETFs. ETFs also carry the risk that the
price a Fund pays or receives may be higher or lower than the ETF’s NAV. ETFs
are also subject to certain additional risks, including the risks of illiquidity
and of possible trading halts due to market conditions or other reasons, based
on the policies of the relevant exchange. ETFs and other investment companies in
which a Fund may invest may be leveraged, which would increase the volatility of
a Fund’s NAV.
Fixed
Income Securities. A
Fund may invest directly or indirectly in fixed income securities. Even though
interest-bearing securities are investments that promise a stable stream of
income, the prices of such securities are affected by changes in interest rates.
In general, fixed income security prices rise when interest rates fall and fall
when interest rates rise. Securities with shorter maturities, while offering
lower yields, generally provide greater price stability than longer term
securities and are less affected by changes in interest rates. The values
of fixed income securities also may be affected by changes in the credit rating
or financial condition of the issuing entities. Once the rating of a portfolio
security has been changed, a Fund will consider all circumstances deemed
relevant in determining whether to continue to hold the security.
Fixed
income investments bear certain risks, including credit risk, or the ability of
an issuer to pay interest and principal as they become due. Generally, higher
yielding bonds are subject to more credit risk than lower yielding bonds.
Interest rate risk refers to the fluctuations in value of fixed income
securities resulting from the inverse relationship between the market value of
outstanding fixed income securities and changes in interest rates. An increase
in interest rates will generally reduce the market value of fixed income
investments and a decline in interest rates will tend to increase their
value.
Call
risk is the risk that an issuer will pay principal on an obligation earlier than
scheduled or expected, which would accelerate cash flows from, and shorten the
average life of, the security. Bonds are typically called when interest rates
have declined. In the event of a bond being called, the Adviser may have to
reinvest the proceeds in lower yielding securities to the detriment of a
Fund.
Extension
risk is the risk that an issuer may pay principal on an obligation slower than
expected, having the effect of extending the average life and duration of the
obligation. This typically happens when interest rates have
increased.
A
number of factors, including changes in a central bank’s monetary policies or
general improvements in the economy, may cause interest rates to rise. Fixed
income securities with longer durations are more sensitive to interest rate
changes than securities with shorter durations, making them more volatile. This
means their prices are more likely to experience a considerable reduction in
response to a rise in interest rates.
When
investing in fixed income securities, a Fund may purchase securities regardless
of their rating, including fixed income securities rated below investment grade
-securities rated below investment grade are often referred to as high yield
securities or “junk bonds”. High yield securities or “junk bonds,” involve
special risks in addition to the risks associated with investments in higher
rated fixed income securities. While offering a greater potential opportunity
for capital appreciation and higher yields, high yield securities may be subject
to greater levels of interest rate, credit and liquidity risk, may entail
greater potential price volatility, and may be less liquid than higher rated
fixed income securities. High yield securities may be regarded as predominantly
speculative with respect to the issuer’s continuing ability to meet principal
and interest payments. They may also be more susceptible to real or perceived
adverse economic and competitive industry conditions than higher rated
securities. Fixed income securities rated in the lowest investment grade
categories by the rating agencies may also possess speculative characteristics.
If securities are in default with respect to the payment of interest or the
repayment of principal, or present an imminent risk of default with respect to
such payments, the issuer of such securities may fail to resume principal or
interest payments, in which case a Fund may lose its entire investment in the
high yield security. In addition, to the extent that there is no established
retail secondary market, there may be thin trading of high yield securities, and
this may have an impact on a Fund’s ability to accurately value high yield
securities and a Fund’s assets and on a Fund’s ability to dispose of the
securities. Adverse publicity and investor perception, whether or not based on
fundamental analysis, may decrease the values and liquidity of high yield
securities especially in a thinly traded market.
Fixed-Income
Securities Ratings. The
nationally recognized statistical rating organizations (“NRSROs”) publish
ratings based upon their assessment of the relative creditworthiness of the
rated fixed-income securities. Generally, a lower rating indicates higher credit
risk, and higher yields are ordinarily available from fixed-income securities in
the lower rating categories to compensate investors for the increased credit
risk. Any use of credit ratings in evaluating fixed-income securities can
involve certain risks. For example, ratings assigned by the rating agencies are
based upon an analysis completed at the time of the rating of the obligor’s
ability to pay interest and repay principal, typically relying to a large extent
on historical data. Rating agencies typically rely to a large extent on
historical data which may not accurately represent present or future
circumstances. Ratings do not purport to reflect to risk of fluctuations in
market value of the fixed-income security and are not absolute standards of
quality and only express the rating agency’s current opinion of an obligor’s
overall financial capacity to pay its financial obligations. A credit rating is
not a statement of fact or a recommendation to purchase, sell or hold a
fixed-income obligation. Also, credit quality can change suddenly and
unexpectedly, and credit ratings may not reflect the issuer’s current financial
condition or events since the security was last rated. Rating agencies may have
a financial interest in generating business, including the arranger or issuer of
the security that normally pays for that rating, and a low rating might affect
future business. While rating agencies have policies and procedures to address
this potential conflict of interest, there is a risk that these policies will
fail to prevent a conflict of interest from impacting the rating. Additionally,
legislation has been enacted in an effort to reform rating agencies. Rules have
also been adopted by the SEC to require rating agencies to provide
additional
disclosure and reduce conflicts of interest, and further reform has been
proposed. It is uncertain how such legislation or additional regulation might
impact the ratings agencies business and the Adviser’s investment
process.
Illiquid
Investments. Each
Fund may invest up to an aggregate amount of 15% of its net assets in illiquid
investments, as such term is defined by Rule 22e-4 under the 1940 Act. A Fund
may not invest in illiquid investments if, as a result of such investment, more
than 15% of the Fund’s net assets would be invested in illiquid investments.
Illiquid investments include securities subject to contractual or other
restrictions on resale and other instruments that lack readily available
markets. The inability of a Fund to dispose of illiquid investments readily or
at a reasonable price could impair a Fund’s ability to raise cash for
redemptions or other purposes. The liquidity of securities purchased by a Fund
that are eligible for resale pursuant to Rule 144A, except for certain 144A
bonds, will be monitored by a Fund on an ongoing basis. In the event that more
than 15% of a Fund’s net assets are invested in illiquid investments, the Fund,
in accordance with Rule 22e-4(b)(1)(iv), will report the occurrence to both the
Board and the SEC and seek to reduce its holdings of illiquid investments within
a reasonable period of time.
Investment
Company Securities.
The Funds may invest in the securities of other investment companies, including
ETFs and money market funds, subject to applicable limitations under
Section 12(d)(1) of the 1940 Act and Rule 12d1-4 under the 1940 Act.
Investing in another pooled vehicle exposes a Fund to all the risks of that
pooled vehicle. Pursuant to Section 12(d)(1), a Fund may invest in the
securities of another investment company (the “acquired company”) provided that
such Fund, immediately after such purchase or acquisition, does not own in the
aggregate: (i) more than 3% of the total outstanding voting stock of the
acquired company; (ii) securities issued by the acquired company having an
aggregate value in excess of 5% of the value of the total assets of such Fund;
or (iii) securities issued by the acquired company and all other investment
companies (other than treasury stock of such Fund) having an aggregate value in
excess of 10% of the value of the total assets of the applicable Fund. To the
extent allowed by law or regulation, the Funds may invest their assets in
securities of investment companies that are money market funds in excess of the
limits discussed above.
The
Funds may rely on Section 12(d)(1)(F) and Rule 12d1-3 under the 1940 Act, which
provide an exemption from Section 12(d)(1) that allow the Funds to invest all of
its assets in other registered funds, including ETFs, if, among other
conditions: (a) a Fund, together with its affiliates, acquires no more than
three percent of the outstanding voting stock of any acquired fund, and (b) the
sales load charged on a Fund’s Shares is no greater than the limits set forth in
Rule 2341 of the Rules of the Financial Industry Regulatory Authority, Inc.
(“FINRA”). In addition, the Funds may invest beyond the limits of Section
12(d)(1) subject to certain terms and conditions set forth in Rule 12d1-4 under
the 1940 Act, including that the Funds enter into an agreement with the acquired
company.
If
a Fund invests in and, thus, is a shareholder of, another investment company,
the Fund’s shareholders will indirectly bear the Fund’s proportionate share of
the fees and expenses paid by such other investment company, including advisory
fees, in addition to both the management fees payable directly by the Fund to
the Fund’s own investment adviser and the other expenses that the Fund bears
directly in connection with the Fund’s own operations.
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies (“Investing Funds”) in the securities of other registered investment
companies, including the Funds. The acquisition of Shares by Investing Funds is
subject to the restrictions of Section 12(d)(1) of the 1940 Act, except as may
be permitted by exemptive rules under the 1940 Act such as Rule 12d1-4 under the
1940 Act, subject to certain terms and conditions, including that the Investing
Fund enter into an agreement with the Funds regarding the terms of the
investment.
Investing
Funds are not permitted to invest in DRSK and IDUB beyond the limits set forth
in Section 12(d)(1) in reliance on Rule 12d1-4 because each of these Funds
operate as a fund of funds and/or invests a significant portion of its assets in
other investment companies. Thus, DRSK and IDUB are unable to satisfy the terms
and conditions of Rule 12d1-4. Accordingly, Investing Funds must adhere to the
limits set forth in Section 12(d)(1) when investing in DRSK and IDUB.
Limited
Partnerships and Master Limited Partnerships (OSCV
only).
The
Fund
may invest in publicly traded limited partnerships and Master Limited
Partnerships (“MLPs”). MLPs are businesses organized as limited partnerships
that trade their proportionate shares of the partnership (units) on a public
exchange. MLPs are required to pay out most or all of their earnings in
distributions. Generally speaking, MLP investment returns are enhanced during
periods of declining or low interest rates and tend to be negatively influenced
when interest rates are rising. As an income vehicle, the unit price may be
influenced by general interest rate trends independent of specific underlying
fundamentals. In addition, most MLPs are fairly leveraged and typically carry a
portion of “floating” rate debt. As such, a significant upward swing in interest
rates would 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.
Limited
partners (like a fund that invests in an MLP) are not involved in the day-to-day
management of the partnership. They are allocated income and capital gains
associated with the partnership project in accordance with the terms established
in the partnership agreement. The risks of investing in an MLP are generally
those inherent in investing in a partnership as opposed to a corporation. For
example, state law governing partnerships is often less restrictive than state
law governing corporations. Accordingly, there may be fewer protections afforded
investors in an MLP than investors in a corporation. Additional risks involved
with investing in an MLP are risks associated with the specific industry or
industries in which the partnership invests, such as the risks of investing in
real estate, or oil and gas industries.
MLPs
are generally treated as partnerships for U.S. federal income tax purposes. When
a Fund invests in the equity securities of an MLP or any other entity that is
treated as a partnership for U.S. federal income tax purposes, a Fund will be
treated as a partner in the entity for tax purposes. Accordingly, in calculating
a Fund’s taxable income, it will be required to take into account its allocable
share of the income, gains, losses, deductions, and credits recognized by each
such entity, regardless of whether the entity distributes cash to a Fund.
Distributions from such an entity to a Fund is not generally taxable unless the
cash amount (or, in certain cases, the fair market value of marketable
securities) distributed to a Fund exceeds a Fund’s adjusted tax basis in its
interest in the entity. In general, the Fund’s allocable share of such an
entity’s net income will increase a Fund’s adjusted tax basis in its interest in
the entity, and distributions to the Funds from such an entity and the Funds’
allocable share of the entity’s net losses will decrease the Funds’ adjusted
basis in its interest in the entity, but not below zero. A Fund may receive cash
distributions from such an entity in excess of the net amount of taxable income
a Fund is allocated from its investment in the entity. In other circumstances,
the net amount of taxable income a Fund is allocated from its investment in such
an entity may exceed cash distributions received from the entity. Thus, a Fund’s
investments in such an entity may lead a Fund to make distributions in excess of
its earnings and profits, or a Fund may be required to sell investments,
including when not otherwise advantageous to do so, to satisfy the distribution
requirements applicable to RICs under the Code.
Depreciation
or other cost recovery deductions passed through to a Fund from any investments
in MLPs in a given year will generally reduce a Fund’s taxable income, but those
deductions may be recaptured in a Fund’s income in one or more subsequent years.
When recognized and distributed, recapture income will generally be taxable to a
Fund’s shareholders at the time of the distribution at ordinary income tax
rates, even though those shareholders might not have held Shares in a Fund at
the time the deductions were taken, and even though those shareholders may not
have corresponding economic gain on their Shares at the time of the recapture.
To distribute recapture income or to fund redemption requests, a Fund may need
to liquidate investments, which may lead to additional taxable
income.
Money
Market Instruments. Each
Fund may invest a portion of its assets in high-quality money market instruments
on an ongoing basis to provide liquidity or for other reasons. The instruments
in which a Fund may invest include: (i) short-term obligations issued by
the U.S. Government; (ii) negotiable certificates of deposit (“CDs”), fixed
time deposits and bankers’ acceptances of U.S. and foreign banks and similar
institutions; (iii) commercial paper rated at the date of purchase
“Prime-1” by Moody’s or “A-1+” or “A-1” by S&P or, if unrated, of comparable
quality as determined by the Fund; and (iv) repurchase agreements. CDs are
short-term negotiable obligations of commercial banks. Time deposits are
non-negotiable deposits maintained in banking institutions for specified periods
of time at stated interest rates. Banker’s acceptances are time drafts drawn on
commercial banks by borrowers, usually in connection with international
transactions.
Mortgage-Backed
and Asset-Backed Securities (DRSK
and JUCY only).
Mortgage-backed
securities are mortgage-related securities issued or guaranteed by the U.S.
government, its agencies and instrumentalities, or issued by nongovernment
entities. Mortgage-related securities represent ownership in pools of mortgage
loans assembled for sale to investors by various government agencies such as the
Government National Mortgage Association (GNMA) and government-related
organizations such as the Federal National Mortgage Association (FNMA) and the
Federal Home Loan Mortgage Corporation (FHLMC), as well as by nongovernment
issuers such as commercial banks, savings and loan institutions, mortgage
bankers and private mortgage insurance companies. Although certain
mortgage-related securities are guaranteed by a third party or otherwise
similarly secured, the market value of the security, which may fluctuate, is not
so secured. These securities differ from conventional bonds in that the
principal is paid back to the investor as payments are made on the underlying
mortgages in the pool. Accordingly, the investing fund receives monthly
scheduled payments of principal and interest along with any unscheduled
principal prepayments on the underlying mortgages. Because these scheduled and
unscheduled principal payments must be reinvested at prevailing interest rates,
mortgage-backed securities do not provide an effective means of locking in
long-term interest rates for the investor.
In
addition, there are a number of important differences among the agencies and
instrumentalities of the U.S. government that issue mortgage-related securities
and among the securities they issue. Mortgage-related securities issued by GNMA
include GNMA Mortgage Pass-Through Certificates (also known as Ginnie Maes)
which are guaranteed as to the timely payment of principal and interest. That
guarantee is backed by the full faith and credit of the U.S. Treasury. GNMA is a
corporation wholly owned by the U.S. government within the Department of Housing
and Urban Development. Mortgage-related securities issued by FNMA include FNMA
Guaranteed Mortgage Pass-Through Certificates (also known as Fannie Maes) and
are guaranteed as to payment of principal and interest by FNMA itself and backed
by a line of credit with the U.S. Treasury. FNMA is a government-sponsored
entity wholly owned by public stockholders. Mortgage-related securities issued
by FHLMC include FHLMC Mortgage Participation Certificates (also known as
Freddie Macs) guaranteed as to payment of principal and interest by FHLMC itself
and backed by a line of credit with the U.S. Treasury. FHLMC is a
government-sponsored entity wholly owned by public stockholders.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and
meet
their financial obligations, preventing mandatory triggering of receivership. On
December 24, 2009, the U.S. Treasury announced that it was amending the
Agreement to allow the $200 billion cap on the U.S. Treasury’s funding
commitment to increase as necessary to accommodate any cumulative reduction in
net worth over the next three years. As a result of this Agreement, the
investments of holders, including the Fund, of mortgage-backed securities and
other obligations issued by Fannie Mae and Freddie Mac are
protected.
Asset-backed
securities are structured like mortgage-backed securities, but instead of
mortgage loans or interests in mortgage loans, the underlying assets may include
such items as motor vehicle installment sales contracts or installment loan
contracts, leases of various types of real and personal property, and
receivables from credit card agreements and from sales of personal property.
Regular payments received on asset-backed securities include both interest and
principal. Asset-backed securities typically have no U.S. government backing.
Additionally, the ability of an issuer of asset-backed securities to enforce its
security interest in the underlying assets may be limited.
If
the investing ETF purchases a mortgage-backed or other asset-backed security at
a premium, the premium may be lost if there is a decline in the market value of
the security whether resulting from changes in interest rates or prepayments in
the underlying collateral. As with other interest-bearing securities, the prices
of such securities are inversely affected by changes in interest rates. Although
the value of a mortgage-backed or other asset-backed security may decline when
interest rates rise, the converse is not necessarily true, since in periods of
declining interest rates the mortgages and loans underlying the securities are
prone to prepayment, thereby shortening the average life of the security and
shortening the period of time over which income at the higher rate is received.
When interest rates are rising, the rate of prepayment tends to decrease,
thereby lengthening the period of time over which income at the lower rate is
received. For these and other reasons, a mortgage-backed or other asset-backed
security’s average maturity may be shortened or lengthened as a result of
interest rate fluctuations and, therefore, it is not possible to predict
accurately the security’s return. In addition, while the trading market for
short-term mortgages and asset-backed securities is ordinarily quite liquid, in
times of financial stress the trading market for these securities may become
restricted.
Non-U.S.
Securities. Investments
in non-U.S. securities involve certain risks that may not be present in
investments in U.S. securities. For example, non-U.S. securities may be subject
to currency risks or to political or economic instability. There may be less
information publicly available about a non-U.S. issuer than about a U.S. issuer,
and a foreign issuer may or may not be subject to uniform accounting, auditing
and financial reporting standards and practices comparable to those in the U.S.
Investments in non-U.S. securities may be subject to withholding or other taxes
and may be subject to additional trading, settlement, custodial, and operational
risks. Other risks of investing in such securities include political or economic
instability in the country involved, the difficulty of predicting international
trade patterns and the possibility of imposition of exchange controls. The
prices of such securities may be more volatile than those of domestic
securities. With respect to certain foreign countries, there is a possibility of
expropriation of assets or nationalization, imposition of withholding taxes on
dividend or interest payments, difficulty in obtaining and enforcing judgments
against foreign entities or diplomatic developments which could affect
investment in these countries. Losses and other expenses may be incurred in
converting between various currencies in connection with purchases and sales of
foreign securities. Since foreign exchanges may be open on days when the Fund
does not price its Shares, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell
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.
Non-U.S.
stock markets may not be as developed or efficient as, and may be more volatile
than, those in the U.S. While the volume of shares traded on non-U.S. stock
markets generally has been growing, such markets usually have substantially less
volume than U.S. markets. Therefore, the Fund’s investment in non-U.S. equity
securities may be less liquid and subject to more rapid and erratic price
movements than comparable securities listed for trading on U.S. exchanges.
Non-U.S. equity securities may trade at price/earnings multiples higher than
comparable U.S. securities and such levels may not be sustainable. There may be
less government supervision and regulation of foreign stock exchanges, brokers,
banks and listed companies abroad than in the U.S. Moreover, settlement
practices for transactions in foreign markets may differ from those in U.S.
markets. Such differences may include delays beyond periods customary in the
U.S. and practices, such as delivery of securities prior to receipt of payment,
that increase the likelihood of a failed settlement, which can result in losses
to the Fund. The value of non-U.S. investments and the investment income derived
from them may also be affected unfavorably by changes in currency exchange
control regulations. Foreign brokerage commissions, custodial expenses and other
fees are also generally higher than for securities traded in the U.S. This may
cause the Fund to incur higher portfolio transaction costs than domestic equity
funds. Fluctuations in exchange rates may also affect the earning power and
asset value of the foreign entity issuing a security, even one denominated in
U.S. dollars. Dividend and interest payments may be repatriated based on the
exchange rate at the time of disbursement, and restrictions on capital flows may
be imposed.
Set
forth below for certain markets in which the Fund may invest are brief
descriptions of some of the conditions and risks in each such market.
•Investments
in Developed Markets Securities. Investments
in developed country issuers may subject the Fund to regulatory, political,
currency, security, economic, and other risks associated with developed
countries. Developed countries tend to represent a significant portion of the
global economy and have generally experienced slower economic growth than some
less developed countries. Certain developed countries have experienced security
concerns, such as terrorism and strained
international
relations. Incidents involving a country’s or region’s security may cause
uncertainty in its markets and may adversely affect its economy and the Fund’s
investments. In addition, developed countries may be adversely impacted by
changes to the economic conditions of certain key trading partners, regulatory
burdens, debt burdens, and the price or availability of certain
commodities.
•Investments
in Emerging Markets Securities.
Investments in securities listed and traded in emerging markets are subject to
additional risks that may not be present for U.S. investments or investments in
more developed non-U.S. markets. Such risks may include: (i) greater market
volatility; (ii) lower trading volume; (iii) greater social, political and
economic uncertainty; (iv) governmental controls on foreign investments and
limitations on repatriation of invested capital; (v) the risk that companies may
be held to lower disclosure, corporate governance, auditing and financial
reporting standards than companies in more developed markets; and (vi) the risk
that there may be less protection of property rights than in other countries.
Emerging markets are generally less liquid and less efficient than developed
securities markets.
•Investments
in Certain Asian Emerging Market Countries. Many
Asian economies are characterized by over-extension of credit, frequent currency
fluctuation, devaluations and restrictions, rising unemployment, rapid
fluctuations in inflation, reliance on exports and less efficient markets.
Currency devaluation in one Asian country can have a significant effect on the
entire region. The legal systems in many Asian countries are still developing,
making it more difficult to obtain and/or enforce judgments.
Furthermore,
increased political and social unrest in some Asian countries could cause
economic and market uncertainty throughout the region. The auditing and
reporting standards in some Asian emerging market countries may not provide the
same degree of shareholder protection or information to investors as those in
developed countries. In particular, valuation of assets, depreciation, exchange
differences, deferred taxation, contingent liability and consolidation may be
treated differently than under the auditing and reporting standards of developed
countries.
Certain
Asian emerging market countries are undergoing a period of growth and change
which may result in trading volatility and difficulties in the settlement and
recording of securities transactions, and in interpreting and applying the
relevant law and regulations. The securities industries in these countries are
comparatively underdeveloped. Stockbrokers and other intermediaries in Asian
emerging market countries may not perform as well as their counterparts in the
United States and other more developed securities markets. Certain Asian
emerging market countries may require substantial withholding on dividends paid
on portfolio securities and on realized capital gains. There can be no assurance
that repatriation of a fund’s income, gains, or initial capital from these
countries can occur.
