ck0001137360-20210430
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PROSPECTUS |
|
|
September
1, 2021 |
|
VANECK®
China
Bond ETF CBON®
|
|
|
Principal
U.S. Listing Exchange: NYSE Arca, Inc. |
The
U.S. Securities and Exchange Commission ("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. |
800.826.2333 vaneck.com
SUMMARY
INFORMATION
INVESTMENT OBJECTIVE
VanEck®
China
Bond ETF1
(the “Fund”) seeks to replicate as closely as possible, before fees and
expenses, the price and yield performance of the ChinaBond China High Quality
Bond Index (the “Index”).
FUND FEES AND EXPENSES
The following tables describe
the fees and expenses that 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 tables and
examples below.
|
|
|
|
|
|
Shareholder Fees (fees paid directly from
your investment) |
None |
Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
Fee |
0.40 |
% |
|
|
|
|
|
|
Other
Expenses |
0.28 |
% |
|
|
|
|
|
|
Total
Annual Fund Operating Expenses(a) |
0.68 |
% |
|
|
Fee
Waivers and Expense Reimbursement(a) |
-0.18 |
% |
|
|
Total
Annual Fund Operating Expenses After Fee Waivers and Expense
Reimbursement(a) |
0.50 |
% |
|
|
|
|
|
(a) Van Eck Associates
Corporation (the “Adviser”) has agreed to waive fees and/or pay Fund expenses to
the extent necessary to prevent the operating expenses of the Fund (excluding
acquired fund fees and expenses, interest expense, trading expenses, taxes and
extraordinary expenses) from exceeding 0.50% of the Fund’s average daily net
assets per year until at least September 1,
2022. During such time, the expense limitation is expected to
continue until the Fund’s Board of Trustees acts to discontinue all or a portion
of such expense limitation.
EXPENSE EXAMPLE
This example is intended to help
you compare the cost of investing in the Fund with the cost of investing in
other funds. This example does not take into account brokerage commissions that
you pay when purchasing or selling Shares of the
Fund.
The example assumes that you invest $10,000
in the Fund for the time periods indicated and then sell or hold all of your
Shares at the end of those periods. The example also assumes that your
investment has a 5% annual return and that the Fund’s operating expenses remain
the same (except that the example incorporates the fee waivers and/or expense
reimbursement arrangement for only the first year).
Although your actual costs may be higher
or lower, based on these assumptions, your costs would be:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
YEAR |
EXPENSES |
|
|
1 |
$51 |
|
|
|
3 |
$199 |
|
|
|
5 |
$361 |
|
|
|
10 |
$830 |
|
|
|
|
|
|
PORTFOLIO
TURNOVER
The Fund will pay transaction
costs, such as commissions, when it purchases and sells securities (or “turns
over” its portfolio). A higher portfolio turnover will cause the Fund to incur
additional transaction costs and may result in higher taxes when Fund Shares are
held in a taxable account. These costs, which are not reflected in annual fund
operating expenses or in the example, may affect the Fund’s performance. During
the most recent fiscal year, the Fund’s portfolio turnover rate was
17% of the average value of its
portfolio.
1
Prior to September 1, 2021, the
Fund's name was VanEck Vectors®
ChinaAMC
China Bond ETF.
PRINCIPAL INVESTMENT
STRATEGIES
The
Fund normally invests at least 80% of its total assets in securities that
comprise the Fund’s benchmark index. The Index is comprised of fixed-rate,
Renminbi (“RMB”)-denominated bonds issued in the People’s Republic of China
(“China” or the “PRC”) by Chinese credit, governmental and quasi-governmental
(e.g., policy banks) issuers (“RMB Bonds”). Chinese credit issuers are generally
considered to be issuers of central enterprise bonds, local enterprise bonds,
medium-term notes, corporate bonds and railway debt. Credit RMB Bonds must have
an issuer rating of AAA or equivalent by one or more of the Chinese local rating
agencies recognized by the relevant authorities in the PRC to be included in the
Index. China currently has three policy banks, which are state-owned banks
responsible for financing economic and trade development and state invested
projects. As of June 30, 2021, the Index was comprised of 5,467 bonds of 854
issuers. The Fund’s 80% investment policy is non-fundamental and may be changed
without shareholder approval upon 60 days’ prior written notice to
shareholders.
The
Fund, using a “passive” or indexing investment approach, attempts to approximate
the investment performance of the Index. Unlike many investment companies that
try to “beat” the performance of a benchmark index, the Fund does not try to
“beat” the Index and does not take temporary defensive positions that are
inconsistent with its investment objective of seeking to replicate the Index.
Because of the practical difficulties and expense of purchasing all of the
securities in the Index, the Fund does not purchase all of the securities in the
Index. Instead, the Adviser and/or Sub-Adviser (defined below) utilize a
“sampling” methodology in seeking to achieve the Fund’s objective. As such, the
Fund may purchase a subset of the bonds in the Index in an effort to hold a
portfolio of bonds with generally the same risk and return characteristics of
the Index.
RMB
Bonds are traded on the inter-bank bond market or the exchange-traded bond
market in the PRC. Currently, the inter-bank bond market is much larger with
respect to trading volume and is generally considered more liquid than the
exchange-traded bond market. The inter-bank bond market is a quote-driven
over-the-counter (“OTC”) market for institutional investors, while the
exchange-traded bond market is an electronic automatic matching system where
securities are traded on the Shanghai Stock Exchange or the Shenzhen Stock
Exchange. These RMB Bonds are made available to domestic PRC investors and
certain foreign investors, including via the Bond Connect program, through those
that have been approved as a Renminbi Qualified Foreign Institutional Investor
(“RQFII”) or a Qualified Foreign Institutional Investor (“QFII”) and those
registered under the China interbank bond market program for foreign
institutional investors. An RQFII or QFII license may be obtained by application
to the China Securities Regulatory Commission (“CSRC”). After obtaining a RQFII
or QFII license, the RQFII or QFII would also need to register their status with
State Administration of Foreign Exchange ("SAFE"). Investment companies are not
currently within the types of entities that are eligible for a RQFII or QFII
license.
The
Fund seeks to achieve its investment objective by primarily investing in RMB
Bonds. Because the Fund does not satisfy the criteria to qualify as a RQFII or
QFII itself, the Fund currently invests directly in RMB Bonds via the RQFII
license of China Asset Management (Hong Kong) Limited, the Fund’s Sub-Adviser
(the “Sub-Adviser”). The Sub-Adviser has obtained RQFII status, which the
Sub-Adviser uses to invest the Fund’s assets in RMB Bonds. Assets not allocated
to the Sub-Adviser for investment will be managed by the Adviser. In the future,
the Fund may satisfy the criteria to qualify as a RQFII or QFII itself, the Fund
may invest directly in RMB Bonds via the RQFII or QFII license of the Adviser or
an affiliate thereof and/or the Fund may also be able to invest in RMB Bonds
using Bond Connect or the China interbank bond market program for foreign
institutional investors.
The
Fund is classified as a non-diversified fund and, therefore, may invest a
greater percentage of its assets in a particular issuer. The Fund may concentrate its
investments in a particular industry or group of industries to the extent that
the Index concentrates in an industry or group of industries. As of April 30,
2021, each of the financials, government, utilities and industrials sectors
represented a significant portion of the
Fund.
PRINCIPAL RISKS OF INVESTING IN THE
FUND
Investors
in the Fund should be willing to accept a high degree of volatility in the price
of the Fund’s Shares and the possibility of significant losses. An investment in
the Fund involves a substantial degree of risk.
An investment in the Fund is not a deposit with a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or
any other government agency.
Therefore,
you should consider carefully the following risks before investing in the Fund,
each of which could significantly and adversely affect the value of an
investment in the Fund.
Risk
of Investing in RMB Bonds.
Investing in RMB Bonds involves additional risks, including, but not limited to,
the fact that the economy of China differs, often unfavorably, from the U.S.
economy in such aspects as, structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, interest rate,
allocation of resources and capital reinvestment, among others. The Chinese
central government has historically exercised substantial control over virtually
every sector of the Chinese economy through administrative regulation and/or
state ownership and actions of the Chinese central and local government
authorities continue to have a substantial effect on economic conditions in
China; the risk of nationalization or expropriation of assets; the risk that the
Chinese government may decide not to continue to support economic reform
programs; and the risk of increased trade tariffs, embargoes and other trade
limitations. In addition, previously the Chinese government has from time to
time taken actions that influence the prices at which certain goods may be sold,
encourage companies to invest or concentrate in particular industries, induce
mergers between companies in certain industries and induce private companies to
publicly offer their securities to increase or continue the rate of economic
growth, control the rate of inflation or otherwise regulate economic expansion.
The Chinese government may do so in the future as well, potentially having a
significant adverse effect on
economic
conditions in China. Investment and trading restrictions may make it difficult
for non-Chinese investors to directly access securities by Chinese issuers.
These restrictions may impact the availability, liquidity and pricing of certain
RMB-denominated securities, including RMB Bonds. Additionally, the Chinese
government maintains strict currency controls and regularly intervenes in the
currency market. The Chinese government’s actions may not be transparent or
predictable. As a result, the value of the RMB and the value of RMB Bonds may
change quickly and arbitrarily.
The
financial market of the People’s Republic of China (“PRC”) is at a relatively
early stage of development, and many of the RMB Bonds in which the Fund may
invest are unrated by U.S. credit rating agencies, which may expose the Fund to
greater risks because of generally reduced liquidity, greater price volatility
and greater credit risk.
The
Fund may also encounter difficulties or delays in enforcing its rights against
issuers of RMB Bonds that are organized in the PRC and therefore only subject to
the laws of the PRC. The interpretation and enforcement of Chinese laws and
regulations may be uncertain. With respect to laws pertaining to bankruptcy
proceedings, such laws in Mainland China are generally less developed than and
different from such laws in the United States. Therefore, bankruptcy proceedings
can take more time to resolve than similar proceedings in the United States and
results can be unpredictable. These and other factors could have a negative
impact on the Fund’s performance and increase the volatility of an investment in
the Fund.
Risk
of the RQFII Regime.
The Index is comprised of RMB Bonds. Because the Fund does not currently satisfy
the criteria to qualify as a RQFII or QFII itself, the Fund currently invests
directly in RMB Bonds via the RQFII license of the Sub-Adviser, although the
Fund may invest in RMB Bonds through Bond Connect or the China interbank bond
market (“CIBM”) program in the future. In addition, the RQFII license of the
Sub-Adviser may be revoked by the Chinese regulators if, among other things, the
Sub-Adviser fails to observe CSRC, State Administration of Foreign Exchange
(“SAFE”) and other applicable Chinese regulations, which are subject to change
and such change may have potential retrospective effect. Also, a RQFII license
may be suspended or revoked by reason of, without limitation: (a) bankruptcy,
liquidation or receivership of the RQFII or RQFII custodian; and (b)
irregularities by the RQFII in its practices as RQFII investor. There can be no
assurance the Fund could retain a replacement sub-adviser with an RQFII license
or other means of investing in RMB Bonds if that became necessary or appropriate
for any reason.
The
Fund cannot predict what would occur if the RQFII license of the Sub-Adviser or
RQFII or QFII licenses generally were revoked, although such an occurrence would
likely have a material adverse effect on the Fund, including the requirement
that the Sub-Adviser on behalf of the Fund dispose of certain or all of its RMB
Bonds. Therefore, any such revocation may have a material adverse effect on the
ability of the Fund to achieve its investment objective. If the Fund is unable
to obtain exposure to the performance of the Index due to the unavailability of
the Sub-Adviser's RQFII license or for other reasons, the Fund, subject to any
necessary regulatory relief, could, among other things, as a defensive measure
limit or suspend creations until the Adviser and/or the Sub-Adviser determine
that the requisite exposure to RMB Bonds is obtainable. If any of the above
events were to occur, the Fund could trade at a significant premium or discount
to its NAV and could experience substantial redemptions, and the Fund could,
among other things, change its investment objective by, for example, seeking to
track an alternative index focused on Chinese-related bonds or other appropriate
investments, or decide to liquidate.
The
regulations which regulate investments by RQFIIs in the PRC and the repatriation
of capital from RQFII investments are relatively new and continue to evolve. The
application and interpretation of such investment regulations are therefore
relatively untested and there is no certainty as to how they will be applied.
The PRC authorities and regulators have been given wide discretion in applying
and interpreting such investment regulations and there is no precedent or
certainty as to how such discretion may be exercised now or in the future. The
application and interpretation of such investment regulations may adversely
affect the Fund. In addition, there are custody risks associated with investing
through a RQFII, where, due to requirements regarding establishing a custody
account in the joint names of the Fund and the Sub-Adviser, the Fund’s assets
may not be as well protected from the claims of the Sub-Adviser’s creditors than
if the Fund had an account in its name only.
The
Sub-Adviser, as a licensed RQFII, is currently permitted to repatriate RMB daily
and is not subject to RMB repatriation restrictions or prior approval, provided
that the final repatriation of capital and profits at the liquidation of the
Fund will be subject to an audit report and tax filing. However, there is no
assurance that RQFIIs may not be subject to restrictions or prior approval
requirements in the future, though it will need to prepare a tax payment
commitment letter in respect of certain repatriation. Any additional
restrictions imposed on the Sub-Adviser or RQFIIs generally may have an adverse
effect on the Fund’s ability to invest directly in RMB Bonds and its ability to
meet redemption requests.
Further,
the Fund will rely on the existing arrangements entered into between RQFIIs with
their respective PRC custodians with respect to the custody of their and
therefore the Fund’s assets in Chinese securities, and their PRC brokers in
relation to the execution of transactions in Chinese securities, in the PRC
markets. The Fund may, therefore, incur losses due to the acts or omissions of
the PRC brokers or the PRC custodians in the execution or settlement of any
transaction, or in the transfer of any funds or securities.
On
May 7, 2020, the People’s Bank of China (“PBOC”) and the State Administration of
Foreign Exchange (“SAFE”) jointly issued the Regulations on Funds of Securities
and Futures Investment by Foreign Institutional Investors (PBOC & SAFE
Announcement [2020] No. 2) (the "Regulations") which came into effect on June 6,
2020. The Regulations supersede certain post-registration
rules
applicable to the QFII and RQFII regimes. One of the key changes of the
Regulations is the removal of quota restrictions on investment. However, this is
a relatively new development, and there is no guarantee that the quotas will
continue to be relaxed.
RMB
Bonds will be held by a PRC sub-custodian pursuant to PRC regulations. Risks
related to the PRC sub-custodian are set out below at “Custody Risks of
Investing in RMB Bonds”. Also, the Fund may incur losses due to the acts or
omissions of the PRC sub-custodian or PRC brokers in the execution or settlement
of any transaction or in the transfer of any funds or securities. In such event,
the relevant Fund may be adversely affected in the execution or settlement of
any transaction or in the transfer of any funds or securities.
Risk
of Investing via the Bond Connect and the CIBM Direct Access
Program.
The Bond Connect program and the CIBM Direct Access Program are relatively new.
Laws, rules, regulations, policies, notices, circulars or guidelines relating to
the programs as published or applied by the relevant authorities of the PRC are
untested and are subject to change from time to time. There can be no assurance
that the Bond Connect program and/or the CIBM Direct Access Program will not be
restricted, suspended or abolished. If such event occurs, the Fund's ability to
invest in the CIBM through the CIBM Direct Access Program or Bond Connect will
be adversely affected, and if the Fund is unable to adequately access the CIBM
through other means, the Fund's ability to achieve its investment objective will
be adversely affected.
The
Fund’s investments through Bond Connect are generally subject to Mainland China
securities laws and listing requirements, among other restrictions. Such
securities may lose their eligibility at any time, in which case they could be
sold but could no longer be purchased through Bond Connect. The Fund will not
benefit from access to Hong Kong investor compensation funds, which are set up
to protect against defaults of trades, when investing through Bond Connect. Bond
Connect is only available on days when markets in both Mainland China and Hong
Kong are open. As a result, prices of Bond Connect Securities may fluctuate at
times when the Fund is unable to add to or exit its position and, therefore, may
limit the Fund’s ability to trade when it would otherwise do so.
Under
the prevailing PRC regulations, eligible foreign investors who wish to
participate in the Bond Connect program may do so through an offshore custody
agent, registration agent or other third parties (as the case may be), who would
be responsible for making the relevant filings and account opening with the
relevant authorities. The Fund is therefore subject to the risk of default or
errors on the part of such agents. The Fund may also incur losses due to the
acts or omissions of the onshore settlement agent in the process of settling any
transactions. As a result, the value of the relevant Fund may be adversely
affected.
Under
the prevailing PRC regulations, eligible foreign institutional investors who
wish to invest directly in CIBM through the CIBM Direct Access Program may do so
through an onshore settlement agent, who would be responsible for making the
relevant filings and account opening with the relevant authorities. The Fund is
therefore subject to the risk of default or errors on the part of such agent.
The Fund may also incur losses due to the acts or omissions of the onshore
settlement agent in the process of settling any transactions. As a result, the
value of the relevant Fund may be adversely affected.
Investing
in the CIBM Direct Access Program is also subject to certain restrictions
imposed by the Mainland Chinese authorities on fund remittance and repatriation
which may potentially affect the Fund’s performance and liquidity. Any
non-compliance with or failure to meet the fund remittance and repatriation
requirements may result in regulatory sanctions, which in turn may have an
adverse impact on the portion of the Fund’s investment via the CIBM Direct
Access Program. Further, there is no assurance that the fund remittance and
repatriation requirements in relation to the Fund's investment through the CIBM
Direct Access Program will not be changed as a result of change in government
policies or foreign exchange control policies. The Fund may incur loss in the
event such changes.
Although
there is no quota limitation regarding investment via the CIBM Direct Access
Program, the Fund is required to make further filings with the PBOC if it wishes
to increase its anticipated investment size. There is no guarantee the PBOC will
accept such further filings. In the event any further filings for an increase in
the anticipated investment size are not accepted by the PBOC, the Fund’s ability
to invest in the CIBM will be limited and the performance of the Fund may be
unfavorably affected as a result.
Trading
through the Bond Connect program is performed through newly developed trading
platforms and operational systems. There is no assurance that such systems will
function properly (in particular, under extreme market conditions) or will
continue to be adapted to changes and developments in the market. In the event
that the relevant systems fails to function properly, trading through the Bond
Connect may be disrupted. The Fund's ability to trade through the Bond Connect
(and hence to pursue its investment strategy) may therefore be adversely
affected. In addition, where the Fund invests in the CIBM through the Bond
Connect program, it may be subject to risks of delays inherent in the order
placing and/or settlement.
The
Bond Connect utilizes delivery versus payment (DVP) settlement, and the movement
of cash and securities is carried out simultaneously on a real-time basis.
However, it should be noted that there is no assurance that settlement risks can
be eliminated and DVP settlement practices in the PRC may differ from practices
in developed markets. In particular, such settlement may not be instantaneous
and be subject to a delay of a period of hours. Where the counterparty does not
perform its obligations under a transaction or there is otherwise a failure due
to CCDC or SCH (as applicable), the Fund may sustain losses. Bond Connect trades
are settled in CNY and investors must have timely access to a reliable supply of
CNY in Hong Kong, which may incur conversion costs and cannot be guaranteed.
Moreover, Bond Connect Securities generally may not be sold, purchased or
otherwise transferred other than through Bond Connect in accordance with
applicable rules.
The
Fund’s investments through Bond Connect will be held on behalf of the Fund via a
book entry omnibus account in the name of the Central Moneymarkets Unit of Hong
Kong (“CMU”) maintained with a Mainland China-based custodian (either CCDC or
SCH). The Fund’s ownership interest in investments through Bond Connect will not
be reflected directly in book entry with CCDC or SCH and will instead only be
reflected on the books of its Hong Kong sub-custodian. Whilst the Bond Connect
Authorities (defined below) have expressly stated that investors will enjoy the
rights and interests of the bonds acquired through the Bond Connect in
accordance with applicable laws, the exercise and the enforcement of beneficial
ownership rights over such bonds in the courts in China is yet to be tested. In
addition, in the event that the nominee holder (i.e.
