ck0001467831-20220930
ETFMG Alternative Harvest ETF
(MJ)
ETFMG U.S. Alternative Harvest ETF
(MJUS)
Listed
on NYSE Arca, Inc.
Each
Fund is a series of ETF Managers Trust
PROSPECTUS
January
31, 2023
THE
SEC HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
This
prospectus has been arranged into different sections so that you can easily
review this important information. For detailed information about the Fund,
please see:
ETFMG
Alternative Harvest ETF — Fund Summary
Investment Objective
The ETFMG Alternative Harvest
ETF (the "Fund" or the “Alternative Harvest ETF”) seeks to provide investment
results that, before fees and expenses, correspond generally to the total return
performance of the Prime Alternative Harvest Index (the
"Index").
Fees and Expenses
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
Fee |
0.75 |
% |
Distribution
and Service (12b-1) Fees |
None |
Other
Expenses |
0.00 |
% |
Acquired
Fund Fees and Expenses1,2 |
0.19 |
% |
Total
Annual Fund Operating Expenses |
0.94 |
% |
Less:
Fee Waiver3 |
(0.19 |
%) |
Total
Annual Fund Operating Expenses After Fee Waiver3 |
0.75 |
% |
1Total Annual Fund
Operating Expenses do not correlate to the Expenses to Average Net Assets
provided in the Financial Highlights, which reflect the operating expenses of
the Fund and do not include 0.19% that is attributed to acquired fund fees and
expenses.
2Acquired fund fees and
expenses have been restated to reflect estimated expenses for the current fiscal
year.
3The Fund’s investment
adviser, ETF Managers Group LLC (the “Adviser”), has agreed to waive its
management fee in an amount equal to the acquired fund fees and expenses related
to any investment in ETFMG U.S. Alternative Harvest ETF. This arrangement will
remain in effect through at least March 31,
2024, and prior to such date the Adviser may not terminate the
arrangement without the approval of the Board of Trustees of the
Trust.
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. This
Example does not take into account the 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 cost would be:
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1
Year |
| 3
Years |
| 5
Years |
| 10
Years |
$77 |
| $240 |
| $417 |
| $930 |
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 the Fund 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
September 30, 2022, the Fund's portfolio turnover rate was 74% of the average value of its
portfolio.
Principal Investment
Strategies
The
Fund uses a “passive” or indexing approach to try to achieve the Fund’s
investment objective. Unlike many investment companies, the Fund does not try to
“beat” the Index and does not seek temporary defensive positions when markets
decline or appear overvalued.
The
Fund uses a replication strategy. A replication strategy is an indexing strategy
that involves investing in the securities of the Index in approximately the same
proportions as in the Index. However, the Fund may utilize a representative
sampling strategy with respect to the Index when a replication strategy might be
detrimental to shareholders, such as when there are practical difficulties or
substantial costs involved in compiling a portfolio of equity securities to
follow the Index, in instances in which a security in the Index becomes
temporarily illiquid, unavailable or less liquid, or as a result of legal
restrictions or limitations (such as tax diversification requirements) that
apply to the Fund but not the Index.
The
Index tracks the performance of the common stock (or corresponding American
Depositary Receipts (“ADRs”), Global Depositary Receipts (“GDRs”)) of companies
across the globe, including U.S. companies, that (i) engage in the cultivation,
production,
marketing or distribution of cannabis, including industrial hemp; (ii) engage in
the production, marketing, transportation or distribution of products containing
cannabis, including industrial hemp, for medical or non-medical purposes,
including, but not limited to, drugs, supplements, or food products (the
companies in categories (i) and (ii) are “Cannabis Companies”); (iii) engage in
the creation, marketing, transportation or distribution of prescription drugs,
supplements or food products that utilize cannabinoids as an ingredient
(“Pharmaceutical Companies”); (iv) trade tobacco or produce tobacco products,
such as cigarettes, cigars or electronic cigarettes; (v) produce cigarette and
cigar components, such as cigarette paper and filters; (vi) engage in the
creation, production and distribution of fertilizers, plant foods, pesticides or
growing equipment to be used in the cultivation of cannabis or tobacco; or (vii)
provide other products or services designed for, or used by, companies in the
Cannabis industry, including technology, real estate or financial services. A
company is considered to be a “U.S. Cannabis Company” if it derives more than
50% of its revenue from the activity described in categories (i), (ii), (iii),
or (vii) within the United States.
The
Fund will only directly invest in companies that are engaged exclusively in
legal activities under applicable national and local laws, including U.S.
federal and state laws. The Fund will not hold direct ownership in any companies
that engage in cannabis-related business unless permitted by national and local
laws of the relevant jurisdiction, including United States (“U.S.”) federal and
state laws. Because the Fund only holds securities of companies that are
currently engaged exclusively in legal activities under applicable national and
local laws, the Fund will not hold equity securities of any company that engages
in the cultivation, production or distribution of marijuana or products derived
from marijuana for medical or non-medical purposes in a particular country,
including the United States, unless and until such time as the cultivation,
production or distribution of medical or non-medical marijuana, as applicable,
becomes legal under all local and national laws governing the company in such
country.
“Applicable
national and local laws” refers to (i) controlled substance laws and regulations
or (ii) food, drug, and cosmetics, or equivalent
laws and regulations under whose jurisdiction the company is subject that govern
the cultivation, production or distribution, for medical or non-medical
purposes, of marijuana in a particular country. “Hemp” refers to cannabis plants
with a tetrahydrocannabinol (“THC”) concentration of not more than 0.3% on a dry
weight basis, as well as derivatives thereof, whereas "marijuana" refers to all
other cannabis plants and derivatives thereof.
The
Pharmaceutical Companies produce, market or distribute drug products that use
cannabinoids to create government approved drugs. Cannabinoids are extracts from
the cannabis plant and include tetrahydrocannabinol, cannabidiol (“CBD”),
dronabinol and nabilone. All Pharmaceutical Companies that are held by the Fund
have the necessary permits and licenses to engage in lawful medical research
using cannabinoids to produce government approved drugs, or to otherwise
produce, market or distribute such drugs. This activity is distinct from the
“medical marijuana” business, which refers to the use of the cannabis leaf, as
opposed to specific extracts in pharmaceutical form, to alleviate the symptoms
of injury or illness.
As
of the date of this prospectus, the Fund does not directly invest in companies
that grow or distribute marijuana inside of the U.S. or any “medical marijuana”
companies in the United States. The Fund may, however, hold securities of
companies that have a business interest in the hemp and hemp-based products
markets within the United States. If U.S. federal law changes in the future and
these cannabis-related business activities become legal at the federal level,
the Fund may begin directly investing in U.S. listed companies in the cannabis
and hemp ecosystem in accordance with the Fund’s investment objective and
principal investment strategy.
The
initial universe of companies engaged in the above activities is determined
based on proprietary research and analysis conducted by the Index Provider. The
Index Provider uses a variety of publicly available resources for such analysis,
including shareholder reports of issuers or the Bloomberg Terminal, to determine
whether a company is engaged in one of the businesses described in categories
(i)-(vii), above. The Index universe is then screened to eliminate the stocks
that have a market capitalization of less than $200 million ($100 million for
U.S. Cannabis Companies) or a three-month average daily trading value of less
than $500,000 ($100,000 for U.S. Cannabis Companies). Additionally, component
securities of the Index must not be listed on an exchange in a country which
employs restrictions on foreign capital investment such that those restrictions
render the component effectively non-investable for a U.S.-based fund.
The
Index may also consist of U.S.-listed common stocks of Special Purpose
Acquisitions Corporations (“SPACs”) that have been organized with the stated
purpose of acquiring one or more operating businesses that would otherwise be
eligible for inclusion in the Index (a SPAC-derived company). A SPAC is a “blank
check” company with no commercial operations that is designed to raise capital
via an initial public offering for the purpose of engaging in a merger,
acquisition, reorganization, or similar business combination (a “Combination”)
with one or more operating companies. If a SPAC that is included in the Index
announces a Combination with an operating company that will be eligible for
inclusion in the Index, the pre-Combination SPAC and, subsequently, the
SPAC-derived company will continue to be included in the Index, so long as it
continues to satisfy the remaining eligibility criteria. If the SPAC announces a
Combination with a non-qualifying business, the SPAC will be removed from the
Index at the time of the next Index reconstitution.
The
Index is developed and owned by Prime Indexes (the “Index Provider”), and the
Index is calculated and maintained by Solactive AG. The Index Provider is not
affiliated with Solactive AG, the Fund, the Fund’s investment adviser, and the
Fund’s distributor.
The
Index is reconstituted and rebalanced quarterly. The companies in the Index are
weighted using a proprietary weighting methodology that weights securities
either by market capitalization or in equal amounts, depending on how heavily
the issuer is engaged in the businesses described in categories (i) or (ii),
above. As of January 10, 2022, the Index had 40 constituents. The Fund
rebalances
its portfolio in accordance with its Index, and, therefore, any changes to the
Index’s rebalance schedule will result in corresponding changes to the Fund’s
rebalance schedule.
The
Fund will invest at least 80% of its total assets, exclusive of collateral held
from securities lending, in the component securities of the Index and in ADRs
and GDRs based on the component securities in the Index (the “80% Policy”). The
Fund may invest up to 20% of its total assets in securities that are not in the
Index to the extent that the Fund’s investment adviser believes that such
investments should help the Fund’s overall portfolio track the Index. The Fund
may invest in other investment companies that principally invest, either
directly or through derivatives, in component securities of the Index. The Fund
may invest a significant portion of its assets in exchange-traded funds (“ETFs”)
that invest substantially all of their assets in equity securities of component
securities of the Index and derivatives or other instruments that have economic
characteristics similar to such securities. While the Fund does not intend to
directly invest in swaps, certain ETFs in which the Fund invests may utilize
total return swaps to obtain exposure to the price movements of securities of
Index component companies without owning or taking physical custody of such
security. The Fund may pursue its investment objective by investing in an
affiliated series of ETF Managers Trust, ETFMG U.S. Alternative Harvest ETF. ETF
Managers Group, LLC, investment adviser to the Fund, serves as the investment
adviser to ETFMG U.S. Alternative Harvest ETF.
The
Fund may lend its portfolio securities to brokers, dealers, and other financial
organizations. These loans, if and when made, may not exceed 33 1/3% of the
total asset value of the Fund (including the loan collateral). By lending its
securities, the Fund may increase its income by receiving payments from the
borrower.
Correlation:
Correlation
is the extent to which the values of different types of investments move in
tandem with one another in response to changing economic and market conditions.
An index is a theoretical financial calculation, while the Fund is an actual
investment portfolio. The performance of the Fund and the Index may vary
somewhat due to transaction costs, asset valuations, foreign currency
valuations, market impact, corporate actions (such as mergers and spin-offs),
legal restrictions or limitations, illiquid or unavailable securities, and
timing variances.
The
Fund’s investment adviser expects that, over time, the correlation between the
Fund’s performance and that of the Index, before fees and expenses, will exceed
95%. A correlation percentage of 100% would indicate perfect correlation. If the
Fund uses a replication strategy, it can be expected to have greater correlation
to the Index than if it uses a representative sampling strategy.
Industry
Concentration: The
Fund will concentrate its investments (i.e., hold 25% or more of its net assets) in a
particular industry or group of related industries to approximately the same
extent that the Index is concentrated.
Principal Risks
As with all funds, a shareholder is subject to the risk
that his or her investment could lose money. The principal risks
affecting shareholders’ investments in the Fund are set forth below.
An investment in the Fund is not a
bank deposit and is not insured or guaranteed by the FDIC or any government
agency.
United
States Regulatory Risks of the Marijuana Industry:
The possession and use of marijuana, even for medical purposes, is illegal under
federal and certain states’ laws, which may negatively impact the value of the
Fund’s investments. Use of marijuana is regulated by both the federal government
and state governments, and state and federal laws regarding marijuana often
conflict. Even in those states in which the use of marijuana has been legalized,
its possession and use remains a violation of federal law. Federal law
criminalizing the use of marijuana pre-empts state laws that legalizes its use
for medicinal and recreational purposes. It is not yet known whether the current
Administration will push back against states where marijuana use and possession
is legal, step up the enforcement of federal marijuana laws and the prosecution
of nonviolent federal drug crimes and, in the event the Rohrabacher-Blumenauer
amendment is not renewed by Congress, begin using federal funds to prevent
states from implementing laws that authorize medical marijuana use, possession,
distribution, and cultivation. Such actions by the DOJ could produce a chilling
effect on the industry’s growth and discourage banks from expanding their
services to cannabis-related companies where such services are currently
limited. This conflict between the regulation of marijuana under federal and
state law creates volatility and risk for all cannabis-related companies. In
particular, the stepped up enforcement of marijuana laws by the federal
government would adversely affect the value of the Fund’s U.S. investments.
Certain Cannabis Companies or Pharmaceutical Companies may never be able to
legally produce and sell products in the United States or other national or
local jurisdictions.
Marijuana
is a Schedule I controlled substance under the Controlled Substances Act (“CSA”)
(21 U.S.C. § 811), meaning that it has a high potential for abuse, has no
currently “accepted medical use” in the United States, lacks accepted safety for
use under medical supervision, and may not be prescribed, marketed or sold in
the United States. Few drug products containing natural cannabis or
naturally-derived cannabis extracts have been approved by the Food and Drug
Administration (“FDA”) for use in the United States or obtained registrations
from the United States Drug Enforcement Administration (“DEA”) for commercial
production.
Facilities
conducting research, manufacturing, distributing, importing or exporting, or
dispensing controlled substances in the U.S. must be registered (licensed) to
perform such activities and have the security, control, recordkeeping, reporting
and inventory mechanisms required by the DEA to prevent drug loss and diversion.
Failure to obtain the necessary registrations or comply with necessary
regulatory requirements may significantly impair the ability of certain
companies in which the Fund invests to pursue medical marijuana research or to
otherwise cultivate, possess or distribute marijuana.
Non-U.S.
Regulatory Risks of the Marijuana Industry:
The companies in which the Fund invests are subject to various laws, regulations
and guidelines relating to the manufacture, management, transportation, storage
and disposal of marijuana, as well as being subject to laws and regulations
relating to health and safety, the conduct of operations and the protection of
the environment. Even if a company’s operations are permitted under current law,
they may not be permitted in the future, in which case such company may not be
in a position to carry on its operations in its current locations. Additionally,
controlled substance legislation differs between countries and legislation in
certain countries may restrict or limit the ability of certain companies in
which the Fund invests to sell their products.
Operational
Risks of the Marijuana Industry:
Companies involved in the marijuana industry face intense competition, may have
limited access to the services of banks, may have substantial burdens on company
resources due to litigation, complaints or enforcement actions, and are heavily
dependent on receiving necessary permits and authorizations to engage in medical
marijuana research or to otherwise cultivate, possess or distribute marijuana.
Additionally, cannabis-related companies are subject to various laws and
regulations that may differ at the local, state, and federal level. These laws
and regulations may significantly affect a cannabis-related company’s ability to
conduct business, secure financing, impact the market for cannabis business
sales and services, and set limits on cannabis use, production, transportation
and storage. Since the use of marijuana is illegal under United States federal
law, federally regulated banking institutions may be unwilling to make financial
services available to growers and sellers of marijuana. Additionally, litigation
initiated by private citizens or companies could have a negative impact on the
financial and operational status of cannabis-related companies.
United
States Regulatory Risks of CBD and Hemp: The
Agriculture Improvement Act of 2018 (or the “Farm Bill”) effectively removes
hemp from the list of controlled substances and allows states to regulate its
production, commerce and research with approval from the United States
Department of Agriculture. Certain Index constituents may sell dietary
supplements and/or foods containing CBD within the United States. The Farm Bill
delegates to the FDA responsibility for regulating products containing hemp or
derivatives thereof (including CBD) under the Federal Food, Drug, and Cosmetic
Act (the “FD&C”). Under the FD&C, if a substance (such as CBD) is an
active ingredient in a drug product that has been approved by the FDA, then the
substance cannot be sold in dietary supplements or foods without FDA approval,
unless the substance was marketed as a dietary supplement or as a conventional
food before the drug was approved or before the new drug investigations were
authorized. The FDA has publicly taken the position that CBD cannot be sold in
dietary supplements or foods because CBD is an active ingredient in an
FDA-approved drug, but has yet to issue any regulations in this regard. However,
companies that sell CBD in dietary supplements and foods have taken the position
that CBD was marketed as a dietary supplement and/or as a conventional food
before the drug was approved or before the new drug investigations were
authorized, and because the FDA has not brought enforcement action against such
companies, this question of fact has not yet been adjudicated. In the absence of
a conclusive legal determination to the contrary, as of the date of this
prospectus, it has not been determined that the sale of dietary supplements
and/or foods containing CBD within the United States would cause a company’s
securities to be ineligible for inclusion in the Index. It is possible that such
a legal determination or future federal and/or state laws or regulations could
drastically curtail permissible uses of hemp, which could have an adverse effect
of the value of the Fund’s investments in companies with business interests
in hemp and hemp-based products.
