ck0001710607-20230831
January
1, 2024
Avantis
Investors®
By
American Century Investments®
Statement
of Additional Information
American
Century ETF Trust
|
|
|
|
|
|
|
|
| |
|
| Ticker: |
Exchange: |
|
Avantis®
All
Equity Markets ETF |
AVGE |
NYSE
Arca, Inc. |
|
Avantis®
All
Equity Markets Value ETF |
AVGV |
NYSE
Arca, Inc. |
|
Avantis®
All International Markets Equity ETF |
AVNM |
NYSE
Arca, Inc. |
|
Avantis®
All International Markets Value ETF |
AVNV |
NYSE
Arca, Inc. |
|
Avantis®
Core Fixed Income ETF |
AVIG |
NYSE
Arca, Inc. |
|
Avantis®
Core Municipal Fixed Income ETF |
AVMU |
NYSE
Arca, Inc. |
|
Avantis®
Credit ETF |
AVGB |
The
Nasdaq Stock Market LLC |
|
Avantis®
Emerging Markets Equity ETF |
AVEM |
NYSE
Arca, Inc. |
|
Avantis®
Emerging Markets ex-China Equity ETF |
AVXC |
The
Nasdaq Stock Market LLC |
|
Avantis®
Emerging Markets Small Cap Equity ETF |
AVEE |
NYSE
Arca, Inc. |
|
Avantis®
Emerging Markets Value ETF |
AVES |
NYSE
Arca, Inc. |
|
Avantis®
Inflation Focused Equity ETF |
AVIE |
NYSE
Arca, Inc. |
|
Avantis®
International Equity ETF |
AVDE |
NYSE
Arca, Inc. |
|
Avantis®
International Large Cap Value ETF |
AVIV |
NYSE
Arca, Inc. |
|
Avantis®
International Small Cap Equity ETF |
AVDS |
NYSE
Arca, Inc. |
|
Avantis®
International Small Cap Value ETF |
AVDV |
NYSE
Arca, Inc. |
|
Avantis®
Moderate Allocation ETF |
AVMA |
NYSE
Arca, Inc. |
|
Avantis®
Real Estate ETF |
AVRE |
NYSE
Arca, Inc. |
|
Avantis®
Responsible Emerging Markets Equity ETF |
AVSE |
NYSE
Arca, Inc. |
|
Avantis®
Responsible International Equity ETF |
AVSD |
NYSE
Arca, Inc. |
|
Avantis®
Responsible U.S. Equity ETF |
AVSU |
NYSE
Arca, Inc. |
|
Avantis®
Short-Term Fixed Income ETF |
AVSF |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Equity ETF |
AVUS |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Large Cap Equity ETF |
AVLC |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Large Cap Value ETF |
AVLV |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Mid Cap Equity ETF |
AVMC |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Mid Cap Value ETF |
AVMV |
NYSE
Arca, Inc. |
|
|
|
|
|
|
|
|
| |
|
| Ticker: |
Exchange: |
|
Avantis®
U.S. Small Cap Equity ETF |
AVSC |
NYSE
Arca, Inc. |
|
Avantis®
U.S. Small Cap Value ETF |
AVUV |
NYSE
Arca, Inc. |
|
|
|
|
|
| |
|
This
statement of additional information adds to the discussion in the funds’
prospectuses dated January 1, 2024, but is not a prospectus. The statement
of additional information should be read in conjunction with the funds’
current prospectuses. If you would like a copy of a prospectus, please
contact us at one of the addresses or telephone numbers listed on the back
cover or visit Avantis Investors’ website at avantisinvestors.com.
This
statement of additional information incorporates by reference certain
information that appears in the funds’ annual reports, which are delivered
to all investors. You may obtain a free copy of the funds’ annual reports
by calling 833-9AVANTIS. |
|
©2024
American Century Proprietary Holdings, Inc. All rights reserved.
American
Century ETF Trust is a registered open-end management investment company that
was organized as a Delaware statutory trust on June 27, 2017. Throughout this
statement of additional information (SAI) we refer to American Century ETF Trust
as the trust.
Each
fund described in this SAI (each, a “fund” and together, the “funds”) is a
separate series of the trust. Each fund has its own investment objective,
strategies, assets, and tax identification and stock registration
numbers.
|
|
|
|
|
|
|
|
| |
| Fund/Class |
Ticker
Symbol |
Inception
Date |
| Avantis
All Equity Markets ETF |
AVGE |
09/27/2022 |
| Avantis
All Equity Markets Value ETF |
AVGV |
06/27/2023 |
| Avantis
All International Markets Equity ETF |
AVNM |
06/27/2023 |
| Avantis
All International Markets Value ETF |
AVNV |
06/27/2023 |
| Avantis
Core Fixed Income ETF |
AVIG |
10/13/2020 |
| Avantis
Core Municipal Fixed Income ETF |
AVMU |
12/08/2020 |
| Avantis
Credit ETF |
AVGB |
|
| Avantis
Emerging Markets Equity ETF |
AVEM |
09/17/2019 |
| Avantis
Emerging Markets ex-China Equity ETF |
AVXC |
|
| Avantis
Emerging Markets Small Cap Equity ETF |
AVEE |
11/07/2023 |
| Avantis
Emerging Markets Value ETF |
AVES |
09/28/2021 |
| Avantis
Inflation Focused Equity ETF |
AVIE |
09/27/2022 |
| Avantis
International Equity ETF |
AVDE |
09/24/2019 |
| Avantis
International Large Cap Value ETF |
AVIV |
09/28/2021 |
| Avantis
International Small Cap Equity ETF |
AVDS |
07/18/2023 |
| Avantis
International Small Cap Value ETF |
AVDV |
09/24/2019 |
| Avantis
Moderate Allocation ETF |
AVMA |
06/27/2023 |
| Avantis
Real Estate ETF |
AVRE |
09/28/2021 |
| Avantis
Responsible Emerging Markets Equity ETF |
AVSE |
03/28/2022 |
| Avantis
Responsible International Equity ETF |
AVSD |
03/15/2022 |
| Avantis
Responsible U.S. Equity ETF |
AVSU |
03/15/2022 |
| Avantis
Short-Term Fixed Income ETF |
AVSF |
10/13/2020 |
| Avantis
U.S. Equity ETF |
AVUS |
09/24/2019 |
| Avantis
U.S. Large Cap Equity ETF |
AVLC |
09/26/2023 |
| Avantis
U.S. Large Cap Value ETF |
AVLV |
09/21/2021 |
| Avantis
U.S. Mid Cap Equity ETF |
AVMC |
11/07/2023 |
| Avantis
U.S. Mid Cap Value ETF |
AVMV |
11/07/2023 |
| Avantis
U.S. Small Cap Equity ETF |
AVSC |
01/11/2022 |
| Avantis
U.S. Small Cap Value ETF |
AVUV |
09/24/2019 |
The
funds offer and issue shares at their net asset value per share (NAV) only in
aggregations of a specified number of shares (a Creation Unit), generally in
exchange for a designated portfolio of securities (including any portion of such
securities for which cash may be substituted) (Deposit Securities), together
with the deposit of a specified cash payment (Cash Component). Shares of each
fund (except
Avantis Credit ETF and Avantis Emerging Markets ex-China Equity ETF)
are listed for trading on NYSE Arca, Inc. (NYSE
Arca),
a national securities exchange. Shares
of Avantis Credit ETF and Avantis Emerging Markets ex-China Equity ETF are
listed for trading on The Nasdaq Stock Market LLC (NASDAQ). NYSE Arca and NASDAQ
are each referred to as a Listing Exchange.
Shares of each fund are traded in the secondary market and elsewhere at market
prices that may be at, above or below the fund’s NAV. Shares of each fund are
redeemable only in Creation Units, generally in exchange for portfolio
securities and a Cash Component.
The
trust reserves the right to permit or require that creations and redemptions of
shares are effected fully or partially in cash. Shares may be issued in advance
of receipt of Deposit Securities, subject to various conditions, including a
requirement to maintain with the trust a cash deposit equal to at least 105% and
up to 115%, which percentage the trust may change from time to time, of the
market
value
of the omitted Deposit Securities. See Creation
and Redemption of Creation Units
on page 36
of this SAI. Transaction fees and other costs associated with creations or
redemptions that include a cash portion may be higher than the transaction fees
and other costs associated with in-kind creations or redemptions. In all cases,
transaction fees will be limited in accordance with the requirements of U.S.
Securities and Exchange Commission (SEC) rules and regulations applicable to
management investment companies offering redeemable securities.
A
discussion of exchange listing and trading matters associated with an investment
in each fund is contained in the Investing
in the Fund
section of that fund’s prospectus. The discussion below supplements, and should
be read in conjunction with, that section of each prospectus.
Shares
of the funds are listed for trading, and trade throughout the day, on the
Listing Exchange and in the other secondary markets. Shares of the funds may
also be listed on certain non-U.S. exchanges. There can be no assurance that the
requirements of the Listing Exchange necessary to maintain the listing of shares
of the fund will continue to be met. The Listing Exchange may, but is not
required to, remove the shares of a fund from listing if (i) the Listing
Exchange becomes aware that the fund is no longer eligible to operate in
reliance on Rule 6c-11 of the Investment Company Act of 1940 (Investment Company
Act), (ii) the fund no longer complies with the Listing Exchange’s requirements
for exchange-traded fund shares, (iii) following the initial 12-month period
beginning upon the commencement of trading of fund shares, there are fewer than
50 beneficial owners of shares of the fund, or (iv) any other event shall occur
or condition shall exist that, in the opinion of the Listing Exchange, makes
further dealings on the Listing Exchange inadvisable.
The
Listing Exchange will also remove shares of a fund from listing and trading upon
termination of the fund.
As
in the case of other publicly traded securities, when you buy or sell shares
through a broker, you will incur a brokerage commission determined by that
broker.
The
trust reserves the right to adjust the share prices of a fund in the future to
maintain convenient trading ranges for investors. Any adjustments would be
accomplished through stock splits or reverse stock splits, which would have no
effect on the net assets of the fund or an investor’s equity interest in the
fund.
This
section explains the extent to which the funds’ advisor, American Century
Investment Management, Inc. (ACIM or the advisor), can use various investment
vehicles and strategies in managing a fund’s assets. Descriptions of the
investment techniques and risks associated with each appear in the section,
Investment
Strategies and Risks,
below. In the case of the funds’ principal investment strategies, these
descriptions elaborate upon discussions contained in the prospectuses. In
addition to the main types of investments and strategies undertaken by the funds
as described in the prospectuses, the funds also may invest in other types of
instruments and engage in and pursue other investment strategies, which are
described in this SAI.
The
funds are diversified as defined in the Investment Company Act. Diversified
means that, with respect to 75% of its total assets, each fund will not invest
more than 5% of its total assets in the securities of a single issuer or own
more than 10% of the outstanding voting securities of a single issuer (other
than U.S. government securities and securities of other investment companies).
Additionally, with respect to Avantis All Equity Markets ETF, Avantis All Equity
Markets Value ETF, Avantis All International Markets Equity ETF, Avantis All
International Markets Value ETF and Avantis Moderate Allocation ETF, the
underlying funds are generally diversified and so indirectly provide broad
exposure to a large number of securities.
To
meet federal tax requirements for qualification as a regulated investment
company, each fund must limit its investments so that at the close of each
quarter of its taxable year (1) no more than 25% of its total assets are
invested in the securities of a single issuer (other than the U.S. government or
a regulated investment company), and (2) with respect to at least 50% of its
total assets, no more than 5% of its total assets are invested in the securities
of a single issuer (other than the U.S. government or a regulated investment
company) and it does not own more than 10% of the outstanding voting securities
of a single issuer.
The
funds are actively managed ETFs. In general, within the restrictions outlined
here and in the funds’ prospectuses, the portfolio managers have broad powers to
decide how to invest fund assets. Investments in the fund vary according to what
is judged advantageous under changing economic conditions. It is the advisor’s
policy to retain maximum flexibility in management without restrictive
provisions as to the proportion of one or another class of securities that may
be held, subject to the investment restrictions described on the following
pages.
Incidental
to a fund’s other investment activities, including in connection with a
bankruptcy, restructuring, workout, or other extraordinary events concerning a
particular investment a fund owns, the fund may receive securities (including
convertible securities, warrants and rights), real estate or other investments
that the fund normally would not, or could not, buy. If this happens, the fund
may, although it is not required to, sell such investments as soon as
practicable while seeking to maximize the return to shareholders.
Unless
otherwise noted, all investment restrictions described below and in each fund’s
prospectus are measured at the time of the transaction in the security. If
market action affecting fund securities (including, but not limited to,
appreciation, depreciation or a credit rating event) causes a fund to exceed an
investment restriction, the advisor is not required to take immediate
action. Under normal market conditions, however, the advisor’s policies
and procedures indicate that the advisor will not make any purchases that will
make the fund further outside the investment restriction.
This
section describes investment vehicles and techniques the portfolio managers can
use in managing a fund’s assets. It also details the risks associated with each,
because each investment vehicle and technique contributes to a fund’s overall
risk profile.
Asset-Backed
Securities (ABS)
ABS
are structured like mortgage-backed securities, but instead of mortgage loans or
interest in mortgage loans, the underlying assets may include, for example, such
items as motor vehicle installment sales or installment loan contracts, leases
of various types of real and personal property, home equity loans, student
loans, small business loans, and receivables from credit card agreements. The
ability of an issuer of ABS to enforce its security interest in the underlying
assets may be limited. The value of an ABS is affected by changes in the
market’s perception of the assets backing the security, the creditworthiness of
the servicing agent for the loan pool, the originator of the loans, the
financial institution providing any credit enhancement, and subordination
levels.
Payments
of principal and interest passed through to holders of ABS are typically
supported by some form of credit enhancement, such as a letter of credit, surety
bond, limited guarantee by another entity or a priority to certain of the
borrower’s other securities. The degree of credit enhancement varies, and
generally applies to only a fraction of the ABS’s par value until exhausted. If
the credit enhancement of an ABS held by the fund has been exhausted, and if any
required payments of principal and interest are not made with respect to the
underlying loans, the fund may experience losses or delays in receiving
payment.
Some
types of ABS may be less effective than other types of securities as a means of
“locking in” attractive long-term interest rates. One reason is the need to
reinvest prepayments of principal; another is the possibility of significant
unscheduled prepayments resulting from declines in interest rates. These
prepayments would have to be reinvested at lower rates. As a result, these
securities may have less potential for capital appreciation during periods of
declining interest rates than other securities of comparable maturities,
although they may have a similar risk of decline in market value during periods
of rising interest rates. Prepayments may also significantly shorten the
effective maturities of these securities, especially during periods of declining
interest rates. Conversely, during periods of rising interest rates, a reduction
in prepayments may increase the effective maturities of these securities,
subjecting them to a greater risk of decline in market value in response to
rising interest rates than traditional debt securities, and, therefore,
potentially increasing the volatility of the fund.
The
risks of investing in ABS are ultimately dependent upon the repayment of loans
by the individual or corporate borrowers. Although the fund would generally have
no recourse against the entity that originated the loans in the event of default
by a borrower, ABS typically are structured to mitigate this risk of
default.
ABS
are generally issued in more than one class, each with different payment terms.
Multiple class ABS may be used as a method of providing credit support through
creation of one or more classes whose right to payments is made subordinate to
the right to such payments of the remaining class or classes. Multiple classes
also may permit the issuance of securities with payment terms, interest rates or
other characteristics differing both from those of each other and from those of
the underlying assets. Examples include so-called strips (ABS entitling the
holder to disproportionate interests with respect to the allocation of interest
and principal of the assets backing the security), and securities with classes
having characteristics such as floating interest rates or scheduled amortization
of principal.
Bank
Obligations
Negotiable
certificates of deposit (CDs) evidence a bank’s obligation to repay money
deposited with it for a specified period of time. The following table identifies
the types of CDs the funds may buy.
|
|
|
|
|
| |
| CD
Type |
Issuer |
| Domestic |
Domestic
offices of U.S. banks |
| Yankee |
U.S.
branches of foreign banks |
| Eurodollar |
Issued
in London by U.S., Canadian, European and Japanese banks |
| Schedule
B |
Canadian
subsidiaries of non-Canadian banks |
To
the extent permitted by its investment objective and policies, the funds may
also buy bankers’ acceptances, bank notes and time deposits. Bankers’
acceptances are used to finance foreign commercial trade. Issued by a bank with
an importer’s name on them, these
instruments
allow the importer to back up its own pledge to pay for imported goods with a
bank’s obligation to cover the transaction if the importer fails to do
so.
Bank
notes are senior unsecured promissory notes issued in the United States by
domestic commercial banks.
Time
deposits are non-negotiable bank deposits maintained for up to seven days at a
stated interest rate. These instruments may be withdrawn on demand, although
early withdrawals may be subject to penalties.
The
bank obligations the portfolio managers may buy generally are not insured by the
FDIC or any other insurer.
Collateralized
Obligations
Each
fund may invest in collateralized obligations including, collateralized debt
obligations (CDOs), collateralized loan obligations (CLOs), collateralized bond
obligations (CBOs), and other similarly structured investments. CBOs and CLOs
are types of asset backed securities. A CLO is a trust or other special purpose
entity that is typically collateralized by a pool of loans, which may include,
among others, U.S. and non-U.S. senior secured loans, senior unsecured loans,
and subordinate corporate loans, including loans that may be rated below
investment grade or equivalent unrated loans. A CBO is generally a trust which
is backed by a diversified pool of high risk, below investment grade
fixed-income securities. The risks of an investment in a CDO depend largely on
the type of the collateral backing the obligation and the class of the CDO in
which the fund invests. CDOs are subject to credit, interest rate, valuation,
prepayment and extension risks. These securities are also subject to risk of
default on the underlying asset, particularly during periods of economic
downturn. CDOs carry additional risks including, but not limited to, (i) the
possibility that distributions from collateral securities will not be adequate
to make interest or other payments, (ii) the collateral may decline in value or
default, (iii) the fund may invest in CDOs that are subordinate to other
classes, and (iv) the complex structure of the security may not be fully
understood at the time of investment and may produce disputes with the issuer or
unexpected investment results.
Commercial
Paper
The
funds may invest in commercial paper (CP) that is issued by utility, financial,
and industrial companies, supranational organizations and foreign governments
and their agencies and instrumentalities. Rating agencies assign ratings to
short-term securities (including CP) issuers indicating the agencies’ assessment
of credit risk. Short-term ratings assigned by certain rating agencies are
provided in the Explanation
of Fixed-Income Securities Ratings, Appendix B.
Some
examples of CP and CP issuers are provided in the following
paragraphs.
Domestic
CP is issued by U.S. industrial and finance companies, utility companies,
thrifts and bank holding companies. Foreign CP is issued by non-U.S. industrial
and finance companies and financial institutions. Domestic and foreign corporate
issuers occasionally have the underlying support of a well-known, highly rated
commercial bank or insurance company. Bank support is provided in the form of a
letter of credit (an LOC) or irrevocable revolving credit commitment (an IRC).
Insurance support is provided in the form of a surety bond.
Bank
holding company CP is issued by the holding companies of many well-known
domestic banks. Bank holding company CP may be issued by the parent of a money
center or regional bank.
Thrift
CP is issued by major federal- or state-chartered savings and loan associations
and savings banks.
Schedule
B Bank CP is short-term, U.S. dollar-denominated CP issued by Canadian
subsidiaries of non-Canadian banks (Schedule B banks). Whether issued as CP, a
certificate of deposit or a promissory note, each instrument issued by a
Schedule B bank ranks equally with any other deposit obligation. CP issued by
Schedule B banks provides an investor with the comfort and reduced risk of a
direct and unconditional parental bank guarantee. Schedule B instruments
generally offer higher rates than the short-term instruments of the parent bank
or holding company.
Asset-backed
CP is issued by corporations through special programs. In a typical program, a
special purpose corporation (SPC), created and/or serviced by a bank or other
financial institution, uses the proceeds from an issuance of CP to purchase
receivables or other financial assets from one or more corporations (sellers).
The sellers transfer their interest in the receivables or other financial assets
to the SPC, and the cash flow from the receivables or other financial assets is
used to pay interest and principal on the CP. Letters of credit or other forms
of credit enhancement may be available to cover the risk that the cash flow from
the receivables or other financial assets will not be sufficient to cover the
maturing CP.
Convertible
Securities
A
convertible security is a bond, debenture, note, preferred stock or other
security that may be converted into or exchanged for a prescribed amount of
common stock of the same or a different issuer within a particular time period
at a specified price or formula. A convertible security entitles the holder to
receive the interest paid or accrued on debt or the dividend paid on preferred
stock until the convertible security matures or is redeemed, converted or
exchanged. Before conversion or exchange, such securities ordinarily provide a
stream of income with generally higher yields than common stocks of the same or
similar issuers, but lower than the yield on non-convertible debt. Of course,
there can be no assurance of current income because issuers of convertible
securities may default on
their
obligations. In addition, there can be no assurance of capital appreciation
because the value of the underlying common stock will fluctuate. Because of the
conversion feature, the managers consider some convertible securities to be
equity equivalents.
The
price of a convertible security will normally fluctuate in some proportion to
changes in the price of the underlying asset. A convertible security is subject
to risks relating to the activities of the issuer and/or general market and
economic conditions. The stream of income typically paid on a convertible
security may tend to cushion the security against declines in the price of the
underlying asset. However, the stream of income causes fluctuations based upon
changes in interest rates and the credit quality of the issuer. In general, the
value of a convertible security is a function of (1) its yield in comparison
with yields of other securities of comparable maturity and quality that do not
have a conversion privilege and (2) its worth, at market value, if converted or
exchanged into the underlying common stock. The price of a convertible security
often reflects such variations in the price of the underlying common stock in a
way that a non-convertible security does not. At any given time, investment
value generally depends upon such factors as the general level of interest
rates, the yield of similar nonconvertible securities, the financial strength of
the issuer and the seniority of the security in the issuer’s capital
structure.
A
convertible security may be subject to redemption at the option of the issuer at
a predetermined price. If a convertible security held by a fund is called for
redemption, the fund would be required to permit the issuer to redeem the
security and convert it to underlying common stock or to cash or would sell the
convertible security to a third party, which may have an adverse effect on the
fund. A convertible security may feature a put option that permits the holder of
the convertible security to sell that security back to the issuer at a
predetermined price. A fund generally invests in convertible securities for
their favorable price characteristics and total return potential and normally
would not exercise an option to convert unless the security is called or
conversion is forced.
Counterparty
Risk
A
fund will be exposed to the credit risk of the counterparties with which, or the
brokers, dealers and exchanges through which, it deals, whether it engaged in
exchange traded or off-exchange transactions.
A
fund is subject to the risk that issuers of the instruments in which it invests
and trades may default on their obligations under those instruments, and that
certain events may occur that have an immediate and significant adverse effect
on the value of those instruments. There can be no assurance that an issuer of
an instrument in which a fund invests will not default, or that an event that
has an immediate and significant adverse effect on the value of an instrument
will not occur, and that a fund will not sustain a loss on a transaction as a
result.
Transactions
entered into by a fund may be executed on various U.S. and non-U.S. exchanges,
and may be cleared and settled through various clearinghouses, custodians,
depositories and prime brokers throughout the world. Although a fund attempts to
execute, clear and settle the transactions through entities the advisor believes
to be sound, there can be no assurance that a failure by any such entity will
not lead to a loss to a fund.
Cyber
Security Risk
As
the funds increasingly rely on technology and information systems to operate,
they become susceptible to operational risks linked to security breaches in
those information systems. Both calculated attacks and unintentional events can
cause failures in the funds’ information systems. Cyber attacks can include
acquiring unauthorized access to information systems, usually through hacking or
the use of malicious software, for purposes of stealing assets or confidential
information, corrupting data, or disrupting fund operations. Cyber attacks can
also occur without direct access to information systems, for example by making
network services unavailable to intended users. Cyber security failures by, or
breaches of the information systems of, the advisor, distributors,
broker-dealers, other service providers (including, but not limited to, index
providers, clearinghouses, fund accountants, custodians, transfer agents and
administrators), or the issuers of securities the fund invests in may also cause
disruptions and impact the funds’ business operations. Breaches in
information security may result in financial losses, interference with the
funds’ ability to calculate NAV, impediments to trading, inability of fund
shareholders to transact business, violations of applicable privacy and other
laws, regulatory fines, penalties, reputational damage, reimbursement or other
compensation costs, or additional compliance costs. Additionally, the funds may
incur substantial costs to prevent future cyber incidents. The funds have
business continuity plans in the event of, and risk management systems to help
prevent, such cyber attacks, but these plans and systems have limitations
including the possibility that certain risks have not been identified. Moreover,
the funds do not control the cyber security plans and systems of our service
providers and other third-party business partners. The funds and their
shareholders could be negatively impacted as a result.
Debt
Securities
The
funds may invest in debt securities. Each fund may invest in debt securities
when the portfolio managers believe such securities represent an attractive
investment for the funds. These funds may invest in debt securities for income
or as a defensive strategy when the managers believe adverse economic or market
conditions exist.
The
funds may purchase sovereign debt instruments issued or guaranteed by foreign
governments or their agencies, including debt of emerging market countries.
Sovereign debt may be in the form of conventional securities or other types of
debt instruments, such as
loans
or loan participations. Sovereign debt of emerging market countries may involve
a high degree of risk and may present a risk of default or renegotiation or
rescheduling of debt payments.
Debt
securities rated lower than Baa by Moody’s or BBB by S&P, or their
equivalent, are considered by many to be predominantly speculative. Changes in
economic conditions or other circumstances are more likely to lead to a weakened
capacity to make principal and interest payments on such securities than is the
case with higher quality debt securities. Regardless of rating levels, all debt
securities considered for purchase by the fund are analyzed by the investment
manager to determine, to the extent reasonably possible, that the planned
investment is sound, given the fund’s investment objective.
See Explanation
of Fixed-Income Securities Ratings in Appendix B.
In
addition to other factors that will affect its value, the value of a fund’s
investments in fixed income securities will change as prevailing interest rates
change. In general, the prices of such securities vary inversely with interest
rates. As prevailing interest rates fall, the prices of bonds and other
securities that trade on a yield basis rise. When prevailing interest rates
rise, bond prices generally fall. These changes in value may, depending upon the
amount and type of fixed-income securities holdings of a fund, impact the net
asset value of that fund’s shares.
Depositary
Receipts
Depositary
receipts are certificates evidencing ownership of shares of a foreign issuer.
They include American Depositary Receipts (ADRs),
as well as other “hybrid” forms of ADRs, European Depositary Receipts (EDRs),
Global Depositary Receipts (GDRs), Non-Voting Depositary Receipts (NVDRs), and
other similar depositary arrangements. Depositary receipts are securities that
evidence ownership interests in a security or a pool of securities that have
been deposited with a “depository” and may be sponsored or unsponsored. These
certificates are issued by depository banks and generally trade on an
established market in the United States or elsewhere. The underlying shares are
held in trust by a custodian bank or similar financial institution in the
issuer’s home country. The depository bank may not have physical custody of the
underlying securities at all times and may charge fees for various services,
including forwarding dividends and interest and corporate
actions. Depositary receipts are alternatives to directly purchasing the
underlying foreign securities in their national markets and currencies. However,
depositary receipts continue to be subject to many of the risks associated with
investing directly in foreign securities.
For
ADRs, the depository is typically a U.S. financial institution and the
underlying securities are issued by a foreign issuer. For other depositary
receipts, the depository may be a foreign or a U.S. entity, and the underlying
securities may have a foreign or a U.S. issuer. Depositary receipts will not
necessarily be denominated in the same currency as their underlying securities.
Generally, ADRs are issued in registered form, denominated in U.S. dollars.
Other depositary receipts, such as GDRs and EDRs, may be issued in bearer form
and denominated in other currencies, and are generally traded in securities
markets outside the U.S. While the two types of depositary receipt facilities
(unsponsored or sponsored) are similar, there are differences regarding a
holder’s rights and obligations and the practices of market participants. A
depository may establish an unsponsored facility without participation by (or
acquiescence of) the underlying issuer; typically, however, the depository
requests a letter of non-objection from the underlying issuer prior to
establishing the facility. Holders of unsponsored depositary receipts generally
bear all the costs of the facility. The depository usually charges fees upon
deposit and withdrawal of the underlying securities, the conversion of dividends
into U.S. dollars or other currency, the disposition of non-cash distributions,
and the performance of other services. The depository of an unsponsored facility
frequently is under no obligation to distribute shareholder communications
received from the underlying issuer or to pass through voting rights to
depositary receipt holders with respect to the underlying
securities.
Sponsored
depositary receipt facilities are created in generally the same manner as
unsponsored facilities, except that sponsored depositary receipts are
established jointly by a depository and the underlying issuer through a deposit
agreement. The deposit agreement sets out the rights and responsibilities of the
underlying issuer, the depository, and the depositary receipt holders. With
sponsored facilities, the underlying issuer typically bears some of the costs of
the depositary receipts (such as dividend payment fees of the depository),
although most sponsored depositary receipts agree to distribute notices of
shareholders meetings, voting instructions, and other shareholder communications
and information to the depositary receipt holders at the underlying issuer’s
request. The depositary of an unsponsored facility frequently is under no
obligation to distribute shareholder communications received from the issuer of
the deposited security or to pass through, to the holders of the receipts,
voting rights with respect to the deposited securities. Depositary receipts do
not eliminate all of the risks associated with directly investing in the
securities of foreign issuers.