CMU) becomes insolvent, such bonds may form part of the pool of assets of the
nominee holder available for distribution to its creditors and the Fund, as a
beneficial owner, may have no rights whatsoever in respect thereof.
"Bond
Connect Authorities" refers to the exchanges, trading systems, settlement
systems, governmental, regulatory or tax bodies which provide services and/or
regulate Bond Connect and activities relating to Bond Connect, including,
without limitation, the PBOC, the HKMA, the HKEx, the CEFTS, the CMU, the CSDCC
and the SHCH and any other regulator, agency or authority with jurisdiction,
authority or responsibility in respect of Bond Connect.
Renminbi
Currency Risk.
Emerging markets such as China can experience high rates of inflation, deflation
and currency devaluation. The value of the RMB may be subject to a high degree
of fluctuation due to, among other things, changes in interest rates, the
effects of monetary policies issued by the PRC, the United States, foreign
governments, central banks or supranational entities, the imposition of currency
controls or other national or global political or economic developments. The
income received by the Fund for its investments denominated in RMB will
principally be in RMB. The Fund’s exposure to the RMB and changes in value of
the RMB versus the U.S. dollar may result in reduced returns for the Fund.
Moreover, the Fund may incur costs in connection with conversions between U.S.
dollars and RMB. The RMB is currently not a freely convertible currency. The
Chinese government places strict regulation on the RMB and sets the value of the
RMB to levels dependent on the value of the U.S. dollar. The Chinese
government’s imposition of restrictions on the repatriation of RMB out of
Mainland China may limit the depth of the offshore RMB market and reduce the
liquidity of the Fund’s investments. The international community has requested
that China ease its restrictions on currency exchange, but it is unclear whether
the Chinese government will change its policy. These restrictions may adversely
affect the Fund and its investments. The Fund may also be exposed to both
offshore RMB (CNH) and onshore RMB (CNY). Although CNH and CNY are the same
currency, they trade at different rates. To the extent the Fund carries out
conversions between offshore RMB (CNH) and onshore RMB (CNY), investors should
note that CNH and CNY trade a different rates. Any divergence between CNH and
CNY may adversely impact investors. Any divergence between CNH and CNY may
adversely impact the Fund.
Chinese
Banking Industry Risk.
The Chinese banking industry is a highly regulated industry and is subject to
laws and regulations touching all aspects of the banking business. The principal
regulators include the China Banking Regulatory Commission (“CBRC”) and the
People’s Bank of China (“PBOC”). These regulators are given wide discretion in
exercising their authority. The banking regulatory regime in China is currently
undergoing significant changes, including changes in laws and regulations, as it
moves toward a more transparent regulatory process. Some of these changes may
have an adverse impact on the performance of Chinese banks that issued RMB Bonds
and thus may adversely affect their capacity to honor their commitments under
the RMB Bonds to the holders of such bonds, which may include the
Fund.
PRC
Tax Risk.
Under current regulations in the PRC, foreign investors may invest in PRC
securities, in general, through institutions that have obtained either RQFII
status, or by investing in participatory notes and other access products issued
by institutions with RQFII status. Since only RQFII’s interests in PRC
securities are recognized under the PRC laws, any tax liability would, if it
arises, be payable by the QFII or RQFII.
Under
current PRC Enterprise Income Tax Law (“PRC EIT law”) and regulations, any
entity considered to be a tax resident of the PRC would be subject to PRC
enterprise income tax (“EIT”) at the rate of 25% on its worldwide taxable
income. If an entity were considered to be a non-resident enterprise with a
“permanent establishment” in the PRC, it would be subject to PRC EIT at the rate
of 25% on the profits attributable to the permanent establishment. The Fund
intends to operate in a manner that will prevent it from being treated as a tax
resident of the PRC and from having a permanent establishment in the PRC, though
this cannot be guaranteed. It is possible, however, that the PRC could disagree
with such an assessment or that changes in PRC tax law could affect the PRC EIT
status of the Fund.
If
the entity is a non-PRC tax resident enterprise without permanent establishment
in the PRC, the PRC-sourced income (including cash dividends, distributions,
interest and capital gains) derived by it from any investment in PRC securities
would be subject to PRC withholding income tax (“WHT”) at the rate of 10% unless
exempt or reduced under the PRC EIT Law or a relevant tax treaty. Interest
income from certain bonds (i.e.
government bonds, local government bonds and railway bonds) are also entitled to
a 100% EIT exemption and 50% EIT exemption respectively in accordance with the
Implementation Rules to the Enterprise Income Tax Law and a circular dated 10
March 2016 on Income Tax Policies on Interest Income from Railway Bonds under
Caishui [2016] No. 30. Pursuant to Caishui [2018] No. 108 ("Notice 108"),
foreign institutional investors are exempt from EIT on bond interest income
derived from November 7, 2018 to November 6, 2021. Such EIT exemption would not
be applicable if the bond interest derived is connected with the foreign
institutional investors' establishment or place in the PRC.
The
Fund may also potentially be subject to PRC value-added tax at the rate of 6% on
capital gains derived from trading of PRC securities. However, Caishui [2016]
No. 36 (“Notice 36”) and Caishui [2016] No. 70 (“Notice 70”) provides a
value-added tax exemption for RQFIIs in respect of their gains derived from the
trading of PRC securities. In addition, deposit interest income and interest
received from government bonds and local government bonds are also exempt from
VAT. The prevailing VAT regulations do not specifically exempt VAT on interest
derived from bonds other than the aforesaid. Hence, interest income on
non-government bonds (including corporate bonds) technically should be subject
to 6% VAT. However, in accordance with Cai Shui [2016] No. 70 ("Circular 70"),
the Supplementary Notice of the Ministry of Finance and the State Administration
of Taxation on VAT Policies for Interbank Dealings of Financial Institutions in
respect of bond interest income derived by foreign institutional investors, PRC
VAT on investments in the CIBM (including currency market, bond market and
derivative market) is exempted from November 7, 2018 to November 6, 2021
pursuant to Notice 108.
In
addition, urban maintenance and construction tax (currently at rates ranging
from 1% to 7%), educational surcharge (currently at the rate of 3%) and local
educational surcharge (currently at the rate of 2%) (collectively the
“Surtaxes”) are imposed based on value-added tax liabilities. PRC securities
that are exempt from value-added tax, are also exempt from the applicable
Surtaxes.
Aside
from the above-mentioned general rules, the PRC tax authorities have not
clarified whether income tax and other tax categories are payable on gains
arising from the trading in securities that do not constitute shares or other
equity investments, such as bonds and other fixed income securities, of RQFIIs
and other investors through Bond Connect or the CIBM Direct Access Program. It
is therefore possible that the relevant tax authorities may, in the future,
clarify the tax position and impose an income tax or withholding tax on realized
gains derived from dealing in PRC fixed income securities.
The
Fund does not currently make any tax provision in respect of any potential PRC
withholding income tax, EIT, value-added tax and Surtaxes on gains derived from
disposal of equity and bonds and other fixed income securities. However, in
light of the above-mentioned uncertainty and in order to meet any potential tax
liability for gains on disposal of bonds and other fixed income securities, the
Fund reserves the right to provide for the withholding income tax on such gains
or income, and withhold income tax of 10% for the account of Fund in respect of
any potential tax on the gross realized and unrealized capital gains. Upon any
future resolution of the abovementioned uncertainty or further changes to the
tax law or policies, the Fund will, as soon as practicable, make relevant
adjustments to the amount of tax provision (if any) as they consider necessary.
The amount of any such tax provision will be disclosed in the accounts of the
Fund.
Any
such withholding income tax on gains on disposal of fixed income securities may
reduce the income from, and/or adversely affect the performance of, the Fund. In
light of the uncertainties of the tax position, RQFIIs may withhold certain
amounts in anticipation of PRC withholding income tax on the gains on disposal
of the Fund’s investments in China fixed income securities. The amount withheld
would be retained by the relevant RQFII until the position with regard to PRC
taxation of RQFIIs Fund in respect of their gains and profits has been
clarified. In the event that such position is clarified to the advantage of the
RQFII and the Fund, the RQFII may rebate all or part of the withheld amount. The
withheld amount so rebated shall be retained by the Fund and reflected in the
value of its shares. Notwithstanding the foregoing, no investor who redeems
his/her shares before the rebate of any withheld amounts shall be entitled to
claim any part of such rebate.
It
should also be noted that the actual applicable tax imposed by the PRC tax
authorities may be different and may change from time to time. There is a
possibility of the rules being changed and taxes being applied retrospectively.
As such, any provision for taxation made by the Fund may be excessive or
inadequate to meet final PRC tax liabilities. Consequently, investors of the
Fund may be advantaged or disadvantaged depending upon the final tax
liabilities, the level of provision and when they subscribed and/or redeemed
their shares in/from the Fund.
If
the actual applicable tax levied by the PRC tax authorities is higher than that
provided for by the relevant Fund so that there is a shortfall in the tax
provision amount, investors should note that the Net Asset Value of the Fund may
suffer more than the tax provision amount as that Fund will ultimately have to
bear the additional tax liabilities. In this case, the then existing and new
investors will be disadvantaged. On the other hand, if the actual applicable tax
rate levied by the PRC tax authorities is lower than that provided for by the
Fund so that there is an excess in the tax provision amount, investors who have
redeemed shares in the Fund before the PRC tax authorities’ ruling, decision or
guidance in this respect will be disadvantaged as they would have borne the loss
from the Fund’s over-provision. In this case, the then existing and new
Shareholders may benefit if the difference between the tax provision and the
actual taxation liability under that lower tax amount can be returned to the
account of the Fund as assets thereof.
Shareholders
should note that the above disclosure has been prepared based on an
understanding of the laws, regulations and practice in the PRC in-force as of
the date of this Prospectus.
It
is possible that the current tax laws, regulations and practice in the PRC will
change, including the possibility of taxes being applied retrospectively, and
that such changes may result in higher taxation on PRC investments than is
currently contemplated.
Sovereign
Bond Risk.
Investments in sovereign bonds involve special risks not present in corporate
bonds. The governmental authority that controls the repayment of the bond may be
unable or unwilling to make interest payments and/or repay the principal on its
debt or to otherwise honor its obligations. If an issuer of sovereign bonds
defaults on payments of principal and/or interest, the Fund may have limited
recourse against the issuer. During periods of economic uncertainty, the market
prices of sovereign
bonds,
and the Fund’s NAV, may be more volatile than prices of corporate bonds, which
may result in losses. In the past, certain governments of emerging market
countries have declared themselves unable to meet their financial obligations on
a timely basis, which has resulted in losses for holders of such sovereign
bonds.
Risk
of Investing in the Financials Sector.
The Fund will be sensitive to, and its performance will depend to a greater
extent on, the overall condition of the financials sector. Companies in the
financials sector may be subject to extensive government regulation that affects
the scope of their activities, the prices they can charge and the amount of
capital they must maintain. The profitability of companies in the financials
sector may be adversely affected by increases in interest rates, by loan losses,
which usually increase in economic downturns, and by credit rating downgrades.
In addition, the financials sector is undergoing numerous changes, including
continuing consolidations, development of new products and structures and
changes to its regulatory framework. Furthermore, some companies in the
financials sector perceived as benefitting from government intervention in the
past may be subject to future government-imposed restrictions on their
businesses or face increased government involvement in their operations.
Increased government involvement in the financials sector, including measures
such as taking ownership positions in financial institutions, could result in a
dilution of the Fund’s investments in financial institutions.
Risk
of Investing in the Industrials Sector.
The
Fund will be sensitive to, and its performance will depend to a greater extent
on, the overall condition of the industrials sector. The industrials sector
comprises companies that produce capital goods used in construction and
manufacturing, such as companies that make and sell machinery, equipment and
supplies that are used to produce other goods. Companies in the industrials
sector may be adversely affected by changes in government regulation, world
events and economic conditions. In addition, companies in the industrials sector
may be adversely affected by environmental damages, product liability claims and
exchange rates.
Risk
of Investing in the Utilities Sector.
The
Fund will be sensitive to, and its performance will depend to a greater extent
on, the overall condition of the utilities sector. The utilities sector
comprises companies that provide basic amenities, such as electricity, water,
sewage services, dams, and natural gas to residential, industrial, commercial,
and government customers. Companies in the utilities sector may be adversely
affected by changes in exchange rates, domestic and international competition,
difficulty in raising adequate amounts of capital and governmental limitation on
rates charged to customers.
Credit
Risk.
Bonds are subject to credit risk. Credit risk refers to the possibility that the
issuer or guarantor of a security will be unable and/or unwilling to make timely
interest payments and/or repay the principal on its debt or to otherwise honor
its obligations and/or default completely. Bonds are subject to varying degrees
of credit risk, depending on the issuer’s financial condition and on the terms
of the securities, which may be reflected in credit ratings. There is a
possibility that the credit rating of a bond may be downgraded after purchase or
the perception of an issuer’s credit worthiness may decline, which may adversely
affect the value of the security.
Interest
Rate Risk.
Debt securities, such as bonds, are also subject to interest rate risk. Interest
rate risk refers to fluctuations in the value of a bond resulting from changes
in the general level of interest rates. When the general level of interest rates
goes up, the prices of most debt securities go down. When the general level of
interest rates goes down, the prices of most debt securities go up. The
prevailing historically low interest rate environment increases the risks
associated with rising interest rates, including the potential for periods of
volatility and increased redemptions. In addition, debt securities, such as
bonds, with longer durations tend to be more sensitive to interest rate changes,
usually making them more volatile than debt securities with shorter durations.
In addition, in response to the COVID-19 pandemic, as with other serious
economic disruptions, governmental authorities and regulators are enacting
significant fiscal and monetary policy changes, including providing direct
capital infusions into companies, creating new monetary programs and lowering
interest rates. These actions present heightened risks to debt instruments, and
such risks could be even further heightened if these actions are unexpectedly or
suddenly reversed or are ineffective in achieving their desired
outcomes.
Risk
of Subordinated Obligations.
Payments under some bonds may be structurally subordinated to all existing and
future liabilities and obligations of each of the respective subsidiaries and
associated companies of an issuer of the bond. Claims of creditors of such
subsidiaries and associated companies will have priority as to the assets of
such subsidiaries and associated companies over the issuer and its creditors,
including the Fund, who seek to enforce the terms of the bond. Certain bonds do
not contain any restrictions on the ability of the subsidiaries of the issuers
to incur additional unsecured indebtedness.
Risk
of Investing in Foreign Securities.
Investments in the securities of foreign issuers involve risks beyond those
associated with investments in U.S. securities. These additional risks include
greater market volatility, the availability of less reliable financial
information, higher transactional and custody costs, taxation by foreign
governments, decreased market liquidity and political instability. Because
certain foreign securities markets may be limited in size, the activity of large
traders may have an undue influence on the prices of securities that trade in
such markets. The Fund invests in securities of issuers located in countries
whose economies are heavily dependent upon trading with key partners. Any
reduction in this trading may have an adverse impact on the Fund’s investments.
Risk
of Investing in Emerging Market Issuers. Investments
in securities of emerging market issuers are exposed to a number of risks that
may make these investments volatile in price or difficult to trade. Emerging
markets are more likely than developed markets to experience problems with the
clearing and settling of trades, as well as the holding of securities by local
banks, agents and depositories. Political risks may include unstable
governments, nationalization, restrictions on foreign ownership, laws that
prevent
investors from getting their money out of a country and legal systems that do
not protect property rights as well as the laws of the United States. Market
risks may include economies that concentrate in only a few industries,
securities issues that are held by only a few investors, liquidity issues and
limited trading capacity in local exchanges and the possibility that markets or
issues may be manipulated by foreign nationals who have inside information. The
frequency, availability and quality of financial information about investments
in emerging markets varies. The Fund has limited rights and few practical
remedies in emerging markets and the ability of U.S. authorities to bring
enforcement actions in emerging markets may be limited, and the Fund's passive
investment approach does not take account of these risks. All of these factors
can make emerging market securities more volatile and potentially less liquid
than securities issued in more developed markets.
Risk
of Cash Transactions.
Unlike other exchange-traded funds (“ETFs”), the Fund expects to effect its
creations and redemptions at least partially for cash, rather than wholly for
in-kind securities. Therefore, it may be required to sell portfolio securities,
and subsequently incur brokerage costs and/or recognize gains or loss on such
sales that the Fund might not have recognized if it were to distribute portfolio
securities in kind. As such, investments in Shares may be less tax-efficient
than an investment in a conventional ETF.
Market
Risk.
The prices of the securities in the Fund are subject to the risks associated
with investing in the securities market, including general economic conditions,
sudden and unpredictable drops in value, exchange trading suspensions and
closures and public health risks. These risks may be magnified if certain
social, political, economic and other conditions and events (such as natural
disasters, epidemics and pandemics, terrorism, conflicts and social unrest)
adversely interrupt the global economy; in these and other circumstances, such
events or developments might affect companies world-wide. An investment in the Fund may lose
money.
Operational
Risk.
The Fund is exposed to operational risk arising from a number of factors,
including, but not limited to, human error, processing and communication errors,
errors of the Fund’s service providers, counterparties or other third parties,
failed or inadequate processes and technology or system failures.
Sampling
Risk.
The Fund’s use of a representative sampling approach will result in its holding
a smaller number of securities than are in the Index. As a result, an adverse
development respecting an issuer of securities held by the Fund could result in
a greater decline in NAV than would be the case if the Fund held all of the
securities in the Index. Conversely, a positive development relating to an
issuer of securities in the Index that is not held by the Fund could cause the
Fund to underperform the Index. To the extent the assets in the Fund are
smaller, these risks will be greater.
Index
Tracking Risk.
The Fund’s return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses, including taxes,
not applicable to the Index and incurs costs associated with buying and selling
securities, especially when rebalancing the Fund’s securities holdings to
reflect changes in the composition of the Index, or (to the extent the Fund
effects creations and redemptions for cash) raising cash to meet redemptions or
deploying cash in connection with newly created Creation Units, which are not
factored into the return of the Index. Transaction costs, including brokerage
costs, will decrease the Fund’s NAV to the extent not offset by the transaction
fee payable by an Authorized Participant (“AP”). Market disruptions and
regulatory restrictions could have an adverse effect on the Fund’s ability to
adjust its exposure to the required levels in order to track the Index. Errors
in the Index data, the Index computations and/or the construction of the Index
in accordance with its methodology may occur from time to time and may not be
identified and corrected by the Index provider for a period of time or at all,
which may have an adverse impact on the Fund and its shareholders. Shareholders
should understand that any gains from the Index provider's errors will be kept
by the Fund and its shareholders and any losses or costs resulting from the
Index provider's errors will be borne by the Fund and its shareholders. When the
Index is rebalanced and the Fund in turn rebalances its portfolio to attempt to
increase the correlation between the Fund’s portfolio and the Index, any
transaction costs and market exposure arising from such portfolio rebalancing
will be borne directly by the Fund and its shareholders. Apart from scheduled
rebalances, the Index provider or its agents may not be fully invested at times
either as a result of cash flows into carry out additional ad hoc rebalances to
the Index. Therefore, errors and additional ad hoc rebalances carried out by the
Index provider or its agents to the Index may increase the costs to and the
tracking error risk of the Fund. In addition, the Fund's use of a representative
sampling approach may cause the Fund to not be as well correlated with the
return of the Index as would be the case if the Fund purchased all of the
securities in the Index, or invested in them in the exact proportions in which
they are represented in the Index. The Fund’s performance may also deviate from
the return of the Index due to legal restrictions or limitations imposed by the
governments of certain countries, certain listing standards of the Fund’s
listing exchange (the “Exchange”), a lack of liquidity on stock exchanges in
which such securities trade, potential adverse tax consequences or other
regulatory reasons (such as diversification requirements). The Fund may value
certain of its investments, underlying securities, and/or other assets based on
fair value prices. To the extent the Fund calculates its NAV based on fair value
prices and the value of the Index is based on securities’ closing prices
(i.e.,
the value of the Index is not based on fair value prices), the Fund’s ability to
track the Index may be adversely affected. When markets are volatile, the
ability to sell securities at fair value prices may be adversely impacted and
may result in additional trading costs and/or increase the index tracking risk.
