ck0001540305-20210331
PROSPECTUS
ALPHACLONE ALTERNATIVE ALPHA ETF –
(ALFA)
Listed
on Cboe BZX Exchange, Inc.
July 31,
2021
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
of these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
TABLE
OF CONTENTS
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Taxation
of REIT Investments |
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Investment Objective
The AlphaClone Alternative
Alpha ETF (the “Fund”) seeks to track the price and yield, before fees and
expenses, of the AlphaClone Hedge Fund Masters Index (the
“Index”).
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
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Annual
Fund Operating Expenses (expenses
that you pay each year as a percentage of the value of your
investment) |
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Management
Fees |
0.65% |
| Distribution
and/or Service (12b-1) Fees |
0.00% |
| Other
Expenses |
0.00% |
| Total
Annual Fund Operating Expenses |
0.65% |
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Expense Example
This Example is
intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then redeem all of your Shares at the
end of those periods. The Example also assumes that your investment has a 5%
return each year and that the Fund’s operating expenses remain the same. The
Example does not take into account brokerage commissions that you may pay on
your purchases and sales of Shares. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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| 1
Year |
3
Years |
5
Years |
10
Years |
| $66 |
$208 |
$362 |
$810 |
Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
Example, affect the Fund’s performance. For the fiscal year ended March 31,
2021, the Fund’s portfolio turnover rate was 179% of the average value of its
portfolio.
Principal Investment Strategies
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index.
AlphaClone
Hedge Fund Masters Index
The
Index utilizes a proprietary, quantitative Clone Score methodology developed by
AlphaClone, Inc. (“AlphaClone”), the Fund’s index provider, to replicate the
five most heavily weighted U.S. equity securities from each of the ten hedge
funds and institutional investors with the highest Clone Scores (as described
below). The Index was established by AlphaClone in 2017 and is composed of up to
50 U.S.-listed equity securities of small, mid, or large capitalization
companies and reconstituted quarterly.
AlphaClone’s
Clone Score methodology analyzes the historical returns of a given hedge fund’s
or institutional investor’s holdings and assigns a Clone Score (i.e.,
ranking) to each such hedge fund and institutional investor based on such
returns. Clone Scores are recalculated semi-annually. The Clone Score
methodology incorporates information from hedge fund and institutional investor
public disclosure filings (e.g.,
Form 13F filings) with the SEC to identify their disclosed holdings at the end
of each quarter. Index constituents are equal weighted at the time of each
reconstitution, although each individual constituent is limited to a 5%
weighting at the time of each reconstitution.
The
equity securities that may comprise the Index include, but are not limited to,
U.S.-listed common and preferred stock of domestic and foreign companies,
including those in emerging markets, real estate investment trusts (“REITs”),
master limited partnerships (“MLPs”), and American Depositary Receipts (“ADRs”).
Such securities may be issued by small, mid, or large capitalization companies
and must meet certain liquidity thresholds at the time of reconstitution to be
included in the Index.
The
Fund’s Investment Strategy
The
Fund attempts to invest all, or substantially all, of its assets in the
component securities that make up the Index. The Fund expects that, over time,
the correlation between the Fund’s performance and that of the Index, before
fees and expenses, will be 95% or better.
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning the Fund generally will invest in all of the component
securities of the Index in approximately the same proportion as in the Index.
However, the Fund may use a “representative sampling” strategy, meaning it may
invest in a sample of the securities in the Index whose risk, return and other
characteristics closely resemble the risk, return and other characteristics of
the Index as a whole, when the Fund’s investment adviser believes it is in the
best interests of the Fund (e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
The
Fund generally may invest in securities or other investments not included in the
Index, but which the Fund’s investment adviser believes will help the Fund track
the Index. For example, the Fund may invest in securities that are not
components of the Index to reflect various corporate actions and other changes
to the Index (such as reconstitutions, additions and deletions). On a day-to-day
basis, the Fund also may hold money market mutual funds or short-term debt
instruments that have terms-to-maturity of less than 397 days and exhibit high
quality credit profiles, including U.S. government securities and repurchase
agreements.
To
the extent the Index concentrates (i.e.,
holds more than 25% of its total assets) in the securities of a particular
industry or group of related industries, the Fund will concentrate its
investments to approximately the same extent as the
Index. Securities in the consumer, financial, and
information technology sectors are expected to represent a significant portion
of the Index, although specific sector exposures may change over
time.
Principal Investment Risks
The
principal risks of investing in the Fund are summarized below. The principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with other funds. Each risk summarized below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. As with any investment, there is a risk that you could
lose all or a portion of your investment in the Fund. Some or
all of these risks may adversely affect the Fund’s net asset value per share
(“NAV”), trading price, yield, total return and/or ability to meet its
objectives. For more information about the risks of investing in the Fund, see
the section in the Fund’s Prospectus titled “Additional Information About the
Fund.”
•ADR
Risk. ADRs
involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. ADRs listed
on U.S. exchanges are issued by banks or trust companies, and entitle the holder
to all dividends and capital gains that are paid out on the underlying foreign
shares.
•Concentration
Risk. The
Fund’s investments will be concentrated in an industry or group of industries to
the extent that the Index is so concentrated. In such event, the value of the
Shares may rise and fall more than the value of shares of a fund that invests in
securities of companies in a broader range of industries.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, acts of terrorism, spread of
infectious diseases or other public health issues, recessions, or other events
could have a significant negative impact on the Fund and its investments. For
example, the global pandemic caused by COVID-19, a novel coronavirus, and the
aggressive responses taken by many governments, including closing borders,
restricting international and domestic travel, and the imposition of prolonged
quarantines or similar restrictions, has had negative impacts, and in many cases
severe impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk. The
Fund has a limited number of financial institutions that may act as Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or
liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant.
◦Trading. Although
Shares are listed for trading on Cboe BZX Exchange, Inc.
(the “Exchange”) and may be traded on U.S. exchanges other than the Exchange,
there can be no assurance that Shares will trade with any volume, or at all, on
any stock exchange. In stressed market conditions, the liquidity of Shares may
begin to mirror the liquidity of the Fund’s underlying portfolio holdings, which
can be significantly less liquid than Shares, and this could lead to differences
between the market price of the Shares and the underlying value of those
Shares.
•Foreign
Markets Risk. Investments
in ADRs that provide exposure to non-U.S. securities involve certain risks that
may not be present with investments in U.S. securities. For example, the value
of non-U.S. securities may be subject to risk of decline due to foreign currency
fluctuations or to political or economic instability. Investments in ADRs also
may be subject to withholding or other taxes and may be indirectly subject to
additional trading, settlement, custodial, and operational risks. These and
other factors can make investments in the Fund more volatile and potentially
less liquid than other types of investments.