•Investments
in China and Hong Kong. Investing
in other investment companies with underlying shares organized, listed or
domiciled in China involves special considerations not typically associated with
investing in countries with more democratic governments or more established
economies or securities markets. Such risks may include: (i) the risk of
nationalization or expropriation of assets or confiscatory taxation;
(ii) greater social, economic and political uncertainty (including the risk
of war); (iii) dependency on exports and the corresponding importance of
international trade; (iv) increasing competition from Asia’s other low-cost
emerging economies; (v) higher rates of inflation; (vi) controls on
foreign investment and limitations on repatriation of invested capital;
(vii) greater governmental involvement in and control over the economy;
(viii) the risk that the Chinese government may decide not to continue to
support the economic reform programs implemented since 1978 and could return to
the prior, completely centrally planned, economy; (ix) the fact that
Chinese companies, particularly those located in China, may be smaller, less
seasoned and newly organized; (x) the differences in, or lack of, auditing
and financial reporting standards which may result in unavailability of material
information about issuers, particularly in China where, for example, the Public
Company Accounting Oversight Board (“PCAOB”) lacks access to inspect
PCAOB-registered accounting firms; (xi) the fact that statistical
information regarding the economy of China may be inaccurate or not comparable
to statistical information regarding the U.S. or other economies; (xii) the
less extensive, and still developing, regulation of the securities markets,
business entities and commercial transactions; (xiii) the fact that the
settlement period of securities transactions in foreign markets may be longer;
(xiv) the fact that the willingness and ability of the Chinese government
to support the Chinese and Hong Kong economies and markets is uncertain;
(xv) the risk that it may be more difficult, or impossible, to obtain
and/or enforce a judgment than in other countries; (xvi) the rapid and
erratic nature of growth, particularly in China, resulting in inefficiencies and
dislocations; (xvii) the risk that, because of the degree of
interconnectivity between the economies and financial markets of China and Hong
Kong, any sizable reduction in the demand for goods from China, or an economic
downturn in China, could negatively affect the economy and financial market of
Hong Kong as well; and (xviii) the risk that certain companies in the
Fund’s Index may have dealings with countries subject to sanctions or embargoes
imposed by the U.S. Government or identified as state sponsors of terrorism.
China
is also vulnerable economically to the impact of a public health crisis, which
could depress consumer demand, reduce economic output, and potentially lead to
market closures, travel restrictions, and quarantines, all of which would
negatively impact China’s economy and could affect the economies of its trading
partners.
After
many years of steady growth, the growth rate of China’s economy had slowed prior
to 2020. Although this slowdown was to some degree intentional, the slowdown
also slowed the once rapidly growing Chinese real estate market and left local
governments
with high debts with few viable means to raise revenue, especially with the fall
in demand for housing. In the first quarter of 2021, however, as China recovered
from the COVID-19 pandemic, these trends reversed as China’s economy grew over
18% on a year-over-year basis and demand grew within the Chinese real estate
market. It remains unclear though whether these trends will continue given
global economic uncertainties caused by the pandemic and trade relations and
fears that the Chinese real estate market may be overheating.
Investments
in Hong Kong are also subject to certain political risks not associated with
other investments. Following the establishment of the People’s Republic of China
by the Communist Party in 1949, the Chinese government renounced various debt
obligations incurred by China’s predecessor governments, which obligations
remain in default, and expropriated assets without compensation. There can be no
assurance that the Chinese government will not take similar action in the
future. Investments in China and Hong Kong involve risk of a total loss due to
government action or inaction. China has committed by treaty to preserve Hong
Kong’s autonomy and its economic, political and social freedoms for 50 years
from the July 1, 1997 transfer of sovereignty from Great Britain to China.
However, if China would exert its authority so as to alter the economic,
political or legal structures or the existing social policy of Hong Kong,
investor and business confidence in Hong Kong could be negatively affected,
which in turn could negatively affect markets and business performance. In
addition, the Hong Kong dollar trades at a fixed exchange rate in relation to
(or, is “pegged” to) the U.S. dollar, which has contributed to the growth and
stability of the Hong Kong economy. However, it is uncertain how long the
currency peg will continue or what effect the establishment of an alternative
exchange rate system would have on the Hong Kong economy. Because the Fund’s NAV
is denominated in U.S. dollars, the establishment of an alternative exchange
rate system could result in a decline in the Fund’s NAV. These and other factors
could have a negative impact on the Fund’s performance.
•Investments
in Europe.
Most developed countries in Western Europe are members of the European Union
(“EU”), and many are also members of the European Monetary Union (EMU), which
requires compliance with restrictions on inflation rates, deficits, and debt
levels. Unemployment in certain European nations is historically high and
several countries face significant debt problems. These conditions can
significantly affect every country in Europe. The euro is the official currency
of the EU. The Fund, through its investments in Europe, may have significant
exposure to the euro and events affecting the euro. Recent market events
affecting several of the EU member countries have adversely affected the
sovereign debt issued by those countries, and ultimately may lead to a decline
in the value of the euro. A significant decline in the value of the euro may
produce unpredictable effects on trade and commerce generally and could lead to
increased volatility in financial markets worldwide.
The
UK formally exited from the EU on January 31, 2020 (known as “Brexit”), and
effective December 31, 2020, the UK ended a transition period during which it
continued to abide by the EU’s rules and the UK’s trade relationships with the
EU were generally unchanged. During this period and beyond, the impact on the UK
and European economies and the broader global economy could be significant,
resulting in negative impacts, such as increased volatility and illiquidity,
potentially lower economic growth on markets in the UK, Europe, and globally,
and changes in legal and regulatory regimes to which certain Fund assets are or
become subject, any of which may adversely affect the value of Fund investments.
The
effects of Brexit will depend, in part, on agreements the UK negotiates to
retain access to EU markets, including, but not limited to, current trade and
finance agreements. Brexit could lead to legal and tax uncertainty and
potentially divergent national laws and regulations, as the UK determines which
EU laws to replace or replicate. The extent of the impact of the withdrawal
negotiations in the UK and in global markets, as well as any associated adverse
consequences, remain unclear, and the uncertainty may have a significant
negative effect on the value of a Fund’s investments. If one or more other
countries were to exit the EU or abandon the use of the euro as a currency, the
value of investments tied to those countries or the euro could decline
significantly and unpredictably.
Russia’s
large-scale invasion of Ukraine on February 24, 2022 has led to various
countries imposing economic sanctions on certain Russian individuals and Russian
corporate and banking entities. A number of jurisdictions have also instituted
broader sanctions on Russia, including banning Russia from global payments
systems that facilitate cross-border payments. In response, the government of
Russia has imposed capital controls to restrict movements of capital entering
and exiting the country. As a result, the value and liquidity of Russian
securities and the Russian currency have experienced significant declines.
Further, as of August 1, 2023, the Russian securities markets effectively have
been closed for trading by most foreign investors since February 28, 2022.
Russia’s
military incursion and resulting sanctions could have a severe adverse effect on
the region’s economies and more globally, including significant negative impacts
on the financial markets for certain securities and commodities and could affect
the value of a Fund’s investments. Eastern European markets are particularly
sensitive to social, political, economic, and currency events in Russia and may
suffer heavy losses as a result of their trading and investment links to the
Russian economy and currency. Changes in regulations on trade, decreasing
imports or exports, changes in the exchange rate of the euro, a significant
influx of refugees, and recessions among European countries may have a
significant adverse effect on the economies of other European countries
including those of Eastern Europe.
Other
Short-Term Instruments.
The Funds may invest in short-term instruments, including money market
instruments, on an ongoing basis to provide liquidity or for other reasons.
Money market instruments are generally short-term investments that may include
but are not limited to: (i) shares of money market funds;
(ii) obligations issued or guaranteed by the U.S. government, its agencies
or instrumentalities (including government-sponsored enterprises);
(iii) negotiable certificates of deposit (“CDs”), bankers’ acceptances,
fixed time deposits and other obligations of U.S. and foreign banks (including
foreign branches) and similar institutions; (iv) commercial paper rated at
the date of purchase “Prime-1” by Moody’s or “A‑1” by S&P or, if unrated, of
comparable quality as determined by the Adviser; (v) non-convertible
corporate debt securities (e.g.,
bonds and debentures) with remaining maturities at the date of purchase of not
more than 397 days and that satisfy the rating requirements set forth in Rule
2a-7 under the 1940 Act; and (vi) short-term U.S. dollar-denominated
obligations of foreign banks (including U.S. branches) that, in the opinion of
the Adviser, are of comparable quality to obligations of U.S. banks which may be
purchased by a Fund. Any of these instruments may be purchased on a current or a
forward-settled basis. Money market instruments also include shares of money
market funds. Time deposits are non-negotiable deposits maintained in
banking institutions for specified periods of time at stated interest rates.
Bankers’ acceptances are time drafts drawn on commercial banks by borrowers,
usually in connection with international transactions.
Repurchase
Agreements.
Each Fund may invest in repurchase agreements to generate income from its excess
cash balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which a Fund acquires a financial instrument
(e.g.,
a security issued by the U.S. government or an agency thereof, a banker’s
acceptance or a certificate of deposit) from a seller, subject to resale to the
seller at an agreed upon price and date (normally, the next Business Day). A
repurchase agreement may be considered a loan collateralized by securities. The
resale price reflects an agreed upon interest rate effective for the period the
instrument is held by the applicable Fund and is unrelated to the interest rate
on the underlying instrument.
In
these repurchase agreement transactions, the securities acquired by a Fund
(including accrued interest earned thereon) must have a total value in excess of
the value of the repurchase agreement and are held by the Custodian until
repurchased. No more than an aggregate of 15% of a Fund’s net assets will be
invested in illiquid investments, including repurchase agreements having
maturities longer than seven days and securities subject to legal or contractual
restrictions on resale, or for which there are no readily available market
quotations.
The
use of repurchase agreements involves certain risks. For example, if the other
party to the agreement defaults on its obligation to repurchase the underlying
security at a time when the value of the security has declined, a Fund may incur
a loss upon disposition of the security. If the other party to the agreement
becomes insolvent and subject to liquidation or reorganization under the U.S.
Bankruptcy Code or other laws, a court may determine that the underlying
security is collateral for a loan by a Fund not within the control of the Fund
and, therefore, the Fund may not be able to substantiate its interest in the
underlying security and may be deemed an unsecured creditor of the other party
to the agreement.
Securities
Lending. Each
Fund may lend portfolio securities in an amount up to one-third of its total
assets to brokers, dealers and other financial institutions. In a portfolio
securities lending transaction, a Fund receives from the borrower an amount
equal to the interest paid or the dividends declared on the loaned securities
during the term of the loan as well as the interest on the collateral
securities, less any fees (such as finders or administrative fees) the Fund pays
in arranging the loan. A Fund may share the interest it receives on the
collateral securities with the borrower. The terms of each Fund’s loans permit
each Fund to reacquire loaned securities on five business days’ notice or in
time to vote on any important matter. Loans are subject to termination at the
option of the applicable Fund or borrower at any time, and the borrowed
securities must be returned when the loan is terminated. The Funds may pay fees
to arrange for securities loans.
The
SEC currently requires that the following conditions must be met whenever a
Fund’s portfolio securities are loaned: (1) the Fund must receive at least 100%
cash collateral from the borrower; (2) the borrower must increase such
collateral whenever the market value of the securities rises above the level of
such collateral; (3) the Fund must be able to terminate the loan at any time;
(4) the Fund must receive reasonable interest on the loan, as well as any
dividends, interest or other distributions on the loaned securities, and any
increase in market value; (5) the Fund may pay only reasonable custodian fees
approved by the Board in connection with the loan; (6) while voting rights
on the loaned securities may pass to the borrower, the Board must terminate the
loan and regain the right to vote the securities if a material event adversely
affecting the investment occurs; and (7) the Fund may not loan its portfolio
securities so that the value of the loaned securities is more than one-third of
its total asset value, including collateral received from such loans. These
conditions may be subject to future modification. Such loans will be terminable
at any time upon specified notice. A Fund might experience the risk of loss if
the institution with which it has engaged in a portfolio loan transaction
breaches its agreement with the Fund. In addition, the Funds will not enter into
any portfolio security lending arrangement having a duration of longer than one
year. The principal risk of portfolio lending is potential default or insolvency
of the borrower. In either of these cases, a Fund could experience delays in
recovering securities or collateral or could lose all or part of the value of
the loaned securities. As part of participating in a lending program, the
applicable Fund may be required to invest in collateralized debt or other
securities that bear the risk of loss of principal. In addition, all investments
made with the collateral received are subject to the risks associated with such
investments. If such investments lose value, a Fund will have to cover the loss
when repaying the collateral.
Any
loans of portfolio securities are fully collateralized based on values that are
marked-to-market daily. Any securities that a Fund may receive as collateral
will not become part of the Fund’s investment portfolio at the time of the loan
and, in the event of a default by the borrower, the Fund will, if permitted by
law, dispose of such collateral except for such part thereof that is a security
in which
the
Fund is permitted to invest. During the time securities are on loan, the
borrower will pay a Fund any accrued income on those securities, and the Fund
may invest the cash collateral and earn income or receive an agreed-upon fee
from a borrower that has delivered cash-equivalent collateral.
Tax
Risks. As
with any investment, you should consider how your investment in Shares will be
taxed. The tax information in the Prospectus and this SAI is provided as general
information. You should consult your own tax professional about the tax
consequences of an investment in Shares. Unless your investment in Shares is
made through a tax-exempt entity or tax-deferred retirement account, such as an
individual retirement account, you need to be aware of the possible tax
consequences when the Fund makes distributions or you sell Shares.
U.S.
Government Securities. Each
Fund may invest in U.S. government securities. Securities issued or guaranteed
by the U.S. government or its agencies or instrumentalities include U.S.
Treasury securities, which are backed by the full faith and credit of the U.S.
Treasury and which differ only in their interest rates, maturities, and times of
issuance. U.S. Treasury bills have initial maturities of one-year or less; U.S.
Treasury notes have initial maturities of one to ten years; and U.S. Treasury
bonds generally have initial maturities of greater than ten years. Certain U.S.
government securities are issued or guaranteed by agencies or instrumentalities
of the U.S. government including, but not limited to, obligations of U.S.
government agencies or instrumentalities such as the Federal National Mortgage
Association (“Fannie Mae”), the Government National Mortgage Association
(“Ginnie Mae”), the Small Business Administration, the Federal Farm Credit
Administration, the Federal Home Loan Banks, Banks for Cooperatives (including
the Central Bank for Cooperatives), the Federal Land Banks, the Federal
Intermediate Credit Banks, the Tennessee Valley Authority, the Export-Import
Bank of the United States, the Commodity Credit Corporation, the Federal
Financing Bank, the Student Loan Marketing Association, the National Credit
Union Administration and the Federal Agricultural Mortgage Corporation (“Farmer
Mac”).
Some
obligations issued or guaranteed by U.S. government agencies and
instrumentalities, including, for example, Ginnie Mae pass-through certificates,
are supported by the full faith and credit of the U.S. Treasury. Other
obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of
the U.S. government to purchase certain obligations of the federal agency, while
other obligations issued by or guaranteed by federal agencies, such as those of
the Federal Home Loan Banks, are supported by the right of the issuer to borrow
from the U.S. Treasury, while the U.S. government provides financial support to
such U.S. government-sponsored federal agencies, no assurance can be given that
the U.S. government will always do so, since the U.S. government is not so
obligated by law. U.S. Treasury notes and bonds typically pay coupon interest
semi-annually and repay the principal at maturity.
On
September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae
and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), placing the two
federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each
instrumentality and obtained warrants for the purchase of common stock of each
instrumentality (the “Senior Preferred Stock Purchase Agreement” or
“Agreement”). Under the Agreement, the U.S. Treasury pledged to provide up to
$200 billion per instrumentality as needed, including the contribution of cash
capital to the instrumentalities in the event their liabilities exceed their
assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory
triggering of receivership. On December 24, 2009, the U.S. Treasury
announced that it was amending the Agreement to allow the $200 billion cap on
the U.S. Treasury’s funding commitment to increase as necessary to accommodate
any cumulative reduction in net worth over the next three years. As a result of
this Agreement, the investments of holders, including the Funds, of
mortgage-backed securities and other obligations issued by Fannie Mae and
Freddie Mac are protected.
The
total public debt of the United States as a percentage of gross domestic product
has grown rapidly since the beginning of the 2008–2009 financial downturn.
Although high debt levels do not necessarily indicate or cause economic
problems, they may create certain systemic risks if sound debt management
practices are not implemented. A high national debt can raise concerns that the
U.S. government will not be able to make principal or interest payments when
they are due. This increase has also necessitated the need for the U.S. Congress
to negotiate adjustments to the statutory debt limit to increase the cap on the
amount the U.S. government is permitted to borrow to meet its existing
obligations and finance current budget deficits. In August 2011, S&P lowered
its long-term sovereign credit rating on the U.S. In explaining the downgrade at
that time, S&P cited, among other reasons, controversy over raising the
statutory debt limit and growth in public spending. An increase in national debt
levels may also necessitate the need for the U.S. Congress to negotiate
adjustments to the statutory debt ceiling to increase the cap on the amount the
U.S. Government is permitted to borrow to meet its existing obligations and
finance current budget deficits. Future downgrades could increase volatility in
domestic and foreign financial markets, result in higher interest rates, lower
prices of U.S. Treasury securities and increase the costs of different kinds of
debt. Any controversy or ongoing uncertainty regarding the statutory debt
ceiling negotiations may impact the U.S. long-term sovereign credit rating and
may cause market uncertainty. As a result, market prices and yields of
securities supported by the full faith and credit of the U.S. government may be
adversely affected.
Treasury
Inflation-Protected Securities. The
Funds may invest in underlying funds that invest in inflation-protected public
obligations, commonly known as “TIPS,” of the U.S. Treasury, as well as TIPS of
major governments and emerging market countries, excluding the United States.
TIPS are a type of security issued by a government that is designed to provide
inflation protection to investors. TIPS are income-generating instruments whose
interest and principal payments are adjusted for inflation—a sustained increase
in prices that erodes the purchasing power of money. The inflation adjustment,
which is typically applied monthly to the principal of the bond, follows a
designated inflation index, such as the Consumer Price Index. A fixed coupon
rate is applied to the inflation-adjusted principal so that as inflation rises
or falls, both the principal value and the interest payments will increase or
decrease. This can provide investors with a hedge against inflation, as it helps
preserve the purchasing power of an investment. Because of this inflation
adjustment feature, inflation-protected bonds typically have lower yields than
conventional fixed-rate bonds.
INVESTMENT
RESTRICTIONS
The
Trust has adopted the following investment restrictions as fundamental policies
with respect to the Funds. These restrictions cannot be changed with respect to
a Fund without the approval of the holders of a majority of the Fund’s
outstanding voting securities. For the purposes of the 1940 Act, a “majority of
outstanding shares” means the vote of the lesser of: (1) 67% or more of the
voting securities of the Fund present at the meeting if the holders of more than
50% of the Fund’s outstanding voting securities are present or represented by
proxy; or (2) more than 50% of the outstanding voting securities of the
Fund.
Except
with the approval of a majority of the outstanding voting securities, ADME may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries, except that the Fund will concentrate to approximately the same
extent that the Index concentrates in the securities of such particular industry
or group of related industries. For purposes of this limitation, securities of
the U.S. government (including its agencies and instrumentalities), repurchase
agreements collateralized by U.S. government securities, and tax-exempt
securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
7.With
respect to 75% of its total assets, purchase the securities of any one issuer
if, immediately after and as a result of such purchase, (a) the value of the
Fund’s holdings in the securities of such issuer exceeds 5% of the value of the
Fund’s total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of the issuer (with the exception that this restriction does
not apply to the Fund’s investments in the securities of the U.S. government, or
its agencies or instrumentalities, or other investment companies).
For
the purposes of ADME’s fundamental restriction #1, the Index is a reference to
the Fund’s underlying index prior to November 8, 2019, on which date the Fund
changed from being index-based to actively-managed. The Fund no longer tracks
the Index, and the Index no longer exists; as a result, the Fund will not
concentrate its investments to the extent of the Index.
Except
with the approval of a majority of the outstanding voting securities, DRSK may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), registered investment companies,
repurchase agreements collateralized by U.S. government securities, and
securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
7.With
respect to 75% of its total assets, purchase the securities of any one issuer
if, immediately after and as a result of such purchase, (a) the value of the
Fund’s holdings in the securities of such issuer exceeds 5% of the value of the
Fund’s total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of the issuer (with the exception that this restriction does
not apply to the Fund’s investments in the securities of the U.S. government, or
its agencies or instrumentalities, or other investment companies).
Except
with the approval of a majority of the outstanding voting securities, ACIO may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), registered investment companies,
repurchase agreements collateralized by U.S. government securities, and
securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
7.With
respect to 75% of its total assets, purchase the securities of any one issuer
if, immediately after and as a result of such purchase, (a) the value of the
Fund’s holdings in the securities of such issuer exceeds 5% of the value of the
Fund’s total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of the issuer (with the exception that this restriction does
not apply to the Fund’s investments in the securities of the U.S. government, or
its agencies or instrumentalities, or other investment companies).
Except
with the approval of a majority of the outstanding voting securities, OSCV may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities, and tax-exempt securities of state
or municipal governments and their political subdivisions are not considered to
be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
7.With
respect to 75% of its total assets, purchase the securities of any one issuer
if, immediately after and as a result of such purchase, (a) the value of the
Fund’s holdings in the securities of such issuer exceeds 5% of the value of the
Fund’s total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of the issuer (with the exception that this restriction does
not apply to the Fund’s investments in the securities of the U.S. government, or
its agencies or instrumentalities, or other investment companies).
Except
with the approval of a majority of the outstanding voting securities, IDUB may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), repurchase
agreements
collateralized by U.S. government securities, registered investment companies,
and securities of state or municipal governments and their political
subdivisions are not considered to be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
Except
with the approval of a majority of the outstanding voting securities, JUCY may
not:
1.Concentrate
its investments (i.e.,
hold more than 25% of its total assets) in any industry or group of related
industries. For purposes of this limitation, securities of the U.S. government
(including its agencies and instrumentalities), registered investment companies,
repurchase agreements collateralized by U.S. government securities, and
securities of state or municipal governments and their political subdivisions
are not considered to be issued by members of any industry.
2.Borrow
money or issue senior securities (as defined under the 1940 Act), except to the
extent permitted under the 1940 Act.
3.Make
loans, except to the extent permitted under the 1940 Act.
4.Purchase
or sell real estate unless acquired as a result of ownership of securities or
other instruments, except to the extent permitted under the 1940 Act. This shall
not prevent the Fund from investing in securities or other instruments backed by
real estate, real estate investment trusts or securities of companies engaged in
the real estate business.
5.Purchase
or sell physical commodities unless acquired as a result of ownership of
securities or other instruments, except to the extent permitted under the 1940
Act. This shall not prevent the Fund from purchasing or selling options and
futures contracts or from investing in securities or other instruments backed by
physical commodities.
6.Underwrite
securities issued by other persons, except to the extent permitted under the
1940 Act.
7.With
respect to 75% of its total assets, purchase the securities of any one issuer
if, immediately after and as a result of such purchase, (a) the value of the
Fund’s holdings in the securities of such issuer exceeds 5% of the value of the
Fund’s total assets, or (b) the Fund owns more than 10% of the outstanding
voting securities of the issuer (with the exception that this restriction does
not apply to the Fund’s investments in the securities of the U.S. government, or
its agencies or instrumentalities, or other investment companies).
In
addition to the investment restrictions adopted as fundamental policies as set
forth above, each Fund (unless otherwise indicated) observes the following
restrictions, which may be changed without a shareholder vote.
1.ADME
invests, under normal circumstances, at least 80% of its net assets (plus
borrowings for investment purposes) in equity securities.
2.OSCV
invests, under normal circumstances, at least 80% of its net assets (plus
borrowings for investment purposes) in stocks of small-capitalization companies.
The Fund defines small-capitalization companies as those that, at the time of
investment, fall within the lowest 15% of the total U.S. equity market
capitalization (excluding, for purposes of this calculation, companies with
market capitalizations of less than $10 million), as calculated
annually.
If
a percentage limitation is adhered to at the time of investment or contract, a
later increase or decrease in percentage resulting from any change in value or
total or net assets will not result in a violation of such restriction, except
that the percentage limitation with respect to the borrowing of money will be
observed continuously.