The Fund may also need to rely on borrowings to meet redemptions, which may lead
to increased expenses.
In
addition, any issues the Fund encounters with regard to currency convertibility
(including the cost of borrowing funds, if any) and repatriation may also
increase the index tracking risk. The Fund will be required to remit RMB to
settle the purchase of RMB Bonds and repatriate RMB to U.S. dollars to settle
redemption orders. In the event such remittance is delayed or disrupted, the
Fund will not be able to fully replicate the Index by investing in their
relevant RMB Bonds, which may lead to increased tracking error, and may need to
rely on borrowings to meet redemptions, which may lead to increased expenses.
Because the Index is priced in Chinese RMB and the Fund is priced in U.S.
dollars, the ability of the Fund to track the Index is in part subject to
foreign exchange fluctuations as between the U.S. dollar and the RMB. The Fund’s
performance may also deviate from the performance of the Index due to the impact
of withholding taxes, late announcements relating to changes to the Index and
high turnover of the Index. The Fund may underperform the Index when the value
of the U.S. dollar increases relative to the value of the RMB. For tax
efficiency purposes, the Fund may sell certain securities, and such sale may
cause the Fund to realize a loss and deviate from the performance of the Index.
In light of the factors discussed above, the Fund’s return may deviate
significantly from the return of the Index. Changes to the composition of the
Index in connection with a rebalancing or reconstitution of the Index may cause
the Fund to experience increased volatility, during which time the Fund’s index
tracking risk may be heightened.
Authorized
Participant Concentration Risk.
The Fund may have a limited number of financial institutions that act as APs,
none of which are obligated to engage in creation and/or redemption
transactions. To the extent that those APs exit the business, or are unable to
or choose not to process creation and/or redemption orders, and no other AP is
able to step forward to create and redeem, there may be a significantly
diminished trading market for Shares or Shares may trade like closed-end funds
at a greater discount (or premium) to NAV and possibly face trading halts and/or
de-listing. The AP concentration risk may be heightened in scenarios where APs
have limited or diminished access to the capital required to post
collateral.
No
Guarantee of Active Trading Market.
While Shares are listed on the Exchange, there can be no assurance that an
active trading market for the Shares will be maintained. Further, secondary
markets may be subject to irregular 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 the Shares and in executing
creation and redemption orders, which could cause a material deviation in the
Fund’s market price from its NAV.
Trading
Issues.
Trading in Shares on the Exchange may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to the Exchange’s “circuit
breaker” rules. There can be no assurance that the requirements of the Exchange
necessary to maintain the listing of the Fund will continue to be met or will
remain unchanged.
Passive
Management Risk.
An investment in the Fund involves risks similar to those of investing in any
fund invested in bonds, such as market fluctuations caused by such factors as
economic and political developments, changes in interest rates and perceived
trends in security prices. However, because the Fund is not “actively” managed,
unless a specific security is removed from the Index, the Fund generally would
not sell a security because the security’s issuer was in financial trouble.
Additionally, unusual market conditions may cause the Index provider to postpone
a scheduled rebalance or reconstitution, which could cause the Index to vary
from its normal or expected composition. Therefore, the Fund’s performance could
be lower than funds that may actively shift their portfolio assets to take
advantage of market opportunities or to lessen the impact of a market decline or
a decline in the value of one or more issuers.
Fund
Shares Trading, Premium/Discount Risk and Liquidity of Fund Shares. The
market price of the Shares may fluctuate in response to the Fund’s NAV, the
intraday value of the Fund’s holdings and supply and demand for Shares. The
Adviser cannot predict whether Shares will trade above, below, or at their most
recent NAV. Disruptions to creations and redemptions, the existence of market
volatility or potential lack of an active trading market for Shares (including
through a trading halt), as well as other factors, may result in Shares trading
at a significant premium or discount to NAV or to the intraday value of the
Fund’s holdings. If a shareholder purchases Shares at a time when the market
price is at a premium to the NAV or sells Shares at a time when the market price
is at a discount to the NAV, the shareholder may pay significantly more or
receive significantly less than the underlying value of the Shares that were
bought or sold or the shareholder may be unable to sell his or her Shares. The
securities held by the Fund may be traded in markets that close at a different
time than the Exchange. Liquidity in those securities may be reduced after the
applicable closing times. Accordingly, during the time when the Exchange is open
but after the applicable market closing, fixing or settlement times, bid-ask
spreads on the Exchange and the resulting premium or discount to the Shares’ NAV
may widen. Additionally, in stressed market conditions, the market for the
Fund’s Shares may become less liquid in response to deteriorating liquidity in
the markets for the Fund’s underlying portfolio holdings. There are various
methods by which investors can purchase and sell Shares. Investors should
consult their financial intermediaries before purchasing or selling Shares of
the Fund.
Non-Diversified
Risk.
The Fund is classified as a “non-diversified”
fund under the Investment Company Act of 1940, as amended (the “1940 Act”).
Therefore, the Fund may invest a relatively high percentage of its assets in a
smaller number of issuers or may invest a larger proportion of its assets in a
single issuer. Moreover, the gains and losses on a single investment may have a
greater impact on the Fund’s NAV and may make the Fund more volatile than more
diversified funds.
Concentration
Risk.
The Fund’s assets may be concentrated in a particular sector or sectors or
industry or group of industries to the extent the Index concentrates in a
particular sector or sectors or industry or group of industries. To the extent
that the Fund is concentrated in a particular sector or sectors or industry or
group of industries, the Fund will be subject to the risk that economic,
political or other conditions that have a negative effect on those sectors
and/or industries may negatively impact the Fund to a greater extent than if the
Fund’s assets were invested in a wider variety of sectors or
industries.
PERFORMANCE
The bar chart that follows
shows how the Fund performed for the calendar years shown. The table below the
bar chart shows the Fund’s average annual returns (before and after taxes).
The bar chart
and table provide an indication of the risks of investing in the Fund by
comparing the Fund’s performance from year to year and by showing how the Fund’s
average annual returns for the one year, five year, ten year and/or since
inception periods, as applicable, compared with the Fund’s benchmark index and a
broad measure of market performance. All returns assume
reinvestment of dividends and distributions. The Fund’s past performance
(before and after taxes) is not necessarily indicative of how the Fund will
perform in the future. Updated performance information is
available online at www.vaneck.com.
Annual Total Returns (%)—Calendar
Years
The
year-to-date total return as of
June 30, 2021 was
2.30%.
|
|
|
|
|
|
|
|
|
Best
Quarter: |
5.84% |
4Q 2020 |
Worst
Quarter: |
-6.40% |
4Q
2016 |
Average Annual Total Returns for the Periods
Ended December 31, 2020
The after-tax returns presented
in the table below are calculated using the highest historical individual
federal marginal income tax rates and do not reflect the impact of state and
local taxes. Your actual after-tax returns will depend on your
specific tax situation and may differ from those shown below. After-tax returns are not
relevant to investors who hold Shares of the Fund through tax-deferred
arrangements, such as 401(k) plans or individual retirement
accounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Past One
Year |
Past Five
Years |
Since
Inception
(11/10/2014) |
|
VanEck China Bond ETF (return
before taxes) |
11.13% |
2.94% |
2.49% |
|
VanEck China Bond ETF (return after
taxes on distributions) |
9.91% |
2.36% |
1.88% |
|
VanEck China Bond ETF (return after
taxes on distributions and sale of Fund Shares) |
6.54% |
2.00% |
1.63% |
|
ChinaBond
China High Quality Bond Index
(reflects no deduction for
fees, expenses or taxes) |
10.92% |
3.86% |
3.37% |
|
Bloomberg US Aggregate Bond
Index (reflects no deduction for fees, expenses or
taxes) |
7.51% |
4.44% |
3.85% |
See “License Agreements
and Disclaimers” for important information.
PORTFOLIO
MANAGEMENT
Investment
Adviser.
Van Eck Associates Corporation.
Investment
Sub-Adviser.
China Asset Management (Hong Kong) Limited.
Portfolio
Managers.
The following individuals are primarily and jointly responsible for the
day-to-day management of the Fund’s portfolio:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name |
Title
with Sub-Adviser |
Date
Began Managing the Fund |
|
|
Cai
Jing |
Portfolio
Manager |
June
2017 |
|
|
Name |
Title
with Adviser |
Date
Began Managing the Fund |
|
|
Francis
G. Rodilosso |
Portfolio
Manager |
November
2014 |
|
PURCHASE
AND SALE OF FUND SHARES
Individual
Shares of the Fund may only be purchased and sold in secondary market
transactions through a broker or dealer at a market price. Shares of the Fund
are listed on the Exchange, and because Shares trade at market prices rather
than NAV, Shares of the Fund may trade at a price greater than NAV (i.e.,
a "premium") or less than NAV (i.e.,
a "discount").
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares of the Fund (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, including information about the Fund’s NAV, market price, premiums
and discounts, and bid/ask spreads, is included on the Fund’s website at
www.vaneck.com.
TAX
INFORMATION
The
Fund’s distributions are taxable and will generally be taxed as ordinary income
or capital gains.
PAYMENTS
TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
The
Adviser and its related companies may pay broker-dealers or other financial
intermediaries (such as a bank) for the sale of the Fund Shares and related
services. These payments may create a conflict of interest by influencing your
broker-dealer or other intermediary or its employees or associated persons to
recommend the Fund over another investment. Ask your financial adviser or visit
your financial intermediary’s website for more information.
|
|
|
ADDITIONAL
INFORMATION ABOUT THE FUND'S INVESTMENT STRATEGIES AND
RISKS |
PRINCIPAL
INVESTMENT STRATEGIES
The
Fund uses a sampling approach in seeking to achieve its investment objective.
Sampling means that the Adviser or Sub- Adviser uses quantitative analysis to
select a representative sample of securities that the Adviser or Sub-Adviser,
respectively, believes collectively have an investment profile similar to the
Index. The Adviser or Sub-Adviser, as applicable, seeks to select securities
that will have, in the aggregate, investment characteristics (based on factors
such as market capitalization and industry weightings), fundamental
characteristics (such as return variability, duration, maturity or credit
ratings and yield) and liquidity measures similar to those of the Index. The
quantity of holdings in the Fund will be based on a number of factors, including
asset size of the Fund.
The
Adviser generally expects the Fund to hold less than the total number of
securities in the Index, but reserves the right to hold as many securities as it
believes necessary to achieve the Fund’s investment objective. In addition, from
time to time, securities are added to or removed from the Index. The Fund may
sell securities that are represented in the Index, or purchase securities that
are not yet represented in its Index, in anticipation of their removal from or
addition to the Index. Further, the Adviser and/or Sub-Adviser may choose to
underweight or overweight securities, purchase or sell securities not in the
Index, or utilize various combinations of other available investment techniques,
in seeking to track the Index.
The
Fund’s assets will be primarily invested in RMB Bonds. Because the Fund does not
satisfy the criteria to qualify as a RQFII or QFII itself, the Fund intends to
invest directly in RMB Bonds via the Sub-Adviser’s RQFII license but may, in the
future, invest in RMB Bonds using Bond Connect or the China interbank bond
market program. In the event that the Sub-Adviser is unable to maintain its
RQFII status or to seek to replicate the Index through the other means described
in this Prospectus, the Fund may retain one or more additional sub-advisers that
maintain RQFII licenses and/or the Adviser or an affiliate thereof may obtain a
QFII license and the Adviser or additional sub-adviser(s), on behalf of the
Fund, may invest in RMB Bonds via the Adviser’s or additional sub-adviser(s)’s
QFII or RQFII license, respectively.
FUNDAMENTAL
AND NON-FUNDAMENTAL POLICIES
The
Fund’s investment objective and each of its other investment policies are
non-fundamental policies that may be changed by the Board of Trustees (the
"Board of Trustees") of VanEck ETF Trust (the "Trust") without shareholder
approval, except as noted in this Prospectus or the Statement of Additional
Information (“SAI”) under the section entitled “Investment Policies and
Restrictions—Investment Restrictions.”
RISKS
OF INVESTING IN THE FUND
The
following section provides additional information regarding the principal risks
identified under “Principal Risks of Investing in the Fund” in the Fund’s
“Summary Information” section followed by additional risk
information.
Investors
in the Fund should be willing to accept a high degree of volatility in the price
of the Fund’s Shares and the possibility of significant losses. An investment in
the Fund involves a substantial degree of risk. An investment in the Fund is not
a deposit with a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Therefore, you should
consider carefully the following risks before investing in the Fund, each of
which could significantly and adversely affect the value of an investment in the
Fund.
Risk
of Investing in RMB Bonds.
Investments in RMB Bonds involve certain risks and special considerations,
including the following:
Political
and Economic Risk.
The economy of China, which has been in a state of transition from a planned
economy to a more market oriented economy, differs from the economies of most
developed countries in many respects, including the level of government
involvement, its state of development, its growth rate, control of foreign
exchange, and allocation of resources. Although the majority of productive
assets in China are still owned by the PRC government at various levels, the PRC
government has implemented economic reform measures emphasizing utilization of
market forces in the development of the economy of China and a high level of
management autonomy.
The
PRC government has carried out economic reforms to achieve decentralization and
utilization of market forces to develop the economy of the PRC. These reforms
have resulted in significant economic growth and social progress. There can,
however, be no assurance that the PRC government will continue to pursue such
economic policies or, if it does, that those policies will continue to be
successful. Any such adjustment and modification of those economic policies may
have an adverse impact on the securities market in the PRC as well as the
underlying securities of the Index in which the Fund may invest. Further, the
PRC government may from time to time adopt corrective measures to control the
growth of the PRC economy which may also have an adverse impact on the capital
growth and performance of the Fund. The PRC may privatize certain entities and
industries. Privatized entities may lose money or be
re-nationalized.
Political
changes, social instability and adverse diplomatic developments in the PRC could
result in the imposition of additional government restrictions including
expropriation of assets, confiscatory taxes or nationalization of some or all of
the property held by the issuers of the Fund’s RMB Bond investments or contained
in the Index.
Market
volatility caused by potential regional or territorial conflicts or natural or
other disasters, may have an adverse impact on the performance of the
Fund.
The
laws, regulations, including the investment regulations governing RQFIIs (QFIIs
Bond Connect and the CIBM Direct Access Program ),
government policies and the political and economic climate in China may change
with little or no advance notice. Any such change could adversely affect market
conditions and the performance of the Chinese economy and, thus, the value of
the RMB Bonds or other securities in the Fund’s portfolio.
The
Chinese government continues to be an active participant in many economic
sectors through ownership positions and regulation. The allocation of resources
in China is subject to a high level of government control. The Chinese
government strictly regulates the payment of foreign currency denominated
obligations and sets monetary policy. Through its policies, the government may
provide preferential treatment to particular industries or companies. The
policies set by the government could have a substantial adverse effect on the
Chinese economy and the Fund’s investments.
The
Chinese economy is export-driven and highly reliant on trade, and much of
China’s growth has been the result of focused investments in economic sectors
intended to produce goods and services for export purposes. Adverse changes to
the economic conditions of its primary trading partners, such as the United
States, Japan and South Korea, would adversely impact the Chinese economy and
the Fund’s investments. International trade tensions involving China and its
trading counterparties may arise from time to time which can result in trade
tariffs, embargoes, trade limitations, trade wars and other negative
consequences. Such actions and consequences may ultimately result in a
significant reduction in international trade, an oversupply of certain
manufactured goods, devaluations of existing inventories and potentially the
failure of individual companies and/or large segments of China’s export industry
with a potentially severe negative impact to the Fund.
The
Fund may encounter difficulties or delays in enforcing its rights against
issuers of RMB Bonds that are organized in the PRC and therefore only subject to
the laws of the PRC. The interpretation and enforcement of Chinese laws and
regulations may be uncertain. With respect to laws pertaining to bankruptcy
proceedings, such laws in mainland China are generally less developed than and
different from such laws in the United States. Therefore, bankruptcy proceedings
can take more time to resolve than similar proceedings in the United States and
results can be unpredictable. These and other factors could have a negative
impact on the Fund’s performance and increase the volatility of an investment in
the Fund.
Inflation.
Economic growth in China has also historically been accompanied by periods of
high inflation. The performance of the Chinese economy and the Fund’s
investments could be negatively impacted by inflation.
Tax
Changes.
The Chinese system of taxation is not as well settled as that of the United
States. In addition, changes in the Chinese tax system may have retroactive
effects.
Nationalization
and Expropriation.
After the formation of the Chinese socialist state in 1949, the Chinese
government renounced various debt obligations and nationalized private assets
without providing any form of compensation. There can be no assurance that the
Chinese government will not take similar actions in the future. Accordingly, an
investment in the Fund involves a risk of a total loss.
U.S.
Sanctions.
From time to time, certain of the companies in which the Fund expects to invest
may operate in, or have dealings with, countries subject to sanctions or
embargoes imposed by the U.S. Government and the United Nations and/or countries
identified by the U.S. Government as state sponsors of terrorism. A company may
suffer damage to its reputation if it is identified as a company which operates
in, or has dealings with, countries subject to sanctions or embargoes imposed by
the U.S. Government and the United Nations and/or countries identified by the
U.S. Government as state sponsors of terrorism. As an investor in such
companies, the Fund will be indirectly subject to those risks.
Hong
Kong Policy.
As part of Hong Kong’s transition from British to Chinese sovereignty in 1997,
China agreed to allow Hong Kong to maintain a high degree of autonomy with
regard to its political, legal and economic systems for a period of at least 50
years. Under the agreement, China does not tax Hong Kong, does not limit the
exchange of the Hong Kong dollar for foreign currencies and does not place
restrictions on free trade in Hong Kong. However, there is no guarantee that
China will continue to honor the agreement, and China may change its policies
regarding Hong Kong at any time. As of July 2020, the Chinese Standing Committee
of the National People's Congress enacted the Law of the People's Republic of
China on Safeguarding National Security in the Hong Kong Special Administrative
Region. As of the same month, Hong Kong is no longer afforded preferential
economic treatment by the United States under US law, and there is uncertainty
as to how the economy of Hong Kong will be affected. Any such change could
adversely affect market conditions and the performance of the Chinese economy
and, thus, the value of the securities in the Fund’s portfolio.
Chinese
Bond Markets. The
inter-bank bond market and exchange-traded bond markets in China have a limited
operating history and are not as developed as those in the United States. These
markets tend to be smaller in size, have less liquidity and historically have
had greater volatility than markets in the United States and some other
countries. The bid and offer spread on RMB Bonds, whether traded on the
inter-bank or listed bond market, may be high and the Fund may therefore incur
significant trading costs and may suffer losses when selling such investments.
In the absence of a regular and active secondary market, the Fund may not be
able to sell its bond holdings at prices or at times the Adviser and/or
Sub-Adviser consider advantageous and may need to hold the bonds until their
maturity date. In addition, there is less regulation and monitoring of Chinese
bond markets and the activities of investors, brokers and other participants
than in the United States. During periods of significant market volatility, the
Chinese government has, from time to time, intervened in its domestic bond
markets
to a greater degree than would be typical in more developed markets. Bond
markets in China are in the process of change and further development. This may
lead to trading volatility, unpredictable trading suspensions, difficulty in the
settlement and recording of transactions and difficulty in interpreting and
applying the relevant regulations.
Credit
Rating Risk.
RMB Bonds, whether they are traded on the inter-bank market or the
exchange-traded market, are generally rated by local credit rating agencies. The
rating industry in the PRC is still in its early development stage and, due to
lack of historical data and slow responses to certain credit events, the rating
methodologies used by the local credit rating agencies may be driven by domestic
factors rather than quantitative methods. In addition, the rating process may
lack transparency and the rating standards may be significantly different from
that adopted by internationally recognized credit rating agencies. Credit
ratings given by PRC rating agencies may therefore not be directly comparable
with those given by other international rating agencies. RMB Bonds may be
substantially more risky and the Fund may be exposed to a higher degree of
credit risk. A downward revision or withdrawal of any such rating may have an
adverse effect on market prices, liquidity and marketability of these RMB Bonds
and the Fund’s investments.