•High
Portfolio Turnover Risk. The
Fund may trade all or a significant portion of the securities in its portfolio
in connection with each rebalance and reconstitution of its Index. A high
portfolio turnover rate increases transaction costs, which may increase the
Fund’s expenses. Frequent trading may also cause adverse tax consequences
for investors in the Fund due to an increase in short-term capital
gains.
•MLP
Risk. MLP
investment returns are enhanced during periods of declining or low interest
rates and tend to be negatively influenced when interest rates are rising. In
addition, most MLPs are fairly leveraged and typically carry a portion of a
“floating” rate debt. As such, a significant upward swing in interest rates
would also drive interest expense higher. Furthermore, most MLPs grow by
acquisitions partly financed by debt, and higher interest rates could make it
more difficult to make acquisitions. MLP investments also entail many of the
general tax risks of investing in a partnership. Limited partners in an MLP
typically have limited control and limited rights to vote on matters affecting
the partnership. Additionally, there is always the risk that an MLP will fail to
qualify for favorable tax treatment.
•Models
and Data Risk. The
composition of the Index is heavily dependent on proprietary quantitative models
as well as information and data supplied by third parties (“Models and
Data”).
When
Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon may lead to securities being included in or excluded from the
Index that would have been excluded or included had the Models and Data been
correct and complete. If the composition of the Index reflects such errors, the
Fund’s portfolio can be expected to reflect the errors, too.
•Passive
Investment Risk.
The Fund is not actively managed, and its adviser would not sell shares of an
equity security due to current or projected underperformance of a security,
industry, or sector, unless that security is removed from the Index or the
selling of shares of that security is otherwise required upon a reconstitution
or rebalancing of the Index in accordance with the Index
methodology.
•REIT
Investment Risk. Investments
in REITs involve unique risks. REITs may have limited financial resources, may
trade less frequently and in limited volume, and may be more volatile than other
securities. REITs may be affected by changes in the value of their underlying
properties or mortgages or by defaults by their borrowers or tenants.
Furthermore, these entities depend upon specialized management skills, have
limited diversification and are, therefore, subject to risks inherent in
financing a limited number of projects. In addition, the performance of a REIT
may be affected by changes in the tax laws or by its failure to qualify for
tax-free pass-through of income.
•Sector
Risk.
To the extent the Fund invests more heavily in particular sectors of the
economy, its performance will be especially sensitive to developments that
significantly affect those sectors.
◦Consumer
Sectors Risk.
The success of consumer product manufacturers and retailers is tied closely to
the performance of domestic and international economies, interest rates,
exchange rates, competition, consumer confidence, changes in demographics and
consumer preferences. Companies in the consumer staples sector, such as
companies that produce or sell
food,
beverage, and drug retail or other household items, may be adversely impacted by
changes in global and economic conditions, rising energy prices, and changes in
the supply or price of commodities. Companies in the consumer discretionary
sector, such as automobile, textile, retail, and media companies, depend heavily
on disposable household income and consumer spending, and may be strongly
affected by social trends and marketing campaigns. These companies may be
subject to severe competition, which may have an adverse impact on their
profitability.
◦Financial
Sector Risk. This
sector can be significantly affected by changes in interest rates, government
regulation, the rate of defaults on corporate, consumer and government debt, the
availability and cost of capital, and fallout from the housing and sub-prime
mortgage crisis. Insurance companies, in particular, may be significantly
affected by changes in interest rates, catastrophic events, price and market
competition, the imposition of premium rate caps, or other changes in government
regulation or tax law and/or rate regulation, which may have an adverse impact
on their profitability. This sector has experienced significant losses in the
recent past, and the impact of more stringent capital requirements and of recent
or future regulation on any individual financial company or on the sector as a
whole cannot be predicted. In recent years, cyber attacks and technology
malfunctions and failures have become increasingly frequent in this sector and
have caused significant losses.
◦Information
Technology Sector Risk. Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect
profitability.
•Smaller
Companies Risk. The
equity securities of smaller companies have historically been subject to greater
investment risk than securities of larger companies. The prices of equity
securities of smaller companies tend to be more volatile and less liquid than
the prices of equity securities of larger companies.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for calendar
years ended December 31. The table illustrates how the Fund’s average annual
returns for the 1-year, 5-year, and since inception periods compare with those
of a broad measure of market performance and the indexes tracked by the Fund
during the applicable period. The Fund’s past performance,
before and after taxes, does not necessarily indicate how it will perform in the
future. Updated performance information is available on the
Fund’s website at www.alphaclonefunds.com.
Calendar Year Total Returns
For the year-to-date period ended
June 30, 2021, the Fund’s
total return was 10.08%. During the period of time shown in the bar
chart, the Fund’s highest quarterly return
was 27.53% for the quarter ended June 30, 2020, and the
lowest quarterly return was
-24.08% for the quarter ended March 31,
2020.
Average
Annual Total Returns
For the Period Ended December 31,
2020
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| AlphaClone
Alternative Alpha ETF |
1
Year |
5
Year |
Since
Inception
(5/30/2012) |
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Return Before
Taxes |
31.46% |
15.63% |
14.24% |
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Return After Taxes on
Distributions |
31.31% |
15.58% |
14.15% |
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Return After Taxes on Distributions and
Sale of Shares |
18.73% |
12.63% |
11.87% |
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AlphaClone
Hedge Fund Masters Index/
AlphaClone
Hedge Fund Downside Hedged Index1
(reflects
no deduction for fees, expenses, or taxes) |
31.89% |
16.30% |
14.99% |
|
S&P
500 Index
(reflects no deduction for
fees, expenses, or taxes) |
18.40% |
15.22% |
15.35% |
1 Effective December 27, 2017, the
Fund’s investment objective changed to track the performance, before fees and
expenses, of the AlphaClone Hedge Fund Masters Index. Prior to December 27,
2017, the Fund’s investment objective was to track the price and total return
performance, before fees and expenses, of the AlphaClone Hedge Fund Downside
Hedged Index. Performance shown for periods prior to December 27, 2017 is that
of the AlphaClone Hedge Fund Downside Hedged Index.
After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates during the period covered by the table above and do not reflect the impact
of state and local taxes. Actual after-tax returns depend on an
investor’s tax situation and may differ from those shown. After-tax returns shown are
not relevant to investors who hold their Shares through tax-deferred
arrangements such as an individual retirement account (“IRA”) or other
tax-advantaged accounts.
