Semi-Annual Shareholder Report
Day Hagan/Ned Davis Research Smart Sector ETF (SSUS)
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (SSFI)
OCTOBER 31, 2021
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TABLE OF CONTENTS
Page | |
Expense Examples | 1 |
Portfolios of Investments | |
Day Hagan/Ned Davis Research Smart Sector ETF (SSUS) | 2 |
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (SSFI) | 3 |
Statements of Assets and Liabilities | 4 |
Statements of Operations | 5 |
Statements of Changes in Net Assets | 6 |
Financial Highlights | 7 |
Notes to Financial Statements | 8 |
Additional Information | 12 |
Expense Examples (Unaudited) | October 31, 2021 |
As a Fund shareholder, you may incur two types of costs: (1) transaction costs, including commissions on trading, as applicable; and (2) ongoing costs, including advisory fees and other Fund expenses. These examples are intended to help you understand your ongoing costs (in dollars) of investing in a Fund and to compare these costs with the ongoing costs of investing in other mutual funds.
The expense examples below are based on an investment of $1,000 invested at May 1, 2021 and held through the period ended October 31, 2021.
The Actual Expense figures in the table below provide information about actual account values and actual expenses. You may use this information, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $ 8,600 account value divided by $ 1,000 = 8.6), then multiply the result by the number in the table under the heading entitled “Actual Expenses Paid During the Period” to estimate the expenses you paid on your account during this period.
The Hypothetical Expense figures in the table below provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in your Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of other funds.
Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs. Therefore, the examples are useful in comparing ongoing costs only and will not help you determine the relative total cost of owning different funds. In addition, if these transactional costs were included, your costs would have been higher.
Beginning | Actual Ending | Hypothetical | Actual | Hypothetical | Annualized | |
Account | Account | Ending | Expenses | Expenses | Net Expense | |
Value | Value | Account Value | Paid During | Paid During | Ratio During | |
Fund | 5/1/21 | 10/31/21 | 10/31/21(1) | the Period | the Period(1)(2) | the Period |
Day Hagan/Ned Davis Research Smart Sector ETF | $1,000.00 | $1,109.40 | $1,021.83 | $3.62(3) | $3.47 | 0.68% |
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF | 1,000.00 | 1,005.60 | 1,024.60 | 0.64(4) | 0.62 | 0.68% |
(1) | Represents the hypothetical 5% annual return before expenses. |
(2) | Expenses are equal to the average hypothetical account value over the period, multiplied by the Fund’s annualized expense ratio, multiplied by the number of days in the most recent fiscal half-year divided by the number of days in the fiscal year (to reflect the one-half year period). |
(3) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 184/365 (to reflect the one-half year period). |
(4) | Expenses are equal to the Fund’s annualized expense ratio multiplied by the average account value over the period, multiplied by 34/365 to reflect the period from September 28, 2021 (date of commencement of operations) to October 31, 2021. |
Semi-Annual Shareholder Report | 1
Day Hagan/Ned Davis Research Smart Sector ETF (SSUS) |
October 31, 2021 (Unaudited) |
Portfolio of Investments Summary Table
Percentage of Fair Value | |
Exchange-Traded Funds | 100.0% |
Total | 100.0% |
Portfolio holdings and allocations are subject to change. As of October 31, 2021, percentages in the table above are based on total investments. Such total investments may differ from the percentages set forth in the following Portfolio of Investments which are computed using the Fund’s total net assets.
Portfolio of Investments
Shares | Fair Value | |||||||
Exchange-Traded Funds — 99.4% | ||||||||
405,776 | Communication Services Select Sector | |||||||
SPDR Fund ETF | $ | 32,583,813 | ||||||
312,300 | Consumer Discretionary Select Sector | |||||||
SPDR Fund ETF | 62,819,145 | |||||||
253,886 | Consumer Staples Select Sector | |||||||
SPDR Fund ETF | 18,089,378 | |||||||
328,489 | Energy Select Sector SPDR Fund ETF | 18,878,263 | ||||||
877,710 | Financial Select Sector SPDR Fund ETF | 35,336,605 | ||||||
78,942 | Health Care Select Sector SPDR Fund ETF | 10,564,018 | ||||||
240,132 | Industrial Select Sector SPDR Fund ETF | 25,091,393 | ||||||
75,777 | Materials Select Sector SPDR Fund ETF | 6,450,138 | ||||||
253,183 | Real Estate Select Sector SPDR Fund ETF | 12,107,211 | ||||||
613,204 | Technology Select Sector SPDR Fund ETF | 99,050,842 | ||||||
162,340 | Utilities Select Sector SPDR Fund ETF | 10,862,169 | ||||||
Total Exchange-Traded Funds (Cost $292,511,459) | $ | 331,832,975 | ||||||
Total Investments — 99.4% (Cost $292,511,459) | $ | 331,832,975 | ||||||
Other Assets less Liabilities — 0.6% | 2,163,765 | |||||||
Net Assets — 100.0% | $ | 333,996,740 |
ETF — Exchange-Traded Fund
SPDR — Standard and Poor’s Depositary Receipts
(See notes which are an integral part of the Financial Statements)
2 | Semi-Annual Shareholder Report
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (SSFI) |
October 31, 2021 (Unaudited) |
Portfolio of Investments Summary Table
Percentage of Fair Value | |
Exchange-Traded Funds | 100.0% |
Total | 100.0% |
Portfolio holdings and allocations are subject to change. As of October 31, 2021, percentages in the table above are based on total investments. Such total investments may differ from the percentages set forth in the following Portfolio of Investments which are computed using the Fund’s total net assets.