The
following descriptions of certain provisions of the 1940 Act may assist
investors in understanding the above policies and restrictions:
Concentration.
The
SEC has defined concentration as investing 25% or more of a Fund’s total assets
in an industry or group of industries, with certain exceptions.
Borrowing.
The 1940 Act presently allows a Fund to borrow from a bank (including pledging,
mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total
assets (not including temporary borrowings up to 5% of its total
assets).
Senior
Securities.
Senior securities may include any obligation or instrument issued by a Fund
evidencing indebtedness. The 1940 Act generally prohibits a fund from issuing
senior securities.
An
exemptive rule under the 1940 Act, however, permits a
fund
to enter into transactions that might otherwise be deemed to be senior
securities, such as derivative transactions, reverse repurchase agreements and
similar financing transactions, and short sales, subject to certain
conditions.
Lending.
Under the 1940 Act, a Fund may only make loans if expressly permitted by its
investment policies. The Funds’ current investment policy on lending is that a
Fund may not make loans if, as a result, more than 33 1/3% of its total assets
would be lent to other parties, except that a Fund may: (i) purchase or hold
debt instruments in accordance with its investment objective and policies; (ii)
enter into repurchase agreements; and (iii) engage in securities lending as
described in this SAI.
Real
Estate and Commodities.
The 1940 Act does not directly restrict a Fund’s ability to invest in real
estate or commodities, but the 1940 Act requires every investment company to
have a fundamental investment policy governing such investments.
Underwriting.
Under the 1940 Act, underwriting securities involves the Funds purchasing
securities directly from an issuer for the purpose of selling (distributing)
them or participating in any such activity either directly or
indirectly.
EXCHANGE
LISTING AND TRADING
Shares
are listed for trading and trade throughout the day on the Exchange.
There
can be no assurance that the Fund will continue to meet the requirements of the
Exchange necessary to maintain the listing of Shares. The Exchange will consider
the suspension of trading in, and will initiate delisting proceedings of, the
Shares if any of the requirements set forth in the Exchange rules, including
compliance with Rule 6c-11(c) under the 1940 Act, are not continuously
maintained or such other event shall occur or condition shall exist that,
in the opinion of the Exchange, makes further dealings on the Exchange
inadvisable. The Exchange will remove the Shares of the Fund from listing and
trading upon termination of the Fund.
The
Trust reserves the right to adjust the price levels of Shares in the future to
help maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the applicable Fund.
MANAGEMENT
OF THE TRUST
Board
Responsibilities.
The management and affairs of the Trust and its series are overseen by the
Board, which elects the officers of the Trust who are responsible for
administering the day-to-day operations of the Trust and the Funds. The Board
has approved contracts, as described below, under which certain companies
provide essential services to the Trust.
The
day-to-day business of the Trust, including the management of risk, is performed
by third-party service providers, such as the Adviser, the Distributor, and the
Administrator. The Board is responsible for overseeing the Trust’s service
providers and, thus, has oversight responsibility with respect to risk
management performed by those service providers. Risk management seeks to
identify and address risks, i.e.,
events or circumstances that could have material adverse effects on the
business, operations, shareholder services, investment performance or reputation
of a Fund. The Funds and their service providers employ a variety of processes,
procedures and controls to identify such events or circumstances, to lessen the
probability of their occurrence and/or to mitigate the effects of such events or
circumstances if they do occur. Each service provider is responsible for one or
more discrete aspects of the Trust’s business and, consequently, for managing
the risks associated with that business. The Board has emphasized to the Funds’
service providers the importance of maintaining vigorous risk management.
The
Board’s role in risk oversight begins before the inception of the Funds, at
which time certain of the Funds’ service providers present the Board with
information concerning the investment objectives, strategies, and risks of the
Funds as well as proposed investment limitations for the Funds. Additionally,
the Adviser provides the Board with an overview of, among other things, their
investment philosophy, brokerage practices, and compliance infrastructure.
Thereafter, the Board continues its oversight function as various personnel,
including the Trust’s Chief Compliance Officer, as well as personnel of the
Adviser, and other service providers such as the Funds’ independent registered
public accounting firm, make periodic reports to the Audit Committee or to the
Board with respect to various aspects of risk management. The Board and the
Audit Committee oversee efforts by management and service providers to manage
risks to which the Funds may be exposed.
The
Board is responsible for overseeing the nature, extent, and quality of the
services provided to the Funds by the Adviser and receives information about
those services at its regular meetings. In addition, on an annual basis
(following the initial two-year period), in connection with its consideration of
whether to renew the Investment Advisory Agreement with the Adviser, the Board
or its designee may meet with the Adviser to review such services. Among other
things, the Board regularly considers the Adviser’s adherence to each Fund’s
investment restrictions and compliance with various Fund policies and procedures
and with applicable securities regulations. The Board also reviews information
about each Fund’s performance and each Fund’s investments, including, for
example, portfolio holdings schedules.
The
Trust’s Chief Compliance Officer reports regularly to the Board to review and
discuss compliance issues and Fund and Adviser risk assessments. At least
annually, the Trust’s Chief Compliance Officer provides the Board with a report
reviewing the adequacy and effectiveness of the Trust’s policies and procedures
and those of its service providers, including the Adviser. The report addresses
the operation of the policies and procedures of the Trust and each service
provider since the date of the last report; any material changes to
the
policies and procedures since the date of the last report; any recommendations
for material changes to the policies and procedures; and any material compliance
matters since the date of the last report.
The
Board receives reports from the Funds’ service providers regarding operational
risks and risks related to the valuation and liquidity of portfolio securities.
Annually, the Funds’ independent registered public accounting firm reviews with
the Audit Committee its audit of the Funds’ financial statements, focusing on
major areas of risk encountered by the Funds and noting any significant
deficiencies or material weaknesses in the Funds’ internal controls.
Additionally, in connection with its oversight function, the Board oversees Fund
management’s implementation of disclosure controls and procedures, which are
designed to ensure that information required to be disclosed by the Trust in its
periodic reports with the SEC are recorded, processed, summarized, and reported
within the required time periods. The Board also oversees the Trust’s internal
controls over financial reporting, which comprise policies and procedures
designed to provide reasonable assurance regarding the reliability of the
Trust’s financial reporting and the preparation of the Trust’s financial
statements.
From
their review of these reports and discussions with the Adviser, the Chief
Compliance Officer, independent registered public accounting firm and other
service providers, the Board and the Audit Committee learn in detail about the
material risks of each Fund, thereby facilitating a dialogue about how
management and service providers identify and mitigate those risks.
The
Board recognizes that not all risks that may affect a Fund can be identified
and/or quantified, that it may not be practical or cost-effective to eliminate
or mitigate certain risks, that it may be necessary to bear certain risks (such
as investment-related risks) to achieve a Fund’s goals, and that the processes,
procedures and controls employed to address certain risks may be limited in
their effectiveness. Moreover, reports received by the Board as to risk
management matters are typically summaries of the relevant information. Most of
the Funds’ investment management and business affairs are carried out by or
through the Adviser and other service providers, each of which has an
independent interest in risk management but whose policies and the methods by
which one or more risk management functions are carried out may differ from the
Funds’ and each other’s in the setting of priorities, the resources available or
the effectiveness of relevant controls. As a result of the foregoing and other
factors, the Board’s ability to monitor and manage risk, as a practical matter,
is subject to limitations.
Members
of the Board. There
are four members of the Board, three of whom are not interested persons of the
Trust, as that term is defined in the 1940 Act (the “Independent Trustees”).
Mr. Michael A. Castino serves as Chairman of the Board and is an interested
person of the Trust, and Mr. Leonard M. Rush serves as the Trust’s Lead
Independent Trustee. As Lead Independent Trustee, Mr. Rush acts as a
spokesperson for the Independent Trustees in between meetings of the Board,
serves as a liaison for the Independent Trustees with the Trust’s service
providers, officers, and legal counsel to discuss ideas informally, and
participates in setting the agenda for meetings of the Board and separate
meetings or executive sessions of the Independent Trustees.
The
Board is comprised of a super-majority (75 percent) of Independent Trustees.
There is an Audit Committee of the Board that is chaired by an Independent
Trustee and comprised solely of Independent Trustees. The Audit Committee chair
presides at the Audit Committee meetings, participates in formulating agendas
for Audit Committee meetings, and coordinates with management to serve as a
liaison between the Independent Trustees and management on matters within the
scope of responsibilities of the Audit Committee as set forth in its
Board-approved charter. There is a Nominating and Governance Committee of the
Board that is chaired by an Independent Trustee and comprised solely of
Independent Trustees. The Nominating and Governance Committee chair presides at
the Nominating and Governance Committee meetings, participates in formulating
agendas for Nominating and Governance Committee meetings, and coordinates with
management to serve as a liaison between the Independent Trustees and management
on matters within the scope of responsibilities of the Nominating and Governance
Committee as set forth in its Board-approved charter. The Trust has determined
its leadership structure is appropriate given the specific characteristics and
circumstances of the Trust. The Trust made this determination in consideration
of, among other things, the fact that the Independent Trustees of the Trust
constitute a super-majority of the Board, the number of Independent Trustees
that constitute the Board, the amount of assets under management in the Trust,
and the number of funds overseen by the Board. The Board also believes that its
leadership structure facilitates the orderly and efficient flow of information
to the Independent Trustees from Fund management.
Additional
information about each Trustee of the Trust is set forth below. The address of
each Trustee of the Trust is c/o U.S. Bank Global Fund Services, 615 E.
Michigan Street, Milwaukee, WI 53202.
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorships Held by Trustee
During
Past 5 Years |
Independent
Trustees |
Leonard
M. Rush, CPA Born: 1946 |
Lead
Independent Trustee and Audit Committee Chairman |
Indefinite
term; since 2012 |
Retired;
formerly Chief Financial Officer, Robert W. Baird & Co. Incorporated
(wealth management firm) (2000–2011). |
57 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
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Name
and Year of Birth |
Position
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of Portfolios in Fund Complex Overseen by Trustee |
Other
Directorships Held by Trustee
During
Past 5 Years |
David
A. Massart Born: 1967 |
Trustee
and Nominating and Governance Committee Chairman |
Indefinite
term; Trustee
since
2012;
Committee
Chairman
since
2023 |
Partner
and Managing Director, Beacon Pointe Advisors, LLC (since 2022);
Co-Founder, President, and Chief Investment Strategist, Next Generation
Wealth Management, Inc. (2005-2021). |
57 |
Independent
Trustee, Managed Portfolio Series (34 portfolios) (since
2011). |
Janet
D. Olsen Born: 1956 |
Trustee |
Indefinite
term; since 2018 |
Retired;
formerly Managing Director and General Counsel, Artisan Partners Limited
Partnership (investment adviser) (2000–2013); Executive Vice President and
General Counsel, Artisan Partners Asset Management Inc. (2012–2013); Vice
President and General Counsel, Artisan Funds, Inc. (investment company)
(2001–2012). |
57 |
Independent
Trustee, PPM Funds (2 portfolios) (since 2018). |
Interested
Trustee |
Michael
A. Castino Born: 1967 |
Trustee
and Chairman |
Indefinite
term; Trustee since 2014; Chairman since 2013 |
Managing
Director, Investment Manager Solutions, Sound Capital Solutions LLC (since
2023); Senior Vice President, U.S. Bancorp Fund Services, LLC (2013–2023);
Managing Director of Index Services, Zacks Investment Management
(2011–2013). |
57 |
None |
Individual
Trustee Qualifications. The
Trust has concluded that each of the Trustees should serve on the Board because
of their ability to review and understand information about the Funds provided
to them by management, to identify and request other information they may deem
relevant to the performance of their duties, to question management and other
service providers regarding material factors bearing on the management and
administration of the Funds, and to exercise their business judgment in a manner
that serves the best interests of each Fund’s shareholders. The Trust has
concluded that each of the Trustees should serve as a Trustee based on his or
her own experience, qualifications, attributes and skills as described below.
The
Trust has concluded that Mr. Rush should serve as a Trustee because of his
substantial industry experience, including serving in several different senior
executive roles at various global financial services firms, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He most recently served as Managing Director and Chief Financial Officer
of Robert W. Baird & Co. Incorporated and several other affiliated entities
and served as the Treasurer for Baird Funds. He also served as the Chief
Financial Officer for Fidelity Investments’ four broker-dealers and has
substantial experience with mutual fund and investment advisory organizations
and related businesses, including Vice President and Head of Compliance for
Fidelity Investments, a Vice President at Credit Suisse First Boston, a Manager
with Goldman Sachs, & Co. and a Senior Manager with Deloitte & Touche.
Mr. Rush has been determined to qualify as an Audit Committee Financial
Expert for the Trust.
The
Trust has concluded that Mr. Massart should serve as a Trustee because of his
substantial industry experience, including over two decades working with high
net worth individuals, families, trusts, and retirement accounts to make
strategic and tactical asset allocation decisions, evaluate and select
investment managers, and manage complex client relationships, and the experience
he has gained as serving as trustee of another investment company trust since
2011. He is currently a Partner and Managing Director at Beacon Pointe Advisors,
LLC. Previously, he served as President and Chief Investment Strategist of a SEC
registered investment advisory firm he co-founded, as a Managing Director of
Strong Private Client, and as a Manager of Wells Fargo Investments, LLC.
The
Trust has concluded that Ms. Olsen should serve as a Trustee because of her
substantial industry experience, including over a decade serving as a senior
executive of an investment management firm and a related public company, and the
experience she has gained by serving as an executive officer of another
investment company from 2001 to 2012. Ms. Olsen most recently served as Managing
Director and General Counsel of Artisan Partners Limited Partnership, a
registered investment adviser serving primarily investment companies and
institutional investors, and several affiliated entities, including its general
partner, Artisan Partners Asset Management Inc. (NYSE: APAM), and as an
executive officer of Artisan Funds Inc.
The
Trust has concluded that Mr. Castino should serve as Trustee because of the
experience he gained as Chairman of the Trust since 2013, as a senior officer of
U.S. Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund
Services (“Fund Services” or the “Transfer Agent”), from 2012 to 2023, and in
his past roles with investment management firms and indexing firms involved with
ETFs, as well as his experience in and knowledge of the financial services
industry. Mr. Castino currently serves as Managing Director, Investment Manager
Solutions, of Sound Capital Solutions, LLC, a state-registered investment
adviser.
In
its periodic assessment of the effectiveness of the Board, the Board considers
the complementary individual skills and experience of the individual Trustees
primarily in the broader context of the Board’s overall composition so that the
Board, as a body, possesses the appropriate (and appropriately diverse) skills
and experience to oversee the business of the funds.
Board
Committees.
The Board has established the following standing committees of the Board:
Audit
Committee.
The Board has a standing Audit Committee that is composed of each of the
Independent Trustees of the Trust. The Audit Committee operates under a written
charter approved by the Board. The principal responsibilities of the Audit
Committee include: recommending which firm to engage as the Funds’ independent
registered public accounting firm and whether to terminate this relationship;
reviewing the independent registered public accounting firm’s compensation, the
proposed scope and terms of its engagement, and the firm’s independence;
pre-approving audit and non-audit services provided by the Funds’ independent
registered public accounting firm to the Trust and certain other affiliated
entities; serving as a channel of communication between the independent
registered public accounting firm and the Trustees; reviewing the results of
each external audit, including any qualifications in the independent registered
public accounting firm’s opinion, any related management letter, management’s
responses to recommendations made by the independent registered public
accounting firm in connection with the audit, reports submitted to the Committee
by the internal auditing department of the Trust’s Administrator that are
material to the Trust as a whole, if any, and management’s responses to any such
reports; reviewing the Funds’ audited financial statements and considering any
significant disputes between the Trust’s management and the independent
registered public accounting firm that arose in connection with the preparation
of those financial statements; considering, in consultation with the independent
registered public accounting firm and the Trust’s senior internal accounting
executive, if any, the independent registered public accounting firms’ report on
the adequacy of the Trust’s internal financial controls; reviewing, in
consultation with the Funds’ independent registered public accounting firm,
major changes regarding auditing and accounting principles and practices to be
followed when preparing the Funds’ financial statements; and other audit related
matters. During the fiscal year ended April 30, 2023, the Audit Committee
met four times.
The
Audit Committee also serves as the Qualified Legal Compliance Committee (“QLCC”)
for the Trust for the purpose of compliance with Rules 205.2(k) and 205.3(c) of
the Code of Federal Regulations, regarding alternative reporting procedures for
attorneys retained or employed by an issuer who appear and practice before the
SEC on behalf of the issuer (the “issuer attorneys”). An issuer attorney who
becomes aware of evidence of a material violation by the Trust, or by any
officer, director, employee, or agent of the Trust, may report evidence of such
material violation to the QLCC as an alternative to the reporting requirements
of Rule 205.3(b) (which requires reporting to the chief legal officer and
potentially “up the ladder” to other entities).
Nominating
and Governance Committee.
The Board has a standing Nominating and Governance Committee that is composed of
each of the Independent Trustees of the Trust. The Nominating and Governance
Committee operates under a written charter approved by the Board. The principal
responsibility of the Nominating and Governance Committee is to consider,
recommend and nominate candidates to fill vacancies on the Trust’s Board, if
any. The Nominating and Governance Committee generally will not consider
nominees recommended by shareholders. The Nominating and Governance Committee is
also responsible for, among other things, reviewing and making recommendations
regarding Independent Trustee compensation and the Trustees’ annual
“self-assessment.” The Nominating and Governance Committee meets periodically,
as necessary. During the fiscal year ended April 30, 2023, the Nominating
and Governance Committee met one time.
Principal
Officers of the Trust
The
officers of the Trust conduct and supervise its daily business. The address of
each officer of the Trust is c/o U.S. Bank Global Fund Services,
615 E. Michigan Street, Milwaukee, WI 53202. Additional information about
the Trust’s officers is as follows:
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Name
and
Year
of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s)
During
Past 5 Years |
Kristina
R. Nelson Born: 1982 |
President |
Indefinite
term;
since
2019 |
Senior
Vice President, U.S. Bancorp Fund Services, LLC (since 2020); Vice
President, U.S. Bancorp Fund Services, LLC (2014–2020). |
Alyssa
M. Bernard Born: 1988 |
Vice
President |
Indefinite
term; since 2021 |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2021); Assistant Vice
President, U.S. Bancorp Fund Services, LLC (2018–2021); Attorney, Waddell
& Reed Financial, Inc. (2017–2018). |
Cynthia
L. Andrae Born: 1971 |
Chief
Compliance Officer and Anti-Money Laundering Officer |
Indefinite
term;
since
2022
(other
roles since 2021) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2019); Deputy Chief
Compliance Officer, U.S. Bancorp Fund Services, LLC (2021-2022);
Compliance Officer, U.S. Bancorp Fund Services, LLC
(2015-2019). |
Kristen
M. Weitzel Born: 1977 |
Treasurer |
Indefinite
term;
since
2014
(other
roles since 2013) |
Vice
President, U.S. Bancorp Fund Services, LLC (since 2015). |
Joshua
J. Hinderliter Born: 1983 |
Secretary |
Indefinite
term;
since
2023 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Managing
Associate, Thompson Hine LLP (2016–2022). |
Vladimir
V. Gurevich Born: 1983 |
Assistant
Treasurer |
Indefinite
term;
since
2022 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2023); Officer,
U.S. Bancorp Fund Services, LLC (2021-2023); Fund Administrator, UMB Fund
Services, Inc. (2015–2021). |
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Name
and
Year
of Birth |
Position(s)
Held with the Trust |
Term
of Office and Length of Time Served |
Principal
Occupation(s)
During
Past 5 Years |
Jason
E. Shlensky Born: 1987 |
Assistant
Treasurer |
Indefinite
term;
since
2019 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2019); Officer,
U.S. Bancorp Fund Services, LLC (2014–2019). |
Jessica
L. Vorbeck Born: 1984 |
Assistant
Treasurer |
Indefinite
term; since 2020 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Officer,
U.S. Bancorp Fund Services, LLC (2014-2017, 2018-2022). |
Kathryne
E. Keough Born: 1995 |
Assistant
Secretary |
Indefinite
term; since 2023 |
Assistant
Vice President, U.S. Bancorp Fund Services, LLC (since 2022); Regulatory
Administration Attorney, U.S. Bancorp Fund Services, LLC (since 2021);
Regulatory Administration Intern, U.S. Bancorp Fund Services, LLC
(2020–2021); Law Student (2018-2021). |
Trustee
Ownership of Shares. The
Funds are required to show the dollar amount ranges of each Trustee’s
“beneficial ownership” of Shares and each other series of the Trust as of the
end of the most recently completed calendar year. Dollar amount ranges disclosed
are established by the SEC. “Beneficial ownership” is determined in accordance
with Rule 16a-1(a)(2) under the 1934 Act.
As
of December 31, 2022, Mr. Rush owned, in the aggregate, between $1 and $10,000
of shares in other series of the Trust. No other Trustee owned Shares or shares
of any other series of the Trust.
Board
Compensation. The
Trustees each receive an annual trustee fee of $216,600 for attendance at the
four regularly scheduled quarterly meetings and one annual meeting, if
necessary, and receive additional compensation for each additional meeting
attended of $2,000, as well as reimbursement for travel and other out-of-pocket
expenses incurred in connection with attendance at Board meetings. The Lead
Independent Trustee receives an additional annual fee of $15,000. The Chairman
of the Audit Committee receives an additional annual fee of $15,000. The
Chairman of the Nominating and Governance Committee receives an additional
annual fee of $8,000. The Trust has no pension or retirement plan.
The
following table shows the compensation earned by each Trustee for the Funds’
fiscal year ending April 30, 2023. Independent Trustee fees are paid by the
Adviser to each series of the Trust and not by the Funds. Trustee compensation
does not include reimbursed out-of-pocket expenses in connection with attendance
at meetings.
|
|
|
|
|
|
|
| |
Name |
Aggregate
Compensation From the Funds |
Total
Compensation From Fund Complex Paid to Trustees |
Interested
Trustee |
Michael
A. Castino |
$0 |
$0 |
Independent
Trustees |
David
A. Massart |
$0 |
$206,450 |
Leonard
M. Rush, CPA |
$0 |
$235,783 |
Janet
D. Olsen |
$0 |
$205,783 |
PRINCIPAL
SHAREHOLDERS, CONTROL PERSONS, AND MANAGEMENT OWNERSHIP
A
principal shareholder is any person who owns of record or beneficially 5% or
more of the outstanding Shares of a Fund. A control person is a shareholder that
owns beneficially or through controlled companies more than 25% of the voting
securities of a company or acknowledges the existence of control. Shareholders
owning voting securities in excess of 25% may determine the outcome of any
matter affecting and voted on by shareholders of a Fund. As of August 1, 2023,
the Trustees and officers, as a group, owned less than 1% of Shares of each
Fund, and the following shareholders were considered to be a principal
shareholder of a Fund:
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Aptus
Drawdown Managed Equity ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
58.26% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
11.80% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
10.33% |
Record |
LPL
Financial 75 State Street, 22nd Floor Boston, MA 02109 |
7.69% |
Record |
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Pershing
LLC One Pershing Plaza Jersey City, NJ 07399 |
6.51% |
Record |
Aptus
Collared Investment Opportunity ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
51.65% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
17.61% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
14.59% |
Record |
Pershing
LLC One Pershing Plaza Jersey City, NJ 07399 |
6.35% |
Record |
LPL
Financial 75 State Street, 22nd Floor Boston, MA 02109 |
5.88% |
Record |
Aptus
Defined Risk ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
52.76% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
17.58% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
13.88% |
Record |
LPL
Financial 75 State Street, 22nd Floor Boston, MA 02109 |
5.58% |
Record |
Opus
Small Cap Value ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
46.36% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
18.79% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
17.23% |
Record |
LPL
Financial 75 State Street, 22nd Floor Boston, MA 02109 |
7.79% |
Record |
Pershing
LLC One Pershing Plaza Jersey City, NJ 07399 |
6.23% |
Record |
Aptus
International Enhanced Yield ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
53.39% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
21.23% |
Record |
Pershing
LLC One Pershing Plaza Jersey City, NJ 07399 |
12.57% |
Record |
|
|
|
|
|
|
|
| |
Name
and Address |
%
Ownership |
Type
of Ownership |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
8.63% |
Record |
Aptus
Enhanced Yield ETF |
TD
Ameritrade, Inc. 200 South 108th Avenue Omaha, NE
68103-2226 |
41.52% |
Record |
National
Financial Services LLC 200 Liberty Street New York, NY
10281 |
22.48% |
Record |
Charles
Schwab & Co., Inc. 211 Main Street San Francisco, CA
94105-1905 |
22.01% |
Record |
Codes
of Ethics
The
Trust and the Adviser have each adopted codes of ethics pursuant to
Rule 17j-1 of the 1940 Act. These codes of ethics are designed to prevent
affiliated persons of the Trust and the Adviser from engaging in deceptive,
manipulative or fraudulent activities in connection with securities held or to
be acquired by a Fund (which may also be held by persons subject to the codes of
ethics). Each Code of Ethics permits personnel subject to that Code of Ethics to
invest in securities for their personal investment accounts, subject to certain
limitations, including limitations related to securities that may be purchased
or held by a Fund. The Distributor (as defined below) relies on the principal
underwriters exception under Rule 17j-1(c)(3), specifically where the
Distributor is not affiliated with the Trust or the Adviser, and no officer,
director, or general partner of the Distributor serves as an officer, director,
or general partner of the Trust or the Adviser.