Portfolio
Management
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| Adviser |
Exchange
Traded Concepts, LLC (“ETC” or the “Adviser”) |
| Portfolio
Managers |
Andrew
Serowik, Todd Alberico, and Gabriel Tan, each a Portfolio Manager of the
Adviser, serve as the portfolio managers of the Fund. Mr. Serowik has been
a portfolio manager of the Fund since January 2020. Mr. Alberico and Mr.
Tan have been portfolio managers of the Fund since June
2021. |
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers at market prices, rather than NAV. Because
Shares trade at market prices rather than NAV, Shares may trade at a price
greater than NAV (premium) or less than NAV (discount).
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem.
Creation Units generally consist of 25,000 Shares, though this may change from
time to time. The Fund generally issues and redeems Creation Units in exchange
for a portfolio of securities closely approximating the holdings of the Fund
(the “Deposit Securities”) and/or a designated amount of U.S. cash.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax-advantaged account. Distributions on investments made through
tax-deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
ADDITIONAL
INFORMATION ABOUT THE INDEX
AlphaClone
provides the underlying Index to the Fund. AlphaClone created and developed the
Index and is responsible for maintaining and applying the rules-based
methodology for the Index. The Index is calculated by Solactive AG. Solactive AG
is not affiliated with the Fund, AlphaClone, ETC, the Fund’s distributor, or any
of their respective affiliates.
ADDITIONAL
INFORMATION ABOUT THE FUND
Investment
Objective
The
Fund’s investment objective has been adopted as a non-fundamental investment
policy and may be changed without shareholder approval upon written notice to
shareholders.
Manager
of Managers Structure
The
Fund and the Adviser have received an exemptive order from the SEC permitting
the Adviser (subject to certain conditions and the Board’s approval) to select
or change sub-advisers without obtaining shareholder approval. The order also
permits the Adviser to materially amend the terms of agreements with a
sub-adviser (including an increase in the fee paid by the Adviser to the
sub-adviser (and not paid by the Fund)) or to continue the employment of a
sub-adviser after an event that would otherwise cause the automatic termination
of services with Board approval, but without shareholder approval. Shareholders
will be notified of any sub-adviser changes.
Principal
Investment Risks
This
section provides additional information regarding the principal risks described
in the Fund Summary. As in the Fund Summary, the principal risks below are
presented in alphabetical order to facilitate finding particular risks and
comparing them with other funds. Each risk described below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. Each of the factors below could have a negative impact on the Fund’s
performance and trading prices.
•ADR
Risk. The
Fund may hold the securities of non-U.S. companies in the form of ADRs. ADRs are
negotiable certificates issued by a U.S. financial institution that represent a
specified number of shares in a foreign stock and trade on a U.S. national
securities exchange, such as the New York Stock Exchange. Sponsored ADRs are
issued with the support of the issuer of the foreign stock underlying the ADRs
and carry all of the rights of common shares, including voting rights. The
underlying securities of the ADRs in the Fund’s portfolio are usually
denominated or quoted in currencies other than the U.S. Dollar. As a result,
changes in foreign currency exchange rates may affect the value of the Fund’s
portfolio. In addition, because the underlying securities of ADRs trade on
foreign exchanges at times when the U.S. markets are not open for trading, the
value of the securities underlying the ADRs may change materially at times when
the U.S. markets are not open for trading, regardless of whether there is an
active U.S. market for shares.
•Concentration
Risk. The
Fund’s investments will be concentrated in an industry or group of industries to
the extent that the Index is so concentrated. In such event, the value of the
Shares may rise and fall more than the value of shares of a fund that invests in
securities of companies in a broader range of industries.
•Equity
Market Risk.
Common stocks are susceptible to general stock market fluctuations and to
volatile increases and decreases in value as market confidence in and
perceptions of their issuers change. These investor perceptions are based on
various and unpredictable factors including: expectations regarding government,
economic, monetary and fiscal policies; inflation and interest rates; economic
expansion or contraction; and global or regional political, economic, public
health, and banking crises. If you held common stock, or common stock
equivalents, of any given issuer, you would generally be exposed to greater risk
than if you held preferred stocks and debt obligations of the issuer because
common stockholders, or holders of equivalent interests, generally have inferior
rights to receive payments from issuers in comparison with the rights of
preferred stockholders, bondholders, and other creditors of such issuers.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and in many cases unprecedented volatility and
severe losses due to the global pandemic caused by COVID-19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The
fall-out from these disruptions has included the rapid closure of businesses
deemed “non-essential” by federal, state, or local governments and rapidly
increasing unemployment, as well as greatly reduced liquidity for certain
instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. Such disruptions may continue for an
extended period of time or reoccur in the future to a similar or greater extent.
In response, the U.S. government and the Federal Reserve have taken
extraordinary actions to support the domestic economy and financial markets,
resulting in very low interest rates and in some cases negative yields. It is
unknown how long circumstances related to the pandemic will persist, whether
they will reoccur in the
future,
whether efforts to support the economy and financial markets will be successful,
and what additional implications may follow from the pandemic. The impact of
these events and other epidemics or pandemics in the future could adversely
affect Fund performance.
•ETF
Risks. The
Fund is an ETF, and, as a result of an ETF’s structure, it is exposed to the
following risks:
◦APs,
Market Makers, and Liquidity Providers Concentration Risk.
The Fund has a limited number of financial institutions that may act as APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. To the extent either of the following events
occur, Shares may trade at a material discount to NAV and possibly face
delisting: (i) APs exit the business or otherwise become unable to process
creation and/or redemption orders and no other APs step forward to perform these
services, or (ii) market makers and/or liquidity providers exit the business or
significantly reduce their business activities and no other entities step
forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Investors buying or selling Shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers, as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively small amounts
of Shares. In addition, secondary market investors will also incur the cost of
the difference between the price at which an investor is willing to buy Shares
(the “bid” price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid-ask spread.” The bid-ask spread varies over time for Shares
based on trading volume and market liquidity, and the spread is generally lower
if Shares have more trading volume and market liquidity and higher if Shares
have little trading volume and market liquidity. Further, a relatively small
investor base in the Fund, asset swings in the Fund, and/or increased market
volatility may cause increased bid-ask spreads. Due to the costs of buying or
selling Shares, including bid-ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small
investments.
◦Shares
May Trade at Prices Other Than NAV.