Portfolio of Investments
Shares | Fair Value | |||||||
Exchange-Traded Funds — 97.6% | ||||||||
36,720 | SPDR Bloomberg Investment Grade | |||||||
Floating Rate ETF | $ | 1,125,101 | ||||||
56,000 | SPDR Portfolio Corporate Bond ETF | 1,970,640 | ||||||
46,540 | SPDR Portfolio High Yield Bond ETF | 1,240,291 | ||||||
69,680 | SPDR Portfolio Long Term Treasury ETF | 2,929,348 | ||||||
21,980 | Vanguard Emerging Markets | |||||||
Government Bond ETF | 1,714,440 | |||||||
14,040 | Vanguard Mortgage-Backed Securities ETF | 745,664 | ||||||
33,260 | Vanguard Short-Term | |||||||
Inflation-Protected Securities ETF | 1,731,848 | |||||||
13,060 | Vanguard Total International Bond ETF | 740,110 | ||||||
Total Exchange-Traded Funds (Cost $12,167,912) | $ | 12,197,442 | ||||||
Total Investments — 97.6% (Cost $12,167,912) | $ | 12,197,442 | ||||||
Other Assets less Liabilities — 2.4% | 296,992 | |||||||
Net Assets — 100.0% | $ | 12,494,434 |
ETF — Exchange-Traded Fund
SPDR — Standard and Poor’s Depositary Receipts
(See notes which are an integral part of the Financial Statements)
Semi-Annual Shareholder Report | 3
Statements of Assets and Liabilities |
October 31, 2021 (Unaudited) |
Day Hagan/Ned Davis | Day Hagan/Ned Davis | |||||||
Research Smart Sector | Research Smart Sector | |||||||
ETF (SSUS) | Fixed Income ETF (SSFI) | |||||||
Assets: | ||||||||
Investments, at value (Cost $292,511,459 and $12,167,912) | $ | 331,832,975 | $ | 12,197,442 | ||||
Cash and Cash Equivalents | 2,343,701 | 303,220 | ||||||
Total Assets | 334,176,676 | 12,500,662 | ||||||
Liabilities: | ||||||||
Accrued expenses: | ||||||||
Advisory | 179,936 | 6,228 | ||||||
Total Liabilities | 179,936 | 6,228 | ||||||
Net Assets | $ | 333,996,740 | $ | 12,494,434 | ||||
Net Assets consist of: | ||||||||
Paid in Capital | $ | 277,888,200 | $ | 12,453,871 | ||||
Total Distributable Earnings / (Loss) | 56,108,540 | 40,563 | ||||||
Net Assets | $ | 333,996,740 | $ | 12,494,434 | ||||
Net Assets: | $ | 333,996,740 | $ | 12,494,434 | ||||
Shares of Beneficial Interest Outstanding (unlimited number of shares authorized, no par value): | 9,275,000 | 500,000 | ||||||
Net Asset Value (offering and redemption price per share): | $ | 36.01 | $ | 24.99 |
(See notes which are an integral part of the Financial Statements)
4 | Semi-Annual Shareholder Report
Statements of Operations
Day Hagan/Ned Davis | Day Hagan/Ned Davis | |||||||
Research Smart Sector | Research Smart Sector | |||||||
ETF (SSUS) | Fixed Income ETF (SSFI) | |||||||
For the period | ||||||||
Six Months Ended | September 28, 2021(a) | |||||||
October 31, 2021 | through October 31, 2021 | |||||||
(Unaudited) | (Unaudited) | |||||||
Investment Income: | ||||||||
Dividend income | $ | 1,868,684 | $ | 17,283 | ||||
Interest income | 87 | — | ||||||
Total Investment Income | 1,868,771 | 17,283 | ||||||
Expenses: | ||||||||
Advisory | 920,358 | 6,250 | ||||||
Total Net Expenses | 920,358 | 6,250 | ||||||
Net Investment Income | 948,413 | 11,033 | ||||||
Realized and Unrealized Gains (Losses): | ||||||||
Net realized losses from investment transactions | (1,002,237 | ) | — | |||||
Net realized gains from in-kind transactions | 18,871,227 | — | ||||||
Change in unrealized appreciation on investments | 10,319,985 | 29,530 | ||||||
Net Realized and Unrealized Gains (Losses) | 28,188,975 | 29,530 | ||||||
Change in Net Assets Resulting From Operations | $ | 29,137,388 | $ | 40,563 |
(a) | Commencement of operations. |
(See notes which are an integral part of the Financial Statements)
Semi-Annual Shareholder Report | 5
Statements of Changes in Net Assets
Day Hagan/Ned Davis | ||||||||||||
Day Hagan/Ned Davis Research | Research Smart Sector | |||||||||||
Smart Sector ETF (SSUS) | Fixed Income ETF (SSFI) | |||||||||||
For the period | ||||||||||||
Six Months Ended | September 28, 2021(a) | |||||||||||
October 31, 2021 | Year Ended | through October 31, 2021 | ||||||||||
(Unaudited) | April 30, 2021 | (Unaudited) | ||||||||||
From Investment Activities: | ||||||||||||
Operations: | ||||||||||||
Net investment income | $ | 948,413 | $ | 840,949 | $ | 11,033 | ||||||
Net realized gains from investment and in-kind transactions | 17,868,990 | 14,731,390 | — | |||||||||
Change in unrealized appreciation/depreciation on investments | 10,319,985 | 29,693,548 | 29,530 | |||||||||
Change in net assets resulting from operations | 29,137,388 | 45,265,887 | 40,563 | |||||||||
Distributions to Shareholders From: | ||||||||||||
Net investment income | — | (684,487 | ) | — | ||||||||
Change in net assets from distributions | — | (684,487 | ) | — | ||||||||
Capital Transactions: | ||||||||||||
Proceeds from shares issued | 162,355,092 | 191,689,432 | 12,453,871 | |||||||||
Cost of shares redeemed | (79,032,792 | ) | (61,011,503 | ) | — | |||||||
Change in net assets from capital transactions | 83,322,300 | 130,677,929 | 12,453,871 | |||||||||
Change in net assets | 112,459,688 | 175,259,329 | 12,494,434 | |||||||||
Net Assets: | ||||||||||||
Beginning of period | 221,537,052 | 46,277,723 | — | |||||||||
End of period | $ | 333,996,740 | $ | 221,537,052 | $ | 12,494,434 | ||||||
Share Transactions: | ||||||||||||
Issued | 4,800,000 | 6,850,000 | 500,000 | |||||||||
Redeemed | (2,350,000 | ) | (2,125,000 | ) | — | |||||||