There
can be no assurance that the codes of ethics will be effective in preventing
such activities. Each code of ethics may be examined at the office of the SEC in
Washington, D.C. or on the Internet at the SEC’s website at http://www.sec.gov.
PROXY
VOTING POLICIES
The
Funds have delegated proxy voting responsibilities to the Adviser, subject to
the Board’s oversight. In delegating proxy responsibilities, the Board has
directed that proxies be voted consistent with each Fund’s and its shareholders’
best interests and in compliance with all applicable proxy voting rules and
regulations. The Adviser has adopted proxy voting policies and guidelines for
this purpose (“Proxy Voting Policies”). A copy of the Proxy Voting Policies is
set forth in Appendix
A
to this SAI. The Trust’s Chief Compliance Officer is responsible for monitoring
the effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have
been adopted by the Trust as the policies and procedures that the Adviser will
use when voting proxies on behalf of a Fund.
The
Proxy Voting Policies address, among other things, material conflicts of
interest that may arise between the interests of the Funds and the interests of
the Adviser. The Proxy Voting Policies will ensure that all issues brought to
shareholders are analyzed in light of the Adviser’s fiduciary responsibilities.
When
available, information on how the Funds voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 will be
available (1) without charge, upon request, by calling 1–800–617–0004 and (2) on
the SEC’s website at www.sec.gov.
INVESTMENT
ADVISER
The
Adviser, Aptus Capital Advisors, LLC, an Alabama limited liability company
located at 265 Young Street, Fairhope, Alabama 36532, serves as the investment
adviser to the Funds. The Adviser is controlled by John D. (“JD”) Gardner, CFA,
Chief Investment Officer, Managing Member, and majority owner of the
Adviser.
Pursuant
to an Investment Advisory Agreement (the “Advisory Agreement”), the Adviser
provides investment advice to the Funds and oversees the day-to-day operations
of the Funds, subject to the direction and control of the Board and the officers
of the Trust. The Adviser is responsible for trading portfolio securities on
behalf of each Fund, including selecting broker-dealers to execute purchase and
sale transactions, subject to the oversight of the Board. Under the Advisory
Agreement, the Adviser is also responsible for arranging transfer agency,
custody, fund administration, securities lending, accounting, distribution and
other services necessary for the Funds to operate. The Adviser administers each
Fund’s business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services. Under the Advisory Agreement,
the Adviser has agreed to pay all expenses incurred by each 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, acquired fund
fees and expenses, accrued deferred tax liability, extraordinary expenses,
distribution fees and expenses paid by the Fund under any distribution plan
adopted pursuant to Rule 12b-1
under
the 1940 Act, and the unified management fee payable to the Adviser. For
services provided to the Funds, each Fund pays the Adviser a unified management
fee at an annual rate of the Fund’s average daily net assets as
follows:
|
|
|
|
| |
Name
of Fund |
Management
Fee |
Aptus
Drawdown Managed Equity ETF |
0.79% |
Aptus
Collared Investment Opportunity ETF |
0.79% |
Aptus
Defined Risk ETF |
0.69% |
Opus
Small Cap Value ETF |
0.79% |
Aptus
International Enhanced Yield ETF1 |
0.39% |
Aptus
Enhanced Yield ETF |
0.59% |
1Prior
to May 1, 2023, the Adviser received management fees equal to 0.59% of the
Fund’s average daily net assets.
The
Advisory Agreement with respect to each Fund will continue in force for an
initial period of two years. Thereafter, the Advisory Agreement will be
renewable from year to year with respect to a Fund, so long as its continuance
is approved at least annually (1) by the vote, cast in person at a meeting
called for that purpose, of a majority of those Trustees who are not “interested
persons” of the Adviser or the Trust; and (2) by the majority vote of either the
full Board or the vote of a majority of the outstanding Shares. The Advisory
Agreement automatically terminates on assignment and is terminable on a 60-day
written notice either by the Trust or the Adviser.
The
Adviser shall not be liable to the Trust or any shareholder for anything done or
omitted by it, except acts or omissions involving willful misfeasance, bad
faith, negligence or reckless disregard of the duties imposed upon it by its
agreement with the Trust or for any losses that may be sustained in the
purchase, holding or sale of any security.
The
table below shows advisory fees paid by the Funds for the fiscal years/periods
ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Fund |
2023 |
| 2022 |
| 2021 |
|
| |
Aptus
Drawdown Managed Equity ETF |
$2,422,251 |
|
| $2,364,545 |
|
| $1,395,458 |
|
|
| |
Aptus
Collared Investment Opportunity ETF |
$3,977,545 |
|
| $2,444,002 |
|
| $1,231,736 |
|
|
| |
Aptus
Defined Risk ETF |
$5,325,795 |
|
| $5,524,175 |
|
| $3,267,559 |
|
|
| |
Opus
Small Cap Value ETF |
$1,666,198 |
|
| $1,227,928 |
|
| $511,449 |
|
|
| |
Aptus
International Enhanced Yield ETF |
$649,382 |
|
| $481,680 |
|
(1) |
N/A |
|
| |
Aptus
Enhanced Yield ETF |
$639,363 |
|
(2) |
N/A |
| N/A |
|
| |
(1)
For the fiscal period July 22, 2021 (commencement of operations) through April
30, 2022.
(2)
For the fiscal period October 31, 2022 (commencement of operations) through
April 30, 2023.
PORTFOLIO
MANAGERS
Each
of ADME and ACIO is managed by John D. (“JD”) Gardner, CFA, Chief Investment
Officer and Managing Member of the Adviser, John Luke Tyner, CFA, Portfolio
Manager and Equity Analyst of the Adviser, and David Wagner III, CFA, Portfolio
Manager and Analyst of the Adviser. DRSK is managed by Messrs. Gardner, Tyner,
and Mark Callahan, Portfolio Manager and Head of Trading. OSCV is managed by
Messrs. Gardner, and Wagner, as well as Brad Rapking, CFA, Portfolio Manager and
Analyst of the Adviser. IDUB is managed by Messrs. Gardner, Tyner, Rapking,
Wagner, and Callahan. JUCY is managed by Messrs. Gardner, Callahan, and
Rapking.
The
above individuals are referred to below as the “Portfolio Managers”.
Share
Ownership
The
Funds are required to show the dollar range of each Portfolio Manager’s
“beneficial ownership” of Shares as of the end of the most recently completed
fiscal year or a more recent date for a new portfolio manager. Dollar amount
ranges disclosed are established by the SEC. “Beneficial ownership” is
determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
As
of April 30, 2023, the Portfolio Managers beneficially owned Shares in the
following dollar ranges:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Portfolio
Manager |
Dollar
Range of Shares owned of |
ADME |
ACIO |
DRSK |
OSCV |
IDUB |
JUCY |
JD
Gardner, CFA |
N/A |
N/A |
N/A |
$100,001
– $500,000 |
N/A |
over
$1,000,000 |
John
Luke Tyner, CFA |
$10,001
– $50,000 |
$10,001
– $50,000 |
$10,001
– $50,000 |
N/A |
$1
– $10,000 |
N/A |
Brad
Rapking, CFA |
N/A |
N/A |
N/A |
$100,001
– $500,000 |
$1
– $10,000 |
$1
– $10,000 |
David
Wagner III, CFA |
N/A |
N/A |
N/A |
$500,001
- $1,000,000 |
N/A |
N/A |
Mark
Callahan |
N/A |
N/A |
$10,001
– $50,000 |
N/A |
None |
$10,001
– $50,000 |
Other
Accounts
In
addition to the Funds, the Portfolio Managers did not manage any other accounts
as of April 30, 2023.
Compensation
Each
Portfolio Manager’s compensation includes a fixed salary and participation in a
retirement plan, neither of which is based on the performance of the Funds.
Description
of Material Conflicts of Interest
The
Portfolio Managers may manage accounts other than the Funds. To the extent they
do, the Adviser’s management of “other accounts” may give rise to potential
conflicts of interest in connection with its management of each Fund’s
investments, on the one hand, and the investments of the other accounts, on the
other. The other accounts may have similar investment objectives or strategies
as the Funds. A potential conflict of interest may arise as a result, whereby a
Portfolio Manager could favor one account over another. Another potential
conflict could include a Portfolio Manager’s knowledge about the size, timing,
and possible market impact of Fund trades, whereby the Portfolio Manager could
use this information to the advantage of other accounts and to the disadvantage
of a Fund. However, the Adviser has established policies and procedures to
ensure that the purchase and sale of securities among all accounts the Adviser
manages are fairly and equitably allocated.
THE
DISTRIBUTOR
The
Trust, the Adviser, and
Quasar
Distributors, LLC (the “Distributor”), a wholly-owned subsidiary of Foreside
Financial Group, LLC (d/b/a ACA Group), are parties to a distribution agreement
(the “Distribution Agreement”), whereby the Distributor acts as principal
underwriter for the Fund and distributes Shares. Shares are continuously offered
for sale by the Distributor only in Creation Units. The Distributor will not
distribute Shares in amounts less than a Creation Unit and does not maintain a
secondary market in Shares. The principal business address of the Distributor is
111 East Kilbourn Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
Under
the Distribution Agreement, the Distributor, as agent for the Trust, will review
orders for the purchase and redemption of Creation Units, provided that any
subscriptions and orders will not be binding on the Trust until accepted by the
Trust. The Distributor is a broker-dealer registered under the 1934 Act and a
member of FINRA.
The
Distributor may also enter into agreements with securities dealers (“Soliciting
Dealers”) who will solicit purchases of Creation Units of Shares. Such
Soliciting Dealers may also be Authorized Participants (as discussed in
“Procedures
for Purchase of Creation Units”
below) or DTC participants (as defined below).
The
Distribution Agreement will continue for two years from its effective date and
is renewable annually thereafter. The continuance of the Distribution Agreement
must be specifically approved at least annually (i) by the vote of the Trustees
or by a vote of the shareholders of the Fund and (ii) by the vote of a majority
of the Independent Trustees who have no direct or indirect financial interest in
the operations of the Distribution Agreement or any related agreement, cast in
person at a meeting called for the purpose of voting on such approval. The
Distribution Agreement is terminable without penalty by the Trust on 60 days’
written notice when authorized either by majority vote of its outstanding voting
Shares or by a vote of a majority of its Board (including a majority of the
Independent Trustees), or by the Distributor on 60 days’ written notice, and
will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or
gross negligence on the part of the Distributor, or reckless disregard by it of
its obligations thereunder, the Distributor shall not be liable for any action
or failure to act in accordance with its duties thereunder.
Intermediary
Compensation.
The
Adviser or its affiliates, out of their own resources and not out of Fund assets
(i.e.,
without additional cost to a Fund or its shareholders), may pay certain broker
dealers, banks and other financial intermediaries (“Intermediaries”) for certain
activities related to a 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 and
educational
training
or support. These arrangements are not financed by a Fund and, thus, do not
result in increased Fund expenses. They are not reflected in the fees and
expenses listed in the fees and expenses sections of a Fund’s Prospectus and
they do not change the price paid by investors for the purchase of Shares or the
amount received by a shareholder as proceeds from the redemption of Shares.
Such
compensation may be paid to Intermediaries that provide services to a Fund,
including marketing and education support (such as through conferences, webinars
and printed communications). The Adviser periodically assesses the advisability
of continuing to make these payments. Payments to an Intermediary may be
significant to the Intermediary, and amounts that Intermediaries pay to your
adviser, broker or other investment professional, if any, may also be
significant to such adviser, broker or investment professional. Because an
Intermediary may make decisions about what investment options it will make
available or recommend, and what services to provide in connection with various
products, based on payments it receives or is eligible to receive, such payments
create conflicts of interest between the Intermediary and its clients. For
example, these financial incentives may cause the Intermediary to recommend a
Fund over other investments. The same conflict of interest exists with respect
to your financial adviser, broker or investment professional if he or she
receives similar payments from his or her Intermediary firm.
Intermediary
information is current only as of the date of this SAI. Please contact your
adviser, broker, or other investment professional for more information regarding
any payments his or her Intermediary firm may receive. Any payments made by the
Adviser or its affiliates to an Intermediary may create the incentive for an
Intermediary to encourage customers to buy Shares.
If
you have any additional questions, please call 1-800-617-0004.
Distribution
and Service Plan.
The Trust has adopted a Distribution and Service Plan (the “Plan”) in accordance
with the provisions of Rule 12b-1 under the 1940 Act, which regulates
circumstances under which an investment company may directly or indirectly bear
expenses relating to the distribution of its shares. No payments pursuant to the
Plan are expected to be made during the twelve (12) month period from the date
of this SAI. Rule 12b-1 fees to be paid by a Fund under the Plan may only be
imposed after approval by the Board.
Continuance
of the Plan must be approved annually by a majority of the Trustees of the Trust
and by a majority of the Trustees who are not interested persons (as defined in
the 1940 Act) of the Trust and have no direct or indirect financial interest in
the Plan or in any agreements related to the Plan (“Qualified Trustees”). The
Plan requires that quarterly written reports of amounts spent under the Plan and
the purposes of such expenditures be furnished to and reviewed by the Trustees.
The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding Shares of a Fund.
All material amendments of the Plan will require approval by a majority of the
Trustees of the Trust and of the Qualified Trustees.
The
Plan provides that each Fund pays the Distributor an annual fee of up to a
maximum of 0.25% of the average daily net assets of the Shares. Under the Plan,
the Distributor may make payments pursuant to written agreements to financial
institutions and intermediaries such as banks, savings and loan associations and
insurance companies including, without limit, investment counselors,
broker-dealers and the Distributor’s affiliates and subsidiaries (collectively,
“Agents”) as compensation for services and reimbursement of expenses incurred in
connection with distribution assistance. The Plan is characterized as a
compensation plan since the distribution fee will be paid to the Distributor
without regard to the distribution expenses incurred by the Distributor or the
amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the
FINRA rules concerning sales charges.
Under
the Plan, subject to the limitations of applicable law and regulations, each
Fund is authorized to compensate the Distributor up to the maximum amount to
finance any activity primarily intended to result in the sale of Creation Units
of the Fund or for providing or arranging for others to provide shareholder
services and for the maintenance of shareholder accounts. Such activities may
include, but are not limited to: (i) delivering copies of a Fund’s then
current reports, prospectuses, notices, and similar materials, to prospective
purchasers of Creation Units; (ii) marketing and promotional services,
including advertising; (iii) paying the costs of and compensating others,
including Authorized Participants (as discussed in “Procedures for Purchase of
Creation Units” below) with whom the Distributor has entered into written
Participant Agreements (as defined below), for performing shareholder servicing
on behalf of a Fund; (iv) compensating certain Authorized Participants for
providing assistance in distributing the Creation Units of a Fund, including the
travel and communication expenses and salaries and/or commissions of sales
personnel in connection with the distribution of the Creation Units of a Fund;
(v) payments to financial institutions and intermediaries such as banks,
savings and loan associations, insurance companies and investment counselors,
broker-dealers, mutual fund supermarkets and the affiliates and subsidiaries of
the Trust’s service providers as compensation for services or reimbursement of
expenses incurred in connection with distribution assistance;
(vi) facilitating communications with beneficial owners of Shares,
including the cost of providing (or paying others to provide) services to
beneficial owners of Shares, including, but not limited to, assistance in
answering inquiries related to shareholder accounts; and (vii) such other
services and obligations as are set forth in the Distribution Agreement. The
Distributor does not retain Fund monies for profit. Instead, it keeps them in
retention for future distribution related expenses. The Adviser compensates the
Distributor for certain distribution related services.
THE
ADMINISTRATOR, CUSTODIAN, AND TRANSFER AGENT
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services,
located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the
Funds’ transfer agent, administrator, and index receipt agent.
Pursuant
to a Fund Administration Servicing Agreement and a Fund Accounting Servicing
Agreement between the Trust and Fund Services, Fund Services provides the Trust
with administrative and management services (other than investment advisory
services) and accounting services, including portfolio accounting services, tax
accounting services and furnishing financial reports. In this capacity, Fund
Services does not have any responsibility or authority for the management of the
Funds, the determination of investment policy, or for any matter pertaining to
the distribution of Shares. As compensation for the administration, accounting
and management services, the Adviser pays Fund Services a fee based on each
Fund’s average daily net assets, subject to a minimum annual fee. Fund Services
also is entitled to certain out-of-pocket expenses for the services mentioned
above, including pricing expenses.
The
table below shows fees paid by the Adviser to Fund Services for the fiscal
years/periods ended April 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Name
of Fund |
2023 |
| 2022 |
| 2021 |
|
| |
Aptus
Drawdown Managed Equity ETF |
$168,126 |
|
| $168,593 |
|
| $144,658 |
|
|
| |
Aptus
Collared Investment Opportunity ETF |
$214,927 |
|
| $157,944 |
|
| $121,531 |
|
|
| |
Aptus
Defined Risk ETF |
$284,703 |
|
| $280,354 |
|
| $195,131 |
|
|
| |
Opus
Small Cap Value ETF |
$135,233 |
|
| $120,863 |
|
| $102,475 |
|
|
| |
Aptus
International Enhanced Yield ETF |
$109,928 |
|
| $94,792 |
|
(1) |
N/A |
|
| |
Aptus
Enhanced Yield ETF |
$68,677 |
|
(2) |
N/A |
| N/A |
|
| |
(1)
For the fiscal period July 22, 2021 (commencement of operations) through April
30, 2022.
(2)
For the fiscal period October 31, 2022 (commencement of operations) through
April 30, 2023.
Pursuant
to a Custody Agreement, U.S. Bank National Association (the “Custodian” or “U.S.
Bank”), 1555 North Rivercenter Drive, Suite 302, Milwaukee, Wisconsin 53212,
serves as the Custodian of the Funds’ assets. The Custodian holds and
administers the assets in each Fund’s portfolio. Pursuant to the Custody
Agreement, the Custodian receives an annual fee from the Adviser based on the
Trust’s total average daily net assets, subject to a minimum annual fee, and
certain settlement charges. The Custodian also is entitled to certain
out-of-pocket expenses.
LEGAL
COUNSEL
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue NW, Washington, DC
20004-2541, serves as legal counsel for the Trust.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Cohen
& Company, Ltd., located at 342 North Water Street, Suite 830, Milwaukee,
Wisconsin 53202, serves as the independent registered public accounting firm for
the Funds.
PORTFOLIO
HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The
Board has adopted a policy regarding the disclosure of information about each
Fund’s security holdings. Each Fund’s entire portfolio holdings are publicly
disseminated each day a Fund is open for business and may be available through
financial reporting and news services, including publicly available internet web
sites. In addition, the composition of the Deposit Securities (as defined below)
is publicly disseminated daily prior to the opening of the Exchange via the
National Securities Clearing Corporation (“NSCC”).
DESCRIPTION
OF SHARES
The
Declaration of Trust authorizes the issuance of an unlimited number of funds and
Shares. Each Share represents an equal proportionate interest in the applicable
Fund with each other Share. Shares are entitled upon liquidation to a pro rata
share in the net assets of the applicable Fund. Shareholders have no preemptive
rights. The Declaration of Trust provides that the Trustees may create
additional series or classes of Shares. All consideration received by the Trust
for shares of any additional funds and all assets in which such consideration is
invested would belong to that fund and would be subject to the liabilities
related thereto. Share certificates representing Shares will not be issued.
Shares, when issued, are fully paid and non-assessable.
Each
Share has one vote with respect to matters upon which a shareholder vote is
required, consistent with the requirements of the 1940 Act and the rules
promulgated thereunder. Shares of all funds of the Trust vote together as a
single class, except that if the matter being voted on affects only a particular
fund it will be voted on only by that fund and if a matter affects a particular
fund differently from other funds, that fund will vote separately on such
matter. As a Delaware statutory trust, the Trust is not required, and does not
intend, to hold annual meetings of shareholders. Approval of shareholders will
be sought, however, for certain changes in the operation of the Trust and for
the election of Trustees under certain circumstances. Upon the written request
of shareholders owning at least 10% of the Trust’s Shares, the Trust will call
for a meeting of shareholders to consider the removal of one or more Trustees
and other certain matters. In the event that such a meeting is requested, the
Trust will provide appropriate assistance and information to the shareholders
requesting the meeting.
Under
the Declaration of Trust, the Trustees have the power to liquidate a Fund
without shareholder approval. While the Trustees have no present intention of
exercising this power, they may do so if a Fund fails to reach a viable size
within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION
OF TRUSTEES’ LIABILITY
The
Declaration of Trust provides that a Trustee shall be liable only for his or her
own willful misfeasance, bad faith, gross negligence or reckless disregard of
the duties involved in the conduct of the office of Trustee, and shall not be
liable for errors of judgment or mistakes of fact or law. The Trustees shall not
be responsible or liable in any event for any neglect or wrong-doing of any
officer, agent, employee, adviser or principal underwriter of the Trust, nor
shall any Trustee be responsible for the act or omission of any other Trustee.
The Declaration of Trust also provides that the Trust shall indemnify each
person who is, or has been, a Trustee, officer, employee or agent of the Trust,
any person who is serving or has served at the Trust’s request as a Trustee,
officer, trustee, employee or agent of another organization in which the Trust
has any interest as a shareholder, creditor or otherwise to the extent and in
the manner provided in the Amended and Restated By-laws. However, nothing in the
Declaration of Trust shall protect or indemnify a Trustee against any liability
for his or her willful misfeasance, bad faith, gross negligence, or reckless
disregard of the duties involved in the conduct of the office of Trustee.
Nothing contained in this section attempts to disclaim a Trustee’s individual
liability in any manner inconsistent with the federal securities laws.
BROKERAGE
TRANSACTIONS
The
policy of the Trust regarding purchases and sales of securities for a Fund is
that primary consideration will be given to obtaining the most favorable prices
and efficient executions of transactions. Consistent with this policy, when
securities transactions are effected on a stock exchange, the Trust’s policy is
to pay commissions which are considered fair and reasonable without necessarily
determining that the lowest possible commissions are paid in all circumstances.