As with all ETFs, Shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of Shares will
approximate the Fund’s NAV, there may be times when the market price of Shares
is more than the NAV intra-day (premium) or less than the NAV intra-day
(discount) due to supply and demand of Shares or during periods of market
volatility. This risk is heightened in times of market volatility, periods of
steep market declines, and periods when there is limited trading activity for
Shares in the secondary market, in which case such premiums or discounts may be
significant.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to Exchange “circuit breaker”
rules, which temporarily halt trading on the Exchange when a decline in the
S&P 500®
Index during a single day reaches certain thresholds (e.g.,
7%, 13%, and 20%). Additional rules applicable to the Exchange may halt trading
in Shares when extraordinary volatility causes sudden, significant swings in the
market price of Shares. There can be no assurance that Shares will trade with
any volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio holdings, which can be significantly less liquid than Shares, and this
could lead to differences between the market price of the Shares and the
underlying value of those Shares.
•Foreign
Markets Risk.
Investments in ADRs that provide exposure to non-U.S. companies involve certain
risks that may not be present with investments in U.S. companies. For example,
investments in non-U.S. companies may be subject to risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less
information publicly available about a non-U.S. issuer than a U.S. issuer.
Securities of non-U.S. companies may be subject to different accounting,
auditing, financial reporting and investor protection standards than those of
U.S. companies. Investments tied to non-U.S. companies may be subject to
withholding or other taxes and may be subject to additional trading, settlement,
custodial, and operational risks. Because legal systems differ, there is also
the possibility that it will be difficult to obtain or enforce legal judgments
in certain countries. Since foreign exchanges may be open on days when the Fund
does not price their Shares, the value of the securities in the Fund’s
portfolios 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.
•High
Portfolio Turnover Risk. The
Fund may trade all or a significant portion of the securities in its portfolio
in connection with each rebalance and reconstitution of its Index. A high
portfolio turnover rate increases transaction costs, which may increase the
Fund’s expenses. Frequent trading may also cause adverse tax consequences
for investors in the Fund due to an increase in short-term capital
gains.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing.
The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and
earnings.
•MLP
Risk. MLPs
involve risks related to limited control and limited rights to vote on matters
affecting the MLP, risks related to potential conflicts of interest between the
MLP and the MLP’s general partner, and cash flow risks. MLP common units and
other equity securities can be affected by macroeconomic and other factors
affecting the stock market in general, expectations of interest rates, investor
sentiment towards MLPs or the energy sector, changes in a particular issuer’s
financial condition or unfavorable or unanticipated poor performance of a
particular issuer (in the case of MLPs, generally measured in terms of
distributable cash flow). Prices of common units of individual MLPs and other
equity securities also can be affected by fundamentals unique to the partnership
or company, including earnings power and coverage ratios.
MLPs
typically do not pay U.S. federal income tax at the partnership level. Instead,
each partner is allocated a share of the partnership’s income, gains, losses,
deductions and expenses. A change in current tax law or in the underlying
business mix of a given MLP could result in an MLP being treated as a
corporation for U.S. federal income tax purposes, which would result in such MLP
being required to pay U.S. federal income tax on its taxable income. The
classification of an MLP as a corporation for U.S. federal income tax purposes
would have the effect of reducing the amount of cash available for distribution
by the MLP. Thus, if any MLP owned by the Fund were treated as a corporation for
U.S. federal income tax purposes, the result could be a reduction of the value
of your investment in the Fund and lower income, as compared to if the MLP were
not taxed as a corporation.
Tax
Risks. Regulated
investment companies (“RICs”) are subject to a favorable tax treatment under the
U.S. Internal Revenue Code of 1986, as amended (the “Code”). To qualify as a
RIC, the Fund must meet certain source-of-income, asset diversification and
annual distribution requirements. Under the diversification requirements, the
Fund must generally limit its investments in MLPs to no more than 25% of its
total assets. If the Fund were to fail to qualify as a RIC (e.g. by
investing more than 25% of its assets in MLPs), it would be subject to federal
income tax as a corporation, and its distributions to shareholders would be
taxed as dividend income to the extent of the Fund’s earnings and profits. Under
certain circumstances, the Fund could cure a failure to qualify as a RIC, but to
do so, the Fund could incur significant Fund-level taxes and could be forced to
dispose of certain assets.
Depreciation
or other cost recovery deductions passed through to the Fund from investments in
MLPs in a given year will generally reduce the Fund’s taxable income, but those
deductions may be recaptured in the Fund’s income in one or more subsequent
years. When recognized and distributed, recapture income will generally be
taxable to shareholders at the time of the distribution at ordinary income tax
rates, even though those shareholders might not have held shares in the Fund at
the time the deductions were taken by the Fund, and even though those
shareholders will not have corresponding economic gain on their shares at the
time of the recapture. In order to distribute recapture income or to fund
redemption requests, the Fund may need to liquidate investments.
•Models
and Data Risk. When
Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon expose the Fund to potential risks. For example, by relying on
Models and Data, AlphaClone may be induced to buy certain
investments
at prices that are too high, to sell certain other investments at prices that
are too low, or to miss favorable opportunities altogether. Similarly, any
hedging based on faulty Models and Data may prove to be unsuccessful.
Some
of the models used by AlphaClone for the Fund are predictive in nature. The use
of predictive models has inherent risks. For example, such models may
incorrectly forecast future behavior, leading to potential losses on a cash flow
and/or a mark-to-market basis. In addition, in unforeseen or certain
low-probability scenarios (often involving a market disruption of some kind),
such models may produce unexpected results, which can result in losses for the
Fund. Furthermore, because predictive models are usually constructed based on
historical data supplied by third parties, the success of relying on such models
may depend heavily on the accuracy and reliability of the supplied historical
data.
All
models rely on correct market data inputs. If incorrect market data is entered
into even a well-founded model, the resulting information will be incorrect.
However, even if market data is input correctly, “model prices” will often
differ substantially from market prices, especially for instruments with complex
characteristics, such as derivative instruments.
•Passive
Investment Risk.
The Fund invests in the securities included in, or representative of, the Index
regardless of their investment merit. The Fund does not attempt to outperform
the Index or take defensive positions in declining markets. As a result, the
Fund’s performance may be adversely affected by a general decline in the market
segments relating to the Index. The returns from the types of securities in
which the Fund invests may underperform returns from the various general
securities markets or different asset classes. This may cause the Fund to
underperform other investment vehicles that invest in different asset classes.
Different types of securities (for example, large-, mid- and
small-capitalization stocks) tend to go through cycles of doing better – or
worse – than the general securities markets. In the past, these periods have
lasted for as long as several years.
•REIT
Investment Risk.