Change in shares | 2,450,000 | 4,725,000 | 500,000 |
(a) | Commencement of operations. |
(See notes which are an integral part of the Financial Statements)
6 | Semi-Annual Shareholder Report
Financial Highlights
Net | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
realized | Ratio of | Ratio of Net | Net | |||||||||||||||||||||||||||||||||||||||||||||||||||||
Net Asset | and | Distributions | Net Asset | Ratio of Net | Gross | Investment | Assets | |||||||||||||||||||||||||||||||||||||||||||||||||
Value, | Net | unrealized | Total from | from net | Value, | Total | Total | Expenses to | Expenses to | Income to | at end | |||||||||||||||||||||||||||||||||||||||||||||
beginning | investment | gains | investment | investment | Total | end of | return at | return at | Average | Average | Average | of period | Portfolio | |||||||||||||||||||||||||||||||||||||||||||
of period | income(a) | (losses) | activities | income | distributions | period | NAV(b)(c) | market(b)(d) | Net Assets(e) | Net Assets(e) | Net Assets(e) | (000’s) | turnover(b)(f) | |||||||||||||||||||||||||||||||||||||||||||
Day Hagan/Ned Davis Research Smart Sector ETF (SSUS) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Six Months ended October 31, 2021 (Unaudited) | $ | 32.46 | 0.12 | 3.43 | 3.55 | — | — | $ | 36.01 | 10.94 | % | 11.22 | % | 0.68 | % | 0.68 | % | 0.70 | % | $ | 333,997 | 31 | % | |||||||||||||||||||||||||||||||||
Year Ended April 30, 2021 | $ | 22.04 | 0.20 | 10.36 | 10.56 | (0.14 | ) | (0.14 | ) | $ | 32.46 | 48.02 | % | 47.19 | % | 0.68 | % | 0.68 | % | 0.71 | % | $ | 221,537 | 84 | % | |||||||||||||||||||||||||||||||
January 16, 2020(g) through April 30, 2020 | $ | 24.86 | 0.01 | (2.83 | ) | (2.82 | ) | — | — | $ | 22.04 | (11.34 | )% | (10.90 | )% | 0.68 | % | 0.68 | % | 0.23 | % | $ | 46,278 | 27 | % | |||||||||||||||||||||||||||||||
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (SSFI) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
September 28, 2021(g) through October 31, 2021 (Unaudited) | $ | 24.85 | 0.03 | 0.11 | 0.14 | — | — | $ | 24.99 | 0.56 | % | 0.56 | % | 0.68 | % | 0.68 | % | 1.16 | % | $ | 12,494 | 0 | % |
(a) | Calculated using the average shares method. |
(b) | Not annualized for periods less than one year. |
(c) | Net asset value total return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, if any, and redemption on the last day of the period at net asset value. This percentage is not an indication of the performance of a shareholder’s investment in the Fund based on market value due to differences between the market price of the shares and the net asset value per share of the Fund. |
(d) | Market value total return is calculated assuming an initial investment made at the market value at the beginning of the period, reinvestment of all dividends and distributions at net asset value during the period, if any, and redemption on the last day of the period at market value. Market value is determined by the composite closing price. Composite closing security price is defined as the last reported sale price from any primary listing market (e.g., NYSE Arca) or participating regional exchanges or markets. The composite closing price is the last reported sale price from any of the eligible sources, regardless of volume and not an average price and may have occurred on a date prior to the close of the reporting period. Market value may be greater or less than net asset value, depending on the Fund’s closing price on the listing market. |
(e) | Annualized for periods less than one year. |
(f) | Portfolio turnover increases/decreases due to change within portfolio holdings during the period. |
(g) | Commencement of operations. |
(See notes which are an integral part of the Financial Statements)
Semi-Annual Shareholder Report | 7
Notes to Financial Statements | October 31, 2021 (Unaudited) |
(1) Organization
Strategy Shares (the “Trust”) was organized on September 7, 2010 as a Delaware statutory trust. The Trust is registered under the Investment Company Act of 1940 (the “1940 Act”), as an open-end management investment company. The Declaration of Trust permits the Trust to issue an unlimited number of shares of beneficial interest (“Shares”) in one or more series representing interests in separate portfolios of securities. Currently, the Trust offers its Shares in five separate series. The assets of each series are segregated and a shareholder’s interest is limited to the series in which shares are held. The accompanying Financial Statements relate to the following series: Day Hagan/Ned Davis Research Smart Sector ETF (SSUS) and Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (SSFI) (individually referred to as a “Fund,” or collectively as the “Funds”). Each Fund is classified as non-diversified under the 1940 Act and is an actively-managed exchange-traded fund. The investment objective of the Day Hagan/Ned Davis Research Smart Sector ETF is to seek long-term capital appreciation and preservation of capital. The investment objective of the Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF is total return, consisting of income and capital appreciation. The Funds’ prospectuses provide a description of the each Fund’s investment objectives, policies, and strategies.