Available
Disclosure About Chinese Companies.
Disclosure and regulatory standards in emerging market countries, such as China,
are in many respects less stringent than U.S. standards. There is substantially
less publicly available information about Chinese issuers than there is about
U.S. issuers. Therefore, disclosure of certain material information may not be
made, and less information may be available to the Fund and other investors than
would be the case if the Fund’s investments were restricted to securities of
U.S. issuers. Chinese issuers are subject to accounting, auditing and financial
standards and requirements that differ, in some cases significantly, from those
applicable to U.S. issuers. In particular, the assets and profits appearing on
the financial statements of a Chinese issuer may not reflect its financial
position or results of operations in the way they would be reflected had such
financial statements been prepared in accordance with U.S. Generally Accepted
Accounting Principles.
Chinese
Corporate and Securities Law.
The regulations on investments and repatriation of capital by QFIIs and RQFIIs
are relatively new. As a result, the application and interpretation of such
investment regulations are therefore relatively untested. In addition, PRC
authorities have broad discretion in this regard. The Fund’s rights with respect
to its investments in RMB Bonds through the Sub-Adviser’s RQFII license will not
be governed by U.S. law, and instead will be governed by Chinese law. China
operates under a civil law system, in which court precedent is not binding.
Because there is no binding precedent to interpret existing statutes, there is
uncertainty regarding the implementation of existing law.
Legal
principles relating to corporate affairs and the validity of corporate
procedures, directors’ fiduciary duties and liabilities and stockholders’ rights
often differ from those that may apply in the United States and other countries.
Chinese laws providing protection to investors, such as laws regarding the
fiduciary duties of officers and directors, are undeveloped and will not provide
investors, such as the Fund, with protection in all situations where protection
would be provided by comparable law in the United States. China lacks a national
set of laws that address all issues that may arise with regard to a foreign
investor such as the Fund.
It
may therefore be difficult for a Fund to enforce its rights as an investor under
Chinese corporate and securities laws, and it may be difficult or impossible for
a Fund to obtain a judgment in court. Moreover, as Chinese corporate and
securities laws continue to develop, these developments may adversely affect
foreign investors, such as the Fund.
Foreign
Exchange Control. The
RMB is currently not a freely convertible currency. The Chinese government
maintains strict currency controls and regularly intervenes in the currency
market. The Chinese government’s actions may not be transparent or predictable.
As a result, the value of the RMB and the value of RMB Bonds may change quickly
and arbitrarily. These and other factors could have a negative impact on the
Fund’s performance and increase the volatility of an investment in the Fund.
Foreign
Currency Considerations.
Emerging markets such as China can experience high rates of inflation, deflation
and currency revaluation. The value of the RMB may be subject to a high degree
of fluctuation due to, among other things, changes in interest rates, the
effects of monetary policies issued by the PRC, the United States, foreign
governments, central banks or supranational entities, the imposition of currency
controls or other national or global political or economic developments. The
Fund’s exposure to the RMB and changes in value of the RMB versus the U.S.
dollar may result in reduced returns for the Fund. Moreover, the Fund may incur
costs in connection with conversions between U.S. dollars and RMB. The Chinese
government’s imposition of restrictions on the repatriation of RMB out of
Mainland China may limit the depth of the offshore RMB market and reduce the
liquidity of the Fund’s investments. These restrictions as well as any
accelerated appreciation or depreciation of RMB may adversely affect the Fund
and its investments. Under exceptional circumstances, payment of redemptions
and/or dividend payment in RMB may be delayed due to the exchange controls and
restrictions applicable to RMB.
The
Fund’s assets are expected to be primarily invested in RMB Bonds and the income
received by the Fund will be principally in RMB. Meanwhile, the Fund will
compute and expects to distribute its income in U.S. dollars, and the
computation of income will be made on the date that the income is earned by the
Fund at the foreign exchange rate in effect on that date. Therefore, if the
value of the RMB falls relative to the U.S. dollar between the earning of the
income and the time at which the Fund converts the RMB to U.S. dollars, the Fund
may be required to liquidate certain positions in order to make
distributions
if the Fund has insufficient cash in U.S. dollars to meet distribution
requirements under the Internal Revenue Code of 1986, as amended (the "Internal
Revenue Code"). The liquidation of investments, if required, may also have an
adverse impact on the Fund’s performance.
RMB
can be further categorized into onshore RMB (“CNY”), which can be traded only in
the PRC, and offshore RMB (“CNH”), which can be traded outside the PRC. CNY and
CNH are traded at different exchange rates and their exchange rates may not move
in the same direction. Although there has been a growing amount of RMB held
offshore, CNH cannot be freely remitted into the PRC and is subject to certain
restrictions. The Fund may also be adversely affected by the exchange rates
between CNY and CNH. In addition, there may not be sufficient amounts of RMB for
the Fund to be fully invested because the Fund has to convert U.S. dollars
received from the purchase of Creation Units (a large specified number of Shares
issued and redeemed by the Fund) into RMB to purchase RMB Bonds, and this may
result in settlement delays. Moreover, the trading and settlement of
RMB-denominated securities are recent developments in Hong Kong and there is no
assurance that problems will not be encountered with the systems or that other
logistical problems will not arise that could adversely impact the
Fund.
Risk
of the RQFII Regime. The
Index is comprised of RMB Bonds. In seeking to track the Index, the Fund intends
to primarily invest in RMB Bonds through the Sub-Adviser’s RQFII license,
although the Fund may, in the future, invest in RMB Bonds using Bond Connect or
the China interbank bond market program. In addition, the RQFII license of the
Sub-Adviser may be revoked by the Chinese regulators if, among other things, the
Sub-Adviser fails to observe CSRC, SAFE and other applicable Chinese
regulations, which are subject to change and such change may have potential
retrospective effect. There can be no assurance the Fund could retain a
replacement sub-adviser with an RQFII license or other means of investing in RMB
Bonds if that became necessary or appropriate for any reason.
The
Fund cannot predict what would occur if the RQFII license of the Sub-Adviser or
RQFII or QFII licenses generally were revoked, although such an occurrence would
likely have a material adverse effect on the Fund, including the requirement
that the Sub-Adviser on behalf of the Fund dispose of certain or all of its RMB
Bonds. Therefore, any such revocation may have a material adverse effect on the
ability of the Fund to achieve its investment objective. If the Fund is unable
to obtain sufficient exposure to the performance of the Index due to the
unavailability of the Sub-Adviser's RQFII license or for other reasons, the
Fund, subject to any necessary regulatory relief, could, among other things, as
a defensive measure limit or suspend creations until the Adviser and/or the
Sub-Adviser determine that the requisite exposure to RMB Bonds is obtainable. If
any of the above events were to occur, the Fund could trade at a significant
premium or discount to its net asset value (“NAV”) and could experience
substantial redemptions, and the Fund could, among other things, change its
investment objective by, for example, seeking to track an alternative index
focused on Chinese-related bonds or other appropriate investments, or decide to
liquidate.
The
regulations which regulate investments by RQFIIs in the People’s Republic of
China (“PRC”) and the repatriation of capital from RQFII investments are
relatively new and continue to evolve. The application and interpretation of
such investment regulations are therefore relatively untested and there is no
certainty as to how they will be applied. The PRC authorities and regulators
have been given wide discretion in applying and interpreting such investment
regulations and there is no precedent or certainty as to how such discretion may
be exercised now or in the future. The application and interpretation of such
investment regulations may adversely affect the Fund. In addition, there are
custody risks associated with investing through a RQFII, where, due to
requirements regarding establishing a custody account in the joint names of the
Fund and the Sub-Adviser, the Fund’s assets may not be as well protected from
the claims of the Sub-Adviser’s creditors than if the Fund had an account in its
name only.
The
Sub-Adviser, as a licensed RQFII, is currently permitted to repatriate RMB daily
and is not subject to RMB repatriation restrictions or prior approval. However,
there is no assurance that RQFIIs may not be subject to restrictions or prior
approval requirements in the future, though it will need to prepare a tax
payment commitment letter in respect of certain repatriation.
Any
additional restrictions imposed on the Sub-Adviser or RQFIIs generally may have
an adverse effect on the Fund’s ability to invest directly in RMB Bonds and its
ability to meet redemption requests.
Further,
the Fund will rely on the existing arrangements entered into between RQFIIs with
their respective PRC custodians with respect to the custody of their and
therefore the Fund’s assets in Chinese securities, and their PRC brokers in
relation to the execution of transactions in Chinese securities, in the PRC
markets. The Fund may, therefore, incur losses due to the acts or omissions of
the PRC brokers or the PRC custodians in the execution or settlement of any
transaction, or in the transfer of any funds or securities.
On
May 7, 2020, the People’s Bank of China (“PBOC”) and the State Administration of
Foreign Exchange (“SAFE”) jointly issued the Regulations on Funds of Securities
and Futures Investment by Foreign Institutional Investors (PBOC & SAFE
Announcement [2020] No. 2) (the "Regulations") which came into effect on June 6,
2020. The Regulations supersede certain post-registration rules applicable to
QFII and RQFII regimes. One of the key changes of the Regulations is the removal
of quota restrictions on investment. However, this is a relatively new
development, and there is no guarantee that the quotas will continue to be
relaxed.
RMB
Bonds will be held by a PRC sub-custodian pursuant to PRC regulations. Risks
related to the PRC sub-custodian are set out below at “Custody Risks of
Investing in RMB Bonds.” Also, the Fund may incur losses due to the acts or
omissions of the PRC sub-custodian or PRC brokers in the execution or settlement
of any transaction or in the transfer of any funds or securities. In such
event,
the relevant Fund may be adversely affected in the execution or settlement of
any transaction or in the transfer of any funds or securities.
Risk
of Investing via the Bond Connect and the CIBM Direct Access
Program.
The Bond Connect program and the CIBM Direct Access Program are relatively new.
Laws, rules, regulations, policies, notices, circulars or guidelines relating to
the programs as published or applied by the relevant authorities of the PRC are
untested and are subject to change from time to time. There can be no assurance
that the Bond Connect program and/or the CIBM Direct Access Program will not be
restricted, suspended or abolished. If such event occurs, the Fund's ability to
invest in the CIBM through the CIBM Direct Access Program or Bond Connect will
be adversely affected, and if the Fund is unable to adequately access the CIBM
through other means, the Fund's ability to achieve its investment objective will
be adversely affected.
The
Fund’s investments through Bond Connect are generally subject to Mainland China
securities laws and listing requirements, among other restrictions. Such
securities may lose their eligibility at any time, in which case they could be
sold but could no longer be purchased through Bond Connect. The Fund will not
benefit from access to Hong Kong investor compensation funds, which are set up
to protect against defaults of trades, when investing through Bond Connect. Bond
Connect is only available on days when markets in both Mainland China and Hong
Kong are open. As a result, prices of Bond Connect Securities may fluctuate at
times when the Fund is unable to add to or exit its position and, therefore, may
limit the Fund’s ability to trade when it would otherwise do so.
Under
the prevailing PRC regulations, eligible foreign investors who wish to
participate in the Bond Connect program may do so through an offshore custody
agent, registration agent or other third parties (as the case may be), who would
be responsible for making the relevant filings and account opening with the
relevant authorities. The Fund is therefore subject to the risk of default or
errors on the part of such agents. The Fund may also incur losses due to the
acts or omissions of the onshore settlement agent in the process of settling any
transactions. As a result, the value of the relevant Fund may be adversely
affected.
Under
the prevailing PRC regulations, eligible foreign institutional investors who
wish to invest directly in CIBM through the CIBM Direct Access Program may do so
through an onshore settlement agent, who would be responsible for making the
relevant filings and account opening with the relevant authorities. The Fund is
therefore subject to the risk of default or errors on the part of such agent.
The Fund may also incur losses due to the acts or omissions of the onshore
settlement agent in the process of settling any transactions. As a result, the
value of the relevant Fund may be adversely affected.
Investing
in the CIBM Direct Access Program is also subject to certain restrictions
imposed by the Mainland Chinese authorities on fund remittance and repatriation
which may potentially affect the Fund’s performance and liquidity. Any
non-compliance with or failure to meet the fund remittance and repatriation
requirements may result in regulatory sanctions, which in turn may have an
adverse impact on the portion of the Fund’s investment via the CIBM Direct
Access Program. Further, there is no assurance that the fund remittance and
repatriation requirements in relation to the Fund's investment through the CIBM
Direct Access Program will not be changed as a result of change in government
policies or foreign exchange control policies. The Fund may incur loss in the
event such changes.
Although
there is no quota limitation regarding investment via the CIBM Direct Access
Program, the Fund is required to make further filings with the PBOC if it wishes
to increase its anticipated investment size. There is no guarantee the PBOC will
accept such further filings. In the event any further filings for an increase in
the anticipated investment size are not accepted by the PBOC, the Fund’s ability
to invest in the CIBM will be limited and the performance of the Fund may be
unfavorably affected as a result.
Trading
through the Bond Connect program is performed through newly developed trading
platforms and operational systems. There is no assurance that such systems will
function properly (in particular, under extreme market conditions) or will
continue to be adapted to changes and developments in the market. In the event
that the relevant systems fails to function properly, trading through the Bond
Connect may be disrupted. The Fund's ability to trade through the Bond Connect
(and hence to pursue its investment strategy) may therefore be adversely
affected. In addition, where the Fund invests in the CIBM through the Bond
Connect program, it may be subject to risks of delays inherent in the order
placing and/or settlement.
The
Bond Connect utilizes delivery versus payment (DVP) settlement, and the movement
of cash and securities is carried out simultaneously on a real-time basis.
However, it should be noted that there is no assurance that settlement risks can
be eliminated and DVP settlement practices in the PRC may differ from practices
in developed markets. In particular, such settlement may not be instantaneous
and be subject to a delay of a period of hours. Where the counterparty does not
perform its obligations under a transaction or there is otherwise a failure due
to CCDC or SCH (as applicable), the Fund may sustain losses. Bond Connect trades
are settled in CNY and investors must have timely access to a reliable supply of
CNY in Hong Kong, which may incur conversion costs and cannot be guaranteed.
Moreover, Bond Connect Securities generally may not be sold, purchased or
otherwise transferred other than through Bond Connect in accordance with
applicable rules.
The
Fund’s investments through Bond Connect will be held on behalf of the Fund via a
book entry omnibus account in the name of the Central Moneymarkets Unit of Hong
Kong (“CMU”) maintained with a Mainland China-based custodian (either CCDC or
SCH). The Fund’s ownership interest in investments through Bond Connect will not
be reflected directly in book entry with CCDC or SCH and will instead only be
reflected on the books of its Hong Kong sub-custodian. Whilst the Bond Connect
Authorities (defined below) have expressly stated that investors will enjoy the
rights and interests of the bonds acquired through the Bond
Connect
in accordance with applicable laws, the exercise and the enforcement of
beneficial ownership rights over such bonds in the courts in China is yet to be
tested. In addition, in the event that the nominee holder (i.e.
CMU) becomes insolvent, such bonds may form part of the pool of assets of the
nominee holder available for distribution to its creditors and the Fund, as a
beneficial owner, may have no rights whatsoever in respect thereof.
"Bond
Connect Authorities" refers to the exchanges, trading systems, settlement
systems, governmental, regulatory or tax bodies which provide services and/or
regulate Bond Connect and activities relating to Bond Connect, including,
without limitation, the PBOC, the HKMA, the HKEx, the CEFTS, the CMU, the CSDCC
and the SHCH and any other regulator, agency or authority with jurisdiction,
authority or responsibility in respect of Bond Connect.
Investment
and Repatriation Restrictions.
Investments by the Fund in RMB Bonds through the Sub-Adviser’s RQFII license or
the China interbank bond market program and other Chinese financial instruments
regulated by the CSRC, including warrants and open- and closed-end investment
companies, are subject to governmental pre-approval limitations on the quantity
that the Fund may purchase or limits on the classes of securities in which the
Fund may invest.
The
Sub-Adviser, as a licensed RQFII, is currently permitted to repatriate RMB daily
and is not subject to RMB repatriation restrictions or prior approval. However,
there is no assurance that PRC rules and regulations will not change or that
repatriation restrictions will not be imposed in the future. Any additional
restrictions imposed on the Sub-Adviser or RQFIIs generally may have an adverse
effect on the Fund’s ability to invest directly in RMB Bonds and its ability to
meet redemptions requests.
If
the Fund’s direct investments in RMB Bonds through the Sub-Adviser’s RQFII
license become subject to repatriation restrictions, the Fund may be unable to
satisfy distribution requirements applicable to RICs under the Internal Revenue
Code and be subject to income and excise tax at the Fund level. In addition, the
Fund could be required to recognize unrealized gains, pay taxes and make
distributions before re-qualifying for taxation as a RIC. See the prospectus
under “Shareholder Information—Tax Information—Taxes on Distributions” for more
information.
The
Fund may elect, for U.S. federal income tax purposes, to treat Chinese taxes
(including withholding taxes) paid by the Fund as paid by its shareholders. Even
if the Fund is qualified to make that election and does so this treatment will
not apply with respect to amounts the Fund reserves, if any, in anticipation of
the imposition of withholding taxes not currently in effect. If these amounts
are used to pay any tax liability of the Fund in a later year, they will be
treated as paid by the shareholders in such later year, even if they are imposed
with respect to income of an earlier year. See the prospectus under “Shareholder
Information—Tax Information” for a further description of this
risk.
The
Chinese government limits foreign investment in the securities of certain
Chinese issuers entirely if foreign investment is banned in respect of the
industry in which the relevant Chinese issuers are conducting their business.
These restrictions or limitations may have adverse effects on the liquidity and
performance of the Fund holdings as compared to the performance of the Index.
This may increase the risk of tracking error and may adversely affect the Fund’s
ability to achieve its investment objective.
Risk
of Loss of Favorable U.S. Tax Treatment.
The Fund intends to distribute annually all or substantially all of its
investment company taxable income and net capital gain. However, if the Fund
does not repatriate funds associated with direct investment in RMB Bonds on a
timely basis, it may be unable to satisfy the distribution requirements required
to qualify for the favorable tax treatment otherwise generally afforded to RICs
under the Internal Revenue Code. If the Fund fails to qualify for any taxable
year as a RIC, the Fund would be treated as a corporation subject to U.S.
federal income tax, thereby subjecting any income earned by the Fund to tax at
the corporate level currently at a 21% U.S. federal tax rate and, when such
income is distributed, to a further tax at the shareholder level to the extent
of the Fund’s current or accumulated earnings and profits. In addition, the Fund
would not be eligible for a deduction for dividends paid to shareholders. In
addition, the Fund could be required to recognize unrealized gains, pay taxes
and make distributions (any of which could be subject to interest charges)
before re-qualifying for taxation as a RIC. See below under “Shareholder
Information—Tax Information—Taxes on Distributions” for more
information.
Foreign
Exchange Control.
The Chinese government heavily regulates the domestic exchange of foreign
currencies within China. Chinese law requires that all domestic transactions
must be settled in RMB, places significant restrictions on the remittance of
foreign currency and strictly regulates currency exchange from RMB. Under SAFE
regulations, Chinese corporations may only purchase foreign currencies through
government approved banks. In general, Chinese companies must receive approval
from or register with the Chinese government before investing in certain capital
account items, including direct investments and loans, and must thereafter
maintain separate foreign exchange accounts for the capital items. Foreign
investors may only exchange foreign currencies at specially authorized banks
after complying with documentation requirements. These restrictions may
adversely affect the Fund and its investments. There may not be sufficient
amounts of RMB for the Fund to be fully invested because the Fund has to convert
U.S. dollars received from the purchase of Creation Units into RMB to purchase
RMB-denominated investments. It should also be noted that that the PRC
government’s policies on exchange control and repatriation restrictions are
subject to change, and any such change may adversely impact the Fund. There can
be no assurance that the RMB exchange rate will not fluctuate widely against the
U.S.
dollar
or any other foreign currency in the future. Under exceptional circumstances,
payment of redemptions and/or dividend payment in RMB may be delayed due to the
exchange controls and restrictions applicable to RMB.