Investments
in REITs involve unique risks. REITs may have limited financial resources, may
trade less frequently and in limited volume, and may be more volatile than other
securities. In addition, to the extent the Fund holds interests in REITs, it is
expected that investors in the Fund will bear two layers of asset-based
management fees and expenses (directly at the Fund level and indirectly at the
REIT level). The risks of investing in REITs include certain risks associated
with the direct ownership of real estate and the real estate industry in
general. These include risks related to general, regional and local economic
conditions; fluctuations in interest rates and property tax rates; shifts in
zoning laws, environmental regulations and other governmental action such as the
exercise of eminent domain; cash flow dependency; increased operating expenses;
lack of availability of mortgage funds; losses due to natural disasters;
overbuilding; losses due to casualty or condemnation; changes in property values
and rental rates; and other factors.
In
addition to these risks, residential/diversified REITs and commercial 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, REITs are dependent upon management skills and generally may
not be diversified. REITs are also subject to heavy cash flow dependency,
defaults by borrowers and self-liquidation. In addition, REITs could possibly
fail to qualify for the beneficial tax treatment available to REITs under the
Code, or to maintain their exemptions from registration under the Investment
Company Act of 1940, as amended (the “1940 Act”). The Fund expects that
dividends received from a REIT and distributed to Fund shareholders generally
will be taxable to the shareholder as ordinary income. 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 a default by a borrower or lessee, the REIT may
experience delays in enforcing its rights as a mortgagee or lessor and may incur
substantial costs associated with protecting investments.
•Sector
Risk. The
Fund’s investing approach may result in an emphasis on certain sectors or
sub-sectors of the market at any given time. To the extent the Fund invests more
heavily in one sector or sub-sector of the market, it thereby presents a more
concentrated risk and its performance will be especially sensitive to
developments that significantly affect those sectors or sub-sectors. In
addition, the value of Shares may change at different rates compared to the
value of shares of a fund with investments in a more diversified mix of sectors
and industries. An individual sector or sub-sector of the market may have
above-average performance during particular periods, but may also move up and
down more than the broader market. The several industries that constitute a
sector may all react in the same way to economic, political or regulatory
events. The Fund’s performance could also be affected if the sectors or
sub-sectors do not perform as expected. Alternatively, the lack of exposure to
one or more sectors or sub-sectors may adversely affect
performance.
◦Consumer
Sectors Risk. The
success of consumer product manufacturers and retailers is tied closely to the
performance of domestic and international economies, interest rates, exchange
rates, competition, consumer confidence, tariffs and trade barriers, changes in
demographics, and consumer preferences. Companies in consumer-oriented sectors
depend heavily on disposable household income and consumer spending, and may be
strongly affected by social trends and marketing campaigns. These companies may
be subject to severe competition, which may have an adverse impact on their
profitability.
◦Financial
Sector Risk.
Companies in the financial sector of an economy are often subject to extensive
governmental regulation and intervention, which may adversely affect the scope
of their activities, the prices they can charge and the
amount
of capital they must maintain. Governmental regulation may change frequently and
may have significant adverse consequences for companies in the financial sector,
including effects not intended by such regulation. The impact of recent or
future regulation in various countries on any individual financial company or on
the sector as a whole cannot be predicted.
Certain
risks may impact the value of investments in the financial sector more severely
than those of investments outside this sector, including the risks associated
with companies that operate with substantial financial leverage. Companies in
the financial sector may also be adversely affected by increases in interest
rates and loan losses, decreases in the availability of money or asset
valuations, credit rating downgrades and adverse conditions in other related
markets.
Insurance
companies, in particular, may be subject to severe price competition and/or rate
regulation, which may have an adverse impact on their profitability. Insurance
companies are subject to extensive government regulation in some countries and
can be significantly affected by changes in interest rates, general economic
conditions, price and marketing competition, the imposition of premium rate
caps, or other changes in government regulation or tax law. Different segments
of the insurance industry can be significantly affected by mortality and
morbidity rates, environmental clean-up costs and catastrophic events such as
earthquakes, hurricanes and terrorist acts.
The
financial sector is also a target for cyber attacks and may experience
technology malfunctions and disruptions. In recent years, cyber attacks and
technology failures have become increasingly frequent and have caused
significant losses.
◦Information
Technology Sector Risk.
Market
or economic factors impacting information technology companies and companies
that rely heavily on technological advances could have a significant effect on
the value of the Fund’s investments. The value of stocks of information
technology companies and companies that rely heavily on technology is
particularly vulnerable to rapid changes in technology product cycles, rapid
product obsolescence, government regulation and competition, both domestically
and internationally, including competition from foreign competitors with lower
production costs. Stocks of information technology companies and companies that
rely heavily on technology, especially those of smaller, less-seasoned
companies, tend to be more volatile than the overall market. Information
technology companies are heavily dependent on patent and intellectual property
rights, the loss or impairment of which may adversely affect profitability.
Additionally, companies in the technology sector may face dramatic and often
unpredictable changes in growth rates and competition for the services of
qualified personnel.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and the Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
PORTFOLIO
HOLDINGS INFORMATION
Information
about the Fund’s daily portfolio holdings is available at
www.alphaclonefunds.com. A complete description of the Fund’s policies and
procedures with respect to the disclosure of the Fund’s portfolio holdings is
available in the Fund’s Statement of Additional Information (“SAI”).
MANAGEMENT
Investment
Adviser
Exchange
Traded Concepts, LLC, serves as the investment adviser and has overall
responsibility for the general management and administration of the Fund. The
Adviser also arranges for transfer agency, custody, fund administration, and all
other non-distribution related services necessary for the Fund to operate. For
the services it provides to the Fund, the Fund pays the Adviser a unified
management fee, which is calculated daily and paid monthly, at an annual rate of
0.65% of the Fund’s average daily net assets. For
the Fund’s fiscal year ended March 31, 2021, the Adviser received
management fees equaling 0.65% of its average daily net assets.
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Fund except for the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, taxes, brokerage
commissions and other expenses incurred in placing orders for the purchase and
sale of securities and other investment instruments, acquired fund fees and
expenses, accrued deferred tax liability, extraordinary expenses, and
distribution fees and expenses paid by the Trust under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act.
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
Adviser has provided investment advisory services to individual and
institutional accounts since 2009. The Adviser is an Oklahoma limited liability
company and is located at 10900 Hefner Pointe Drive, Suite 400, Oklahoma City,
Oklahoma 73120.
The
basis for the Board’s approval of the Fund’s Investment Advisory Agreement is
available in the Fund’s Annual Report to Shareholders for the period ended March
31, 2021.
Portfolio
Managers
Andrew
Serowik, Todd Alberico, and Gabriel Tan are primarily responsible for the
day-to-day management of the Fund.
Mr.