The Day Hagan/Ned Davis Research Smart Sector ETF commenced operations on January 16, 2020 and the Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF commenced operations on September 28, 2021.
Shares of each Fund are listed and traded on the NYSE Arca, Inc. Market prices for the Shares may be different from their net asset value (“NAV”) . Each Fund issues and redeems Shares on a continuous basis at NAV only in large blocks, currently 25,000 Shares, called “Creation Units.” Creation Units are issued and redeemed principally in-kind for securities included in a specified universe. Once created, Shares generally trade in the secondary market at market prices that change throughout the day in amounts less than a Creation Unit.
Under the Trust’s organizational documents, its officers and Board of Trustees (“the Board”) are indemnified against certain liabilities arising out of the performance of their duties to the Funds. In addition, in the normal course of business, the Trust may enter into contracts with vendors and others that provide for general indemnifications. The Trust’s maximum exposure under these arrangements is unknown, as this would involve future claims that may be made against the Trust. However, based on experience, the Trust expects that risk of loss to be remote.
(2) Significant Accounting Policies
The following is a summary of significant accounting policies consistently followed by each Fund in the preparation of its financial statements. These policies are in conformity with generally accepted accounting principles in the United States of America (“GAAP”). Each Fund is an investment company and accordingly follows the investment company accounting and reporting guidance of the Financial Accounting Standards Board (“FASB”) Accounting Standard Codification Topic 946 Financial Services - Investment Companies. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts of assets, liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of increases and decreases in net assets from operations during the reporting period. Actual results could differ from those estimates.
A. Investment Valuations
The Funds hold investments at fair value. Fair value is defined as the price that would be expected to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The valuation techniques used to determine fair value are further described below.
Security values are ordinarily obtained through the use of independent pricing services in accordance with procedures adopted by the Trust’s Board. Pursuant to these procedures, the Funds may use a pricing service, bank, or broker-dealer experienced in such matters to value the Funds’ securities. When reliable market quotations are not readily available for any security, the fair value of that security will be determined by a committee established by the Board in accordance with procedures adopted by the Board. The fair valuation process is designed to value the subject security at the price the Funds would reasonably expect to receive upon its current sale. Additional consideration is given to securities that have experienced a decrease in the volume or level of activity or to circumstances that indicate that a transaction is not orderly.
The Trust has a three-tier fair value hierarchy that is dependent upon the various “inputs” used to determine the value of the Funds’ investments. The valuation techniques described below maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. These inputs are summarized in the three broad levels listed below:
● | Level 1 – Quoted prices in active markets for identical assets. |
● | Level 2 – Other observable pricing inputs at the measurement date (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.). |
● | Level 3 – Significant unobservable pricing inputs at the measurement date (including the Fund’s own assumptions in determining the fair value of investments). |
The inputs or methodology used for valuing investments are not necessarily an indication of the risk associated with investing in those investments.
Equity securities (including foreign equity securities) traded on a securities exchange are valued at the last reported sales price on the principal exchange. Equity securities quoted by Nasdaq are valued at the Nasdaq official closing price. If there is no reported sale on the principal exchange, and in the case of over-the-counter securities, equity securities are valued at a bid price estimated by the security pricing service. In each of these situations, valuations are typically categorized as Level 1 in the fair value hierarchy.
Debt securities traded on a national securities exchange or in the over-the-counter market are valued at the last reported sales price on the principal exchange. If there is no reported sale on the principal exchange, and for all other debt securities, debt securities are valued at a bid price estimated by a security pricing service. In each of these situations, valuations are typically categorized as Level 2 in the fair value hierarchy.
8 | Semi-Annual Shareholder Report
Notes to Financial Statements (Continued)
The following table provides the fair value measurement as of October 31, 2021.
Total | ||||||||
Fund | Level 1 | Investments | ||||||
Day Hagan/Ned Davis Research | ||||||||
Smart Sector ETF | ||||||||
Exchange-Traded Funds | $ | 331,832,975 | $ | 331,832,975 | ||||
Total Investments | $ | 331,832,975 | $ | 331,832,975 | ||||
Day Hagan/Ned Davis Research | ||||||||
Smart Sector Fixed Income ETF | ||||||||
Exchange-Traded Funds | $ | 12,197,442 | $ | 12,197,442 | ||||
Total Investments | $ | 12,197,442 | $ | 12,197,442 | ||||
For the period ended October 31, 2021, there were no Level 3 investments for which significant unobservable inputs were used to determine fair value.
B. Security Transactions and Related Income
Investment transactions are accounted for no later than the first calculation of the NAV on the business day following the trade date. For financial reporting purposes, however, security transactions are accounted for on the trade date on the last business day of the reporting period. Discounts and premiums on securities purchased are amortized over the lives of the respective securities using the effective interest method. Securities gains and losses are calculated on the identified cost basis. Interest income and expenses are accrued daily. Dividends, less foreign tax withholding, if any, are recorded on the ex-dividend date. Investment income from non-U.S. sources received by a Fund is generally subject to non-U.S. withholding taxes at rates ranging up to 30%. Such withholding taxes may be reduced or eliminated under the terms of applicable U.S. income tax treaties. The Funds may be subject to foreign taxes on gains in investments or currency repatriation. The Funds accrue such taxes, as applicable, based on their current interpretation of tax rules in the foreign markets in which they invest.