The Trust believes that a requirement always to seek the lowest possible
commission cost could impede effective portfolio management and preclude the
Funds and the Adviser from obtaining a high quality of brokerage and research
services. In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, the Adviser will rely upon its experience and knowledge
regarding commissions generally charged by various brokers and on its judgment
in evaluating the brokerage services received from the broker effecting the
transaction. Such determinations are necessarily subjective and imprecise, as in
most cases, an exact dollar value for those services is not ascertainable. The
Trust has adopted policies and procedures that prohibit the consideration of
sales of Shares as a factor in the selection of a broker or dealer to execute
its portfolio transactions.
The
Adviser owes a fiduciary duty to its clients to seek to provide best execution
on trades effected. In selecting a broker-dealer for each specific transaction,
the Adviser chooses the broker-dealer deemed most capable of providing the
services necessary to obtain the most favorable execution. “Best execution” is
generally understood to mean the most favorable cost or net proceeds reasonably
obtainable under the circumstances. The full range of brokerage services
applicable to a particular transaction may be considered when making this
judgment, which may include, but is not limited to: liquidity, price,
commission, timing, aggregated trades, capable floor brokers or traders,
competent block trading coverage, ability to position, capital strength and
stability, reliable and accurate communications and settlement processing, use
of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a
particular security or market in which the transaction is to occur. The specific
criteria will vary depending upon the nature of the transaction, the market in
which it is executed, and the extent to which it is possible to select from
among multiple broker-dealers. The Adviser will also use electronic crossing
networks (“ECNs”) when appropriate.
Subject
to the foregoing policies, brokers or dealers selected to execute a Fund’s
portfolio transactions may include such Fund’s Authorized Participants (as
discussed in “Procedures
for Purchase of Creation Units”
below) or their affiliates. An Authorized Participant or its affiliates may be
selected to execute a Fund’s portfolio transactions in conjunction with an
all-cash creation unit order or an order including “cash-in-lieu” (as described
below under “Purchase
and Redemption of Shares in Creation Units”),
so long as such selection is in keeping with the foregoing policies. As
described below under “Purchase
and Redemption of Shares in Creation Units—Creation Transaction Fee”
and “—Redemption
Transaction Fee”,
each Fund may determine to not charge a variable fee on certain orders when the
Adviser has determined that doing so is in the best interests of Fund
shareholders, e.g.,
for creation orders that facilitate the rebalance of the applicable Fund’s
portfolio in a more tax efficient manner than could be achieved without such
order, even if the decision to not charge a variable fee could be viewed as
benefiting the Authorized Participant or its affiliate selected to execute the
Fund’s portfolio transactions in connection with such orders.
The
Adviser may use a Fund’s assets for, or participate in, third-party soft dollar
arrangements, in addition to receiving proprietary research from various
full-service brokers, the cost of which is bundled with the cost of the broker’s
execution services. The Adviser does not “pay up” for the value of any such
proprietary research. Section 28(e) of the 1934 Act permits the Adviser, under
certain circumstances, to cause a Fund to pay a broker or dealer a commission
for effecting a transaction in excess of the amount of commission another broker
or dealer would have charged for effecting the transaction in recognition of the
value of brokerage and research services provided by the broker or dealer. The
Adviser may receive a variety of research services and information on many
topics, which it can use in connection with its management responsibilities with
respect to the various accounts over which it exercises investment discretion or
otherwise provides investment advice. The research services may include
qualifying order management systems, portfolio attribution and monitoring
services and computer software and access charges which are directly related to
investment
research. Accordingly, a Fund may pay a broker commission higher than the lowest
available in recognition of the broker’s provision of such services to the
Adviser, but only if the Adviser determines the total commission (including the
soft dollar benefit) is comparable to the best commission rate that could be
expected to be received from other brokers. The amount of soft dollar benefits
received depends on the amount of brokerage transactions effected with the
brokers. A conflict of interest exists because there is an incentive to: 1)
cause clients to pay a higher commission than the firm might otherwise be able
to negotiate; 2) cause clients to engage in more securities transactions than
would otherwise be optimal; and 3) only recommend brokers that provide soft
dollar benefits.
The
Adviser faces a potential conflict of interest when it uses client trades to
obtain brokerage or research services. This conflict exists because the Adviser
is able to use the brokerage or research services to manage client accounts
without paying cash for such services, which reduces the Adviser’s expenses to
the extent that the Adviser would have purchased such products had they not been
provided by brokers. Section 28(e) permits the Adviser to use brokerage or
research services for the benefit of any account it manages. The Funds generate
soft dollars used to purchase brokerage or research services that may ultimately
benefit other accounts managed by the Adviser, effectively cross subsidizing the
other accounts managed by the Adviser that benefit directly from the Funds. The
Adviser may not necessarily use all of the brokerage or research services in
connection with managing a Fund whose trades generated the soft dollars used to
purchase such products.
The
Adviser is responsible, subject to oversight by the Board, for placing orders on
behalf of each Fund for the purchase or sale of portfolio securities. If
purchases or sales of portfolio securities of a Fund and one or more other
investment companies or clients supervised by the Adviser are considered at or
about the same time, transactions in such securities are allocated among the
several investment companies and clients in a manner deemed equitable and
consistent with its fiduciary obligations to all by the Adviser. In some cases,
this procedure could have a detrimental effect on the price or volume of the
security so far as a Fund is concerned. However, in other cases, it is possible
that the ability to participate in volume transactions and to negotiate lower
brokerage commissions will be beneficial to the Funds. The primary consideration
is prompt execution of orders at the most favorable net price.
A
Fund may deal with affiliates in principal transactions to the extent permitted
by exemptive order or applicable rule or regulation.
The
table below shows the aggregate brokerage commissions paid by the Fund for the
fiscal years/periods ended April 30, none of which were paid to affiliated
brokers:
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Name
of Fund |
2023 |
| 2022 |
| 2021 |
|
| |
Aptus
Drawdown Managed Equity ETF |
$1,054,217 |
|
| $320,237 |
|
| $177,454 |
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Aptus
Collared Investment Opportunity ETF |
$2,189,848 |
|
| $642,505 |
|
(1) |
$228,982 |
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Aptus
Defined Risk ETF |
$2,266,495 |
|
| $5,660,274 |
|
(2) |
$2,175,835 |
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Opus
Small Cap Value ETF |
$36,211 |
|
| $32,427 |
|
| $32,749 |
|
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| |
Aptus
International Enhanced Yield ETF |
$1,658,438 |
|
| $783,667 |
|
(3) |
N/A |
|
| |
Aptus
Enhanced Yield ETF |
$0 |
|
(4) |
N/A |
| N/A |
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(1)
Asset growth and market conditions during the most recent fiscal year increased
the dollar amount of brokerage commissions.
(2)
Asset growth and market conditions during the most recent fiscal year increased
the dollar amount of brokerage commissions.
(3)
For the fiscal period July 22, 2021 (commencement of operations) through April
30, 2022.
(4)
For the fiscal period October 31, 2022 (commencement of operations) through
April 30, 2023.
Brokerage
with Fund Affiliates.
A Fund may execute brokerage or other agency transactions through registered
broker-dealer affiliates of the Funds, the Adviser, or the Distributor for a
commission in conformity with the 1940 Act, the 1934 Act and rules promulgated
by the SEC. These rules require that commissions paid to the affiliate by the
Funds for exchange transactions not exceed “usual and customary” brokerage
commissions. The rules define “usual and customary” commissions to include
amounts which are “reasonable and fair compared to the commission, fee or other
remuneration received or to be received by other brokers in connection with
comparable transactions involving similar securities being purchased or sold on
a securities exchange during a comparable period of time.” The Trustees,
including those who are not “interested persons” of the Funds, have adopted
procedures for evaluating the reasonableness of commissions paid to affiliates
and review these procedures periodically.
During
the fiscal year/period ended April 30, 2023, the Funds did not pay
brokerage commissions to any registered broker-dealer affiliates of the Fund,
the Adviser, or the Distributor.
Directed
Brokerage. During
the fiscal year/period ended April 30, 2023, the Funds did not direct
brokerage transactions to a broker because of research services provided.
Securities
of “Regular Broker-Dealers.”
Each Fund is required to identify any securities of its “regular brokers and
dealers” (as such term is defined in the 1940 Act) that it may hold at the close
of its most recent fiscal year. “Regular brokers or dealers” of a Fund are the
ten brokers or dealers that, during the most recent fiscal year: (i) received
the greatest dollar amounts of brokerage commissions from the Fund’s portfolio
transactions; (ii) engaged as principal in the largest dollar amounts of
portfolio transactions of the Fund; or (iii) sold the largest dollar amounts of
Shares. The Funds did not hold any securities of “regular broker dealers” as of
April 30, 2023.
PORTFOLIO
TURNOVER RATE
Portfolio
turnover may vary from year to year, as well as within a year. High turnover
rates are likely to result in comparatively greater brokerage expenses. The
overall reasonableness of brokerage commissions is evaluated by the Adviser
based upon its knowledge of available information as to the general level of
commissions paid by other institutional investors for comparable services. For
the fiscal year/period ended April 30, each Fund’s portfolio turnover rate
was:
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Name
of Fund |
2023 |
| 2022 |
|
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| |
Aptus
Drawdown Managed Equity ETF |
64 |
% |
| 43 |
% |
|
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Aptus
Collared Investment Opportunity ETF |
69 |
% |
|
48 |
% |
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Aptus
Defined Risk ETF |
119 |
% |
(3) |
69 |
% |
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Opus
Small Cap Value ETF |
35 |
% |
| 45 |
% |
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Aptus
International Enhanced Yield ETF |
102 |
% |
(3) |
2 |
% |
(1) |
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Aptus
Enhanced Yield ETF |
0% |
(2) |
N/A |
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(1)
For the fiscal period July 22, 2021 (commencement of operations) through April
30, 2022.
(2)
For the fiscal period October 31, 2022 (commencement of operations) through
April 30, 2023.
(3)
The Fund’s portfolio turnover rate increased during the fiscal year ended April
30, 2023 due to the Adviser’s decision to harvest losses and rebalance the
portfolio.
BOOK
ENTRY ONLY SYSTEM
The
Depository Trust Company (“DTC”) acts as securities depositary for Shares.
Shares are represented by securities registered in the name of DTC or its
nominee, Cede & Co., and deposited with, or on behalf of, DTC. Except in
limited circumstances set forth below, certificates will not be issued for
Shares.
DTC
is a limited-purpose trust company that was created to hold securities of its
participants (the “DTC Participants”) and to facilitate the clearance and
settlement of securities transactions among the DTC Participants in such
securities through electronic book-entry changes in accounts of the DTC
Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks,
trust companies, clearing corporations and certain other organizations, some of
whom (and/or their representatives) own DTC. More specifically, DTC is owned by
a number of its DTC Participants and by the New York Stock Exchange (“NYSE”) and
FINRA. Access to the DTC system is also available to others such as banks,
brokers, dealers, and trust companies that clear through or maintain a custodial
relationship with a DTC Participant, either directly or indirectly (the
“Indirect Participants”).
Beneficial
ownership of Shares is limited to DTC Participants, Indirect Participants, and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to in this SAI as “Beneficial Owners”) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC Participants) and on the records of DTC Participants (with
respect to Indirect Participants and Beneficial Owners that are not DTC
Participants). Beneficial Owners will receive from or through the DTC
Participant a written confirmation relating to their purchase of Shares. The
Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered
in their names and will not receive or be entitled to physical delivery of Share
certificates. Each Beneficial Owner must rely on the procedures of DTC and any
DTC Participant and/or Indirect Participant through which such Beneficial Owner
holds its interests, to exercise any rights of a holder of Shares.
Conveyance
of all notices, statements, and other communications to Beneficial Owners is
effected as follows. DTC will make available to the Trust upon request and for a
fee a listing of Shares held by each DTC Participant. The Trust shall obtain
from each such DTC Participant the number of Beneficial Owners holding Shares,
directly or indirectly, through such DTC Participant. The Trust shall provide
each such DTC Participant with copies of such notice, statement, or other
communication, in such form, number and at such place as such DTC Participant
may reasonably request, in order that such notice, statement or communication
may be transmitted by such DTC Participant, directly or indirectly, to such
Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant
a fair and reasonable amount as reimbursement for the expenses attendant to such
transmittal, all subject to applicable statutory and regulatory
requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all Shares. DTC or its nominee, upon receipt of any such
distributions, shall credit immediately DTC Participants’ accounts with payments
in amounts proportionate to their respective beneficial interests in a Fund as
shown on the records of DTC or its nominee. Payments by DTC Participants to
Indirect Participants and Beneficial Owners of Shares held through such DTC
Participants will be governed by standing instructions and customary practices,
as is now the case with securities held for the accounts of customers in bearer
form or registered in a “street name,” and will be the responsibility of such
DTC Participants.
The
Trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in Shares, or for maintaining, supervising, or reviewing any
records relating to such
beneficial
ownership interests, or for any other aspect of the relationship between DTC and
the DTC Participants or the relationship between such DTC Participants and the
Indirect Participants and Beneficial Owners owning through such DTC
Participants.
DTC
may determine to discontinue providing its service with respect to a Fund at any
time by giving reasonable notice to the Fund and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the applicable Fund shall take action either to find a
replacement for DTC to perform its functions at a comparable cost or, if such
replacement is unavailable, to issue and deliver printed certificates
representing ownership of Shares, unless the Trust makes other arrangements with
respect thereto satisfactory to the Exchange.
PURCHASE
AND REDEMPTION OF SHARES IN CREATION UNITS
The
Trust issues and redeems Shares only in Creation Units on a continuous basis
through the Transfer Agent, without a sales load (but subject to transaction
fees, if applicable), at their NAV per share next determined after receipt of an
order, on any Business Day, in proper form pursuant to the terms of the
Authorized Participant Agreement (“Participant Agreement”). The NAV of Shares is
calculated each business day as of the scheduled close of regular trading on the
NYSE, generally 4:00 p.m., Eastern time. The Funds will not issue fractional
Creation Units. A “Business Day” is any day on which the NYSE is open for
business.
Fund
Deposit.
The consideration for purchase of a Creation Unit of a Fund generally consists
of the in-kind deposit of a designated portfolio of securities (the “Deposit
Securities”) and the Cash Component (defined below), computed as described
below. Notwithstanding the foregoing, the Trust reserves the right to permit or
require the substitution of a “cash in lieu” amount (“Deposit Cash”) to be added
to the Cash Component to replace any Deposit Security. When accepting purchases
of Creation Units for all or a portion of Deposit Cash, a Fund may incur
additional costs associated with the acquisition of Deposit Securities that
would otherwise be provided by an in-kind purchaser.
Together,
the Deposit Securities or Deposit Cash, as applicable, and the Cash Component
constitute the “Fund Deposit,” which represents the minimum initial and
subsequent investment amount for a Creation Unit of the applicable Fund. The
“Cash Component” is an amount equal to the difference between the NAV of Shares
(per Creation Unit) and the value of the Deposit Securities or Deposit Cash, as
applicable. If the Cash Component is a positive number (i.e.,
the NAV per Creation Unit exceeds the value of the Deposit Securities or Deposit
Cash, as applicable), the Cash Component shall be such positive amount. If the
Cash Component is a negative number (i.e.,
the NAV per Creation Unit is less than the value of the Deposit Securities or
Deposit Cash, as applicable), the Cash Component shall be such negative amount
and the creator will be entitled to receive cash in an amount equal to the Cash
Component. The Cash Component serves the function of compensating for any
differences between the NAV per Creation Unit and the value of the Deposit
Securities or Deposit Cash, as applicable. Computation of the Cash Component
excludes any stamp duty or other similar fees and expenses payable upon transfer
of beneficial ownership of the Deposit Securities, if applicable, which shall be
the sole responsibility of the Authorized Participant (as defined below).
Each
Fund, through NSCC, makes available on each Business Day, prior to the opening
of business on the Exchange (currently 9:30 a.m., Eastern time), the list of the
names and the required number of Shares of each Deposit Security or the required
amount of Deposit Cash, as applicable, to be included in the current Fund
Deposit (based on information at the end of the previous Business Day) for the
applicable Fund. Such Fund Deposit is subject to any applicable adjustments as
described below, to effect purchases of Creation Units of the applicable Fund
until such time as the next-announced composition of the Deposit Securities or
the required amount of Deposit Cash, as applicable, is made available.
The
identity and number of Shares of the Deposit Securities or the amount of Deposit
Cash, as applicable, required for a Fund Deposit for the Fund changes as
rebalancing adjustments and corporate action events are reflected from time to
time by the Adviser with a view to the investment objective of the Fund.
The
Trust reserves the right to permit or require the substitution of Deposit Cash
to replace any Deposit Security, which shall be added to the Cash Component,
including, without limitation, in situations where the Deposit Security: (i) may
not be available in sufficient quantity for delivery; (ii) may not be eligible
for transfer through the systems of DTC for corporate securities and municipal
securities; (iii) may not be eligible for trading by an Authorized Participant
(as defined below) or the investor for which it is acting; (iv) would be
restricted under the securities laws or where the delivery of the Deposit
Security to the Authorized Participant would result in the disposition of the
Deposit Security by the Authorized Participant becoming restricted under the
securities laws; or (v) in certain other situations (collectively, “custom
orders”).
Procedures
for Purchase of Creation Units.
To be eligible to place orders with the Transfer Agent to purchase a Creation
Unit of a Fund, an entity must be (i) a “Participating Party” (i.e.,
a broker-dealer or other participant in the clearing process through the
Continuous Net Settlement System of the NSCC (the “Clearing Process”)), a
clearing agency that is registered with the SEC; or (ii) a DTC Participant (see
“Book
Entry Only System”).
In addition, each Participating Party or DTC Participant (each, an “Authorized
Participant”) 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. Each Authorized Participant will
agree, pursuant to the terms of a Participant Agreement, on behalf of itself or
any investor on whose behalf it will act, to certain conditions, including that
it will pay to the Trust, an amount of cash sufficient to pay the Cash Component
together with the creation transaction fee (described below), if applicable, and
any other applicable fees and taxes.
All
orders to purchase Shares directly from a Fund must be placed for one or more
Creation Units and in the manner and by the time set forth in the Participant
Agreement and/or applicable order form. The order cut-off time for orders to
purchase Creation Units of the ADME is 4:00 p.m. Eastern time and of each other
Fund is 3:00 p.m. Eastern time, which times may be modified by the Funds from
time-to-time by amendment to the Participant Agreement and/or applicable order
form. The date on which an order to purchase Creation Units (or an order to
redeem Creation Units, as set forth below) is received and accepted is referred
to as the “Order Placement Date.”
An
Authorized Participant may require an investor to make certain representations
or enter into agreements with respect to the order (e.g.,
to provide for payments of cash, when required). Investors should be aware that
their particular broker may not have executed a Participant Agreement and that,
therefore, orders to purchase Shares directly from a Fund in Creation Units have
to be placed by the investor’s broker through an Authorized Participant that has
executed a Participant Agreement. In such cases there may be additional charges
to such investor. At any given time, there may be only a limited number of
broker-dealers that have executed a Participant Agreement and only a small
number of such Authorized Participants may have international capabilities.
On
days when the Exchange closes earlier than normal, a Fund may require orders to
create Creation Units to be placed earlier in the day. In addition, if a market
or markets on which a Fund’s investments are primarily traded is closed, the
applicable Fund will also generally not accept orders on such day(s). Orders
must be transmitted by an Authorized Participant by telephone or other
transmission method acceptable to the Transfer Agent pursuant to procedures set
forth in the Participant Agreement and in accordance with the applicable order
form. On behalf of the Funds, the Transfer Agent will notify the Custodian of
such order. The Custodian will then provide such information to the appropriate
local sub-custodian(s). Those placing orders through an Authorized Participant
should allow sufficient time to permit proper submission of the purchase order
to the Transfer Agent by the cut-off time on such Business Day. Economic or
market disruptions or changes, or telephone or other communication failure may
impede the ability to reach the Transfer Agent or an Authorized Participant.
Fund
Deposits must be delivered by an Authorized Participant through the Federal
Reserve System (for cash) or through DTC (for corporate securities), through a
subcustody agent (for foreign securities) and/or through such other arrangements
allowed by the Trust or its agents. With respect to foreign Deposit Securities,
the Custodian shall cause the subcustodian of the Funds to maintain an account
into which the Authorized Participant shall deliver, on behalf of itself or the
party on whose behalf it is acting, such Deposit Securities (or Deposit Cash for
all or a part of such securities, as permitted or required), with any
appropriate adjustments as advised by the Trust. Foreign Deposit Securities must
be delivered to an account maintained at the applicable local subcustodian. A
Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion so as to ensure the delivery of the requisite number of Deposit
Securities or Deposit Cash, as applicable, to the account of the applicable Fund
or its agents by no later than 12:00 p.m. Eastern Time (or such other time as
specified by the Trust) on the Settlement Date. If a Fund or its agents do not
receive all of the Deposit Securities, or the required Deposit Cash in lieu
thereof, by such time, then the order may be deemed rejected and the Authorized
Participant shall be liable to the applicable Fund for losses, if any, resulting
therefrom. The “Settlement Date” for a Fund is generally the second Business Day
after the Order Placement Date, except for ADME and IDUB for which the
Settlement Date is generally the Business Day after the Order Placement Date.
All questions as to the number of Deposit Securities or Deposit Cash to be
delivered, as applicable, and the validity, form and eligibility (including time
of receipt) for the deposit of any tendered securities or cash, as applicable,
will be determined by the Trust, whose determination shall be final and binding.
The amount of cash represented by the Cash Component must be transferred
directly to the Custodian through the Federal Reserve Bank wire transfer system
in a timely manner so as to be received by the Custodian no later than the
Settlement Date. If the Cash Component and the Deposit Securities or Deposit
Cash, as applicable, are not received by the Custodian in a timely manner by the
Settlement Date, the creation order may be cancelled. Upon written notice to the
Distributor, such canceled order may be resubmitted the following Business Day
using a Fund Deposit as newly constituted to reflect the then current NAV of the
applicable Fund.
The
order shall be deemed to be received on the Business Day on which the order is
placed provided that the order is placed in proper form prior to the applicable
cut-off time and the federal funds in the appropriate amount are deposited with
the Custodian on the Settlement Date. If the order is not placed in proper form
as required, or federal funds in the appropriate amount are not received on the
Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the applicable Fund for losses, if any, resulting
therefrom. A creation request is considered to be in “proper form” if all
procedures set forth in the Participant Agreement, order form and this SAI are
properly followed.
Issuance
of a Creation Unit.
Except as provided in this SAI, Creation Units will not be issued until the
transfer of good title to the Trust of the Deposit Securities or payment of
Deposit Cash, as applicable, and the payment of the Cash Component have been
completed. When the subcustodian has confirmed to the Custodian that the
required Deposit Securities (or the cash value thereof) have been delivered to
the account of the relevant subcustodian or subcustodians, the Distributor and
the Adviser shall be notified of such delivery, and the Trust will issue and
cause the delivery of the Creation Units. The delivery of Creation Units so
created generally will occur no later than the second Business Day following the
day on which the purchase order is deemed received by the Distributor, except
for IDUB for which the delivery of Creation Units so created generally will
occur no later than the Business Day following the day on which the purchase
order is deemed received by the Transfer Agent. The Authorized Participant shall
be liable to the applicable Fund for losses, if any, resulting from unsettled
orders.