Serowik joined the Adviser from Goldman Sachs. He began his career at Spear,
Leeds & Kellogg (“SLK”), continuing with Goldman after its acquisition of
SLK. During his career of more than 19 years at the combined companies, he held
various roles, including managing the global Quant ETF Strats team and One Delta
ETF Strats. He designed and developed systems for portfolio risk calculation,
algorithmic ETF trading, and execution monitoring, with experience across all
asset classes. He graduated from the University of Michigan with a Bachelor of
Business Administration degree in Finance.
Mr.
Alberico joined the Adviser in November 2020, having spent the past 14 years in
ETF trading at Goldman Sachs, Cantor Fitzgerald, and, most recently, Virtu
Financial. He spent most of that time focused on the Trading and Portfolio Risk
Management of ETFs exposed to international and domestic equity. He has worked
on several different strategies including lead market-making and electronic
trading, to customer facing institutional business developing models for block
trading as well as transitional trades. Mr. Alberico graduated from St. John’s
University in NY with a Bachelor of Science degree in Finance.
Mr.
Tan joined the Adviser in May 2019 as an Associate Portfolio Manager and was
promoted to Portfolio Manager in December 2020. He began his career at UBS and
BBR Partners where he worked as a financial planning analyst and a portfolio
strategist for over four years. During his time there, he developed
comprehensive wealth management solutions focused on portfolio optimization,
trust and estate planning, and tax planning. Mr. Tan graduated from the
University of North Carolina at Chapel Hill with a Bachelor of Science in
Business Administration with a concentration in Investments, a Bachelor of Arts
in Economics, and a Minor in Chinese.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts managed by the Portfolio Managers, and
the Portfolio Managers’ ownership of Shares.
HOW
TO BUY AND SELL SHARES
The
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from the Fund, and only APs may tender their Shares for
redemption directly to the Fund, at NAV. APs must be a member or participant of
a clearing agency registered with the SEC and must execute a Participant
Agreement that has been agreed to by the Distributor (defined below), and that
has been accepted by the Fund’s transfer agent, with respect to purchases and
redemptions of Creation Units. Once created, Shares trade in the secondary
market in quantities less than a Creation Unit.
Most
investors buy and sell Shares in secondary market transactions through brokers
at market prices. Shares are listed for trading on the secondary market on the
Exchange and can be bought and sold throughout the trading day like other
publicly traded securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the bid-ask spread on
your transactions. In addition, because secondary market transactions occur at
market prices, you may pay more than NAV when you buy Shares, and receive less
than NAV when you sell those Shares.
Book
Entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly
maintain a custodial relationship with DTC. As a beneficial owner of Shares, you
are not entitled to receive physical delivery of stock certificates or to have
Shares registered in your name, and you are not considered a registered owner of
Shares. Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are the same
as those that apply to any other securities that you hold in book entry or
“street name” through your brokerage account.
Frequent
Purchases and Redemptions of Shares
The
Fund imposes no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly with the Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Fund accommodates
frequent purchases and redemptions by APs. However, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and
redemptions,
the Fund employs fair value pricing and may impose transaction fees on purchases
and redemptions of Creation Units to cover the custodial and other costs
incurred by the Fund in effecting trades. In addition, the Fund and the Adviser
reserve the right to reject any purchase order at any time.
Determination
of NAV
The
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (“NYSE”), generally 4:00 p.m. Eastern time, each day
the NYSE is open for business. The NAV is calculated by dividing the Fund’s net
assets by its Shares outstanding.
In
calculating its NAV, the Fund generally values its assets on the basis of market
quotations, last sale prices, or estimates of value furnished by a pricing
service or brokers who make markets in such instruments. If such information is
not available for a security held by the Fund or is determined to be unreliable,
the security will be valued at fair value estimates under guidelines established
by the Board (as described below).
Fair
Value Pricing
The
Board has adopted procedures and methodologies to fair value Fund securities
whose market prices are not “readily available” or are deemed to be unreliable.
For example, such circumstances may arise when: (i) a security has been
de-listed or has had its trading halted or suspended; (ii) a security’s
primary pricing source is unable or unwilling to provide a price; (iii) a
security’s primary trading market is closed during regular market hours; or
(iv) a security’s value is materially affected by events occurring after
the close of the security’s primary trading market. Generally, when fair valuing
a security, the Fund will take into account all reasonably available information
that may be relevant to a particular valuation including, but not limited to,
fundamental analytical data regarding the issuer, information relating to the
issuer’s business, recent trades or offers of the security, general and/or
specific market conditions and the specific facts giving rise to the need to
fair value the security. Fair value determinations are made in good faith and in
accordance with the fair value methodologies included in the Board-adopted
valuation procedures. Due to the subjective and variable nature of fair value
pricing, there can be no assurance that the Adviser will be able to obtain the
fair value assigned to the security upon the sale of such security.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Fund. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Fund is available through certain broker-dealers. If
you are interested in enrolling in householding and receiving a single copy of
prospectuses and other shareholder documents, please contact your broker-dealer.
If you are currently enrolled in householding and wish to change your
householding status, please contact your broker-dealer.
Investments
by Registered Investment Companies
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in the Fund beyond the limits set
forth in section 12(d)(1), subject to certain terms and conditions set forth in
an SEC exemptive order issued to the Adviser or rule under the 1940 Act,
including that such investment companies enter into an agreement with the
Fund.
DIVIDENDS,
DISTRIBUTIONS, AND TAXES
Dividends
and Distributions
The
Fund intends to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least annually. The Fund will declare and
pay capital gain distributions, if any, in cash. Distributions in cash may be
reinvested automatically in additional whole Shares only if the broker through
whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Fund. Your investment
in the Fund may have other tax implications. Please consult your tax advisor
about the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
The
Fund intends to qualify each year for treatment as a RIC under the Code. If it
meets certain minimum distribution requirements, a RIC is not subject to tax at
the fund level on income and gains from investments that are timely distributed
to shareholders. However, the Fund’s failure to qualify as a RIC or to meet
minimum distribution requirements would result (if certain relief provisions
were not available) in fund-level taxation and, consequently, a reduction in
income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when the Fund makes distributions, when you sell your Shares listed
on the Exchange; and when you purchase or redeem Creation Units (APs only).
Taxes
on Distributions
The
Fund intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For federal income tax purposes,
distributions of investment income are generally taxable as ordinary income or
qualified dividend income. Taxes on distributions of capital gains (if any) are
determined by how long the Fund owned the investments that generated them,
rather than how long a shareholder has owned his or her Shares. Sales of assets
held by the Fund for more than one year generally result in long-term capital
gains and losses, and sales of assets held by the Fund for one year or less
generally result in short-term capital gains and losses. Distributions of the
Fund’s net capital gain (the excess of net long-term capital gains over net
short-term capital losses) that are reported by the Fund as capital gain
dividends (“Capital Gain Dividends”) will be taxable as long-term capital gains,
which for non-corporate shareholders are subject to tax at reduced rates of up
to 20% (lower rates apply to individuals in lower tax brackets). Distributions
of short-term capital gain will generally be taxable as ordinary income.