C. Cash and Cash Equivalents
Idle cash may be swept into various overnight demand deposits and is classified as cash and cash equivalents on the Statements of Assets and Liabilities. The Funds maintain cash in bank deposit accounts which, at times, may exceed United States federally insured limits. Amounts swept overnight are available on the next business day.
D. Dividends and Distributions to Shareholders
Dividends to shareholders are recorded on the ex-dividend date. For the Day Hagan/Ned Davis Research Smart Sector ETF, dividends from net investment income, if any, are declared and paid annually. For the Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF, dividends from net investment income, if any, are declared and paid quarterly. Net realized capital gains, if any, are distributed at least annually.
The amount of dividends from net investment income and net realized gains are determined in accordance with federal income tax regulations, which may differ from GAAP. These “book/tax” differences are considered either temporary or permanent in nature. To the extent these differences are permanent in nature (e.g., distributions and income received from pass-through investments, differing treatment of income relating to swap agreements), such amounts are reclassified within the capital accounts based on their nature for federal income tax purposes; temporary differences do not require reclassification. Temporary differences are primarily due to wash sales and differing
treatment on certain investments. To the extent dividends and distributions exceed net investment income and net realized gains for tax purposes, they are reported as distribution of capital.
The Funds may own shares of real estate investments trusts (“REITs”), which report information on the source of their distributions annually. Distributions received from investments in REITs in excess of income from underlying investments are recorded as realized gain and/or as a reduction to the cost of the individual REIT.
E. Allocation of Expenses
Expenses directly attributable to a Fund are charged to that Fund. Expenses not directly attributable to a Fund are allocated proportionally among all series of the Trust in relation to the net assets of each series or on another reasonable basis. The Trust may share expenses with Mutual Fund and Variable Insurance Trust, an open-end management investment company managed by Rational Advisors, Inc. Those expenses that are shared are allocated proportionally among each of the trusts or on another reasonable basis.
(3) Investment Advisory and Other Contractual Services A. Investment Advisory Fees
Donald L. Hagan, LLC, doing business as Day Hagan Asset Management (the “Advisor”), serves as the Funds’ investment advisor pursuant to a Management Agreement. Subject at all times to the supervision and approval of the Board, the Advisor is responsible for the overall management of the Funds. The Trust has arranged for distribution, custody, fund administration, transfer agency and all other services necessary for the Funds to operate. The Advisor receives a fee for its services, a “Unified Fee.” Each Fund pays 0.68% of its average daily net assets, computed daily and paid monthly. Out of the Unified Fee, the Advisor is obligated to pay or arrange for the payment of substantially all expenses of the Funds, (including, without limitation, transfer agent fees, administrative fees and expenses, custodian fees, legal fees, accounting fees, any other expenses (including clerical expenses) of issue, sale, repurchase or redemption of shares, expenses of registering or qualifying shares for sale, transfer taxes, all expenses of preparing the Trust’s registration statements and prospectuses for the Funds, and the cost of printing and delivering to shareholders prospectuses and reports), except the Funds’ management fee; taxes; brokerage commissions and trading costs; interest (including borrowing costs and overdraft charges); short sale dividends and interest expenses; acquired fund fees and expenses; and non-routine or extraordinary expenses of the Funds (such as litigation or reorganizational costs), each of which is paid by the Funds. The Advisor’s Unified Fee is designed to cause substantially all of the Funds’ expenses to be paid and to compensate the Advisor for providing services for the Funds.
B. Distribution and Shareholder Services Fees
Foreside Fund Services, LLC (the “Distributor”) is the principal underwriter and distributor of each Fund’s Shares. The Distributor is compensated by the Advisor in accordance with a Distribution Services Agreement between the Advisor and the Distributor. The Trust has adopted but has yet to implement a Rule 12b-1 Distribution Plan (the “Plan”). The Plan is designed to compensate or reimburse financial intermediaries (including the Distributor, the Advisor, and their affiliates) for activities principally intended to result in the sale of Fund shares, such as advertising and marketing of shares (including printing and disseminating prospectuses and sales literature to prospective shareholders and financial intermediaries) and providing incentives to
Semi-Annual Shareholder Report | 9
Notes to Financial Statements (Continued)
financial intermediaries to sell shares. The Plan is also designed to cover the cost of administrative services performed in conjunction with the sale of shares, including, but not limited to, shareholder services, recordkeeping services and educational services, as well as the costs of implementing and operating the Plan. In accordance with the Plan, the Distributor may enter into agreements with financial intermediaries and dealers relating to distribution and/or marketing services with respect to the Funds. Pursuant to the Plan, the Funds may pay a 12b-1 fee not to exceed 0.25% per year of each Fund’s average daily net assets. No 12b-1 fee is currently paid by the Funds and the Board has not approved any payments under the Plan.
(4) Investment Transactions
Purchases and sales of investments, excluding in-kind transactions and short-term investments, for the period ended October 31, 2021 were as follows:
Fund | Purchases | Sales | ||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 84,806,932 | $ | 84,079,059 |
Purchases and sales of in-kind transactions for the period ended October 31, 2021 were as follows:
Fund | Purchases | Sales | ||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 161,165,325 | $ | 78,142,783 | ||||
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF | 12,167,912 | — |
(5) Capital Share Transactions
Shares are issued and redeemed by each Fund only in aggregations of a specified number of shares or multiples thereof at net asset value. Except when aggregated in Creation Units, shares of each Fund are not redeemable. Transactions in shares for each Fund are disclosed in detail on the Statements of Changes in Net Assets.