Derivative
Instruments
To
the extent permitted by its investment objectives and policies, each of the
funds may invest in derivative instruments. Generally, a derivative instrument
is a financial arrangement the value of which is based on, or derived from, a
traditional security, asset, or market index. A
fund may not invest in a derivative instrument if its credit, interest rate,
liquidity, counterparty or other associated risks are outside acceptable limits
set forth in its prospectus. The advisor has a derivatives risk management
program that includes policies and procedures reasonably designed to manage each
fund’s respective derivatives risk. The derivatives risk management program
complies with Rule 18f-4 of the Investment Company Act. Unless a fund qualifies
as a limited derivatives user, the fund will be required to participate in the
derivatives risk management program, which includes compliance with
value-at-risk based leverage limits, oversight
by
a derivatives risk manager, and additional reporting and disclosure regarding
its derivatives positions. A fund designated as a limited derivatives user has
policies and procedures to manage its aggregate derivatives risk. The advisor
will report on the derivatives risk management program to the Board of Trustees
on a quarterly basis.
Examples
of common derivative instruments include futures contracts, warrants, structured
notes, credit default swaps, options contracts, swap transactions and forward
currency contracts.
The
risks associated with investments in derivatives differ from, and may be greater
than, the risks associated with investing directly in traditional
investments.
Leverage
Risk
– Relatively small market movements may cause large changes in an investment’s
value. Leverage is associated with certain types of derivatives or trading
strategies. Certain transactions in derivatives (such as futures transactions or
sales of put options) involve substantial leverage and may expose a fund to
potential losses that exceed the amount of initial investment.
Hedging
Risk
– When used to hedge against a position in a fund, losses on a derivative
instrument are typically offset by gains on the hedged position, and vice versa.
Thus, though hedging can minimize or cancel out losses, it can also have the
same effect on gains. Occasionally, there may be imperfect matching between the
derivative and the underlying security, such a match may prevent the fund from
achieving the intended hedge or expose it to a risk of loss. There is no
guarantee that a fund’s hedging strategy will be effective. Portfolio managers
may decide not to hedge against any given risk either because they deem such
risk improbable or they do not foresee the occurrence of the risk. Additionally,
certain risks may be impossible to hedge against.
Correlation
Risk
– The value of the underlying security, interest rate, market index or other
financial asset may not move in the direction the portfolio managers anticipate.
Additionally, the value of the derivative may not move or react to changes in
the underlying security, interest rate, market index or other financial asset as
anticipated.
Illiquidity
Risk –
There may be no liquid secondary market, which may make it difficult or
impossible to close out a position when desired. For exchange-traded derivatives
contracts, daily limits on price fluctuations and speculative position limits
set by the exchanges on which the fund transacts in derivative instruments may
prevent profitable liquidation of positions, subjecting a fund to the potential
of greater losses.
Settlement
Risk
– A fund may have an obligation to deliver securities or currency pursuant to a
derivatives transaction that such fund does not own at the inception of the
derivatives trade.
Counterparty
Risk
– A counterparty may fail to perform its obligations. Because bi-lateral
derivative transactions are traded between counterparties based on contractual
relationships, a fund is subject to the risk that a counterparty will not
perform its obligations under the related contracts. Although each fund intends
to enter into transactions only with counterparties which the advisor believes
to be creditworthy, there can be no assurance that a counterparty will not
default and that the funds will not sustain a loss on a transaction as a result.
In situations where a fund is required to post margin or other collateral with a
counterparty, the counterparty may fail to segregate the collateral or may
commingle the collateral with the counterparty’s own assets. As a result, in the
event of the counterparty’s bankruptcy or insolvency, a fund’s collateral may be
subject to the conflicting claims of the counterparty’s creditors, and a fund
may be exposed to the risk of a court treating a fund as a general unsecured
creditor of the counterparty, rather than as the owner of the
collateral.
Volatility
Risk
– A fund could face higher volatility because some derivative instruments create
leverage.
Futures
and Options
Each
fund may enter into futures contracts, options or options on futures contracts.
Futures contracts provide for the sale by one party and purchase by another
party of a specific security at a specified future time and price.
Futures
Generally,
futures transactions will be used to:
•protect
against a decline in market value of the fund’s securities at a time the fund
needs to raise cash (taking a short futures position), or
•protect
against the risk of an increase in market value for securities in which the fund
generally invests at a time when the fund is not fully-invested (taking a long
futures position), or
•provide
a temporary substitute for the purchase of an individual security or securities
that may be purchased in an orderly fashion.
Some
futures and options strategies, such as selling futures, buying puts and writing
calls, hedge a fund’s investments against price fluctuations. Other strategies,
such as buying futures, writing puts and buying calls, tend to increase market
exposure.
Although
other techniques may be used to control a fund’s exposure to market
fluctuations, the use of futures contracts may be a more effective means of
hedging this exposure. While a fund pays brokerage commissions in connection
with opening and closing out futures positions, these costs are lower than the
transaction costs incurred in the purchase and sale of the underlying
securities.
For
example, the sale of a future by a fund means the fund becomes obligated to
deliver the security (or securities, in the case of an index future) at a
specified price on a specified date. The purchase of a future means the fund
becomes obligated to buy the security (or securities) at a specified price on a
specified date. The portfolio managers may engage in futures and options
transactions, provided
that
the transactions are consistent with the fund’s investment objectives. The
managers also may engage in futures and options transactions based on specific
securities. Futures contracts are traded on national futures exchanges. Futures
exchanges and trading are regulated under the Commodity Exchange Act by the
Commodity Futures Trading Commission (CFTC), a U.S. government
agency.
Index
futures contracts differ from traditional futures contracts in that when
delivery takes place, no stocks or bonds change hands. Instead, these contracts
settle in cash at the spot market value of the index. Although other types of
futures contracts by their terms call for actual delivery or acceptance of the
underlying securities, in most cases the contracts are closed out before the
settlement date. A futures position may be closed by taking an opposite position
in an identical contract (i.e.,
buying a contract that has previously been sold or selling a contract that has
previously been bought).
Unlike
when the fund purchases or sells a security, no price is paid or received by the
fund upon the purchase or sale of the future. Initially, the fund will be
required to deposit an amount of cash or securities equal to a varying specified
percentage of the contract amount. This amount is known as initial margin. The
margin deposit is intended to ensure completion of the contract (delivery or
acceptance of the underlying security) if it is not terminated prior to the
specified delivery date. A margin deposit does not constitute a margin
transaction for purposes of the fund’s investment restrictions. Minimum initial
margin requirements are established by the futures exchanges and may be
revised.
In
addition, brokers may establish margin deposit requirements that are higher than
the exchange minimums. Cash held in the margin accounts generally is not income
producing. However, coupon bearing securities, such as Treasury bills and bonds,
held in margin accounts generally will earn income. Subsequent payments, to and
from the broker, called variation margin, will be made on a daily basis as the
price of the underlying security or index fluctuates, making the future more or
less valuable, a process known as marking the contract to market. Changes in
variation margin are recorded by the fund as unrealized gains or losses. At any
time prior to expiration of the future, the fund may elect to close the position
by taking an opposite position. A final determination of variation margin is
then made; additional cash is required to be paid by or released to the fund and
the fund realizes a loss or gain.
Options
By
buying a put option, a fund obtains the right (but not the obligation) to sell
the instrument underlying the option at a fixed strike price and in return a
fund pays the current market price for the option (known as the option premium).
A fund may terminate its position in a put option it has purchased by allowing
it to expire, by exercising the option or by entering into an offsetting
transaction, if a liquid market exists. If the option is allowed to expire, a
fund will lose the entire premium it paid. If a fund exercises a put option on a
security, it will sell the instrument underlying the option at the strike price.
Purchasing an option on a futures contract does not require a fund to make
margin payments unless the option is exercised. The buyer of a typical put
option can expect to realize a gain if the value of the underlying instrument
falls substantially. However, if the price of the instrument underlying the
option does not fall enough to offset the cost of purchasing the option, a put
buyer can expect to suffer a loss limited to the amount of the premium paid,
plus related transaction costs.
The
features of call options are essentially the same as those of put options,
except that the buyer of a call option obtains the right to purchase, rather
than sell, the instrument underlying the option at the option’s strike price.
The buyer of a typical call option can expect to realize a gain if the value of
the underlying instrument increases substantially and can expect to suffer a
loss if security prices do not rise sufficiently to offset the cost of the
option.
When
a fund writes a put option, it takes the opposite side of the transaction from
the option’s buyer. In return for the receipt of the premium, a fund assumes the
obligation to pay the strike price for the instrument underlying the option if
the other party to the option chooses to exercise it. A fund may seek to
terminate its position in a put option it writes before exercise by purchasing
an offsetting option in the market at its current price. Otherwise, a fund must
continue to be prepared to pay the strike price while the option is outstanding,
regardless of price changes, and must continue to post margin as discussed
below. If the price of the underlying instrument rises, a put writer would
generally realize as profit the premium it received. If the price of the
underlying instrument remains the same over time, it is likely that the writer
will also profit, because it should be able to close out the option at a lower
price. If the price of the underlying instrument falls, the put writer would
expect to suffer a loss.
A
fund writing a call option is obligated to sell or deliver the option’s
underlying instrument in return for the strike price upon exercise of the
option. Writing calls generally is a profitable strategy if the price of the
underlying instrument remains the same or falls. A call writer offsets part of
the effect of a price decline by receipt of the option premium but gives up some
ability to participate in security price increases. The writer of an exchange
traded put or call option on a security, an index of securities or a futures
contract is required to deposit cash or securities or a letter of credit as
margin and to make mark to market payments of variation margin as the position
becomes unprofitable.
The
funds may write (or sell) call options that obligate them to sell (or deliver)
the option’s underlying instrument upon exercise of the option. While the
receipt of option premiums would mitigate the effects of price declines, the
funds would give up some ability to participate in a price increase on the
underlying security. If a fund were to engage in options transactions, it would
own the futures contract at the time a call was written and would keep the
contract open until the obligation to deliver it pursuant to the call
expired.
Options
on Futures
By
purchasing an option on a futures contract, a fund obtains the right, but not
the obligation, to sell the futures contract (a put option) or to buy the
contract (a call option) at a fixed strike price. A fund can terminate its
position in a put option by allowing it to expire or by exercising the option.
If the option is exercised, the fund completes the sale of the underlying
security at the strike price. Purchasing an option on a futures contract does
not require a fund to make margin payments unless the option is
exercised.
Some
funds may write (or sell) call options that obligate them to sell (or deliver)
the option’s underlying instrument upon exercise of the option. While the
receipt of option premiums would mitigate the effects of price declines, a fund
would give up some ability to participate in a price increase on the underlying
security. If a fund were to engage in options transactions, it would own the
futures contract at the time a call was written and would keep the contract open
until the obligation to deliver it pursuant to the call expired.
Risks
Related to Futures and Options Transactions
Futures
and options prices can be volatile, and trading in these markets involves
certain risks. If the portfolio managers apply a hedge at an inappropriate time
or judge interest rate or equity market trends incorrectly, futures and options
strategies may lower a fund’s return.
A
fund could suffer losses if it were unable to close out its position because of
an illiquid secondary market. Futures contracts may be closed out only on an
exchange that provides a secondary market for these contracts, and there is no
assurance that a liquid secondary market will exist for any particular futures
contract at any particular time. Consequently, it may not be possible to close a
futures position when the portfolio managers consider it appropriate or
desirable to do so. In the event of adverse price movements, a fund would be
required to continue making daily cash payments to maintain its required margin.
If the fund had insufficient cash, it might have to sell portfolio securities to
meet daily margin requirements at a time when the portfolio managers would not
otherwise elect to do so. In addition, a fund may be required to deliver or take
delivery of instruments underlying futures contracts it holds. The portfolio
managers will seek to minimize these risks by limiting the futures contracts
entered into on behalf of the funds to those traded on national futures
exchanges and for which there appears to be a liquid secondary
market.
A
fund could suffer losses if the prices of its futures and options positions were
poorly correlated with its other investments, or if securities underlying
futures contracts purchased by a fund had different maturities than those of the
portfolio securities being hedged. Such imperfect correlation may give rise to
circumstances in which a fund loses money on a futures contract while it
experiences a decline in the value of its hedged portfolio securities. A fund
also could lose margin payments it has deposited with a margin broker, if, for
example, the broker became bankrupt.
Most
futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum
amount that the price of a futures contract may vary either up or down from the
previous day’s settlement price at the end of the trading session. Once the
daily limit has been reached in a particular type of contract, no trades may be
made on that day at a price beyond the limit. However, the daily limit governs
only price movement during a trading day and, therefore, does not limit
potential losses. In addition, the daily limit may prevent liquidation of
unfavorable positions. Futures contract prices have occasionally moved to the
daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of futures positions and subjecting some
futures traders to substantial losses.
If
a fund’s futures commission merchant, (FCM) becomes bankrupt or insolvent, or
otherwise defaults on its obligations to the fund, the fund may not receive all
amounts owed to it in respect of its trading, despite the clearinghouse fully
discharging all of its obligations. The Commodity Exchange Act requires an FCM
to segregate all funds received from its customers with respect to regulated
futures transactions from such FCM’s proprietary funds. If an FCM were not to do
so to the full extent required by law, the assets of an account might not be
fully protected in the event of the bankruptcy of an FCM. Furthermore, in the
event of an FCM’s bankruptcy, a fund would be limited to recovering only a pro
rata share of all available funds segregated on behalf of an FCM’s combined
customer accounts, even though certain property specifically traceable to the
fund (for example, U.S. Treasury bills deposited by the fund) was held by an
FCM. FCM bankruptcies have occurred in which customers were unable to recover
from the FCM’s estate the full amount of their funds on deposit with such FCM
and owing to them. Such situations could arise due to various factors, or a
combination of factors, including inadequate FCM capitalization, inadequate
controls on customer trading and inadequate customer capital. In addition, in
the event of the bankruptcy or insolvency of a clearinghouse, the fund might
experience a loss of funds deposited through its FCM as margin with the
clearinghouse, a loss of unrealized profits on its open positions, and the loss
of funds owed to it as realized profits on closed positions. Such a bankruptcy
or insolvency might also cause a substantial delay before the fund could obtain
the return of funds owed to it by an FCM who was a member of such
clearinghouse.
When
purchasing an option on a futures contract, the fund assumes the risk of the
premium paid for the option plus related transaction costs. The purchase of an
option on a futures contract also entails the risk that changes in the value of
the underlying futures contract will not be fully reflected in the value of the
option purchased.
Restrictions
on the Use of Futures Contracts and Options
Each
fund may enter into futures contracts, options, options on futures contracts, or
swap agreements as permitted by its investment policies and the Commodity
Futures Trading Commission (CFTC) rules. The advisor to each fund has claimed an
exclusion from the
definition
of the term “commodity pool operator” under the Commodity Exchange Act and,
therefore, the advisor is not subject to registration or regulation as a
commodity pool operator under that Act with respect to its provision of services
to each fund.
Certain
rules adopted by the CFTC may impose additional limits on the ability of a fund
to invest in futures contracts, options on futures, swaps, and certain other
commodity interests if its investment advisor does not register with the CFTC as
a “commodity pool operator” with respect to such fund. It is expected that the
funds will be able to execute their investment strategies within the limits
adopted by the CFTC’s rules. As a result, the advisor does not intend to
register with the CFTC as a commodity pool operator on behalf of any of the
funds. If one of the funds engages in transactions that necessitate future
registration with the CFTC, the advisor will register as a commodity pool
operator and comply with applicable regulations with respect to that
fund.
Foreign
Currency Transactions and Forward Exchange Contracts
A
fund may conduct foreign currency transactions on a spot basis (i.e.,
cash) or forward basis (i.e.,
by entering into forward currency exchange contracts, currency options and
futures transactions to purchase or sell foreign currencies). Although foreign
exchange dealers generally do not charge a fee for such transactions, they do
realize a profit based on the difference between the prices at which they are
buying and selling various currencies.
Forward
contracts are customized transactions that require a specific amount of a
currency to be delivered at a specific exchange rate on a specific date or range
of dates in the future. Forward contracts are generally traded in an interbank
market directly between currency traders (usually larger commercial banks) and
their customers. The parties to a forward contract may agree to offset or
terminate the contract before its maturity or may hold the contract to maturity
and complete the contemplated currency exchange.
The
following summarizes the principal currency management strategies involving
forward contracts. A fund may also use swap agreements, indexed securities, and
options and futures contracts relating to foreign currencies for the same
purposes.
(1)Settlement
Hedges or Transaction Hedges. When the portfolio managers wish to lock in the
U.S. dollar price of a foreign currency denominated security when a fund is
purchasing or selling the security or when the fund expects to receive a
dividend, the fund may enter into a forward contract to do so. This type of
currency transaction, often called a “settlement hedge” or “transaction hedge,”
protects the fund against an adverse change in foreign currency values between
the date a security is purchased or sold and the date on which payment is made
or received (i.e.,
settled). Forward contracts to purchase or sell a foreign currency may also be
used by a fund in anticipation of future purchases or sales of securities
denominated in foreign currency, even if the specific investments have not yet
been selected by the portfolio managers. This strategy is often referred to as
“anticipatory hedging.”
(2)Position
Hedges. When the portfolio managers wish to minimize the variation produced by
changes in the foreign currency associated with a security, a fund may enter
into a forward contract to sell foreign currency for a fixed U.S. dollar amount
approximating the value of some or all of its portfolio securities either
denominated in, or whose value is tied to, such foreign currency. This use of a
forward contract is sometimes referred to as a “position hedge.” For example, if
a fund owned securities denominated in Euro, it could enter into a forward
contract to sell Euro in return for U.S. dollars to hedge against possible
declines in the Euro’s value. This hedge would tend to offset both positive and
negative currency fluctuations but would not tend to offset changes in security
values caused by other factors.
A
fund could also hedge the position by entering into a forward contract to sell
another currency expected to perform similarly to the currency in which the
fund’s existing investments are denominated. This type of hedge, often called a
“proxy hedge,” could offer advantages in terms of cost, yield or efficiency, but
may not hedge currency exposure as effectively as a simple position hedge
against U.S. dollars. This type of hedge may result in losses if the currency
used to hedge does not perform similarly to the currency in which the hedged
securities are denominated.
The
precise matching of forward contracts in the amounts and values of securities
involved generally would not be possible because the future values of such
foreign currencies will change as a consequence of market movements in the
values of those securities between the date the forward contract is entered into
and the date it matures. The successful execution of a short-term hedging
strategy is highly uncertain.
At
the maturity of the forward contract, the fund may either sell the portfolio
security and make delivery of the foreign currency, or it may retain the
security and terminate the obligation to deliver the foreign currency by
purchasing an “offsetting” forward contract with the same currency trader
obligating the fund to purchase, on the same maturity date, the same amount of
the foreign currency.
It
is impossible to forecast with absolute precision the market value of portfolio
securities at the expiration of the forward contract. Accordingly, it may be
necessary for a fund to purchase additional foreign currency on the spot market
(and bear the expense of such purchase) if the market value of the security is
less than the amount of foreign currency the fund is obligated to deliver and if
a decision is made to sell the security and make delivery of the foreign
currency the fund is obligated to deliver.
(3)Shifting
Currency Exposure. A fund may also enter into forward contracts to shift its
investment exposure from one currency into another. This may include shifting
exposure from U.S. dollars to foreign currency, or from one foreign currency to
another foreign currency. This strategy tends to limit exposure to the currency
sold, and increase exposure to the currency that is purchased, much as if a fund
had sold a security denominated in one currency and purchased an equivalent
security denominated
in
another currency. For example, if the portfolio managers have too much exposure
to the U.S. dollar and need exposure to the Euro, they could enter into a
forward contract to purchase Euros for a fixed amount of U.S. dollars. This
transaction would protect against losses resulting from a decline in the value
of the U.S. dollar, but would cause the fund to assume the risk of fluctuations
in the value of the Euro.
Currency
management strategies may substantially subject a fund’s investment exposure to
changes in currency rates and could result in losses to a fund if currencies
perform adversely. For example, if a currency’s value rose at a time when the
fund hedged by selling the currency in exchange for U.S. dollars, a fund would
not participate in the currency’s appreciation. Similarly, if the portfolio
managers increase a fund’s exposure to a currency and that currency’s value
declines, a fund will sustain a loss. There is no assurance that the funds’ use
of foreign currency management strategies will be advantageous or that it will
hedge at appropriate times.
The
fund will generally cover outstanding forward contracts by maintaining liquid
portfolio securities denominated in, or whose value is tied to, the currency
underlying the forward contract or the currency being hedged.
Swap
Agreements
Each
fund may invest in swap agreements, consistent with its investment objective and
strategies. A fund may enter into a swap agreement to, for example, attempt to
obtain or preserve a particular return or spread at a lower cost than obtaining
a return or spread through purchases and/or sales of instruments in other
markets; protect against currency fluctuations; attempt to manage duration to
protect against any increase in the price of securities the fund anticipates
purchasing at a later date; or gain exposure to certain markets in the most
economical way possible.
Swap
agreements are two-party contracts entered primarily by institutional investors
for periods ranging from a few weeks to more than one year. In a standard “swap”
transaction, two parties agree to exchange the returns (or differentials in
rates of return) earned or realized on predetermined investments or instruments,
which may be adjusted for an interest factor. The gross returns to be exchanged
or “swapped” between the parties are generally calculated with respect to a
“notional amount,” i.e.,
the return on or increase in value of a dollar amount invested at a particular
interest rate, in a particular foreign currency, or in a “basket” of securities
representing a particular index. Forms of swap agreements include, for example,
interest rate swaps, under which fixed- or floating-rate interest payments on a
specific principal amount are exchanged and total return swaps, under which one
party agrees to pay the other the total return of a defined underlying asset
(usually an index, including inflation indexes, stock, bond or defined portfolio
of loans and mortgages) in exchange for fee payments, often a variable stream of
cashflows based on a reference rate. The funds may enter into credit default
swap agreements to hedge an existing position by purchasing or selling credit
protection. Credit default swaps enable an investor to buy/sell protection
against a credit event of a specific issuer. The seller of credit protection
against a security or basket of securities receives an up-front or periodic
payment to compensate against potential default event(s). The fund may enhance
returns by selling protection or attempt to mitigate credit risk by buying
protection. Market supply and demand factors may cause distortions between the
cash securities market and the credit default swap market.
Interest
rate swaps could result in losses if interest rate changes are not correctly
anticipated by the fund. Total return swaps could result in losses if the
reference index, security, or investments do not perform as anticipated by the
fund. Credit default swaps could result in losses if the fund does not correctly
evaluate the creditworthiness of the issuer on which the credit default swap is
based. Because they are two-party contracts and because they may have terms of
greater than seven days, swap agreements may be illiquid. Moreover, a fund bears
the risk of loss of the amount expected to be received under a swap agreement in
the event of the default or bankruptcy of a swap agreement counterparty. The
funds will enter into swap agreements only with counterparties that meet certain
standards of creditworthiness or that are cleared through a Derivatives Clearing
Organization (“DCO”). Certain restrictions imposed on the funds by the Internal
Revenue Code may limit the funds’ ability to use swap agreements.
The
Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”)
and related regulatory developments require the clearing and exchange-trading of
certain standardized derivative instruments that the CFTC and SEC have defined
as “swaps.” The CFTC has implemented mandatory exchange-trading and clearing
requirements under the Dodd-Frank Act and the CFTC continues to approve
contracts for central clearing. Although exchange trading is designed to
decrease counterparty risk, it does not do so entirely because the fund will
still be subject to the credit risk of the central clearinghouse. Cleared swaps
are subject to margin requirements imposed by both the central clearinghouse and
the clearing member FCM. Uncleared swaps are now subject to post and
collect collateral on a daily basis to secure mark-to-market obligations
(variation margin). Swaps data reporting may subject
a fund to administrative costs, and the safeguards established to
protect trader anonymity may not function as expected.
Exchange trading, central clearing, margin
requirements, and data reporting regulations may increase a fund’s
cost of hedging risk and, as a result, may affect shareholder
returns.
Distressed
Investments
Distressed
investments generally entail greater risks due to such things as sensitivity to
general economic and capital market conditions, interest rates, risks associated
with leveraged companies and risks inherent in investing in companies
experiencing financial and operating distress (e.g.,
issuer credit risk). Distressed investments generally have very low credit
ratings or are unrated by credit rating agencies.
Greater
Risk of Loss — These
investments are regarded as highly speculative. There is a greater risk that
issuers of lower-rated investments will default than issuers of higher-rated
investments, and some may be subject to bankruptcy proceedings or may be in
default as to the repayment of principal and/or interest. Issuers of lower-rated
investments generally are more vulnerable to real or perceived economic changes,
political changes or adverse industry developments. In addition, distressed debt
investments are frequently subordinated to the prior payment of senior
indebtedness or have claims that are otherwise junior in priority with regard to
the issuer’s assets. If an issuer fails to pay principal or interest, the fund
would experience a decrease in income and a decline in the market value of its
investments. These investments carry a much greater risk of default and loss,
which could include the loss of the entire amount of the
investment.
Valuation
Difficulties — It
is often more difficult to value distressed and other lower-rated investments
than higher-rated investments. If an issuer’s financial condition deteriorates,
accurate financial and business information may be limited or unavailable. In
addition, lower-rated investments may be thinly traded and there may be no
established secondary market. Because of the lack of market pricing and current
information for investments in some distressed and lower-rated investments,
valuation of such investments is much more dependent on judgment than is the
case with higher-rated investments.
Liquidity
— There
may be no established secondary or public market for investments in distressed
and other lower-rated investments. Such investments generally are traded in
markets that are less liquid than the market for higher-rated investments. In
addition, relatively few institutional purchasers may hold a major portion of an
issue of lower-rated investments. As a result, the fund may be required to sell
investments at substantial losses, or may be unable to sell
investments.
Equity
Equivalents
Equity
equivalents include securities that permit a fund to receive an equity interest
in an issuer, the opportunity to acquire an equity interest in an issuer, or the
opportunity to receive a return on its investment that permits the fund to
benefit from the growth over time in the equity of an issuer. Examples of equity
equivalents include preferred stock, convertible preferred stock, convertible
securities, stock futures contracts or stock index futures contracts. Equity
equivalents also may include securities whose value or return is derived from
the value or return of a different security.
Foreign
Securities
The
funds may invest in the securities of foreign issuers, including foreign
governments, when these securities meet the fund’s standards of selection. The
funds may make foreign investments either directly in foreign securities or
indirectly by purchasing depositary receipts, depositary shares or similar
instruments (DRs) for foreign securities. DRs are securities that are listed on
exchanges or quoted in over-the-counter markets in one country but represent
shares of issuers domiciled in another country. The funds also may purchase
securities of issuers in foreign markets, either on foreign securities
exchanges, electronic trading networks or in over-the-counter
markets.
A
description of the funds’ investment strategies regarding foreign securities is
contained in the funds’ prospectuses. Investing in securities of foreign issuers
generally involves greater risks than investing in the securities of domestic
companies including:
Currency
Risk.
The value of the foreign investments held by the funds may be significantly
affected by changes in currency exchange rates. The dollar value of a foreign
security generally decreases when the value of the dollar rises against the
foreign currency in which the security is denominated and tends to increase when
the value of the dollar falls against such currency. In addition, the value of
fund assets may be affected by losses and other expenses incurred in converting
between various currencies in order to purchase and sell foreign securities, and
by currency restrictions, exchange control regulation, currency devaluations and
political developments.
Social,
Political and Economic Risk.
The economies of many of the countries in which the funds invest are not as
developed as the economy of the United States and may be subject to
significantly different forces. Political or social instability, expropriation,
nationalization, or confiscatory taxation, and limitations on the removal of
funds or other assets, could also adversely affect the value of investments.
Further, the funds may find it difficult or be unable to enforce ownership
rights, pursue legal remedies or obtain judgments in foreign
courts.
Regulatory
Risk.
Foreign companies generally are not subject to the regulatory controls imposed
on U.S. issuers and, in general, there is less publicly available information
about foreign securities than is available about domestic securities. Many
foreign companies are not subject to uniform accounting, auditing and financial
reporting standards, practices and requirements comparable to those applicable
to domestic companies and there may be less stringent investor protection and
disclosure standards in some foreign markets. Certain jurisdictions do not
currently provide the Public Company Accounting Oversight Board (“PCAOB”) with
sufficient access to inspect audit work papers and practices, or otherwise do
not cooperate with U.S. regulators, potentially exposing investors in U.S.
capital markets to significant risks. Income from foreign securities owned by
the funds may be reduced by a withholding tax at the source, which would reduce
dividend income payable to shareholders.
Market
and Trading Risk.
Brokerage commission rates in foreign countries, which are generally fixed
rather than subject to negotiation as in the United States, are likely to be
higher. The securities markets in many of the countries in which the funds
invest will have substantially less trading volume than the principal U.S.
markets. As a result, the securities of some companies in these
countries
may be less liquid, more volatile and harder to value than comparable U.S.
securities. Furthermore, one securities broker may represent all or a
significant part of the trading volume in a particular country, resulting in
higher trading costs and decreased liquidity due to a lack of alternative
trading partners. There is generally less government regulation and supervision
of foreign stock exchanges, brokers and issuers, which may make it difficult to
enforce contractual obligations. In addition, it may be more difficult in
foreign countries to accurately determine appropriate brokerage commissions,
taxes and other trading costs related to securities trades.
Clearance
and Settlement Risk.
Foreign securities markets also have different clearance and settlement
procedures, and in certain markets there have been times when settlements have
been unable to keep pace with the volume of securities transactions, making it
difficult to conduct such transactions. Market practice may require that
payments are made prior to receipt of the security which is being purchased or
that delivery of a security must be made before payment is received. Delays in
clearance and settlement could result in temporary periods when assets of the
funds are uninvested and no return is earned. The inability of the funds to make
intended security purchases due to clearance and settlement problems could cause
the funds to miss attractive investment opportunities. Inability to dispose of
portfolio securities due to clearance and settlement problems could result
either in losses to the funds due to subsequent declines in the value of the
portfolio security or, if the fund has entered into a contract to sell the
security, liability to the purchaser. This risk may be magnified in emerging
markets because settlement systems may be less organized, creating a risk that
settlements may be not only delayed, but also lost because of failures or
defects in such systems.