Creation
Units may be purchased in advance of receipt by the Trust of all or a portion of
the applicable Deposit Securities as described below. In these circumstances,
the initial deposit will have a value greater than the NAV of Shares on the date
the order is placed in proper form since, in addition to available Deposit
Securities, cash must be deposited in an amount equal to the sum of (i) the Cash
Component, plus (ii) an additional amount of cash equal to a percentage of the
value as set forth in the Participant Agreement, of the undelivered Deposit
Securities (the “Additional Cash Deposit”), which shall be maintained in a
separate non-interest bearing collateral account. The Authorized Participant
must deposit with the Custodian the Additional Cash Deposit, as applicable, by
12:00 p.m. Eastern time (or such other time as specified by the Trust) on the
Settlement Date. If a Fund or its agents do not receive the Additional Cash
Deposit in the appropriate amount, by such time, then the order may be deemed
rejected and the Authorized Participant shall be liable to the applicable Fund
for losses, if any, resulting therefrom. An additional amount of cash shall be
required to be deposited with the Trust, pending delivery of the missing Deposit
Securities to the extent necessary to maintain the Additional Cash Deposit with
the Trust in an amount at least equal to the applicable percentage, as set forth
in the Participant Agreement, of the daily market value of the missing Deposit
Securities. The Participant Agreement will permit the Trust to buy the missing
Deposit Securities at any time. Authorized Participants will be liable to the
Trust for the costs incurred by the Trust in connection with any such purchases.
These costs will be deemed to include the amount by which the actual purchase
price of the Deposit Securities exceeds the value of such Deposit Securities on
the day the purchase order was deemed received by the Transfer Agent plus the
brokerage and related transaction costs associated with such purchases. The
Trust will return any unused portion of the Additional Cash Deposit once all of
the missing Deposit Securities have been properly received by the Custodian or
purchased by the Trust and deposited into the Trust. In addition, a transaction
fee, as described below under “Creation
Transaction Fee,”
may be charged. The delivery of Creation Units so created generally will occur
no later than the Settlement Date.
Acceptance
of Orders of Creation Units.
The Trust reserves the right to reject an order for Creation Units transmitted
to it by the Transfer Agent with respect to a Fund including, without
limitation, if (a) the order is not in proper form; (b) the Deposit Securities
or Deposit Cash, as applicable, delivered by the Participant are not as
disseminated through the facilities of the NSCC for that date by the Custodian;
(c) the investor(s), upon obtaining Shares ordered, would own 80% or more of the
currently outstanding Shares of the applicable Fund; (d) the acceptance of the
Fund Deposit would, in the opinion of counsel, be unlawful; (e) the acceptance
or receipt of the order for a Creation Unit would, in the opinion of counsel to
the Trust, be unlawful; or (f) in the event that circumstances outside the
control of the Trust, the Custodian, the Transfer Agent and/or the Adviser make
it for all practical purposes not feasible to process orders for Creation Units.
Examples
of such circumstances include acts of God or public service or utility problems
such as fires, floods, extreme weather conditions and power outages resulting in
telephone, telecopy and computer failures; market conditions or activities
causing trading halts; systems failures involving computer or other information
systems affecting the Trust, the Distributor, the Custodian, a sub-custodian,
the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant
in the creation process, and other extraordinary events. The Transfer Agent
shall notify a prospective creator of a Creation Unit and/or the Authorized
Participant acting on behalf of the creator of a Creation Unit of its rejection
of the order of such person. The Trust, the Transfer Agent, the Custodian, any
sub-custodian and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits
nor shall either of them incur any liability for the failure to give any such
notification. The Trust, the Transfer Agent, the Custodian and the Distributor
shall not be liable for the rejection of any purchase order for Creation Units.
All
questions as to the number of Shares of each security in the Deposit Securities
and the validity, form, eligibility and acceptance for deposit of any securities
to be delivered shall be determined by the Trust, and the Trust’s determination
shall be final and binding.
Creation
Transaction Fee.
A fixed purchase (i.e.,
creation) transaction fee, payable to the Fund’s custodian, may be imposed for
the transfer and other transaction costs associated with the purchase of
Creation Units (“Creation Order Costs”). The standard fixed creation transaction
fee for each Fund, regardless of the number of Creation Units created in the
transaction, can be found in the table below. Each Fund may adjust the standard
fixed creation transaction fee from time to time. The fixed creation fee may be
waived on certain orders if the applicable Fund’s custodian has determined to
waive some or all of the Creation Order Costs associated with the order or
another party, such as the Adviser, has agreed to pay such fee.
In
addition, a variable fee, payable to the Fund, of up to the maximum percentage
listed in the table below of the value of the Creation Units subject to the
transaction may be imposed for cash purchases, non-standard orders, or partial
cash purchases of Creation Units. The variable charge is primarily designed to
cover additional costs (e.g.,
brokerage, taxes) involved with buying the securities with cash. Each Fund may
determine to not charge a variable fee on certain orders when the Adviser has
determined that doing so is in the best interests of Fund shareholders,
e.g.,
for creation orders that facilitate changes to the Fund’s portfolio in a more
tax efficient manner than could be achieved without such order. Investors who
use the services of a broker or other such intermediary may be charged a fee for
such services. Investors are responsible for the fixed costs of transferring the
Fund Securities from the Trust to their account or on their order.
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Name
of Fund |
Fixed
Creation Transaction Fee |
Maximum
Variable Transaction Fee |
Aptus
Drawdown Managed Equity ETF |
$300 |
2% |
Aptus
Collared Investment Opportunity ETF |
$300 |
2% |
Aptus
Defined Risk ETF |
$300 |
2% |
Opus
Small Cap Value ETF |
$300 |
2% |
Aptus
International Enhanced Yield ETF |
$300 |
2% |
Aptus
Enhanced Yield ETF |
$300 |
2% |
Risks
of Purchasing Creation Units.
There are certain legal risks unique to investors purchasing Creation Units
directly from a Fund. Because Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. Certain activities that
a shareholder performs as a dealer could, depending on the circumstances, result
in the shareholder being deemed a participant in the distribution in a manner
that could render the shareholder a statutory underwriter and subject to the
prospectus delivery and liability provisions of the Securities Act. For example,
a shareholder could be deemed a statutory underwriter if it purchases Creation
Units from a Fund, breaks them down into the constituent Shares, and sells those
Shares directly to customers, or if a shareholder chooses to couple the creation
of a supply of new Shares with an active selling effort involving solicitation
of secondary-market demand for Shares. Whether a person is an underwriter
depends upon all of the facts and circumstances pertaining to that person’s
activities, and the examples mentioned here should not be considered a complete
description of all the activities that could cause you to be deemed an
underwriter.
Dealers
who are not “underwriters” but are participating in a distribution (as opposed
to engaging in ordinary secondary-market transactions), and thus dealing with
Shares as part of an “unsold allotment” within the meaning of Section 4(a)(3)(C)
of the Securities Act, will be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next determined after
receipt of a redemption request in proper form by a Fund through the Transfer
Agent and only on a Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST
WILL NOT REDEEM SHARES IN AMOUNTS LESS THAN CREATION UNITS. Investors must
accumulate enough Shares in the secondary market to constitute a Creation Unit
to have such Shares redeemed by the Trust. There can be no assurance, however,
that there will be sufficient liquidity in the public trading market at any time
to permit assembly of a Creation Unit. Investors should expect to incur
brokerage and other costs in connection with assembling a sufficient number of
Shares to constitute a redeemable Creation Unit.
With
respect to the Funds, the Custodian, through the NSCC, makes available prior to
the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on
each Business Day, the list of the names and Share quantities of each Fund’s
portfolio securities that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (“Fund Securities”). Fund Securities received on redemption may not be
identical to Deposit Securities.
Redemption
proceeds for a Creation Unit are paid either in-kind or in cash, or combination
thereof, as determined by the Trust. With respect to in-kind redemptions of a
Fund, redemption proceeds for a Creation Unit will consist of Fund Securities—as
announced by the Custodian on the Business Day of the request for redemption
received in proper form plus cash in an amount equal to the difference between
the NAV of Shares being redeemed, as next determined after a receipt of a
request in proper form, and the value of the Fund Securities (the “Cash
Redemption Amount”), less a fixed redemption transaction fee, as applicable, as
set forth below. In the event that the Fund Securities have a value greater than
the NAV of Shares, a compensating cash payment equal to the differential is
required to be made by or through an Authorized Participant by the redeeming
shareholder. Notwithstanding the foregoing, at the Trust’s discretion, an
Authorized Participant may receive the corresponding cash value of the
securities in lieu of the in-kind securities value representing one or more Fund
Securities.
Redemption
Transaction Fee.
A fixed redemption transaction fee, payable to the Funds’ custodian, may be
imposed for the transfer and other transaction costs associated with the
redemption of Creation Units (“Redemption Order Costs”). The standard fixed
redemption transaction fee for each Fund, regardless of the number of Creation
Units redeemed in the transaction, can be found in the table below. Each Fund
may adjust the redemption transaction fee from time to time. The fixed
redemption fee may be waived on certain orders if the applicable Fund’s
custodian has determined to waive some or all of the Redemption Order Costs
associated with the order or another party, such as the Adviser, has agreed to
pay such fee.
In
addition, a variable fee, payable to the applicable Fund, of up to the maximum
percentage listed in the table below of the value of the Creation Units subject
to the transaction may be imposed for cash redemptions, non-standard orders, or
partial cash redemptions (when cash redemptions are available) of Creation
Units. The variable charge is primarily designed to cover additional costs
(e.g.,
brokerage, taxes) involved with selling portfolio securities to satisfy a cash
redemption. Each Fund may determine to not charge a variable fee on certain
orders when the Adviser has determined that doing so is in the best interests of
Fund shareholders, e.g.,
for redemption orders that facilitate changes to the Fund’s portfolio in a more
tax efficient manner than could be achieved without such order.
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Name
of Fund |
Fixed
Creation Transaction Fee |
Maximum
Variable Transaction Fee |
Aptus
Drawdown Managed Equity ETF |
$300 |
2% |
Aptus
Collared Investment Opportunity ETF |
$300 |
2% |
Aptus
Defined Risk ETF |
$300 |
2% |
Opus
Small Cap Value ETF |
$300 |
2% |
Aptus
International Enhanced Yield ETF |
$300 |
2% |
Aptus
Enhanced Yield ETF |
$300 |
2% |
Investors
who use the services of a broker or other such intermediary may be charged a fee
for such services. Investors are responsible for the fixed costs of transferring
the Fund Securities from the Trust to their account or on their order.
Procedures
for Redemption of Creation Units. Orders
to redeem Creation Units must be submitted in proper form to the Transfer Agent
prior to 4:00 p.m. Eastern time for ADME and 3:00 p.m. Eastern time for each
other Fund. A redemption request is considered to be in “proper form” if (i) an
Authorized Participant has transferred or caused to be transferred to the
Trust’s Transfer Agent the Creation Unit(s) being redeemed through the
book-entry system of DTC so as to be effective by the time as set forth in the
Participant Agreement and (ii) a request in form satisfactory to the Trust is
received by the Transfer Agent from the Authorized Participant on behalf of
itself or another redeeming investor within the time periods specified in the
Participant Agreement. If the Transfer Agent does not receive the investor’s
Shares through DTC’s facilities by the times and pursuant to the other terms and
conditions set forth in the Participant Agreement, the redemption request shall
be rejected.
The
Authorized Participant must transmit the request for redemption, in the form
required by the Trust, to the Transfer Agent in accordance with procedures set
forth in the Authorized Participant Agreement. Investors should be aware that
their particular broker may not have executed an Authorized Participant
Agreement, and that, therefore, requests to redeem Creation Units may have to be
placed by the investor’s broker through an Authorized Participant who has
executed an Authorized Participant Agreement. Investors making a redemption
request should be aware that such request must be in the form specified by such
Authorized Participant. Investors making a request to redeem Creation Units
should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the shares to the Trust’s Transfer Agent;
such investors should allow for the additional time that may be required to
effect redemptions through their banks, brokers or other financial
intermediaries if such intermediaries are not Authorized
Participants.
Additional
Redemption Procedures.
In connection with taking delivery of Shares of Fund Securities upon redemption
of Creation Units, a redeeming shareholder or Authorized Participant acting on
behalf of such shareholder must maintain appropriate custody arrangements with a
qualified broker-dealer, bank, or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account
such Fund Securities will be delivered. Deliveries of redemption proceeds
generally will be made within two business days of the trade date, except for
IDUB for which deliveries of redemption proceeds generally will be made within
one business day of the trade date.
However,
due to the schedule of holidays in certain countries, the different treatment
among foreign and U.S. markets of dividend record dates and dividend ex-dates
(that is the last date the holder of a security can sell the security and still
receive dividends payable on the security sold), and in certain other
circumstances, the delivery of in-kind redemption proceeds with respect to IDUB
may take longer than one Business Day after the day on which the redemption
request is received in proper form. If neither the redeeming Shareholder nor the
Authorized Participant acting on behalf of such redeeming Shareholder has
appropriate arrangements to take delivery of the Fund Securities in the
applicable foreign jurisdiction and it is not possible to make other such
arrangements, or if it is not possible to effect deliveries of the Fund
Securities in such jurisdiction, the Trust may, in its discretion, exercise its
option to redeem such Shares in cash, and the redeeming Shareholders will be
required to receive its redemption proceeds in cash.
The
Trust may in its discretion exercise its option to redeem such Shares in cash,
and the redeeming investor will be required to receive its redemption proceeds
in cash. In addition, an investor may request a redemption in cash that a Fund
may, in its sole discretion, permit. In either case, the investor will receive a
cash payment equal to the NAV of its Shares based on the NAV of Shares next
determined after the redemption request is received in proper form (minus a
redemption transaction fee, if applicable, and additional charge for requested
cash redemptions specified above, to offset the Trust’s brokerage and other
transaction costs associated with the disposition of Fund Securities). A Fund
may also, in its sole discretion, upon request of a shareholder, provide such
redeemer a portfolio of securities that differs from the exact composition of
the Fund Securities but does not differ in NAV.
Redemptions
of Shares for Fund Securities will be subject to compliance with applicable
federal and state securities laws and the Funds (whether or not it otherwise
permits cash redemptions) reserve the right to redeem Creation Units for cash to
the extent that the Trust could not lawfully deliver specific Fund Securities
upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which
it is acting subject to a legal restriction with respect to a particular
security included in the Fund Securities applicable to the redemption of
Creation Units may be paid an equivalent amount of cash. The Authorized
Participant may request the redeeming investor of the Shares to complete an
order form or to enter into agreements with respect to such matters as
compensating cash payment. Further, an Authorized Participant that is not a
“qualified
institutional
buyer,” (“QIB”) as such term is defined under Rule 144A of the Securities Act,
will not be able to receive Fund Securities that are restricted securities
eligible for resale under Rule 144A. An Authorized Participant may be required
by the Trust to provide a written confirmation with respect to QIB status to
receive Fund Securities.
Because
the portfolio securities of the Funds may trade on other exchanges on days that
the Exchange is closed or are otherwise not Business Days for such Fund,
shareholders may not be able to redeem their Shares of the applicable Fund, or
to purchase or sell Shares of the applicable Fund on the Exchange, on days when
the NAV of the applicable Fund could be significantly affected by events in the
relevant foreign markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to a Fund (1) for any period during which the Exchange is closed (other
than customary weekend and holiday closings); (2) for any period during which
trading on the Exchange is suspended or restricted; (3) for any period during
which an emergency exists as a result of which disposal of the Shares of the
applicable Fund or determination of the NAV of the Shares is not reasonably
practicable; or (4) in such other circumstance as is permitted by the SEC.
DETERMINATION
OF NET ASSET VALUE
NAV
per Share for a Fund is computed by dividing the value of the net assets of the
applicable Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
Shares outstanding, rounded to the nearest cent. Expenses and fees, including
the management fees, are accrued daily and taken into account for purposes of
determining NAV. The NAV of each Fund is calculated by Fund Services and
determined at the scheduled close of the regular trading session on the NYSE
(ordinarily 4:00 p.m., Eastern time) on each day that the NYSE is open, provided
that fixed-income assets may be valued as of the announced closing time for
trading in fixed-income instruments on any day that the Securities Industry and
Financial Markets Association (“SIFMA”) announces an early closing time.
Pursuant
to Rule 2a-5 under the 1940 Act, the Board has appointed the Adviser as the
Funds’ valuation designee (the “Valuation Designee”) to perform all fair
valuations of each Fund’s portfolio investments, subject to the Board’s
oversight. As the Valuation Designee, the Adviser has established procedures for
its fair valuation of each Fund’s portfolio investments. These procedures
address, among other things, determining when market quotations are not readily
available or reliable and the methodologies to be used for determining the fair
value of investments, as well as the use and oversight of third-party pricing
services for fair valuation. The Adviser’s fair value determinations will be
carried out in compliance with Rule 2a-5 and based on fair value methodologies
established and applied by the Adviser and periodically tested to ensure such
methodologies are appropriate and accurate with respect to each Fund’s portfolio
investments. The Adviser’s fair value methodologies may involve obtaining inputs
and prices from third-party pricing services.
In
calculating each Fund’s NAV per Share, each Fund’s investments are generally
valued using market quotations to the extent such market quotations are readily
available. If market quotations are not readily available or are deemed to be
unreliable by the Adviser, the Adviser will fair value such investments and use
the fair value to calculate each Fund’s NAV. When fair value pricing is
employed, the prices of securities used by the Adviser to calculate each Fund’s
NAV may differ from quoted or published prices for the same securities. Due to
the subjective and variable nature of fair value pricing, it is possible that
the fair value determined for a particular security may be materially different
(higher or lower) from the price of the security quoted or published by others,
or the value when trading resumes or is realized upon its sale. There may be
multiple methods that can be used to value a portfolio investment when market
quotations are not readily available. The value established for any portfolio
investment at a point in time might differ from what would be produced using a
different methodology or if it had been priced using market
quotations.
DIVIDENDS
AND DISTRIBUTIONS
The
following information supplements and should be read in conjunction with the
section in the Prospectus entitled “Dividends, Distributions and Taxes.”
General
Policies.
Dividends from net investment income, if any, are declared and paid at least
annually by each Fund. Distributions of net realized securities gains, if any,
generally are declared and paid once a year, but a Fund may make distributions
on a more frequent basis to improve index tracking for the Fund or for the Fund
to comply with the distribution requirements of the Code to preserve a Fund’s
eligibility for treatment as a RIC, in all events in a manner consistent with
the provisions of the 1940 Act.
Dividends
and other distributions on Shares are distributed, as described below, on a pro
rata basis to Beneficial Owners of such Shares. Dividend payments are made
through DTC Participants and Indirect Participants to Beneficial Owners then of
record with proceeds received from the Trust.
Each
Fund makes additional distributions to the extent necessary (i) to distribute
the entire annual taxable income of the applicable Fund, plus any net capital
gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of
the Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or
advisable to preserve a Fund’s eligibility for treatment as a RIC or to avoid
imposition of income or excise taxes on undistributed income.
Dividend
Reinvestment Service.
The Trust will not make the DTC book-entry dividend reinvestment service
available for use by Beneficial Owners for reinvestment of their cash proceeds,
but certain individual broker-dealers may make available the DTC
book-
entry
Dividend Reinvestment Service for use by Beneficial Owners of the Funds through
DTC Participants for reinvestment of their dividend distributions. Investors
should contact their brokers to ascertain the availability and description of
these services. Beneficial Owners should be aware that each broker may require
investors to adhere to specific procedures and timetables to participate in the
dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend
distributions of both income and realized gains will be automatically reinvested
in additional whole Shares issued by the Trust of the applicable Fund at NAV per
Share. Distributions reinvested in additional Shares will nevertheless be
taxable to Beneficial Owners acquiring such additional Shares to the same extent
as if such distributions had been received in cash.
FEDERAL
INCOME TAXES
The
following is only a summary of certain U.S. federal income tax considerations
generally affecting a Fund and its shareholders that supplements the discussion
in the Prospectus. No attempt is made to present a comprehensive explanation of
the federal, state, local or foreign tax treatment of a Fund or its
shareholders, and the discussion here and in the Prospectus is not intended to
be a substitute for careful tax planning.
The
following general discussion of certain U.S. federal income tax consequences is
based on provisions of the Code and the regulations issued thereunder as in
effect on the date of this SAI. New legislation, as well as administrative
changes or court decisions, may significantly change the conclusions expressed
herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders
are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax
situations of the shareholders and regarding specific questions as to federal,
state, foreign or local taxes.
Taxation
of the Funds.
Each Fund intends to elect and intends to continue to qualify each year to be
treated as a separate RIC under the Code. As such, the Funds should not be
subject to federal income taxes on their net investment income and capital
gains, if any, to the extent that they timely distribute such income and capital
gains to their shareholders. To qualify for treatment as a RIC, a Fund must
distribute annually to its shareholders at least the sum of 90% of its net
investment income (generally including the excess of net short-term capital
gains over net long-term capital losses) and 90% of its net tax-exempt interest
income, if any (the “Distribution Requirement”) and also must meet several
additional requirements. Among these requirements are the following: (i) at
least 90% of the applicable Fund’s gross income each taxable year must be
derived from dividends, interest, payments with respect to certain securities
loans, gains from the sale or other disposition of stock, securities or foreign
currencies, or other income derived with respect to its business of investing in
such stock, securities or foreign currencies and net income derived from
interests in qualified publicly traded partnerships (the “Qualifying Income
Requirement”); and (ii) at the end of each quarter of the Fund’s taxable year,
the Fund’s assets must be diversified so that (a) at least 50% of the value of
the Fund’s total assets is represented by cash and cash items, U.S. government
securities, securities of other RICs, and other securities, with such other
securities limited, in respect to any one issuer, to an amount not greater in
value than 5% of the value of the Fund’s total assets and to not more than 10%
of the outstanding voting securities of such issuer, including the equity
securities of a qualified publicly traded partnership, and (b) not more than 25%
of the value of its total assets is invested, including through corporations in
which the Fund owns a 20% or more voting stock interest, in the securities
(other than U.S. government securities or securities of other RICs) of any one
issuer, the securities (other than securities of other RICs) of two or more
issuers which the applicable Fund controls and which are engaged in the same,
similar, or related trades or businesses, or the securities of one or more
qualified publicly traded partnerships (the “Diversification Requirement”). The
determination of the value and the identity of the issuer of derivative
investments that the Fund may invest in are often unclear for purposes of the
Diversification Requirement described above. Although each Fund intends to
carefully monitor its investments to ensure that it is adequately diversified
under the Diversification Requirement, there are no assurances that the IRS will
agree with a Fund’s determination of the issuer under the Diversification
Requirement with respect to such derivatives.
To
the extent a Fund makes investments that may generate income that is not
qualifying income, including certain derivatives, the Fund will seek to restrict
the resulting income from such investments so that the Fund’s non-qualifying
income does not exceed 10% of its gross income.
Although
the Funds intend to distribute substantially all of their net investment income
and may distribute their capital gains for any taxable year, the Funds will be
subject to federal income taxation to the extent any such income or gains are
not distributed. Each Fund is treated as a separate corporation for federal
income tax purposes. A Fund therefore is considered to be a separate entity in
determining its treatment under the rules for RICs described herein. The
requirements (other than certain organizational requirements) for qualifying RIC
status are determined at the fund level rather than at the Trust level.