The consideration for the purchase of Creation Units of a Fund generally consists of the in-kind deposit of a designated basket of securities, which constitutes an optimized representation of the securities of that Fund’s specified universe, and an amount of cash. Investors purchasing and redeeming Creation Units may be charged a transaction fee to cover the transfer and other transactional costs it incurs to issue or redeem Creation Units. The standard charge and maximum transaction fee for each Fund are $250 and $1,000, respectively.
From time to time, settlement of securities related to subscriptions-in-kind or redemptions-in-kind may be delayed. In such cases, securities related to in-kind contributions are reflected as “Due from custodian” and securities related to in-kind redemptions are reflected as “Securities payable related to in-kind transactions” on the Statements of Assets and Liabilities.
During the period ended October 31, 2021, the Funds received securities in exchange for subscriptions of capital shares (subscriptions-in-kind) as follows:
Fund | Fair Value | |||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 161,165,325 | ||
Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF | 12,167,912 |
(6) Federal Income Taxes
It is the policy of each Fund to qualify or continue to qualify as a regulated investment company by complying with the provisions available to certain investment companies, as defined in applicable sections of the Internal Revenue Code, and to make distributions of net investment income and net realized capital gains sufficient to relieve it from all, or substantially all, federal income taxes.
The Trust has evaluated tax positions taken or expected to be taken in the course of preparing each Fund’s tax returns to determine whether it is more-likely-than not (i.e., greater than 50-percent chance) that each tax position will be sustained upon examination by a taxing authority based on the technical merits of the position. A tax position that meets the more-likely-than-not recognition threshold is measured to determine the amount of benefit to recognize in the financial statements. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in an increase in a liability for taxes payable (or a reduction of a tax refund receivable), including the recognition of any related interest and penalties as an operating expense. Tax positions taken in tax years remain subject to examination by tax authorities (generally three years plus the interim tax period since then for federal income tax purposes). The determination has been made that there are not any uncertain tax positions that would require the Funds to record a tax liability and, therefore, there is no impact to the Funds’ financial statements. The Funds recognize interest and penalties, if any, related to unrecognized tax benefits as income tax expense on the Statements of Operations. During the period ended October 31, 2021, the Funds did not incur any interest or penalties. The tax year end for the Funds is April 30th.
As of April 30, 2021, the tax cost of securities and the breakdown of unrealized appreciation/(depreciation) were as follows:
Net Unrealized | ||||||||||||||||
Tax Cost of | Unrealized | Unrealized | Appreciation/ | |||||||||||||
Fund | Securities | Appreciation | Depreciation | (Depreciation) | ||||||||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 191,265,917 | $ | 28,627,667 | $ | — | $ | 28,627,667 |
The differences between book-basis and tax-basis unrealized appreciation/depreciation are attributable primarily to basis adjustments for wash sales.
The tax character of distributions paid during the tax year ended April 30, 2021 were as follows:
Distributions paid from | ||||||||||||||||||||
Ordinary | Net Long Term | Total Taxable | Return of | Total | ||||||||||||||||
Fund | Income | Capital Gains | Distributions | Capital | Distributions Paid | |||||||||||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 684,487 | $ | — | $ | 684,487 | $ | — | $ | 684,487 |
10 | Semi-Annual Shareholder Report
Notes to Financial Statements (Continued)
As of April 30, 2021, the components of distributed earnings/(loss) on a tax basis were as follows:
Undistributed | Undistributed | Accumulated | Unrealized | Total | ||||||||||||||||||||
Ordinary | Long Term | Distributed | Capital and | Appreciation/ | Distributed | |||||||||||||||||||
Fund | Income | Capital Gains | Earnings | Other Losses | (Depreciation) | Earnings/(Loss) | ||||||||||||||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 178,698 | $ | — | $ | 178,698 | $ | (1,835,213 | ) | $ | 28,627,667 | $ | 26,971,152 |
As of April 30, 2021, the Day Hagan/Ned Davis Research Smart Sector ETF utilized capital loss carryforwards (“CLCF”) of $1,306,209 to offset capital gains. The Day Hagan/Ned Davis Research Smart Sector ETF has a net CLCF as summarized in the table below. This CLCF is not subject to expiration:
Fund | Short-Term Amount | Long-Term Amount | Total | |||||||||
Day Hagan/Ned Davis Research Smart Sector ETF | $ | 1,835,213 | $ | — | $ | 1,835,213 |
(7) Investment Risks ETF Risk
The NAV of a Fund can fluctuate up or down, and you could lose money investing in a Fund if the prices of the securities owned by the Fund decline. In addition, a Fund may be subject to the following risks: (1) the market price of a Fund’s shares may trade above or below its NAV; (2) an active trading market for a Fund’s shares may not develop or be maintained; or (3) trading of a Fund’s shares may be halted if the listing exchange’s officials deem such action appropriate, the shares are delisted from the exchange, or the activation of market-wide “circuit breakers” (which are tied to large decreases in stock prices) halts stock trading generally.