Other
Investment Companies Risk: The
Fund will incur higher and duplicative expenses when it invests in other
investment companies such as ETFs (affiliated ETFs will not charge duplicate
fees and expenses). There is also the risk that the Fund may suffer losses due
to the investment practices of the underlying funds. When the Fund invests in
other investment companies, the Fund will be subject to substantially the same
risks as those associated with the direct ownership of securities held by such
investment companies. Investments in ETFs are also subject to the following
risks: (i) the market price of an ETF’s shares may trade above or below their
net asset value; (ii) an active trading market for an ETF’s shares may not
develop or be maintained; and (iii) trading of an ETF’s shares may be halted for
a number of reasons.
Swap
Risk: The
Fund may invest in ETFs that may invest in swaps. In a total return swap, the
buyer receives a periodic return equal to the total return of a specified
security, securities or index, for a specified period of time. In return, the
buyer pays the counterparty a variable stream of payments, typically based upon
short term interest rates, possibly plus or minus an agreed upon spread. For
example, if an ETF enters into a swap where it agrees to exchange a floating
rate of interest for a fixed rate of interest, the ETF may have to pay more
money than it receives. Total return swaps entered into in which payments are
not netted may entail greater risk than a swap entered into a net basis. There
is a risk that adverse price movements in an instrument can result in a loss
substantially greater than the ETF’s initial investment in that instrument (in
some cases, the potential loss is unlimited). If there is a default by the other
party to such a transaction, the ETF will have contractual remedies pursuant to
the agreements related to the transaction. However, particularly in the case of
privately-negotiated instruments, there is a risk that the counterparty will not
perform its obligations, which could leave the ETF worse off than if it had not
entered into the position. These instruments are subject to high levels of
volatility, in some cases due to the high levels of leverage the ETF may achieve
with them.
The
remaining risks are presented in alphabetical order. Each risk summarized below
is considered a “principal risk” of investing in the Fund, regardless of the
order in which it appears.
Associated
Risks of Investments in SPACs: The
Fund invests in equity securities of SPACs, which raise assets to seek potential
acquisition opportunities. Unless and until an acquisition is completed, a SPAC
generally invests its assets in U.S. government securities, money market
securities, and cash. Because SPACs have no operating history or ongoing
business other than seeking
acquisitions,
the value of their securities is particularly dependent on the ability of the
entity’s management to identify and complete a profitable acquisition. There is
no guarantee that the SPACs in which the Fund invests will complete an
acquisition or that any acquisitions that are completed will be profitable.
Public stockholders of SPACs may not be afforded a meaningful opportunity to
vote on a proposed initial business combination because certain stockholders,
including stockholders affiliated with the management of the SPAC, may have
sufficient voting power, and a financial incentive, to approve such a
transaction without support from public stockholders. As a result, a SPAC may
complete a business combination even though a majority of its public
stockholders do not support such a combination. Because the SPACs included in
the Index will be designed to pursue acquisitions only within certain industries
or regions, their stock prices may experience greater volatility than stocks of
other SPACs.
Associated
Risks of SPAC-Derived Companies: The
Fund invests in companies that are derived from a SPAC. These companies may be
unseasoned and lack a trading history, a track record of reporting to investors,
and widely available research coverage. SPAC-derived companies are thus often
subject to extreme price volatility and speculative trading. These stocks may
have above-average price appreciation in connection with a potential business
combination with a SPAC prior to investment by the Fund. The price of stocks in
which the Fund invests may not continue to appreciate and the performance of
these stocks may not replicate the performance exhibited in the past. In
addition, SPAC-derived companies may share similar illiquidity risks of private
equity and venture capital. The free float shares held by the public in a
SPAC-derived company are typically a small percentage of the market
capitalization. The ownership of many SPAC-derived companies often includes
large holdings by venture capital and private equity investors who seek to sell
their shares in the public market in the months following a business combination
transaction when shares restricted by lock-up are released, causing greater
volatility and possible downward pressure during the time that locked-up shares
are released.
Concentration
Risk: The
Fund’s investments will be concentrated in an industry or group of industries to
the extent the Index is so concentrated. To the extent the Fund invests more
heavily in particular industries, groups of industries, or sectors of the
economy, its performance will be especially sensitive to developments that
significantly affect those industries, groups of industries, or sectors of the
economy, and the value of Fund shares may rise and fall more than the value of
shares that invest in securities of companies in a broader range of industries
or sectors.
Consumer
Staples Sector Risk:
The consumer staples sector may be affected by the permissibility of using
various product components and production methods, marketing campaigns and other
factors affecting consumer demand. Tobacco companies, in particular, may be
adversely affected by new laws, regulations and litigation. The consumer staples
sector may also be adversely affected by changes or trends in commodity prices,
which may be influenced or characterized by unpredictable factors.
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 such as
political, market and economic developments, as well as events that impact
specific issuers. Additionally, natural or environmental disasters, widespread
disease or other public health issues, war, acts of terrorism or other events
could result in increased premiums or discounts to the Fund’s NAV.
ETF
Risks:
Absence
of an Active Market: Although
the Fund’s shares are approved for listing on the NYSE Arca, Inc. (the
“Exchange”), there can be no assurance that an active trading market will
develop and be maintained for Fund shares. There can be no assurance that the
Fund will grow to or maintain an economically viable size, in which case the
Fund may experience greater tracking error to its Index than it otherwise would
at higher asset levels or the Fund may ultimately liquidate.
Authorized
Participants (“APs”), Market Makers, and Liquidity Providers
Concentration: 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 net asset value (“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 Fund 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.
Fluctuation
of NAV: The
NAV of Fund shares will generally fluctuate with changes in the market value of
the Fund’s securities holdings. The market prices of shares will generally
fluctuate in accordance with changes in the Fund’s NAV and supply and demand of
shares on the Exchange. It cannot be predicted whether Fund shares will trade
below, at or above their NAV. During periods of unusual volatility or market
disruptions, market prices of Fund shares may deviate significantly from the
market value of the Fund’s securities holdings or the NAV of Fund shares. As a
result, investors in the Fund may pay significantly more or receive
significantly less for Fund shares than the value of the Fund’s underlying
securities or the NAV of Fund shares.
Market
Trading:
An investment in the Fund faces numerous market trading risks, including the
potential lack of an active market for Fund shares, losses from trading in
secondary markets, periods of high volatility and disruption in the
creation/redemption process of the Fund. Any of these factors, among others, may
lead to the Fund’s shares trading at a premium or discount to NAV.
Trading
Issues:
Although
Fund shares are listed for trading on the Exchange, there can be no assurance
that an active trading market for such shares will develop or be maintained.
Trading in Fund shares may be halted due to market conditions or for reasons
that, in the view of the Exchange, make trading in shares inadvisable. There can
be no assurance that the requirements of the Exchange necessary to maintain the
listing of any Fund will continue to be met or will remain unchanged or that the
shares will trade with any volume, or at all. Further, secondary markets may be
subject to erratic trading activity, wide bid/ask spreads and extended trade
settlement periods in times of market stress because market makers and APs may
step away from making a market in Fund shares and in executing creation and
redemption orders, which could cause a material deviation in the Fund’s market
price from its NAV.
Foreign
Investment Risk:
Returns on investments in foreign stocks could be more volatile than, or trail
the returns on, investments in U.S. stocks. Since foreign exchanges may be open
on days when the Fund does not price its Shares, the value of the securities in
the Fund’s portfolio may change on days when shareholders will not be able to
purchase or sell the Shares. Conversely, Shares may trade on days when foreign
exchanges are closed. Because securities held by the Fund trade on foreign
exchanges that are closed when the Fund’s primary listing exchange is open, the
Fund is likely to experience premiums and discounts greater than those of
domestic ETFs. Each of these factors can make investments in the Fund more
volatile and potentially less liquid than other types of
investments.
Currency
Risk:
Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency
rates in foreign countries may fluctuate significantly over short periods of
time for a number of reasons, including changes in interest rates and the
imposition of currency controls or other political developments in the U.S. or
abroad.
Depositary
Receipts Risk:
The
Fund may invest in depositary receipts. Investment in ADRs and GDRs may be less
liquid than the underlying shares in their primary trading market and GDRs, many
of which are issued by companies in emerging markets, may be more volatile and
less liquid than depositary receipts issued by companies in more developed
markets.
Foreign
Market and Trading Risk:
The trading markets for many foreign securities are not as active as U.S.
markets and may have less governmental regulation and oversight. Foreign markets
also may have clearance and settlement procedures that make it difficult for the
Fund to buy and sell securities. These factors could result in a loss to the
Fund by causing the Fund to be unable to dispose of an investment or to miss an
attractive investment opportunity, or by causing Fund assets to be uninvested
for some period of time.
Foreign
Securities Risk:
The Fund invests a significant portion of its assets directly in securities of
issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks
that may not be present with investments in securities of U.S. issuers, such as
risk of loss due to foreign currency fluctuations or to political or economic
instability, as well as varying regulatory requirements applicable to
investments in non-U.S. issuers. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also
be subject to different regulatory, accounting, auditing, financial reporting
and investor protection standards than U.S. issuers.
Political
and Economic Risk:
The Fund is subject to foreign political and economic risk not associated with
U.S. investments, meaning that political events, social and economic events and
natural disasters occurring in a country where the Fund invests could cause the
Fund’s investments in that country to experience gains or losses. The Fund also
could be unable to enforce its ownership rights or pursue legal remedies in
countries where it invests.
Health
Care Companies Risk:
Health care companies are subject to extensive government regulation and their
profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
and an increased emphasis on the delivery of healthcare through outpatient
services. Health care companies are heavily dependent on obtaining and defending
patents, which may be time consuming and costly, and the expiration of patents
may also adversely affect the profitability of the companies. Health care
companies are also subject to extensive litigation based on product liability
and similar claims. In addition, their products can become obsolete due to
industry innovation, changes in technologies, or other market developments. Many
new products in the health care field require significant research and
development and may be subject to regulatory approvals, all of which may be time
consuming and costly with no guarantee that any product will come to market.
Biotechnology
Company Risk: A
biotechnology company’s valuation can often be based largely on the potential or
actual performance of a limited number of products and can accordingly be
greatly affected if one of its products proves, among other things, unsafe,
ineffective or unprofitable. Biotechnology companies are subject to regulation
by, and the restrictions of, the FDA, the U.S. Environmental Protection Agency,
state and local governments, and foreign regulatory authorities.
Pharmaceutical
Company Risk: Companies
in the pharmaceutical industry can be significantly affected by, among other
things, government approval of products and services, government regulation and
reimbursement rates, product liability claims, patent expirations and protection
and intense competition.
Natural
Disaster/Epidemic Risk:
Natural or environmental disasters, such as earthquakes, fires, floods,
hurricanes, tsunamis and other severe weather-related phenomena generally, and
widespread disease, including pandemics and epidemics, have been and may be
highly disruptive to economies and markets, adversely impacting individual
companies, sectors, industries, markets, currencies, interest and inflation
rates, credit ratings, investor sentiment, and other factors affecting the value
of the Fund’s investments. Given the increasing interdependence among global
economies and markets, conditions in one country, market, or region are
increasingly likely to adversely affect markets, issuers, and/or foreign
exchange rates in other countries, including the U.S. Any such events could have
a significant adverse impact on the value of the Fund’s investments.
Non-Diversification
Risk:
Because the Fund is “non-diversified,” it may
invest a greater percentage of its assets in the securities of a single issuer
or a small number of issuers than if it was a diversified fund. As a result, a
decline in the value of an investment in a single issuer or a small number of
issuers could cause the Fund’s overall value to decline to a greater degree than
if the Fund held a more diversified portfolio. This may increase the Fund’s
volatility and have a greater impact on the Fund’s performance.
Non-Cannabis
Related Business Risk:
Many of the companies in the Index are engaged in other lines of business
unrelated to the activities identified in the principal investment strategies,
above, and these lines of business could adversely affect their operating
results. The operating results of these companies may fluctuate as a result of
events in the other lines of business. In addition, a company’s ability to
engage in new activities may expose it to business risks with which it has less
experience than it has with the business risks associated with its traditional
businesses. There can be no assurance that the other lines of business in which
these companies are engaged will not have an adverse effect on a company’s
business or financial condition.
Passive
Investment Risk:
The Fund is not actively managed and therefore would not sell an equity security
due to current or projected underperformance of a security, industry or sector,
unless that security is removed from the Index. Unlike with an actively managed
fund, the Fund’s investment adviser does not use techniques or defensive
strategies designed to lessen the effects of market volatility or to reduce the
impact of periods of market decline. This means that, based on market and
economic conditions, the Fund’s performance could be lower than other types of
funds that may actively shift their portfolio assets to take advantage of market
opportunities or to lessen the impact of a market decline.
Risks
Related to Investing in Canada:
Because the investments of the Fund are geographically concentrated in Canadian
companies or companies that have a significant presence in Canada, investment
results could be dependent on the financial condition of the Canadian economy.
The Canadian economy is reliant on the sale of natural resources and
commodities, which can pose risks such as the fluctuation of prices and the
variability of demand for exportation of such products. Changes in spending on
Canadian products by the economies of other countries or changes in any of these
economies may cause a significant impact on the Canadian economy. In particular,
the Canadian economy is heavily dependent on relationships with certain key
trading partners, including the United States and China.
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.
Securities
Lending Risk:
The Fund may engage in securities lending. The Fund may lose money if the
borrower of the loaned securities delays returning in a timely manner or fails
to return the loaned securities. Securities lending involves the risk that the
Fund could lose money in the event of a decline in the value of collateral
provided for loaned securities. In addition, the Fund bears the risk of loss in
connection with its investment of the cash collateral it receives from a
borrower. To the extent that the value or return of the Fund’s investment of the
cash collateral declines below the amount owed to the borrower, the Fund may
incur losses that exceed the amount it earned on lending the security.
Smaller
Companies Risk:
The Fund’s Index may be composed primarily of, or have significant exposure to,
securities of smaller companies. Smaller companies may be more vulnerable to
adverse business or economic events than larger, more established companies, and
may underperform other segments of the market or the equity market as a whole.
The securities of smaller companies also are often traded in the
over-the-counter market and tend to be bought and sold less frequently and at
significantly lower trading volumes than the securities of larger companies. As
a result, it may be more difficult for the Fund to buy or sell a significant
amount of the securities of a smaller company without an adverse impact on the
price of the company’s securities, or the Fund may have to sell such securities
in smaller quantities over a longer period of time, which may increase the
Fund’s tracking error.
Tax
Risk:
To qualify for the favorable tax treatment generally available to regulated
investment companies (“RICs”), the Fund must satisfy certain diversification
requirements under the Internal Revenue Code of 1986, as amended (the “Code”).
In particular, the asset diversification requirements will be satisfied if (i)
at least 50% of the value of the Fund’s total assets are represented by cash and
cash items, U.S. government securities, the securities of other RICs and “other
securities,” provided that such “other securities” of any one issuer do not
represent more than 5% of the Fund’s total assets or greater than 10% of the
outstanding voting securities of such issuer, and (ii) no more than 25% of the
value of the Fund’s assets are invested in securities of any one issuer (other
than U.S. government securities and securities of other RICs), the securities
(other than securities of other RICs) of any two or more issuers that are
controlled by the Fund and are engaged in the same or similar or related trades
or business, or the securities of one or more “qualified publicly traded
partnerships. When the Index is concentrated in a relatively small number of
securities, it may not be possible for the Fund to fully implement a replication
strategy or a representative sampling strategy while satisfying these
diversification requirements. The Fund’s efforts to satisfy the diversification
requirements may cause the Fund’s return to deviate from that of the Index, and
the
Fund’s
efforts to replicate the Index may cause it inadvertently to fail to satisfy the
diversification requirements. If the Fund were to fail to qualify as a RIC, it
would be subject to U.S. federal income tax at corporate rates on its income,
and distributions to its shareholders would not be deductible by the Fund in
computing its taxable income. In addition, distributions to a Fund’s
shareholders would generally be taxed as ordinary dividends.
Under
certain circumstances, a Fund may be able to cure a failure to qualify as a RIC,
but in order to do so such Fund may incur significant Fund-level taxes and may
be forced to dispose of certain assets. Relief is provided for certain de
minimis failures of the diversification requirements where a Fund corrects the
failure within a specified period. If a Fund were to fail to qualify as a RIC in
any taxable year, such Fund would be required to pay out its earnings and
profits accumulated in that year in order to qualify for treatment as a RIC in a
subsequent year. If a Fund failed to qualify as a RIC for a period greater than
two taxable years, such Fund would generally be required to pay U.S. federal
income tax at corporate rates on any net built-in gains 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.
Tracking
Error Risk:
The Fund’s return may not match or achieve a high degree of correlation with the
return of the Index. To the extent the Fund utilizes a sampling approach, it may
experience tracking error to a greater extent than if the Fund sought to
replicate the Index. In addition, in order to minimize the market impact of an
Index rebalance, the Fund may begin trading to effect the rebalance in advance
of the effective date of the rebalance and continue trading after the effective
date of the rebalance, which may contribute to tracking error.