Ownership
Risk.
Evidence of securities ownership may be uncertain in many foreign countries. In
many of these countries, the most notable of which is the Russian Federation,
the ultimate evidence of securities ownership is the share register held by the
issuing company or its registrar. While some companies may issue share
certificates or provide extracts of the company’s share register, these are not
negotiable instruments and are not effective evidence of securities ownership.
In an ownership dispute, the company’s share register is controlling. As a
result, there is a risk that a fund’s trade details could be incorrectly or
fraudulently entered on the issuer’s share register at the time of the
transaction, or that a fund’s ownership position could thereafter be altered or
deleted entirely, resulting in a loss to the fund. While the funds intend to
invest directly in Russian companies that utilize an independent registrar,
there can be no assurance that such investments will not result in a loss to the
funds.
Emerging
Markets Risk.
Investing in emerging market companies generally is also riskier than investing
in other foreign securities. Risks of investing in emerging markets countries
may relate to lack of liquidity, market manipulation, limited reliable access to
capital, and differing foreign investment structures. Emerging market countries
may have unstable governments and/or economies that are subject to sudden
change. These changes may be magnified by the countries’ emergent financial
markets, resulting in significant volatility to investments in these countries.
These countries also may lack the legal, business and social framework to
support securities markets.
As
a result of the foregoing risks, Avantis Emerging Markets Equity ETF,
Avantis
Emerging Markets ex-China Equity ETF, Avantis
Emerging Markets Value ETF, Avantis
Emerging Markets Small Cap Equity ETF
and Avantis Responsible Emerging Markets Equity ETF are intended for aggressive
investors seeking significant gains through investments in foreign securities.
Those investors must be willing and able to accept the significantly greater
risks associated with the investment strategy that the funds will pursue. An
investment in the funds is not appropriate for individuals with limited
investment resources or who are unable to tolerate fluctuations in the value of
their investment.
Risk
of Focusing Investment on Region or Country.
Investing a significant portion of assets in one country or region makes a fund
more dependent upon the political and economic circumstances of that particular
country or region.
Eurozone
Investment Risk
— The
Economic and Monetary Union of the European Union (EMU) is comprised of the
European Union (EU) members that have adopted the euro currency. By adopting the
euro as its currency, a member state relinquishes control of its own monetary
policies and is subject to fiscal and monetary controls. EMU members could
voluntarily abandon, or be forced out of, the euro. Such events could impact the
market values of Eurozone and various other securities and currencies, cause
redenomination of certain securities into less valuable local currencies and
create more volatile and illiquid markets. As a result, European countries are
significantly affected by fiscal and monetary controls implemented by the EMU.
The euro currency may not fully reflect the strengths and weaknesses of the
various economies that comprise the EMU and Europe generally. Certain countries
and regions in the EU are experiencing significant financial difficulties. Some
of these countries may be dependent on assistance from other European
governments and institutions or agencies. Assistance may be dependent on a
country’s implementation of reforms or reaching a certain level of performance.
Failure to reach those objectives or an insufficient level of assistance could
result in an economic downturn that could significantly affect the value of
investments in those and other European countries. One or more countries could
depart from the EU, which could weaken the EU and, by extension, its remaining
members. For example, the United Kingdom’s departure, described in more detail
below.
United
Kingdom Investment Risk
— Commonly known as “Brexit,” the United Kingdom’s exit from the EU
occurred in January of 2021. The UK and the EU continue to work to establish
regulatory frameworks for cooperation on financial services. Continuing
uncertainty in the UK, EU, and other financial markets may result in volatility,
fluctuations in asset values and exchange rates, decreased liquidity and
unwillingness or inability of financial and other counterparties to enter into
transactions.
Risk
of Investing in China
— Investing in Chinese securities is riskier than investing in U.S.
securities. Although the Chinese government is currently implementing reforms to
promote foreign investment and reduce government economic control, there is no
guarantee
that the reforms will be ongoing or effective. Investing in China involves risk
of loss due to nationalization, expropriation, and confiscation of assets and
property. Losses may also occur due to new or expanded restrictions on foreign
investments or repatriation of capital. Participants in the Chinese market are
subject to less regulation and oversight than participants in the U.S. market.
This may lead to trading volatility, difficulty in the settlement and recording
of transactions, and uncertainty in interpreting and applying laws and
regulations. Reduction in spending on Chinese products and services, institution
of tariffs or other trade barriers, or a downturn in the economies of any of
China’s key trading partners may adversely affect the securities of Chinese
issuers. Regional conflict could also have an adverse effect on the Chinese
economy.
Though
the PCAOB recently secured complete access to inspect registered public
accounting firms headquartered in mainland China and Hong Kong, the SEC and the
PCAOB continue to have concerns about deficiencies in these firms' audit
engagements. Because of these deficiencies,
there is the risk that material information about Chinese issuers may be
unavailable. As a result, there is substantially greater risk that disclosures
will be incomplete or misleading and, in the event of investor harm,
substantially less access to recourse, in comparison to U.S. domestic
companies.
The
U.S. government may occasionally place restrictions on investments in Chinese
companies. For example, in November 2020, an Executive Order was issued that
prohibits U.S. persons from purchasing or investing in certain publicly-traded
securities of companies identified as “Communist Chinese military companies” or
in instruments that are designed to provide investment exposure to those
companies. The companies identified may change from time to time. A fund may
incur losses if more investors attempt to sell such securities or if the fund is
unable to participate in an otherwise attractive investment. Securities that are
or become prohibited may become less liquid and their market prices may decline.
In addition, the market for securities of other Chinese-based issuers may also
be negatively impacted, resulting in reduced liquidity and price
declines.
Due
to Chinese governmental restrictions on foreign ownership of companies in
certain industries, Chinese operating companies often rely on variable interest
entity (VIE) structures to raise capital from non-Chinese investors. In a VIE
structure, a China-based operating company establishes an entity—typically
offshore—that enters into service and other contracts with the Chinese company
designed to provide economic exposure to the company. The offshore entity then
issues shares that are sold to non-Chinese investors. A U.S.-listed company and
its China-based VIE might appear to be the same company—because they are
presented in a consolidated manner—but they are not. The U.S.-listed company’s
control over the China-based company is predicated on contracts with the
China-based company, not equity ownership. The Chinese government has never
explicitly approved these structures and thus could determine at any time, and
without notice, that the VIE’s underlying contractual arrangements violate
Chinese law. If either the China-based company (or its officers, directors, or
Chinese equity owners) breach those contracts with the U.S.-listed shell
company, or Chinese law changes in a way that affects the enforceability of
these arrangements, or those contracts are otherwise not enforceable under
Chinese law, U.S. investors may suffer losses with limited recourse available.
Additionally, investments in the U.S.-listed company may be affected by
conflicts of interest and duties between the legal owners of the China-based VIE
and the stockholders of the U.S.-listed company. Finally, if Chinese companies
listed on U.S. exchanges, including ADRs and companies that rely on VIE
structures, do not meet U.S. accounting standards and auditor oversight
requirements they may be delisted, which would likely decrease the liquidity and
value of these securities.
Stock
Connect Risk.
Investments in China A-shares listed and traded through the
Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock Connect programs
(“Stock Connect Programs”) involve unique risks. The Stock Connect Programs are
relatively new and there is no guarantee that they will continue. Trading
through Stock Connect Programs is subject to daily quotas that limit the maximum
daily net purchases and daily limits on permitted price fluctuations. Trading
suspensions are more likely in the A-shares market than in many other global
equity markets. There can be no assurance that a liquid market on an exchange
will exist. In addition, investments made through Stock Connect Programs are
subject to comparatively untested trading, clearance and settlement procedures.
Stock Connect Programs are available only on days when markets in both China and
Hong Kong are open. A fund’s ownership interest in Stock Connect Programs
securities will not be reflected directly, and thus the fund may have to rely on
the ability or willingness of a third party to enforce its rights. Investments
in Stock Connect Program A-shares are generally subject to Chinese securities
regulations and listing rules, among other restrictions. Hong Kong investor
compensation funds, which protect against trade defaults, are unavailable when
investing through Stock Connect Programs. Uncertainties in Chinese tax rules
could also result in unexpected tax liabilities for the fund.
Sanctions.
The
U.S. may impose economic sanctions against companies in various sectors of
certain countries. This could limit a fund’s investment opportunities in such
countries, impairing the fund’s ability to invest in accordance with its
investment strategy and/or to meet its investment objective. For example, a fund
may be prohibited from investing in securities issued by companies subject to
such sanctions. In addition, the sanctions may require a fund to freeze its
existing investments in sanctioned companies, prohibiting the fund from selling
or otherwise transacting in these investments. Current sanctions or the threat
of potential sanctions may also impair the value or liquidity of affected
securities and negatively impact a fund.
In
early 2022, the United States and countries throughout the world imposed
economic sanctions on Russia in response to its military invasion of Ukraine.
The sanctions are broad and include restrictions on the Russian government as
well as Russian companies, individuals, and banking entities. The sanctions and
other measures, such as boycotts or changes in consumer preferences, will likely
cause declines in the value and liquidity of Russian securities, downgrades in
the credit ratings of Russian securities, devaluation of Russia’s currency, and
increased market volatility and disruption in Russia and throughout the world.
Sanctions and similar measures,
such
as banning Russia from financial transaction systems that facilitate
international transfers of funds, could limit or prevent the funds from selling
and buying impacted securities both in Russia and in other markets. Such
measures will likely cause significant delay in the settlement of impacted
securities transactions or prevent settlement all together. The lack of
available market prices for such securities may cause the funds to use fair
value procedures to value certain securities. The consequences of the war and
sanctions may negatively impact other regional and global economic markets.
Additionally, Russia may take counter measures or engage in retaliatory
actions—including cyberattacks and espionage—which could further disrupt global
markets and supply chains. Companies in other countries that do business with
Russia and the global commodities market for oil and natural gas, especially,
will likely feel the impact of the sanctions. The sanctions, together with the
potential for a wider armed or cyber conflict, could increase financial market
volatility globally and negatively impact the funds’ performance beyond any
direct exposure to Russian issuers or securities.
Inflation-linked
Securities
Inflation-linked
securities are issued by the U.S. Treasury, U.S. government agencies and
instrumentalities other than the U.S. Treasury, and entities other than the U.S.
Treasury or U.S. government agencies and instrumentalities.
Inflation-linked
securities are designed to offer a return linked to inflation, thereby
protecting future purchasing power of the money invested in them. However,
inflation-linked securities provide this protected return only if held to
maturity. In addition, inflation-linked securities may not trade at par value.
Real interest rates (the market rate of interest less the anticipated rate of
inflation) change over time as a result of many factors, such as what investors
are demanding as a true value for money. When real rates do change,
inflation-linked securities prices will be more sensitive to these changes than
conventional bonds, because these securities were sold originally based upon a
real interest rate that is no longer prevailing. Should market expectations for
real interest rates rise, the price of inflation-linked securities and the share
price of the fund holding these securities will fall. Investors in the fund
should be prepared to accept not only this share price volatility but also the
possible adverse tax consequences it may cause.
An
investment in securities featuring inflation-linked principal and/or interest
involves factors not associated with more traditional fixed-principal
securities. Such factors include the possibility that the inflation index may be
subject to significant changes, that changes in the index may or may not
correlate to changes in interest rates generally or changes in other indices, or
that the resulting interest may be greater or less than that payable on other
securities of similar maturities. In the event of sustained deflation, it is
possible that the amount of semiannual interest payments, the inflation-linked
principal of the security or the value of the stripped components will decrease.
If any of these possibilities are realized, a fund’s NAV could be negatively
affected.
Inflation-linked
Treasury Securities
Inflation-linked
U.S. Treasury securities are U.S. Treasury securities with a final value and
interest payment stream linked to the inflation rate. inflation-linked U.S.
Treasury securities may be issued in either note or bond form. inflation-linked
U.S. Treasury notes have maturities of at least one year, but not more than 10
years. Inflation-linked U.S. Treasury bonds have maturities of more than 10
years.
Inflation-linked
U.S. Treasury securities may be attractive to investors seeking an investment
backed by the full faith and credit of the U.S. government that provides a
return in excess of the rate of inflation. These securities were first sold in
the U.S. market in January 1997. Inflation-linked U.S. Treasury securities are
auctioned and issued on a quarterly basis.
Structure
and Inflation Index — The
principal value of inflation-linked U.S. Treasury securities will be adjusted to
reflect changes in the level of inflation. The index for measuring the inflation
rate for inflation-linked U.S. Treasury securities is the non-seasonally
adjusted U.S. City Average All Items Consumer Price Index for All Urban
Consumers (Consumer Price Index) published monthly by the U.S. Department of
Labor’s Bureau of Labor Statistics.
Semiannual
coupon interest payments are made at a fixed percentage of the inflation-linked
principal value. The coupon rate for the semiannual interest rate of each
issuance of inflation-linked U.S. Treasury securities is determined at the time
the securities are sold to the public (i.e.,
by competitive bids in the auction). The coupon rate will likely reflect real
yields available in the U.S. Treasury market; real yields are the prevailing
yields on U.S. Treasury securities with similar maturities, less then-prevailing
inflation expectations. While a reduction in inflation will cause a reduction in
the interest payment made on the securities, the repayment of principal at the
maturity of the security is guaranteed by the U.S. Treasury to be no less than
the original face or par amount of the security at the time of
issuance.
Indexing
Methodology — The
principal value of inflation-linked U.S. Treasury securities will be indexed, or
adjusted, to account for changes in the Consumer Price Index. Semiannual coupon
interest payment amounts will be determined by multiplying the inflation-linked
principal amount by one-half the stated rate of interest on each interest
payment date.
Taxation
— The
taxation of inflation-linked U.S. Treasury securities is similar to the taxation
of conventional bonds. Both interest payments and the difference between
original principal and the inflation-linked principal will be treated as
interest income subject to taxation. Interest payments are taxable when received
or accrued. The inflation adjustment to the principal is subject to tax in the
year the adjustment is made, not at maturity of the security when the cash from
the repayment of principal is received. If an upward adjustment has been made,
investors in non-tax-deferred accounts will pay taxes on this amount currently.
Decreases in the indexed principal can be deducted only from current or previous
interest payments reported as income.
Inflation-linked
U.S. Treasury securities therefore have a potential cash flow mismatch to an
investor, because investors must pay taxes on the inflation-linked principal
before the repayment of principal is received. It is possible that, particularly
for high income tax bracket investors, inflation-linked U.S. Treasury securities
would not generate enough cash in a given year to cover the tax liability they
could create. This is similar to the current tax treatment for zero-coupon bonds
and other discount securities. If inflation-linked U.S. Treasury securities are
sold prior to maturity, capital losses or gains are realized in the same manner
as traditional bonds.
Investors
in the fund will receive dividends that represent both the interest payments and
the principal adjustments of the inflation-linked securities held in the fund’s
portfolio. An investment in the fund may, therefore, be a means to avoid the
cash flow mismatch associated with a direct investment in inflation-linked
securities. For more information about taxes and their effect on you as an
investor in the fund, see Taxes
on page 60.
U.S.
Government Agencies
A
number of U.S. government agencies and instrumentalities other than the U.S.
Treasury may issue inflation-linked securities. Some U.S. government agencies
have issued inflation-linked securities whose design mirrors that of the
inflation-linked U.S. Treasury securities described above.
Other
Entities
Entities
other than the U.S. Treasury or U.S. government agencies and instrumentalities
may issue inflation-linked securities. While some entities have issued
inflation-linked securities whose design mirrors that of the inflation-linked
U.S. Treasury securities described above, others utilize different structures.
For example, the principal value of these securities may be adjusted with
reference to the Consumer Price Index, but the semiannual coupon interest
payments are made at a fixed percentage of the original issue principal.
Alternatively, the principal value may remain fixed, but the coupon interest
payments may be adjusted with reference to the Consumer Price
Index.
Initial
Public Offerings
The
funds may invest in initial public offerings (IPOs) of common stock or other
equity securities issued by a company including issuances in connection with a
spin-off. The purchase of securities in an IPO may involve higher transaction
costs than those associated with the purchase of securities already traded on
exchanges or other established markets. In addition to the risks associated with
equity securities generally, IPO securities may be subject to additional risk
due to factors such as the absence of a prior public market, unseasoned trading
and speculation, a potentially small number of securities available for trading,
limited information about the issuer and other factors. These factors may cause
IPO shares to be volatile in price. While a fund may hold IPO securities for a
period, it may sell them in the aftermarket soon after the purchase, which could
increase portfolio turnover and lead to increased expenses such as commissions
and transaction costs. Investments in IPOs could have a magnified impact (either
positive or negative) on performance if a fund’s assets are relatively small.
The impact of IPOs on a fund’s performance may tend to diminish as assets
grow.
Inverse
Floaters
An
inverse floater is a type of derivative instrument that bears an interest rate
that moves inversely to market interest rates. As market interest rates rise,
the interest rate on inverse floaters goes down, and vice versa. Generally, this
is accomplished by expressing the interest rate on the inverse floater as an
above-market fixed rate of interest, reduced by an amount determined by
reference to a market-based or bond-specific floating interest rate (as well as
by any fees associated with administering the inverse floater
program).
Inverse
floaters may be issued in conjunction with an equal amount of Dutch Auction
floating-rate bonds (floaters), or a market-based index may be used to set the
interest rate on these securities. A Dutch Auction is an auction system in which
the price of the security is gradually lowered until it meets a responsive bid
and is sold. Floaters and inverse floaters may be brought to market by (1) a
broker-dealer who purchases fixed-rate bonds and places them in a trust, or (2)
an issuer seeking to reduce interest expenses by using a floater/inverse floater
structure in lieu of fixed-rate bonds.
In
the case of a broker-dealer structured offering (where underlying fixed-rate
bonds have been placed in a trust), distributions from the underlying bonds are
allocated to floater and inverse floater holders in the following
manner:
(i)Floater
holders receive interest based on rates set at a six-month interval or at a
Dutch Auction, which is typically held every 28 to 35 days. Current and
prospective floater holders bid the minimum interest rate that they are willing
to accept on the floaters, and the interest rate is set just high enough to
ensure that all of the floaters are sold.
(ii)Inverse
floater holders receive all of the interest that remains, if any, on the
underlying bonds after floater interest and auction fees are paid. The interest
rates on inverse floaters may be significantly reduced, even to zero, if
interest rates rise.
Procedures
for determining the interest payment on floaters and inverse floaters brought to
market directly by the issuer are comparable, although the interest paid on the
inverse floaters is based on a presumed coupon rate that would have been
required to bring fixed-rate bonds to market at the time the floaters and
inverse floaters were issued.
Where
inverse floaters are issued in conjunction with floaters, inverse floater
holders may be given the right to acquire the underlying security (or to create
a fixed-rate bond) by calling an equal amount of corresponding floaters. The
underlying security may then be
held
or sold. However, typically, there are time constraints and other limitations
associated with any right to combine interests and claim the underlying
security.
Floater
holders subject to a Dutch Auction procedure generally do not have the right to
put back their interests to the issuer or to a third party. If a Dutch Auction
fails, the floater holder may be required to hold its position until the
underlying bond matures, during which time interest on the floater is capped at
a predetermined rate.
The
secondary market for floaters and inverse floaters may be limited. The market
value of inverse floaters tends to be significantly more volatile than
fixed-rate bonds.
Investments
in Issuers with Limited Operating Histories
The
funds may invest in securities of issuers with limited operating histories. The
portfolio managers consider an issuer to have a limited operating history if
that issuer has a record of less than three years of continuous operation. The
managers will consider periods of capital formation, incubation, consolidations,
and research and development in determining whether an issuer has a record of
three years of continuous operation.
Investments
in securities of issuers with limited operating histories may involve greater
risks than investments in securities of more mature issuers. By their nature,
such issuers present limited operating histories and financial information upon
which the managers may base their investment decision on behalf of the funds. In
addition, financial and other information regarding such issuers, when
available, may be incomplete or inaccurate.
For
purposes of this limitation, “issuers” refers to operating companies that issue
securities for the purposes of issuing debt or raising capital as a means of
financing their ongoing operations. It does not, however, refer to entities,
corporate or otherwise, that are created for the express purpose of securitizing
obligations or income streams. For example, a fund’s investments in a trust
created for pooling mortgage obligations or other financial assets would not be
subject to the limitation.
Loan
Participations
Loan
participations represent interests in the cash flow generated by commercial
loans. Each loan participation requires three parties: a participant (or
investor), a lending bank and a borrower. The investor purchases a share in a
loan originated by a lending bank, and this participation entitles the investor
to a percentage of the principal and interest payments made by the
borrower.
Loan
participations are attractive because they typically offer higher yields than
other money market instruments. However, along with these higher yields come
certain risks, not the least of which is the risk that the borrower will be
unable to repay the loan. Generally, because the lending bank does not guarantee
payment, the investor is directly exposed to risk of default by the borrower. In
addition, the investor is not a direct creditor of the borrower. The
participation represents an interest in assets owned by the lending bank. If the
lending bank becomes insolvent, the investor could be considered an unsecured
creditor of the bank instead of the holder of a participating interest in a
loan. Because of these risks, the manager must carefully consider the
creditworthiness of both the borrower and the lender.
Another
concern is liquidity. Because there is no established secondary market for loan
participations, a fund’s ability to sell them for cash is limited. Some
participation agreements place limitations on the investor’s right to resell the
loan participation, even when a buyer can be found.
Loan
Participation Notes
In
terms of their functioning and investment risk, loan participation notes
(“LPNs”) are comparable to an investment in “normal” bonds. In return for the
investor’s commitment of capital, the issuer makes regular interest payments
and, at maturity or in accordance with an agreed upon amortization schedule, the
note is repaid at par.
However,
in contrast to “normal” bonds, there are three parties involved in the issuance
of an LPN. The legal issuer, typically a bankruptcy-remote, limited purpose
entity, issues notes to investors and uses the proceeds received from investors
to make loans to the borrower-with each loan generally having substantially
identical payment terms to the related note issued by the issuer. The borrower
is typically an operating company, and the issuer’s obligations under a note are
typically limited to the extent of any capital repayments and interest payments
made by the borrower under the related loan. Accordingly, the investor generally
assumes the credit risk of the underlying borrower. The loan participation note
structure is generally used to provide the borrower more efficient financing in
the capital markets than the borrower would be able to obtain if it issued notes
directly.
In
the event of a default by the borrower of an LPN, the fund may experience delays
in receiving payments of interest and principal while the note issuer enforces
and liquidates the underlying collateral, and there is no guarantee that the
underlying collateral will cover the principal and interest owed to the fund
under the LPN.
LPNs
are generally subject to liquidity risk. Even though an LPN may be traded on an
exchange there can be no assurance that a liquid market will develop for the
LPNs, that holders of the LPNs will be able to sell their LPNs, or that such
holders will be able to sell their LPNs for a price that reflects their
value.
Depending
on the creditworthiness of the underlying borrower, LPNs may be subject to the
risk of investing in high-yield securities. Additionally, LPNs are generally
utilized by foreign borrowers and therefore may be subject to the risk of
investing in foreign securities and emerging market risk. Such foreign risk
could include interest payments being subject to withholding tax.
Loans
of Portfolio Securities
To
realize additional income, a fund may lend its portfolio securities. Such loans
may not exceed one-third of the fund’s total assets valued at market, however,
this limitation does not apply to purchases of debt securities in accordance
with the fund’s investment objectives, policies and limitations, or to
repurchase agreements with respect to portfolio securities.
Cash
received from the borrower as collateral through loan transactions may be
invested in other eligible securities. Investing this cash subjects that
investment to market appreciation or depreciation. If a borrower defaults on a
securities loan because of insolvency or other reasons, the lending fund could
experience delays or costs in recovering the securities it loaned; if the value
of the loaned securities increased over the value of the collateral, the fund
could suffer a loss. To minimize the risk of default on securities loans, the
advisor adheres to guidelines prescribed by the Board of Trustees governing
lending of securities. These guidelines strictly govern:
•the
type and amount of collateral that must be received by the fund;
•the
circumstances under which additions to that collateral must be made by
borrowers;
•the
return to be received by the fund on the loaned securities;
•the
limitations on the percentage of fund assets on loan; and
•the
credit standards applied in evaluating potential borrowers of portfolio
securities.
In
addition, the guidelines require that the fund have the option to terminate any
loan of a portfolio security at any time and set requirements for recovery of
securities from borrowers.
Lower-Quality
Bonds
Consistent
with their investment objectives, the funds may invest in lower-rated bonds and
unrated bonds judged by the advisor to be of comparable quality (collectively,
lower-quality bonds).While the market values of higher-quality bonds tend to
correspond to market interest rate changes, the market values of lower-quality
bonds tend to reflect the financial condition of their issuers. The ability of
an issuer to make payment could be affected by litigation, legislation or other
political events, or the bankruptcy of the issuer. Lower-quality municipal bonds
are more susceptible to these risks than higher-quality municipal bonds. In
addition, lower-quality bonds may be unsecured or subordinated to other
obligations of the issuer. Projects financed through the issuance of
lower-quality bonds often carry higher levels of risk. The issuer’s ability to
service its debt obligations may be adversely affected by an economic downturn,
weaker-than-expected economic development, a period of rising interest rates,
the issuer’s inability to meet projected revenue forecasts, a higher level of
debt, or a lack of needed additional financing. Lower quality bonds generally
are unsecured and are often subordinated to other obligations of the issuer.
These bonds may have call or buy-back features that permit the issuer to call or
repurchase the bond from the holder. Premature disposition of a lower-quality
bond due to a call or buy-back feature, deterioration of the issuer’s
creditworthiness, or a default may make it difficult for the advisor to manage
the flow of income to the fund, which may have a negative tax impact on
shareholders.The market for lower-quality bonds tends to be concentrated among a
smaller number of dealers than the market for higher-quality bonds. This market
may be dominated by dealers and institutions (including mutual funds), rather
than by individuals. To the extent that a secondary trading market for
lower-quality bonds exists, it may not be as liquid as the secondary market for
higher-quality bonds. Limited liquidity in the secondary market may adversely
affect market prices and hinder the advisor’s ability to dispose of particular
bonds when it determines that it is in the best interest of a fund to do so.
Reduced liquidity also may hinder the advisor’s ability to obtain market
quotations for purposes of valuing a fund’s portfolio and determining its NAV.
The advisor continually monitors securities to determine their relative
liquidity. A fund may incur expenses in excess of its ordinary operating
expenses if it becomes necessary to seek recovery on a defaulted bond,
particularly a lower-quality bond.
Mortgage-Related
Securities
Background
A
mortgage-backed security represents an ownership interest in a pool of mortgage
loans. The loans are made by financial institutions to finance home and other
real estate purchases. As the loans are repaid, investors receive payments of
both interest and principal.
Like
fixed-income securities such as U.S. Treasury bonds, mortgage-backed securities
pay a stated rate of interest during the life of the security. However, unlike a
bond, which returns principal to the investor in one lump sum at maturity,
mortgage-backed securities return principal to the investor in increments during
the life of the security.
Because
the timing and speed of principal repayments vary, the cash flow on
mortgage-backed securities is irregular. If mortgage holders sell their homes,
refinance their loans, prepay their mortgages or default on their loans, the
principal is distributed pro
rata
to investors.
As
with other fixed-income securities, the prices of mortgage-backed securities
fluctuate in response to changing interest rates; when interest rates fall, the
prices of mortgage-backed securities rise, and vice versa. Changing interest
rates have additional significance for mortgage-backed securities investors,
however, because they influence prepayment rates (the rates at which mortgage
holders prepay their mortgages), which in turn affect the yields on
mortgage-backed securities. When interest rates decline, prepayment rates
generally increase. Mortgage holders take advantage of the opportunity to
refinance their mortgages at lower rates with lower monthly payments. When
interest rates rise, mortgage holders are less inclined to refinance their
mortgages. The effect of prepayment activity on yield depends on whether the
mortgage-backed security was purchased at a premium or at a
discount.
The
fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, the fund might miss an opportunity to earn interest at higher
prevailing rates.
GNMA
Certificates
The
Government National Mortgage Association (GNMA) is a wholly owned corporate
instrumentality of the United States within the Department of Housing and Urban
Development. The National Housing Act of 1934 (Housing Act), as amended,
authorizes GNMA to guarantee the timely payment of interest and repayment of
principal on certificates that are backed by a pool of mortgage loans insured by
the Federal Housing Administration under the Housing Act, or by Title V of the
Housing Act of 1949 (FHA Loans), or guaranteed by the Veterans’ Affairs under
the Servicemen’s Readjustment Act of 1944 (VA Loans), as amended, or by pools of
other eligible mortgage loans. The Housing Act provides that the full faith and
credit of the U.S. government is pledged to the payment of all amounts that may
be required to be paid under any guarantee. GNMA has unlimited authority to
borrow from the U.S. Treasury in order to meet its obligations under this
guarantee.
GNMA
certificates represent a pro
rata
interest in one or more pools of the following types of mortgage loans: (a)
fixed-rate level payment mortgage loans; (b) fixed-rate graduated payment
mortgage loans (GPMs); (c) fixed-rate growing equity mortgage loans (GEMs); (d)
fixed-rate mortgage loans secured by manufactured (mobile) homes (MHs); (e)
mortgage loans on multifamily residential properties under construction (CLCs);
(f) mortgage loans on completed multifamily projects (PLCs); (g) fixed-rate
mortgage loans that use escrowed funds to reduce the borrower’s monthly payments
during the early years of the mortgage loans (buydown mortgage loans); and (h)
mortgage loans that provide for payment adjustments based on periodic changes in
interest rates or in other payment terms of the mortgage loans.