If
a Fund fails to satisfy the Qualifying Income Requirement or the Diversification
Requirement in any taxable year, the applicable Fund may be eligible for relief
provisions if the failures are due to reasonable cause and not willful neglect
and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. Additionally, relief is provided for certain
de
minimis
failures of the Diversification Requirement where a Fund corrects the failure
within a specified period of time. To be eligible for the relief provisions with
respect to a failure to meet the Diversification Requirement, a Fund may be
required to dispose of certain assets. If these relief provisions were not
available to a Fund and it were to fail to qualify for treatment as a RIC for a
taxable year, all of its taxable income would be subject to tax at the regular
21% corporate rate without any deduction for distributions to shareholders, and
its distributions (including capital gains distributions) generally would be
taxable to the shareholders of the applicable Fund as ordinary income
dividends,
subject to the dividends received deduction for corporate shareholders and the
lower tax rates on qualified dividend income received by non-corporate
shareholders, subject to certain limitations. To requalify for treatment as a
RIC in a subsequent taxable year, a Fund would be required to satisfy the RIC
qualification requirements for that year and to distribute any earnings and
profits from any year in which the applicable Fund failed to qualify for tax
treatment as a RIC. If a Fund failed to qualify as a RIC for a period greater
than two taxable years, it would generally be required to pay a Fund-level tax
on certain net built in gains recognized with respect to certain of its assets
upon a disposition of such assets within five years of qualifying as a RIC in a
subsequent year. The Board reserves the right not to maintain the qualification
of a Fund for treatment as a RIC if it determines such course of action to be
beneficial to shareholders. If a Fund determines that it will not qualify as a
RIC, the applicable Fund will establish procedures to reflect the anticipated
tax liability in the Fund’s NAV.
A
Fund may elect to treat part or all of any “qualified late year loss” as if it
had been incurred in the succeeding taxable year in determining the Fund’s
taxable income, net capital gain, net short-term capital gain, and earnings and
profits. The effect of this election is to treat any such “qualified late year
loss” as if it had been incurred in the succeeding taxable year in
characterizing Fund distributions for any calendar year. A “qualified late year
loss” generally includes net capital loss, net long-term capital loss, or net
short-term capital loss incurred after October 31 of the current taxable year
(commonly referred to as “post-October losses”) and certain other late-year
losses.
Capital
losses in excess of capital gains (“net capital losses”) are not permitted to be
deducted against a RIC’s net investment income. Instead, for U.S. federal income
tax purposes, potentially subject to certain limitations, a Fund may carry a net
capital loss from any taxable year forward indefinitely to offset its capital
gains, if any, in years following the year of the loss. To the extent subsequent
capital gains are offset by such losses, they will not result in U.S. federal
income tax liability to the applicable Fund and may not be distributed as
capital gains to its shareholders. Generally, a Fund may not carry forward any
losses other than net capital losses. The carryover of capital losses may be
limited under the general loss limitation rules if the Fund experiences an
ownership change as defined in the Code.
A
Fund will be subject to a nondeductible 4% federal excise tax on certain
undistributed income if it does not distribute to its shareholders in each
calendar year an amount at least equal to 98% of its ordinary income for the
calendar year plus 98.2% of its capital gain net income for the one-year period
ending on October 31 of that year, subject to an increase for any shortfall in
the prior year’s distribution. For this purpose, any ordinary income or capital
gain net income retained by a Fund and subject to corporate income tax will be
considered to have been distributed. The Funds intend to declare and distribute
dividends and distributions in the amounts and at the times necessary to avoid
the application of the excise tax, but can make no assurances that all such tax
liability will be completely eliminated. A Fund may in certain circumstances be
required to liquidate Fund investments in order to make sufficient distributions
to avoid federal excise tax liability at a time when the investment adviser
might not otherwise have chosen to do so, and liquidation of investments in such
circumstances may affect the ability of the Fund to satisfy the requirement for
qualification as a RIC.
If
a Fund meets the Distribution Requirement but retains some or all of its income
or gains, it will be subject to federal income tax to the extent any such income
or gains are not distributed. A Fund may designate certain amounts retained as
undistributed net capital gain in a notice to its shareholders, who (i) will be
required to include in income for U.S. federal income tax purposes, as long-term
capital gain, their proportionate shares of the undistributed amount so
designated, (ii) will be entitled to credit their proportionate shares of the
income tax paid by the Fund on that undistributed amount against their federal
income tax liabilities and to claim refunds to the extent such credits exceed
their tax liabilities, and (iii) will be entitled to increase their tax basis,
for federal income tax purposes, in their Shares by an amount equal to the
excess of the amount of undistributed net capital gain included in their
respective income over their respective income tax credits.
Taxation
of Shareholders – Distributions.
Each Fund intends to distribute annually to its shareholders substantially all
of its investment company taxable income (computed without regard to the
deduction for dividends paid), its net tax-exempt income, if any, and any net
capital gain (net recognized long-term capital gains in excess of net recognized
short-term capital losses, taking into account any capital loss carryforwards).
The distribution of investment company taxable income (as so computed) and net
realized capital gain will be taxable to Fund shareholders regardless of whether
the shareholder receives these distributions in cash or reinvests them in
additional Shares.
Each
Fund (or your broker) will report to shareholders annually the amounts of
dividends paid from ordinary income, the amount of distributions of net capital
gain, the portion of dividends which may qualify for the dividends received
deduction for corporations, and the portion of dividends which may qualify for
treatment as qualified dividend income, which, subject to certain limitations
and requirements, is taxable to non-corporate shareholders at rates of up to
20%. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares.
Distributions
from each Fund’s net capital gain will be taxable to shareholders at long-term
capital gains rates, regardless of how long shareholders have held their Shares.
In addition, certain capital gain dividends attributable to dividends the Funds
receive from REITs (i.e., “unrecaptured section 1250 gain”) may be taxable to
non-corporate shareholders at a rate of 25%.
Qualified
dividend income includes, in general, subject to certain holding period and
other requirements, dividend income from taxable domestic corporations and
certain foreign corporations. Subject to certain limitations, eligible foreign
corporations include
those
incorporated in possessions of the United States, those incorporated in certain
countries with comprehensive tax treaties with the United States, and other
foreign corporations if the stock with respect to which the dividends are paid
is readily tradable on an established securities market in the United States.
Dividends received by a Fund from an underlying fund taxable as a RIC or from a
REIT may be treated as qualified dividend income generally only to the extent so
reported by such underlying fund or REIT, however, dividends received by a Fund
from a REIT are generally not treated as qualified dividend income. If 95% or
more of a Fund’s gross income (calculated without taking into account net
capital gain derived from sales or other dispositions of stock or securities)
consists of qualified dividend income, the Fund may report all distributions of
such income as qualified dividend income.
Certain
of the Funds’ investment strategies may significantly reduce or eliminate their
ability to make distributions eligible to be treated as qualified dividend
income.
Fund
dividends will not be treated as qualified dividend income if a Fund does not
meet holding period and other requirements with respect to dividend paying
stocks in its portfolio, and the shareholder does not meet holding period and
other requirements with respect to the Shares on which the dividends were paid.
Distributions by a Fund of its net short-term capital gains will be taxable as
ordinary income. Distributions from a Fund’s net capital gain will be taxable to
shareholders at long-term capital gains rates, regardless of how long
shareholders have held their Shares. Distributions may be subject to state and
local taxes.
In
the case of corporate shareholders, certain dividends received by a Fund from
U.S. corporations (generally, dividends received by the Fund in respect of any
share of stock (1) with a tax holding period of at least 46 days during the
91-day period beginning on the date that is 45 days before the date on which the
stock becomes ex-dividend as to that dividend and (2) that is held in an
unleveraged position) and distributed and appropriately so reported by the Fund
may be eligible for the 50% dividends received deduction. Certain preferred
stock must have a holding period of at least 91 days during the 181-day period
beginning on the date that is 90 days before the date on which the stock becomes
ex-dividend as to that dividend to be eligible. Capital gain dividends
distributed to a Fund from other RICs are not eligible, and dividends
distributed to a Fund from REITs are generally not eligible for the dividends
received deduction. To qualify for the deduction, corporate shareholders must
meet the minimum holding period requirement stated above with respect to their
Shares, taking into account any holding period reductions from certain hedging
or other transactions or positions that diminish their risk of loss with respect
to their Shares, and, if they borrow to acquire or otherwise incur debt
attributable to Shares, they may be denied a portion of the dividends received
deduction with respect to those Shares.
Certain
of the Funds’ investment strategies may significantly reduce or eliminate their
ability to make distributions eligible for the dividends-received deduction.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by a Fund in October, November or December and payable to shareholders
of record in such a month that is paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it was declared.
U.S.
individuals with adjusted gross income (subject to certain adjustments)
exceeding certain threshold amounts ($250,000 if married filing jointly or if
considered a “surviving spouse” for federal income tax purposes, $125,000 if
married filing separately, and $200,000 in other cases) are subject to a 3.8%
tax on all or a portion of their “net investment income,” which includes taxable
interest, dividends, and certain capital gains (generally including capital gain
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.
Shareholders
who have not held Shares for a full year should be aware that a Fund may report
and distribute, as ordinary dividends or capital gain dividends, a percentage of
income that is not equal to the percentage of the Fund’s ordinary income or net
capital gain, respectively, actually earned during the applicable shareholder’s
period of investment in the Fund. A taxable shareholder may wish to avoid
investing in a Fund shortly before a dividend or other distribution, because the
distribution will generally be taxable even though it may economically represent
a return of a portion of the shareholder’s investment.
To
the extent that a Fund makes a distribution of income received by the Fund in
lieu of dividends (a “substitute payment”) with respect to securities on loan
pursuant to a securities lending transaction, such income will not constitute
qualified dividend income to individual shareholders and will not be eligible
for the dividends received deduction for corporate shareholders.
If
a Fund’s distributions exceed its earnings and profits, all or a portion of the
distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in a Fund and result in a
higher capital gain or lower capital loss when the Shares on which the
distribution was received are sold. After a shareholder’s basis in the Shares
has been reduced to zero, distributions in excess of earnings and profits will
be treated as gain from the sale of the shareholder’s Shares.
As
of April 30, 2023, the Funds had the following accumulated capital loss
carryforwards, which amounts do not expire:
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Name
of Fund |
Short-Term |
| Long-Term |
|
|
| |
Aptus
Drawdown Managed Equity ETF |
$54,685,583 |
| $23,481,548 |
|
|
| |
Aptus
Collared Investment Opportunity ETF |
$26,527,034 |
| $9,716,195 |
|
|
| |
Aptus
Defined Risk ETF |
$48,528,882 |
| $38,008,345 |
|
|
| |
Opus
Small Cap Value ETF |
$8,675,630 |
| $1,710,552 |
|
|
| |
Aptus
International Enhanced Yield ETF |
$16,283,838 |
| $21,404,971 |
|
|
| |
Aptus
Enhanced Yield ETF |
$4,215,593 |
| N/A |
|
|
| |
Taxation
of Shareholders – Sale or Exchange of Shares.
A sale or exchange of Shares may give rise to a gain or loss. For tax purposes,
an exchange of your Fund shares of a different fund is the same as a sale. In
general, provided that a shareholder holds Shares as capital assets, any gain or
loss realized upon a taxable disposition of Shares will be treated as long-term
capital gain or loss if Shares have been held for more than 12 months.
Otherwise, such gain or loss on the taxable disposition of Shares will generally
be treated as short-term capital gain or loss. Any loss realized upon a taxable
disposition of Shares held for six months or less will be treated as long-term
capital loss, rather than short-term capital loss, to the extent of any amounts
treated as distributions to the shareholder of long-term capital gain (including
any amounts credited to the shareholder as undistributed capital gains). All or
a portion of any loss realized upon a taxable disposition of Shares may be
disallowed if substantially identical Shares are acquired (through the
reinvestment of dividends or otherwise) within a 61-day period beginning 30 days
before and ending 30 days after the disposition. In such a case, the basis of
the newly acquired Shares will be adjusted to reflect the disallowed
loss.
The
cost basis of Shares acquired by purchase will generally be based on the amount
paid for Shares and then may be subsequently adjusted for other applicable
transactions as required by the Code. The difference between the selling price
and the cost basis of Shares generally determines the amount of the capital gain
or loss realized on the sale or exchange of Shares. Contact the broker through
whom you purchased your Shares to obtain information with respect to the
available cost basis reporting methods and elections for your account.
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. The ability of Authorized
Participants to receive a full or partial cash redemption of Creation Units of a
Fund may limit the tax efficiency of such Fund. An Authorized Participant who
redeems Creation Units will generally recognize a gain or loss equal to the
difference between the exchanger’s basis in the Creation Units and the sum of
the aggregate market value of any securities received plus the amount of any
cash received for such Creation Units. The Internal Revenue Service (“IRS”),
however, may assert that a loss realized upon an exchange of securities for
Creation Units cannot currently be deducted under the rules governing “wash
sales” (for a person who does not mark-to-market its portfolio) or on the basis
that there has been no significant change in economic position.
Any
capital gain or loss realized upon the creation of Creation Units will generally
be treated as long-term capital gain or loss if the securities exchanged for
such Creation Units have been held for more than one year. Any capital gain or
loss realized upon the redemption of Creation Units will generally be treated as
long-term capital gain or loss if Shares comprising the Creation Units have been
held for more than one year. Otherwise, such capital gains or losses will
generally be treated as short-term capital gains or losses. Any loss upon a
redemption of Creation Units held for six months or less may be treated as
long-term capital loss to the extent of any amounts treated as distributions to
the applicable Authorized Participant of long-term capital gain with respect to
the Creation Units (including any amounts credited to the Authorized Participant
as undistributed capital gains).
The
Trust, on behalf of the Funds, has the right to reject an order for Creation
Units if the purchaser (or a group of purchasers) would, upon obtaining the
Creation Units so ordered, own 80% or more of the outstanding Shares and if,
pursuant to Section 351 of the Code, a Fund would have a basis in the deposit
securities different from the market value of such securities on the date of
deposit. The Trust also has the right to require the provision of information
necessary to determine beneficial Share ownership for purposes of the 80%
determination. If a Fund does issue Creation Units to a purchaser (or a group of
purchasers) that would, upon obtaining the Creation Units so ordered, own 80% or
more of the outstanding Shares, the purchaser (or a group of purchasers) will
not recognize gain or loss upon the exchange of securities for Creation Units.
Authorized
Participants purchasing or redeeming Creation Units should consult their own tax
advisers with respect to the tax treatment of any creation or redemption
transaction and whether the wash sales rule applies and when a loss may be
deductible.
Taxation
of Fund Investments.
Certain of a Fund’s investments may be subject to complex provisions of the Code
(including provisions relating to hedging transactions, straddles, integrated
transactions, foreign currency contracts, forward foreign currency contracts,
and notional principal contracts) that, among other things, may affect a Fund’s
ability to qualify as a RIC, affect the character of gains and losses realized
by the Fund (e.g.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the Fund and defer losses. These rules could therefore
affect the character, amount and timing of distributions to shareholders. These
provisions also may require a Fund to mark to market certain types of positions
in its portfolio (i.e.,
treat them as if they were closed out) which may cause the Fund to recognize
income without the Fund receiving cash with which to make distributions in
amounts sufficient to enable the Fund to satisfy the RIC distribution
requirements for avoiding income and excise
taxes.
A Fund intends to monitor its transactions, intends to make appropriate tax
elections, and intends to make appropriate entries in its books and records to
mitigate the effect of these rules and preserve the Fund’s qualification for
treatment as a RIC. To the extent a Fund invests in an underlying fund that is
taxable as a RIC, the rules applicable to the tax treatment of complex
securities will also apply to the underlying funds that also invest in such
complex securities and investments.
The
Funds are required for federal income tax purposes to mark to market and
recognize as income for each taxable year its net unrealized gains and losses on
certain futures and options contracts under section 1256 of the Code (a “Section
1256 Contract”) as of the end of the year as well as those actually realized
during the year. Gain or loss from Section 1256 Contracts on broad-based indexes
required to be marked to market will be 60% long-term and 40% short-term capital
gain or loss. Application of this rule may alter the timing and character of
distributions to shareholders. The Funds may be required to defer the
recognition of losses on Section 1256 Contracts to the extent of any
unrecognized gains on offsetting positions held by the Funds. These provisions
may also require a Fund to mark-to-market certain types of positions in its
portfolios (i.e., treat them as if they were closed out), which may cause the
Fund to recognize income without receiving cash with which to make distributions
in amounts necessary to satisfy the distribution requirement and for avoiding
the excise tax discussed above. Accordingly, in order to avoid certain income
and excise taxes, a Fund may be required to liquidate its investments at a time
when the investment adviser might not otherwise have chosen to do
so.
Offsetting
positions held by a Fund (e.g., certain Funds’ options collar strategy)
involving certain derivative instruments, such as options, forward, and futures,
as well as its long and short positions in portfolio securities, may be
considered, for U.S. federal income tax purposes, to constitute “straddles.”
Straddles are defined to include “offsetting positions” in actively traded
personal property. For instance, a straddle can arise if a Fund writes a certain
covered call option on a stock (i.e., a call on a stock owned by the Fund), or
writes a call option on a stock index to the extent the Fund’s stock holdings
(and any subset thereof) and the index on which it has written a call overlap
sufficiently to constitute a straddle under applicable Treasury Regulations. The
tax treatment of “straddles” is governed by section 1092 of the Code which, in
certain circumstances, overrides or modifies the provisions of section 1256
described above. If a Fund is treated as entering into a “straddle” and at least
one (but not all) of the Fund’s positions in derivative contracts comprising a
part of such straddle is a Section 1256 Contract, then such straddle could be
characterized as a “mixed straddle.” Each Fund may make one or more elections
with respect to “mixed straddles.” Depending upon which election is made, if
any, the results with respect to the Fund may differ. Generally, to the extent
the straddle rules apply to positions established by a Fund, losses realized by
the Fund may be deferred to the extent of unrealized gain in any offsetting
positions. Moreover, as a result of the straddle rules, short-term capital loss
on straddle positions may be recharacterized as long-term capital loss, and
long-term capital gain may be characterized as short-term capital gain. In
addition, the existence of a straddle can cause the holding periods to be tolled
on the offsetting positions. As a result, the straddle rules could cause
distributions that would otherwise constitute “qualified dividend income” or
qualify for the dividends-received deduction to fail to satisfy the applicable
holding period requirements described above. Furthermore, a Fund may be required
to capitalize, rather than deduct currently, any interest expense and carrying
charges applicable to a position that is part of a straddle, including any
interest on indebtedness incurred or continued to purchase or carry any
positions that are part of a straddle. The application of the straddle rules to
certain offsetting Fund positions can therefore affect the amount, timing and/or
character of distributions to shareholders, and may result in significant
differences from the amount, timing and/or character of distributions that would
have been made by the Fund if it had not entered into offsetting positions in
respect of certain of its portfolio securities.
If
a Fund enters into a “constructive sale” of any appreciated financial position
in its portfolio, the Fund will be treated as if it had sold and immediately
repurchased the property and must recognize gain (but not loss) with respect to
that position. A constructive sale of an appreciated financial position occurs
when a Fund enters into certain offsetting transactions with respect to the same
or substantially identical property, including, but not limited to: (i) a short
sale; (ii) an offsetting notional principal contract; (iii) a futures or forward
contract; or (iv) other transactions identified in future Treasury Regulations.
The character of the gain from constructive sales will depend upon a Fund’s
holding period in the appreciated financial position. Losses realized from a
sale of a position that was previously the subject of a constructive sale will
be recognized when the position is subsequently disposed of. The character of
such losses will depend upon the Fund’s holding period in the position beginning
with the date the constructive sale was deemed to have occurred and the
application of various loss deferral provisions in the Code. Constructive sale
treatment does not apply to certain closed transactions, including if such a
transaction is closed on or before the 30th day after the close of the Fund’s
taxable year and a Fund holds the appreciated financial position unhedged
throughout the 60-day period beginning with the day such transaction was
closed.
If
a Fund invests in certain zero coupon securities or any other securities that
are sold at original issue discount and thus do not make periodic cash interest
payments, the Fund will be required to include as part of its current income the
imputed interest on such obligations even though the Fund has not received any
interest payments on such obligations during that period. However, each Fund
must distribute to its shareholders, at least annually, all or substantially all
of its investment company taxable income (determined without regard to the
deduction for dividends paid), including such accrued income, to qualify for
treatment as a RIC under the Code and avoid U.S. federal income and excise
taxes. Therefore, a Fund may have to dispose of its portfolio securities,
potentially under disadvantageous circumstances, to generate cash, or may have
to borrow cash, to satisfy distribution requirements. Such a disposition of
securities may potentially result in additional taxable gain or loss to the
Funds and may affect the amount and timing of distributions from the
Funds.
Any
market discount recognized on a bond is taxable as ordinary income. A market
discount bond is a bond acquired in the secondary market at a price below
redemption value or adjusted issue price if issued with original issue discount.
Absent an election by a Fund to include the market discount in income as it
accrues, gain on the Fund’s disposition of such an obligation will be treated as
ordinary income rather than capital gain to the extent of the accrued market
discount.
Certain
Funds may invest in inflation-linked debt securities directly or through an ETF
or underlying fund taxable as a RIC. Any increase in the principal amount of an
inflation-linked debt security will be original interest discount, which is
taxable as ordinary income and is required to be distributed, even though the
Fund will not receive the principal, including any increase thereto, until
maturity. As noted above, if a Fund invests in such securities it may be
required to liquidate other investments, including at times when it is not
advantageous to do so, in order to satisfy its distribution requirements and to
eliminate any possible taxation at the Fund level.
Foreign
Investments.
Dividends and interest received by a Fund from sources within foreign countries
may be subject to withholding and other taxes imposed by such countries. Tax
treaties between certain countries and the U.S. may reduce or eliminate such
taxes. Foreign tax credits, if any, received by a Fund as a result of an
investment in another RIC (including an ETF which is taxable as a RIC) will not
be passed through to you unless the Fund qualifies as a “qualified
fund-of-funds” under the Code. If a Fund is a “qualified fund-of-funds” it will
be eligible to file an election with the IRS that will enable the Fund to pass
along these foreign tax credits to its shareholders. A Fund will be treated as a
“qualified fund-of-funds” under the Code if at least 50% of the value of the
Fund’s total assets (at the close of each quarter of the Fund’s taxable year) is
represented by interests in other RICs. Each Fund does not expect to satisfy the
requirements for passing through to its shareholders any share of foreign taxes
paid by the Fund, with the result that shareholders will not include such taxes
in their gross incomes and will not be entitled to a tax deduction or credit for
such taxes on their own tax returns.
If
a Fund holds shares in a “passive foreign investment company” (“PFIC”), it may
be subject to U.S. federal income tax on a portion of any “excess distribution”
or gain from the disposition of such shares even if such income is distributed
as a taxable dividend by the Fund to its shareholders. Additional charges in the
nature of interest may be imposed on a Fund in respect of deferred taxes arising
from such distributions or gains.
Each
Fund may be eligible to treat a PFIC as a “qualified electing fund” (“QEF”)
under the Code in which case, in lieu of the foregoing requirements, the Fund
will be required to include in income each year a portion of the ordinary
earnings and net capital gains of the qualified electing fund, even if not
distributed to the Fund, and such amounts will be subject to the 90% and excise
tax distribution requirements described above. To make this election, a Fund
would be required to obtain certain annual information from the PFICs in which
it invests, which may be difficult or impossible to obtain. Alternatively, a
Fund may make a mark-to-market election that will result in such Fund being
treated as if it had sold and repurchased its PFIC stock at the end of each
year. In such case, a Fund would report any gains resulting from such deemed
sales as ordinary income and would deduct any losses resulting from such deemed
sales as ordinary losses to the extent of previously recognized gains. The
election must be made separately for each PFIC owned by a Fund and, once made,
is effective for all subsequent taxable years, unless revoked with the consent
of the IRS. By making the election, a Fund could potentially ameliorate the
adverse tax consequences with respect to its ownership of shares in a PFIC, but
in any particular year may be required to recognize income in excess of the
distributions it receives from PFICs and its proceeds from dispositions of PFIC
stock. A Fund may have to distribute this excess income to satisfy the 90%
distribution requirement and to avoid imposition of the 4% excise tax. To
distribute this income and avoid a tax at the fund level, a Fund might be
required to liquidate portfolio securities that it might otherwise have
continued to hold, potentially resulting in additional taxable gain or loss.