Valuation
Risk: The sales price that the Fund could
receive for a security may differ from the Fund’s valuation of the security and
may differ from the value used by the Index, particularly for securities that
trade in low volume or volatile markets or that are valued using a fair value
methodology. In addition, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell the
Fund’s shares.
Performance
Information
The following
information provides some indication of the risks of investing in the
Fund. The bar chart shows the annual return for the Fund. The
table shows how the Fund’s average annual returns for one year, five years, and
since inception compare with those of the Index and a broad measure of market
performance. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will
perform in the future. On
December 26, 2017, the Fund’s investment objective and principal investment
strategy were substantially revised; therefore, the performance and average
annual total returns shown for periods prior to December 26, 2017 is likely to
have differed had the Fund’s current investment strategy been in effect during
those periods.
Updated performance information is
available on the Fund’s website at www.etfmg.com.
Calendar Year Total Returns as of December
31,
During the period of time shown
in the bar chart, the Fund’s highest return for a calendar
quarter was 59.25% (quarter ended March 31, 2021) and
the Fund’s lowest return for a calendar
quarter was -43.18% (quarter ended June 30,
2022).
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Average
Annual Total Returns
(for periods ended
December 31, 2022) |
1
Year |
5
Years |
Since
Inception
12/3/2015 |
ETFMG
Alternative Harvest ETF |
|
| |
Return Before
Taxes |
-60.18% |
-31.12% |
-18.02% |
Return After Taxes on
Distributions |
-60.68% |
-31.97% |
-19.66% |
Return After Taxes on Distributions and
Sale of Fund Shares |
-35.50% |
-18.45% |
-10.81% |
S&P
500 Index
(reflects no deduction for
fees, expenses or taxes) |
-18.11% |
9.42% |
11.33% |
Solactive
Latin America Real Estate Index/Prime Alternative Harvest Index
(reflects
no deduction for fees, expenses or taxes)1 |
-60.72% |
-32.09% |
-18.64% |
1
The table reflects
performance of the Solactive Latin America Real Estate Index through December
26, 2017 and the Prime Alternative Harvest Index
thereafter.
After-tax returns are
calculated using the highest historical individual U.S. federal marginal income
tax rates and do not reflect the impact of state and local
taxes.
Actual after-tax returns
depend on your tax situation and may differ from those shown and are not
relevant if you hold your shares through tax-advantaged arrangements, such as
401(k) plans or individual retirement
accounts. In some cases, the return
after taxes may exceed the return before taxes due to an assumed tax benefit
from any losses on a sale of Fund shares at the end of the measurement
period.
Investment
Adviser
ETF
Managers Group LLC (the “Adviser”) serves as the investment adviser to the Fund.
Portfolio
Managers
Samuel
R. Masucci, III, Chief Executive Officer of the Adviser, has been the Fund’s
portfolio manager since 2018. Frank Vallario, Chief Investment Officer of
the Adviser, has been the Fund’s portfolio manager since 2019.
For
important information about the purchase and sale of Fund shares, tax
information, and financial intermediary compensation, please turn to “Summary
Information about Purchases, Sales, Taxes, and Financial Intermediary
Compensation” on page 17 of the Prospectus.
ETFMG
U.S. Alternative Harvest ETF — Fund Summary
Investment Objective
The ETFMG U.S. Alternative
Harvest ETF (the “Fund” or the “U.S. Alternative Harvest ETF”) seeks income and
long-term growth of capital.
Fees and Expenses
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.
|
|
|
|
| |
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your
investment) |
|
Management
Fee |
0.75 |
% |
Distribution
and Service (12b-1) Fees |
None |
Other
Expenses |
0.00 |
% |
Acquired
Fund Fees and Expenses1 |
0.01 |
% |
Total
Annual Fund Operating Expenses |
0.76 |
% |
1Total Annual Fund
Operating Expenses do not correlate to the Expenses to Average Net Assets
provided in the Financial Highlights, which reflect the operating expenses of
the Fund and do not include 0.01% that is attributed to acquired fund fees and
expenses.
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. This
Example does not take into account the 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 cost would
be:
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| |
1
Year |
| 3
Years |
| 5
Years |
| 10
Years |
$78 |
| $243 |
| $422 |
| $942 |
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 the Fund 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
September 30, 2022, the Fund's portfolio turnover rate was 12% of the average value of its
portfolio.
Principal Investment
Strategies
The
Fund seeks to achieve its investment objective by investing, under normal
circumstances, at least 80% of its net assets (plus any borrowings for
investment purposes) in securities of companies that derive at least 50% of
their net revenue from the “Cannabis Business” (as defined below) in the United
States, and in derivatives that have economic characteristics similar to such
securities. The Cannabis Business is defined as: (i) cultivating, producing,
marketing or distributing Cannabis, including industrial hemp (ii) producing,
marketing or distributing products containing Cannabis-derived products, (iii)
producing, processing, marketing, transporting or distributing prescription
drugs, supplements, or food products that include Cannabis-derived products, or
(iv) providing products or services designed for, or used by, companies in the
Cannabis industry, including technology, real estate or financial services. The
Fund will not invest directly in or hold ownership in any companies that engage
in cannabis-related business unless permitted by national and local laws of the
relevant jurisdiction, including U.S. federal and state laws.
The
Fund is actively managed. In pursuing its investment objective, the Fund will
invest in companies that generally are representative of the components of the
Prime U.S. Alternative Harvest Index (the “Reference Index”) or in total return
swaps intended to provide exposure to such companies. The Reference Index is
comprised of equity securities of companies engaged in the Cannabis Business in
the United States. Eligible companies are identified by Prime Indexes, an
independent indexing company that is not affiliated with the Adviser, using a
variety of publicly available resources, including financial statements and
other reports published by issuers. The Fund may use total return swaps for the
purpose of achieving the approximate economic equivalent of a purchase of a
security in the Reference Index when the Fund is not able to purchase such
security directly because of administrative, legal or other restrictions. A
total return swap for the purpose of achieving the approximate economic
equivalent of a purchase or sale of a security means the counterparty would be
obligated to pay the Fund a return based on the market price of the security and
the Fund would be obligated to pay the counterparty a return based upon a fixed
or floating interest rate.
Although
the Fund generally provides exposure to the components of the Reference Index,
the Fund is not an index tracking exchange-traded fund and the Fund will weight
its investments in different proportions than their weightings within the
Reference Index on the basis of considerations such as liquidity and costs
associated with the total return swaps. In addition, the Fund is not required to
invest in all of the components of the Reference Index and may invest in the
stocks of companies in the Cannabis Business that are not included in the
Reference Index or in total return swaps intended to provide exposure to
companies not included in the Reference Index. The Fund’s investment adviser,
subject to the oversight of the Trust’s Board of Trustees (the “Board”), has
discretion on a daily basis to manage the Fund’s portfolio in accordance with
the Fund’s investment objective and investment policies. The Fund will not
change the 80% investment policy included in its principal investment strategy
without providing at least 60 days’ written notice to shareholders.
The
Fund may also invest in U.S.-listed common stocks of Special Purpose
Acquisitions Corporations (“SPACs”) that have been organized with the stated
purpose of acquiring one or more operating businesses that engage in Cannabis
Business (a SPAC-derived company). A SPAC is a “blank check” company with no
commercial operations that is designed to raise capital via an initial public
offering for the purpose of engaging in a merger, acquisition, reorganization,
or similar business combination (a “Combination”) with one or more operating
companies. If a SPAC that is included in the Fund’s portfolio announces a
Combination with an operating company that is engaged in the Cannabis Business,
the pre-Combination SPAC and, subsequently, the SPAC-derived company may be
included in the Fund’s portfolio, so long as it continues to satisfy the
remaining eligibility criteria. If the SPAC announces a Combination with a
non-qualifying business, the SPAC will be removed from the Fund as promptly as
practicable following the determination being made.
The Fund will concentrate at least 25%
of its investments in the Pharmaceuticals industry and Equity Real Estate
Investment Trusts (REITs) industry groups.
The
Fund may lend its portfolio securities to brokers, dealers, and other financial
organizations. These loans, if and when made, may not exceed 33 1/3% of the
total asset value of the Fund (including the loan collateral). By lending its
securities, the Fund may increase its income by receiving payments from the
borrower.
Principal Risks
As with all funds, a shareholder is subject to the risk
that his or her investment could lose money. The principal risks
affecting shareholders’ investments in the Fund are set forth below.
An investment in the Fund is not a
bank deposit and is not insured or guaranteed by the FDIC or any government
agency.
United
States Regulatory Risks of the Marijuana Industry:
The possession and use of marijuana, even for medical purposes, is illegal under
federal and certain states’ laws, which may negatively impact the value of the
Fund’s investments. Use of marijuana is regulated by both the federal government
and state governments, and state and federal laws regarding marijuana often
conflict. Even in those states in which the use of marijuana has been legalized,
its possession and use remains a violation of federal law. Federal law
criminalizing the use of marijuana pre-empts state laws that legalizes its use
for medicinal and recreational purposes. It is not yet known whether the current
Administration will push back against states where marijuana use and possession
is legal, step up the enforcement of federal marijuana laws and the prosecution
of nonviolent federal drug crimes and, in the event the Rohrabacher-Blumenauer
amendment is not renewed by Congress, begin using federal funds to prevent
states from implementing laws that authorize medical marijuana use, possession,
distribution, and cultivation. Such actions by the DOJ could produce a chilling
effect on the industry’s growth and discourage banks from expanding their
services to cannabis-related companies where such services are currently
limited. This conflict between the regulation of marijuana under federal and
state law creates volatility and risk for all cannabis-related companies. In
particular, the stepped up enforcement of marijuana laws by the federal
government would adversely affect the value of the Fund’s U.S. investments.
Certain Cannabis Companies or Pharmaceutical Companies may never be able to
legally produce and sell products in the United States or other national or
local jurisdictions.
Marijuana
is a Schedule I controlled substance under the Controlled Substances Act (“CSA”)
(21 U.S.C. § 811), meaning that it has a high potential for abuse, has no
currently “accepted medical use” in the United States, lacks accepted safety for
use under medical supervision, and may not be prescribed, marketed or sold in
the United States. Few drug products containing natural cannabis or
naturally-derived cannabis extracts have been approved by the Food and Drug
Administration (“FDA”) for use in the United States or obtained registrations
from the United States Drug Enforcement Administration (“DEA”) for commercial
production.
Facilities
conducting research, manufacturing, distributing, importing or exporting, or
dispensing controlled substances in the U.S. must be registered (licensed) to
perform such activities and have the security, control, recordkeeping, reporting
and inventory mechanisms required by the DEA to prevent drug loss and diversion.
Failure to obtain the necessary registrations or comply with necessary
regulatory requirements may significantly impair the ability of certain
companies in which the Fund invests to pursue medical marijuana research or to
otherwise cultivate, possess or distribute marijuana.
Non-U.S.
Regulatory Risks of the Marijuana Industry:
The companies in which the Fund invests are subject to various laws, regulations
and guidelines relating to the manufacture, management, transportation, storage
and disposal of marijuana, as well as being subject to laws and regulations
relating to health and safety, the conduct of operations and the protection of
the environment. Even if a company’s operations are permitted under current law,
they may not be permitted in the future, in which case such company may not
be
in a position to carry on its operations in its current locations. Additionally,
controlled substance legislation differs between countries and legislation in
certain countries may restrict or limit the ability of certain companies in
which the Fund invests to sell their products.
Operational
Risks of the Marijuana Industry:
Companies involved in the marijuana industry face intense competition, may have
limited access to the services of banks, may have substantial burdens on company
resources due to litigation, complaints or enforcement actions, and are heavily
dependent on receiving necessary permits and authorizations to engage in medical
marijuana research or to otherwise cultivate, possess or distribute marijuana.
Additionally, cannabis-related companies are subject to various laws and
regulations that may differ at the local, state, and federal level. These laws
and regulations may significantly affect a cannabis-related company’s ability to
conduct business, secure financing, impact the market for cannabis business
sales and services, and set limits on cannabis use, production, transportation
and storage. Since the use of marijuana is illegal under United States federal
law, federally regulated banking institutions may be unwilling to make financial
services available to growers and sellers of marijuana. Additionally, litigation
initiated by private citizens or companies could have a negative impact on the
financial and operational status of cannabis-related companies.
United
States Regulatory Risks of CBD and Hemp: The
Agriculture Improvement Act of 2018 (or the “Farm Bill”) effectively removes
hemp from the list of controlled substances and allows states to regulate its
production, commerce and research with approval from the United States
Department of Agriculture. Certain Index constituents may sell dietary
supplements and/or foods containing CBD within the United States. The Farm Bill
delegates to the FDA responsibility for regulating products containing hemp or
derivatives thereof (including CBD) under the Federal Food, Drug, and Cosmetic
Act (the “FD&C”). Under the FD&C, if a substance (such as CBD) is an
active ingredient in a drug product that has been approved by the FDA, then the
substance cannot be sold in dietary supplements or foods without FDA approval,
unless the substance was marketed as a dietary supplement or as a conventional
food before the drug was approved or before the new drug investigations were
authorized. The FDA has publicly taken the position that CBD cannot be sold in
dietary supplements or foods because CBD is an active ingredient in an
FDA-approved drug, but has yet to issue any regulations in this regard. However,
companies that sell CBD in dietary supplements and foods have taken the position
that CBD was marketed as a dietary supplement and/or as a conventional food
before the drug was approved or before the new drug investigations were
authorized, and because the FDA has not brought enforcement action against such
companies, this question of fact has not yet been adjudicated. In the absence of
a conclusive legal determination to the contrary, as of the date of this
prospectus, it has not been determined that the sale of dietary supplements
and/or foods containing CBD within the United States would cause a company’s
securities to be ineligible for inclusion in the Index. It is possible that such
a legal determination or future federal and/or state laws or regulations could
drastically curtail permissible uses of hemp, which could have an adverse effect
of the value of the Fund’s investments in companies with business interests
in hemp and hemp-based products.
Swap
Risk: In
a total return swap, the buyer receives a periodic return equal to the total
return of a specified security, securities or index, for a specified period of
time. In return, the buyer pays the counterparty a variable stream of payments,
typically based upon short term interest rates, possibly plus or minus an agreed
upon spread. For example, if the Fund enters into a swap where it agrees to
exchange a floating rate of interest for a fixed rate of interest, the Fund may
have to pay more money than it receives. Total return swaps entered into in
which payments are not netted may entail greater risk than a swap entered into a
net basis. There is a risk that adverse price movements in an instrument can
result in a loss substantially greater than the Fund’s initial investment in
that instrument (in some cases, the potential loss is unlimited). If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. However,
particularly in the case of privately-negotiated instruments, there is a risk
that the counterparty will not perform its obligations, which could leave the
Fund worse off than if it had not entered into the position. These instruments
are subject to high levels of volatility, in some cases due to the high levels
of leverage the Fund may achieve with them.
The
remaining risks are presented in alphabetical order. Each risk summarized below
is considered a “principal risk” of investing in the Fund, regardless of the
order in which it appears.
Associated
Risks of Investments in SPACs: The
Fund invests in equity securities of SPACs, which raise assets to seek potential
acquisition opportunities. Unless and until an acquisition is completed, a SPAC
generally invests its assets in U.S. government securities, money market
securities, and cash. Because SPACs have no operating history or ongoing
business other than seeking acquisitions, the value of their securities is
particularly dependent on the ability of the entity’s management to identify and
complete a profitable acquisition. There is no guarantee that the SPACs in which
the Fund invests will complete an acquisition or that any acquisitions that are
completed will be profitable. Public stockholders of SPACs may not be afforded a
meaningful opportunity to vote on a proposed initial business combination
because certain stockholders, including stockholders affiliated with the
management of the SPAC, may have sufficient voting power, and a financial
incentive, to approve such a transaction without support from public
stockholders. As a result, a SPAC may complete a business combination even
though a majority of its public stockholders do not support such a combination.
Because the SPACs included in the Fund’s portfolio will be designed to pursue
acquisitions only within certain industries or regions, their stock prices may
experience greater volatility than stocks of other SPACs.
Associated
Risks of SPAC-Derived Companies: The
Fund invests in companies that are derived from a SPAC. These companies may be
unseasoned and lack a trading history, a track record of reporting to investors,
and widely available research coverage. SPAC-derived companies are thus often
subject to extreme price volatility and speculative trading. These stocks may
have above-average
price
appreciation in connection with a potential business combination with a SPAC
prior to investment by the Fund. The price of stocks in which the Fund invests
may not continue to appreciate and the performance of these stocks may not
replicate the performance exhibited in the past. In addition, SPAC-derived
companies may share similar illiquidity risks of private equity and venture
capital. The free float shares held by the public in a SPAC-derived company are
typically a small percentage of the market capitalization. The ownership of many
SPAC-derived companies often includes large holdings by venture capital and
private equity investors who seek to sell their shares in the public market in
the months following a business combination transaction when shares restricted
by lock-up are released, causing greater volatility and possible downward
pressure during the time that locked-up shares are released.
Consumer
Staples Sector Risk:
The consumer staples sector may be affected by the permissibility of using
various product components and production methods, marketing campaigns and other
factors affecting consumer demand. Tobacco companies, in particular, may be
adversely affected by new laws, regulations and litigation. The consumer staples
sector may also be adversely affected by changes or trends in commodity prices,
which may be influenced or characterized by unpredictable factors.