Market Risk
Overall market risks may also affect the value of the Funds. The market values of securities or other investments owned by the Funds will go up or down, sometimes rapidly or unpredictably. Factors such as economic growth and market conditions, interest rate levels, exchange rates and political events affect the securities markets. Changes in market conditions and interest rates generally do not have the same impact on all types of securities and instruments. Unexpected local, regional or global events and their aftermath, such as war; acts of terrorism; financial, political or social disruptions; natural, environmental or manmade disasters; the spread of infectious illnesses or other public health issues; recessions and depressions; or other tragedies, catastrophes and events could have a significant impact on the Funds and their investments and could result in increased premiums or discounts to the Funds’ net asset values, and may impair market liquidity, thereby increasing liquidity risk. Such events can cause investor fear and panic, which can adversely affect the economies of many companies, sectors, nations, regions and the market in general, in ways that cannot necessarily be foreseen. The Funds could lose money over short periods due to short-term market movements and over longer periods during more prolonged market downturns. During a general market downturn, multiple asset classes may be negatively affected. In times of severe market disruptions you could lose your entire investment.
An outbreak of infectious respiratory illness caused by a novel coronavirus known as COVID-19 was first detected in China in December 2019 and subsequently spread globally. This coronavirus has resulted in, among other things, travel restrictions, closed international borders, enhanced health screenings at ports of entry and elsewhere, disruption of and delays in healthcare service preparation and delivery, prolonged quarantines, significant disruptions to business operations, market closures, cancellations and restrictions, supply chain disruptions, lower consumer demand, and significant volatility and declines in global financial markets, as well as general concern and uncertainty. The impact of COVID-19 has adversely affected, and other infectious illness outbreaks that may arise in the future could adversely affect, the economies of many nations and the entire global economy, individual issuers and capital markets in ways that cannot necessarily be foreseen. In addition, the impact of infectious illnesses in emerging market countries may be greater due to generally less established healthcare systems. Public health crises caused by the COVID-19 outbreak may exacerbate other pre-existing political, social and economic risks in certain countries or globally. The duration of the COVID-19 outbreak and its effects cannot be determined with certainty.
Underlying Fund Risk
The ETFs in which the Funds invest are subject to investment advisory and other expenses, which will be indirectly paid by the Funds. As a result, the cost of investing in the Funds will be higher than the cost of investing directly in the ETFs and may be higher than other funds that invest directly in stocks and bonds. Each of the ETFs is subject to its own specific risks.
As of October 31, 2021, 29.66% of the Day Hagan/Ned Davis Research Smart Sector ETF’s net assets were invested in the Technology Select Sector SPDR Fund ETF. The financial statements of the Technology Select Sector SPDR Fund ETF, including its portfolio of investments, can be found at the SEC’s website www.sec.gov and should be read in conjunction with the Day Hagan/Ned Davis Research Smart Sector ETF’s financial statements.
(8) Subsequent Events
Management of the Funds has evaluated the need for disclosures and/or adjustments resulting from subsequent events through the date these financial statements were issued. Based upon this evaluation, no additional disclosures or adjustments were required to the financial statements as of October 31, 2021.
Semi-Annual Shareholder Report | 11
Additional Information
Consideration and Approval of Management Agreement between Strategy Shares and Day Hagan Asset Management with respect to Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF
(Unaudited)
In connection with a regular telephonic meeting held on June 18, 2021, the Board of Trustees (the “Board” or the “Trustees”) of Strategy Shares (the “Trust”), including a majority of the Trustees who are not “interested persons,” as that term is defined in the Investment Company Act of 1940, as amended, discussed the approval of the management agreement between the Trust and Day Hagan Asset Management (“Day Hagan”) with respect to Day Hagan/Ned Davis Research Smart Sector Fixed Income ETF (the “Fund”), a series of the Trust (the “Management Agreement”).
The Board was assisted by legal counsel throughout the review process. The Board relied upon the advice of legal counsel and its own business judgment in evaluating the Management Agreement and the weight to be given to each factor considered. The conclusions reached by the Board were based upon a comprehensive evaluation and discussion of all the information provided and were not the result of any one factor. Moreover, each Trustee may have afforded different weight to the various factors in reaching his conclusions with respect to the Management Agreement. In connection with their deliberations regarding approval of the Management Agreement, the Board reviewed materials prepared by Day Hagan (the “Day Hagan 15(c) Response”).
Nature and Extent of Services. The Board reviewed the services that Day Hagan would provide to the Fund and information concerning the financial condition and resources, personnel, business, operations, and compliance program of Day Hagan. The Board noted its familiarity with the key personnel serving the Fund and other affiliated funds, and discussed the consistent and quality services provided by the dedicated team of qualified professionals at Day Hagan. The Board then discussed the firm’s strong culture of compliance and risk management program. After further discussion and review of the Day Hagan 15(c) Response, the Board concluded that Day Hagan would provide an acceptable level of services to the Fund.
Performance. The Board reviewed information regarding a composite of private accounts that Day Hagan managed with a strategy similar to that of the of the Fund, the Day Hagan/Ned Davis Research Smart Sector Fixed Income Strategy Composite (the “Composite”) for the 1-year period ended May 28, 2021, and the period from the Composite’s inception on December 6, 2019, through May 28, 2021. The Board noted that the Composite had outperformed the Bloomberg Barclays U.S. Aggregate Bond Total Return Index for both the 1-year and since inception periods. After further discussion and review of the Day Hagan 15(c) Response, the Board acknowledged the performance results of the Composite under Day Hagan’s management, and noted that the Board would revisit the Fund’s performance after it commenced investment operations.
Fees and Expenses. The Board reviewed the proposed advisory fee for the Fund of 0.68% as compared to a peer group of funds that invested primarily in U.S. and international fixed income securities and the Morningstar Total Bond Market category. The Board considered that the fee payable to Day Hagan was a “unitary fee” under which Day Hagan would be responsible for paying all of the Fund’s routine expenses, with certain exceptions including brokerage and trading costs, interest, acquired fund fees and expenses, and non-routine or extraordinary expenses. The Board noted that the proposed unitary fee was within the range of net expenses charged to the peer group and the Morningstar category. After further discussion and review of the Day Hagan 15(c) Response, the Board concluded that the proposed fee payable to Day Hagan was reasonable.