Custody
Risks of Investing in RMB Bonds.
Each PRC sub-custodian maintains the Fund’s RMB deposit accounts and oversees
the Fund’s investments in RMB Bonds to ensure compliance with the rules and
regulations of the CSRC and the People’s Bank of China. The securities purchased
by the Sub-Adviser, in its capacity as a RQFII, on behalf of the Fund, will be
credited to a securities trading account maintained by the PRC sub-custodian in
the joint names of the Fund and the Sub-Adviser, and the Fund will pay the cost
of the account. The Sub-Adviser may not use the account for any other purpose
than for maintaining the Fund’s assets invested in RMB Bonds. However, given
that the securities trading account will be maintained in the joint names of the
Sub-Adviser and the Fund, the Fund’s assets may not be as well protected as they
would be if it were possible for them to be registered and held solely in the
name of the Fund. In particular, there is a risk that creditors of the
Sub-Adviser may assert that the securities are owned by the Sub-Adviser and not
the Fund, and that a court would uphold such an assertion, in which case
creditors of the Sub-Adviser could seize assets of the Fund.
Investors
should also note that cash deposits in the Fund’s account with the PRC
sub-custodian will not be segregated from the proprietary assets of the PRC
sub-custodian or the assets of its other clients. Therefore, to the extent the
Fund’s assets are commingled, the cash deposits will be vulnerable in the event
of a liquidation or bankruptcy by the PRC sub-custodian. Under such
circumstances, the Fund will not have any proprietary rights to the cash
deposited in the account, and the Fund will become an unsecured creditor, and
would have no priority over the claims of any other unsecured creditors to the
assets of the PRC sub-custodian. The Fund may encounter difficulties or delays
in recovering such debt, or may not be able to recover it in full or at all, in
which case the Fund will suffer losses.
Renminibi
Currency Risk. Emerging
markets such as China can experience high rates of inflation, deflation and
currency devaluation. The value of the RMB may be subject to a high degree of
fluctuation due to, among other things, changes in interest rates, the effects
of monetary policies issued by the PRC, the United States, foreign governments,
central banks or supranational entities, the imposition of currency controls or
other national or global political or economic developments. The income received
by the Fund for its investments denominated in RMB will principally be in RMB.
The Fund’s exposure to the RMB and changes in value of the RMB versus the U.S.
dollar may result in reduced returns for the Fund. Moreover, the Fund may incur
costs in connection with conversions between U.S. dollars and RMB. The RMB is
currently not a freely convertible currency. The Chinese government places
strict regulation on the RMB and sets the value of the RMB to levels dependent
on the value of the U.S. dollar. The Chinese government’s imposition of
restrictions on the repatriation of RMB out of Mainland China may limit the
depth of the offshore RMB market and reduce the liquidity of the Fund’s
investments. The international community has requested that China ease its
restrictions on currency exchange, but it is unclear whether the Chinese
government will change its policy. These restrictions may adversely affect the
Fund and its investments. The Fund may also be exposed to both offshore RMB
(CNH) and onshore RMB (CNY). Although CNH and CNY are the same currency, they
trade at different rates. To the extent the Fund carries out conversions between
offshore RMB (CNH) and onshore RMB (CNY), investors should note that CNH and CNY
trade a different rates. Any divergence between CNH and CNY may adversely impact
investors. Any divergence between CNH and CNY may adversely impact the
Fund.
Chinese
Banking Industry Risk. The
Chinese banking industry is a highly regulated industry and is subject to laws
and regulations touching all aspects of the banking business. The principal
regulators include the CBRC and the PBOC. These regulators are given wide
discretion in exercising their authority. The banking regulatory regime in China
is currently undergoing significant changes, including changes in laws and
regulations, as it moves toward a more transparent regulatory process. Some of
these changes may have an adverse impact on the performance of Chinese banks
that issued RMB Bonds and thus may adversely affect their capacity to honor
their commitments under the RMB Bonds to the holders of such bonds, which may
include the Fund.
PRC
Tax Risk. Under
current regulations in the PRC, foreign investors may invest in PRC securities,
in general, through institutions that have obtained either RQFII status, or by
investing in participatory notes and other access products issued by
institutions with RQFII status. Since only RQFII’s interests in PRC securities
are recognized under the PRC laws, any tax liability would, if it arises, be
payable by the QFII or RQFII.
Under
current PRC Enterprise Income Tax Law (“PRC EIT law”) and regulations, any
entity considered to be a tax resident of the PRC would be subject to PRC
enterprise income tax (“EIT”) at the rate of 25% on its worldwide taxable
income. If an entity were considered to be a non-resident enterprise with a
“permanent establishment” in the PRC, it would be subject to PRC EIT at the rate
of 25% on the profits attributable to the permanent establishment. The Fund
intends to operate in a manner that will prevent it from being treated as tax
residents of the PRC and from having a permanent establishment in the PRC,
though this cannot be guaranteed. It is possible, however, that the PRC could
disagree with such an assessment or that changes in PRC tax law could affect the
PRC EIT status of the Fund.
If
the entity is a non-PRC tax resident enterprise without permanent establishment
in the PRC, the PRC-sourced income (including cash dividends, distributions,
interest and capital gains) derived by it from any investment in PRC securities
would be subject to PRC withholding income tax (“WHT”) at the rate of 10% unless
exempt or reduced under the PRC EIT Law or a relevant tax treaty. Interest
income from certain bonds (i.e.
government bonds, local government bonds and railway bonds) are also entitled to
a
100%
EIT exemption and 50% EIT exemption respectively in accordance with the
Implementation Rules to the Enterprise Income Tax Law and a circular dated 10
March 2016 on Income Tax Policies on Interest Income from Railway Bonds under
Caishui [2016] No. 30. Pursuant to Caishui [2018] No. 108 ("Notice 108"),
foreign institutional investors are exempt from EIT on bond interest income
derived from November 7, 2018 to November 6, 2021. Such EIT exemption would not
be applicable if the bond interest derived is connected with the foreign
institutional investors' establishment or place in the PRC.
The
Fund may also potentially be subject to PRC value-added tax at the rate of 6% on
capital gains derived from trading of PRC securities. However, Caishui [2016]
No. 36 (“Notice 36”) and Caishui [2016] No. 70 (“Notice 70”) provides a
value-added tax exemption for RQFIIs in respect of their gains derived from the
trading of PRC securities. In addition, deposit interest income and interest
received from government bonds and local government bonds are also exempt from
VAT. The prevailing VAT regulations do not specifically exempt VAT on interest
derived from bonds other than the aforesaid. Hence, interest income on
non-government bonds (including corporate bonds) technically should be subject
to 6% VAT. However, in accordance with Cai Shui [2016] No. 70 ("Circular 70"),
the Supplementary Notice of the Ministry of Finance and the State Administration
of Taxation on VAT Policies for Interbank Dealings of Financial Institutions in
respect of bond interest income derived by foreign institutional investors, PRC
VAT on investments in the CIBM (including currency market, bond market and
derivative market) is exempted from November 7, 2018 to November 6, 2021
pursuant to Notice 108.
In
addition, urban maintenance and construction tax (currently at rates ranging
from 1% to 7%), educational surcharge (currently at the rate of 3%) and local
educational surcharge (currently at the rate of 2%) (collectively the
“Surtaxes”) are imposed based on value-added tax liabilities. PRC securities
that are exempt from value-added tax, are also exempt from the applicable
Surtaxes.
Aside
from the above-mentioned general rules, the PRC tax authorities have not
clarified whether income tax and other tax categories are payable on gains
arising from the trading in securities that do not constitute shares or other
equity investments, such as bonds and other fixed income securities, of RQFIIs
and other investors through Bond Connect or the CIBM Direct Access Program. It
is therefore possible that the relevant tax authorities may, in the future,
clarify the tax position and impose an income tax or withholding tax on realized
gains derived from dealing in PRC fixed income securities.
The
Fund does not currently make any tax provision in respect of any potential PRC
withholding income tax, EIT, value-added tax and Surtaxes on gains derived from
disposal of equity and bonds and other fixed income securities. However, in
light of the above-mentioned uncertainty and in order to meet any potential tax
liability for gains on disposal of bonds and other fixed income securities, the
Fund reserves the right to provide for the withholding income tax on such gains
or income, and withhold income tax of 10% for the account of Fund in respect of
any potential tax on the gross realized and unrealized capital gains. Upon any
future resolution of the above mentioned uncertainty or further changes to the
tax law or policies, the Fund will, as soon as practicable, make relevant
adjustments to the amount of tax provision (if any) as they consider necessary.
The amount of any such tax provision will be disclosed in the accounts of the
Fund.
Any
such withholding income tax on gains on disposal of fixed income securities may
reduce the income from, and/or adversely affect the performance of, the Fund. In
light of the uncertainties of the tax position, RQFIIs may withhold certain
amounts in anticipation of PRC withholding income tax on the gains on disposal
of the Fund’s investments in China fixed income securities. The amount withheld
would be retained by the relevant RQFII until the position with regard to PRC
taxation of RQFIIs Fund in respect of their gains and profits has been
clarified. In the event that such position is clarified to the advantage of the
RQFII and the Fund, the RQFII may rebate all or part of the withheld amount. The
withheld amount so rebated shall be retained by the Fund and reflected in the
value of its shares. Notwithstanding the foregoing, no investor who redeems
his/her shares before the rebate of any withheld amounts shall be entitled to
claim any part of such rebate.
It
should also be noted that the actual applicable tax imposed by the PRC tax
authorities may be different and may change from time to time. There is a
possibility of the rules being changed and taxes being applied retrospectively.
As such, any provision for taxation made by the Fund may be excessive or
inadequate to meet final PRC tax liabilities. Consequently, investors of the
Fund may be advantaged or disadvantaged depending upon the final tax
liabilities, the level of provision and when they subscribed and/or redeemed
their shares in/from the Fund.
If
the actual applicable tax levied by the PRC tax authorities is higher than that
provided for by the relevant Fund so that there is a shortfall in the tax
provision amount, investors should note that the Net Asset Value of the Fund may
suffer more than the tax provision amount as that Fund will ultimately have to
bear the additional tax liabilities. In this case, the then existing and new
investors will be disadvantaged. On the other hand, if the actual applicable tax
rate levied by the PRC tax authorities is lower than that provided for by the
Fund so that there is an excess in the tax provision amount, investors who have
redeemed shares in the Fund before the PRC tax authorities’ ruling, decision or
guidance in this respect will be disadvantaged as they would have borne the loss
from the Fund’s over-provision. In this case, the then existing and new
Shareholders may benefit if the difference between the tax provision and the
actual taxation liability under that lower tax amount can be returned to the
account of the Fund as assets thereof.
Shareholders
should note that the above disclosure has been prepared based on an
understanding of the laws, regulations and practice in the PRC in-force as of
the date of this Prospectus.
It
is possible that the current tax laws, regulations and practice in the PRC will
change, including the possibility of taxes being applied retrospectively, and
that such changes may result in higher taxation on PRC investments than is
currently contemplated.
Sovereign
Bond Risk.
Investments in sovereign bonds involve special risks not present in corporate
bonds. The governmental authority that controls the repayment of the bonds may
be unable or unwilling to make interest payments and/or repay the principal on
its debt or to otherwise honor its obligations. If an issuer of sovereign bonds
defaults on payments of principal and/or interest, the Fund may have limited
recourse against the issuer. During periods of economic uncertainty, the market
prices of sovereign bonds, and the Fund’s NAV, may be more volatile than prices
of corporate bonds, which may result in losses. In the past, certain governments
of emerging market countries have declared themselves unable to meet their
financial obligations on a timely basis, which has resulted in losses for
holders of sovereign bonds.
Risk
of Investing in the Financials Sector.
The Fund will be sensitive to, and its performance may depend to a greater
extent on, the overall condition of the financials sector. Companies in the
financials sector may be subject to extensive government regulation that affects
the scope of their activities, the prices they can charge and the amount of
capital they must maintain. The profitability of companies in the financials
sector may be adversely affected by increases in interest rates, by loan losses,
which usually increase in economic downturns, and by credit rating downgrades.
In addition, the financials sector is undergoing numerous changes, including
continuing consolidations, development of new products and structures and
changes to its regulatory framework. Furthermore, some companies in the
financials sector perceived as benefiting from government intervention in the
past may be subject to future government-imposed restrictions on their
businesses or face increased government involvement in their operations.
Increased government involvement in the financials sector, including measures
such as taking ownership positions in financial institutions, could result in a
dilution of the Fund’s investments in financial institutions.
Risk
of Investing in the Industrials Sector. The
Fund will be sensitive to, and its performance will depend to a greater extent
on, the overall condition of the industrials sector. The industrials sector
comprises companies that produce capital goods used in construction and
manufacturing, such as companies that make and sell machinery, equipment and
supplies that are used to produce other goods. Companies in the industrials
sector may be adversely affected by changes in government regulation, world
events and economic conditions. In addition, companies in the industrials sector
may be adversely affected by environmental damages, product liability claims and
exchange rates. The stock prices of companies in the industrials sector are
affected by supply and demand both for their specific product or service and for
industrial sector products in general. The products of manufacturing companies
may face product obsolescence due to rapid technological developments and
frequent new product introduction. In addition, the industrials sector may also
be adversely affected by changes or trends in commodity prices, which may be
influenced or characterized by unpredictable factors.
Risk
of Investing in the Utilities Sector. The
Fund will be sensitive to, and its performance will depend to a greater extent
on, the overall condition of the utilities sector. The utilities sector
comprises companies that provide basic amenities, such as electricity, water,
sewage services, dams, and natural gas to residential, industrial, commercial,
and government customers. Issuers in the utilities sector are subject to a
variety of factors that may adversely affect their business or operations,
including high interest costs in connection with capital construction and
improvement programs, difficulty in raising capital in adequate amounts on
reasonable terms in periods of high inflation and unsettled capital markets, and
the effects of effects of economic slowdowns and surplus capacity. Companies in
the utilities sector are subject to extensive regulation, including governmental
regulation of rates charged to customers, and may face difficulty in obtaining
regulatory approval of new technologies. The effects of a U.S. national energy
policy and lengthy delays and greatly increased costs and other problems
associated with the design, construction, licensing, regulation and operation of
nuclear facilities for electric generation, including, among other
considerations, the problems associated with the use of radioactive materials
and the disposal of radioactive wastes, may adversely affect companies in the
utilities sector. Certain companies in the utilities sector may be inexperienced
and may suffer potential losses resulting from a developing deregulatory
environment. Technological innovations may render existing plants, equipment or
products obsolete. Companies in the utilities sector may face increased
competition from other providers of utility services. The potential impact of
terrorist activities on companies in the utilities sector and its customers and
the impact of natural or man-made disasters may adversely affect the utilities
sector. Issuers in the utilities sector also may be subject to regulation by
various governmental authorities and may be affected by the imposition of
special tariffs and changes in tax laws, regulatory policies and accounting
standards.
Credit
Risk.
Debt securities are subject to credit risk. Credit risk refers to the
possibility that the issuer or guarantor of a security will be unable and/or
unwilling to make timely interest payments and/or repay the principal on its
debt or to otherwise honor its obligations and/or default completely on
securities. Debt securities are subject to varying degrees of credit risk,
depending on the issuer’s financial condition and on the terms of the
securities, which may be reflected in credit ratings. There is a possibility
that the credit rating of a debt security may be downgraded after purchase or
the perception of an issuer’s credit worthiness may decline, which may adversely
affect the value of the security. The Fund may hold securities that are insured
by a bond issuer. A downgrade of the credit rating of such bond issuer may cause
the value of the insured security to decline. Lower credit quality may also
affect liquidity and make it difficult for the Fund to sell the
security.
Interest
Rate Risk. Debt
securities, such as bonds, are also subject to interest rate risk. Interest rate
risk refers to fluctuations in the value of a security resulting from changes in
the general level of interest rates. When the general level of interest rates
goes up, the prices of most debt securities go down. When the general level of
interest rates goes down, the prices of most debt securities go up. Many factors
can cause interest rates to rise, including central bank monetary policy, rising
inflation rates and general economic conditions. The historically low interest
rate environment increases the risk associated with rising interest rates,
including the potential for periods of volatility and increased
redemptions.
In
addition, bonds with longer durations tend to be more sensitive to interest rate
changes, usually making them more volatile than bonds with shorter durations. To
the extent the Fund invests a substantial portion of its assets in debt
securities with longer-term maturities, rising interest rates may cause the
value of the Fund’s investments to decline significantly.
In
addition, in response to the COVID-19 pandemic, as with other serious economic
disruptions, governmental authorities and regulators are enacting significant
fiscal and monetary policy changes, including providing direct capital infusions
into companies, creating new monetary programs and lowering interest rates.
These actions present heightened risks to debt instruments, and such risks could
be even further heightened if these actions are unexpectedly or suddenly
reversed or are ineffective in achieving their desired outcomes.
Risk
of Subordinated Obligations.
Payments under some bonds may be structurally subordinated to all existing and
future liabilities and obligations of each of the respective subsidiaries and
associated companies of an issuer of the bond. Claims of creditors of such
subsidiaries and associated companies will have priority as to the assets of
such subsidiaries and associated companies over the issuer and its creditors,
including the Fund, who seek to enforce the terms of the bond. Certain bonds do
not contain any restrictions on the ability of the subsidiaries of the issuers
to incur additional unsecured indebtedness.
Risk
of Investing in Foreign Securities.
Investments in the securities of foreign issuers involve risks beyond those
associated with investments in U.S. securities. These additional risks include
greater market volatility, the availability of less reliable financial
information, higher transactional and custody costs, taxation by foreign
governments, decreased market liquidity and political instability. Because
certain foreign securities markets may be limited in size, the activity of large
traders may have an undue influence on the prices of securities that trade in
such markets. Certain foreign markets that have historically been considered
relatively stable may become volatile in response to changed conditions or new
developments. Increased interconnectivity of world economies and financial
markets increases the possibility that adverse developments and conditions in
one country or region will affect the stability of economies and financial
markets in other countries or regions. The Fund invests in securities of issuers
located in countries whose economies are heavily dependent upon trading with key
partners. Any reduction in this trading may have an adverse impact on the Fund’s
investments. Because the Fund may invest in securities denominated in foreign
currencies and some of the income received by the Fund may be in foreign
currency, changes in currency exchange rates may negatively impact the Fund’s
return. The risks of investing in emerging market countries are greater than
risks associated with investments in foreign developed countries.
Foreign
issuers are often subject to less stringent requirements regarding accounting,
auditing, financial reporting and record keeping than are U.S. issuers, and
therefore, not all material information may be available or reliable. Securities
exchanges or foreign governments may adopt rules or regulations that may
negatively impact the Fund’s ability to invest in foreign securities or may
prevent the Fund from repatriating its investments. In addition, the Fund may
not receive shareholder communications or be permitted to vote the securities
that it holds, as the issuers may be under no legal obligation to distribute
shareholder communications.
Certain
foreign markets may rely heavily on particular industries or foreign capital and
are more vulnerable to diplomatic developments, the imposition of economic
sanctions against a particular country or countries, organizations, entities
and/or individuals, changes in international trade patterns, trade barriers and
other protectionist or retaliatory measures. The United States and other nations
or international organizations may impose economic sanctions or take other
actions that may adversely affect issuers of specific countries. Economic
sanctions could, among other things, effectively restrict or eliminate the
Fund’s ability to purchase or sell securities or groups of securities for a
substantial period of time, and may make the Fund’s investments in such
securities harder to value. These sanctions, any future sanctions or other
actions, or even the threat of further future sanctions or other actions, may
negatively affect the value and liquidity of the Fund.
Also,
certain issuers located in foreign countries in which the Fund invests may
operate in, or have dealings with, countries subject to sanctions and/or
embargoes imposed by the U.S. Government and the United Nations and/or countries
identified by the U.S. Government as state sponsors of terrorism. As a result,
an issuer may sustain damage to its reputation if it is identified as an issuer
which operates in, or has dealings with, such countries. The Fund, as an
investor in such issuers, will be indirectly subject to those
risks.