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 such as
political, market and economic developments, as well as events that impact
specific issuers. Additionally, natural or environmental disasters, widespread
disease or other public health issues, war, acts of terrorism or other events
could result in increased premiums or discounts to the Fund’s NAV.
ETF
Risks:
Absence
of an Active Market: Although
the Fund’s shares are approved for listing on the NYSE Arca, Inc. (the
“Exchange”), there can be no assurance that an active trading market will
develop and be maintained for Fund shares. There can be no assurance that the
Fund will grow to or maintain an economically viable size, in which case the
Fund may may ultimately liquidate.
Authorized
Participants (“APs”), Market Makers, and Liquidity Providers
Concentration: 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 net asset value (“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.
Cash
Transactions:
The Fund may effect its creations and redemptions primarily for cash, rather
than in-kind securities. Paying redemption proceeds in cash rather than through
in-kind delivery of portfolio securities may require the Fund to dispose of or
sell portfolio investments at an inopportune time to obtain the cash needed to
distribute redemption proceeds. This may cause the Fund to incur certain costs
such as brokerage costs, and to recognize gains or losses that it might not have
incurred if it had made a redemption in-kind. As a result, the Fund may pay out
higher or lower annual capital gains distributions than ETFs that redeem
in-kind. In addition, the costs imposed on the Fund will decrease the Fund’s NAV
unless the costs are offset by a transaction fee payable by an AP.
Costs
of Buying or Selling Shares: Investors
buying or selling Fund 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.
Fluctuation
of NAV: The
NAV of Fund shares will generally fluctuate with changes in the market value of
the Fund’s securities holdings. The market prices of shares will generally
fluctuate in accordance with changes in the Fund’s NAV and supply and demand of
shares on the Exchange. It cannot be predicted whether Fund shares will trade
below, at or above their NAV. During periods of unusual volatility or market
disruptions, market prices of Fund shares may deviate significantly from the
market value of the Fund’s securities holdings or the NAV of Fund shares. As a
result, investors in the Fund may pay significantly more or receive
significantly less for Fund shares than the value of the Fund’s underlying
securities or the NAV of Fund shares.
Market
Trading:
An investment in the Fund faces numerous market trading risks, including the
potential lack of an active market for Fund shares, losses from trading in
secondary markets, periods of high volatility and disruption in the
creation/redemption process of the Fund. Any of these factors, among others, may
lead to the Fund’s shares trading at a premium or discount to NAV.
Trading
Issues:
Although
Fund shares are listed for trading on the Exchange, there can be no assurance
that an active trading market for such shares will develop or be maintained.
Trading in Fund shares may be halted due to market conditions or for reasons
that, in the view of the Exchange, make trading in shares inadvisable. There can
be no assurance that the requirements of the Exchange necessary to maintain the
listing of any Fund will continue to be met or will remain unchanged or that the
shares will trade with any volume, or at all. Further, secondary markets may be
subject to erratic trading activity, wide bid/ask spreads and extended trade
settlement periods in times of market stress because market makers and APs may
step away from making a market in Fund shares and in executing creation and
redemption orders, which could cause a material deviation in the Fund’s market
price from its NAV.
Health
Care Companies Risk:
Health care companies are subject to extensive government regulation and their
profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
and an increased emphasis on the delivery of healthcare through outpatient
services. Health care companies are heavily dependent on obtaining and defending
patents, which may be time consuming and costly, and the expiration of patents
may also adversely affect the profitability of the companies. Health care
companies are also subject to extensive litigation based on product liability
and similar claims. In addition, their products can become obsolete due to
industry innovation, changes in technologies, or other market developments. Many
new products in the health care field require significant research and
development and may be subject to regulatory approvals, all of which may be time
consuming and costly with no guarantee that any product will come to market.
Biotechnology
Company Risk: A
biotechnology company’s valuation can often be based largely on the potential or
actual performance of a limited number of products and can accordingly be
greatly affected if one of its products proves, among other things, unsafe,
ineffective or unprofitable. Biotechnology companies are subject to regulation
by, and the restrictions of, the FDA, the U.S. Environmental Protection Agency,
state and local governments, and foreign regulatory authorities.
Pharmaceutical
Company Risk: Companies
in the pharmaceutical industry can be significantly affected by, among other
things, government approval of products and services, government regulation and
reimbursement rates, product liability claims, patent expirations and protection
and intense competition.
Management
Risk: The
Fund is actively-managed and may not meet its investment objective based on the
investment adviser’s success or failure to implement investment strategies for
the Fund.
Natural
Disaster/Epidemic Risk:
Natural or environmental disasters, such as earthquakes, fires, floods,
hurricanes, tsunamis and other severe weather-related phenomena generally, and
widespread disease, including pandemics and epidemics, have been and may be
highly disruptive to economies and markets, adversely impacting individual
companies, sectors, industries, markets, currencies, interest and inflation
rates, credit ratings, investor sentiment, and other factors affecting the value
of the Fund’s investments. Given the increasing interdependence among global
economies and markets, conditions in one country, market, or region are
increasingly likely to adversely affect markets, issuers, and/or foreign
exchange rates in other countries, including the U.S. Any such events could have
a significant adverse impact on the value of the Fund’s investments.
New
Fund Risk: The
Fund is a recently organized investment company with limited operating history.
As a result, prospective investors have a limited track record or history on
which to base their investment decision. There can be no assurance that the Fund
will grow to or maintain an economically viable size.
Non-Diversification
Risk:
Because the Fund is “non-diversified,” it may
invest a greater percentage of its assets in the securities of a single issuer
or a small number of issuers than if it was a diversified fund. As a result, a
decline in the value of an investment in a single issuer or a small number of
issuers could cause the Fund’s overall value to decline to a greater degree than
if the Fund held a more diversified portfolio. This may increase the Fund’s
volatility and have a greater impact on the Fund’s performance.
Non-Cannabis
Related Business Risk:
Many of the companies in the Fund’s portfolio are engaged in other lines of
business unrelated to the activities identified in the principal investment
strategies, above, and these lines of business could adversely affect their
operating results. The operating results of these companies may fluctuate as a
result of events in the other lines of business. In addition, a company’s
ability to engage in new activities may expose it to business risks with which
it has less experience than it has with the business risks associated with its
traditional businesses. There can be no assurance that the other lines of
business in which these companies are engaged will not have an adverse effect on
a company’s business or financial condition.
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.
Securities
Lending Risk:
The Fund may engage in securities lending. The Fund may lose money if the
borrower of the loaned securities delays returning in a timely manner or fails
to return the loaned securities. Securities lending involves the risk that the
Fund could lose money in the event of a decline in the value of collateral
provided for loaned securities. In addition, the Fund bears the risk of loss in
connection with its investment of the cash collateral it receives from a
borrower. To the extent that the value or return of the Fund’s investment of the
cash collateral declines below the amount owed to the borrower, the Fund may
incur losses that exceed the amount it earned on lending the security.
Smaller
Companies Risk:
The Fund’s Index may be composed primarily of, or have significant exposure to,
securities of smaller companies. Smaller companies may be more vulnerable to
adverse business or economic events than larger, more established companies, and
may underperform other segments of the market or the equity market as a whole.
The securities of smaller companies also are often traded in the
over-the-counter market and tend to be bought and sold less frequently and at
significantly lower trading volumes than the securities of larger companies. As
a result, it may be more difficult for the Fund to buy or sell a significant
amount of the securities of a smaller company without an adverse impact on the
price of the company’s securities, or the Fund may have to sell such securities
in smaller quantities over a longer period of time, which may increase the
Fund’s tracking error.
Tax
Risk:
To qualify for the favorable tax treatment generally available to RICs, the Fund
must satisfy certain diversification requirements under the Internal Revenue
Code of 1986, as amended (the “Code”). In particular, the asset diversification
requirements will be satisfied if (i) at least 50% of the value of the Fund’s
total assets are represented by cash and cash items, U.S. government securities,
the securities of other RICs and “other securities,” provided that such “other
securities” of any one issuer do not represent more than 5% of the Fund’s total
assets or greater than 10% of the outstanding voting securities of such issuer,
and (ii) no more than 25% of the value of the Fund’s assets are invested in
securities of any one issuer (other than U.S. government securities and
securities of other RICs), the securities (other than securities of other RICs)
of any two or more issuers that are controlled by the Fund and are engaged in
the same or similar or related trades or business, or the securities of one or
more “qualified publicly traded partnerships.” When the Index is concentrated in
a relatively small number of securities, it may not be possible for the Fund to
fully implement a replication strategy or a representative sampling strategy
while satisfying these diversification requirements. The Fund’s efforts to
satisfy the diversification requirements may cause the Fund’s return to deviate
from that of the Index, and the Fund’s efforts to replicate the Index may cause
it inadvertently to fail to satisfy the diversification requirements. If the
Fund were to fail to qualify as a RIC, it would be subject to U.S. federal
income tax at corporate rates on its income, and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income. In addition, distributions to a Fund’s shareholders would generally be
taxed as ordinary dividends.
Under
certain circumstances, a Fund may be able to cure a failure to qualify as a RIC,
but in order to do so such Fund may incur significant Fund-level taxes and may
be forced to dispose of certain assets. Relief is provided for certain de
minimis failures of the diversification requirements where a Fund corrects the
failure within a specified period. If a Fund were to fail to qualify as a RIC in
any taxable year, such Fund would be required to pay out its earnings and
profits accumulated in that year in order to qualify for treatment as a RIC in a
subsequent year. If a Fund failed to qualify as a RIC for a period greater than
two taxable years, such Fund would generally be required to pay U.S. federal
income tax at corporate rates on any net built-in gains 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.
Performance
Information
The following
information provides some indication of the risks of investing in the
Fund. The bar chart shows the annual return for the Fund. The
table shows how the Fund’s average annual returns for one year and since
inception compare with a broad measure of market performance. The Fund’s past performance,
before and after taxes, is not necessarily an indication of how the Fund will
perform in the future. Updated performance information is
available on the Fund’s website at www.etfmg.com.
Calendar Year Total Returns as of December
31,
During the period of time shown
in the bar chart, the Fund’s highest return for a calendar
quarter was -9.28% (quarter ended December 31, 2022) and
the Fund’s lowest return for a calendar
quarter was -50.21% (quarter ended June 30,
2022).
|
|
|
|
|
|
|
| |
Average
Annual Total Returns
(for periods ended
December 31, 2022) |
1
Year |
Since
Inception
5/12/2021 |
ETFMG
U.S. Alternative Harvest ETF |
| |
Return Before
Taxes |
-66.86% |
-62.99% |
Return After Taxes on
Distributions |
-66.86% |
-62.99% |
Return After Taxes on Distributions and
Sale of Fund Shares |
-39.58% |
-43.93% |
S&P
500 Index
(reflects no deduction for
fees, expenses or taxes) |
-18.11% |
-1.89% |
Prime US Alternative Harvest Index
NTR |
-66.22% |
-61.80% |
After-tax returns are
calculated using the highest historical individual U.S. federal marginal income
tax rates and do not reflect the impact of state and local
taxes. Actual after-tax returns
depend on your tax situation and may differ from those shown and are not
relevant if you hold your shares through tax-advantaged arrangements, such as
401(k) plans or individual retirement accounts. In some cases, the return
after taxes may exceed the return before taxes due to an assumed tax benefit
from any losses on a sale of Fund shares at the end of the measurement
period.
Investment
Adviser
ETF
Managers Group LLC (the “Adviser”) serves as the investment adviser to the Fund.
Portfolio
Managers
Samuel
R. Masucci, III, Chief Executive Officer of the Adviser, and Frank Vallario,
Chief Investment Officer of the Adviser, have been the Fund’s portfolio managers
since the Fund’s inception in 2021.
For
important information about the purchase and sale of Fund shares, tax
information, and financial intermediary compensation, please turn to “Summary
Information about Purchases, Sales, Taxes, and Financial Intermediary
Compensation” on page 17 of the Prospectus.
Summary
Information about Purchases, Sales, Taxes, and Financial Intermediary
Compensation
Purchase
and Sale of Fund 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).
Each
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. Each
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities (the “Deposit Securities” and/or a designated amount of U.S. cash.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Funds,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Funds’ website at www.etfmg.com.
Except
when aggregated in Creation Units, each Fund’s shares are not redeemable
securities.
Tax
Information
The
distributions made by each Fund generally are taxable to the Fund’s
shareholders, and will be taxed as ordinary income, qualified dividend income,
or capital gains (or a combination thereof), unless your investment is in an
Individual Retirement Account (“IRA”) or other tax-advantaged account. However,
subsequent withdrawals from such IRA or other tax-advantaged account may be
subject to federal income tax. You should consult your tax advisor about your
specific tax situation..
Financial
Intermediary Compensation
If
you purchase shares of the Funds 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 Funds, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange traded products, including the Funds, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of a Fund’s shares. These payments may create a
conflict of interest by influencing the Intermediary and your salesperson to
recommend the Funds 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 Funds’ Investment Objectives and Strategies
This
section contains additional details about each Fund’s investment objective,
principal investment strategies and related risks.
Investment
Objective
Each
Fund’s investment objective is non-fundamental, meaning that it may be changed
by the Board of Trustees (the “Board”) of ETF Managers Trust (the “Trust”),
without the approval of Fund shareholders. The ETFMG Alternative Harvest ETF
reserves the right to substitute a different index for the Index without
shareholder approval. In addition, the Fund’s 80% investment policy for the
ETFMG Alternative Harvest ETF and ETFMG U.S. Alternative Harvest ETF has been
adopted as a non-fundamental investment policy and may be changed without
shareholder approval upon 60 days’ written notice to shareholders.
The
Funds, as part of their securities lending program, may invest collateral in an
affiliated series of ETF Managers Trust, ETFMG Sit Ultra Short ETF (the “Ultra
Short ETF”). ETF Managers Group LLC serves as the investment adviser to the
Ultra Short ETF. Other investment companies, including Ultra Short ETF, in which
a Fund may invest cash collateral can be expected to incur fees and expenses for
operations, such as investment advisory and administration fees, which would be
in addition to those incurred by the Funds, and which, with respect to Ultra
Short ETF, will be received in full or in part by the Adviser.
Section 12(d)(1)
of the 1940 Act restricts investments by registered investment companies in the
securities of other investment companies, including Shares. Registered
investment companies are permitted to invest in a Fund beyond the limits set
forth in section 12(d)(1), subject to certain terms and conditions set forth in
SEC exemptive orders or rules.
Investment
Objective for the ETFMG Alternative Harvest ETF
The
Fund seeks to provide investment results that, before fees and expenses,
correspond generally to the total return performance of the Prime Alternative
Harvest Index (the “Index”).
The
Fund uses an “indexing” investment approach, and seeks to provide investment
results that, before fees and expenses, corresponds generally to the price and
yield performance of the Index. A number of factors may affect the Fund’s
ability to achieve a high correlation with the Index, including the degree to
which the Fund utilizes a sampling methodology. There can be no guarantee that
the Fund will achieve a high degree of correlation. The Fund’s investment
adviser (“Adviser”) may sell securities that are represented in the Index or
purchase securities not yet represented in the Index, in anticipation of their
removal from or addition to the Index. There may also be instances in which the
Adviser may choose to overweight securities in the Index, thus causing the Fund
to purchase
or
sell securities not in the Index, but which the Adviser believes are appropriate
to substitute for certain securities in the Index. The Fund will not take
defensive positions.
The
Fund may also invest in other investment companies that principally invest,
either directly or through derivatives, in component securities of the Index.
The Fund may pursue its investment objective by investing in an affiliated
series of ETF Managers Trust, ETFMG U.S. Alternative Harvest ETF. ETF Managers
Group LLC serves as the investment adviser to ETFMG U.S. Alternative Harvest
ETF.
The
Fund will not invest directly in or hold ownership in any companies that engage
in cannabis-related business unless permitted by national and local laws of the
relevant jurisdiction, including U.S. federal and state laws. Therefore, the
Fund will not invest directly in any Cannabis Companies and Pharmaceutical
Companies that grow, produce, distribute, or sell cannabis or products derived
from cannabis in a country, state, province, locality or other political
subdivision where this activity is illegal under applicable law. To that end,
while the Index may include equity securities traded on global securities
exchanges or the over-the-counter market, the Fund will invest directly (as
opposed to obtaining exposure via ETFs) only in companies that list their
securities on exchanges that require compliance with all laws, rules and
regulations applicable to their business, including U.S. federal laws. The
current exchanges identified by the Fund that meet these requirements are the
New York Stock Exchange, NYSE American and Nasdaq Stock Market, TSX Exchange,
TSX Venture Exchange, Australian Securities Exchange and Tel Aviv Stock
Exchange.
Investment
Objective for the ETFMG U.S. Alternative Harvest ETF
The
Fund seeks income and long-term growth of capital.