Current
Status of Fannie Mae and Freddie Mac
Since
September 2008, Fannie Mae and Freddie Mac have operated under a conservatorship
administered by the Federal Housing Finance Agency (FHFA). In addition, the U.S.
Treasury has entered into senior preferred stock purchase agreements (SPSPAs) to
provide additional financing to Fannie Mae and Freddie Mac. Although the SPSPAs
are intended to provide Fannie Mae and Freddie Mac with the necessary cash
resources to meet their obligations, Fannie Mae and Freddie Mac continue to
operate as going concerns while in conservatorship, and each remains liable for
all of its obligations, including its guaranty obligations, associated with its
mortgage-backed securities.
The
future status and role of Fannie Mae or Freddie Mac could be impacted by, among
other things, the actions taken and restrictions placed on Fannie Mae or Freddie
Mac by the FHFA in its role as conservator, the restrictions placed on Fannie
Mae’s or Freddie Mac’s operations and activities under the senior preferred
stock purchase agreements, market responses to developments at Fannie Mae or
Freddie Mac, and future legislative, regulatory, or legal action that alters the
operations, ownership, structure and/or mission of Fannie Mae or Freddie Mac,
each of which may, in turn, impact the value of, and cash flows on, any
securities guaranteed by Fannie Mae and Freddie Mac.
Fannie
Mae Certificates
The
Federal National Mortgage Association (FNMA or Fannie Mae) is a federally
chartered and privately owned corporation established under the Federal National
Mortgage Association Charter Act. Fannie Mae was originally established in 1938
as a U.S. government agency designed to provide supplemental liquidity to the
mortgage market and was reorganized as a stockholder-owned and privately managed
corporation by legislation enacted in 1968. Fannie Mae acquires capital from
investors who would not ordinarily invest in mortgage loans directly and thereby
expands the total amount of funds available for housing. This money is used to
buy home mortgage loans from local lenders, replenishing the supply of capital
available for mortgage lending.
Fannie
Mae certificates represent a pro
rata
interest in one or more pools of FHA Loans, VA Loans, or, most commonly,
conventional mortgage loans (i.e.,
mortgage loans that are not insured or guaranteed by a government agency) of the
following types: (a) fixed-rate level payment mortgage loans; (b) fixed-rate
growing equity mortgage loans; (c) fixed-rate graduated payment mortgage loans;
(d) adjustable-rate mortgage loans; and (e) fixed-rate mortgage loans secured by
multifamily projects.
Fannie
Mae certificates entitle the registered holder to receive amounts representing a
pro
rata
interest in scheduled principal and interest payments (at the certificate’s
pass-through rate, which is net of any servicing and guarantee fees on the
underlying mortgage loans), any principal prepayments, and a proportionate
interest in the full principal amount of any foreclosed or otherwise liquidated
mortgage
loan. The full and timely payment of interest and repayment of principal on each
Fannie Mae certificate is guaranteed by Fannie Mae; this guarantee is not backed
by the full faith and credit of the U.S. government.
Freddie
Mac Certificates
The
Federal Home Loan Mortgage Corporation (FHLMC or Freddie Mac) is a corporate
instrumentality of the United States created pursuant to the Emergency Home
Finance Act of 1970 (FHLMC Act), as amended. Freddie Mac was established
primarily for the purpose of increasing the availability of mortgage credit. Its
principal activity consists of purchasing first-lien conventional residential
mortgage loans (and participation interests in such mortgage loans) and
reselling these loans in the form of mortgage-backed securities, primarily
Freddie Mac certificates.
Freddie
Mac certificates represent a pro
rata
interest in a group of mortgage loans (a Freddie Mac certificate group)
purchased by Freddie Mac. The mortgage loans underlying Freddie Mac certificates
consist of fixed- or adjustable-rate mortgage loans with original terms to
maturity of between 10 and 30 years, substantially all of which are secured by
first-liens on one- to four-family residential properties or multifamily
projects. Each mortgage loan must meet standards set forth in the FHLMC Act. A
Freddie Mac certificate group may include whole loans, participation interests
in whole loans, undivided interests in whole loans, and participations composing
another Freddie Mac certificate group.
Freddie
Mac guarantees to each registered holder of a Freddie Mac certificate the timely
payment of interest at the rate provided for by the certificate. Freddie Mac
also guarantees ultimate collection of all principal on the related mortgage
loans, without any offset or deduction, but generally does not guarantee the
timely repayment of principal. Freddie Mac may remit principal at any time after
default on an underlying mortgage loan, but no later than 30 days following (a)
foreclosure sale, (b) payment of a claim by any mortgage insurer, or (c) the
expiration of any right of redemption, whichever occurs later, and in any event
no later than one year after demand has been made upon the mortgager for
accelerated payment of principal. Obligations guaranteed by Freddie Mac are not
backed by the full faith and credit pledge of the U.S. government.
Collateralized
Mortgage Obligations (CMOs)
A
CMO is a multiclass bond backed by a pool of mortgage pass-through certificates
or mortgage loans. CMOs may be collateralized by (a) GNMA, Fannie Mae or Freddie
Mac pass-through certificates; (b) unsecured mortgage loans insured by the
Federal Housing Administration or guaranteed by the Department of Veterans’
Affairs; (c) unsecuritized conventional mortgages; or (d) any combination
thereof.
In
structuring a CMO, an issuer distributes cash flow from the underlying
collateral over a series of classes called tranches. Each CMO is a set of two or
more tranches, with average lives and cash flow patterns designed to meet
specific investment objectives. The average life expectancies of the different
tranches in a four-part deal, for example, might be two, five, seven and 20
years.
As
payments on the underlying mortgage loans are collected, the CMO issuer pays the
coupon rate of interest to the bondholders in each tranche. At the outset,
scheduled and unscheduled principal payments go to investors in the first
tranches. Investors in later tranches do not begin receiving principal payments
until the prior tranches are paid off. This basic type of CMO is known as a
sequential pay or plain vanilla CMO.
Some
CMOs are structured so that the prepayment or market risks are transferred from
one tranche to another. Prepayment stability is improved in some tranches if
other tranches absorb more prepayment variability.
The
final tranche of a CMO often takes the form of a Z-bond, also known as an
accrual bond or accretion bond. Holders of these securities receive no cash
until the earlier tranches are paid in full. During the period that the other
tranches are outstanding, periodic interest payments are added to the initial
face amount of the Z-bond but are not paid to investors. When the prior tranches
are retired, the Z-bond receives coupon payments on its higher principal balance
plus any principal prepayments from the underlying mortgage loans. The existence
of a Z-bond tranche helps stabilize cash flow patterns in the other tranches. In
a changing interest rate environment, however, the value of the Z-bond tends to
be more volatile.
As
CMOs have evolved, some classes of CMO bonds have become more prevalent. The
planned amortization class (PAC) and targeted amortization class (TAC), for
example, were designed to reduce prepayment risk by establishing a sinking-fund
structure. PAC and TAC bonds assure to varying degrees that investors will
receive payments over a predetermined period under various prepayment scenarios.
Although PAC and TAC bonds are similar, PAC bonds are better able to provide
stable cash flows under various prepayment scenarios than TAC bonds because of
the order in which these tranches are paid.
The
existence of a PAC or TAC tranche can create higher levels of risk for other
tranches in the CMO because the stability of the PAC or TAC tranche is achieved
by creating at least one other tranche-known as a companion bond, support or
non-PAC bond-that absorbs the variability of principal cash flows. Because
companion bonds have a high degree of average life variability, they generally
pay a higher yield. A TAC bond can have some of the prepayment variability of a
companion bond if there is also a PAC bond in the CMO issue.
Floating-rate
CMO tranches (floaters) pay a variable rate of interest that is usually tied to
a reference rate, such as the Secured Overnight Financing Rate (SOFR).
Institutional investors with short-term liabilities, such as commercial banks,
often find floating-rate CMOs attractive investments. Super floaters (which
float a certain percentage above a reference rate) and inverse floaters (which
float inversely to a reference rate) are variations on the floater structure
that have highly variable cash flows.
Single-
and Multi-Family Mortgage-Related Securities
A
single- or multi-family mortgage-backed security represents an ownership
interest in a pool of mortgage loans. The loans are made by financial
institutions or municipal agencies to finance home and other real estate
purchases. As the loans are repaid, investors receive payments of both interest
and principal. Like fixed-income securities such as U.S. Treasury bonds,
mortgage-backed securities pay a stated rate of interest during the life of the
security. However, unlike a bond, which returns principal to the investor in one
lump sum at maturity, single- or multi-family mortgage-backed securities return
principal to the investor in increments during the life of the security.Because
the timing and speed of principal repayments vary, the cash flow on single- or
multi-family mortgage-backed securities is irregular. If mortgage holders sell
their homes, refinance their loans, prepay their mortgages or default on their
loans, the principal may be distributed pro
rata
to investors. As with other fixed-income securities, the prices of single- or
multi-family mortgage-backed securities fluctuate in response to changing
interest rates; when interest rates fall, the prices of these securities rise,
and vice versa. Changing interest rates have additional significance for
mortgage-backed securities investors, however, because they influence prepayment
rates (the rates at which mortgage holders prepay their mortgages), which in
turn affect the yields on mortgage-backed securities. When interest rates
decline, prepayment rates generally increase. Mortgage holders take advantage of
the opportunity to refinance their mortgages at lower rates with lower monthly
payments. When interest rates rise, mortgage holders are less inclined to
refinance their mortgages. The effect of prepayment activity on yield depends on
whether the mortgage-backed security was purchased at a premium or at a
discount.
A
fund may receive principal sooner than it expected because of accelerated
prepayments. Under these circumstances, the fund might have to reinvest returned
principal at rates lower than it would have earned if principal payments were
made on schedule. Conversely, a mortgage-backed security may exceed its
anticipated life if prepayment rates decelerate unexpectedly. Under these
circumstances, a fund might miss an opportunity to earn interest at higher
prevailing rates.
Stripped
Mortgage-Backed Securities
Stripped
mortgage-backed securities are created by segregating the cash flows from
underlying mortgage loans or mortgage securities to create two or more new
securities, each with a specified percentage of the underlying security’s
principal or interest payments. Mortgage-backed securities may be partially
stripped so that each investor class receives some interest and some principal.
When securities are completely stripped, however, all of the interest is
distributed to holders of one type of security, known as an interest-only
security, or IO, and all of the principal is distributed to holders of another
type of security known as a principal-only security, or PO. Strips can be
created in a pass-through structure or as tranches of a CMO.
The
market values of IOs and POs are very sensitive to interest rate and prepayment
rate fluctuations. POs, for example, increase (or decrease) in value as interest
rates decline (or rise). The price behavior of these securities also depends on
whether the mortgage collateral was purchased at a premium or discount to its
par value. Prepayments on discount coupon POs generally are much lower than
prepayments on premium coupon POs. IOs may be used to hedge a fund’s other
investments because prepayments cause the value of an IO strip to move in the
opposite direction from other mortgage-backed securities.
Commercial
Mortgage-Backed Securities (CMBS)
CMBS
are securities created from a pool of commercial mortgage loans, such as loans
for hotels, shopping centers, office buildings, apartment buildings, and the
like. Interest and principal payments from these loans are passed on to the
investor according to a particular schedule of payments. They may be issued by
U.S. government agencies or by private issuers. The credit quality of CMBS
depends primarily on the quality of the underlying loans and on the structure of
the particular deal. Generally, deals are structured with senior and subordinate
classes. Multiple classes may permit the issuance of securities with payment
terms, interest rates, or other characteristics differing both from those of
each other and those of the underlying assets. Examples include classes having
characteristics such as floating interest rates or scheduled amortization of
principal. Rating agencies rate the individual classes of the deal based on the
degree of seniority or subordination of a particular class and other factors.
The value of these securities may change because of actual or perceived changes
in the creditworthiness of individual borrowers, their tenants, the servicing
agents, or the general state of commercial real estate and other
factors.
CMBS
may be partially stripped so that each investor class receives some interest and
some principal. When securities are completely stripped, however, all of the
interest is distributed to holders of one type of security, known as an
interest-only security (IO), and all of the principal is distributed to holders
of another type of security known as a principal-only security (PO). As interest
rates rise and fall, the value of IOs tends to move in the same direction as
interest rates. The cash flows and yields on IO classes are extremely sensitive
to the rate of principal payments (including prepayments) on the related
underlying mortgage assets. In the cases of IOs, prepayments affect the amount
of cash flows provided to the investor. If the underlying mortgage assets
experience greater than anticipated prepayments of principal, an investor may
fail to fully recoup its initial investment in an IO class of a stripped
mortgage-backed security, even if the IO class is rated AAA or Aaa or is derived
from a full faith and credit obligation. However, because commercial mortgages
are often locked out from prepayment, or have high prepayment penalties or a
defeasance mechanism, the prepayment risk associated with a CMBS IO class is
generally less than that of a residential IO.
Adjustable
Rate Mortgage Securities
Adjustable
rate mortgage securities (ARMs) have interest rates that reset at periodic
intervals. Acquiring ARMs permits a fund to participate in increases in
prevailing current interest rates through periodic adjustments in the coupons of
mortgages underlying the pool on which ARMs are based. In addition, when
prepayments of principal are made on the underlying mortgages during periods of
rising interest rates, a fund can reinvest the proceeds of such prepayments at
rates higher than those at which they were previously invested. Mortgages
underlying most ARMs, however, have limits on the allowable annual or lifetime
increases that can be made in the interest rate that the mortgagor pays.
Therefore, if current interest rates rise above such limits over the period of
the limitation, a fund holding an ARM does not benefit from further increases in
interest rates. Moreover, when interest rates are in excess of coupon rates
(i.e.,
the rates being paid by mortgagors) of the mortgages, ARMs behave more like
fixed-income securities and less like adjustable rate securities and are subject
to the risks associated with fixed-income securities. In addition, during
periods of rising interest rates, increases in the coupon rate of adjustable
rate mortgages generally lag current market interest rates slightly, thereby
creating the potential for capital depreciation on such securities.
Mortgage
Dollar Rolls
Mortgage
dollar rolls consist of a fund selling mortgage-backed securities to financial
institutions for delivery in the current month and simultaneously contracting to
repurchase similar securities on a specified future date. During the period
between the sale and repurchase (the “roll period”), the fund forgoes principal
and interest paid on the mortgage-backed securities. The fund is compensated by
the difference between the current sales price and the forward price for the
future purchase (often referred to as the “drop”), as well as by the interest
earned on the cash proceeds of the initial sale. The fund will use the proceeds
generated from the transaction to invest in high-quality, short duration
investments, which may enhance the fund’s current yield and total return. Such
investments may have a leveraging effect, increasing the volatility of the
fund.
For
each mortgage dollar roll transaction, the fund will cover the roll by
segregating on its books an offsetting cash position or a position of liquid
securities of equivalent value. The portfolio managers will monitor the value of
such securities to determine that the value equals or exceeds the mortgage
dollar roll contract price.
The
fund could suffer a loss if the contracting party fails to perform the future
transaction and the fund is therefore unable to buy back the mortgage-backed
securities it initially sold. The fund also takes the risk that the
mortgage-backed securities that it repurchases at a later date will have less
favorable market characteristics than the securities originally
sold.
To
Be Announced (TBA) Transactions
A TBA transaction
is a method of trading mortgage-backed securities where the buyer and seller
agree upon general trade parameters such as agency, settlement date, par amount,
and price at the time the contract is entered into but the mortgage-backed
securities are delivered in the future. Although the securities that are
delivered in TBA transactions must meet certain standards, there is a
risk that the actual securities received by the fund may be less favorable than
what was anticipated when entering into the
transaction. TBA transactions also involve the risk that a
counterparty will fail to deliver the security, exposing the fund to further
losses. Whether or not the fund takes delivery of the securities at the
termination date of a TBA transaction, it will nonetheless be exposed
to changes in the value of the underlying investments during the term of the
agreement.
Municipal
Obligations
Tax-exempt
or taxable municipal obligations are generally issued by state and local
governments or government entities. Interest payments from municipal obligations
are generally exempt from federal income tax. Interest payments from certain
municipal obligations, however, are subject to federal income tax because of the
degree of non-government involvement in the transaction or because federal tax
code limitations on the issuance of tax-exempt bonds that benefit private
entities have been exceeded. Some typical examples of these taxable municipal
obligations include industrial revenue bonds and economic development bonds
issued by state or local governments to aid private enterprise. The interest on
a taxable municipal bond is often exempt from state taxation in the issuing
state. The funds (except Avantis Core Municipal Fixed Income ETF) do not expect
to be eligible to pass through to shareholders the tax-exempt character of
interest on municipal obligations.
Municipal
Activities Focus
From
time to time, a significant portion of the Avantis Core Municipal Fixed Income
ETF’s assets may be invested in municipal obligations that are related to the
extent that economic, business or political developments affecting one of these
obligations could affect the other obligations in a similar manner. For example,
if the fund invested a significant portion of its assets in utility bonds and a
state or federal government agency or legislative body promulgated or enacted
new environmental protection requirements for utility providers, projects
financed by utility bonds could suffer as a group. Additional financing might be
required to comply with the new environmental requirements, and outstanding debt
might be downgraded in the interim. Among other factors that could negatively
affect bonds issued to finance similar types of projects are state and federal
legislation regarding financing for municipal projects, pending court decisions
relating to the validity or means of financing municipal projects, material or
manpower shortages and declining demand for projects or facilities financed by
the municipal bonds.
Municipal
Bonds
Municipal
bonds generally have maturities of more than one year when issued and are
designed to meet longer-term capital needs. These securities have two principal
classifications: general obligation bonds and revenue bonds.
General
Obligation (GO) bonds are issued by states, counties, cities, towns and regional
districts to fund a variety of public projects, including construction of and
improvements to schools, highways, and water and sewer systems. GO bonds are
backed by the issuer’s full faith and credit pledge based on its ability to levy
taxes for the timely payment of interest and repayment of principal, although
such levies may be constitutionally or statutorily limited as to rate or
amount.
Revenue
bonds are not backed by an issuer’s taxing authority; rather, interest and
principal are secured by the net revenues from a project or facility. Revenue
bonds are issued to finance a variety of capital projects, including
construction or refurbishment of utility and waste disposal systems, highways,
bridges, tunnels, air and seaport facilities, schools and
hospitals.
Industrial
Development Bonds (IDBs), a type of revenue bond, are issued by or on behalf of
public authorities to finance privately operated facilities. These bonds are
used to finance business, manufacturing, housing, athletic and pollution control
projects, as well as public facilities such as mass transit systems, air and
seaport facilities and parking garages. Payment of interest and repayment of
principal on an IDB depend solely on the ability of the facility’s operator to
meet financial obligations and on the pledge, if any, of the real or personal
property financed. The interest earned on IDBs may be subject to the federal
alternative minimum tax.
Some
longer-term municipal bonds allow an investor to “put” or sell the security at a
specified time and price to the issuer or other “put provider.” If a put
provider fails to honor its commitment to purchase the security, the fund may
have to treat the security’s final maturity as its effective maturity,
lengthening the fund’s weighted average maturity and increasing the volatility
of the fund.
The
funds may purchase municipal bonds with credit enhancements such as letters of
credit or municipal bond insurance from time to time. Letters of credit are
issued by a third party, usually a bank, to enhance liquidity and ensure
repayment of principal and any accrued interest if the underlying municipal bond
should default. Municipal bond insurance, which is usually purchased by the bond
issuer from a private, nongovernmental insurance company, provides an
unconditional and irrevocable guarantee that the insured bond’s principal and
interest will be paid when due. Insurance does not guarantee the price of the
bond or the share price of a fund. The credit rating of an insured bond reflects
the credit rating of the insurer, based on its claims-paying ability. But, it
can reflect the rating on the insured credit if the bond insurer rating is
downgraded below that of the insured credit.The obligation of a municipal bond
insurance company to pay a claim extends over the life of each insured bond.
Although defaults on insured municipal bonds have been low to date, there is no
assurance that this will continue. A higher-than-expected default rate could
strain the insurer’s loss reserves and adversely affect its ability to pay
claims to bondholders. A significant portion of insured municipal bonds that
have been issued and are outstanding are insured by a small number of insurance
companies, so an event involving one or more of these insurance companies, such
as a credit rating downgrade, could have a significant adverse effect on the
value of the municipal bonds insured by that insurance company and on the
municipal bond markets as a whole.Before the 2008 financial crisis, municipal
bond insurers insured approximately half of newly issued municipal securities.
Since the crisis, the number of municipal bond insurers has dropped, and the
role of bond insurance in the municipal markets has declined significantly.
Currently, there are only a few companies actively writing such polices, and
municipal market penetration is less than 10%.
Municipal
Lease Obligations
Municipal
lease obligations, which may take the form of a lease, an installment purchase,
or a conditional sale contract, are issued by state and local governments and
authorities to acquire land and a wide variety of equipment and facilities.
Generally, the funds will not hold such obligations directly as a lessor of the
property but will purchase a participation interest in a municipal lease
obligation from a bank or other third party. Municipal leases frequently carry
risks distinct from those associated with general obligation or revenue bonds.
State constitutions and statutes set requirements that states and municipalities
must meet to incur debt. These may include voter referenda, interest rate limits
or public sale requirements. Leases, installment purchases or conditional sale
contracts (which normally provide for title to the leased asset to pass to the
government issuer) have evolved as a way for government issuers to acquire
property and equipment without meeting constitutional and statutory requirements
for the issuance of debt. Many leases and contracts include nonappropriation
clauses, which provide that the governmental issuer has no obligation to make
future payments under the lease or contract unless money is appropriated for
such purposes by the appropriate legislative body on a yearly or other periodic
basis. Municipal lease obligations also may be subject to abatement risk. For
example, construction delays or destruction of a facility as a result of an
uninsurable disaster that prevents occupancy could result in all or a portion of
a lease payment not being made.
Municipal
Notes
Consistent
with their investment objectives, the funds may invest in municipal notes, which
are issued by state and local governments or government entities to provide
short-term capital or to meet cash flow needs.
Tax
Anticipation Notes (TANs) are issued in anticipation of seasonal tax revenues,
such as ad valorem property, income, sales, use and business taxes, and are
payable from these future taxes. TANs usually are general obligations of the
issuer. General obligations are backed by the issuer’s full faith and credit
pledge based on its ability to levy taxes for the timely payment of interest and
repayment of principal, although such levies may be constitutionally or
statutorily limited as to rate or amount.
Revenue
Anticipation Notes (RANs) are issued with the expectation that receipt of future
revenues, such as federal revenue sharing or state aid payments, will be used to
repay the notes. Typically, these notes also constitute general obligations of
the issuer.
Bond
Anticipation Notes (BANs) are issued to provide interim financing until
long-term financing can be arranged. In most cases, the long-term bonds provide
the money for repayment of the notes.
Revenue
anticipation warrants, or reimbursement warrants, are issued to meet the cash
flow needs of state governments at the end of a fiscal year and in the early
weeks of the following fiscal year. These warrants are payable from unapplied
money in the state’s General Fund, including the proceeds of RANs issued
following enactment of a state budget or the proceeds of refunding warrants
issued by the state.
Municipal
Tobacco Bonds
Municipal
tobacco bonds’ payment obligations are tied to a master settlement agreement
between 46 states and certain U.S. territories and several major tobacco
companies. The agreement provides that if certain conditions are met the tobacco
companies may reduce or suspend part of their payments. In such an event, the
issuer of the bonds may not make full payments and the funds, as investors of
the bonds, may suffer.
Other
Investment Companies
Each
of the funds may invest in other investment companies, such as closed-end
investment companies, unit investment trusts, other exchange-traded funds (ETFs)
and other open-end investment companies, provided that the investment is
consistent with the fund’s investment policies and restrictions. Under the
Investment Company Act, a fund’s investment in such securities, subject to
certain exceptions, currently is limited to:
•3%
of the total voting stock of any one investment company;
•5%
of the fund’s total assets with respect to any one investment company;
and
•10%
of a fund’s total assets in the aggregate.
Such
exceptions may include reliance on Rule 12d1-4 of the Investment Company Act.
Rule 12d1-4, subject to certain requirements, would permit a fund to invest in
affiliated investment companies (other American Century mutual funds and ETFs)
and unaffiliated investment companies in excess of the limitations described
above.
A
fund’s investments in other investment companies may include money market funds
managed by the advisor. Investments in money market funds are not subject to the
percentage limitations set forth above.
As
a shareholder of another investment company, a fund would bear, along with other
shareholders, its pro
rata
portion of the other investment company’s expenses, including advisory fees.
These expenses would be in addition to the management fee that each fund bears
directly in connection with its own operations.
Repurchase
Agreements
Each
fund may invest in repurchase agreements when they present an attractive
short-term return on cash that is not otherwise committed to the purchase of
securities pursuant to the investment policies of that fund.
A
repurchase agreement occurs when, at the time the fund purchases an
interest-bearing obligation, the seller (a bank or a broker-dealer registered
under the Securities Exchange Act of 1934) agrees to purchase it on a specified
date in the future at an agreed-upon price. The repurchase price reflects an
agreed-upon interest rate during the time the fund’s money is invested in the
security.
Because
the security purchased constitutes collateral security for the repurchase
obligation, a repurchase agreement can be considered a loan collateralized by
the security purchased. The fund’s risk is the seller’s ability to pay the
agreed-upon repurchase price on the repurchase date. If the seller defaults, the
fund may incur costs in disposing of the collateral, which would reduce the
amount realized thereon. If the seller seeks relief under the bankruptcy laws,
the disposition of the collateral may be delayed or limited. To the extent the
value of the security decreases, the fund could experience a loss.
The
funds will limit repurchase agreement transactions to securities issued by the
U.S. government, its agencies and instrumentalities, and will enter into such
transactions with those banks and securities dealers who are deemed creditworthy
by the funds’ advisor.
Repurchase
Agreements maturing in more than seven days would count toward a fund’s 15%
limit on illiquid securities.
Restricted
and Illiquid Securities
The
funds may, from time to time, purchase restricted or illiquid securities,
including Rule 144A securities, when they present attractive investment
opportunities that otherwise meet the funds’ criteria for selection. Restricted
securities include securities that cannot be sold to the public without
registration under the Securities Act of 1933 or the availability of an
exemption from registration, or that are “not readily marketable” because they
are subject to other legal or contractual delays in or restrictions on resale.
Rule 144A securities are securities that are privately placed with and traded
among qualified institutional investors rather than the general public. Although
Rule 144A securities are considered restricted securities, they are not
necessarily illiquid.
With
respect to securities eligible for resale under Rule 144A, the advisor will
determine the liquidity of such securities pursuant to the fund’s Liquidity Risk
Management Program, approved by the Board of Trustees in accordance with Rule
22e-4.
Because
the secondary market for restricted securities is generally limited to certain
qualified institutional investors, the liquidity of such securities may be
limited accordingly, and a fund may, from time to time, hold a Rule 144A or
other security that is illiquid. In such an event, the portfolio managers will
consider appropriate remedies to minimize the effect on such fund’s liquidity.
Each of the funds may invest no more than 15% of the value of its assets in
illiquid securities.
Secondary
Listings Risk
A
fund’s shares may be listed or traded on U.S. and non-U.S. stock exchanges other
than the U.S. stock exchange where the fund’s primary listing is maintained.
There can be no assurance that a fund’s shares will continue to trade on any
such stock exchange or in any market or that the fund’s shares will continue to
meet the requirements for listing or trading on any exchange or in any market.
The fund’s shares may be less actively traded in certain markets than others,
and investors are subject to the execution and settlement risks and market
standards of the market where they or their broker direct their trades for
execution. Certain information available to investors who trade fund shares on a
U.S. stock exchange during regular U.S. market hours may not be available to
investors who trade in other markets, which may result in secondary market
prices in such markets being less efficient.
Short-Term
Securities
To
meet anticipated redemptions, anticipated purchases of additional securities for
a fund’s portfolio, or, in some cases, for temporary defensive purposes, the
funds may invest a portion of their assets in money market and other short-term
securities.
Examples
of those securities include:
•Securities
issued or guaranteed by the U.S. government and its agencies and
instrumentalities;
•Commercial
Paper;
•Certificates
of Deposit and Euro Dollar Certificates of Deposit;
•Bankers’
Acceptances;
•Short-term
notes, bonds, debentures, or other debt instruments;
•Repurchase
agreements; and
•Money
market funds
Structured
Investments
A
structured investment is a security whose value or performance is linked to an
underlying index or other security or asset class. Structured investments
involve the transfer of specified financial assets to a special purpose entity,
generally a corporation or trust, or the deposit of financial assets with a
custodian; and the issuance of securities or depositary receipts backed by, or
representing interests in, those assets. Structured investments may be organized
and operated to restructure the investment characteristics of the underlying
security. The cash flow on the underlying instruments may be apportioned among
the newly issued structured investments to create securities with different
investment characteristics, such as varying maturities, payment priorities and
interest rate provisions, and the extent of such payments made with respect to
structured investments is dependent on the extent of the cash flow on the
underlying instruments.
Structured
investments are generally individually negotiated agreements or traded over the
counter, and as such, there is no active trading market for such investments.
Thus structured investments may be less liquid than other securities. Because
structured investments typically involve no credit enhancement, their credit
risk generally will be equivalent to that of the underlying instruments. In
addition, structured investments are subject to the risks that the issuers of
the underlying securities may be unable or unwilling to repay principal and
interest (credit risk), and that issuers of the underlying securities may
request to reschedule or restructure outstanding debt and to extend additional
loan amounts (prepayment or extension risk).