Each Fund intends to make the appropriate tax elections, if possible, and take
any additional steps that are necessary to mitigate the effect of these rules.
Amounts included in income each year by a Fund arising from a QEF election, will
be “qualifying income” under the Qualifying Income Requirement (as described
above) even if not distributed to the Fund, if the Fund derives such income from
its business of investing in stock, securities or currencies.
Additional
Tax Information Concerning U.S. REITs.
A
Fund may invest in entities treated as REITs for U.S. federal income tax
purposes.
Investments
in REIT equity securities may require a Fund to accrue and distribute income not
yet received. To generate sufficient cash to make the requisite distributions, a
Fund may be required to sell securities in its portfolio (including when it is
not advantageous to do so) that it otherwise would have continued to hold. A
Fund’s investments in REIT equity securities may at other times result in a
Fund’s receipt of cash in excess of the REIT’s earnings; if a Fund distributes
these amounts, these distributions could constitute a return of capital to such
Fund’s shareholders for federal income tax purposes. Dividends paid by a REIT,
other than capital gain distributions, will be taxable as ordinary income up to
the amount of the REIT’s current and accumulated earnings and profits. Capital
gain dividends paid by a REIT to a Fund will be treated as long-term capital
gains by a Fund and, in turn, may be distributed by a Fund to its shareholders
as a capital gain distribution. Dividends received by a Fund from a REIT
generally will not constitute qualified dividend income or qualify for the
dividends received deduction. If a REIT is operated in a manner such that it
fails to qualify as a REIT, an investment in the REIT would become subject to
double taxation, meaning the taxable income of the REIT would be subject to
federal income tax at the regular corporate rate without any deduction for
dividends paid to shareholders and the dividends would be taxable to
shareholders as ordinary income (or possibly as qualified dividend income) to
the extent of the REIT’s current and accumulated earnings and profits.
REITs
in which a Fund invests often do not provide complete and final tax information
to a Fund until after the time that such Fund issues a tax reporting statement.
As a result, a Fund may at times find it necessary to reclassify the amount and
character of its distributions to you after it issues your tax reporting
statement. When such reclassification is necessary, you will be sent a
corrected, final Form 1099-DIV to reflect the reclassified information. If you
receive a corrected Form 1099-DIV, use the information on this corrected form,
and not the information on the previously issued tax reporting statement, in
completing your tax returns.
“Qualified
REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are treated as eligible for a 20% deduction by non-corporate taxpayers.
This deduction, if allowed in full, equates to a maximum effective tax rate of
29.6% (37% top rate applied to income after 20% deduction). Distributions by a
Fund to its shareholders that are attributable to qualified REIT dividends
received by such Fund and which the Fund properly reports as “section 199A
dividends,” are treated as “qualified REIT dividends” in the hands of
non-corporate shareholders. A section 199A dividend is treated as a qualified
REIT dividend only if the shareholder receiving such dividend holds the
dividend-paying RIC shares for at least 46 days of the 91-day period beginning
45 days before the shares become ex-dividend, and is not under an obligation to
make related payments with respect to a position in substantially similar or
related property. A Fund is permitted to report such part of its dividends as
section 199A dividends as are eligible, but is not required to do so.
“Qualified
publicly traded partnership income” within the meaning of Section 199A(e)(5) of
the Code is treated as eligible for a 20% deduction by non-corporate taxpayers.
Qualified publicly traded partnership income is generally income of a “publicly
traded partnership” that is not treated as a corporation for U.S. federal income
tax purposes that is effectively connected with such entity’s trade or business,
but does not include certain investment income. A “publicly traded partnership”
for purposes of this deduction is not necessarily the same as a “qualified
publicly traded partnership” as defined for the purpose of the immediately
preceding paragraphs. This deduction, if allowed in full, equates to a maximum
effective tax rate of 29.6% (37% top rate applied to income after 20%
deduction). A RIC, such as a Fund, is not permitted to pass the special
character of this income through to their shareholders. Currently, direct
investors in entities that generate “qualified publicly traded partnership
income” will enjoy the lower rate, but investors in RICs that invest in such
entities will not. It is uncertain whether future technical corrections or
administrative guidance will address this issue to enable a Fund to pass through
the special character of “qualified publicly traded partnership income” to
shareholders.
Backup
Withholding.
Each Fund will be required in certain cases to withhold (as “backup
withholding”) on amounts payable to any shareholder who (1) fails to provide a
correct taxpayer identification number certified under penalty of perjury; (2)
is subject to backup withholding by the IRS for failure to properly report all
payments of interest or dividends; (3) fails to provide a certified statement
that he or she is not subject to “backup withholding”; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident
alien). The backup withholding rate is currently 24%. Backup withholding is not
an additional tax and any amounts withheld may be credited against the
shareholder’s ultimate U.S. tax liability. Backup withholding will not be
applied to payments that have been subject to the 30% withholding tax on
shareholders who are neither citizens nor permanent residents of the U.S.
Non-U.S.
Shareholders.
Any non-U.S. investors in a Fund may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisers prior to investing in the
Fund. Foreign shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income.
Each 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. Short-term capital gain dividends
received by a nonresident alien individual who is present in the U.S. for a
period or periods aggregating 183 days or more during the taxable year are not
exempt from this 30% withholding tax. Gains realized by foreign shareholders
from the sale or other disposition of Shares generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from a Fund. Backup withholding will not be applied to payments that are subject
to the 30% (or lower applicable treaty rate) withholding tax described in this
paragraph. Different tax consequences may result if the foreign shareholder is
engaged in a trade or business within the United States. In addition, the tax
consequences to a foreign shareholder entitled to claim the benefits of a tax
treaty may be different than those described above.
Unless
certain non-U.S. entities that hold Shares comply with IRS requirements that
will generally require them to report information regarding U.S. persons
investing in, or holding accounts with, such entities, a 30% withholding tax may
apply to Fund distributions payable to such entities. A non-U.S. shareholder may
be exempt from the withholding described in this paragraph under an applicable
intergovernmental agreement between the U.S. and a foreign government, provided
that the shareholder and the applicable foreign government comply with the terms
of the agreement.
For
foreign shareholders to qualify for an exemption from backup withholding,
described above, the foreign shareholder must comply with special certification
and filing requirements. Foreign shareholders in a Fund should consult their tax
advisers in this regard.
Tax-Exempt
Shareholders.
Certain tax-exempt shareholders, including qualified pension plans, IRAs, salary
deferral arrangements, 401(k) plans, and other tax-exempt entities, generally
are exempt from federal income taxation except with respect to their unrelated
business taxable income (“UBTI”). Tax-exempt entities are not permitted to
offset losses from one unrelated trade or business against
the
income or gain of another unrelated trade or business. Certain net losses
incurred prior to January 1, 2018 are permitted to offset gain and income
created by an unrelated trade or business, if otherwise available. Under current
law, each Fund generally serves to block UBTI from being realized by its
tax-exempt shareholders with respect to their shares of Fund income. However,
notwithstanding the foregoing, tax-exempt shareholders could realize UBTI by
virtue of their investment in a Fund if, for example, (i) the Fund invests in
residual interests of Real Estate Mortgage Investment Conduits (“REMICs”), (ii)
the Fund invests in a REIT that is a taxable mortgage pool (“TMP”) or that has a
subsidiary that is a TMP or that invests in the residual interest of a REMIC, or
(iii) Shares constitute debt-financed property in the hands of the tax-exempt
shareholders within the meaning of section 514(b) of the Code. Charitable
remainder trusts are subject to special rules and should consult their tax
advisers. The IRS has issued guidance with respect to these issues and
prospective shareholders, especially charitable remainder trusts, are strongly
encouraged to consult with their tax advisers regarding these
issues.
Certain
Potential Tax Reporting Requirements.
Under U.S. Treasury regulations, if a shareholder recognizes a loss on
disposition of Shares of $2 million or more for an individual shareholder or $10
million or more for a corporate shareholder (or certain greater amounts over a
combination of years), the shareholder must file with the IRS a disclosure
statement on IRS Form 8886. Direct shareholders of portfolio securities are in
many cases excepted from this reporting requirement, but under current guidance,
shareholders of a RIC are not excepted. Significant penalties may be imposed for
the failure to comply with the reporting requirements. The fact that a loss is
reportable under these regulations does not affect the legal determination of
whether the taxpayer’s treatment of the loss is proper. Shareholders should
consult their tax advisers to determine the applicability of these regulations
in light of their individual circumstances.
Other
Issues.
In those states which have income tax laws, the tax treatment of a Fund and of
Fund shareholders with respect to distributions by the Fund may differ from
federal tax treatment.
FINANCIAL
STATEMENTS
The
Annual
Report
for the Funds for the fiscal period ended April 30, 2023 is a separate
document and the financial statements and accompanying notes appearing therein
are incorporated by reference into this SAI. You may request a copy of the
Funds’ Annual Report at no charge by calling 1-800-617-0004 or through the
Funds’ website at www.aptusetfs.com and
www.opusetfs.com/funds/oscv.
Appendix
A
APTUS
CAPITAL ADVISORS, LLC
Proxy
Voting and Disclosure Policy
Introduction
Effective
March 10, 2003, the U.S. Securities and Exchange Commission (the “SEC”) adopted
rule and form amendments under the Investment Advisers Act of 1940 (the
“Advisers Act”) that address an investment adviser’s fiduciary obligation to its
clients when the Advisor has the authority to vote their proxies (collectively,
the rule and form amendments are referred to herein as the “Advisers Act
Amendments”).
In
accordance with the agreement with Aptus Capital Advisors, LLC (“ACA”), ACA
votes proxies for the Fund. ACA does not vote proxies for separate account
clients.
The
Advisers Act Amendments require that Aptus Capital Advisors, LLC (“ACA”) adopt
and implement policies and procedures for voting proxies in the best interest of
clients, to describe the procedures to clients, and to tell clients how they may
obtain information about how ACA has actually voted their proxies.
This
Proxy Voting and Disclosure Policy (the “Policy”) is designed to ensure that ACA
complies with the requirements of the Advisers Act Amendments, and otherwise
fulfills its obligations with respect to proxy voting, disclosure, and
recordkeeping. The overall goal is to ensure that proxy voting is managed in an
effort to act in the best interests of the Fund’s shareholders. While decisions
about how to vote must be determined on a case-by-case basis, proxy voting
decisions will be made considering these guidelines and following the procedures
recited herein.
Specific
Proxy Voting Policies and Procedures
ACA
believes that the voting of proxies is an important part of portfolio management
as it represents an opportunity for shareholders to make their voices heard and
to influence the direction of a company. ACA is committed to voting corporate
proxies in the manner that serves the best interests of their
clients.
The
following details ACA’s philosophy and practice regarding the voting of
proxies.
A.General
ACA
believes that each proxy proposal should be individually reviewed to determine
whether the proposal is in the best interests of its clients. As a result,
similar proposals for different companies may receive different votes because of
different corporate circumstances.
B.Procedures
To
implement ACA’s proxy voting policies, ACA has developed the following
procedures for voting proxies.
a.ACA’s
chief compliance officer (CCO) is responsible for overseeing these proxy voting
procedures for client accounts (including, without limitation, the Fund) and
designating ACA’s proxy voting manager (the “Proxy Manager”). Upon receipt of a
corporate proxy by ACA, the special or annual report and the proxy shall be
submitted to the Proxy Manager. The Proxy Manager will then vote the proxy in
accordance with this policy.
Note:
For any proxy proposal not clearly addressed by this policy, the Proxy Manager
will consult with ACA’s CCO.
b.The
Proxy Manager shall be responsible for reviewing the special or annual report,
proxy proposals, and proxy proposal summaries. The reviewer shall take into
consideration what vote is in the best interests of clients and the provisions
of ACA’s Voting Guidelines in Section C below. The Proxy Manager will then vote
the proxies.
c.The
Proxy Manager shall be responsible for maintaining copies of each annual report,
proposal, proposal summary, actual vote, and any other information required to
be maintained for a proxy vote under Rule 204-2 of the Advisers Act (see
discussion in Section V below) or (for the Fund) under Rule 30b1-4 of the
Investment Company Act. With respect to proxy votes on topics deemed, in the
opinion of the Proxy Manager, to be controversial or particularly sensitive, the
Proxy Manager will provide a written explanation for the proxy vote which will
be maintained with the record of the actual vote in ACA’s files.
C.Absence
of Proxy Manager
In
the event that the Proxy Manager is unavailable to vote a proxy, then the CCO
shall perform the Proxy Manager’s duties with respect to such proxy in
accordance with the policies and procedures detailed above.
D.Option
to Vote or Not Vote
Notwithstanding
anything to the contrary in this policy, in situations where the Proxy Manager
or CCO determines that refraining from voting a proxy is in the client’s best
interest, such as when ACA has determined that the cost of voting the proxy
exceeds the expected benefit to the client, ACA may determine not
to
vote a proxy.
Voting
Guidelines
While
ACA’s policy is to review each proxy proposal on its individual merits, ACA has
adopted guidelines for certain types of matters to assist the Proxy Manager in
the review and voting of proxies. These guidelines are set forth
below:
A.Corporate
Governance
1. Election
of Directors and Similar Matters
In
an uncontested election, ACA will generally vote in favor of management’s
proposed directors. In a contested election, ACA will evaluate proposed
directors on a case-by-case basis. With respect to proposals regarding the
structure of a company’s Board of Directors, ACA will review any contested
proposal on its merits.
Notwithstanding
the foregoing, ACA expects generally to support
proposals
to:
•Eliminate
cumulative voting; and
•Limit
directors’ liability and broaden directors’ indemnification rights; And
expects
generally
to vote
against proposals
to:
•Adopt
the use of cumulative voting;
•Change
the size, manner of selection, and removal of the board, where the Portfolio
Manager believes such changes would likely have anti-takeover effects;
and
•Add
special interest directors to the board of directors (e.g., efforts to expand
the board of directors to control the outcome of a particular
decision).
2. Audit
Committee Approvals
ACA
generally supports proposals that help ensure that a company’s auditors are
independent and capable of delivering a fair and accurate opinion of a company’s
finances. ACA will generally vote to ratify the selection of
auditors.
3. Shareholder
Rights
ACA
may consider all proposals that will have a material effect on shareholder
rights on a case-by-case basis. Notwithstanding the foregoing, ACA expects
generally to support
proposals
to:
•Adopt
confidential voting and independent tabulation of voting results;
and
•Require
shareholder approval of poison pills. And expects
generally
to vote
against proposals
to:
•Adopt
super-majority voting requirements; and
•Restrict
the rights of shareholders to call special meetings, amend the bylaws or act by
written consent.
4. Anti-Takeover
Measures, Corporate Restructurings and Similar Matters
ACA
may review any proposal to adopt an anti-takeover measure, to undergo a
corporate restructuring (e.g., change of entity form or state of incorporation,
mergers or acquisitions) or to take similar action by reviewing the potential
short and long-term effects of the proposal on the company. These effects may
include, without limitation, the economic and financial impact the proposal may
have on the company, and the market impact that the proposal may have on the
company’s stock.
Notwithstanding
the foregoing, ACA expects generally to support
proposals
to:
•Prohibit
the payment of greenmail (i.e.,
the purchase by the company of its own shares to prevent a hostile
takeover);
•Adopt
fair price requirements (i.e.,
requirements that all shareholders be paid the same price in a tender offer or
takeover context), unless the Proxy Manager deems them sufficiently limited in
scope;
•Require
shareholder approval of “poison pills”; and
•Opt-out
of statutory provisions that permit a company to consider the non-financial
effects of mergers and acquisitions.
And
expects generally to vote
against proposals
to:
•Adopt
classified boards of directors;
•Reincorporate
a company where the primary purpose appears to be the creation of takeover
defenses; and
•Require
a company to consider the non-financial effects of mergers or
acquisitions.
5. Capital
Structure Proposals
ACA
will seek to evaluate capital structure proposals on their own merits on a
case-by- case basis. ACA will generally support
the
following proposals, if the Proxy Manager has determined that the proposal has a
legitimate business purpose and is otherwise in shareholders’ best
interests:
•Proposals
to create new classes of common and preferred stock, unless they appear to the
Proxy Manager be an anti-takeover measure; and
•Proposals
to eliminate preemptive rights.
B.Compensation
1. General
ACA
generally believes that compensation matters should be left up to the board’s
compensation committee which can be held accountable for its decisions through
the election of directors. ACA typically supports proposals that encourage the
disclosure of a company’s compensation policies. In addition, ACA generally
supports proposals that fairly compensate executives, particularly those
proposals that link executive compensation to performance. ACA may consider any
contested
proposal
related to a company’s compensation policies on a case-by-case
basis.
Notwithstanding
the foregoing, ACA generally expects to support
proposals
to:
•Require
shareholders approval of golden parachutes; and
•Adopt
golden parachutes that do not exceed three times the base compensation of the
applicable executives.
And
expects generally to vote
against proposals
to:
•Adopt
golden parachute plans that exceed three times base compensation;
and
•Adopt
measures that appear to arbitrarily limit executive or employee
benefits.
2. Stock
Option Plans
ACA
evaluates proposed stock option plans and issuances on a case-by-case basis. In
reviewing proposals regarding stock option plans and issuances, ACA may
consider, without limitation, the potential dilutive effect on shareholders’
shares, the potential short and long-term economic effects on the company and
shareholders and the actual terms of the proposed options.
Notwithstanding
the foregoing, ACA generally expects to oppose
proposals that
eliminate
much of the downside risk inherent in an option grant that is designed to induce
recipients to maximize shareholder return; such as:
•Backdating
options (Backdating an option is the act of changing an options grant date from
the actual grant date to an earlier date when the underlying stock was lower,
resulting in a lower exercise price for the option); and
•Repricing
options or option exchange programs, unless macroeconomic or industry trends,
rather than company specific issues, cause a stock’s value to decline
dramatically.
3. Director
Compensation Plans
ACA
believes that non-employee directors should receive reasonable and appropriate
compensation for the time and effort they spend serving on the board and its
committees. Director fees should be competitive in order to retain and attract
qualified individuals. We will consider recommending supporting compensation
plans that include option grants or other equity-based awards that help to align
the interests of outside directors with those of shareholders. However, equity
grants to directors should not be performance-based to ensure directors are not
incentivized in the same manner
as
executives but rather serve as a check on imprudent risk-taking in executive
compensation plan design.
C.Corporate
Responsibility and Social Issues
ACA
generally believes that ordinary business matters (including, without
limitation, positions on corporate responsibility and social issues) are
primarily the responsibility of a company’s management that should be addressed
solely by the company’s management. Accordingly, ACA will generally abstain
from voting
on proposals involving corporate responsibility and social issues.
Notwithstanding the foregoing, ACA may vote against corporate responsibility and
social issue proposals that ACA believes will have substantial adverse economic
or other effects on a company, and ACA may vote for corporate responsibility and
social issue proposals that ACA believes will have substantial positive economic
or other effects on a company.
Conflicts
In
cases where ACA is aware of conflict between the interest of the Fund’s
shareholders and the interest of ACA or its affiliates, the Fund’s principal
underwriter or an affiliated person of the Fund, then the Fund’s Proxy Voting
Committee shall determine how the Fund will vote the proxy.
Proxy
Proposals Specific to Registered Investment Companies
ACA
invests portions of the Fund portfolio in registered investment companies
(“Underlying Funds”) that are not affiliated with ACA. It is the policy of ACA
to vote all proxies received from the Underlying Funds in the same proportion
that all shares of the Underlying Funds are voted, or in accordance with
instructions received from fund shareholders, pursuant to Section 12(d)(1)(F) of
the Investment Company Act of 1940, as amended.
Securities
Lending
The
Fund may participate in securities lending programs with various counterparties.
Under most securities lending arrangements, proxy voting rights during the
lending period generally are transferred to the borrower, and thus proxies
received in connection with the securities on loan may not be voted by the
lender unless the loan is recalled.
ACA
evaluates several factors in determining whether to recall loaned securities in
order to vote such proxies including, but not limited to, the subject matter of
the proposal being voted on, the likely impact on the voting results if ACA
voted the securities on loan, and the value of voting the loaned securities
relative to the securities lending income expected to be derived from such
securities. Based on its experience, ACA believes that in most cases the value
of recalling loaned securities to vote proxies will be less than the securities
lending income either because the outcome of the vote will not be impacted by
voting the loaned securities or the result of the vote is not likely to have
significant economic consequences. However, ACA will use its best efforts to
recall any security on loan where ACA (a) learns of a vote on a material event
that may affect a security on loan and (b) determine that it is in the best
interests of Fund to recall the security for voting purposes.
ACA
Disclosure of How to Obtain Voting Information
Rule
206(4)-6 requires ACA to disclose in response to any client request how the
client can obtain information from ACA on how its securities were voted. ACA
will disclose in Form ADV that clients can obtain information on how their
securities were voted by making a written request to ACA. Upon receiving a
written request from a client, ACA will provide the information requested by the
client within a reasonable amount of time.
Rule
206(4)-6 also requires ACA to describe its proxy voting policies and procedures
to clients, and upon request, to provide clients with a copy of those policies
and procedures. ACA will provide such a description in its Form ADV. Upon
receiving a written request from a client, ACA will provide a copy of this
policy within a reasonable amount of time.
If
approved by the client, this policy and any requested records may be provided
electronically.
Recordkeeping
ACA
shall keep the following records for a period of at least s years, the first two
in an easily accessible place:
(i)A
copy of this Policy;
(ii)Proxy
Statements received regarding client securities;
(iii)Records
of votes cast on behalf of clients;
(iv)Any
documents prepared by ACA that were material to making a decision how to vote,
or that memorialized the basis for the decision;
(v)Records
of client requests for proxy voting information, and
(vi)With
respect to the Fund, a record of each shareholder request for proxy voting
information and the Fund’s response, including the date of the request, the name
of the shareholder, and the date of the response.
The
Fund shall maintain a copy of each of the foregoing records that is related to
proxy votes on behalf of the Fund by ACA. These records may be kept as part of
ACA’s records.
ACA
may rely on proxy statements filed on the SEC EDGAR system instead of keeping
its own copies, and may rely on proxy statements and records of proxy votes cast
by ACA that are maintained with a third party such as a proxy voting service,
provided that ACA has obtained an undertaking from the third party to provide a
copy of the documents promptly upon request.
Form
N-PX –Behavioral Momentum Fund
The
Behavioral Fund must file Form N-PX with the Securities and Exchange Commission
to report its proxy voting record for each twelve-month period, ending on June
30 of each year. The report must be submitted not later than August 31 and is
made publically available. The CCO is responsible for ensuring that ACA
maintains the information required to complete form N-PX, as listed
below:
•The
name of the issuer of the portfolio security;
•The
exchange ticker symbol of the portfolio security;
•The
CUSIP number for the portfolio security;
•The
shareholder meeting date;
•A
brief identification of the matter voted on;
•Whether
the matter was proposed by the issuer or by a security holder;
•Whether
the fund cast its vote on the matter;
•How
the fund cast its vote (e.g.,
for or against proposal, or abstain; for or withhold regarding election of
directors); and
•Whether
the fund cast its vote for or against management.
ACA’s
CCO is responsible for preparing and ensuring the accuracy of the Form N-PX and
will submit the Form to US Bancorp Fund Services upon request. US Bancorp Fund
Services upon request will submit the Form N-PX to the SEC on behalf of the
Fund.