The
Fund will not invest directly in or hold ownership in any companies that engage
in cannabis-related business unless permitted by national and local laws of the
relevant jurisdiction, including U.S. federal and state laws. Therefore, the
Fund will not invest directly in any Cannabis Company that grows, produces,
distributes, or sells cannabis or products derived from cannabis in a country,
state, province, locality or other political subdivision where this activity is
illegal under applicable law. To that end, the Fund will invest directly (as
opposed to obtaining exposure via swap contracts) in companies that list their
securities on exchanges that require compliance with all laws, rules and
regulations applicable to their business, including U.S. federal laws. The
current exchanges identified by the Fund that meet these requirements are the
New York Stock Exchange, NYSE American and Nasdaq Stock Market, TSX Exchange,
TSX Venture Exchange, Australian Securities Exchange and Tel Aviv Stock
Exchange.
Additional
Risk Information
The
following section provides additional information regarding the principal risks
identified under “Principal Risks” in each Fund’s summary.
United
States Regulatory Risks of the Marijuana Industry:
The possession and use of marijuana, even for medical purposes, is illegal under
federal and certain states’ laws, which may negatively impact the value of a
Fund’s investments. Use of marijuana is regulated by both the federal government
and state governments, and state and federal laws regarding marijuana often
conflict. Marijuana is a Schedule I controlled substance under the CSA and is
illegal under federal law. Currently, over half of the states plus the District
of Columbia have laws and/or regulations that recognize, in one form or another,
legitimate medical uses for cannabis and consumer use of cannabis in connection
with medical treatment or for non-medical purposes. Even in those states in
which the use of marijuana for medical or non-medical purposes has been
legalized, its sale and use remains a violation of federal law. Federal law
criminalizing the use of marijuana pre-empts state laws that legalizes its use
for medicinal and recreational purposes. It is not yet known whether the current
Administration will push back against states where marijuana use and possession
is legal and step up the enforcement of federal marijuana laws and the
prosecution of nonviolent federal drug crimes. Congress may fail to renew the
Rohrabacher-Blumenauer amendment, which currently prohibits the DOJ from using
federal funds to prevent states from implementing laws that authorize medical
marijuana use, possession, distribution, and cultivation. Such actions could
produce a chilling effect on the industry’s growth and discourage banks from
expanding their services to cannabis-related companies. This conflict between
the regulation of marijuana under federal and state law creates volatility and
risk for all cannabis-related companies. In particular, the stepped up
enforcement of marijuana laws by the federal government would adversely affect
the value of a Fund’s U.S. investments. Certain Cannabis Companies or
Pharmaceutical Companies may never be able to legally produce and sell products
in the United States or other national or local
jurisdictions.
As
noted above, marijuana is a Schedule I controlled substance in the United States
under the CSA. The DEA classifies controlled substances into five schedules:
Schedule I, II, III, IV or V substances. Schedule I substances by definition
have a high potential for abuse, have no currently “accepted medical use” in the
United States, lack accepted safety for use under medical supervision, and may
not be prescribed, marketed or sold in the United States. Pharmaceutical
products approved by the FDA for use in the United States may be listed as
Schedule II, III, IV or V, with Schedule II substances considered to present the
highest potential for abuse or dependence and Schedule V substances the lowest
relative risk among such substances.
Few
drug products containing natural cannabis or naturally-derived cannabis extracts
have been approved by the FDA for use in the United States or obtained DEA
registrations for commercial production. Drug products containing cannabis or
cannabis extracts that receive the required government approvals for use in
commercial production may be subject to significant government regulation
regarding
manufacture, importation, exportation, domestic distribution, storage, sale, and
legitimate use. In addition, the scheduling process may take one or more years,
thereby delaying the launch of the drug product in the United States.
Facilities
conducting research, manufacturing, distributing, importing or exporting, or
dispensing controlled substances in the U.S. must be registered (licensed) to
perform such activities and have the security, control, recordkeeping, reporting
and inventory mechanisms required by the DEA to prevent drug loss and diversion.
Failure to obtain the necessary registrations or comply with necessary
regulatory requirements may significantly impair the ability of certain
companies in which a Fund invests to pursue medical marijuana research or to
otherwise cultivate, possess or distribute marijuana.
Additionally,
U.S. Federal tax law prohibits a taxpayer from claiming a deduction or credit
for any amount paid or incurred during the tax year in carrying on any trade or
business if that trade or business (or the activities that comprise that trade
or business) consists of trafficking in controlled substances (e.g.,
marijuana) where that trafficking is prohibited by either federal law or the
state law for the state in which the trade or business is conducted.
Consequently, Cannabis Companies may pay higher amounts of taxes than
non-Cannabis Companies, which could result in less income to a Fund and, in
turn, less for a Fund to distribute to shareholders.
Non-U.S.
Regulatory Risks of the Marijuana Industry:
The companies in which each Fund invests are subject to various laws,
regulations and guidelines relating to the manufacture, management,
transportation, storage and disposal of marijuana, as well as being subject to
laws and regulations relating to health and safety, the conduct of operations
and the protection of the environment. Even if a company’s operations are
permitted under current law, they may not be permitted in the future, in which
case such company may not be in a position to carry on its operations in its
current locations. Additionally, controlled substance legislation differs
between countries and legislation in certain countries may restrict or limit the
ability of certain companies in which a Fund invests to sell their
products.
Operational
Risks of the Marijuana Industry:
Companies involved in the marijuana industry face intense competition, may have
limited access to the services of banks, may have substantial burdens on company
resources due to litigation, complaints or enforcement actions, and are heavily
dependent on receiving necessary permits and authorizations to engage in medical
marijuana research or to otherwise cultivate, possess or distribute marijuana.
Additionally, cannabis-related companies are subject to various laws and
regulations that may differ at the local, state, and federal level. These laws
and regulations may significantly affect a cannabis-related company’s ability to
conduct business, secure financing, impact the market for cannabis business
sales and services, and set limits on cannabis use, production, transportation
and storage. Since the use of marijuana is illegal under United States federal
law, federally regulated banking institutions may be unwilling to make financial
services available to growers and sellers of marijuana. Additionally, litigation
initiated by private citizens or companies could have a negative impact on the
financial and operational status of cannabis-related companies.
Companies
participating in the marijuana industry may face litigation, formal or informal
complaints, enforcement actions, and inquiries by various federal, state, or
local governmental authorities. Litigation, complaints, and enforcement actions
could consume considerable amounts of financial and other corporate resources,
which could have a negative impact on sales, revenue, profitability, and growth
prospects. Similarly, certain companies may not be able to obtain or maintain
the necessary licenses, permits, authorizations, or accreditations, or may only
be able to do so at great cost, to engage in medical marijuana research or to
otherwise cultivate, possess or distribute marijuana. Failure to comply with or
to obtain the necessary licenses, permits, authorizations, or accreditations
could result in restrictions on a company’s ability to legally engage in medical
marijuana research or to otherwise cultivate, possess or distribute marijuana,
which could have a negative impact on the value of a Fund’s investments.
United
States Regulatory Risks of CBD and Hemp: The
Agriculture Improvement Act of 2018 (or the “Farm Bill”) effectively removes
hemp from the list of controlled substances and allows states to regulate its
production, commerce and research with approval from the United States
Department of Agriculture. Certain Index constituents may sell dietary
supplements and/or foods containing CBD within the United States. The Farm Bill
delegates to the FDA responsibility for regulating products containing hemp or
derivatives thereof (including CBD) under the Federal Food, Drug, and Cosmetic
Act (the “FD&C”). Under the FD&C, if a substance (such as CBD) is an
active ingredient in a drug product that has been approved by the FDA, then the
substance cannot be sold in dietary supplements or foods without FDA approval,
unless the substance was marketed as a dietary supplement or as a conventional
food before the drug was approved or before the new drug investigations were
authorized. The FDA has publicly taken the position that CBD cannot be sold in
dietary supplements or foods because CBD is an active ingredient in an
FDA-approved drug, but has yet to issue any regulations in this regard. However,
companies that sell CBD in dietary supplements and foods have taken the position
that CBD was marketed as a dietary supplement and/or as a conventional food
before the drug was approved or before the new drug investigations were
authorized, and because the FDA has not brought enforcement action against such
companies, this question of fact has not yet been adjudicated. In the absence of
a conclusive legal determination to the contrary, as of the date of this
prospectus, it has not been determined that the sale of dietary supplements
and/or foods containing CBD within the United States would cause a company’s
securities to be ineligible for inclusion in the Index. It is possible that such
a legal determination or future federal and/or state laws or regulations could
drastically curtail permissible uses of hemp, which could have an adverse effect
of the value of a Fund’s investments in companies with business interests in
hemp and hemp-based products.
Other
Investment Companies (including ETFs) Risk (ETFMG Alternative Harvest ETF
only):
The Fund may invest directly in another investment company by purchasing shares
of the investment company. The Fund will incur higher and duplicative expenses
when it
invests
in other investment companies such as ETFs (affiliated ETFs will not charge
duplicate fees and expenses). There is also the risk that the Fund may suffer
losses due to the investment practices of the underlying funds. If the other
investment company fails to achieve its investment objective, the value of the
Fund’s investment will not perform as expected, thus affecting the Fund’s
performance and its correlation with the Index. When the Fund invests in other
investment companies, the Fund will be subject to substantially the same risks
as those associated with the direct ownership of securities held by such
investment companies. Investments in ETFs are also subject to the following
risks: (i) the market price of an ETF’s shares may trade above or below their
net asset value; (ii) an active trading market for an ETF’s shares may not
develop or be maintained; and (iii) trading of an ETF’s shares may be halted for
a number of reasons. Investments in such shares may be subject to brokerage and
other trading costs, which could result in greater expenses to the Fund.
Finally, depending on the demand in the market, the Fund may not be able to
liquidate its holdings in ETFs at an optimal price or time, which may adversely
affect the Fund’s performance.
Swap
Risk: In
a total return swap, the buyer receives a periodic return equal to the total
return of a specified security, securities or index, for a specified period of
time. In return, the buyer pays the counterparty a variable stream of payments,
typically based upon short term interest rates, possibly plus or minus an agreed
upon spread. For example, if the Fund enters into a swap where it agrees to
exchange a floating rate of interest for a fixed rate of interest, the Fund may
have to pay more money than it receives. Total return swaps entered into in
which payments are not netted may entail greater risk than a swap entered into a
net basis. There is a risk that adverse price movements in an instrument can
result in a loss substantially greater than the Fund’s initial investment in
that instrument (in some cases, the potential loss is unlimited). If there is a
default by the other party to such a transaction, the Fund will have contractual
remedies pursuant to the agreements related to the transaction. However,
particularly in the case of privately-negotiated instruments, there is a risk
that the counterparty will not perform its obligations, which could leave the
Fund worse off than if it had not entered into the position. These instruments
are subject to high levels of volatility, in some cases due to the high levels
of leverage the Fund may achieve with them.
The
remaining risks are presented in alphabetical order. Each risk summarized below
is considered a “principal risk” of investing in the Fund, regardless of the
order in which it appears.
Associated
Risks of Investments in SPACs: Each
Fund’s Index may include equity securities of SPACs, which raise assets to seek
potential acquisition opportunities. Unless and until an acquisition is
completed, a SPAC generally invests its assets in U.S. government securities,
money market securities, and cash. If an acquisition that meets the requirements
for the SPAC is not completed within a pre-established period of time
(e.g.,
two years), the invested funds are returned to the entity’s shareholders. This
period of time may be extended indefinitely, which would delay the return of
invested funds to shareholders while management considers an acquisition.
Because SPACs have no operating history or ongoing business other than seeking
acquisitions, the value of their securities is particularly dependent on the
ability of the entity’s management to identify and complete a profitable
acquisition. Public stockholders of SPACs may not be afforded a meaningful
opportunity to vote on a proposed initial business combination because certain
stockholders, including stockholders affiliated with the management of the SPAC,
may have sufficient voting power, and a financial incentive, to approve such a
transaction without support from public stockholders. As a result, a SPAC may
complete a business combination even though a majority of its public
stockholders do not support such a combination. There is no guarantee that the
SPACs included in the Index will complete an acquisition or that any
acquisitions that are completed will be profitable. Because the SPACs included
in the Index will be designed to pursue acquisitions only within certain
industries or regions, their stock prices may experience greater volatility than
stocks of other SPACs. SPACs may also encounter intense competition from other
entities having a similar business objective, such as private investors or
investment vehicles and other SPACs, competing for the same acquisition
opportunities, which could make completing an attractive business combination
more difficult.
Associated
Risks of SPAC-Derived Companies: The
Fund invests in companies that are derived from a SPAC. These companies may be
unseasoned and lack a trading history, a track record of reporting to investors,
and widely available research coverage. SPAC-derived companies are thus often
subject to extreme price volatility and speculative trading. These stocks may
have above-average price appreciation in connection with a potential business
combination with a SPAC prior to investment by the Fund. The price of stocks in
which the Fund invests may not continue to appreciate and the performance of
these stocks may not replicate the performance exhibited in the past. In
addition, SPAC-derived companies may share similar illiquidity risks of private
equity and venture capital. The free float shares held by the public in a
SPAC-derived company are typically a small percentage of the market
capitalization. The ownership of many SPAC-derived companies often includes
large holdings by venture capital and private equity investors who seek to sell
their shares in the public market in the months following a business combination
transaction when shares restricted by lock-up are released, causing greater
volatility and possible downward pressure during the time that locked-up shares
are released.
Concentration
Risk: Each
Fund’s investments will be concentrated in an industry or group of industries to
the extent the Index is so concentrated. To the extent a Fund invests more
heavily in particular industries, groups of industries, or sectors of the
economy, its performance will be especially sensitive to developments that
significantly affect those industries, groups of industries, or sectors of the
economy, and the value of Shares may rise and fall more than the value of shares
that invest in securities of companies in a broader range of industries or
sectors.
Consumer
Staples Sector Risk: Companies
in the consumer staples sector may be adversely affected by changes in the
global economy, consumer spending, competition, demographics and consumer
preferences, and production spending. Companies in the
consumer
staples sector may also be affected by changes in global economic, environmental
and political events, economic conditions, the depletion of resources, and
government regulation. For instance, government regulations may affect the
permissibility of using various food additives and production methods of
companies that make food products, which could affect company profitability. In
addition, tobacco companies may be adversely affected by the adoption of
proposed legislation and/or by litigation. For example, the FDA’s plan to
propose tobacco product standards to ban menthol as a characterizing flavor in
cigarettes and to ban all flavors in cigars may lead to decreased revenue for
tobacco companies and negatively affect the value of a Fund’s investments.
Companies in the consumer staples sector also may be subject to risks pertaining
to the supply of, demand for and prices of raw materials. The prices of raw
materials fluctuate in response to a number of factors, including, without
limitation, changes in government agricultural support programs, exchange rates,
import and export controls, changes in international agricultural and trading
policies, and seasonal and weather conditions. Companies in the consumer staples
sector may be subject to severe competition, which may also have an adverse
impact on their profitability.
Equity
Market Risk:
An investment in a Fund involves risks of investing in equity securities, such
as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in securities
prices. The values of equity securities could decline generally or could
underperform other investments. Different types of equity securities tend to go
through cycles of out-performance and under-performance in comparison to the
general securities markets. In addition, securities may decline in value due to
factors affecting a specific issuer, market or securities markets generally.
Holders of common stocks incur more risk than holders of preferred stocks and
debt obligations because common stockholders, as owners of the issuer, have
generally inferior rights to receive payments from the issuer in comparison with
the rights of creditors of, or holders of debt obligations or preferred stocks
issued by, the issuer. Additionally, natural or environmental disasters,
widespread disease or other public health issues, war, acts of terrorism or
other events could result in increased premiums or discounts to a Fund’s NAV.
ETF
Risks:
Absence
of an Active Market Risk: Although
a Fund’s shares are approved for listing on the Exchange, there can be no
assurance that an active trading market will develop and be maintained for Fund
shares. There can be no assurance that a Fund will grow to or maintain an
economically viable size, in which case a Fund may experience greater tracking
error to its Index than it otherwise would at higher asset levels or a Fund may
ultimately liquidate.
APs,
Market Makers and Liquidity Providers Concentration Risk:
A Fund has a limited number of financial institutions that may act as APs, none
of which are obligated to engage in creation and/or redemption transactions. 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, there may be a significantly diminished trading market for Fund shares
and 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. The risks associated with limited APs may be heightened in
scenarios where APs have limited or diminished access to the capital required to
post collateral.
Cash
Transactions Risk (ETFMG U.S. Alternative Harvest ETF only):
A Fund may effect its creations and redemptions primarily for cash, rather than
in-kind securities. Paying redemption proceeds in cash rather than through
in-kind delivery of portfolio securities may require the fund to dispose of or
sell portfolio investments at an inopportune time to obtain the cash needed to
distribute redemption proceeds. This may cause a Fund to incur certain costs
such as brokerage costs, and to recognize gains or losses that it might not have
incurred if it had made a redemption in-kind. As a result, a Fund may pay out
higher or lower annual capital gains distributions than ETFs that redeem
in-kind. In addition, the costs imposed on a Fund will decrease such Fund’ NAV
unless the costs are offset by a transaction fee payable by an AP.