Tender
Option Bonds
Tender
Option Bonds (TOBs) were created to increase the supply of high-quality,
short-term tax-exempt obligations.
TOBs
are created by municipal bond dealers who purchase long-term tax-exempt bonds in
the secondary market, place the certificates in trusts, and sell interests in
the trusts with puts or other liquidity guarantees attached. The credit quality
of the resulting synthetic short-term instrument is based on the put provider’s
short-term rating and the underlying bond’s long-term rating.
There
is some risk that a remarketing agent will renege on a tender option agreement
if the underlying bond is downgraded or defaults. Because of this, the portfolio
managers monitor the credit quality of bonds underlying the fund’s TOB
holdings.
The
portfolio managers also take steps to minimize the risk that a fund may realize
taxable income as a result of holding TOBs. These steps may include
consideration of (1) legal opinions relating to the tax-exempt status of the
underlying municipal bonds, (2) legal opinions relating to the tax ownership of
the underlying bonds, and (3) other elements of the structure that could result
in taxable
income
or other adverse tax consequences. After purchase, the portfolio managers
monitor factors related to the tax-exempt status of the fund’s TOB holdings in
order to minimize the risk of generating taxable income.
U.S.
Government Securities
The
funds may invest in U.S. government securities, including bills, notes and bonds
issued by the U.S. Treasury and securities issued or guaranteed by agencies or
instrumentalities of the U.S. government. Some U.S. government securities are
supported by the direct full faith and credit pledge of the U.S. government;
others are supported by the right of the issuer to borrow from the U.S.
Treasury; others, such as securities issued by the Federal National Mortgage
Association (FNMA), are supported by the discretionary authority of the U.S.
government to purchase the agencies’ obligations; and others are supported only
by the credit of the issuing or guaranteeing instrumentality. There is no
assurance that the U.S. government will provide financial support to an
instrumentality it sponsors when it is not obligated by law to do so.
Occasionally,
Congressional negotiations regarding increasing the U.S. statutory debt ceiling
cause uncertainty in the market. Uncertainty, or a default on U.S. government
debt, could cause the credit rating of the U.S. government to be downgraded,
increase volatility in debt and equity markets, result in higher interest rates,
reduce prices of U.S. Treasury securities, or increase the costs of certain
kinds of debt.
Variable-
and Floating-Rate Securities
Variable-
and floating-rate securities, including variable-rate demand obligations (VRDOs)
and floating-rate notes (FRNs), provide for periodic adjustments to the interest
rate. The adjustments are generally based on an index-linked formula, or
determined through a remarketing process.
These
types of securities may be combined with a put or demand feature that permits
the fund to demand payment of principal plus accrued interest from the issuer or
a financial institution. Examples of VRDOs include variable-rate demand notes
(VRDN) and variable rate demand preferreds (VRDP). VRDNs combine a demand
feature with an interest rate reset mechanism designed to result in a market
value for the security that approximates par. VRDNs are generally designed to
meet the requirements of money market fund Rule 2a-7. VRDPs are issued by a
closed-end fund that in turn invests primarily in portfolios of bonds. They
feature a floating rate dividend set via a weekly remarketing and have a fixed
term, mandatory redemption, and an unconditional put option.
When-Issued
and Forward Commitment Agreements
The
funds may engage in securities transactions on a when-issued or forward
commitment basis in which the transaction price and yield are each fixed at the
time the commitment is made, but payment and delivery occur at a future
date.
For
example, a fund may sell a security and at the same time make a commitment to
purchase the same or a comparable security at a future date and specified price.
Conversely, a fund may purchase a security and at the same time make a
commitment to sell the same or a comparable security at a future date and
specified price. These types of transactions are executed simultaneously in what
are known as dollar-rolls, buy/sell back transactions, cash and carry, or
financing transactions. For example, a broker-dealer may seek to purchase a
security that a fund owns. The fund will sell that security to the broker-dealer
and simultaneously enter into a forward commitment agreement to buy it back at a
future date. This type of transaction generates income for the fund if the
dealer is willing to execute the transaction at a favorable price to acquire a
specific security.
When
purchasing securities on a when-issued or forward commitment basis, a fund
assumes the rights and risks of ownership, including the risks of price and
yield fluctuations. Market rates of interest on debt securities at the time of
delivery may be higher or lower than those contracted for on the when-issued
security. Accordingly, the value of the security may decline prior to delivery,
which could result in a loss to the fund. While the fund will make commitments
to purchase or sell securities with the intention of receiving or delivering
them, it may sell the securities before the settlement date if doing so is
deemed advisable as a matter of investment strategy.
To
the extent a fund remains fully invested or almost fully invested at the same
time it has purchased securities on a when-issued basis, there will be greater
fluctuations in its net asset value than if it solely set aside cash to pay for
when-issued securities. When the time comes to pay for the when-issued
securities, a fund will meet its obligations with available cash, through the
sale of securities, or, although it would not normally expect to do so, by
selling the when-issued securities themselves (which may have a market value
greater or less than the fund’s payment obligation). Selling securities to meet
when-issued or forward commitment obligations may generate taxable capital gains
or losses.
Zero-Coupon,
Step-Coupon, Range Floaters and Pay-In-Kind Securities
Zero-coupon
debt securities do not make regular cash interest payments, and are sold at a
deep discount to their face value.
The
fund may also purchase step-coupon or step-rate debt securities. Instead of
having a fixed coupon for the life of the security, coupon or interest payments
may increase to predetermined rates at future dates. The issuer generally
retains the right to call the security. Some step-coupon securities are issued
with no coupon payments at all during an initial period, and only become
interest-bearing at a future date; these securities are sold at a deep discount
to their face value.
Finally,
the fund may purchase pay-in-kind securities that do not make regular cash
interest payments, but pay interest through the issuance of additional
securities. Because such securities do not pay current cash income, the price of
these securities can be volatile when interest rates fluctuate.
Although
zero-coupon, pay-in-kind and certain range floaters and step-coupon securities
may not pay current cash income, federal income tax law requires the holder to
include in income each year the portion of any original issue discount and other
noncash income on such securities accrued during that year. In order to continue
to qualify for treatment as a regulated investment company under the Internal
Revenue Code and avoid certain excise tax, the fund is required to make
distributions of any original issue discount and other noncash income accrued
for each year. Accordingly, the fund may be required to dispose of other
portfolio securities, which may occur in periods of adverse market prices, to
generate a case to meet these distribution requirements.
Unless
otherwise indicated, with the exception of the percentage limitations on
borrowing, the following policies apply at the time a fund enters into a
transaction. Accordingly, any later increase or decrease beyond the specified
limitation resulting from a change in a fund’s assets will not be considered in
determining whether it has complied with its investment policies.
Fundamental
Investment Policies
The
funds’ fundamental investment policies are set forth below. These investment
policies and a fund’s status as diversified may not be changed without approval
of a majority of the outstanding votes of shareholders of a fund. Under the
Investment Company Act, the vote of a majority of the outstanding votes of
shareholders means, the vote of (A) 67 percent or more of the voting securities
present at a shareholder meeting, if the holders of more than 50 percent of the
outstanding voting securities are present or represented by proxy; or (B) more
than 50 percent of the outstanding voting securities, whichever is
less.
|
|
|
|
|
| |
| Subject |
Policy |
|
Senior
Securities |
A
fund may not issue senior securities, except as permitted under the
Investment Company Act. |
| Borrowing |
A
fund may not borrow money, except to the extent permitted by the
Investment Company Act, or any rules, exemptions or interpretations
thereunder that may be adopted, granted or issued by the SEC. |
| Lending |
A
fund may not make loans if, as a result, more than 33 1/3% of its total
assets would be lent to other persons, including other investment
companies to the extent permitted by the Investment Company Act or any
rules, exemptions or interpretations thereunder that may be adopted,
granted or issued by the SEC. This limitation does not apply to (i) the
lending of portfolio securities, (ii) the purchase of debt securities,
other debt instruments, loan participations and/or engaging in direct
corporate loans in accordance with its investment goals and policies, and
(iii) repurchase agreements to the extent the entry into a repurchase
agreement is deemed to be a loan. |
| Real
Estate |
A
fund may not purchase or sell real estate unless acquired as a result of
ownership of securities or other instruments. This policy shall not
prevent a fund from investing in securities or other instruments backed by
real estate or securities of companies that deal in real estate or are
engaged in the real estate business. |
| Concentration |
Other
than Avantis Real Estate ETF, a fund may not concentrate its investments
in securities of issuers in a particular industry (other than securities
issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities). Avantis Real Estate ETF will concentrate its
investments in the real estate industry. |
| Underwriting |
A
fund may not act as an underwriter of securities issued by others, except
to the extent that the fund may be considered an underwriter within the
meaning of the 1933 Act in the disposition of restricted
securities. |
| Commodities |
A
fund may not purchase or sell commodities, except to the extent permitted
by the Investment Company Act or any rules, exemptions or interpretations
thereunder that may be adopted, granted or issued by the SEC. |
| Control |
A
fund may not invest for purposes of exercising control over
management. |
For
purposes of the investment policy relating to senior securities, a fund may
borrow from any bank provided that immediately after any such borrowing there is
asset coverage of at least 300% for all borrowings of such fund. In the event
that such asset coverage falls below 300%, the fund shall, within three days
thereafter (not including Sundays and holidays) or such longer period as the SEC
may prescribe by rules and regulations, reduce the amount of its borrowings to
an extent that the asset coverage of such borrowings is at least
300%.
In
complying with the fundamental investment policy relating to
concentration:
(a)there
is no limitation with respect to obligations issued or guaranteed by the U.S.
government, any state, territory or possession of the United States, the
District of Columbia or any of their authorities, agencies, instrumentalities or
political subdivisions and
repurchase
agreements secured by such obligations (except that an Industrial Development
Bond backed only by the assets and revenues of a non-governmental user will be
deemed to be an investment in the industry represented by such
user);
(b)wholly
owned finance companies will be considered to be in the industries of their
parents if their activities are primarily related to financing the activities of
their parents;
(c)utilities
will be divided according to their services, for example, gas, gas transmission,
electric and gas, electric and telephone will each be considered a separate
industry; and
(d)personal
credit and business credit businesses will be considered separate
industries.
Although
the funds’ fundamental investment policy relating to commodities would permit
investments in commodities, none of the funds currently intend to purchase or
sell physical commodities unless acquired as a result of ownership of securities
or other instruments. The funds may, however, purchase or sell options and
futures contracts or invest in securities or other instruments backed by
physical commodities to the extent permitted by such fund’s investment
objectives and policies.
The
funds consider the industries of the holdings of the other American Century
funds (affiliated funds) in which they invest to assess industry
concentration.
The
Avantis Core Municipal Fixed Income ETF has a fundamental policy to invest at
least 80% of its net assets, in municipal fixed income securities with interest
payments exempt from federal income tax.
Nonfundamental
Investment Policies
The
funds are subject to the following investment policies that are not fundamental
and may be changed by the Board of Trustees.
Each
fund’s investment objective is a nonfundamental investment policy and may be
changed by the Board of Trustees without approval by shareholders.
The
funds have adopted nonfundamental investment policies in accordance with Rule
35d-1 under the Investment Company Act to invest at least 80% of their assets in
the type of investments suggested by their respective names. For purposes of
such investment policy, “assets” include the fund’s net assets, plus the amount
of any borrowings for investment purposes. Each fund’s Rule 35d-1 80% policy is
nonfundamental, which means that it may be changed by the Board of Trustees
without the approval of shareholders. Shareholders will be given at least 60
days’ notice of any change to a fund’s Rule 35d-1 80% policy.
The
Investment Company Act imposes certain additional restrictions upon the funds’
ability to acquire securities issued by insurance companies, broker-dealers,
underwriters or investment advisors, and upon transactions with affiliated
persons as defined by the Act. It also defines and forbids the creation of cross
and circular ownership.
For
temporary defensive purposes, each fund may invest in securities that may not
fit its investment objective or its stated market. During a temporary defensive
period, a fund may invest a portion of its assets in money market, cash,
cash-equivalents or other short-term securities.
The
portfolio turnover rate of each fund for its most recent fiscal year will be
included in the Fund
Summary
section of that fund’s prospectus. The portfolio turnover rate for each fund’s
last five fiscal years (or a shorter period if the fund is less than five years
old) will be shown in the Financial Highlights tables in the prospectus.
Variations in a fund’s portfolio turnover rate from year to year may be due to a
fluctuating volume of shareholder purchase and redemption activity, varying
market conditions, and/or changes in the managers’ investment
outlook.
The
portfolio managers do not have a predefined holding period for any security
because changes in the market or security specific financial information may
occur at any time. Turnover is expected to be low given that the portfolios
managers consider the trade-off between expected returns and implementation
costs when deciding to sell a security. However, there is no guarantee that
portfolio turnover will always remain low. Higher turnover would generate
correspondingly higher brokerage commissions, which is a cost the funds pay
directly. Portfolio turnover also may affect the character of capital gains
realized and distributed by the funds, if any, because short-term capital gains
are taxable as ordinary income.
ACIM
has adopted policies and procedures with respect to the disclosure of fund
portfolio holdings and characteristics, which are described below.
Distribution
to the Public
On
each business day of a fund, before commencement of trading in shares on a
national securities exchange, the fund will disclose on its website the
identities and quantities of the fund’s portfolio holdings that will form the
basis for the fund’s calculation of NAV at the end of that business day.
Portfolio
holdings are also disclosed in annual and semiannual shareholder reports.
Quarterly portfolio disclosures will be filed with the Securities and Exchange
Commission on Form N-PORT within 60 days of each fiscal quarter
end.
In
addition, each business day, each fund’s portfolio holdings information will be
provided to the funds’ transfer agent or other agents for dissemination through
the facilities of the National Securities Clearing Corporation (NSCC) and/or
other fee-based subscription services to NSCC members and/or subscribers to
those other fee-based subscription services, including large institutional
investors (known as “Authorized Participants”) that have been authorized to
purchase and redeem large blocks of shares pursuant to legal requirements, and
to entities that publish and/or analyze such information in connection with the
process of purchasing or redeeming Creation Units or trading shares of a fund in
the secondary market.
Portfolio
holdings information made available in connection with the creation/redemption
process may be provided to other entities that provide services to the fund in
the ordinary course of business after it has been disseminated to the NSCC. From
time to time, information concerning portfolio holdings other than portfolio
holdings information made available in connection with the creation/redemption
process, as discussed above, may be provided to other entities that provide
services to a fund in the ordinary course of business, no earlier than one
business day following the date of the information. The eligible third parties
to whom portfolio holdings information may be released in advance of general
release fall into the following categories: data consolidators (including rating
agencies), fund rating/ranking services and other data providers and service
providers to the fund, including Authorized Participants and pricing
services.
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 funds on an ongoing basis, at any point a “distribution,” as such term is
used in the 1933 Act, may occur. 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 that could
render them statutory underwriters and subject them to the prospectus delivery
requirement and liability provisions of the 1933 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 transfer
agent, breaks them down into constituent shares and sells such shares directly
to customers or if it chooses to couple the creation 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
1933 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-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in shares, whether or not participating in the distribution of
shares, generally are required to deliver a prospectus. This is because the
prospectus delivery exemption in Section 4(a)(3) of the 1933 Act is not
available in respect of such transactions as a result of Section 24(d) of the
Investment Company Act. Firms that incur a prospectus delivery obligation with
respect to shares of the fund are reminded that, pursuant to Rule 153 under the
1933 Act, a prospectus delivery obligation under Section 5(b)(2) of the 1933 Act
owed to an exchange member in connection with a sale on the Listing Exchange is
satisfied by the fact that the prospectus is available at the Listing Exchange
upon request. The prospectus delivery mechanism provided in Rule 153 is
available only with respect to transactions on an exchange.
The
individuals listed below serve as trustees of the funds. Each trustee will
continue to serve in this capacity until death, retirement, resignation or
removal from office. The board has adopted a mandatory retirement age for
trustees who are not “interested persons,” as that term is defined in the
Investment Company Act (independent trustees). Trustees who are not also
officers of the trust shall retire on December 31st of the year in which they
reach their 75th birthday.
Jonathan
S. Thomas is an “interested person” because he currently serves as President and
Chief Executive Officer of American Century Companies, Inc. (ACC), the parent
company of American Century Investment Management, Inc. (ACIM or the advisor).
The other trustees are independent. They are not employees, directors or
officers of, and have no financial interest in, ACC or any of its wholly owned,
direct or indirect, subsidiaries, including ACIM and American Century Services,
LLC (ACS), and they do not have any other affiliations, positions or
relationships that would cause them to be considered “interested persons” under
the Investment
Company
Act. The following trustees also serve in this capacity for a number of other
registered investment companies in the American Century Investments family of
funds: Jonathan S. Thomas, 15; Jeremy I. Bulow, 8; and Thomas
W. Bunn,
7.
The
following table presents additional information about the trustees. The mailing
address for each trustee other than Jonathan S. Thomas is 330 Madison Avenue,
New York, New York 10017. The mailing address for Jonathan S. Thomas is 4500
Main Street, Kansas City, Missouri 64111.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Name
(Year of Birth) |
Position(s)
Held
with
Funds |
Length
of
Time Served |
Principal
Occupation(s) During Past 5 Years |
Number
of
American
Century
Portfolios
Overseen
by
Trustee |
Other
Directorships
Held During Past
5 Years |
| Independent
Trustees |
|
|
| |
Reginald
M. Browne
(1968)
|
Trustee
and Board Chair |
Since
2017 (Board Chair since 2019) |
Principal,
GTS
Securities
(automated capital markets trading firm) (2019 to present);
Senior
Managing Director, Co Global Head-ETF Group, Cantor
Fitzgerald
(financial services firm) (2013 to 2019) |
55 |
None |
Jeremy
I. Bulow
(1954) |
Trustee |
Since
2022 |
Professor
of Economics, Stanford
University Graduate School of Business (1979
to present) |
87 |
None |
| Thomas
W. Bunn (1953) |
Trustee |
Since
2023 |
Retired |
120 |
None |
Barry
A. Mendelson
(1958) |
Trustee |
Since
2017 |
Retired |
55 |
None |
| Interested
Trustee |
|
|
| |
Jonathan
S. Thomas
(1963) |
Trustee |
Since
2017 |
President
and Chief Executive Officer, ACC
(2007 to present). Also serves as Chief Executive Officer, ACS;
Director, ACC
and
other ACC
subsidiaries |
152 |
None |
Qualifications
of Trustees
Generally,
no one factor was decisive in the selection of the trustees to the board.
Qualifications considered by the board to be important to the selection and
retention of trustees include the following: (i) the individual’s business and
professional experience and accomplishments; (ii) the individual’s educational
background and accomplishments; (iii) the individual’s experience and expertise
performing senior policy-making functions in business, government, education,
accounting, law and/or administration; (iv) how the individual’s expertise and
experience would contribute to the mix of relevant skills and experience on the
board; (v) the individual’s ability to work effectively with the other members
of the board; and (vi) the individual’s ability and willingness to make the time
commitment necessary to serve as an effective trustee. In addition, the
individuals’ ability to review and critically evaluate information, their
ability to evaluate fund service providers, their ability to exercise good
business judgment on behalf of fund shareholders, their prior service on the
board, and their familiarity with the funds are considered important
assets.
While
the board has not adopted a specific policy on diversity, it takes overall
diversity into account when considering and evaluating nominees for trustee. The
board generally considers the manner in which each trustee’s professional
experience, background, skills, and other individual attributes will contribute
to the effectiveness of the board. Additional information about each trustee’s
individual educational and professional experience (supplementing the
information provided in the table above) follows and was considered as part of
his or her nomination to, or retention on, the board.
Reginald
M. Browne:
BS in Business Administration, La Salle University; 15 years of experience in
the ETF industry with a core focus on market-making and institutional
sales
Jeremy
I. Bulow:
BA, MA, Yale University; PhD in Economics, Massachusetts Institute of
Technology; formerly, Director, Bureau of Economics, Federal Trade Commission
Thomas
W. Bunn:
BS in Business Administration, Wake Forest University; MBA in Finance,
University of North Carolina at Chapel Hill; formerly Vice Chairman and
President, KeyCorp (banking services); 31 years of experience in investment,
commercial and corporate banking; managing directorship roles with Bank of
America
Barry
A. Mendelson: AB,
Geology, Vassar College; JD, The George Washington University School of Law;
formerly, Principal and Senior Counsel, The
Vanguard Group
(investment management); 8 years of experience with the U.S. Securities and
Exchange Commission, Division of Investment Management
Jonathan
S. Thomas:
BA in Economics, University of Massachusetts; MBA, Boston College; formerly held
senior leadership roles with Fidelity Investments, Boston Financial Services,
Bank of America and Morgan Stanley; serves on the Board of Governors of the
Investment Company Institute
Responsibilities
of the Board
The
board is responsible for overseeing the advisor’s management and operations of
the funds pursuant to the management agreement. Trustees also have significant
responsibilities under the federal securities laws. Among other things,
they:
•oversee
the performance of the funds;
•oversee
the quality of the advisory and shareholder services provided by the
advisor;
•review
annually the fees paid to the advisor for its services;
•monitor
potential conflicts of interest between the funds and their affiliates,
including the advisor;
•oversee
custody of assets and the valuation of securities; and
•oversee
the funds’ compliance program.
In
performing their duties, board members receive detailed information about the
funds and the advisor regularly throughout the year, and they meet in person at
least quarterly with management of the advisor to review reports about fund
operations. The trustees’ role is to provide oversight and not to provide
day-to-day management.
The
board has all powers necessary or convenient to carry out its responsibilities.
Consequently, the board may adopt bylaws providing for the regulation and
management of the affairs of the funds and may amend and repeal them to the
extent that such bylaws do not reserve that right to the funds’ shareholders.
They may increase or reduce the number of board members and may, subject to the
Investment Company Act, fill board vacancies. Board members also may elect and
remove such officers and appoint and terminate such agents as they consider
appropriate. They may establish and terminate committees consisting of two or
more trustees who may exercise the powers and authority of the board as
determined by the trustees. They may, in general, delegate such authority as
they consider desirable to any officer of the funds, to any board committee and
to any agent or employee of the funds or to any custodian, transfer agent,
investor servicing agent, principal underwriter or other service provider for a
fund.
To
communicate with the board, or a member of the board, a shareholder should send
a written communication addressed to the board or member of the board to the
attention of the Corporate Secretary at the following address: P.O. Box 418210,
Kansas City, Missouri 64141-9210. Shareholders who prefer to communicate by
email may send their comments to [email protected]. All
shareholder communications received will be forwarded to the board or the
independent board chair.
Board
Leadership Structure and Standing Board Committees
Reginald
M. Browne serves as the independent board chair and has served in such capacity
since 2019. All of the board’s members except Jonathan S. Thomas are independent
trustees. The independent trustees meet separately to consider a variety of
matters that are scheduled to come before the board and meet periodically with
the funds’ Chief Compliance Officer and fund auditors. They are advised by
independent legal counsel. No independent trustee may serve as an officer or
employee of a fund. The board has also established an Audit Committee, described
below, comprised solely of independent trustees. The board believes that the
current leadership structure is appropriate and allows for independent oversight
of the funds.
The
board has an Audit Committee that approves the funds’ (or trust’s) engagement of
the independent registered public accounting firm and recommends approval of
such engagement to the independent trustees. The committee also oversees the
activities of the accounting firm, receives regular reports regarding fund
accounting, oversees securities valuation (approving the funds’ valuation policy
and receiving reports regarding instances of fair valuation thereunder) and
receives regular reports from the advisor’s internal audit department. The
committee currently consists of Barry A. Mendelson (chair), Reginald M. Browne,
Jeremy I. Bulow and Thomas
W. Bunn.
It met two times during the fiscal year ended August 31, 2023.
Risk
Oversight by the Board
As
previously disclosed, the board oversees the advisor’s management of the funds
and meets at least quarterly with management of the advisor to review reports
and receive information regarding fund operations. Risk oversight relating to
the funds is one component of the board’s oversight and is undertaken in
connection with the duties of the board. The board oversees various types of
risks relating to the funds, including, but not limited to, investment risk,
operational risk and enterprise risk. Through its regular interactions with
management of the advisor during and between meetings, the board will analyze,
evaluate, and provide feedback on the advisor’s risk management processes. In
addition, the board will receive information regarding, and have discussions
with senior management of the advisor about, the advisor’s enterprise risk
management systems and strategies. There can be no assurance that all elements
of risk, or even all elements of material risk, will be disclosed to or
identified by the board, or that the advisor’s risk management systems and
strategies, and the board’s oversight thereof, will mitigate all elements of
risk, or even all elements of material risk to the funds.
Board
Compensation
For
the fiscal year ended August 31, 2023,
trustees listed in the following table received the amounts shown for services
on the trust’s board and on the boards of other funds in the American Century
family of funds if applicable. Neither Jonathan S. Thomas nor any officers of
the funds receives compensation from the funds.
|
|
|
|
|
|
|
|
| |
| Name
of Trustee |
Total
Compensation for Service as Trustee to the Trust1,2 |
Total
Compensation for Services as Directors/Trustees for the American Century
Investments Family of Funds3 |
| Reginald
M. Browne |
$175,000 |
$175,000 |
| Jeremy
I. Bulow |
$141,667 |
$431,667 |
|
Thomas
W. Bunn4 |
— |
$343,500 |
| Barry
A. Mendelson |
$154,167 |
$154,167 |
|
Stephen
E. Yates5 |
$141,667 |
$467,167 |
1 Includes
compensation paid to the trustees for the fiscal year ended August 31,
2023,
and also includes amounts deferred at the election of the trustees under the
American Century Mutual Funds’ Independent Directors’ Deferred Compensation
Plan.
2 Reflects
the compensation paid to each trustee for the funds in this SAI aggregated with
the compensation paid to the trustees for other series of the
trust.
3 Includes
compensation paid to each trustee for his service as director/trustee for one
(in the case of Mr. Bulow,
nine; Mr.
Bunn, seven;
and Mr. Yates, eight) investment company in the American Century Investments
family of funds. Includes deferred compensation paid under the American Century
Mutual Funds’ Independent Directors’ Deferred Compensation Plan as follows: Mr.
Browne, $175,000;
and Mr. Bulow, $116,717.
4 Mr.
Bunn was not a trustee of the Trust on August 31, 2023; however, he served as a
director/trustee on other boards under the American Century Investments Family
of Funds prior to that date.
5 Mr.
Yates
retired from the Board on December 31, 2023.
None
of the funds currently provides any pension or retirement benefits to the
trustees except pursuant to the American Century Mutual Funds’ Independent
Directors’ Deferred Compensation Plan adopted by the trust. Under the plan, the
independent trustees may defer receipt of all or any part of the fees to be paid
to them for serving as trustees of the funds. All deferred fees are credited to
accounts established in the names of the trustees. The amounts credited to each
account then increase or decrease, as the case may be, in accordance with the
performance of one or more American Century funds selected by the trustees. The
account balance continues to fluctuate in accordance with the performance of the
selected fund or funds until final payment of all amounts credited to the
account. Trustees are allowed to change their designation of funds from time to
time.
Generally,
deferred fees are not payable to a trustee until the distribution date elected
by the trustee in accordance with the terms of the plan. Such distribution date
may be a date on or after the trustee’s retirement date, but may be an earlier
date if the trustee agrees not to make any additional deferrals after such
distribution date. Distributions may commence prior to the elected payment date
for certain reasons specified in the plan, such as unforeseeable emergencies,
death or disability. Trustees may receive deferred fee account balances either
in a lump sum payment or in substantially equal installment payments to be made
over a period not to exceed 10 years. Upon the death of a trustee, all remaining
deferred fee account balances are paid to the trustee’s beneficiary or, if none,
to the trustee’s estate.
The
plan is an unfunded plan and, accordingly, the funds have no obligation to
segregate assets to secure or fund the deferred fees. To date, the funds have
met all payment obligations under the plan. The rights of trustees to receive
their deferred fee account balances are the same as the rights of a general
unsecured creditor of the funds. The plan may be terminated at any time by the
administrative committee of the plan. If terminated, all deferred fee account
balances will be paid in a lump sum.
Ownership
of Fund Shares
The
trustees owned shares in the funds as of December 31, 2022,
as shown in the table below. Avantis
All Equity Markets Value ETF, Avantis All International Markets Equity ETF,
Avantis All International Markets Value ETF, Avantis Credit ETF, Avantis
Emerging Markets ex-China Equity ETF, Avantis Emerging Markets Small Cap Equity
ETF, Avantis International Small Cap Equity ETF, Avantis Moderate Allocation
ETF, Avantis U.S. Large Cap Equity ETF, Avantis U.S. Mid Cap Equity ETF and
Avantis U.S. Mid Cap Value ETF had not yet commenced operations as of such date
and are not included in the table below. Because Mr. Bunn was not a trustee of
the Trust on December 31, 2022, he is not included in this table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Name
of Trustee
|
| |
Reginald
M. Browne |
Jeremy
I.
Bulow |
Barry
A. Mendelson |
Jonathan
S. Thomas |
| Dollar
Range of Equity Securities in the Fund: |
|
|
| |
| Avantis
All Equity Markets ETF |
A |
A |
A |
E |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| |
Name
of Trustee
|
| |
Reginald
M. Browne |
Jeremy
I.