Risk
of Investing in Emerging Market Issuers.
Investments in securities of emerging markets issuers are exposed to a number of
risks that may make these investments volatile in price or difficult to trade.
Political risks may include unstable governments, nationalization, restrictions
on foreign ownership, laws that prevent investors from getting their money out
of a country and legal systems that do not protect property rights as well as
the laws of the United States. Market risks may include economies that
concentrate in only a few industries, securities issues that are held by only a
few investors, liquidity issues and limited trading
capacity
in local exchanges and the possibility that markets or issues may be manipulated
by foreign nationals who have inside information.
Risk
of Cash Transactions. Unlike
other ETFs, the Fund effects its creations and redemptions at least partially
for cash, rather than wholly for in-kind securities. Because the Fund currently
intends to effect a portion of redemptions for cash, rather than in-kind
distributions, it may be required to sell portfolio securities in order to
obtain the cash needed to distribute redemption proceeds, which involves
transaction costs that the Fund may not have incurred had it effected
redemptions entirely in kind. These costs may include brokerage costs and/or
taxable gains or losses, which may be imposed on the Fund and decrease the
Fund’s NAV to the extent such costs are not offset by a transaction fee payable
by an AP. If the Fund recognizes gain on these sales, this generally will cause
the Fund to recognize gain it might not otherwise have recognized if it were to
distribute portfolio securities in-kind, or to recognize such gain sooner than
would otherwise be required. As a result, an investment in the Fund may be less
tax-efficient than an investment in a more conventional ETF. Other ETFs
generally are able to make in-kind redemptions and avoid realizing gains in
connection with transactions designed to raise cash to meet redemption requests.
The Fund generally intends to distribute these gains to shareholders to avoid
being taxed on this gain at the Fund level and otherwise comply with the special
tax rules that apply to it. This strategy may cause shareholders to be subject
to tax on gains they would not otherwise be subject to, or at an earlier date
than, if they had made an investment in a different ETF.
Market
Risk.
The prices of the securities in the Fund are subject to the risks associated
with investing in bonds, including general economic conditions, sudden and
unpredictable drops in value, exchange trading suspensions and closures and
public health risks. These risks may be magnified if certain social, political,
economic and other conditions and events (such as natural disasters, epidemics
and pandemics, terrorism, conflicts and social unrest) adversely interrupt the
global economy; in these and other circumstances, such events or developments
might affect companies world-wide. Overall securities values could decline
generally or underperform other investments. An investment in the Fund may lose
money.
Operational
Risk.
The Fund is exposed to operational risk arising from a number of factors,
including but not limited to, human error, processing and communication errors,
errors of the Fund’s service providers, counterparties or other third-parties,
failed or inadequate processes and technology or system failures.
Sampling
Risk.
The Fund’s use of a representative sampling approach will result in its holding
a smaller number of securities than are in the Index. As a result, an adverse
development respecting an issuer of securities held by the Fund could result in
a greater decline in NAV than would be the case if the Fund held all of the
securities in the Index. Conversely, a positive development relating to an
issuer of securities in the Index that is not held by the Fund could cause the
Fund to underperform the Index. To the extent the assets in the Fund are
smaller, these risks will be greater.
Index
Tracking Risk.
The Fund’s return may not match the return of the Index for a number of reasons.
For example, the Fund incurs a number of operating expenses, including taxes,
not applicable to the Index and incurs costs associated with buying and selling
securities and entering into derivatives transactions, especially when
rebalancing the Fund’s securities holdings to reflect changes in the composition
of the Index, or (to the extent creations and redemptions are effected in cash)
raising cash to meet redemptions or deploying cash in connection with newly
created Creations Units, which are not factored into the return of the Index.
Transaction costs, including brokerage costs, will decrease the Fund’s NAV to
the extent not offset by the transaction fee payable by an Authorized
Participant (“AP”). Market disruptions and regulatory restrictions could have an
adverse effect on the Fund’s ability to adjust its exposure to the required
levels in order to track the Index. There is no assurance that the Fund's Index
Provider (defined herein) or any agents that may act on its behalf will compile
the Fund's Index accurately, or that the Index will be determined, composed or
calculated accurately. Errors in respect of the quality, accuracy and
completeness of the data used to compile the Index may occur from time to time
and may not be identified and corrected by the Index Provider for a period of
time or at all, particularly where the indices are less commonly used as
benchmarks by funds or managers. Therefore, gains, losses or costs associated
with errors of the Index Provider or its agents will generally be borne by the
Fund and its shareholders. For example, during a period where the Fund’s Index
contains incorrect constituents, the Fund would have market exposure to such
constituents and would be underexposed to the Index’s other constituents. Such
errors may negatively or positively impact the Fund and its shareholders.
Shareholders should understand that any gains from the Index provider's errors
will be kept by the Fund and its shareholders and any losses or costs resulting
from the Index provider's errors will be borne by the Fund and its shareholders.
When the Index is rebalanced and the Fund in turn rebalances its portfolio to
attempt to increase the correlation between the Fund’s portfolio and the Index,
any transaction costs and market exposure arising from such portfolio
rebalancing will be borne directly by the Fund and its shareholders. Apart from
scheduled rebalances, the Index provider or its agents may carry out additional
ad hoc rebalances to the Index. Therefore, errors and additional ad hoc
rebalances carried out by the Index provider or its agents to the Index may
increase the costs to and the tracking error risk of the Fund. In addition, the
Fund's use of a representative sampling approach may cause the Fund to not be as
well correlated with the return of the Index as would be the case if the Fund
purchased all of the securities in the Index, or invested in them in the exact
proportions in which they are represented in the Index. The Fund’s performance
may also deviate from the return of the Index due to legal restrictions or
limitations imposed by the governments of certain countries, certain listing
standards of the Fund’s listing exchange (the “Exchange”), a lack of liquidity
on stock exchanges in which such securities trade, potential adverse tax
consequences or other regulatory reasons (such as diversification requirements).
The Fund may value certain of its investments and/or other assets based on fair
value prices. To the extent the Fund calculates its NAV based on fair value
prices and the value of the Index is based on
securities’
closing prices (i.e.,
the value of the Index is not based on fair value prices), the Fund’s ability to
track the Index may be adversely affected. When markets are volatile, the
ability to sell securities at fair value prices may be adversely impacted and
may result in additional trading costs and/or increase the index tracking risk.
The Fund may also need to rely on borrowings to meet redemptions, which may lead
to increased expenses.
In
addition, any issues the Fund encounters with regard to currency convertibility
(including the cost of borrowing funds, if any) and repatriation may also
increase the index tracking risk. The Fund will be required to remit RMB to
settle the purchase of RMB Bonds and repatriate RMB to U.S. dollars to settle
redemption orders. In the event such remittance is delayed or disrupted, the
Fund will not be able to fully replicate the Index by investing in their
relevant RMB Bonds, which may lead to increased tracking error, and may need to
rely on borrowings to meet redemptions, which may lead to increased expenses.
Because the Index is priced in Chinese RMB and the Fund is priced in U.S.
dollars, the ability of the Fund to track the Index is in part subject to
foreign exchange fluctuations as between the U.S. dollar and the RMB. The Fund’s
performance may also deviate from the performance of the Index due to the impact
of withholding taxes, late announcements relating to changes to the Index and
high turnover of the Index. The Fund may underperform the Index when the value
of the U.S. dollar increases relative to the value of the RMB. Moreover, the
Fund may be delayed in purchasing or selling securities included in its Index.
Any issues the Fund encounters with regard to currency convertibility (including
the cost of borrowing funds, if any ) and repatriation may also increase the
index tracking risk. For tax efficiency purposes, the Fund may sell certain
securities, and such sale may cause the Fund to realize a loss and deviate from
the performance of the Index. These and any other issues the Fund encounters
with regard to investment restrictions, trade settlements, currency
convertibility (including the cost of borrowing funds, if any) and repatriation.
In light of the factors discussed above, the Fund’s return may deviate
significantly from the return of the Index. Index tracking risk may be
heightened during times of increased market volatility or other unusual market
conditions. Changes to the composition of the Index in connection with a
rebalancing or reconstitution of the Index may cause the Fund to experience
increased volatility, during which time the Fund’s index tracking risk may be
heightened.
Passive
Management Risk.
Unlike many investment companies, the Fund is not “actively” managed. Therefore,
unless a specific security is removed from the Index, the Fund generally would
not sell a security because the security’s issuer is in financial trouble. If a
specific security is removed from the Index, the Fund may be forced to sell such
security at an inopportune time or for prices other than at current market
values. An investment in the Fund involves risks similar to those of investing
in any fund invested in bonds, such as market fluctuations caused by such
factors as economic and political developments, changes in interest rates and
perceived trends in security prices. The Index may not contain the appropriate
or a diversified mix of securities for any particular economic cycle. The timing
of changes in the securities of the Fund’s portfolio in seeking to replicate the
Index could have a negative effect on the Fund. Unlike with an actively managed
fund, the Adviser and/or Sub-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. Additionally, unusual market conditions may
cause the Fund’s Index provider to postpone a scheduled rebalance or
reconstitution, which could cause the Fund’s Index to vary from its normal or
expected composition. This means that, based on market and economic conditions,
the Fund’s performance could be lower than funds that may actively shift their
portfolio assets to take advantage of market opportunities or to lessen the
impact of a market decline or a decline in the value of one or more
issuers.
Authorized
Participant Concentration Risk. The
Fund may have a limited number of financial institutions that act as APs, none
of which are obligated to engage in creation or redemption transactions. To the
extent that those APs exit the business, or are unable to or choose not to
process creation and/or redemption orders, and no other AP is able to step
forward to create and redeem, there may be a significantly diminished trading
market for Shares or Shares may trade like closed-end funds at a discount (or
premium) to NAV and possibly face trading halts and/or de-listing. The AP
concentration risk may be heightened in scenarios where APs have limited or
diminished access to the capital required to post collateral.
No
Guarantee of Active Trading Market.
While Shares are listed on the Exchange, there can be no assurance that an
active trading market for the Shares will be maintained. Further, secondary
markets may be subject to irregular 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 the Shares and in executing
creation and redemption orders, which could cause a material deviation in the
Fund’s market price from its NAV. Van Eck Securities Corporation, the
distributor of the Shares (the “Distributor”), does not maintain a secondary
market in the Shares. Investors purchasing and selling Shares in the secondary
market may not experience investment results consistent with those experienced
by those APs creating and redeeming directly with the Fund.
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 the Fund’s portfolio securities and the Fund’s market price. This reduced
effectiveness could result in Fund Shares trading at a price that differs
materially from NAV and also in greater than normal intraday bid/ask spreads for
Fund Shares.
Trading
Issues. Trading
in Shares on the Exchange may be halted due to market conditions or for reasons
that, in the view of the Exchange, make trading in Shares inadvisable. In
addition, trading in Shares on the Exchange is subject to trading halts caused
by extraordinary market volatility pursuant to the Exchange's “circuit breaker”
rules. If a trading halt or unanticipated early close of the Exchange occurs, a
shareholder may be unable to purchase or sell Shares of the Fund. There can be
no assurance that the requirements of the Exchange necessary to maintain the
listing of the Fund will continue to be met or will remain
unchanged.
Fund
Shares Trading, Premium/Discount Risk and Liquidity of Fund Shares.
Disruptions to creations and redemptions, the existence of market volatility or
potential lack of an active trading market for Shares (including through a
trading halt), as well as other factors, may result in Shares trading at a
significant premium or discount to NAV or to the intraday value of the Fund’s
holdings. The NAV of the Shares will fluctuate with changes in the market value
of the Fund’s securities holdings. The market price of Shares will fluctuate, in
some cases materially, in accordance with changes in NAV and the intraday value
of the Fund’s holdings, as well as supply and demand on the Exchange. The
Adviser cannot predict whether Shares will trade below, at or above their NAV.
Given the fact that Shares can be created and redeemed by APs in Creation Units,
the Adviser believes that large discounts or premiums to the NAV of Shares
should not be sustained in the long-term. While the creation/redemption feature
is designed to make it likely that Shares normally will trade close to the value
of the Fund’s holdings, market prices are not expected to correlate exactly to
the Fund’s NAV due to timing reasons, supply and demand imbalances and other
factors. The 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 may
be closely related to, but not necessarily identical to, the same forces
influencing the prices of the securities of the Fund’s portfolio of investments
trading individually or in the aggregate at any point in time. If a shareholder
purchases Shares at a time when the market price is at a premium to the NAV or
sells Shares at a time when the market price is at a discount to the NAV, the
shareholder may pay significantly more or receive significantly less than the
underlying value of the Shares that were bought or sold or the shareholder may
be unable to sell his or her Shares. Any of these factors, discussed above and
further below, may lead to the Shares trading at a premium or discount to the
Fund’s NAV. In addition, because certain of the Fund’s underlying securities
trade on exchanges that are closed when the Exchange (i.e.,
the exchange that Shares of the Fund trade on) is open, there are likely to be
deviations between the expected value of an underlying security and the closing
security’s price (i.e.,
the last quote from its closed foreign market) resulting in premiums or
discounts to NAV that may be greater than those experienced by other ETFs. In
addition, the securities held by the Fund may be traded in markets that close at
a different time than the Exchange. Liquidity in those securities may be reduced
after the applicable closing times. Accordingly, during the time when the
Exchange is open but after the applicable market closing, fixing or settlement
times, bid/ask spreads and the resulting premium or discount to the Shares’ NAV
may widen. Additionally, in stressed market conditions, the market for the
Fund’s Shares may become less liquid in response to deteriorating liquidity in
the markets for the Fund’s underlying portfolio holdings. There are various
methods by which investors can purchase and sell Shares. Investors should
consult their financial intermediaries before purchasing or selling Shares of
the Fund.
When
you buy or sell Shares of the Fund through a broker, you will likely incur a
brokerage commission or other charges imposed by brokers. In addition, the
market price of Shares, like the price of any exchange-traded security, includes
a bid/ask spread charged by the market makers or other participants that trade
the particular security. The spread of the Fund’s Shares varies over time based
on the Fund’s trading volume and market liquidity and may increase if the Fund’s
trading volume, the spread of the Fund’s underlying securities, or market
liquidity decrease. In times of severe market disruption, including when trading
of the Fund’s holdings may be halted, the bid/ask spread may increase
significantly. This means that Shares may trade at a discount to the Fund’s NAV,
and the discount is likely to be greatest during significant market
volatility.
Non-Diversified
Risk. The
Fund is a separate investment portfolio of VanEck Vectors ETF Trust (the
“Trust”), which is an open-end investment company registered under the 1940 Act.
The Fund is classified as a “non-diversified” fund under the 1940 Act. Moreover,
the Fund is subject to the risk that it will be more volatile than a diversified
fund because the Fund may invest its assets in a smaller number of issuers or
may invest a larger proportion of its assets in a single issuer. Moreover, the
gains and losses on a single investment may have a greater impact on the Fund’s
NAV and may make the Fund more volatile than more diversified
funds.
Concentration
Risk.
The Fund’s assets may be concentrated in a particular sector or sectors or
industry or group of industries to the extent that the Index concentrates in a
particular sector or sectors or industry or group of industries. The securities
of many or all of the companies in the same sector or industry may decline in
value due to developments adversely affecting such sector or industry. By
concentrating its assets in a particular sector or sectors or industry or group
of industries, the Fund is subject to the risk that economic, political or other
conditions that have a negative effect on those sectors and/or industries may
negatively impact the Fund to a greater extent than if the Fund’s assets were
invested in a wider variety of sectors or industries.
ADDITIONAL
NON-PRINCIPAL INVESTMENT STRATEGIES
The
Fund may also invest in securities not included in the Index, money market
instruments, convertible securities, structured notes (notes on which the amount
of principal repayment and interest payments are based on the movement of one or
more specified factors, such as the movement of a particular stock or stock
index), and/or certain derivatives, which the Adviser or Sub-Adviser believes
will help the Fund track the Index. Depositary receipts not included in the
Fund's Index may be used by the Fund in seeking performance that corresponds to
the Index, and in managing cash flows, and may count towards compliance with the
Fund’s 80% policy. The Fund may also invest, to the extent permitted by the 1940
Act, in other affiliated and unaffiliated funds, such as open-end or closed-end
management investment companies, including other ETFs.
BORROWING
MONEY
The
Fund may borrow money from a bank up to a limit of one-third of the market value
of its assets. The Fund has entered or intends to enter into a credit facility
to borrow money for temporary, emergency or other purposes, including the
funding of shareholder redemption requests, trade settlements and as necessary
to distribute to shareholders any income required to maintain the Fund’s status
as a regulated investment company. To the extent that the Fund borrows money, it
may be leveraged; at such times, the Fund will appreciate or depreciate in value
more rapidly than the Index. Leverage generally has the effect of increasing the
amount of loss or gain the Fund might realize and may increase volatility in the
value of the Fund’s investments.
LENDING
PORTFOLIO SECURITIES
The
Fund may lend its portfolio securities to brokers, dealers and other financial
institutions desiring to borrow securities to complete transactions and for
other purposes. In connection with such loans, the Fund receives cash, U.S.
government securities and stand-by letters of credit not issued by the Fund’s
bank lending agent equal to at least 102% of the value of the portfolio
securities being loaned. This collateral is marked-to-market on a daily basis.
Although the Fund will receive collateral in connection with all loans of its
securities holdings, the Fund would be exposed to a risk of loss should a
borrower fail to return the borrowed securities (e.g.,
the Fund would have to buy replacement securities and the loaned securities may
have appreciated beyond the value of the collateral held by the Fund) or become
insolvent. The Fund may pay fees to the party arranging the loan of securities.
In addition, the Fund will bear the risk that it may lose money because the
borrower of the loaned securities fails to return the securities in a timely
manner or at all. The Fund could also lose money in the event of a decline in
the value of any cash collateral or in the value of investments made with the
cash collateral. These events could trigger adverse tax consequences for the
Fund. Substitute payments for dividends received by the Fund for securities
loaned out by the Fund will not be considered qualified dividend
income.
ADDITIONAL
NON-PRINCIPAL RISKS
Risk
of Investing in Derivatives.
Derivatives are financial instruments whose values are based on the value of one
or more reference assets or indicators, such as a security, currency, interest
rate, or index. The Fund’s use of derivatives involves risks different from, and
possibly greater than, the risks associated with investing directly in
securities and other more traditional investments. Moreover, although the value
of a derivative is based on an underlying asset or indicator, a derivative
typically does not carry the same rights as would be the case if the Fund
invested directly in the underlying securities, currencies or other
assets.
Derivatives
are subject to a number of risks, such as potential changes in value in response
to market developments or, in the case of “over-the-counter” derivatives, as a
result of a counterparty’s credit quality and the risk that a derivative
transaction may not have the effect the Adviser anticipated. Derivatives also
involve the risk of mispricing or improper valuation and the risk that changes
in the value of a derivative may not achieve the desired correlation with the
underlying asset or indicator. Derivative transactions can create investment
leverage, and may be highly volatile, and the Fund could lose more than the
amount it invests. The use of derivatives may increase the amount and affect the
timing and character of taxes payable by shareholders of the Fund.
Many
derivative transactions are entered into “over-the-counter” without a central
clearinghouse; as a result, the value of such a derivative transaction will
depend on, among other factors, the ability and the willingness of the Fund’s
counterparty to perform its obligations under the transaction. If a counterparty
were to default on its obligations, the Fund’s contractual remedies against such
counterparty may be subject to bankruptcy and insolvency laws, which could
affect the Fund’s rights as a creditor (e.g., the Fund may not receive the net
amount of payments that it is contractually entitled to receive). A liquid
secondary market may not always exist for the Fund’s derivative positions at any
time, and the Fund may not be able to initiate or liquidate a swap position at
an advantageous time or price, which may result in significant
losses.