Costs
of Buying or Selling Shares Risk: Investors
buying or selling a Fund’s shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers as determined by the applicable
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 that an investor is willing to pay for shares
(the “bid” price) and the price at which an investor is willing to sell shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid/ask spread.” The bid/ask spread varies over time for shares
based on trading volume and market liquidity, and is generally lower if a Fund’s
shares have more trading volume and market liquidity and higher if a Fund’s
shares have little trading volume and market liquidity. Further, 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.
Fluctuation
of NAV Risk: The
NAV of a Fund’s shares will generally fluctuate with changes in the market value
of such Fund’s securities holdings. The market prices of shares will generally
fluctuate in accordance with changes in a Fund’s NAV and supply and demand of
shares on the Exchange. It cannot be predicted whether a Fund’s shares will
trade below, at or above their NAV. Price differences may be due, in large part,
to the fact that supply and demand forces at work in the secondary trading
market for shares will be closely related to, but not identical to, the same
forces influencing the prices of the securities of the Index trading
individually
or in the aggregate at any point in time. The market prices of a Fund’s shares
may deviate significantly from the NAV of the shares during periods of market
volatility. While the creation/redemption feature is designed to make it likely
that a Fund’s shares normally will trade close to such Fund’s NAV, disruptions
to creations and redemptions may result in trading prices that differ
significantly from the Fund’s NAV. As a result, investors in a Fund may pay
significantly more or receive significantly less for Fund shares than the value
of such Fund’s underlying securities or the NAV of Fund shares. If an investor
purchases a Fund’s shares at a time when the market price is at a premium to the
NAV of the shares or sells at a time when the market price is at a discount to
the NAV of the shares, then the investor may sustain losses.
Market
Trading Risk:
An investment in a Fund faces numerous market trading risks, including the
potential lack of an active market for Fund shares, losses from trading in
secondary markets, periods of high volatility and disruption in the
creation/redemption process of such Fund. Any of these factors, among others,
may lead to a Fund’s shares trading at a premium or discount to NAV.
Trading
Issues Risk:
Although
a Fund’s shares are listed for trading on the Exchange, there can be no
assurance that an active trading market for such shares will be maintained.
Trading in a Fund’s 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 is subject to trading halts caused by extraordinary
market volatility pursuant to the 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 Fund shares when extraordinary volatility causes sudden, significant swings
in the market price of Fund shares. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of a Fund will
continue to be met or will remain unchanged or that the shares will trade with
any volume, or at all. In stressed market conditions, the liquidity of a Fund’s
shares may begin to mirror the liquidity of such Fund’s underlying portfolio
holdings, which can be significantly less liquid than the Fund’s shares,
potentially causing the market price of the Fund’s shares to deviate from their
NAV.
Further,
secondary markets may be subject to erratic trading activity, wide bid/ask
spreads and extended trade settlement periods in times of market stress because
market makers and APs may step away from making a market in Fund shares and in
executing creation and redemption orders, which could cause a material deviation
in a Fund’s market price from its NAV. Decisions by market makers or APs to
reduce their role or step away from these activities in times of market stress
could inhibit the effectiveness of the arbitrage process in maintaining the
relationship between the underlying value of a Fund’s portfolio securities and
such Fund’s market price. This reduced effectiveness could result in Fund shares
trading at a price which differs materially from NAV and also in greater than
normal intraday bid/ask spreads for Fund shares. During a “flash crash,” the
market prices of a Fund’s shares may decline suddenly and significantly. Such a
decline may not reflect the performance of the portfolio securities held by a
Fund. Flash crashes may cause APs and other market makers to limit or cease
trading in a Fund’s shares for temporary or longer periods. Shareholders could
suffer significant losses to the extent that they sell shares at these
temporarily low market prices.
Foreign
Investment Risk (ETFMG Alternative Harvest ETF only):
Returns on investments in foreign stocks could be more volatile than, or trail
the returns on, investments in U.S. stocks. Since foreign exchanges may be open
on days when a Fund does not price its Shares, the value of the securities in a
Fund’s portfolio may change on days when shareholders will not be able to
purchase or sell the Shares. Conversely, Shares may trade on days when foreign
exchanges are closed. Because securities held by a Fund trade on foreign
exchanges that are closed when a Fund’s primary listing exchange is open, a Fund
is likely to experience premiums and discounts greater than those of domestic
ETFs. Each of these factors can make investments in a Fund more volatile and
potentially less liquid than other types of investments.
Currency
Risk:
Indirect and direct exposure to foreign currencies subjects a Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency
rates in foreign countries may fluctuate significantly over short periods of
time for a number of reasons, including changes in interest rates and the
imposition of currency controls or other political developments in the U.S. or
abroad. A Fund’s NAV is determined on the basis of U.S. dollars and, therefore,
a Fund may lose value if the local currency of a foreign market depreciates
against the U.S. dollar, even if the local currency value of a Fund’s holdings
goes up.
Depositary
Receipts Risk:
A Fund may invest in depositary receipts. Depositary receipts include ADRs and
GDRs. ADRs are U.S. dollar-denominated receipts representing shares of
foreign-based corporations. ADRs are issued by U.S. banks or trust companies,
and entitle the holder to all dividends and capital gains that are paid out on
the underlying foreign shares. GDRs are depositary receipts which are similar to
ADRs, but are shares of foreign-based corporations generally issued by
international banks in one or more markets around the world. Investment in ADRs
and GDRs may be less liquid than the underlying shares in their primary trading
market and GDRs, many of which are issued by companies in emerging markets, may
be more volatile and less liquid than depositary receipts issued by companies in
more developed markets.
Depositary
receipts may be sponsored or unsponsored. Sponsored depositary receipts are
established jointly by a depositary and the underlying issuer, whereas
unsponsored depositary receipts may be established by a depositary without
participation by the underlying issuer. Holders of an unsponsored depositary
receipt generally bear all the costs associated with establishing the
unsponsored depositary receipt. In addition, the issuers of the securities
underlying 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 market value of the depositary
receipts.
Depositary
receipts may be unregistered and unlisted. A Fund’s investments also may include
ADRs and GDRs that are not purchased in the public markets and are restricted
securities that can be offered and sold only to “qualified institutional buyers”
under Rule 144A of the Securities Act of 1933, as amended. The Adviser will
determine the liquidity of such investments pursuant to the Funds’ liquidity
risk management program. If a particular investment in such ADRs or GDRs is
deemed illiquid, that investment will be included within a Fund’s limitation on
investment in illiquid securities. Moreover, if adverse market conditions were
to develop during the period between a Fund’s decision to sell these types of
ADRs or GDRs and the point at which a Fund is permitted or able to sell such
security, a Fund might obtain a price less favorable than the price that
prevailed when it decided to sell.
Foreign
Market and Trading Risk:
The trading markets for many foreign securities are not as active as U.S.
markets and may have less governmental regulation and oversight. Foreign markets
also may have clearance and settlement procedures that make it difficult for a
Fund to buy and sell securities. These factors could result in a loss to a Fund
by causing the Fund to be unable to dispose of an investment or to miss an
attractive investment opportunity, or by causing Fund assets to be uninvested
for some period of time. Where all or a part of a Fund’s underlying securities
trade in a market that is closed when the Exchange is open, there may be changes
between the last quotation from its closed foreign market and the value of such
securities during a Fund’s domestic trading day. This could lead to differences
between the market price of a Fund’s shares and the value of a Fund’s underlying
securities.
Foreign
Securities Risk:
A Fund invests in foreign securities, including non-U.S. dollar-denominated
securities traded outside of the United States and U.S. dollar-denominated
securities of foreign issuers traded in the United States. Investment in foreign
securities may involve higher costs than investment in U.S. securities,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments. Foreign investments may also involve
risks associated with the level of currency exchange rates, less complete
financial information about the issuers, less market liquidity, more market
volatility and political instability, as well as varying regulatory requirements
applicable to investments in non-U.S. issuers. Future political and economic
developments, the possible imposition of withholding taxes on dividend income,
the possible seizure or nationalization of foreign holdings, the possible
establishment of exchange controls or freezes on the convertibility of currency,
or the adoption of other governmental restrictions might adversely affect an
investment in foreign securities. Additionally, foreign issuers may be subject
to less stringent regulation, and to different accounting, auditing and
recordkeeping requirements.
Political
and Economic Risk:
A Fund is subject to foreign political and economic risk not associated with
U.S. investments, meaning that political events (civil unrest, national
elections, changes in political conditions and foreign relations, imposition of
exchange controls and repatriation restrictions), social and economic events
(labor strikes, rising inflation) and natural disasters occurring in a country
where a Fund invests could cause the Fund’s investments in that country to
experience gains or losses. A Fund also could be unable to enforce its ownership
rights or pursue legal remedies in countries where it invests.
Health
Care Companies Risk:
Health care companies are subject to extensive government regulation and their
profitability can be significantly affected by restrictions on government
reimbursement for medical expenses, rising costs of medical products and
services, pricing pressure (including price discounting), limited product lines,
and an increased emphasis on the delivery of healthcare through outpatient
services. Health care companies are heavily dependent on obtaining and defending
patents, which may be time consuming and costly, and the expiration of patents
may also adversely affect the profitability of the companies. Health care
companies are also subject to extensive litigation based on product liability
and similar claims. In addition, their products can become obsolete due to
industry innovation, changes in technologies, or other market developments. Many
new products in the health care field require significant research and
development and may be subject to regulatory approvals, all of which may be time
consuming and costly with no guarantee that any product will come to market.
Additionally, liability for products that are later alleged to be harmful or
unsafe may be substantial, and may have a significant impact on a health care
company’s market value and/or share price.
Biotechnology
Company Risk: A
biotechnology company’s valuation can often be based largely on the potential or
actual performance of a limited number of products and can accordingly be
greatly affected if one of its products proves, among other things, unsafe,
ineffective or unprofitable. Biotechnology companies are subject to regulation
by, and the restrictions of, the FDA, the U.S. Environmental Protection Agency,
state and local governments, and foreign regulatory authorities.
Pharmaceutical
Company Risk: Companies
in the pharmaceutical industry can be significantly affected by, among other
things, government approval of products and services, government regulation and
reimbursement rates, product liability claims, patent expirations and protection
and intense competition. The process for obtaining regulatory approval from the
FDA or other governmental regulatory authorities is long and costly and there is
no assurance that the necessary approvals will be obtained or maintained by
these companies.
Additionally,
companies in the pharmaceutical industry may be adversely affected by government
regulation and changes in reimbursement rates from such third party payors, such
as Medicare, Medicaid and other government sponsored programs, private health
insurance plans and health maintenance organizations. The ability of
pharmaceutical companies to commercialize current and any futures products also
depends in part on the extent reimbursement for the cost of such
products
and related treatments are available from these third party payors. A
pharmaceutical company’s valuation may also be affected if one of its products
prove unsafe, ineffective or unprofitable. The stock prices of companies in this
sector have been and will likely continue to be volatile.
Market
illiquidity may cause losses for the Fund. For the Fund, to the extent that the
Index moves adversely, the Fund may be one of many market participants that are
attempting to transact in the securities of an underlying index or correlated
instruments. Under such circumstances, the market for investments of the Index
may lack sufficient liquidity for all market participants’ trades. Therefore,
the Fund may have more difficulty transacting in securities of the Index or
correlated investments such as financial instruments and the Fund’s transactions
could exacerbate the price change of the securities of the Index. Additionally,
because the Fund is leveraged, a minor adverse change in the value of the Index
should be expected to have a substantial adverse impact on the Fund.
Management
Risk (ETFMG U.S. Alternative Harvest ETF only). The
U.S. Alternative Harvest ETF is actively-managed and may not meet its investment
objective based on the investment adviser’s success or failure to implement
investment strategies for the Fund. Due
to its active management, the Fund could underperform other funds with similar
investment objectives.
Natural
Disaster/Epidemic Risk:
Natural
or environmental disasters, such as earthquakes, fires, floods, hurricanes,
tsunamis and other severe weather-related phenomena generally, and widespread
disease, including pandemics and epidemics, have been and may be highly
disruptive to economies and markets, adversely impacting individual companies,
sectors, industries, markets, currencies, interest and inflation rates, credit
ratings, investor sentiment, and other factors affecting the value of a Fund’s
investments. Given the increasing interdependence among global economies and
markets, conditions in one country, market, or region are increasingly likely to
adversely affect markets, issuers, and/or foreign exchange rates in other
countries, including the U.S. Any such events could have a significant adverse
impact on the value of a Fund’s investments.
New
Fund Risk (ETFMG U.S. Alternative Harvest ETF only):
The Fund is a recently organized investment company with no operating history.
As a result, prospective investors have no track record or history on which to
base their investment decision.
Non-Cannabis
Related Business Risk:
Many of the companies in the Index are engaged in other lines of business
unrelated to the activities identified in principal investment strategies,
above, and these lines of business could adversely affect their operating
results. The operating results of these companies may fluctuate as a result of
events in the other lines of business. In addition, a company’s ability to
engage in new activities may expose it to business risks with which it has less
experience than it has with the business risks associated with its traditional
businesses. There can be no assurance that the other lines of business in which
these companies are engaged will not have an adverse effect on a company’s
business or financial condition.
Non-Diversification
Risk:
Because
each Fund is “non-diversified,” a Fund may invest a greater percentage of its
assets in the securities of a single issuer or a small number of issuers than if
it was a diversified fund. As a result, a decline in the value of an investment
in a single issuer or a small number of issuers could cause a Fund’s overall
value to decline to a greater degree than if such Fund held a more diversified
portfolio. This may increase a Fund’s volatility and have a greater impact on
such Fund’s performance.
Passive
Investment Risk (ETFMG Alternative Harvest ETF only): The
Fund is not actively managed. Therefore, unless a specific security is removed
from the Fund’s Index, the Fund generally would not sell a security because the
security’s issuer was in financial trouble. If a specific security is removed
from the Fund’s Index, the Fund may be forced to sell such security at an
inopportune time or for a price other than the security’s current market value.
An investment in the Fund involves risks similar to those of investing in any
equity securities traded on an exchange, such as market fluctuations caused by
such factors as economic and political developments, changes in interest rates
and perceived trends in security prices. It is anticipated that the value of the
Fund’s shares will decline, more or less, in correspondence with any decline in
value of the Fund’s Index. The Index may not contain the appropriate mix of
securities for any particular economic cycle, and the timing of movements from
one type of security to another in seeking to replicate the Index could have a
negative effect on the Fund. Unlike with an actively managed fund, the Adviser
does not use techniques or defensive strategies designed to lessen the effects
of market volatility or to reduce the impact of periods of market decline. This
means that, based on market and economic conditions, the Fund’s performance
could be lower than other types of funds that may actively shift their portfolio
assets to take advantage of market opportunities or to lessen the impact of a
market decline.
Risks
Related to Investing in Canada (ETFMG Alternative Harvest ETF):
Because the investments of the Fund are geographically concentrated in Canadian
companies or companies that have a significant presence in Canada, investment
results could be dependent on the financial condition of the Canadian economy.
The Canadian economy is reliant on the sale of natural resources and
commodities, which can pose risks such as the fluctuation of prices and the
variability of demand for exportation of such products. Changes in spending on
Canadian products by the economies of other countries or changes in any of these
economies may cause a significant impact on the Canadian economy. The United
States is Canada’s largest trading and investment partner, and the Canadian
economy is significantly affected by developments in the U.S. economy. Since the
implementation of North American Free Trade Agreement in 1994 among Canada, the
United States and Mexico, total two-way merchandise trade between the United
States and Canada has more than doubled. Any downturn in U.S. or Mexican
economic activity is likely to have an adverse impact on the Canadian economy.
The Canadian economy is also dependent upon external trade with other key
trading partners, including China. In addition, Canada is a large supplier of
natural resources (e.g.,
oil, natural gas and agricultural products). As a result, the Canadian economy
is sensitive to fluctuations in certain commodity prices.
Sector
Risk (ETFMG U.S. Alternative Harvest ETF only):
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.
Securities
Lending Risk:
Each Fund may engage in securities lending. A Fund may lose money if the
borrower of the loaned securities delays returning in a timely manner or fails
to return the loaned securities. Securities lending involves the risk that a
Fund could lose money in the event of a decline in the value of collateral
provided for loaned securities. In addition, a Fund bears the risk of loss in
connection with its investment of the cash collateral it receives from a
borrower. When a Fund invests cash collateral in other investment companies,
such investments of cash collateral will be subject to substantially the same
risks as those associated with the direct ownership of securities held by such
investment companies. To the extent that the value or return of a Fund’s
investment of the cash collateral declines below the amount owed to the
borrower, such Fund may incur losses that exceed the amount it earned on lending
the security. A Fund may borrow money to repay the applicable borrower the
amount of cash collateral owed to the borrower upon return of the loaned
securities. This will result in financial leverage, which may cause a Fund to be
more volatile because financial leverage tends to exaggerate the effect of any
increase or decrease in the value of such Fund’s portfolio securities.