Bulow |
Barry
A. Mendelson |
Jonathan
S. Thomas |
| Avantis
Core Fixed Income ETF |
A |
A |
A |
A |
| Avantis
Core Municipal Fixed Income ETF |
A |
A |
A |
A |
| Avantis
Emerging Markets Equity ETF |
A |
A |
A |
E |
| Avantis
Emerging Markets Value ETF |
A |
A |
A |
A |
| Avantis
Inflation Focused Equity ETF |
A |
A |
A |
A |
| Avantis
International Equity ETF |
A |
A |
C |
C |
| Avantis
International Large Cap Value ETF |
A |
A |
A |
E |
| Avantis
International Small Cap Value ETF |
A |
A |
C |
A |
| Avantis
Real Estate ETF |
A |
B |
A |
E |
| Avantis
Responsible Emerging Markets Equity ETF |
A |
A |
A |
E |
| Avantis
Responsible International Equity ETF |
A |
A |
A |
E |
| Avantis
Responsible U.S. Equity ETF |
A |
A |
A |
A |
| Avantis
Short-Term Fixed Income ETF |
A |
C |
A |
A |
| Avantis
U.S. Equity ETF |
A |
A |
A |
E |
| Avantis
U.S. Large Cap Value ETF |
A |
A |
A |
E |
| Avantis
U.S. Small Cap Equity ETF |
A |
A |
A |
A |
| Avantis
U.S. Small Cap Value ETF |
A |
B |
A |
E |
Aggregate
Dollar Range of Equity Securities
in all Registered Investment
Companies Overseen by Trustees in Family of Investment Companies |
A |
D |
D |
E |
Ranges:
A—none, B—$1-$10,000, C—$10,001-$50,000, D—$50,001-$100,000, E—More than
$100,000
Beneficial
Ownership of Affiliates by Independent Trustees
No
independent trustee or his or her immediate family members beneficially owned
shares of the advisor, the funds’ principal underwriter or any other person
directly or indirectly controlling, controlled by, or under common control with
the advisor or the funds’ principal underwriter as of the date of this
SAI.
The
following table presents certain information about the executive officers of the
funds. Each officer, except Cleo Chang, serves as an officer for each of the 16
investment companies in the American Century family of funds. No officer is
compensated for his or her service as an officer of the funds. The listed
officers are interested persons of the funds and are appointed or re-appointed
on an annual basis. The mailing address for each officer listed below is 4500
Main Street, Kansas City, Missouri 64111.
|
|
|
|
|
|
|
|
| |
Name
(Year
of Birth) |
Offices
with the Funds |
Principal
Occupation(s) During the Past Five Years |
Patrick
Bannigan
(1965)
|
President
since 2019 |
Executive
Vice President and Director, ACC
(2012 to present); Chief Financial Officer, Chief Accounting Officer and
Treasurer, ACC
(2015 to present). Also serves as President, ACS;
Vice President, ACIM;
Chief Financial Officer, Chief Accounting Officer and/or Director,
ACIM,
ACS
and other ACC
subsidiaries |
R.
Wes Campbell
(1974) |
Chief
Financial
Officer and Treasurer
since 2018; Vice President since
2023 |
Vice
President, ACS
(2020 to present); Investment Operations and Investment Accounting,
ACS
(2000 to present) |
Amy
D. Shelton
(1964) |
Chief
Compliance Officer and Vice President since 2017 |
Chief
Compliance Officer, American Century funds, (2014 to present); Chief
Compliance Officer, ACIM
(2014 to present); Chief Compliance Officer, ACIS
(2009 to present). Also serves as Vice President, ACIS |
John
Pak
(1968) |
General
Counsel and
Vice President since 2021 |
General
Counsel and Senior Vice President, ACC
(2021 to present); Also serves as General Counsel and Senior Vice
President, ACIM,
ACS
and ACIS.
Chief Legal Officer of Investment and Wealth Management, The Bank of New
York Mellon (2014 to 2021) |
|
|
|
|
|
|
|
|
| |
Name
(Year
of Birth) |
Offices
with the Funds |
Principal
Occupation(s) During the Past Five Years |
Cleo
Chang
(1977) |
Vice
President since 2019 |
Senior
Vice President, ACIM (2015
to present) |
Cihan
Kasikara
(1974) |
Vice
President since 2023 |
Senior
Vice President, ACS
(2022 to present); Treasurer, ACS
(2023 to present); Vice President, ACS
(2020 to 2022); Vice President, Franklin
Templeton
(2015 to 2020) |
Kathleen
Gunja Nelson
(1976) |
Vice
President since 2023 |
Vice
President, ACS
(2017 to present) |
Ward
D. Stauffer
(1960) |
Secretary
since 2019 |
Attorney, ACC (2003
to present)
|
The
funds and the advisor have adopted codes of ethics under Rule 17j-1 of the
Investment Company Act. They permit personnel subject to the codes to invest in
securities, including securities that may be purchased or held by the funds,
provided that they first obtain approval from the compliance department before
making such investments. The funds’ distributor (Foreside Fund Services, LLC)
relies on the principal underwriters exception under Rule 17j-1(c)(3),
specifically where the distributor is not affiliated with the Trust or the
advisor, and no officer, director or general partner of the distributor serves
as an officer, director or general partner of the Trust or the
advisor.
The
advisor is responsible for exercising the voting rights associated with the
securities purchased and/or held by the funds. The funds’ Board of Trustees has
approved the advisor’s proxy voting policies to govern the advisor’s proxy
voting activities.
A
copy of the advisor’s proxy voting policies is attached hereto as Appendix
C.
Information regarding how the advisor voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is available at
americancentury.com/proxy. The advisor’s proxy voting record also is available
on the SEC’s website at sec.gov.
The
name and percentage ownership of each DTC Participant (as defined below) that
owns of record 5% or more of the outstanding shares of a fund are listed in
Appendix
A.
The trust generally does not have information concerning the beneficial
ownership of shares held by DTC Participants.
Following
the creation of the initial Creation Unit(s) of shares of a fund and immediately
prior to the commencement of trading in the fund’s shares, a holder of shares
may be a “control person” of the fund, as defined in the Investment Company Act.
A fund cannot predict the length of time for which one or more shareholders may
remain a control person of the fund.
Depository
Trust Company (DTC) acts as securities depository for shares of the funds.
Shares of the funds are represented by securities registered in the name of DTC
or its nominee and deposited with, or on behalf of, DTC.
DTC
was created in 1973 to enable electronic movement of securities between its
participants (DTC Participants), and NSCC was established in 1976 to provide a
single settlement system for securities clearing and to serve as central
counterparty for securities trades among DTC Participants. In 1999, DTC and NSCC
were consolidated within the Depository Trust & Clearing Corporation (DTCC)
and became wholly owned subsidiaries of DTCC. The common stock of DTCC is owned
by the DTC Participants, but the New York Stock Exchange and FINRA, through
subsidiaries, hold preferred shares in DTCC that provide them with the right to
elect one member each to the DTCC Board of Directors. Access to the DTC system
is available to entities, such as banks, brokers, dealers and trust companies,
that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly (Indirect Participants).
Beneficial
ownership of shares is limited to DTC Participants, Indirect Participants and
persons holding interests through DTC Participants and Indirect Participants.
Ownership of beneficial interests in shares (owners of such beneficial interests
are referred to herein as “Beneficial Owners”) is shown on, and the transfer of
ownership is effected only through, records maintained by DTC (with respect to
DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written
confirmation relating to their purchase of shares. The laws of some
jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability
of certain investors to acquire beneficial interests in shares.
Conveyance
of all notices, statements and other communications to Beneficial Owners is
effected as follows. Pursuant to the Depositary Agreement between the trust and
DTC, DTC is required to make available to the trust upon request and for a fee
to be charged to the trust a listing of the shares of a fund held by each DTC
Participant. The trust shall inquire of each such DTC Participant
as
to the number of Beneficial Owners holding shares, directly or indirectly,
through such DTC Participant. The trust shall provide each such DTC Participant
with copies of such notice, statement or other communication, in such form,
number and at such place as such DTC Participant may reasonably request, in
order that such notice, statement or communication may be transmitted by such
DTC Participant, directly or indirectly, to such Beneficial Owners. In addition,
the trust shall pay to each such DTC Participant a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to
applicable statutory and regulatory requirements.
Share
distributions shall be made to DTC or its nominee, Cede & Co., as the
registered holder of all shares of the trust. DTC or its nominee, upon receipt
of any such distributions, shall credit immediately DTC Participants’ accounts
with payments in amounts proportionate to their respective beneficial interests
in shares of the fund as shown on the records of DTC or its nominee. Payments by
DTC Participants to Indirect Participants and Beneficial Owners of shares held
through such DTC Participants will be governed by standing instructions and
customary practices, as is now the case with securities held for the accounts of
customers in bearer form or registered in a “street name,” and will be the
responsibility of such DTC Participants.
The
trust has no responsibility or liability for any aspect of the records relating
to or notices to Beneficial Owners, or payments made on account of beneficial
ownership interests in such shares, or for maintaining, supervising or reviewing
any records relating to such beneficial ownership interests, or for any other
aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and
Beneficial Owners owning through such DTC Participants. DTC may decide to
discontinue providing its service with respect to shares of the trust at any
time by giving reasonable notice to the trust and discharging its
responsibilities with respect thereto under applicable law. Under such
circumstances, the trust shall take action to find a replacement for DTC to
perform its functions at a comparable cost.
Seed
Capital
The
advisor or its affiliates (the “Selling Shareholders”) may purchase shares of a
fund through a broker-dealer to “seed” funds as they are launched, or may
purchase fund shares from other broker-dealers that have previously provided
“seed” for funds when they were launched, or otherwise in secondary market
transactions. The fund shares are being registered to permit the resale of these
fund shares from time to time after purchase. The funds will not receive any of
the proceeds from the resale by the Selling Shareholders of these fund shares.
The
Selling Shareholders intend to sell all or a portion of the fund shares owned by
them and offered hereby from time to time directly or through one or more
broker-dealers. The fund shares may be sold on any national securities exchange
on which the fund shares may be listed or quoted at the time of sale, in the
over-the-counter market or in transactions other than on these exchanges or
systems at fixed prices, at prevailing market prices at the time of the sale, at
varying prices determined at the time of sale, or at negotiated prices. These
sales may be effected in transactions, which may involve crosses or block
transactions.
General
The
trust issues and sells shares of the funds only in Creation Units on a
continuous basis through the distributor, without a sales load, at a price based
on a fund’s NAV next determined after receipt, on any Business Day (as defined
below), of an order received by the transfer agent in proper form. On days when
the Listing Exchange closes earlier than normal, a fund may require orders to be
placed earlier in the day. The following table sets forth the number of shares
of the fund that constitute a Creation Unit for each fund.
|
|
|
|
|
| |
| Fund |
Shares
Per Creation Unit |
| Avantis
All Equity Markets ETF |
2,500 |
| Avantis
All Equity Markets Value ETF |
2,500 |
| Avantis
All International Markets Equity ETF |
2,500 |
| Avantis
All International Markets Value ETF |
2,500 |
| Avantis
Core Fixed Income ETF |
50,000 |
| Avantis
Core Municipal Fixed Income ETF |
50,000 |
|
Avantis
Credit ETF |
50,000 |
| Avantis
Emerging Markets Equity ETF |
50,000 |
| Avantis
Emerging Markets ex-China Equity ETF |
50,000 |
| Avantis
Emerging Markets Small Cap Equity ETF |
50,000 |
| Avantis
Emerging Markets Value ETF |
40,000 |
| Avantis
Inflation Focused Equity ETF |
20,000 |
| Avantis
International Equity ETF |
50,000 |
|
|
|
|
|
| |
| Fund |
Shares
Per Creation Unit |
| Avantis
International Large Cap Value ETF |
30,000 |
| Avantis
International Small Cap Equity ETF |
40,000 |
| Avantis
International Small Cap Value ETF |
30,000 |
| Avantis
Moderate Allocation ETF |
2,500 |
| Avantis
Real Estate ETF |
40,000 |
| Avantis
Responsible Emerging Markets Equity ETF |
50,000 |
| Avantis
Responsible International Equity ETF |
50,000 |
| Avantis
Responsible U.S. Equity ETF |
30,000 |
| Avantis
Short-Term Fixed Income ETF |
50,000 |
| Avantis
U.S. Equity ETF |
30,000 |
| Avantis
U.S. Large Cap Equity ETF |
20,000 |
| Avantis
U.S. Large Cap Value ETF |
20,000 |
| Avantis
U.S. Mid Cap Equity ETF |
20,000 |
| Avantis
U.S. Mid Cap Value ETF |
20,000 |
| Avantis
U.S. Small Cap Equity ETF |
30,000 |
| Avantis
U.S. Small Cap Value ETF |
20,000 |
The
advisor and the Trustees reserve the right to increase or decrease the number of
a fund’s shares that constitute a Creation Unit. The board reserves the right to
declare a split or a consolidation in the number of shares outstanding of a
fund, and to make a corresponding change in the number of shares constituting a
Creation Unit, in the event that the per share price in the secondary market
rises (or declines) to an amount that falls outside the range deemed desirable
by the board.
A
“Business Day” with respect to the funds is any day on which the Listing
Exchange on which a fund is listed for trading is open for business. As of the
date of this SAI, the Listing Exchange observes the following holidays: New
Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial
Day, Juneteenth National Independence Day, Independence Day, Labor Day,
Thanksgiving Day and Christmas Day.
To
the extent a fund engages in in-kind transactions, the fund intends to comply
with the U.S. federal securities laws in accepting securities for deposit and
satisfying redemptions with redemption securities by, among other means,
assuring that any securities accepted for deposit and any securities used to
satisfy redemption requests will be sold in transactions that would be exempt
from registration under the 1933 Act. Further, an Authorized Participant that is
not a “qualified institutional buyer,” as such term is defined under Rule 144A
of the 1933 Act, will not be able to receive securities that are restricted
securities eligible for resale under Rule 144A.
Fund
Deposit
The
consideration for purchase of Creation Units of
a
fund generally consists of the Deposit Securities (i.e.,
the in-kind
deposit
of a designated portfolio of securities (including any
portion
of such securities for which cash may be substituted))
and
the Cash Component computed as described below. However, the funds reserve the
right to permit or require that creations of shares are effected fully or
partially in cash. Together,
the
Deposit Securities and the Cash Component constitute the “Fund Deposit,” which
will be applicable (subject to possible amendment or correction) to creation
requests received in proper form. The Fund Deposit represents the minimum
initial and
subsequent
investment amount for a Creation Unit of a fund.
The
“Cash Component” is an amount equal to the difference
between
the NAV of the shares (per Creation Unit) and the
“Deposit
Amount,” which is an amount equal to the market
value
of the Deposit Securities and serves to compensate for any
differences
between the NAV per Creation Unit and the Deposit
Amount.
Payment of any stamp duty or other similar fees and
expenses
payable upon transfer of beneficial ownership of the
Deposit
Securities are generally the responsibility of the Authorized
Participant
purchasing the Creation Unit.
The
advisor makes available through the NSCC on each Business
Day
prior to the opening of business on the Listing Exchange, the
list
of names and the required number of shares of each Deposit
Security
and the amount of the Cash Component (if any) to be
included
in the current Fund Deposit (based on information as
of
the end of the previous Business Day for a fund). Such Fund
Deposit
is applicable, subject to any adjustments as described
below,
to purchases of Creation Units of shares of a fund until
such
time as the next-announced Fund Deposit is made available.
The
identity and number of shares of the Deposit Securities and
the
amount of the Cash Component changes pursuant to changes
in
the composition of a fund’s portfolio and as rebalancing
adjustments
and corporate action events are reflected from time
to
time by advisor with a view to the investment goal of the fund.
The
composition of the Deposit Securities and the amount of the
Cash
Component may also change in response to adjustments to a fund’s
portfolio.
The
funds reserve the right to permit or require the substitution of a “cash in
lieu” amount to be added to the Cash Component to replace any Deposit Security
that may not be available in sufficient quantity for delivery or that may not be
eligible for transfer through the facilities of DTC (DTC Facilities) or the
clearing process through the Continuous Net Settlement System of the NSCC (NSCC
Clearing Process), a clearing agency that is registered with the SEC (as
discussed below), or that the Authorized Participant is not able to trade due to
a trading restriction. Each fund also reserves the right to permit or require a
“cash in lieu” amount in certain circumstances.
Cash
Purchase Method
When
partial or full cash purchases of Creation Units are
available
or specified for the fund, they
will
be effected in essentially the same manner as in-kind
purchases
thereof. In the case of a partial or full cash purchase,
the
Authorized Participant must pay the cash equivalent of the
Deposit
Securities it would otherwise be required to provide
through
an in-kind purchase, plus the same Cash Component
required
to be paid by an in-kind purchaser.
Creation
Units
To
be eligible to place orders and to create a Creation Unit of the fund, an entity
must be: (i) a “Participating Party,” i.e.,
a broker-dealer or other participant in the NSCC Clearing Process, or (ii) a DTC
Participant, and, in either case, must have executed an agreement with the
distributor with respect to creations and redemptions of Creation Units
(Authorized Participant Agreement). A Participating Party or DTC Participant who
has executed an Authorized Participant Agreement is referred to as an
“Authorized Participant.” All shares of a fund, however created, will be entered
on the records of DTC in the name of Cede & Co. for the account of a DTC
Participant.
Role
of the Authorized Participant
Creation
Units may be purchased only by or through an Authorized Participant that has
entered into an Authorized Participant Agreement with the distributor. Such
Authorized Participant will agree, pursuant to the terms of such Authorized
Participant Agreement and on behalf of itself or any investor on whose behalf it
will act, to certain conditions, including that such Authorized Participant will
make available in advance of each purchase of shares an amount of cash
sufficient to pay the Cash Component, once the NAV of a Creation Unit is next
determined after receipt of the purchase order in proper form, together with the
transaction fees described below. Investors who are not Authorized Participants
must make appropriate arrangements with an Authorized Participant. Investors
should be aware that their particular broker may not be an Authorized
Participant or may not have executed an Authorized Participant Agreement and
that orders to purchase Creation Units may have to be placed by the investor’s
broker through an Authorized Participant. As a result, purchase orders placed
through an Authorized Participant may result in additional charges to such
investor. The trust may not enter into an Authorized Participant Agreement with
more than a small number of Authorized Participants.
Placement
of Creation Orders
An
Authorized Participant must submit an irrevocable order to purchase shares of a
fund, in proper form, no later than the closing time of the regular trading
session of the Listing Exchange (normally 4 p.m., Eastern time) on any Business
Day to receive that day’s NAV. On days when the Listing Exchange closes earlier
than normal, a fund may require orders for Creation Units to be placed earlier
in the day. Orders for Creation Units must be transmitted by an Authorized
Participant by telephone or other transmission method acceptable to the transfer
agent pursuant to procedures set forth in the Authorized Participant Agreement,
as described below. Economic or market disruptions or changes, or telephone or
other communication failure, may impede the ability to reach the transfer agent
or an Authorized Participant. Orders to create shares of a fund that are
submitted on the Business Day immediately preceding a holiday or a day (other
than a weekend) when the equity markets in the relevant non-U.S. market are
closed may not be accepted. The funds’ deadlines specified above for the
submission of purchase orders is referred to as the funds’ “Cutoff Time.” The
trust or its designee, in their discretion, may permit the submission of such
orders and requests by or through an Authorized Participant at any time
(including on days on which the Listing Exchange is not open for business) via
communication through the facilities of the transfer agent’s proprietary website
maintained for this purpose.
Investors,
other than Authorized Participants, are responsible for making arrangements for
a creation request to be made through an Authorized Participant. Those placing
orders to purchase Creation Units through an Authorized Participant should allow
sufficient time to permit proper submission of the purchase order to the
transfer agent or its agent by the Cutoff Time on such Business
Day.
Upon
receiving an order for a Creation Unit, the transfer agent will notify the
advisor and the custodian of such order. The custodian will then provide such
information to any appropriate sub-custodian.
The
Authorized Participant must make available on or before the prescribed
settlement date, by means satisfactory to a fund, immediately available or same
day funds estimated by the fund to be sufficient to pay the Cash Component next
determined after acceptance of the purchase order, together with the applicable
purchase transaction fees. Those placing orders should ascertain the applicable
deadline for cash transfers by contacting the operations department of the
broker or depositary institution effectuating the transfer of the Cash
Component. This deadline is likely to be significantly earlier than the Cutoff
Time of the fund. Investors should be
aware
that an Authorized Participant may require orders for purchases of shares placed
with it to be in the particular form required by the individual Authorized
Participant.
The
Authorized Participant is responsible for all transaction-related fees, expenses
and other costs (as described below), as well as any applicable cash amounts, in
connection with any purchase order.
Once
a purchase order has been accepted, it will be processed based on the NAV next
determined after such acceptance in accordance with the fund’s Cutoff Times as
provided in the Authorized Participant Agreement and disclosed in this
SAI.
Acceptance
of Orders for Creation Units
Subject
to the conditions that (i) an irrevocable purchase order has been submitted by
the Authorized Participant (either on its own or another investor’s behalf) and
(ii) arrangements satisfactory to the fund are in place for payment of the Cash
Component and any other cash amounts which may be due, an order will be
accepted, subject to the fund’s right to reject any order until acceptance, as
set forth below.
Once
a purchase order has been accepted, upon the next determination of the NAV of
the shares, a fund will confirm the issuance of a Creation Unit, against receipt
of payment, at such NAV. The transfer agent will then transmit a confirmation of
acceptance to the Authorized Participant that placed the order.
Each
fund reserves the right to reject or revoke a purchase order transmitted to it
by the transfer agent if: (i) the purchase order is not in proper form; (ii) the
investor(s), upon obtaining the shares ordered, would own 80% or more of the
currently outstanding shares of the fund; (iii) the Deposit Securities delivered
do not conform to the identity and number of shares specified, as described
above; (iv) acceptance of the Fund Deposit would, in the opinion of the fund, be
unlawful; or (v) circumstances outside the control of the fund make it
impossible to process purchase orders for all practical purposes. The transfer
agent shall notify a prospective purchaser of a Creation Unit and/or the
Authorized Participant acting on behalf of such purchaser of its rejection of
such order. The funds, the funds’ custodian, the sub-custodian and the
distributor are under no duty, however, to give notification of any defects or
irregularities in the delivery of Fund Deposits nor shall any of them incur any
liability for failure to give such notification.
Issuance
of a Creation Unit
Except
as provided herein, a Creation Unit will not be issued until the transfer of
good title to the fund of the Deposit Securities and the payment of the Cash
Component have been completed. When the sub-custodian has confirmed to the
custodian that the securities included in the Fund Deposit (or the cash value
thereof) have been delivered to the account of the relevant sub-custodian or
sub-custodians, the transfer agent and the advisor shall be notified of such
delivery and the fund will issue and cause the delivery of the Creation Unit.
Typically, Creation Units are issued on a “T+2 basis” (i.e.,
two Business Days after trade date). However, each fund reserves the right to
settle Creation Unit transactions on a basis other than T+2 if necessary or
appropriate under the circumstances. Additionally, Avantis Emerging Markets
Equity ETF, Avantis
Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Value ETF, Avantis
Emerging Markets Small Cap Equity ETF,
Avantis International Equity ETF, Avantis International Large Cap Value ETF,
Avantis International Small Cap Equity ETF, Avantis International Small Cap
Value ETF, Avantis Real Estate ETF, Avantis Responsible Emerging Markets Equity
ETF, and Avantis Responsible International Equity ETF reserve the right to
settle Creation Unit transactions on a basis other than T+2 to accommodate
non-U.S. market holiday schedules or to account for different treatment among
non-U.S. and U.S. markets of dividend record dates and ex dividend
dates.
To
the extent contemplated by an Authorized Participant Agreement, the funds will
issue Creation Units to an Authorized Participant, notwithstanding the fact that
the corresponding Fund Deposits have not been received in part or in whole, in
reliance on the undertaking of the Authorized Participant to deliver the missing
Deposit Securities as soon as possible, which undertaking shall be secured by
such Authorized Participant’s delivery and maintenance of collateral having a
value at least equal to 105% and up to 115%, which percentage the trust may
change at any time, in its sole discretion, of the value of the missing Deposit
Securities in accordance with the fund’s then-effective procedures. The only
collateral that is acceptable to the funds is cash in U.S. dollars. Such cash
collateral must be delivered no later than 1 p.m., Eastern time on the
prescribed settlement date or such other time as designated by the funds’
custodian. Information concerning the funds’ current procedures for
collateralization of missing Deposit Securities is available from the transfer
agent. The Authorized Participant Agreement will permit the funds to buy the
missing Deposit Securities at any time and will subject the Authorized
Participant to liability for any shortfall between the cost to a fund of
purchasing such securities and the value of the cash collateral including,
without limitation, liability for related brokerage, borrowings and other
charges.
In
certain cases, Authorized Participants may create and redeem Creation Units on
the same trade date and in these instances, a fund reserves the right to settle
these transactions on a net basis or require a representation from the
Authorized Participants that the creation and redemption transactions are for
separate beneficial owners. All questions as to the number of shares of each
security in the Deposit Securities and the validity, form, eligibility and
acceptance for deposit of any securities to be delivered shall be determined by
the funds and the funds’ determination shall be final and binding.
Costs
Associated with Creation Transactions
A
standard creation transaction fee is imposed to offset the transfer and other
transaction costs associated with the issuance of Creation Units. The standard
creation transaction fee is charged to the Authorized Participant on the day
such Authorized Participant creates a Creation Unit, and is the same, regardless
of the number of Creation Units purchased by the Authorized Participant on the
applicable Business Day. The Authorized Participant may also be required to
cover certain brokerage, tax, foreign exchange, execution, market impact and
other costs and expenses related to the execution of trades resulting from such
transaction (up to the maximum amount shown below). If the costs of executing
the transaction exceed the maximum additional charge, such charges will be paid
by the fund. Authorized Participants will also bear the costs of transferring
the Deposit Securities to a fund. Investors who use the services of a broker or
other financial intermediary to acquire fund shares may be charged a fee for
such services.
The
following table sets forth each fund’s standard creation transaction fees and
maximum additional charge (as described above). Transaction fees may be waived
in certain circumstances deemed appropriate by the trust.
|
|
|
|
|
|
|
|
| |
| Fund |
Standard
Creation
Transaction Fee |
Maximum
Additional Charge for Creations1 |
| Avantis
All Equity Markets ETF |
$75 |
3% |
| Avantis
All Equity Markets Value ETF |
$75 |
3% |
| Avantis
All International Markets Equity ETF |
$75 |
3% |
| Avantis
All International Markets Value ETF |
$75 |
3% |
| Avantis
Core Fixed Income ETF |
$200 |
3% |
| Avantis
Core Municipal Fixed Income ETF |
$200 |
3% |
|
Avantis
Credit ETF |
$200 |
3% |
| Avantis
Emerging Markets Equity ETF |
$3,000 |
7% |
| Avantis
Emerging Markets ex-China Equity ETF |
$3,000 |
7% |
| Avantis
Emerging Markets Small Cap Equity ETF |
$3,000 |
7% |
| Avantis
Emerging Markets Value ETF |
$1,900 |
7% |
| Avantis
Inflation Focused Equity ETF |
$250 |
3% |
| Avantis
International Equity ETF |
$2,400 |
7% |
| Avantis
International Large Cap Value ETF |
$1,100 |
7% |
| Avantis
International Small Cap Equity ETF |
$2,400 |
7% |
| Avantis
International Small Cap Value ETF |
$1,800 |
7% |
| Avantis
Moderate Allocation ETF |
$75 |
3% |
| Avantis
Real Estate ETF |
$800 |
7% |
| Avantis
Responsible Emerging Markets Equity ETF |
$3,000 |
7% |
| Avantis
Responsible International Equity ETF |
$2,400 |
7% |
| Avantis
Responsible U.S. Equity ETF |
$850 |
3% |
| Avantis
Short-Term Fixed Income ETF |
$200 |
3% |
| Avantis
U.S. Equity ETF |
$850 |
3% |
| Avantis
U.S. Large Cap Equity ETF |
$500 |
3% |
| Avantis
U.S. Large Cap Value ETF |
$250 |
3% |
| Avantis
U.S. Mid Cap Equity ETF |
$350 |
3% |
| Avantis
U.S. Mid Cap Value ETF |
$150 |
3% |
| Avantis
U.S. Small Cap Equity ETF |
$500 |
3% |
| Avantis
U.S. Small Cap Value ETF |
$500 |
3% |
1 As
a percentage of the NAV per Creation Unit.
Redemption
of Creation Units
Shares
of the funds may be redeemed by Authorized Participants only in Creation Units
at their NAV next determined after receipt of a redemption request in proper
form by the transfer agent and only on a Business Day. The funds will not redeem
shares in amounts less than Creation Units. There can be no assurance, however,
that there will be sufficient liquidity in the secondary market at any time to
permit assembly of a Creation Unit. Investors should expect to incur brokerage
and other costs in connection with assembling a
sufficient
number of shares to constitute a Creation Unit that could be redeemed by an
Authorized Participant. Beneficial owners also may sell shares in the secondary
market. The funds generally redeem Creation Units for Fund Securities (as
defined below) and the Cash Amount (as defined below). Please see the
Cash
Redemption Method
section below and the following discussion summarizing the in-kind method for
further information on redeeming Creation Units of the funds.
The
advisor makes available through the NSCC, prior to the opening of business on
the Listing Exchange on each Business Day, the designated portfolio of
securities (including any portion of such securities for which cash may be
substituted) that will be applicable (subject to possible amendment or
correction) to redemption requests received in proper form (as defined below) on
that day (Fund Securities), and an amount of cash as described below (Cash
Amount) (if any). Such Fund Securities and the corresponding Cash Amount (each
subject to possible amendment or correction) are applicable in order to effect
redemptions of Creation Units of a fund until such time as the next announced
composition of the Fund Securities and Cash Amount is made available. Fund
Securities received on redemption may not be identical to Deposit Securities
that are applicable to creations of Creation Units under certain
circumstances.