Profitability. The Board reviewed the projected profitability analysis that Day Hagan had provided with respect to Fund and considered that Day Hagan expected to realize a profit from its management of the Fund in the first two years of operations.
Economies of Scale. The Board considered the terms of the Management Agreement and noted that the fee payable under the Agreement was a unitary fee, and the Agreement did not contain breakpoints that would reduce the fee rate payable by the Fund as assets reached certain levels. The Board considered that Day Hagan, in its 15(c) Response, stated that it did not currently plan to add breakpoints to its fee rate. After further discussion, the Board determined that the issue of economies of scale would be revisited as assets of the Fund grew materially.
“Fall-out” Benefits. The Board considered the fall-out benefits that Day Hagan was expected to receive from its relationship with the Fund and the Trust.
Conclusion. The Board considered many factors, and no single factor was determinative to the decision of the Board. Having reviewed and discussed in depth such information from Day Hagan as the Board believed to be reasonably necessary to evaluate the terms of the Management Agreement, and as assisted by the advice of counsel, the Board concluded that approval of the Management Agreement was in the best interests of the Fund and its future shareholders.
12 | Semi-Annual Shareholder Report
Additional Information (Continued)
Statement Regarding Liquidity Risk Management Program
Effective June 1, 2019, Strategy Shares (the “Trust”), on behalf of its series (collectively, the “Funds”), implemented a written liquidity risk management program (the “Program”) pursuant to Rule 22e-4 (the “Rule”) under the Investment Company Act of 1940, as amended. As required by the Rule, the Program has been approved by the Board of Trustees of the Trust (the “Board”). The Board also approved the designation of a committee composed of appointed Trust officers, to serve as the administrator (“LPA”) for each Fund’s Program.
Pursuant to the Rule, the LPA provided a report to the Board (the “Report”) covering the period from June 1, 2020 to June 30, 2021 (the “Review Period”) addressing the operation of the Program and assessing its adequacy and effectiveness of implementation, including, if applicable, the operation of a Fund’s highly liquid investment minimum (“HLIM”) and any material changes to the Program. The LPA also conducted the initial annual review each Fund’s liquidity risk (defined as the risk that the Fund could not meet requests for redemption without significant dilution of remaining investors’ interests in the Fund), taking into account applicable factors and considerations specified in the Program.
During the Review Period, the LPA oversaw implementation of the Program and monitoring of each Fund’s liquidity risk on an ongoing basis as set forth in the Program. In accordance with the Rule, the Program includes policies and procedures that provide for: (1) assessment, management, and review (no less frequently than annually) of each Fund’s liquidity risk; (2) as applicable, classification of each Fund’s portfolio holdings into one of four liquidity categories based on the number of days; (3) as applicable, establishing and maintaining compliance with a Fund’s HLIM; and (4) prohibiting a Fund’s acquisition of illiquid investments that would result in the Fund holding more than 15% of its net assets in illiquid assets. In addition, for Funds that reserve the right to effect redemptions in-kind, the Rule requires the Fund to establish redemption in-kind policies and procedures governing how and when it will engage in such redemptions.
Key Conclusions of the Report
The Report stated that the Program was implemented and operated effectively during the Review Period to achieve the goal of assessing and managing each Fund’s liquidity risk during the Review Period. Additionally, the Report stated that there were no material changes to the Program recommended pursuant to the LPA’s review.
There were no material liquidity events that impacted the Funds identified in the Report and none of the Funds were required to comply with the HLIM provisions of the Rule during the Review Period.
The Report noted that each Fund complied with the 15% limitation on illiquid investments during the Review Period and further stated that there were no redemptions in-kind effected by any of the Funds pursuant to the Program during the Review Period.
Semi-Annual Shareholder Report | 13
VOTING PROXIES ON FUND PORTFOLIO SECURITIES
A copy of the policies and procedures that the Funds use to determine how to vote proxies relating to securities held in the Funds’ portfolios, as well as a record of how the Funds voted any such proxies during the most recent 12-month period ended June 30, is available without charge and upon request by calling 1-800-594-7930 or at www.dhfunds.com. This information is also available from the EDGAR database on the SEC’s website at www.sec.gov.
QUARTERLY PORTFOLIO SCHEDULE
The Funds file with the SEC a complete schedule of their portfolio holdings, as of the close of the first and third quarters of their fiscal year, on Form N-PORT. These filings are available on the SEC’s website at www.sec.gov. You may also access this information at www.dhfunds.com by selecting “Form N-PORT.”
Donald L. Hagan, LLC, doing business as Day Hagan Asset Management, is the investment advisor of the Funds. Day Hagan Asset Management maintains corporate records of the Funds. Foreside Fund Services, LLC is the principal underwriter and distributor of the Funds’ shares.
Exchange-traded funds are not bank deposits or obligations, are not guaranteed by any bank, and are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other government agency. Investment in exchange-traded funds involves investment risk, including the possible loss of principal.
This report is authorized for distribution to prospective investors only when preceded or accompanied by a prospectus which contains facts concerning the Funds’ objectives and policies, management fees, expenses and other information.
Day Hagan/Ned Davis Research | Day Hagan/Ned Davis Research |
Smart Sector ETF (SSUS) | Smart Sector Fixed Income ETF (SSFI) |
Cusip 86280R803 | Cusip 86280R860 |
1-800-594-7930 | |