In
October 2020, the Securities and Exchange Commission (the "SEC") adopted a final
rule related to the use of derivatives, short sales, reverse repurchase
agreements and certain other transactions by registered investment companies
that will rescind and withdraw the guidance of the SEC and its staff regarding
asset segregation and cover transactions. The final rule requires funds to trade
derivatives and other transactions that create future payment or delivery
obligations (except reverse repurchase agreements and similar financing
transactions) subject to a value-at-risk (“VaR”) leverage limit, certain
derivatives risk management program and reporting requirements. Generally, these
requirements apply unless a fund qualifies as a “limited derivatives user,” as
defined in the final rule. Under the final rule, when a fund trades reverse
repurchase agreements or similar financing transactions, including certain
tender option bonds, it needs to aggregate the amount of indebtedness associated
with the reverse repurchase agreements or similar financing transactions with
the aggregate amount of any other senior securities representing indebtedness
when calculating the fund’s asset coverage ratio or treat all such transactions
as derivatives transactions. Reverse repurchase agreements or similar financing
transactions aggregated with other indebtedness do not need to be included in
the calculation of whether a fund is a limited derivatives user, but for funds
subject to the VaR testing, reverse repurchase agreements and similar financing
transactions must be included for purposes of such testing whether treated as
derivatives transactions or not. The SEC also provided guidance in connection
with the new rule regarding use of securities lending collateral that may limit
a fund's securities lending activities. Compliance with these new requirements
will be required after an eighteen-month transition period. Following the
compliance date, these requirements may limit the ability of a fund to use
derivatives and reverse repurchase agreements and similar financing transactions
as part of its investment strategies. These requirements may increase the cost
of a fund’s investments and cost of doing business, which could adversely affect
investors.
Shareholder
Risk.
Certain shareholders, including other funds advised by the Adviser, may from
time to time own a substantial amount of the Fund’s Shares. In addition, a third
party investor, the Adviser or an affiliate of the Adviser, an AP, a market
maker, or another entity may invest in the Fund and hold its investment for a
limited period of time. There can be no assurance that any large shareholder
would not redeem its investment. Redemptions by shareholders could have a
negative impact on the Fund. In addition, transactions by large shareholders may
account for a large percentage of the trading volume on the Exchange and may,
therefore, have a material effect on the market price of the
Shares.
Leverage
Risk.
To the extent that the Fund borrows money or utilizes certain derivatives, it
may be leveraged. Leveraging generally exaggerates the effect on NAV of any
increase or decrease in the market value of the Fund’s portfolio securities. To
manage the risk associated with leveraging, the Fund may segregate liquid
assets, or otherwise “cover” its derivatives position in a manner consistent
with the 1940 Act and the rules and SEC interpretations thereunder. The Fund may
modify its asset segregation policies at any time to comply with any changes in
the SEC’s positions regarding asset segregation.
A
description of the Fund’s policies and procedures with respect to the disclosure
of the Fund’s portfolio securities is available in the Fund's SAI.
Board
of Trustees.
The Board of Trustees of the Trust has responsibility for the general oversight
of the management of the Fund, including general supervision of the Adviser and
other service providers, but is not involved in the day-to-day management of the
Trust. A list of the Trustees and the Trust officers, and their present
positions and principal occupations, is provided in the Fund's SAI.
Investment
Adviser and Sub-Adviser.
Under the terms of an investment management agreement between the Trust and Van
Eck Associates Corporation with respect to the Fund (the “Investment Management
Agreement”), Van Eck Associates Corporation serves as the adviser to the Fund
and, subject to the supervision of the Board of Trustees, is responsible for the
day-to-day investment management of the Fund. China Asset Management (Hong Kong)
Limited acts as investment sub-adviser to the Fund and, subject to the oversight
of the Adviser, will be responsible for the day-to-day investment management of
the Fund. China Asset Management (Hong Kong) Limited serves as investment
sub-adviser to the Fund pursuant to an investment sub-advisory agreement between
the Adviser and the Sub-Adviser (the “Investment Sub-Advisory
Agreement”).
As
of June 30, 2021, the Adviser managed approximately $80.26 billion in assets.
The Adviser has been an investment adviser since 1955 and also acts as adviser
or sub-adviser to mutual funds, other ETFs, other pooled investment vehicles and
separate accounts. The Adviser’s principal business address is 666 Third Avenue,
New York, New York 10017.
The
Sub-Adviser was established in September 2008 as a wholly owned subsidiary of
China Asset Management Co., Ltd. (“ChinaAMC”). The Sub-Adviser has been licensed
by Hong Kong Securities and Futures Commission to engage in asset management
activities, dealing in securities and advising on securities. As of June 30,
2021, assets under management were approximately $247.8 billion for ChinaAMC and
$8.4 billion for the Sub-Adviser. The Sub-Adviser currently provides both asset
management and advisory services to Hong Kong and overseas clients, including
institutional mandates from Taiwan, Japan, Korea and Germany. The Sub-Adviser’s
principal place of business is 37F, Bank of China Tower, 1 Garden Road, Central,
Hong Kong.
A
discussion regarding the Board of Trustees’ approval of the Investment
Management Agreement and the Investment Sub- Advisory Agreement will be
available in the Trust’s semi-annual report for the period ended October 31,
2021.
For
the services provided to the Fund under the Investment Management Agreement, the
Fund pays the Adviser monthly fees based on a percentage of the Fund’s average
daily net assets at the annual rate of 0.40%.
Until
at least September 1, 2022, the Adviser has agreed to waive fees and/or pay Fund
expenses to the extent necessary to prevent the operating expenses of the Fund
(excluding acquired fund fees and expenses, interest expense, trading expenses,
taxes and extraordinary expenses) from exceeding 0.50% of its average daily net
assets per year.
The
Fund is responsible for all of its expenses, including the investment advisory
fees, costs of transfer agency, custody, legal, audit and other services,
interest, taxes, any distribution fees or expenses, offering fees or expenses
and extraordinary expenses. For the services provided and the expenses assumed
by the Sub-Adviser pursuant to the Investment Sub-Advisory Agreement, the
Adviser (not the Fund) will pay a monthly fee to the Sub-Adviser based on a
percentage of the management fee paid to the Adviser after taking into account
the Index license fee and expenses paid by the Adviser.
Manager
of Managers Structure.
The Adviser and the Trust may rely on an exemptive order (the “Order”) from the
SEC that permits the Adviser to enter into investment sub-advisory agreements
with unaffiliated sub-advisers without obtaining shareholder approval. The
Adviser, subject to the review and approval of the Board of Trustees, may select
one or more sub-advisers for the 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 of
Trustees, to replace sub-advisers and amend investment sub-advisory agreements,
including applicable fee arrangements, without shareholder approval whenever the
Adviser and the Board of Trustees believe such action will benefit the Fund and
its shareholders. The Adviser thus would have the responsibility (subject to the
oversight of the Board of Trustees) to recommend the hiring and replacement of
sub-advisers as well as the discretion to terminate any sub-adviser and
reallocate the Fund’s assets for management among any other sub-adviser(s) and
itself. This means that the Adviser would 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 would compensate each sub-adviser out of its management
fee.
Administrator,
Custodian and Transfer Agent. Van
Eck Associates Corporation is the administrator for the Fund (the
“Administrator”), and State Street Bank and Trust Company is the custodian of
the Fund’s assets and provides transfer agency and fund accounting services to
the Fund. The Administrator is responsible for certain clerical, recordkeeping
and/or bookkeeping services which are required to be provided pursuant to the
Investment Management Agreement.
All
of the Fund’s RMB Bonds (including onshore PRC cash deposits and its onshore RMB
Bond portfolio) will be held by the PRC sub-custodians. A securities account
shall be opened with CSDCC in the joint names of the Sub-Adviser (as the RQFII
holder) and the Fund. An RMB cash account shall also be established and
maintained with each PRC sub-custodian in the joint names of the Sub-Adviser (as
the RQFII holder) and the Fund. Each PRC sub-custodian shall, in turn, have a
cash clearing account with CSDCC for trade settlement according to applicable
regulations.
Distributor.
Van
Eck Securities Corporation is the distributor of the Shares (the "Distributor").
The Distributor will not distribute Shares in less than a specified number of
Shares, each called a "Creation Unit," and does not maintain a secondary market
in the Shares. The Shares are traded in the secondary market.
Ms.
Jing joined the Sub-Adviser as a portfolio manager in February 2016. Prior to
joining the Sub-Adviser, Ms. Jing mainly focused on the global bond market as a
portfolio manager at each of the following: Bank of China (2002 to 2013), Cantor
Fitzgerald (Hong Kong) Capital Markets Limited (2013) and ICBC Asia (2013 to
2015).
Mr.
Rodilosso has been employed by the Adviser as a portfolio manager since March
2012. Mr. Rodilosso graduated from Princeton University in 1990 with a Bachelor
of Arts and from the Wharton School of Business in 1993 with a Masters of
Business Administration. Mr. Rodilosso serves as portfolio manager of other
funds of the Trust. Mr. Rodilosso also serves as portfolio manager for certain
other investment companies and pooled investment vehicles advised by the
Adviser. See the Fund’s SAI for additional information about the portfolio
managers’ compensation, other accounts managed by the portfolio managers and
their respective ownership of Shares of the Fund.
DETERMINATION
OF NAV
The
NAV per Share for the 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 the total number of
Shares outstanding. Expenses and fees, including the management fee, are accrued
daily and taken into account for purposes of determining NAV. The NAV of the
Fund is determined each business day as of the close of trading (ordinarily 4:00
p.m., Eastern time) on the New York Stock Exchange.
The
values of the Fund’s portfolio securities are based on the securities’ closing
prices on the markets on which the securities trade, when available. Due to the
time differences between the United States and certain countries in which the
Fund invests, securities on these exchanges may not trade at times when Shares
of the Fund will trade. In the absence of a last reported sales price, or if no
sales were reported, and for other assets for which market quotes are not
readily available, values may be based on quotes obtained from a quotation
reporting system, established market makers or by an outside independent pricing
service. Debt instruments with remaining maturities of more than 60 days are
valued at the evaluated mean price provided by an outside independent pricing
service. If an outside independent pricing service is unable to provide a
valuation, the instrument is valued at the mean of the highest bid and the
lowest asked quotes obtained from one or more brokers or dealers selected by the
Adviser. Prices obtained by an outside independent pricing service may use
information provided by market makers or estimates of market values obtained
from yield data related to investments or securities with similar
characteristics and may use a computerized grid matrix of securities and its
evaluations in determining what it believes is the fair value of the portfolio
securities. Short-term debt instruments having a maturity of 60 days or less are
valued at amortized cost. Any assets or liabilities denominated in currencies
other than the U.S. dollar are converted into U.S. dollars at the current market
rates on the date of valuation as quoted by one or more sources. If a market
quotation for a security or other asset is not readily available or the Adviser
believes it does not otherwise accurately reflect the market value of the
security or asset at the time the Fund calculates its NAV, the security or asset
will be fair valued by the Adviser in accordance with the Trust’s valuation
policies and procedures approved by the Board of Trustees. The Fund may also use
fair value pricing in a variety of circumstances, including but not limited to,
situations when the value of a security in the Fund’s portfolio has been
materially affected by events occurring after the close of the market on which
the security is principally traded (such as 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. In addition, the Fund currently expects that it will
fair value certain of the foreign equity securities held by the Fund each day
the Fund calculates its NAV, except those securities principally traded on
exchanges that close at the same time the Fund calculates its NAV.
Accordingly,
the Fund’s NAV may reflect certain portfolio securities’ fair values rather than
their market prices at the time the exchanges on which they principally trade
close. Fair value pricing involves subjective judgments and it is possible that
a fair value determination for a security or other asset is materially different
than the value that could be realized upon the sale of such security or asset.
In addition, fair value pricing could result in a difference between the prices
used to calculate the Fund’s NAV and the prices used by the Fund's Index. This
may adversely affect the Fund’s ability to track its Index. With respect to
securities that are
principally
traded on foreign exchanges, the value of the Fund’s portfolio securities may
change on days when you will not be able to purchase or sell your
Shares.
INTRADAY
VALUE
The
trading prices of the Fund’s Shares in the secondary market generally differ
from the Fund’s daily NAV and are affected by market forces such as the supply
of and demand for Fund Shares and underlying securities held by the Fund,
economic conditions and other factors. Information regarding the intraday value
of the Fund’s Shares (“IIV”) may be disseminated throughout each trading day by
the Exchange or by market data vendors or other information providers. The IIV
is based on the current market value of the securities and/or cash required to
be deposited in exchange for a Creation Unit. The IIV does not necessarily
reflect the precise composition of the current portfolio of securities held by
the Fund at a particular point in time or the best possible valuation of the
current portfolio. Therefore, the IIV should not be viewed as a “real-time”
update of the Fund’s NAV, which is computed only once a day. The IIV is
generally determined by using current market quotations and/or price quotations
obtained from broker-dealers and other market intermediaries that may trade in
the portfolio securities held by the Fund and valuations based on current market
rates. The quotations and/or valuations of the Fund’s holdings may not
be
updated during U.S. trading hours if such holdings do not trade in the
United States. The Fund is not involved in, or responsible for, the calculation
or dissemination of the IIV and makes no warranty as to its accuracy.
RULE
144A AND OTHER UNREGISTERED SECURITIES
An
AP (i.e.,
a person eligible to place orders with the Distributor to create or redeem
Creation Units of the Fund) that is not a “qualified institutional buyer,” as
such term is defined under Rule 144A of the Securities Act of 1933, as amended
(the “Securities Act”), will not be able to receive, as part of a redemption,
restricted securities eligible for resale under Rule 144A or other unregistered
securities.
BUYING
AND SELLING EXCHANGE-TRADED SHARES
The
Shares of the Fund are listed on the Exchange. If you buy or sell Shares in the
secondary market, you will incur customary brokerage commissions and charges and
may pay some or all of the “spread,” which is any difference between the bid
price and the ask price. The spread varies over time for the Fund’s Shares based
on the Fund’s trading volume and market liquidity, and is generally lower if the
Fund has high trading volume and market liquidity, and generally higher if the
Fund has little trading volume and market liquidity (which is often the case for
funds that are newly launched or small in size). In times of severe market
disruption or low trading volume in the Fund’s Shares, this spread can increase
significantly. It is anticipated that the Shares will trade in the secondary
market at prices that may differ to varying degrees from the NAV of the Shares.
During periods of disruptions to creations and redemptions or the existence of
extreme market volatility, the market prices of Shares are more likely to differ
significantly from the Shares’ NAV.
The
Depository Trust Company (“DTC”) serves as securities depository for the Shares.
(The Shares may be held only in book-entry form; stock certificates will not be
issued.) DTC, or its nominee, is the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on the records
of DTC or its participants (described below). Beneficial owners of Shares are
not entitled to have Shares registered in their names, will not receive or be
entitled to receive physical delivery of certificates in definitive form and are
not considered the registered holder thereof. Accordingly, to exercise any
rights of a holder of Shares, each beneficial owner must rely on the procedures
of: (i) DTC; (ii) “DTC Participants,” i.e.,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives) own
DTC; and (iii) “Indirect Participants,” i.e.,
brokers, dealers, banks and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly,
through which such beneficial owner holds its interests. The Trust understands
that under existing industry practice, in the event the Trust requests any
action of holders of Shares, or a beneficial owner desires to take any action
that DTC, as the record owner of all outstanding Shares, is entitled to take,
DTC would authorize the DTC Participants to take such action and that the DTC
Participants would authorize the Indirect Participants and beneficial owners
acting through such DTC Participants to take such action and would otherwise act
upon the instructions of beneficial owners owning through them. As described
above, the Trust recognizes DTC or its nominee as the owner of all Shares for
all purposes. For more information, see the section entitled “Book Entry Only
System” in the Fund's SAI.
The
Exchange is open for trading Monday through Friday and is closed on weekends and
the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. Because non-U.S. 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
Fund’s Shares.
The
right of redemption by an AP may be suspended or the date of payment postponed
(1) for any period during which the Exchange is closed (other than customary
weekend and holiday closings); (2) for any period during which trading on the
Exchange is suspended or restricted; (3) for any period during which an
emergency exists as a result of which disposal of the Shares of the Fund or
determination of its NAV is not reasonably practicable; or (4) in such other
circumstance as is permitted by the SEC.
Market
Timing and Related Matters.
The
Fund imposes no restrictions on the frequency of purchases and redemptions.
Frequent purchases and redemptions of Fund Shares may attempt to take advantage
of a potential arbitrage opportunity presented by a lag between a change in the
value of the Fund’s portfolio securities after the close of the primary markets
for the Fund’s portfolio securities and the reflection of that change in the
Fund’s NAV (“market timing”). The Board of Trustees considered
the
nature of the Fund (i.e.,
a fund whose Shares are expected to trade intraday), that the Adviser monitors
the trading activity of APs for patterns of abusive trading, that the Fund
reserves the right to reject orders that may be disruptive to the management of
or otherwise not in the Fund's best interest, and that the Fund may fair value
certain of its securities. Given this structure, the Board of Trustees
determined that it is not necessary to impose restrictions on the frequency of
purchases and redemptions for the Fund at the present time.
DISTRIBUTIONS
Net
Investment Income and Capital Gains.
As a shareholder of the Fund, you are entitled to your share of the Fund’s
distributions of net investment income and net realized capital gains on its
investments. The Fund pays out substantially all of its net earnings to its
shareholders as “distributions.”
The
Fund typically earns income dividends from stocks and interest from debt
securities. These amounts, net of expenses, are typically passed along to Fund
shareholders as dividends from net investment income. The Fund realizes capital
gains or losses whenever it sells securities. Net capital gains are distributed
to shareholders as “capital gain distributions.” Distributions from the Fund’s
net investment income, including net short-term capital gains, if any, are
taxable to you as ordinary income. Any long-term capital gains distributions you
receive from the Fund are taxable as long-term capital gains.
Net
investment income, if any, is typically distributed to shareholders at least
monthly while net realized capital gains, if any, are typically distributed to
shareholders at least annually. Dividends may be declared and paid more
frequently to improve index tracking or to comply with the distribution
requirements of the Internal Revenue Code. In addition, in situations where the
Fund acquires investment securities after the beginning of a dividend period,
the Fund may elect to distribute at least annually amounts representing the full
dividend yield net of expenses on the underlying investment securities, as if
the Fund owned the underlying investment securities for the entire dividend
period. If the Fund so elects some portion of each distribution may result in a
return of capital, which, for tax purposes, is treated as a return of your
investment in Shares. You will be notified regarding the portion of the
distribution which represents a return of capital.
Distributions
in cash may be reinvested automatically in additional Shares of the Fund only if
the broker through which you purchased Shares makes such option
available.
TAX
INFORMATION
As
with any investment, you should consider how your Fund investment will be taxed.
The tax information in this Prospectus is provided as general information. You
should consult your own tax professional about the tax consequences of an
investment in the Fund, including the possible application of foreign, state and
local taxes. Unless your investment in the Fund is through a tax-exempt entity
or tax-deferred retirement account, such as a 401(k) plan, you need to be aware
of the possible tax consequences when: (i) the Fund makes distributions, (ii)
you sell Shares in the secondary market or (iii) you create or redeem Creation
Units.
Taxes
on Distributions.
As noted above, the Fund expects to distribute net investment income, if any, at
least monthly, and any net realized long-term or short-term capital gains, if
any, annually. The Fund may also pay a special distribution at any time to
comply with U.S. federal tax requirements.
Distributions
from the Fund’s net investment income, including any net short-term gains, if
any, are taxable to you as ordinary income. In general, your distributions are
subject to U.S. federal income tax when they are paid, whether you take them in
cash or reinvest them in the Fund. Distributions of net investment income,
including any net short-term capital gains, if any, are generally taxable to you
as ordinary income. Whether distributions of capital gains represent long-term
or short-term capital gains is determined by how long the Fund owned the
investments that generated them, rather than how long you have owned your
Shares. Distributions of net short-term capital gains in excess of net long-term
capital losses, if any, are generally taxable as ordinary income. Distributions
of net long-term capital gains in excess of net short-term capital losses, if
any, that are properly reported as capital gain dividends are generally taxable
as long-term capital gains. Long-term capital gains of a non-corporate
shareholder are generally taxable at a maximum rate of 15% or 20%, depending on
whether the shareholder’s income exceeds certain threshold amounts. The Fund
does not expect that any of its distributions will be qualified dividends
eligible for lower tax rates or for the corporate dividends received
deduction.