Dividends and distributions are generally taxable to you whether you receive
them in cash or reinvest them in additional Shares.
Distributions
reported by the Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that the Fund received in respect of stock of certain
foreign corporations may be qualified dividend income if that stock is readily
tradable on an established U.S. securities market. Dividends received by a Fund
from an ETF or underlying fund taxable as a RIC may be treated as qualified
dividend income generally only to the extent so reported by such ETF or
underlying fund. Corporate shareholders may be entitled to a dividends received
deduction for the portion of dividends they receive from a Fund that are
attributable to dividends received by the Fund from U.S. corporations, subject
to certain limitations.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from the Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8% tax
on all or a portion of their “net investment income,” which includes interest,
dividends, and certain capital gains (generally including capital gains
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by the Fund before
your investment (and thus were included in the Shares’ NAV when you purchased
your Shares).
You
may wish to avoid investing in the Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your investment.
If
the Fund’s distributions exceed its earnings and profits, all or a portion of
the distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in Shares and result in a
higher capital gain or lower capital loss when the Shares are sold. After a
shareholder’s basis in Shares has been reduced to zero, distributions in excess
of earnings and profits in respect of those Shares will be treated as gain from
the sale of the Shares.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
the Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
your Shares generally are not subject to U.S. taxation, unless you are a
nonresident alien individual who is physically present in the U.S. for 183 days
or more per year. The Fund may, under certain circumstances, report all or a
portion of a dividend as an “interest-related dividend” or a “short-term capital
gain dividend,” which would generally be exempt from this 30%
U.S. withholding tax, provided certain other requirements are met.
Different tax consequences may result if you are a foreign shareholder engaged
in a trade or business within the United States or if a tax treaty applies.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
the Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that are foreign entities and that fail to meet prescribed
information reporting or certification requirements.
The
Fund (or a financial intermediary, such as a broker, through which a shareholder
owns Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who
fails
to properly furnish a correct taxpayer identification number, who has
underreported dividend or interest income, or who fails to certify that he, she
or it is not subject to such withholding.
Taxes
When Shares are Sold on the Exchange
Any
capital gain or loss realized upon a sale of Shares generally is treated as a
long-term capital gain or loss if Shares have been held for more than one year
and as a short-term capital gain or loss if Shares have been held for one year
or less. However, any capital loss on a sale of Shares held for six months or
less is treated as long-term capital loss to the extent of Capital Gain
Dividends paid with respect to such Shares. Any loss realized on a sale will be
disallowed to the extent Shares of the Fund are acquired, including through
reinvestment of dividends, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of Shares. The ability to deduct capital
losses may be limited.
The
cost basis of Shares of the Fund acquired by purchase will generally be based on
the amount paid for the Shares and then may be subsequently adjusted for other
applicable transactions as required by the Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market their
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether wash sale rules apply and when a loss might be deductible.
Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
The
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. The Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, the Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Taxation
of REIT Investments
The
Fund may invest in REITs. “Qualified REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are eligible for a 20% deduction by non-corporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6%
(37% top rate applied to income after 20% deduction). Pursuant to proposed
Treasury regulations on which the Fund may rely, distributions by the Fund to
its shareholders that are attributable to qualified REIT dividends received by
the Fund and which the Fund properly reports as “section 199A dividends,” are
treated as “qualified REIT dividends” in the hands of non-corporate
shareholders. A section 199A dividend is treated as a qualified REIT dividend
only if the shareholder receiving such dividend holds the dividend-paying RIC
shares for at least 46 days of the 91-day period beginning 45 days before the
shares become ex-dividend, and is not under an obligation to make related
payments with respect to a position in substantially similar or related
property. The Fund is permitted to report such part of its dividends as section
199A dividends as are eligible, but is not required to do so.
REITs
in which the Fund invests often do not provide complete and final tax
information to the Fund until after the time that the Fund issues a tax
reporting statement.
As
a result, the Fund may at times find it necessary to reclassify the amount and
character of its distributions to you after it issues your tax reporting
statement. When such reclassification is necessary, the Fund (or a financial
intermediary, such as a broker, through which a shareholder owns Shares) will
send you a corrected, final Form 1099-DIV to reflect the reclassified
information. If you receive a corrected Form 1099-DIV, use the information on
this corrected form, and not the information on the previously issued tax
reporting statement, in completing your tax returns.
Foreign
Taxes
To
the extent the Fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the Fund received from
sources in foreign countries.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in the Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares under all applicable tax
laws. For more information, please see the section entitled “Federal Income
Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Quasar Distributors, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Fund on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, the Fund is authorized to
pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Fund, and there are no plans to impose
these fees. However, in the event Rule 12b-1 fees are charged in the future,
because the fees are paid out of the Fund’s assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often Shares traded on the Exchange at a price above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV per Share is available, free of charge, on the Fund’s
website at www.alphaclonefunds.com.
INDEX/TRADEMARK LICENSES/DISCLAIMERS
The
AlphaClone indexes are the exclusive property of AlphaClone. AlphaClone and the
AlphaClone index name are service marks of AlphaClone or its affiliates and have
been licensed for use for certain purposes by ETC. The financial securities
referred to herein are not sponsored by AlphaClone, and AlphaClone bears no
liability with respect to any such financial securities. No purchaser, seller or
holder of this product, or any other person or entity, should use or refer to
any AlphaClone trade name, trademark or service mark to sponsor, endorse, market
or promote this product without first contacting AlphaClone to determine whether
AlphaClone’s permission is required. Under no circumstances may any person or
entity claim any affiliation with AlphaClone without the prior written
permission of AlphaClone.
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the ability of the Fund to track the total return
performance of the Index or the ability of the Index identified herein to track
the performance of its constituent securities. The Exchange is not responsible
for, nor has it participated in, the determination of the compilation or the
calculation of the Index, nor in the determination of the timing, prices, or
quantities of Shares to be issued, nor in the determination or calculation of
the equation by which Shares are redeemable. The Exchange has no obligation or
liability to owners of Shares in connection with the administration, marketing,
or trading of the Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Index or
the data included therein. The Exchange makes no warranty, express or implied,
as to results to be obtained by the Fund, owners of Shares, or any other person
or entity from the use of the Index or the data included therein. The Exchange
makes no express or implied warranties, and hereby expressly disclaims all
warranties of merchantability or fitness for a particular purpose with respect
to the Index or the data included therein. Without limiting any of the
foregoing, in no event shall the Exchange have any liability for any lost
profits or indirect, punitive, special, or consequential damages even if
notified of the possibility thereof.