Smaller
Companies Risk:
Each Fund’s Index may be composed primarily of, or have significant exposure to,
securities of smaller companies. As a result, the Funds may be subject to the
risk that securities of smaller companies represented in the Indexes may
underperform securities of larger companies or the equity market as a whole. In
addition, in comparison to securities of companies with larger capitalizations,
securities of smaller-capitalization companies may experience more price
volatility, greater spreads between their bid and ask prices, less frequent
trading, significantly lower trading volumes, and cyclical or static growth
prospects. As a result of the differences between the securities of smaller
companies and those of companies with larger capitalizations, it may be more
difficult for a Fund to buy or sell a significant amount of the securities of a
smaller company without an adverse impact on the price of the company’s
securities, or a Fund may have to sell such securities in smaller quantities
over a longer period of time, which may increase the Fund’s tracking error.
Smaller-capitalization companies often have limited product lines, markets or
financial resources, and may therefore be more vulnerable to adverse
developments than larger capitalization companies. These securities may or may
not pay dividends.
Tax
Risk:
Tax
Risk:
To qualify for the favorable tax treatment generally available to RICs, the Fund
must satisfy certain diversification requirements under the Internal Revenue
Code of 1986, as amended (the “Code”). In particular, the asset diversification
requirements will be satisfied if (i) at least 50% of the value of the Fund’s
total assets are represented by cash and cash items, U.S. government securities,
the securities of other RICs and “other securities,” provided that such “other
securities” of any one issuer do not represent more than 5% of the Fund’s total
assets or greater than 10% of the outstanding voting securities of such issuer,
and (ii) no more than 25% of the value of the Fund’s assets are invested in
securities of any one issuer (other than U.S. government securities and
securities of other RICs), the securities (other than securities of other RICs)
of any two or more issuers that are controlled by the Fund and are engaged in
the same or similar or related trades or business, or the securities of one or
more “qualified publicly traded partnerships.” When the Index is concentrated in
a relatively small number of securities, it may not be possible for the Fund to
fully implement a replication strategy or a representative sampling strategy
while satisfying these diversification requirements. The Fund’s efforts to
satisfy the diversification requirements may cause the Fund’s return to deviate
from that of the Index, and the Fund’s efforts to replicate the Index may cause
it inadvertently to fail to satisfy the diversification requirements. If the
Fund were to fail to qualify as a RIC, it would be subject to U.S. federal
income tax at corporate rates on its income, and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income. In addition, distributions to a Fund’s shareholders would generally be
taxed as ordinary dividends.
Under
certain circumstances, a Fund may be able to cure a failure to qualify as a RIC,
but in order to do so such Fund may incur significant Fund-level taxes and may
be forced to dispose of certain assets. Relief is provided for certain de
minimis failures of the diversification requirements where a Fund corrects the
failure within a specified period. If a Fund were to fail to qualify as a RIC in
any taxable year, such Fund would be required to pay out its earnings and
profits accumulated in that year in order to qualify for treatment as a RIC in a
subsequent year. If a Fund failed to qualify as a RIC for a period greater than
two taxable years, such Fund would generally be required to pay U.S. federal
income tax at corporate rates on any net built-in gains 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.
Tracking
Error Risk (ETFMG Alternative Harvest ETF only):
Tracking error refers to the risk that the Adviser may not be able to cause the
Fund’s performance to match or correlate to that of the Fund’s Index, either on
a daily or aggregate basis. There are a number of factors that may contribute to
the Fund’s tracking error, such as Fund expenses, imperfect correlation between
the Fund’s investments and those of the Index, rounding of share prices, changes
to the composition of the Index, regulatory policies, and high portfolio
turnover rate. In addition, mathematical compounding may prevent the Fund from
correlating with the monthly, quarterly, annual or other period performance of
the Index. In addition, in order to minimize the market impact of the Index
rebalance, the Fund may begin trading to effect the rebalance in advance of the
effective date of the rebalance and continue trading after the effective date of
the rebalance. This may contribute to tracking error if the weights of the
Fund’s portfolio securities diverge from the weights of the securities in the
Index during the rebalancing. Tracking error in such circumstances may be
greater if the Fund is trading in securities that are less liquid or lightly
traded. Tracking error may cause the Fund’s performance to be less than
expected.
Valuation
Risk (ETFMG Alternative Harvest ETF only): The
sales price that the Fund could receive for a security may differ from the
Fund’s valuation of the security and may differ from the value used by the
Index, particularly for securities that trade in low volume or
volatile
markets or that are valued using a fair value methodology. In addition, the
value of the securities in the Fund’s portfolio may change on days when
shareholders will not be able to purchase or sell the Fund’s shares.
Portfolio
Holdings
Information
about the Funds’ daily portfolio holdings will be available at www.etfmg.com. A
summarized description of the Funds’ policies and procedures with respect to the
disclosure of the Funds’ portfolio holdings is available in the Funds’ Statement
of Additional Information (“SAI”).
Fund
Management
Adviser.
ETF
Managers Group LLC, the investment adviser to the Funds, is a Delaware
limited liability company located at 30 Maple Street, 2nd
Floor, Summit, New Jersey 07901. The Adviser provides investment advisory
services to exchange-traded funds. The Adviser serves as investment adviser to
the Funds with overall responsibility for the day-to-day portfolio management of
each Fund, subject to the supervision of the Board. For its services, the
Adviser receives, and did receive for each Fund’s most recent fiscal year, a fee
that is equal to the percent shown in the table below per annum of the average
daily net assets of each Fund with the fee for each Fund calculated daily and
paid monthly.
|
|
|
|
| |
Fund |
Management
Fee |
Alternative
Harvest ETF |
0.75% |
U.S.
Alternative Harvest ETF |
0.75% |
Under
the Investment Advisory Agreement, the Adviser has overall responsibility for
the general management and administration of the Funds and arranges for transfer
agency, custody, fund administration, securities lending, and all other
non-distribution related services necessary for each Fund to operate.
Additionally, under the Investment Advisory Agreement, the Adviser has agreed to
pay all expenses of each 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 (such
as, among other things and subject to Board approval, certain proxy solicitation
costs and non-standard Board-related expenses and litigation against the Board,
Trustees, Fund, Adviser, and officers of the Adviser), and distribution (12b-1)
fees and expenses (collectively, “Excluded Expenses”).
With
respect to the Alternative Harvest ETF, the Adviser has agreed to waive its
unitary management fee in an amount equal to the acquired fund fees and expenses
related to any investment by the Alternative Harvest ETF in the U.S. Alternative
Harvest ETF. This arrangement will remain in effect through at least March 31,
2024, and prior to such date the Adviser may not terminate the arrangement
without the approval of the Board of Trustees of the Trust.
A
discussion regarding the basis for the Board's approval of the Investment
Advisory Agreement for the Funds is available in the Funds’ Semi-Annual
Report
for the period ended March 31, 2022.
Manager
of Managers Structure.
The Adviser and the Trust have received an exemptive order (the “Order”) from
the SEC that permits the Adviser to enter into investment sub-advisory
agreements with sub-advisers without obtaining shareholder approval. The
Adviser, subject to the review and approval of the Board, may select one or more
sub-advisers for a Fund and supervise, monitor and evaluate the performance of
each sub-adviser.
The
Order also permits the Adviser, subject to the approval of the Board, to replace
sub-advisers and amend investment sub-advisory agreements, including fees,
without shareholder approval whenever the Adviser and the Board believe such
action will benefit a Fund and its respective shareholders. The Adviser thus has
the ultimate responsibility (subject to the ultimate oversight of the Board) to
recommend the hiring and replacement of sub-advisers as well as the discretion
to terminate any sub-adviser and reallocate a Fund’s assets for management among
any other sub-adviser(s) and itself. This means that the Adviser may be able to
reduce the sub-advisory fees and retain a larger portion of the management fee,
or increase the sub-advisory fees and retain a smaller portion of the management
fee. The Adviser will compensate each sub-adviser out of its management fee. A
Fund is required to provide shareholders with certain information regarding any
new sub-adviser within 90 days of the hiring of any new sub-adviser. Such
information generally includes the information that would have been provided to
shareholders in the form of a proxy statement in the absence of the Order.
The
Adviser’s reliance on such Order with respect to a Fund is contingent on the
holders of a majority of such Fund’s outstanding voting securities approving the
applicable Fund’s use of a manager of managers structure and the Adviser’s
reliance on such Order. Prior to the date of this Prospectus, shareholders of
each Fund approved the use by such Fund of a manager of managers structure and
the Adviser’s reliance on such Order.
Portfolio
Managers
The
Funds’ portfolio managers are primarily responsible for the day-to-day
management of the Funds. The portfolio managers are responsible for various
functions related to portfolio management, including, but not limited to,
investing cash inflows, implementing investment strategy, researching and
reviewing investment strategy.
The
Funds are managed by Samuel R. Masucci, III, Chief Executive Officer of the
Adviser, and Frank Vallario, Chief Investment Officer of the Adviser.
Samuel
Masucci, III has more than 25 years’ experience in investment banking,
structured product development, sales and trading. He founded ETF Managers Group
(ETFMG) in 2014. Prior to ETFMG he has held senior positions at Bear Stearns,
UBS, SBC Warburg, and Merrill Lynch and has experience in creating, building and
managing businesses for the issuance, sales and trading of: ETFs, index
products, commodity products, hedge funds, ABS, and OTC structured products in
the U.S. and Europe.
Frank
Vallario serves in the role of Chief Investment Officer for the Adviser. Mr.
Vallario is responsible for the portfolio construction, trading, risk management
and portfolio analysis processes associated with ETF strategies. Prior to his
current role at the Adviser, Mr. Vallario has had a variety of senior roles
over his 25-year career in financial services. He joined Oppenheimer Funds in
2017 where he was Head of Equity Portfolio Management for Smart Beta ETFs. Prior
to that he was a Senior Portfolio Manager at Columbia Threadneedle from
September 2015 to June 2017 where he was responsible for the day to day
management of the firm’s ETF business, which was acquired from his previous
firm, Emerging Global Advisors (EGA). From September 2010 to September 2015, he
was relationship manager at MSCI responsible for providing investment solutions
to complex problems using MSCI Barra’s fundamental models and portfolio
construction tools. Previously, he was a partner in a start-up asset management
firm where he served as the director of portfolio management. Mr. Vallario
began his career at UBS Global Asset Management where he spent over a decade in
various quantitative portfolio management equity roles including equity market
neutral, tactical asset allocation, structured active equities, enhanced index,
passive management and factor research. Mr. Vallario served on the
Investment Committee for the Girl Scouts of Connecticut and was a University
Affiliate at the University of Utah – David Eccles School of Business. He
received a B.S. in Finance from Lehigh University and a M.B.A. with a
concentration in Finance from Rutgers University.
The
SAI provides additional information about each Portfolio Manager’s compensation,
other accounts managed, and ownership of the applicable Fund’s shares.
Buying
and Selling the Funds
Each
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from a Fund, and only APs may tender their Shares for
redemption directly to 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.
Each
Fund’s shares are listed for secondary trading on the Exchange. When you buy or
sell a Fund’s shares on the secondary market, you will pay or receive the market
price. You may incur customary brokerage commissions and charges and may pay
some or all of the spread between the bid and the offered price in the secondary
market on each leg of a round trip (purchase and sale) transaction. The shares
will trade on the Exchange at prices that may differ to varying degrees from the
daily NAV of the shares. The Exchange is generally open Monday through Friday
and is closed weekends and the following holidays: New Year’s Day, Martin Luther
King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth Day,
Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
NAV
per share for a Fund is computed by dividing the value of the net assets of the
Fund (i.e.,
the value of its total assets less total liabilities) by its total number of
shares outstanding. Expenses and fees, including management and distribution
fees, if any, are accrued daily and taken into account for purposes of
determining NAV. NAV is determined each business day, normally as of the close
of regular trading of the New York Stock Exchange (ordinarily 4:00 p.m., Eastern
time).
When
determining NAV, the value of a Fund’s portfolio securities is based on market
prices of the securities, which generally means a valuation obtained from an
exchange or other market (or based on a price quotation or other equivalent
indication of the value supplied by an exchange or other market) or a valuation
obtained from an independent pricing service. Swap contracts are valued based on
the value of the swap contract’s reference asset and are marked-to-market each
day NAV is calculated. If such information is not readily available or does not
otherwise accurately reflect the fair value of the security, the security will
be valued by another method that the Adviser believes will better reflect fair
value in accordance with the Adviser’s valuation policies and procedures. The
Board has designated the Adviser as the “valuation designee” for the Fund under
Rule 2a-5 of the 1940 Act, subject to its oversight. Fair value pricing may be
used in a variety of circumstances, including, but not limited to, situations
when the value of a security in a Fund’s portfolio has been materially affected
by events occurring after the close of the market on which the security is
principally traded but prior to the close of the Exchange (such as in the case
of a corporate action or other news that may materially affect the price of a
security) or trading in a security has been suspended or halted. Accordingly,
the Fund’s NAV may reflect certain portfolio securities’ fair values rather than
their market prices.
Fair
value pricing involves subjective judgments and it is possible that a fair value
determination for a security will materially differ from the value that could be
realized upon the sale of the security. In addition, fair value pricing could
result in a difference between
the
prices used to calculate a Fund’s NAV and the prices used by the Fund’s Index.
This may result in a difference between a Fund’s performance and the desired
performance relative to the Fund’s Index.
The
Funds invest in non-U.S. securities. Non-U.S. securities held by a Fund may
trade on weekends or other days when the Fund does not price its shares. As a
result, the Fund’s NAV may change on days when Authorized Participants will not
be able to purchase or redeem Fund shares.
Frequent
Purchases and Redemptions of the Funds’ Shares
Unlike
frequent trading of shares of a traditional open-end mutual fund’s (i.e.,
not exchange-traded) shares, frequent trading of shares of the Funds on the
secondary market does not disrupt portfolio management, increase the Funds’
trading costs, lead to realization of capitalization gains, or otherwise harm
the Funds’ shareholders because these trades do not involve the Funds directly.
Certain institutional investors are authorized to purchase and redeem a Fund’s
shares directly with the Fund. Because these trades are effected in-kind
(i.e.,
for securities, and not for cash), they do not cause any of the harmful effects
noted above that may result from frequent cash trades. Moreover, the Funds
impose transaction fees on in-kind purchases and redemptions of Creation Units
to cover the custodial and other costs incurred by the Funds in effecting
in-kind trades. These fees increase if an investor substitutes cash in part or
in whole for Creation Units, reflecting the fact that a Fund’s trading costs
increase in those circumstances. For these reasons, the Board has determined
that it is not necessary to adopt policies and procedures to detect and deter
frequent trading and market-timing in shares of the Funds.
Dividends,
Distributions, and Taxes
Fund
Distributions
Each
Fund intends to pay out dividends, if any, quarterly and distribute any net
realized capital gains to their shareholders annually.
Dividend
Reinvestment Service
Brokers
may make available to their customers who own a Fund’s shares the DTC book-entry
dividend reinvestment service. If this service is available and used, dividend
distributions of both income and capital gains will automatically be reinvested
in additional whole shares of the applicable Fund. Without this service,
investors would receive their distributions in cash. In order to achieve the
maximum total return on their investments, investors are encouraged to use the
dividend reinvestment service. To determine whether the dividend reinvestment
service is available and whether there is a commission or other charge for using
this service, consult your broker. Brokers may require a Fund’s shareholders to
adhere to specific procedures and timetables. 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 applicable
Fund at NAV per share.
Tax
Information
The
following is a summary of some important tax issues that affect the Funds and
their respective shareholders. The summary is based on current tax laws, which
may be changed by legislative, judicial or administrative action. You should not
consider this summary to be a detailed explanation of the tax treatment of the
Funds, or the tax consequences of an investment in the Funds. The summary is
very general, and does not address investors subject to special rules, such as
investors who hold shares through an IRA, 401(k) or other tax-advantaged
account. The following summary describes the U.S. federal income tax
consequences to shareholders that are U.S. persons, as defined in the Code, and
that are not partnerships for U.S. federal income tax purposes, unless otherwise
provided. More information about taxes, including a detailed description of the
U.S. federal income tax consequences to shareholders that are not U.S. persons,
as defined in the Code, is located in the SAI. You are urged to consult your tax
adviser regarding specific questions as to U.S. federal, state and local income
taxes.
Tax
Status of the Funds
Each
Fund is treated as a separate entity for U.S. federal tax purposes, and intends
to qualify for the special tax treatment afforded to RIC under the Code. As long
as each Fund qualifies as a RIC, it generally will not be subject to U.S.
federal income tax on any ordinary income or capital gain that it timely
distributes to its shareholders as dividends.
Tax
Status of Distributions
•Each
Fund intends, for each year, to distribute substantially all of its income and
net capital gains.
•Each
Fund’s distributions from income will generally be taxed to you as ordinary
income, qualified dividend income, or capital gain (or a combination thereof).
For non-corporate shareholders, dividends reported by a Fund as qualified
dividend income are generally eligible for reduced tax rates.
•Corporate
shareholders may be entitled to a dividends-received deduction for the portion
of dividends they receive that are attributable to dividends received by the
Fund from U.S. corporations, subject to certain limitations. A Fund’s strategies
may limit its ability to distribute dividends eligible for the
dividends-received deduction for corporate shareholders.