Distributions
in excess of the Fund’s current and accumulated earnings and profits are treated
as a tax-free return of your investment to the extent of your basis in the
Shares, and generally as capital gain thereafter. A return of capital, which for
tax purposes is treated as a return of your investment, reduces your basis in
Shares, thus reducing any loss or increasing any gain on a subsequent taxable
disposition of Shares. A distribution will reduce the Fund’s NAV per Share and
may be taxable to you as ordinary income or capital gain even though, from an
economic standpoint, the distribution may constitute a return of
capital.
Dividends,
interest and gains from non-U.S. investments of the Fund may give rise to
withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may, in some cases, reduce or
eliminate such taxes.
If
more than 50% of the Fund’s total assets at the end of its taxable year consist
of foreign securities, the Fund may elect to “pass through” to its investors
certain foreign income taxes paid by the Fund, with the result that each
investor will (i) include in gross
income,
even though not actually received, the investor’s pro rata share of the Fund’s
foreign income taxes, and (ii) either deduct (in calculating U.S. taxable
income) or credit (in calculating U.S. federal income), subject to certain
holding period and other limitations, the investor’s pro rata share of the
Fund’s foreign income taxes. It is expected that more than 50% of the Fund’s
assets will consist of foreign securities.
Backup
Withholding.
The Fund may be required to withhold a percentage of your distributions and
proceeds if you have not provided a taxpayer identification number or social
security number or otherwise established a basis for exemption from backup
withholding. The backup withholding rate for individuals is currently 24%. This
is not an additional tax and may be refunded, or credited against your U.S.
federal income tax liability, provided certain required information is furnished
to the Internal Revenue Service (“IRS”).
Taxes
on the Sale or Cash Redemption of Exchange Listed Shares.
Currently, any capital gain or loss realized upon a sale of Shares is generally
treated as long-term capital gain or loss if the Shares have been held for more
than one year and as a short term capital gain or loss if held for one year or
less. However, any capital loss on a sale of Shares held for six months or less
is treated as long-term capital loss to the extent that capital gain dividends
were paid with respect to such Shares. The ability to deduct capital losses may
be limited. To the extent that the Fund shareholder's Shares are redeemed for
cash, this is normally treated as a sale for tax purposes.
Taxes
on Creations and Redemptions of Creation Units.
A person who exchanges securities for Creation Units generally will recognize a
gain or loss. The gain or loss will be equal to the difference between the
market value of the Creation Units at the time of exchange and the sum of the
exchanger’s aggregate basis in the securities surrendered and the amount of any
cash paid for such Creation Units. A person who exchanges Creation Units for
securities will generally recognize a gain or loss equal to the difference
between the exchanger’s basis in the Creation Units and the sum of the aggregate
market value of the securities received. The IRS, however, may assert that a
loss realized upon an exchange of primarily securities for Creation Units cannot
be deducted currently under the rules governing “wash sales,” or on the basis
that there has been no significant change in economic position. Persons
exchanging securities for Creation Units or redeeming Creation Units should
consult their own tax adviser with respect to whether wash sale rules apply and
when a loss might be deductible and the tax treatment of any creation or
redemption transaction.
Under
current U.S. federal income tax laws, any capital gain or loss realized upon a
redemption (or creation) of Creation Units held as capital assets is generally
treated as long-term capital gain or loss if the Shares (or securities
surrendered) have been held for more than one year and as a short-term capital
gain or loss if the Shares (or securities surrendered) have been held for one
year or less.
If
you create or redeem Creation Units, you will be sent a confirmation statement
showing how many Shares you created or sold and at what price.
Medicare
Tax.
An additional 3.8% Medicare tax is imposed on certain net investment income
(including ordinary dividends and capital gain distributions received from the
Fund and net gains from redemptions or other taxable dispositions of Fund
Shares) of U.S. individuals, estates and trusts to the extent that such person’s
“modified adjusted gross income” (in the case of an individual) or “adjusted
gross income” (in the case of an estate or trust) exceeds certain threshold
amounts.
Non-U.S.
Shareholders.
Dividends paid by the Fund to non-U.S. shareholders are generally subject to
withholding tax at a 30% rate or a reduced rate specified by an applicable
income tax treaty to the extent derived from investment income and short-term
capital gains. Dividends paid by the Fund from net tax-exempt income or
long-term capital gains are generally not subject to such withholding tax.
Properly-reported dividends are generally exempt from U.S. federal withholding
tax where they (i) are paid in respect of the Fund’s “qualified net interest
income” (generally, the Fund’s U.S. source interest income, other than certain
contingent interest and interest from obligations of a corporation or
partnership in which the Fund is at least a 10% shareholder, reduced by expenses
that are allocable to such income); or (ii) are paid in respect of the Fund’s
“qualified short-term capital gains” (generally, the excess of the Fund’s net
short-term capital gain over the Fund’s long-term capital loss for such taxable
year). However, depending on its circumstances, the Fund may report all, some or
none of its potentially eligible dividends as such qualified net interest income
or as qualified short-term capital gains and/or treat such dividends, in whole
or in part, as ineligible for this exemption from withholding.
Any
capital gain realized by a non-U.S. shareholder upon a sale of Shares of the
Fund will generally not be subject to U.S. federal income or withholding tax
unless (i) the gain is effectively connected with the shareholder’s trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met or (ii) the Fund is or has been a U.S. real property holding corporation, as
defined below, at any time within the five-year period preceding the date of
disposition of the Fund’s Shares or, if shorter, within the period during which
the non-U.S. shareholder has held the Shares. Generally, a corporation is a U.S.
real property holding corporation if the fair market value of its U.S. real
property interests, as defined in the Internal Revenue Code and applicable
regulations, equals or exceeds 50% of the aggregate fair market value of its
worldwide real property interests and its other assets used or held for use in a
trade or business. The Fund may be, or may prior to a non-U.S. shareholder’s
disposition of Shares become, a U.S. real property holding corporation. If the
Fund is or becomes a U.S. real property holding corporation, so
long
as the Fund’s Shares are regularly traded on an established securities market,
only a non-U.S. shareholder who holds or held (at any time during the shorter of
the five year period preceding the date of disposition or the holder’s holding
period) more than 5% (directly or indirectly as determined under applicable
attribution rules of the Internal Revenue Code) of the Fund’s Shares will be
subject to United States federal income tax on the disposition of
Shares.
As
part of the Foreign Account Tax Compliance Act, (“FATCA”), the Fund may be
required to withhold 30% tax on certain types of U.S. sourced income
(e.g.,
dividends, interest, and other types of passive income) paid to (i) foreign
financial institutions (“FFIs”), including non-U.S. investment funds, unless
they agree to collect and disclose to the IRS information regarding their direct
and indirect U.S. account holders and (ii) certain nonfinancial foreign entities
(“NFFEs”), unless they certify certain information regarding their direct and
indirect U.S. owners. To avoid possible withholding, FFIs will need to enter
into agreements with the IRS which state that they will provide the IRS
information, including the names, account numbers and balances, addresses and
taxpayer identification numbers of U.S. account holders and comply with due
diligence procedures with respect to the identification of U.S. accounts as well
as agree to withhold tax on certain types of withholdable payments made to
non-compliant foreign financial institutions or to applicable foreign account
holders who fail to provide the required information to the IRS, or similar
account information and required documentation to a local revenue authority,
should an applicable intergovernmental agreement be implemented. NFFEs will need
to provide certain information regarding each substantial U.S. owner or
certifications of no substantial U.S. ownership, unless certain exceptions
apply, or agree to provide certain information to the IRS.
The
Fund may be subject to the FATCA withholding obligation, and also will be
required to perform due diligence reviews to classify foreign entity investors
for FATCA purposes. Investors are required to agree to provide information
necessary to allow the Fund to comply with the FATCA rules. If the Fund is
required to withhold amounts from payments pursuant to FATCA, investors will
receive distributions that are reduced by such withholding amounts.
Non-U.S.
shareholders are advised to consult their tax advisors with respect to the
particular tax consequences to them of an investment in the Fund, including the
possible applicability of the U.S. estate tax.
The
foregoing discussion summarizes some of the consequences under current U.S.
federal income tax law of an investment in the Fund. It is not a substitute for
personal tax advice. Consult your own tax advisor about the potential tax
consequences of an investment in the Fund under all applicable tax laws. Changes
in applicable tax authority could materially affect the conclusions discussed
above and could adversely affect the Fund, and such changes often
occur.
The
Index is published by China Central Depository & Clearing Co., Ltd. (the
“Index Provider”). The Index Provider does not sponsor, endorse, or promote the
Fund and bears no liability with respect to the Fund or any
security.
|
|
|
CHINABOND
CHINA HIGH QUALITY BOND INDEX |
The
Index is comprised of fixed-rate, RMB-denominated bonds issued in the PRC by
Chinese credit, governmental and quasi-governmental (e.g., policy banks)
issuers. Chinese credit issuers are generally considered to be issuers of
central enterprise bonds, local enterprise bonds, medium-term notes, corporate
bonds and railway debt. Credit RMB Bonds must have an issuer rating of AAA or
equivalent by one or more of the Chinese local rating agencies recognized by the
relevant authorities in the PRC to be included in the Index.
Qualifying
bonds must be traded on the Chinese inter-bank bond market, the Shanghai Stock
Exchange and/or the Shenzhen Stock Exchange.
The
Index uses a modified market cap weighting methodology.
The
Index is calculated and maintained by the Index Provider. The Index Provider
also computes and publishes the price of all PRC bonds in the Index
daily.
The
Index is rebalanced monthly. The Index Provider may delay or change a scheduled
rebalancing or reconstitution of the Index or the implementation of certain
rules at its sole discretion.
|
|
|
LICENSE
AGREEMENT AND DISCLAIMERS |
The
Adviser has entered into a licensing agreement with the Index Provider to use
the Index. The Fund is entitled to use the Index pursuant to a sub-licensing
arrangement with the Adviser.
The
Index is compiled and calculated constructed and maintained by the Index
Provider. All copyright in the Index values and constituent list vests in the
Index Provider, to which all index indicator data and all index constituent data
shall belong.
The
financial highlights table which follows is intended to help you understand the
Fund’s financial performance for the past five years or as indicated. Certain
information reflects financial results for a single Fund share. The total
returns in the table represent the rate that an investor would have earned (or
lost) on an investment in the Fund (assuming reinvestment of all dividends and
distributions). This information has been audited by Ernst & Young LLP, the
Trust’s independent registered public accounting firm, whose report, along with
the Fund’s financial statements, are included in the Fund’s Annual Report, which
is available upon request.
For
a share outstanding throughout each year:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
Bond ETF |
|
For
the Year Ended April 30, |
|
2021 |
|
2020 |
|
2019 |
|
2018 |
|
2017 |
|
Net
asset value, beginning of year |
$ |
22.39 |
|
|
$ |
22.89 |
|
|
$ |
24.14 |
|
|
$ |
22.16 |
|
|
$ |
24.28 |
|
|
Income
from investment operations: |
|
|
|
|
|
|
|
|
|
|
Net
investment income |
0.73 |
|
(a) |
0.87 |
|
(a) |
0.75 |
|
(a) |
0.74 |
|
(a) |
0.21 |
|
|
Net
realized and unrealized gain (loss) on |
|
|
|
|
|
|
|
|
|
|
investments |
1.60 |
|
|
(0.49) |
|
|
(1.24) |
|
|
2.07 |
|
|
(1.64) |
|
|
Total
from investment operations |
2.33 |
|
|
0.38 |
|
|
(0.49) |
|
|
2.81 |
|
|
(1.43) |
|
|
Less
distributions from: |
|
|
|
|
|
|
|
|
|
|
Net
investment income |
(0.65) |
|
|
(0.79) |
|
|
(0.38) |
|
|
— |
|
|
— |
|
|
Return
of capital |
— |
|
|
(0.09) |
|
|
(0.38) |
|
|
(0.83) |
|
|
(0.69) |
|
|
Total
distributions |
(0.65) |
|
|
(0.88) |
|
|
(0.76) |
|
|
(0.83) |
|
|
(0.69) |
|
|
Net
asset value, end of year |
$ |
24.07 |
|
|
$ |
22.39 |
|
|
$ |
22.89 |
|
|
$ |
24.14 |
|
|
$ |
22.16 |
|
|
Total
return (b) |
10.56 |
|
% |
1.76 |
|
% |
(1.98) |
|
% |
12.94 |
|
% |
(6.00) |
|
% |
Ratios/Supplemental
Data |
|
|
|
|
|
|
|
|
|
|
Net
assets, end of year (000’s) |
$ |
103,503 |
|
|
$ |
4,478 |
|
|
$ |
4,577 |
|
|
$ |
4,828 |
|
|
$ |
6,649 |
|
|
Ratio
of gross expenses to average net assets |
0.68 |
|
% |
3.53 |
|
% |
2.25 |
|
% |
2.59 |
|
% |
1.90 |
|
% |
Ratio
of net expenses to average net assets |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
Ratio
of net expenses to average net assets |
|
|
|
|
|
|
|
|
|
|
excluding
interest expense |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
0.50 |
|
% |
Ratio
of net investment income to average net |
|
|
|
|
|
|
|
|
|
|
assets |
3.07 |
|
% |
3.93 |
|
% |
3.29 |
|
% |
3.21 |
|
% |
3.04 |
|
% |
Portfolio
turnover rate (c) |
17 |
|
% |
21 |
|
% |
22 |
|
% |
39 |
|
% |
9 |
|
% |
(a)Calculated
based upon average shares outstanding.
(b)Total
return is calculated assuming an initial investment made at the net asset value
at the beginning of the year, reinvestment of any dividends and distributions at
net asset value on the dividend/distributions payment date and a redemption at
the net asset value on the last day of the year. The return includes adjustments
in accordance with U.S. Generally Accepted Accounting Principles and as such,
the net asset values for financial reporting purposes and the returns based upon
those net asset values may differ from the net asset values and returns for
shareholder transactions. The return does not reflect the deduction of taxes
that a shareholder would pay on Fund dividends/distributions or the redemption
of Fund shares.
(c)Portfolio
turnover rates exclude securities received or delivered as a result of
processing in-kind capital share transactions.
|
|
|
PREMIUM/DISCOUNT
INFORMATION |
Information
regarding how often the closing trading price of the Shares of the Fund was
above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV of the Fund for the most recently completed calendar year
and the most recently completed calendar quarter(s) since that year (or the life
of the Fund, if shorter) can be found at www.vaneck.com.
CONTINUOUS
OFFERING
The
method by which Creation Units are created and traded may raise certain issues
under applicable securities laws. Because new Creation Units are issued and sold
by the Trust on an ongoing basis, a “distribution,” as such term is used in the
Securities Act, may occur at any point. Broker dealers and other persons are
cautioned that some activities on their part may, depending on the
circumstances, result in their being deemed participants in a distribution in a
manner which could render them statutory underwriters and subject them to the
prospectus delivery and liability provisions of the Securities Act.
For
example, a broker dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with the
Distributor, breaks them down into constituent Shares, and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a categorization
as an underwriter.
Broker
dealers who are not “underwriters” but are participating in a distribution (as
contrasted to ordinary secondary trading transactions), and thus dealing with
Shares that are part of an “unsold allotment” within the meaning of Section
4(a)(3)(C) of the Securities Act, would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
This is because the prospectus delivery exemption in Section 4(a)(3) of the
Securities Act is not available in respect of such transactions as a result of
Section 24(d) of the 1940 Act. As a result, broker dealer firms should note that
dealers who are not underwriters but are participating in a distribution (as
contrasted with ordinary secondary market transactions) and thus dealing with
the Shares that are part of an overallotment within the meaning of Section
4(a)(3)(A) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to Shares are
reminded that, under Rule 153 of the Securities Act, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to an exchange
member in connection with a sale on the Exchange is satisfied by the fact that
the prospectus is available at the Exchange upon request. The prospectus
delivery mechanism provided in Rule 153 is only available with respect to
transactions on an exchange.
In
addition, certain affiliates of the Fund and the Adviser may purchase and resell
Fund shares pursuant to this Prospectus.
OTHER
INFORMATION
The
Trust was organized as a Delaware statutory trust on March 15, 2001. Its
Declaration of Trust currently permits the Trust to issue an unlimited number of
Shares of beneficial interest. If shareholders are required to vote on any
matters, each Share outstanding would be entitled to one vote. Annual meetings
of shareholders will not be held except as required by the 1940 Act and other
applicable law. See the Fund's SAI for more information concerning the Trust’s
form of organization. Section 12(d)(1) of the 1940 Act restricts investments by
investment companies in the securities of other investment companies, including
Shares of the Fund. Registered investment companies are permitted to invest in
the Fund beyond the limits set forth in Section 12(d)(1) subject to certain
terms and conditions set forth in an SEC exemptive order or SEC regulations,
including that such investment companies enter into an agreement with such
Fund.
The
Prospectus, SAI and any other Fund communication do not create any contractual
obligations between the Fund’s shareholders and the Trust, the Fund, the
Adviser, the Sub-Adviser and/or the Trustees. Further, shareholders are not
intended third-party beneficiaries of any contracts entered into by (or on
behalf of) the Fund, including contracts with the Adviser, the Sub-Adviser or
other parties who provide services to the Fund.
Dechert
LLP serves as counsel to the Trust, including the Fund. Ernst & Young LLP
serves as the Trust’s independent registered public accounting firm and will
audit the Fund’s financial statements annually.
ADDITIONAL
INFORMATION
This
Prospectus does not contain all the information included in the Registration
Statement filed with the SEC with respect to the Fund's Shares. The Fund's
Registration Statement, including this Prospectus, the Fund's SAI and the
exhibits are available on the EDGAR database at the SEC’s website
(http://www.sec.gov), and copies may be obtained, after paying a duplicating
fee, by electronic request at the following email address:
[email protected].
The
SAI for the Fund, which has been filed with the SEC, provides more information
about the Fund. The SAI for the Fund is incorporated herein by reference and is
legally part of this Prospectus. Additional information about the Fund's
investments is available in the Fund’s annual and semi-annual reports to
shareholders. In the Fund’s annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund’s performance during its last fiscal year. The SAI and the Fund's annual
and semi-annual reports may be obtained without charge by writing to the Fund at
Van Eck Securities Corporation, the Fund's Distributor, at 666 Third Avenue, 9th
Floor, New York, New York 10017 or by calling the distributor at the following
number: Investor Information: 800.826.2333.
Shareholder
inquiries may be directed to the Fund in writing to 666 Third Avenue, 9th Floor,
New York, New York 10017 or by calling 800.826.2333.
The
Fund's SAI is available at www.vaneck.com.
(Investment
Company Act file no. 811-10325)
[THIS
PAGE INTENTIONALLY LEFT BLANK]
For
more detailed information about the Fund, see the SAI dated September 1, 2021,
as may be supplemented from time to time. Additional information about the
Fund’s investments is or will be available in the Fund’s annual and semi-annual
reports to shareholders. In the Fund’s annual report you will find a discussion
of the market conditions and investment strategies that significantly affected
the Fund’s performance during its last fiscal year.
Call
VanEck at 800.826.2333 to request, free of charge, the annual or semi-annual
reports, the SAI, or other information about the Fund or to make shareholder
inquiries. You may also obtain the SAI or the Fund’s annual or semi-annual
reports by visiting the VanEck website at www.vaneck.com.
Reports
and other information about the Fund are available on the EDGAR Database on the
SEC’s internet site at http://www.sec.gov. In addition, copies of this
information may be obtained, after paying a duplicating fee, by electronic
request at the following email address: [email protected].
|
|
|
|
|
|
|
|
Transfer
Agent: State Street Bank and Trust Company SEC Registration Number:
333-123257 1940 Act Registration Number: 811-10325 |
800.826.2333 vaneck.com |
CBONPRO |