Unless
cash redemptions are available or specified for the funds, the redemption
proceeds for a Creation Unit generally consist of Fund Securities, plus the Cash
Amount, which is an amount equal to the difference between the NAV of the shares
being redeemed, as next determined after the receipt of a redemption request in
proper form, and the value of Fund Securities, less a redemption transaction fee
(as described below).
The
funds may, in their sole discretion, substitute a “cash in lieu” amount to
replace any Fund Security that may not be eligible for transfer through DTC
Facilities or the NSCC Clearing Process or that the Authorized Participant is
not able to trade due to a trading restriction. The funds also reserve the right
to permit or require a “cash in lieu” amount in certain circumstances, including
circumstances in which: (i) the delivery of a Fund Security to the Authorized
Participant would be restricted under applicable securities or other local laws;
(ii) the delivery of a Fund Security to the Authorized Participant would result
in the disposition of the Fund Security by the Authorized Participant becoming
restricted under applicable securities or other local laws; or (iii) in certain
other situations. The amount of cash paid out in such cases will be equivalent
to the value of the substituted security listed as a Fund Security. In the event
that the Fund Securities have a value greater than the NAV of the shares, a
compensating cash payment equal to the difference is required to be made by or
through an Authorized Participant by the redeeming shareholder. The funds
generally redeem Creation Units for Fund Securities and the Cash Amount, but the
funds reserve the right to utilize a cash option for redemption of Creation
Units.
Cash
Redemption Method
When
partial or full cash redemptions of Creation Units are
available
or specified for the fund, they
will
be effected in essentially the same manner as in-kind
purchases
thereof. In the case of a partial or full cash redemption, the Authorized
Participant receives the cash equivalent of the Fund Securities it would
otherwise receive through an in-kind redemption, plus the same Cash Amount to be
paid to an in-kind redeemer.
Costs
Associated with Redemption Transactions
A
standard redemption transaction fee is imposed to offset transfer and other
transaction costs that may be incurred by the funds. The standard redemption
transaction fee is charged to the Authorized Participant on the day such
Authorized Participant redeems a Creation Unit, and is the same regardless of
the number of Creation Units redeemed by an Authorized Participant on the
applicable Business Day. The Authorized Participant may also be required to
cover certain brokerage, tax, foreign exchange, execution, market impact and
other costs and expenses related to the execution of trades resulting from such
transaction (up to the maximum amount shown below). If the costs of executing
the transaction exceed the maximum additional charge, such charges will be paid
by the fund. Authorized Participants will also bear the costs of transferring
the Fund Securities from a fund to their account on their order. Investors who
use the services of a broker or other financial intermediary to dispose of fund
shares may be charged a fee for such services.
The
following table sets forth each fund’s standard redemption transaction fees and
maximum additional charge (as described above). Transaction fees may be waived
in certain circumstances deemed appropriate by the trust.
|
|
|
|
|
|
|
|
| |
| Fund |
Standard
Redemption Transaction Fee |
Maximum
Additional Charge for Redemptions1 |
| Avantis
All Equity Markets ETF |
$75 |
2% |
| Avantis
All Equity Markets Value ETF |
$75 |
2% |
| Avantis
All International Markets Equity ETF |
$75 |
2% |
| Avantis
All International Markets Value ETF |
$75 |
2% |
| Avantis
Core Fixed Income ETF |
$200 |
2% |
| Avantis
Core Municipal Fixed Income ETF |
$200 |
2% |
|
|
|
|
|
|
|
|
| |
| Fund |
Standard
Redemption Transaction Fee |
Maximum
Additional Charge for Redemptions1 |
|
Avantis
Credit ETF |
$200 |
2% |
| Avantis
Emerging Markets Equity ETF |
$3,000 |
2% |
| Avantis
Emerging Markets ex-China Equity ETF |
$3,000 |
2% |
| Avantis
Emerging Markets Small Cap Equity ETF |
$3,000 |
2% |
| Avantis
Emerging Markets Value ETF |
$1,900 |
2% |
| Avantis
Inflation Focused Equity ETF |
$250 |
2% |
| Avantis
International Equity ETF |
$2,400 |
2% |
| Avantis
International Large Cap Value ETF |
$1,100 |
2% |
| Avantis
International Small Cap Equity ETF |
$2,400 |
2% |
| Avantis
International Small Cap Value ETF |
$1,800 |
2% |
| Avantis
Moderate Allocation ETF |
$75 |
2% |
| Avantis
Real Estate ETF |
$800 |
2% |
| Avantis
Responsible Emerging Markets Equity ETF |
$3,000 |
2% |
| Avantis
Responsible International Equity ETF |
$2,400 |
2% |
| Avantis
Responsible U.S. Equity ETF |
$850 |
2% |
| Avantis
Short-Term Fixed Income ETF |
$200 |
2% |
| Avantis
U.S. Equity ETF |
$850 |
2% |
| Avantis
U.S. Large Cap Equity ETF |
$500 |
2% |
| Avantis
U.S. Large Cap Value ETF |
$250 |
2% |
| Avantis
U.S. Mid Cap Equity ETF |
$350 |
2% |
| Avantis
U.S. Mid Cap Value ETF |
$150 |
2% |
| Avantis
U.S. Small Cap Equity ETF |
$500 |
2% |
| Avantis
U.S. Small Cap Value ETF |
$500 |
2% |
1 As
a percentage of the NAV per Creation Unit, inclusive of the standard redemption
transaction fee.
Placement
of Redemption Orders
Redemption
requests for Creation Units of the funds must be submitted to the transfer agent
by or through an Authorized Participant. An Authorized Participant must submit
an irrevocable request to redeem shares of a fund, in proper form, no later than
the closing of the regular trading session of the Listing Exchange (normally 4
p.m., Eastern time) on any Business Day, in order to receive that day’s NAV. On
days when the Listing Exchange closes earlier than normal, a fund may require
orders to redeem Creation Units to be placed earlier that day. Investors, other
than Authorized Participants, are responsible for making arrangements for a
redemption request to be made through an Authorized Participant.
The
Authorized Participant must transmit the request for redemption in the form
required by a fund to the transfer agent in accordance with procedures set forth
in the Authorized Participant Agreement. Investors should be aware that their
particular broker may not have executed an Authorized Participant Agreement and
that, therefore, requests to redeem Creation Units may have to be placed by the
investor’s broker through an Authorized Participant who has executed an
Authorized Participant Agreement. At any time, only a limited number of
broker-dealers may have an Authorized Participant Agreement in effect. Investors
making a redemption request should be aware that such request must be in the
form specified by such Authorized Participant. Investors making a request to
redeem Creation Units should allow sufficient time to permit proper submission
of the request by an Authorized Participant and transfer of the shares to a
fund’s transfer agent; such investors should allow for the additional time that
may be required to effect redemptions through their banks, brokers or other
financial intermediaries if such intermediaries are not Authorized
Participants.
A
redemption request is considered to be in “proper form” if: (i) an Authorized
Participant has transferred or caused to be transferred to a fund’s transfer
agent the Creation Unit redeemed through the book-entry system of DTC so as to
be effective by the Listing Exchange closing time on any Business Day; (ii) a
request in form satisfactory to the fund is received by the transfer agent from
the Authorized Participant on behalf of itself or another redeeming investor
within the time periods specified above; and (iii) all other procedures set
forth in the Authorized Participant Agreement are properly followed. The trust
reserves the right in connection with a redemption request to verify that the
Authorized Participant owns the shares subject to the redemption at the close of
business on the date of the redemption order. If the Authorized Participant,
upon receipt of this request, does not provide sufficient information to the
trust, the redemption request will not be considered to have been received in
proper form and may be rejected. If the transfer agent
does
not receive the investor’s shares through DTC Facilities by 10 a.m., Eastern
time on the prescribed settlement date, the redemption request may be deemed
rejected. Investors should be aware that the deadline for such transfers of
shares through the DTC Facilities may be significantly earlier than the close of
business on the Listing Exchange. Those making redemption requests should
ascertain the deadline applicable to transfers of shares through the DTC
Facilities by contacting the operations department of the broker or depositary
institution effecting the transfer of the shares.
Upon
receiving a redemption request, the transfer agent shall notify the fund and the
fund’s transfer agent of such redemption request. The tender of an investor’s
shares for redemption and the distribution of the securities and/or cash
included in the redemption payment made in respect of Creation Units redeemed
will be made through DTC and the relevant Authorized Participant to the
Beneficial Owner thereof as recorded on the book-entry system of DTC or the DTC
Participant through which such investor holds, as the case may be, or by such
other means specified by the Authorized Participant submitting the redemption
request.
A
redeeming Beneficial Owner or Authorized Participant acting on behalf of such
Beneficial Owner must maintain appropriate security arrangements with a
qualified broker-dealer, bank or other custody providers in each jurisdiction in
which any of the portfolio securities are customarily traded, to which account
such portfolio securities will be delivered.
Deliveries
of redemption proceeds by a fund generally will be made within two Business Days
(i.e.,
“T+2”). Each fund reserves the right to settle redemption transactions later
than T+2 if necessary or appropriate under the circumstances and compliant with
applicable law. Delayed settlement may occur due to a number of different
reasons, including, without limitation, settlement cycles for the underlying
securities, unscheduled market closings, an effort to link distribution to
dividend record dates and ex-dates and newly announced holidays. For example,
the redemption settlement process may be extended beyond T+2 because of the
occurrence of a holiday in a non-U.S. market or in the U.S. bond market that is
not a holiday observed in the U.S. equity market. Additionally, Avantis Emerging
Markets Equity ETF, Avantis Emerging Markets Value ETF, Avantis
Emerging Markets ex-China Equity ETF, Avantis Emerging Markets Small Cap Equity
ETF,
Avantis International Equity ETF, Avantis International Large Cap Value ETF,
Avantis International Small Cap Equity ETF, Avantis International Small Cap
Value ETF, Avantis Real Estate ETF, Avantis Responsible Emerging Markets Equity
ETF, and Avantis Responsible International Equity ETF reserve the right to
settle redemption transactions on a basis other than T+2 to accommodate non-U.S.
market holiday schedules or to account for different treatment among non-U.S.
and U.S. markets of dividend record dates and ex dividend dates.
If
neither the redeeming Beneficial Owner nor the Authorized Participant acting on
behalf of such redeeming Beneficial Owner has appropriate arrangements to take
delivery of Fund Securities in the applicable non-U.S. jurisdiction and it is
not possible to make other such arrangements, or if it is not possible to effect
deliveries of Fund Securities in such jurisdiction, the fund may in its
discretion exercise its option to redeem such shares in cash, and the redeeming
Beneficial Owner will be required to receive its redemption proceeds in cash. In
such case, the investor will receive a cash payment equal to the NAV of its
shares based on the NAV of the fund next determined after the redemption request
is received in proper form (minus a redemption transaction fee and additional
charges specified above, to offset the fund’s brokerage and other transaction
costs associated with the disposition of Fund Securities). Redemptions of shares
for Fund Securities will be subject to compliance with applicable U.S. federal
and state securities laws and the fund (whether or not it otherwise permits cash
redemptions) reserves the right to redeem Creation Units for cash to the extent
that the fund cannot lawfully deliver specific Fund Securities upon redemptions
or cannot do so without first registering the Fund Securities under such
laws.
In
the event that cash redemptions are permitted or required by the trust, proceeds
will be paid to the Authorized Participant redeeming shares as soon as
practicable after the date of redemption (within seven calendar days
thereafter).
To
the extent contemplated by an Authorized Participant Agreement, in the event an
Authorized Participant has submitted a redemption request in proper form but is
unable to transfer all or part of the Creation Unit to be redeemed to a fund, at
or prior to 10 a.m., Eastern time on the prescribed settlement date, the
transfer agent may accept the redemption request in reliance on the undertaking
by the Authorized Participant to deliver the missing shares as soon as possible.
Such undertaking shall be secured by the Authorized Participant’s delivery and
maintenance of collateral consisting of cash, in U.S. dollars in immediately
available funds, having a value at least equal to 105% and up to 115%, which
percentage the trust may change at any time, in its sole discretion, of the
value of the missing shares. Such cash collateral must be delivered at such time
as designated by the custodian, but no later than 10 a.m., Eastern time on the
prescribed settlement date and shall be held by the fund’s custodian and
marked-to-market daily. The fees of the fund’s custodian and any sub-custodians
in respect of the delivery, maintenance and redelivery of the cash collateral
shall be payable by the Authorized Participant. The Authorized Participant
Agreement may permit a fund to purchase missing fund shares or acquire the
Deposit Securities and the Cash Amount underlying such shares, and will subject
the Authorized Participant to liability for any shortfall between the cost of
the fund acquiring such shares, the Deposit Securities or Cash Amount and the
value of the cash collateral including, without limitation, liability for
related brokerage and other charges.
Because
the portfolio securities of a fund may trade on exchange(s) on days that the
Listing Exchange is closed or are otherwise not Business Days for the fund,
shareholders may not be able to redeem their shares of the fund, or purchase or
sell shares of the fund on the Listing Exchange on days when the NAV of the fund
could be significantly affected by events in the relevant non-U.S.
markets.
The
right of redemption may be suspended or the date of payment postponed with
respect to a fund: (i) for any period during which the Listing Exchange is
closed (other than customary weekend and holiday closings); (ii) for any period
during which trading on the
Listing
Exchange is restricted; (iii) for any period during which an emergency exists as
a result of which disposal of the shares of the fund’s portfolio securities or
determination of its NAV is not reasonably practicable; or (iv) in such other
circumstances as is permitted by the SEC.
The
funds have no employees. To conduct the funds’ day-to-day activities, the trust
has hired a number of service providers. Each service provider has a specific
function to fill on behalf of the funds that is described below.
ACIM
and ACS are wholly owned, directly or indirectly, by ACC. The Stowers Institute
for Medical Research (SIMR) controls ACC by virtue of its beneficial ownership
of more than 25% of the voting securities of ACC. SIMR is part of a
not-for-profit biomedical research organization dedicated to finding the keys to
the causes, treatments and prevention of disease.
ACIM
serves as the investment advisor for each of the funds. A description of the
responsibilities of the advisor appears in each prospectus under the heading
Management.
For
services provided to each fund, the advisor receives a unified management fee
based on a percentage of the daily net assets of each fund. For more information
about the unified management fee, see The
Investment Advisor
under the heading Management
in each fund’s prospectus. The amount of the fee is calculated daily and paid
monthly in arrears. The management fee schedules for the funds appear
below.
|
|
|
|
|
| |
| Fund |
Management
Fee Rate |
| Avantis
All Equity Markets ETF |
0.05% |
| Avantis
All Equity Markets Value ETF |
0.05% |
| Avantis
All International Markets Equity ETF |
0.05% |
| Avantis
All International Markets Value ETF |
0.05% |
| Avantis
Core Fixed Income ETF |
0.15% |
| Avantis
Core Municipal Fixed Income ETF |
0.15% |
|
Avantis
Credit ETF |
0.18% |
| Avantis
Emerging Markets Equity ETF |
0.33% |
| Avantis
Emerging Markets ex-China Equity ETF |
0.33% |
| Avantis
Emerging Markets Small Cap Equity ETF |
0.42% |
| Avantis
Emerging Markets Value ETF |
0.36% |
| Avantis
Inflation Focused Equity ETF |
0.25% |
| Avantis
International Equity ETF |
0.23% |
| Avantis
International Large Cap Value ETF |
0.25% |
| Avantis
International Small Cap Equity ETF |
0.30% |
| Avantis
International Small Cap Value ETF |
0.36% |
| Avantis
Moderate Allocation ETF |
0.05% |
| Avantis
Real Estate ETF |
0.17% |
| Avantis
Responsible Emerging Markets Equity ETF |
0.33% |
| Avantis
Responsible International Equity ETF |
0.23% |
| Avantis
Responsible U.S. Equity ETF |
0.15% |
| Avantis
Short-Term Fixed Income ETF |
0.15% |
| Avantis
U.S. Equity ETF |
0.15% |
| Avantis
U.S. Large Cap Equity ETF |
0.15% |
| Avantis
U.S. Large Cap Value ETF |
0.15% |
| Avantis
U.S. Mid Cap Equity ETF |
0.18% |
| Avantis
U.S. Mid Cap Value ETF |
0.20% |
| Avantis
U.S. Small Cap Equity ETF |
0.25% |
| Avantis
U.S. Small Cap Value ETF |
0.25% |
On
each calendar day, each fund accrues a management fee that is equal to the
fund’s management fee rate (as calculated pursuant to the above schedules) times
the net assets of the fund divided by 365 (366 in leap years). On the first
business day of each month, the funds pay a management fee to the advisor for
the previous month. The management fee is the sum of the daily fee calculations
for each day of the previous month.
The
management agreement between the trust and the advisor shall continue in effect
for a period of two years from its effective date (unless sooner terminated in
accordance with its terms) and shall continue in effect from year to year
thereafter for each fund so long as such continuance is approved at least
annually by:
(1)either
the funds’ Board of Trustees, or a majority of the outstanding voting securities
of such fund (as defined in the Investment Company Act); and
(2)the
vote of a majority of the trustees of the funds who are not parties to the
agreement or interested persons of the advisor, cast in person at a meeting
called for the purpose of voting on such approval.
The
management agreement states that the funds’ Board of Trustees or a majority of
the outstanding voting securities of each fund may terminate the management
agreement at any time without payment of any penalty on 60 days’ written notice
to the advisor. The management agreement shall be automatically terminated if it
is assigned.
The
management agreement states that the advisor shall not be liable to the funds or
their shareholders for anything other than willful misfeasance, bad faith, gross
negligence or reckless disregard of its obligations and duties.
The
management agreement also provides that the advisor and its officers, trustees
and employees may engage in other business, render services to others, and
devote time and attention to any other business, whether of a similar or
dissimilar nature.
Certain
investments may be appropriate for the funds and also for other clients advised
by the advisor. Investment decisions for the funds and other clients are made
with a view to achieving their respective investment objectives after
consideration of such factors as their current holdings, availability of cash
for investment and the size of their investment generally. A particular security
may be bought or sold for only one client or fund, or in different amounts and
at different times for more than one but less than all clients or funds. A
particular security may be bought for one client or fund on the same day it is
sold for another client or fund, and a client or fund may hold a short position
in a particular security at the same time another client or fund holds a long
position. In addition, purchases or sales of the same security may be made for
two or more clients or funds on the same date. The advisor has adopted
procedures designed to ensure such transactions will be allocated among clients
and funds in a manner believed by the advisor to be equitable to each. In some
cases this procedure could have an adverse effect on the price or amount of the
securities purchased or sold by a fund.
The
advisor may aggregate purchase and sale orders of the funds with purchase and
sale orders of its other clients when the advisor believes that such aggregation
provides the best execution for the funds. The Board of Trustees has approved
the policy of the advisor with respect to the aggregation of portfolio
transactions. To the extent equity trades are aggregated, shares purchased or
sold are generally allocated to the participating portfolios pro
rata
based on order size. The advisor will not aggregate portfolio transactions of
the funds unless it believes such aggregation is consistent with its duty to
seek best execution on behalf of the funds and the terms of the management
agreement. The advisor receives no additional compensation or remuneration as a
result of such aggregation.
Unified
management fees incurred by each fund for the fiscal period ended August 31,
2023,
2022 and 2021
are indicated in the following table. As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
| Unified
Management Fees |
|
| |
| Fund |
2023 |
2022 |
2021 |
| Avantis
All Equity Markets ETF |
$34,245¹ |
N/A |
N/A |
| Avantis
All Equity Markets Value ETF |
$551² |
N/A |
N/A |
| Avantis
All International Markets Equity ETF |
$20³ |
N/A |
N/A |
| Avantis
All International Markets Value ETF |
$15⁴ |
N/A |
N/A |
| Avantis
Core Fixed Income ETF |
$549,477 |
$231,892 |
$48,56813 |
| Avantis
Core Municipal Fixed Income ETF |
$99,573 |
$43,881 |
$26,82014 |
| Avantis
Emerging Markets Equity ETF |
$8,749,890 |
$3,562,047 |
$1,890,706 |
| Avantis
Emerging Markets Value ETF |
$795,536 |
$262,082⁸ |
N/A |
| Avantis
Inflation Focused Equity ETF |
$32,094⁵ |
N/A |
N/A |
| Avantis
International Equity ETF |
$5,658,914 |
$2,893,435 |
$1,451,556 |
| Avantis
International Large Cap Value ETF |
$455,526 |
$65,598⁸ |
N/A |
| Avantis
International Small Cap Equity ETF |
$1,202⁶ |
N/A |
N/A |
| Avantis
International Small Cap Value ETF |
$9,208,685 |
$5,061,317 |
$2,087,838 |
|
|
|
|
|
|
|
|
|
|
|
| |
| Unified
Management Fees |
|
| |
| Avantis
Moderate Allocation ETF |
$44⁷ |
N/A |
N/A |
| Avantis
Real Estate ETF |
$437,325 |
$89,911⁸ |
N/A |
| Avantis
Responsible Emerging Markets Equity ETF |
$137,852 |
$10,852⁹ |
N/A |
| Avantis
Responsible International Equity ETF |
$164,019 |
$15,41910 |
N/A |
| Avantis
Responsible U.S. Equity ETF |
$164,978 |
$11,58810 |
N/A |
| Avantis
Short-Term Fixed Income ETF |
$296,426 |
$92,552 |
$29,96513 |
| Avantis
U.S. Equity ETF |
$5,473,605 |
$2,912,073 |
$1,316,876 |
| Avantis
U.S. Large Cap Value ETF |
$1,363,098 |
$276,28811 |
N/A |
| Avantis
U.S. Small Cap Equity ETF |
$427,633 |
$17,28112 |
N/A |
| Avantis
U.S. Small Cap Value ETF |
$13,051,606 |
$6,593,208 |
$2,181,290 |
1 For
the period September 27, 2022, the fund’s inception date, to August 31, 2023.
Amount shown reflects waiver by advisor of $22,829 in fees.
2 For
the period June 27, 2023, the fund’s inception date, to August 31, 2023. Amount
shown reflects waiver by advisor of $367 in fees.
3 For
the period June 27, 2023, the fund’s inception date, to August 31, 2023. Amount
shown reflects waiver by advisor of $13 in fees.
4 For
the period June 27, 2023, the fund’s inception date, to August 31, 2023. Amount
shown reflects waiver by advisor of $10 in fees.
5 For
the period September 27, 2022, the fund’s inception date, to August 31, 2023.
6 For
the period July 18, 2023, the fund’s inception date, to August 31, 2023.
7 For
the period June 27, 2023, the fund’s inception date, to August 31, 2023. Amount
shown reflects waiver by advisor of $30 in fees.
8 For
the period September 28, 2021, the fund’s inception date, to August 31,
2022.
9 For
the period March 28, 2022, the fund’s inception date, to August 31,
2022.
10 For
the period March 15, 2022, the fund’s inception date, to August 31,
2022.
11 For
the period September 21, 2021, the fund’s inception date, to August 31,
2022.
12 For
the period January 11, 2022, the fund’s inception date, to August 31,
2022.
13 For
the period October 13, 2020, the fund’s inception date, to August 31,
2021.
14 For
the period December 8, 2020, the fund’s inception date, to August 31,
2021.
Accounts
Managed
The
portfolio managers are responsible for the day-to-day management of various
accounts, as indicated by the following table. None of these accounts has an
advisory fee based on the performance of the account. As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Accounts
Managed (As of August 31, 2023) |
|
|
| Registered
Investment
Companies (e.g.,
American Century
Investments
funds
and American
Century Investments -
subadvised
funds) |
Other
Pooled
Investment
Vehicles (e.g.,
commingled
trusts and
529
education
savings plans) |
Other
Accounts
(e.g., separate
accounts and
corporate
accounts
including incubation
strategies and
corporate
money) |
| Hozef
Arif |
Number
of Accounts |
5 |
0 |
0 |
|
| Assets |
$903.8
million1 |
$0 |
$0 |
|
Matthew
Dubin2 |
Number
of Accounts |
31 |
1 |
9 |
|
| Assets |
$30.5
billion3 |
$205.2
million |
$48.0
million |
| Mitchell
Firestein |
Number
of Accounts |
27 |
1 |
12 |
|
| Assets |
$27.3
billion4 |
$206.9
million |
$199.1
million |
| Mitchell
Handa |
Number
of Accounts |
5 |
0 |
0 |
|
| Assets |
$903.8
million1 |
$0 |
$0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Accounts
Managed (As of August 31, 2023) |
|
|
| Registered
Investment
Companies (e.g.,
American Century
Investments
funds
and American
Century Investments -
subadvised
funds) |
Other
Pooled
Investment
Vehicles (e.g.,
commingled
trusts and
529
education
savings plans) |
Other
Accounts
(e.g., separate
accounts and
corporate
accounts
including incubation
strategies and
corporate
money) |
| Daniel
Ong |
Number
of Accounts |
32 |
1 |
12 |
|
| Assets |
$28.2
billion5 |
$206.9
million |
$199.1
million |
| Ted
Randall |
Number
of Accounts |
27 |
1 |
12 |
|
| Assets |
$27.3
billion4 |
$206.9
million |
$199.1
million |
| Eduardo
Repetto |
Number
of Accounts |
32 |
1 |
12 |
|
| Assets |
$28.2
billion5 |
$206.9
million |
$199.1
million |
1 Includes
$514.3 million in Avantis Core Fixed Income ETF; $86.7 million in Avantis Core
Municipal Fixed Income ETF; and $247.6 million in Avantis Short-Term Fixed
Income ETF.
2 Information
provided as of November 15, 2023.
3 Includes
$242.5 million in Avantis All Equity Markets ETF; $34.2 million in Avantis All
Equity Markets Value ETF; $4.1 million in Avantis All International Markets
Equity ETF; $1.2 million in Avantis All International Markets Value ETF; $4.3
billion in Avantis Emerging Markets Equity ETF; $319.5 million in Avantis
Emerging Markets Value ETF; $3.4 million in Avantis Inflation Focused Equity
ETF; $3.4 billion in Avantis International Equity ETF; $276.3 million in Avantis
International Large Cap Value ETF; $3.8 million in Avantis International Small
Cap Equity ETF; $4.5 billion in Avantis International Small Cap Value ETF; $4.6
million in Avantis Moderate Allocation ETF; $339.8 million in Avantis Real
Estate ETF; $60.7 million in Avantis Responsible Emerging Markets Equity ETF;
$120.3 million in Avantis Responsible International Equity ETF; $191.5 million
in Avantis Responsible U.S. Equity ETF; $4.9 billion in Avantis U.S. Equity ETF;
$1.7 billion in Avantis U.S. Large Cap Value ETF; $501.8 million in Avantis U.S.
Small Cap Equity ETF; and $7.4 billion in Avantis U.S. Small Cap Value
ETF.
4 Includes$219.8
million in Avantis All Equity Markets ETF; $18.1 million in Avantis All Equity
Markets Value ETF; $639.8 thousand in Avantis All International Markets Equity
ETF; $386.3 thousand in Avantis All International Markets Value ETF; $3.8
billion in Avantis Emerging Markets Equity ETF; $289.3 million in Avantis
Emerging Markets Value ETF; $3.4 million in Avantis Inflation Focused Equity
ETF; $3.2 billion in Avantis International Equity ETF; $251.9 million in Avantis
International Large Cap Value ETF; $3.9 million in Avantis International Small
Cap Equity ETF; $3.5 billion in Avantis International Small Cap Value ETF; $2.1
million in Avantis Moderate Allocation ETF; $340.5 million in Avantis Real
Estate ETF; $57.4 million in Avantis Responsible Emerging Markets Equity ETF;
$101.6 million in Avantis Responsible International Equity ETF; $168.8 million
in Avantis Responsible U.S. Equity ETF; $4.7 billion in Avantis U.S. Equity ETF;
$1.5 billion in Avantis U.S. Large Cap Value ETF; $449.8 million in Avantis U.S.
Small Cap Equity ETF; and $6.8 billion in Avantis U.S. Small Cap Value
ETF.
5 Includes
$219.8 million in Avantis All Equity Markets ETF; $18.1 million in Avantis All
Equity Markets Value ETF; $639.8 thousand in Avantis All International Markets
Equity ETF; $386.3 thousand in Avantis All International Markets Value ETF;
$514.3 million in Avantis Core Fixed Income ETF; $86.7 million in Avantis Core
Municipal Fixed Income ETF; $3.8 billion in Avantis Emerging Markets Equity ETF;
$289.3 million in Avantis Emerging Markets Value ETF; $3.4 million in Avantis
Inflation Focused Equity ETF; $3.2 billion in Avantis International Equity ETF;
$251.9 million in Avantis International Large Cap Value ETF; $3.9 million in
Avantis International Small Cap Equity ETF; $3.5 billion in Avantis
International Small Cap Value ETF; $2.1 million in Avantis Moderate Allocation
ETF; $340.5million in Avantis Real Estate ETF; $57.4 million in Avantis
Responsible Emerging Markets Equity ETF; $101.6 million in Avantis Responsible
International Equity ETF; $168.8 million in Avantis Responsible U.S. Equity ETF;
$247.6 million in Avantis Short-Term Fixed Income ETF; $4.7 billion in Avantis
U.S. Equity ETF; $1.5 billion in Avantis U.S. Large Cap Value ETF; $449.8
million in Avantis U.S. Small Cap Equity ETF; and $6.8 billion in Avantis U.S.
Small Cap Value ETF.