The
Adviser, the Exchange, and the Fund make no representation or warranty, express
or implied, to the owners of Shares or any member of the public regarding the
advisability of investing in securities generally or in the Fund particularly or
the ability of the Index to track general stock market performance. The Fund and
the Adviser do not guarantee the accuracy, completeness, or performance of the
Index or the data included therein and shall have no liability in connection
with the Index or Index calculation. The index calculation agent maintains and
calculates the Index used by the Fund. The index calculation agent shall have no
liability for any errors or omissions in calculating the Index.
FINANCIAL
HIGHLIGHTS
The
financial highlights table is intended to help you understand the Fund’s
financial performance for the Fund’s five most recent fiscal years. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned or
lost on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Cohen & Company, Ltd.,
the Fund’s independent registered public accounting firm, whose report, along
with the Fund’s financial statements, is included in the Fund’s annual report,
which is available upon request.
AlphaClone
Alternative Alpha ETF
For
a capital share outstanding throughout the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended
March
31,
2021 |
|
Year
Ended March 31, 2020 |
|
Year
Ended March 31, 2019 |
|
Year
Ended March 31, 2018 |
|
Year
Ended March 31, 2017 |
|
Net
asset value, beginning of year |
$ |
44.55 |
|
|
$ |
50.44 |
|
|
$ |
43.35 |
|
|
$ |
37.93 |
|
|
$ |
33.54 |
|
|
|
|
|
|
|
|
|
|
|
| INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
|
|
|
|
|
|
Net
investment income (loss) (1) |
(0.14) |
|
|
0.36 |
|
|
0.03 |
|
|
0.07 |
|
|
0.09 |
|
|
Net
realized and unrealized gain (loss) on investments |
31.24 |
|
|
(6.16) |
|
|
7.17 |
|
|
5.35 |
|
(2) |
4.30 |
|
|
Total
from investment operations |
31.10 |
|
|
(5.80) |
|
|
7.20 |
|
|
5.42 |
|
|
4.39 |
|
|
|
|
|
|
|
|
|
|
|
| DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
|
|
|
|
|
|
From
net investment income |
(0.37) |
|
|
(0.09) |
|
|
(0.11) |
|
|
— |
|
|
— |
|
|
Total
distributions |
(0.37) |
|
|
(0.09) |
|
|
(0.11) |
|
|
— |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
Net
asset value, end of year |
$ |
75.28 |
|
|
$ |
44.55 |
|
|
$ |
50.44 |
|
|
$ |
43.35 |
|
|
$ |
37.93 |
|
|
|
|
|
|
|
|
|
|
|
|
Total
return |
69.73 |
% |
|
-11.54 |
% |
|
16.65 |
% |
|
14.29 |
% |
(3) |
13.09 |
% |
|
|
|
|
|
|
|
|
|
|
| SUPPLEMENTAL
DATA: |
|
|
|
|
|
|
|
|
|
|
Net
assets at end of year (000’s) |
$ |
28,229 |
|
|
$ |
18,935 |
|
|
$ |
20,177 |
|
|
$ |
23,843 |
|
|
$ |
30,346 |
|
| RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
|
|
|
|
|
|
Expenses
to average net assets |
0.65 |
% |
|
0.65 |
% |
|
0.65 |
% |
|
0.88 |
% |
(4) |
0.97 |
% |
| Ratio
of expenses excluding dividend and interest expense on short positions to
average net assets |
0.65 |
% |
|
0.65 |
% |
|
0.65 |
% |
|
0.88 |
% |
(4) |
0.95 |
% |
| Net
investment income (loss) to average net assets |
(0.21) |
% |
|
0.66 |
% |
|
0.07 |
% |
|
0.18 |
% |
|
0.25 |
% |
| Net
investment income (loss) excluding dividend and interest income on short
positions to average net assets |
(0.21) |
% |
|
0.66 |
% |
|
0.07 |
% |
|
0.18 |
% |
|
0.27 |
% |
|
Portfolio
turnover rate (5) |
179 |
% |
|
126 |
% |
|
197 |
% |
|
371 |
% |
|
183 |
% |
(1)Calculated
based on average shares outstanding during the year.
(2)Includes
$0.26 gain per share derived from payment from sub-adviser.
(3)Before
payment from sub-adviser for the loss resulting from a trade error, the total
return for the year would have been 13.6%.
(4)Effective
December 27, 2017, the Adviser reduced its management fee from 0.95% to
0.65%.
(5)Excludes
the impact of in-kind transactions.
ALPHACLONE
ALTERNATIVE ALPHA ETF
|
|
|
|
|
|
|
|
|
|
|
|
| Adviser |
Exchange
Traded Concepts, LLC
10900
Hefner Point Drive, Suite 400
Oklahoma
City, Oklahoma 73120 |
Index
Provider |
AlphaClone,
Inc.
One
Market Street
Spear
Tower, Suite 3600
San
Francisco, California 94105 |
| Administrator |
U.S.
Bancorp Fund Services, LLC
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Transfer
Agent and
Index Receipt
Agent |
U.S.
Bancorp Fund Services, LLC
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
| Custodian |
U.S.
Bank National Association
1555
N. Rivercenter Drive, Suite 302
Milwaukee,
Wisconsin 53212 |
Distributor |
Quasar
Distributors, LLC
111
East Kilbourn Avenue, Suite 2200
Milwaukee,
Wisconsin 53202 |
| Independent
Registered Public Accounting Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004-2541 |
Investors
may find more information about the Fund in the following documents:
Statement
of Additional Information: The
Fund’s SAI provides additional details about the investments of the Fund and
certain other additional information. A current SAI dated July 31, 2021, as
supplemented from time to time, is on file with the SEC and is herein
incorporated by reference into this Prospectus. It is legally considered a part
of this Prospectus.
Annual/Semi-Annual
Reports: Additional
information about the Fund’s investments is available in the Fund’s annual and
semi-annual reports to shareholders. In the annual report you will find a
discussion of the market conditions and investment strategies that significantly
affected Fund’s performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Fund by contacting the Fund at AlphaClone
Alternative Alpha ETF, c/o U.S. Bank Global Fund Services, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 or by calling 1-800-617-0004.
Shareholder
reports and other information about the Fund are also available:
•Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or
•Free
of charge from the Fund’s Internet web site at www.alphaclonefunds.com; or
(SEC
Investment Company Act File No. 811-22668)