•Any
distributions of net capital gain (the excess of a Fund’s net long-term capital
gains over its net short-term capital losses) properly reported by the Fund as
“capital gain dividends” that you receive from the Fund are taxable as long-term
capital gains regardless of how long you have owned your shares. Long-term
capital gains are currently taxed to non-corporate shareholders at reduced
maximum rates.
•Dividends
and distributions are generally taxable to you whether you receive them in cash
or in additional shares through a broker’s dividend reinvestment service. If you
receive dividends or distributions in the form of additional shares through a
broker’s dividend reinvestment service, you will be required to pay applicable
U.S. federal, state or local taxes on the reinvested dividends but you will not
receive a corresponding cash distribution with which to pay any applicable
tax.
•A
Fund may be able to pass through to you foreign tax credits for certain taxes
paid by the Fund, provided the Fund meets certain requirements.
•Distributions
paid in January but declared by the Fund in October, November or December of the
previous year may be taxable to you in the previous year.
•Each
Fund will inform you of the amount of your ordinary income dividends, qualified
dividend income, foreign tax credits and net capital gain distributions received
from the Fund shortly after the close of each calendar year.
Taxes
on Exchange-Listed Share Sales. A
shareholder generally will recognize gain or loss on the sale, exchange or other
taxable disposition of shares in an amount equal to the difference between the
shareholder’s adjusted basis in the common stock disposed of and the amount
realized on their disposition. Generally, gain recognized by a shareholder on
the disposition of shares will result in capital gain or loss to a shareholder,
and will be a long-term capital gain or loss if the shares have been held for
more than one year at the time of sale, except that any capital loss on the sale
of shares held for six months or less will be treated as long-term capital loss
to the extent of amounts treated as capital gain dividends to the shareholder
with respect to such shares.
Investment
in Foreign Securities.
The Funds may be subject to non-U.S. withholding taxes on income they may earn
from investing in non-U.S. securities, which may reduce the return on such
investments. In addition, the Funds’ investments in non-U.S. securities or
non-U.S. currencies may increase or accelerate the Funds’ recognition of
ordinary income and may affect the timing or amount of their distributions. The
Funds may be eligible to file an election that would permit shareholders who are
U.S. citizens, resident aliens or U.S. corporations to claim a foreign tax
credit or deduction (but not both) on their U.S. federal income tax returns for
their pro rata portions of qualified taxes paid by the Funds to non-U.S.
jurisdiction in respect of non-U.S. securities held for at least the minimum
period specified in the Code. For the purposes of the foreign tax credit, each
such shareholder would include in gross income from non-U.S. sources its pro
rata share of such taxes. Certain limitations imposed by the Code may prevent
shareholders from receiving a full foreign tax credit or deduction for their
allocable amount of such taxes.
Medicare
Tax. U.S.
individuals with income exceeding $200,000 ($250,000 if married and filing
jointly) are subject to a 3.8% Medicare contribution tax on their “net
investment income,” including interest, dividends, and capital gains (including
capital gains realized on the sale or exchange of shares). This 3.8% tax also
applies to all or a portion of the net investment income of certain shareholders
that are estates and trusts which the estate or trust has not distributed to its
beneficiaries.
Non-U.S.
Investors. If
you are not a U.S. person, as defined in the Code, distributions of a Fund’s
ordinary income will generally be subject to a 30% U.S. federal withholding tax,
unless a lower treaty rate applies or unless such income is effectively
connected with a U.S. trade or business of such non-U.S. investor (and if
required by an applicable income tax treaty, attributable to a permanent
establishment maintained in the United States by such non-U.S. investor). This
30% withholding tax generally will not apply to capital gain dividends.
Backup
Withholding. The
Funds or your broker will be required in certain cases to withhold (as “backup
withholding”) on amounts payable to any shareholder who (1) has provided
either an incorrect tax identification number or no number at all, (2) is
subject to backup withholding by the Internal Revenue Service for failure to
properly report payments of interest or dividends, (3) has failed to
certify that such shareholder is not subject to backup withholding, or
(4) has not certified that such shareholder is a U.S. person (including a
U.S. resident alien). The backup withholding rate is currently 24%. Backup
withholding will not, however, be applied to payments that have been subject to
the 30% withholding tax applicable to shareholders who are neither citizens nor
residents of the United States.
FATCA.
Legislation commonly referred to as the “Foreign Account Tax Compliance Act,” or
“FATCA,” generally imposes a 30% withholding tax on payments of certain types of
income to foreign financial institutions (“FFIs”) unless such FFIs either: (i)
enter into an agreement with the U.S. Treasury to report certain required
information with respect to accounts held by certain specified U.S. persons (or
held by foreign entities that have certain specified U.S. persons as substantial
owners) or (ii) reside in a jurisdiction that has entered into an
intergovernmental agreement (“IGA”) with the United States to collect and share
such information and are in compliance with the terms of such IGA and any
enabling legislation or regulations. The types of income subject to the tax
include U.S. source interest and dividends. While the Code would also require
withholding on payments of the gross proceeds from the sale of any property that
could produce U.S. source interest or dividends, the U.S. Treasury has indicated
its intent to eliminate this requirement in subsequent proposed regulations,
which state that taxpayers may rely on the proposed regulations until final
regulations are issued. The information required to be reported includes the
identity and taxpayer identification number of each account holder that is a
specified
U.S. person and transaction activity within the holder’s account. In addition,
subject to certain exceptions, FATCA also imposes a 30% withholding on certain
payments to certain foreign entities that are not FFIs unless such foreign
entities certify that they do not have a greater than 10% U.S. owner that is a
specified U.S. person or provide the withholding agent with identifying
information on each greater than 10% U.S. owner that is a specified U.S. person.
Depending on the status of a shareholder and the status of the intermediaries
through which they hold their shares, shareholders could be subject to this 30%
withholding tax with respect to distributions on their shares. Under certain
circumstances, a shareholder might be eligible for refunds or credits of such
taxes.
Distribution
The
Distributor, ETFMG Financial LLC, an affiliate of the Adviser, is a
broker-dealer registered with the U.S. Securities and Exchange Commission. The
Distributor distributes Creation Units for the Funds on an agency basis and does
not maintain a secondary market in the Funds’ shares. The Distributor has no
role in determining the policies of the Funds or the securities that are
purchased or sold by the Funds. The Distributor’s principal business address is
30 Maple Street, 2nd
Floor, Summit, New Jersey 07901.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act with respect to each Fund. In accordance with the
Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily
net assets each year for certain distribution-related activities and shareholder
services.
No
Rule 12b-1 fees are currently paid by the Funds, and there are no plans to
impose these fees. However, in the event Rule 12b-1 fees are charged
in the future, because the fees are paid out of each applicable 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.
Fund
Service Providers
Eversheds
Sutherland (US) LLP, 700 6th Street NW, Washington, DC 20001, serves as legal
counsel to the Funds.
WithumSmith+Brown,
PC, with offices located at 1411 Broadway, 9th Floor, New York, New York 10018,
serves as the Funds’ independent registered public accounting firm. The
independent registered public accounting firm is responsible for auditing the
annual financial statements of the Funds.
Index/Trademark
Licenses/Disclaimers
Prime
Indexes and the Prime Alternative Harvest Index are trademarks of Level ETF
Ventures LLC (“Level”) and have been licensed for use by the Adviser. The
Alternative Harvest ETF is not sponsored, endorsed, sold or promoted by Level or
its Calculation Agent. Level and the Calculation Agent make no representation
regarding the advisability of trading in such product.
LEVEL
AND THE CALCULATION AGENT DO NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS
OF THE INDEX OR ANY DATA INCLUDED THEREIN AND THEY SHALL HAVE NO LIABILITY FOR
ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN. LEVEL AND THE CALCULATION AGENT
MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE
ADVISER, OWNERS OR USERS OF A FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE
OF THE INDEX OR ANY DATA INCLUDED THEREIN. LEVEL AND THE CALCULATION AGENT MAKE
NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE
INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO
EVENT SHALL LEVEL OR THE CALCULATION AGENT HAVE ANY LIABILITY FOR ANY SPECIAL,
PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF
NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. Each Fund is not sponsored,
endorsed, sold or promoted by Level or the Calculation Agent. Level and the
Calculation Agent make no representation or warranty, express or implied, to the
owners of a Fund or any member of the public regarding the advisability of
investing in securities generally or in a Fund in particular or the ability of
the Index to track general stock market performance. The Index is determined,
composed and calculated by Level or its Calculation Agent without regard to the
Adviser or a Fund. Level and the Calculation Agent have no obligation to take
the needs of the Adviser or the owners of a Fund into consideration in
determining, composing or calculating the Index. Level and the Calculation Agent
are not responsible for and have not participated in the determination of the
prices and amount of a Fund or the timing of the issuance or sale of a Fund or
in the determination or calculation of the equation by which a Fund is converted
into cash. Level and the Calculation Agent have no obligation or liability in
connection with the administration, marketing or trading of a Fund.
Shares
of the Trust are not sponsored, endorsed, or promoted by the Exchange. The
Exchange makes no representation or warranty, express or implied, to the owners
of the shares of a Fund. The Exchange is not responsible for, nor has it
participated in, the determination of the timing of, prices of, or quantities of
the shares of a Fund to be issued, or in the determination or calculation of the
equation by which the shares are redeemable.
The
Exchange has no obligation or liability to owners of the shares of a Fund in
connection with the administration, marketing, or trading of the shares of a
Fund. 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 and each Fund make no representation or warranty, express or implied, to
the owners of shares of a Fund or any members of the public regarding the
advisability of investing in securities generally or in a Fund
particularly.
Premium/Discount
Information
Information
regarding the number of days each Fund’s market price was a price above
(i.e.,
at a premium) or below (i.e.,
at a discount) its NAV for the most recently completed calendar year and the
most recently completed calendar quarters since that year, are provided, free of
charge, on the Funds’ website at www.etfmg.com.
Litigation
The
Trust, the Adviser, and certain officers and affiliated persons of the Adviser
(together with the Adviser, the “Adviser Defendants”) were named as defendants
in an action filed December 21, 2021, in the Superior Court of New Jersey, Union
County, captioned PureShares,
LLC, d/b/a PureFunds et al. v. ETF Managers Group, LLC et al.,
Docket No. UNN-C-152-21 (the “NJ Action”). The NJ Action asserted breach of
contract and other tort claims and sought damages in unspecified amounts and
injunctive relief. On May 25, 2022, the court in the NJ Action dismissed with
prejudice all claims asserted against the Trust, as well as all contract claims
and all except one tort claim asserted against the Adviser
Defendants.
Financial
Highlights
The
financial highlights tables are intended to help you understand the Funds’
financial performance for the period of each Fund’s operations. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have gained (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been derived from the financial statements
audited by WithumSmith+Brown, PC, an independent registered public accounting
firm, whose report, along with the Funds’ financial statements, is included in
the Funds’ Annual
Report,
which is available upon request.
Alternative
Harvest ETF
FINANCIAL
HIGHLIGHTS
For
a capital share outstanding throughout the year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| Year
Ended September 30, 2022 |
| Year
Ended September 30, 2021 |
| Year
Ended September 30, 2020 |
| Year
Ended September 30, 2019 |
| Year
Ended September 30, 2018 |
Net
Asset Value, Beginning Year |
|
|
|
|
|
|
|
| $ |
14.40 |
|
| $ |
10.37 |
|
| $ |
20.83 |
|
| $ |
39.74 |
|
| $ |
31.36 |
|
Income
(Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
investment income 1 |
|
|
|
|
|
|
|
| 0.18 |
|
| 0.26 |
|
| 0.91 |
|
| 1.02 |
|
| 0.37 |
|
Net
realized and unrealized gain (loss) on investments |
|
|
|
|
|
|
|
| (9.78) |
|
| 4.01 |
|
| (10.49) |
|
| (18.96) |
|
| 8.95 |
|
Total
from investment operations |
|
|
|
|
|
|
|
| (9.60) |
|
| 4.27 |
|
| (9.58) |
|
| (17.94) |
|
| 9.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Less
Distributions: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Distributions
from net investment income |
|
|
|
|
|
|
|
| (0.18) |
|
| (0.24) |
|
| (0.88) |
|
| (0.97) |
|
| (0.74) |
|
Net
realized gains |
|
|
|
|
|
|
|
| — |
|
| — |
|
| — |
|
| — |
|
| (0.20) |
|
Total
distributions |
|
|
|
|
|
|
|
| (0.18) |
|
| (0.24) |
|
| (0.88) |
|
| (0.97) |
|
| (0.94) |
|
Net
asset value, end year |
|
|
|
|
|
|
|
| $ |
4.62 |
|
| $ |
14.40 |
|
| $ |
10.37 |
|
| $ |
20.83 |
|
| $ |
39.74 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total
Return |
|
|
|
|
|
|
|
| (67.06) |
% |
| 40.90 |
% |
| (46.83) |
% |
| (45.60) |
% |
| 33.85 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Ratios/Supplemental
Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net
assets at end of year (000’s) |
|
|
|
|
|
|
|
| $ |
324,730 |
|
| $ |
1,067,609 |
|
| $ |
495,971 |
|
| $ |
800,957 |
|
| $ |
679,559 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross
Expenses to Average Net Assets |
|
|
|
|
|
|
|
| 0.75 |
% |
| 0.75 |
% |
| 0.75 |
% |
| 0.75 |
% |
| 0.75 |
% |
Net
Investment Income to Average Net Assets |
|
|
|
|
|
|
|
| 1.95 |
% |
| 1.39 |
% |
| 6.27 |
% |
| 3.26 |
% |
| 1.18 |
% |
Portfolio
Turnover Rate |
|
|
|
|
|
|
|
| 74 |
% |
| 75 |
% |
| 46 |
% |
| 71 |
% |
| 97 |
% |
1 Calculated
based on average shares outstanding during the year.
U.S.
Alternative Harvest ETF
FINANCIAL
HIGHLIGHTS
For
a capital share outstanding throughout the year/period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Period
Ended September 30, 2022 |
|
Period
Ended
September
30,
20211 |
|
Net
Asset Value, Beginning Year/Period |
|
|
|
|
|
| $ |
7.72 |
|
| $ |
10.00 |
| |
Income
(Loss) from Investment Operations: |
|
|
|
|
|
|
|
|
| |
Net
investment income (loss) 2 |
|
|
|
|
|
| 0.13 |
|
| (0.01) |
| |
Net
realized and unrealized (loss) on investments |
|
|
|
|
|
| (5.69) |
|
| (2.27) |
| |
Total
from investment operations |
|
|
|
|
|
| (5.56) |
|
| (2.28) |
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Net
asset value, end year/period |
|
|
|
|
|
| $ |
2.16 |
|
| $ |
7.72 |
| |
Total
Return |
|
|
|
|
|
| (71.97) |
% |
| (22.82) |
% |
3 |
|
|
|
|
|
|
|
|
|
| |
Ratios/Supplemental
Data: |
|
|
|
|
|
|
|
|
| |
Net
assets at end of year/period (000’s) |
|
|
|
|
|
| $ |
84,967 |
|
| $ |
6,097 |
| |
|
|
|
|
|
|
|
|
|
| |
Gross
Expenses to Average Net Assets |
|
|
|
|
|
| 0.75 |
% |
| 0.75 |
% |
4 |
Net
Investment Income (Loss) to Average Net Assets |
|
|
|
|
|
| 4.45 |
% |
| (0.38) |
% |
4 |
Portfolio
Turnover Rate |
|
|
|
|
|
| 12 |
% |
| 16 |
% |
3 |
1 The
Fund commenced operations on May 12, 2021.
2 Calculated
based on average shares outstanding during the year/period.
3 Not
annualized.
4 Annualized.
ETF
Managers Trust
30
Maple Street, 2nd
Floor
Summit,
New Jersey 07901
ANNUAL/SEMI-ANNUAL
REPORTS TO SHAREHOLDERS
Additional
information about the Funds’ investments is available in the Funds’ annual and
semi-annual reports to shareholders (when available). In the Funds’ Annual
Report,
you will find a discussion of the market conditions and investment strategies
that significantly affected the Funds’ performance during its last fiscal
year.
STATEMENT
OF ADDITIONAL INFORMATION (SAI)
The
SAI provides more detailed information about the Funds. The SAI is incorporated
by reference into, and is thus legally a part of, this Prospectus.
FOR
MORE INFORMATION
To
request a free copy of the latest annual or semi-annual report, when available,
the SAI or to request additional information about the Funds or to make other
inquiries, please contact us as follows:
Call: 844-ETFMGRS
(383-6477)
Monday
through Friday
8:30
a.m. to 6:30 p.m. (Eastern time)
Write: ETF
Managers Trust
30
Maple Street, 2nd
Floor
Summit,
New Jersey 07901
Visit: www.etfmg.com
INFORMATION
PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION
Reports
and other information about the Funds are available in the EDGAR Database on the
SEC’s Internet site at http://www.sec.gov, or you can receive copies of this
information, after paying a duplicating fee, by electronic request at the
following e-mail address: [email protected].
The
Trust’s Investment Company Act file number: 811-22310