Potential
Conflicts of Interest
Certain
conflicts of interest may arise in connection with the management of multiple
portfolios. Potential conflicts include, for example, conflicts among investment
strategies, such as one portfolio buying or selling a security while another
portfolio has a differing, potentially opposite position in such security. This
may include one portfolio taking a short position in the security of an issuer
that is held long in another portfolio (or vice versa). Other potential
conflicts may arise with respect to the allocation of investment opportunities,
which are discussed in more detail below. American Century Investments has
adopted policies and procedures that are designed to minimize the effects of
these conflicts.
Responsibility
for managing American Century Investments client portfolios is organized
according to investment discipline. Investment disciplines include, for example,
disciplined equity, global growth equity, global value equity, global fixed
income, multi-asset strategies, exchange traded funds, and Avantis Investors
funds. Within each discipline are one or more portfolio teams responsible for
managing specific client portfolios. Generally, client portfolios with similar
strategies are managed by the same team using the same objective, approach, and
philosophy. Accordingly, portfolio holdings, position sizes, and industry and
sector exposures tend to be similar across similar portfolios, which minimizes
the potential for conflicts of interest. In addition, American Century
Investments maintains an ethical wall that restricts real time access to
information regarding any portfolio’s transaction activities and
positions
to team members that have responsibility for a given portfolio or are within the
same equity investment discipline. The ethical wall is intended to aid in
preventing the misuse of portfolio holdings information and trading activity in
the other disciplines.
American
Century Investments may aggregate orders to purchase or sell the same security
for multiple portfolios when it believes such aggregation is consistent with its
duty to seek best execution on behalf of its clients. Orders of certain client
portfolios may, by investment restriction or otherwise, be determined not
available for aggregation. American Century Investments has adopted policies and
procedures to minimize the risk that a client portfolio could be systematically
advantaged or disadvantaged in connection with the aggregation of orders. To the
extent equity trades are aggregated, shares purchased or sold are generally
allocated to the participating portfolios pro
rata
based on order size. Because initial public offerings (IPOs) are usually
available in limited supply and in amounts too small to permit across-the-board
pro
rata
allocations, American Century Investments has adopted special procedures
designed to promote a fair and equitable allocation of IPO securities among
clients over time. A centralized trading desk executes all fixed income
securities transactions for Avantis ETFs and mutual funds. For all other funds
in the American Century complex portfolio teams are responsible for executing
fixed income trades with broker/dealers in a predominantly dealer marketplace.
Trade allocation decisions are made by the portfolio manager at the time of
trade execution and orders entered on the fixed income order management system.
There is an ethical wall between the Avantis trading desk and all other American
Century traders. The advisor’s Global Head of Trading monitors all trading
activity for best execution and to make sure no set of clients is being
systematically disadvantaged.
Finally,
investment of American Century Investments’ corporate assets in proprietary
accounts may raise additional conflicts of interest. To mitigate these potential
conflicts of interest, American Century Investments has adopted policies and
procedures intended to provide that trading in proprietary accounts is performed
in a manner that does not give improper advantage to American Century
Investments to the detriment of client portfolios.
Compensation
Portfolio
manager compensation is structured to align the interests of portfolio managers
with those of the shareholders whose assets they manage. As of the date of the
SAI, it includes the components described below.
Base
Salary
Portfolio
managers receive base pay in the form of a fixed annual salary.
Bonus
A
significant portion of the portfolio managers’ compensation takes the form of an
annual bonus. As Chief Investment Officer, Mr. Repetto’s annual bonus is tied to
average assets under management in the Avantis Investors’ funds. The bonuses of
all other portfolio managers are discretionary, allocated by Mr. Repetto based
on individual performance. Factors impacting the discretionary bonus may include
a portfolio manager’s understanding and improvement of the funds’ investment
models, efficient execution of investment decisions, and client
interaction.
Ownership
of Securities
The
following table indicates the dollar range of securities of each fund
beneficially owned by the fund’s portfolio managers as of August 31,
2023.
As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
| |
| Ownership
of Securities |
|
| |
Aggregate
Dollar Range of Securities in Fund |
| Avantis
All Equity Markets ETF |
|
| Matthew
Dubin |
D |
| Mitchell
Firestein |
D |
| Daniel
Ong |
B |
| Ted
Randall |
D |
| Eduardo
Repetto |
E |
| Avantis
All Equity Markets Value ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
A |
|
|
|
|
|
| |
| Ownership
of Securities |
|
| |
Aggregate
Dollar Range of Securities in Fund |
| Avantis
All International Markets Equity ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
C |
| Avantis
All International Markets Value ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
C |
| Eduardo
Repetto |
D |
| Avantis
Core Fixed Income ETF |
|
| Hozef
Arif |
E |
| Mitchell
Handa |
C |
| Daniel
Ong |
B |
| Eduardo
Repetto |
G |
| Avantis
Core Municipal Fixed Income ETF |
|
| Hozef
Arif |
D |
| Mitchell
Handa |
C |
| Daniel
Ong |
B |
| Eduardo
Repetto |
G |
| Avantis
Emerging Markets Equity ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
E |
| Daniel
Ong |
E |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
| Avantis
Emerging Markets Value ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
C |
| Daniel
Ong |
C |
| Ted
Randall |
C |
| Eduardo
Repetto |
E |
| Avantis
Inflation Focused Equity ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
F |
| Avantis
International Equity ETF |
|
| Matthew
Dubin |
C1 |
| Mitchell
Firestein |
E |
| Daniel
Ong |
E |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
|
|
|
|
|
| |
| Ownership
of Securities |
|
| |
Aggregate
Dollar Range of Securities in Fund |
| Avantis
International Large Cap Value ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
C |
| Daniel
Ong |
B |
| Ted
Randall |
C |
| Eduardo
Repetto |
G |
| Avantis
International Small Cap Equity ETF |
|
| Matthew
Dubin |
A |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
E |
| Avantis
International Small Cap Value ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
E |
| Daniel
Ong |
E |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
| Avantis
Moderate Allocation ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
E |
| Avantis
Real Estate ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
C |
| Daniel
Ong |
B |
| Ted
Randall |
C |
| Eduardo
Repetto |
C |
| Avantis
Responsible Emerging Markets Equity ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
E |
| Avantis
Responsible International Equity ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
E |
|
|
|
|
|
| |
| Ownership
of Securities |
|
| |
Aggregate
Dollar Range of Securities in Fund |
| Avantis
Responsible U.S. Equity ETF |
|
| Matthew
Dubin |
B |
| Mitchell
Firestein |
B |
| Daniel
Ong |
B |
| Ted
Randall |
B |
| Eduardo
Repetto |
E |
| Avantis
Short-Term Fixed Income ETF |
|
| Hozef
Arif |
E |
| Mitchell
Handa |
C |
| Daniel
Ong |
B |
| Eduardo
Repetto |
G |
| Avantis
U.S. Equity ETF |
|
| Matthew
Dubin |
C1 |
| Mitchell
Firestein |
E |
| Daniel
Ong |
F |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
| Avantis
U.S. Large Cap Value ETF |
|
| Matthew
Dubin |
C1 |
| Mitchell
Firestein |
C |
| Daniel
Ong |
C |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
| Avantis
U.S. Small Cap Equity ETF |
|
| Matthew
Dubin |
B1 |
| Mitchell
Firestein |
C |
| Daniel
Ong |
B |
| Ted
Randall |
C |
| Eduardo
Repetto |
G |
| Avantis
U.S. Small Cap Value ETF |
|
| Matthew
Dubin |
C1 |
| Mitchell
Firestein |
E |
| Daniel
Ong |
F |
| Ted
Randall |
E |
| Eduardo
Repetto |
G |
1 Information
provided as of November 15, 2023.
Ranges:
A – none; B – $1-$10,000; C – $10,001-$50,000; D – $50,001-$100,000; E –
$100,001-$500,000; F – $500,001-$1,000,000; G – More than
$1,000,000.
State
Street Bank and Trust Company, a Massachusetts trust company (the transfer
agent), 1 Heritage Drive, North Quincy, Massachusetts 02171, serves as transfer
agent and dividend-paying agent for the funds under a Transfer Agency and
Service Agreement with the funds. The transfer agent has undertaken to perform
some or all of the following services: (i) perform and facilitate the
performance of purchases and redemptions of creation units; (ii) prepare and
transmit payments for dividends and distributions; (iii) record the issuance of
shares and maintain records of the number of authorized shares; (iv) prepare and
transmit information regarding purchases and redemptions of shares; (v) maintain
required books and records; and (vi) perform other customary services of a
transfer agent and dividend disbursing agent for an exchange traded fund. Under
its investment management
agreement,
the advisor has contractually assumed the funds’ obligation to pay the expenses
of the transfer agent. For a description of this fee and the terms of its
payment, see the above discussion under the caption Investment
Advisor
on page 44.
American
Century Services, LLC (ACS), 4500 Main Street, Kansas City, Missouri 64111,
serves as fund administrator for the funds. The administrator has undertaken to
perform some or all of the following services: (i) providing office facilities
and furnishing corporate officers for the trust; (ii) monitoring compliance with
federal tax and securities law; (iii) performing certain functions ordinarily
performed by the office of a corporate treasurer, and furnishing the services
and facilities ordinarily incident thereto, such as expense accrual, monitoring
and payment of the trust’s bills, preparing monthly reconciliation of the of the
trust’s expense records, updating projections of annual expenses, preparing
material for review by the Board of Trustees and compliance testing; (iv)
maintaining the trust’s books and records in accordance with applicable
statutes, rules and regulations; (vi) preparing post-effective amendments to the
Trust’s registration statement; and (ix) preparing and filing the trust’s
federal and state tax returns (other than those required to be filed by the
trust’s custodian and transfer agent) and providing shareholder tax information
to the trust’s transfer agent. The advisor has contractually assumed the funds’
obligation to pay the expenses of the administrator. For a description of this
fee and the terms of its payment, see the above discussion under the caption
Investment
Advisor
on page 44.
The
advisor has entered into an Administration Agreement with State Street Bank and
Trust Company (the sub-administrator) to provide certain fund accounting, fund
financial reporting, tax and treasury/tax compliance services for the funds,
including striking the daily NAV for each fund. The advisor pays the
sub-administrator a monthly fee as compensation for these services that is based
on the total net assets of accounts in the American Century complex serviced by
the sub-administrator. ACS does pay the sub-administrator for some additional
services on a per fund basis.
Foreside
Fund Services, LLC (the distributor) is the distributor (also known as principal
underwriter) of the shares of the funds and is located at Three Canal Plaza,
Suite 100, Portland, Maine 04101. The distributor is a registered broker-dealer
and is a member of the Financial Industry Regulatory Authority, Inc. (FINRA).
The distributor is not affiliated with the advisor or its
affiliates.
Shares
are continuously offered for sale by the funds through the distributor only in
Creation Units as described in each fund’s prospectus and above in Creation
and Redemption of Creation Units.
Fund shares in amounts less than Creation Units are generally not distributed by
the distributor. The distributor will arrange for the delivery of the prospectus
and, upon request, this SAI to Authorized Participants that have entered into an
Authorized Participation Agreement with the distributor.
The
advisor pays the distributor a fee for serving as principal underwriter of the
funds’ shares out of the advisor’s unified management fee. For a description of
this fee and the terms of its payment, see the above discussion under the
caption Investment
Advisor
on page 44.
The distributor does not earn commissions for distributing the funds’
shares.
Certain
financial intermediaries unaffiliated with the distributor or the funds may
perform various administrative and shareholder services for their clients who
are invested in the funds. These services may include assisting with fund
purchases and redemptions, distributing information about the funds and their
performance, preparing and distributing client account statements, and other
administrative and shareholder services.
Distribution
and Service (12b-1) Fees
The
board has adopted a plan pursuant to Rule 12b-1 for the funds. However, no Rule
12b-1 plan fee is currently charged to the funds, and there are no plans in
place to impose a Rule 12b-1 plan fee. The plan, if implemented, is designed to
benefit each fund and its shareholders. The plan is expected to, among other
things, increase advertising of the funds, encourage purchases of fund shares
and service to its shareholders, and increase or maintain assets of the funds so
that certain fixed expenses may be spread over a broader asset base, with a
positive impact on per share expense ratios. In addition, a positive cash flow
into the fund is useful in managing the fund because the advisor has more
flexibility in taking advantage of new investment opportunities and handling
shareholder redemptions.
Under
the plan, the funds pay the distributor or others for the expenses of activities
that are primarily intended to sell shares of the funds. These expenses also may
include service fees paid to securities dealers or others who have executed a
servicing agreement with a fund, the distributor or its affiliates and who
provide service or account maintenance to shareholders (service fees); and the
expenses of printing prospectuses and reports used for sales purposes, of
marketing support and of preparing and distributing sales literature and
advertisements. Together, these expenses, including the service fees, are
“eligible expenses.” Such payments would be fixed and not based on expenses
incurred by the distributor.
In
addition to the payments that the distributor or others are entitled to under
the plan, the plan also provides that to the extent a fund, the advisor or the
distributor or other parties on behalf of the fund, the advisor or the
distributor make payments that are deemed to be
for
the financing of any activity primarily intended to result in the sale of fund
shares within the context of Rule 12b-1 under the Investment Company Act, then
such payments shall be deemed to have been made pursuant to the
plan.
To
the extent fees are for distribution or marketing functions, as distinguished
from administrative servicing or agency transactions, certain banks may not
participate in the plan because of applicable federal law prohibiting certain
banks from engaging in the distribution of fund shares. These banks, however,
are allowed to receive fees under the plans for administrative servicing or for
agency transactions.
The
distributor must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plan should be continued.
The
plan has been approved according to the provisions of Rule 12b-1. The terms and
provisions of the plan also are consistent with Rule 12b-1.
State
Street Bank and Trust Company (the custodian), One
Congress Street, Suite 1, Boston, Massachusetts 02114-2016,
serves as custodian of the funds’ cash and securities under a Master Custodian
Agreement with the trust. Foreign securities, if any, are held by foreign banks
participating in a network coordinated by the custodian. The custodian takes no
part in determining the investment policies of the funds or in deciding which
securities are purchased or sold by the funds. The funds, however, may invest in
certain obligations of the custodian and may purchase or sell certain securities
from or to the custodian.
State
Street Bank and Trust Company (SSB) serves as securities lending agent for the
funds pursuant to a Securities Lending Administration Agreement with the
advisor. The following table provides the amounts of income and
fees/compensation related to the funds’ securities lending activities during the
fiscal year ended August 31, 2023:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Avantis
All Equity Markets ETF |
Avantis
Core Fixed Income ETF |
Avantis
Emerging Markets Equity ETF |
Avantis
Emerging Markets Value ETF |
Avantis
Inflation Focused Equity ETF |
| Gross
income from securities lending activities |
$28,770 |
$118,916 |
$4,170,223 |
$311,413 |
$168 |
| Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
|
|
| |
| Fees
paid to securities lending agent from a revenue split |
$2,581 |
$2,027 |
$373,587 |
$21,779 |
$2 |
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$99 |
$776 |
$10,228 |
$1,195 |
$1 |
| Administrative
fees not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
$0 |
| Indemnification
fee not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
$0 |
| Rebate
(paid to borrower) |
$2,536 |
$97,240 |
$1,006,218 |
$125,867 |
$146 |
| Other
fees not included in revenue split |
$0 |
$0 |
$0 |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$5,217 |
$100,042 |
$1,390,033 |
$148,841 |
$149 |
| Net
income from securities lending activities |
$23,553 |
$18,874 |
$2,780,190 |
$162,572 |
$19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Avantis
International Equity ETF |
Avantis
International Large Cap Value ETF |
Avantis
International Small Cap Value ETF |
Avantis
Real Estate ETF |
| Gross
income from securities lending activities |
$4,880,261 |
$304,010 |
$5,723,272 |
$58,464 |
| Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
|
| |
| Fees
paid to securities lending agent from a revenue split |
$170,956 |
$7,347 |
$289,015 |
$1,252 |
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$28,660 |
$1,777 |
$27,937 |
$382 |
| Administrative
fees not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Indemnification
fee not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Rebate
(paid to borrower) |
$3,131,260 |
$227,368 |
$2,783,879 |
$44,750 |
| Other
fees not included in revenue split |
$0 |
$0 |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$3,330,876 |
$236,492 |
$3,100,831 |
$46,384 |
| Net
income from securities lending activities |
$1,549,385 |
$67,518 |
$2,622,441 |
$12,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Avantis
Responsible Emerging Markets Equity ETF |
Avantis
Responsible International Equity ETF |
Avantis
Responsible U.S. Equity ETF |
Avantis
Short-Term Fixed Income ETF |
| Gross
income from securities lending activities |
$20,283 |
$78,708 |
$13,960 |
$40,128 |
| Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
|
| |
| Fees
paid to securities lending agent from a revenue split |
$993 |
$2,557 |
$801 |
$622 |
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$78 |
$448 |
$55 |
$261 |
| Administrative
fees not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Indemnification
fee not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Rebate
(paid to borrower) |
$10,059 |
$51,883 |
$5,742 |
$33,587 |
| Other
fees not included in revenue split |
$0 |
$0 |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$11,130 |
$54,887 |
$6,597 |
$34,470 |
| Net
income from securities lending activities |
$9,153 |
$23,821 |
$7,363 |
$5,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
Avantis
U.S. Equity ETF |
Avantis
U.S. Large Cap Value ETF |
Avantis
U.S. Small Cap Equity ETF |
Avantis
U.S. Small Cap Value ETF |
| Gross
income from securities lending activities |
$541,667 |
$32,143 |
$198,076 |
$2,047,961 |
| Fees
and/or compensation paid by the fund for securities lending activities and
related services: |
|
|
| |
| Fees
paid to securities lending agent from a revenue split |
$31,389 |
$1,126 |
$10,391 |
$87,107 |
| Fees
paid for any cash collateral management service (including fees deducted
from a pooled cash collateral reinvestment vehicle) that are not included
in the revenue split |
$2,453 |
$248 |
$896 |
$11,065 |
| Administrative
fees not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Indemnification
fee not included in the revenue split |
$0 |
$0 |
$0 |
$0 |
| Rebate
(paid to borrower) |
$224,060 |
$20,535 |
$91,300 |
$1,162,081 |
| Other
fees not included in revenue split |
$0 |
$0 |
$0 |
$0 |
| Aggregate
fees/compensation for securities lending activities |
$257,902 |
$21,908 |
$102,587 |
$1,260,253 |
| Net
income from securities lending activities |
$283,765 |
$10,235 |
$95,489 |
$787,708 |
As
the funds’ securities lending agent, SSB provides the following services:
locating borrowers for fund securities, executing loans of portfolio securities
pursuant to terms and parameters defined by the advisor and the Board of
Trustees, monitoring the daily value of
the
loaned securities and collateral, requiring additional collateral as necessary,
managing cash collateral, and providing certain limited recordkeeping and
accounting services.
Deloitte
& Touche LLP is the independent registered public accounting firm of the
funds. The address of Deloitte & Touche LLP is 1100 Walnut Street, Kansas
City, Missouri 64106. As the independent registered public accounting firm of
the funds, Deloitte & Touche LLP provides services including auditing the
annual financial statements and financial highlights for each fund.
The
advisor places orders for equity portfolio transactions with broker-dealers, who
receive commissions for their services. Generally, commissions relating to
securities traded on foreign exchanges will be higher than commissions relating
to securities traded on U.S. exchanges. The advisor purchases and sells
fixed-income securities through principal transactions, meaning the advisor
normally purchases securities on a net basis directly from the issuer or a
primary market-maker acting as principal for the securities. The funds generally
do not pay a stated brokerage commission on these transactions, although the
purchase price for debt securities usually includes an undisclosed compensation.
Purchases of securities from underwriters typically include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
serving as market-makers typically include a dealer’s mark-up (i.e.,
a spread between the bid and asked prices).
Under
the management agreement between the funds and the advisor, the advisor has the
responsibility of selecting brokers and dealers to execute portfolio
transactions. The funds’ policy is to secure the most favorable prices and
execution of orders on its portfolio transactions. The advisor selects
broker-dealers on their perceived ability to obtain “best execution” in
effecting transactions in its clients’ portfolios. In selecting broker-dealers
to effect portfolio transactions relating to equity securities, the advisor
considers the full range and quality of a broker-dealer’s research and brokerage
services, including, but not limited to, the following:
•applicable
commission rates and other transaction costs charged by the
broker-dealer
•value
of research provided to the advisor by the broker-dealer (including economic
forecasts, fundamental and technical advice on individual securities, market
analysis, and advice, either directly or through publications or writings, as to
the value of securities, availability of securities or of purchasers/sellers of
securities)
•timeliness
of the broker-dealer’s trade executions
•efficiency
and accuracy of the broker-dealer’s clearance and settlement
processes
•broker-dealer’s
ability to provide data on securities executions
•financial
condition of the broker-dealer
•the
quality of the overall brokerage and customer service provided by the
broker-dealer
In
transactions to buy and sell fixed-income securities, the selection of the
broker-dealer is determined by the availability of the desired security and its
offering price, as well as the broker-dealer’s general execution and operational
and financial capabilities in the type of transaction involved. The advisor will
seek to obtain prompt execution of orders at the most favorable prices or
yields. The advisor does not consider the receipt of products or services other
than brokerage or research services in selecting broker-dealers.
On
an ongoing basis, the advisor seeks to determine what levels of commission rates
are reasonable in the marketplace. In evaluating the reasonableness of
commission rates, the advisor considers:
•rates
quoted by broker-dealers
•the
size of a particular transaction, in terms of the number of shares, dollar
amount, and number of clients involved
•the
ability of a broker-dealer to execute large trades while minimizing market
impact
•the
complexity of a particular transaction
•the
nature and character of the markets on which a particular trade takes
place
•the
level and type of business done with a particular firm over a period of
time
•the
ability of a broker-dealer to provide anonymity while executing
trades
•historical
commission rates
•rates
that other institutional investors are paying, based on publicly available
information
The
brokerage commissions paid by the funds may exceed those that another
broker-dealer might have charged for effecting the same transactions, because of
the value of the brokerage and research services provided by the broker-dealer.
Research services furnished by broker-dealers through whom the funds effect
securities transactions may be used by the advisor in servicing all of its
accounts, and not all such services may be used by the advisor in managing the
portfolios of the funds.
Pursuant
to its internal allocation procedures, the advisor regularly evaluates the
brokerage and research services provided by each broker-dealer that it uses. On
a periodic basis, members of the advisor’s portfolio management team assess the
quality and value of research and brokerage services provided by each
broker-dealer that provides execution services and research to the advisor for
its clients’ accounts. The results of the periodic assessments are used to add
or remove brokers from the approved brokers list, if needed, and to set research
budgets for the following period. Execution-only brokers are used where
deemed appropriate.
To
the extent creation or redemption transactions are conducted on a cash or “cash
in lieu” basis, a fund may contemporaneously transact with broker-dealers for
the purchase or sale of portfolio securities in connection with such
transactions. Such orders may be placed with an Authorized Participant in its
capacity as broker-dealer or with an affiliated broker-dealer of such Authorized
Participant. In such cases, the funds will require such broker-dealer to achieve
execution at a price that is at least as favorable to the fund as the value of
such securities used to calculate the fund’s NAV. The broker-dealer will be
required to reimburse the funds if the price (including applicable brokerage
commissions, taxes and transaction costs) at which such securities were bought
or sold exceeds the value of such securities used to calculate a fund’s NAV.
This amount will vary depending on the quality of the execution and may be
capped at amounts determined by the Advisor in its sole discretion.
Brokerage
commissions paid by a fund may vary significantly from year to year as a result
of changing asset levels throughout the year, portfolio turnover, varying market
conditions, and other factors.
In
the fiscal period ended August 31, 2023,
2022 and 2021,
the brokerage commissions including, as applicable, futures commissions, of each
fund are listed in the following table. As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2023 |
2022 |
2021 |
|
Avantis
All Equity Markets ETF |
$1,422¹ |
N/A |
N/A |
|
Avantis
All Equity Markets Value ETF |
$0² |
N/A |
N/A |
|
Avantis
All International Markets Equity ETF |
$0² |
N/A |
N/A |
|
Avantis
All International Markets Value ETF |
$0² |
N/A |
N/A |
| Avantis
Core Fixed Income ETF |
$2,051 |
$474 |
$23⁹ |
| Avantis
Core Municipal Fixed Income ETF |
$0 |
$0 |
$0¹⁰ |
| Avantis
Emerging Markets Equity ETF |
$564,631 |
$264,072 |
$168,698 |
|
Avantis
Emerging Markets Value ETF |
$86,612 |
$60,412⁴ |
N/A |
| Avantis
Inflation Focused Equity ETF |
$2¹ |
N/A |
N/A |
| Avantis
International Equity ETF |
$118,870 |
$168,234 |
$165,487 |
|
Avantis
International Large Cap Value ETF |
$67,659 |
$19,746⁴ |
N/A |
|
Avantis
International Small Cap Equity ETF |
$621³ |
N/A |
N/A |
| Avantis
International Small Cap Value ETF |
$293,289 |
$337,221 |
$119,063 |
|
Avantis
Moderate Allocation ETF |
$2² |
N/A |
N/A |
|
Avantis
Real Estate ETF |
$15,962 |
$16,339⁴ |
N/A |
|
Avantis
Responsible Emerging Markets Equity ETF |
$14,011 |
$5,534⁵ |
N/A |
|
Avantis
Responsible International Equity ETF |
$14,526 |
$5,533⁶ |
N/A |
|
Avantis
Responsible U.S. Equity ETF |
$1,334 |
$170⁶ |
N/A |
| Avantis
Short-Term Fixed Income ETF |
$300 |
$43 |
$1⁹ |
| Avantis
U.S. Equity ETF |
$30,517 |
$20,971 |
$14,472 |
|
Avantis
U.S. Large Cap Value ETF |
$26,969 |
$7,792⁷ |
N/A |
|
Avantis
U.S. Small Cap Equity ETF |
$20,701 |
$990⁸ |
N/A |
| Avantis
U.S. Small Cap Value ETF |
$274,645 |
$293,259 |
$146,918 |
1 For
the period September 27, 2022, the fund’s inception date, to August 31,
2023.
2 For
the period June 27, 2023, the fund’s inception date, to August 31,
2023.
3 For
the period July 18, 2023, the fund’s inception date, to August 31,
2023.
4 For
the period September 28, 2021, the fund’s inception date, to August 31,
2022.
5 For
the period March 28, 2022, the fund’s inception date, to August 31,
2022.
6 For
the period March 15, 2022, the fund’s inception date, to August 31,
2022.
7 For
the period September 21, 2021, the fund’s inception date, to August 31,
2022.
8 For
the period January 11, 2022, the fund’s inception date, to August 31,
2022.
9 For
the period October 13, 2020, the fund’s inception date, to August 31,
2021.
10 For
the period December 8, 2020, the fund’s inception date, to August 31,
2021.
The
funds’ distributor (ACIS) and investment advisor (ACIM) are wholly owned,
directly or indirectly, by ACC. Nomura Holdings, Inc. (Nomura) is an equity
investor in ACC. The funds listed below paid a subsidiary of Nomura (Affiliated
Broker) the following brokerage commissions for the fiscal years ended August
31, 2023,
2022 and 2021.
|
|
|
|
|
|
|
|
|
|
|
| |
| Fund |
2023 |
2022 |
2021 |
| Avantis
U.S. Equity ETF |
$0 |
$0 |
$1,361 |
| Avantis
U.S. Small Cap Value ETF |
$0 |
$454 |
$3,857 |
For
the fiscal year ended August 31, 2023,
the following table shows the percentage of each fund’s aggregate brokerage
commissions paid to the Affiliated Broker and the percentage of each fund’s
aggregate dollar amount of portfolio transactions involving the payment of
commissions effected through the Affiliated Broker.
|
|
|
|
|
|
|
|
| |
| Fund |
Percentage
of Brokerage Commissions |
Percentage
of Dollar Amount Portfolio Transactions |
| Avantis
U.S. Equity ETF |
0% |
0% |
| Avantis
U.S. Small Cap Value ETF |
0% |
0% |
Regular
Broker-Dealers
As
of the fiscal year ended August 31, 2023,
each of the funds listed below owned securities of its regular brokers or
dealers (as defined by Rule 10b-1 under the Investment Company Act) or of their
parent companies. As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
|
|
|
| |
|
Fund
|
Broker,
Dealer or Parent
|
Value
of Securities Owned as of August 31, 2023 |
| Avantis
All Equity Markets ETF |
None |
|
| Avantis
All Equity Markets Value ETF |
None |
|
| Avantis
All International Markets Equity ETF |
None |
|
| Avantis
All International Markets Value ETF |
None |
|
| Avantis
Core Fixed Income ETF |
Bank
of America Corp. |
$1,373,087 |
|
| The
Charles Schwab Corp. |
$602,189 |
|
| Citigroup,
Inc. |
$2,145,771 |
|
| The
Goldman Sachs Group, Inc. |
$2,050,466 |
|
| JPMorgan
Chase & Co. |
$2,012,649 |
|
| Morgan
Stanley |
$3,297,944 |
|
| The
Toronto-Dominion Bank |
$2,895,174 |
|
| Wells
Fargo & Co. |
$2,641,207 |
| Avantis
Core Municipal Fixed Income ETF |
None |
|
| Avantis
Emerging Markets Equity ETF |
None |
|
| Avantis
Emerging Markets Value ETF |
None |
|
| Avantis
Inflation Focused Equity ETF |
None |
|
| Avantis
International Equity ETF |
Barclays
PLC |
$7,874,693 |
|
| Deutsche
Bank AG |
$5,732,812 |
|
| The
Toronto-Dominion Bank |
$9,338,615 |
|
| UBS
Group AG |
$17,541,285 |
|
|
|
|
|
|
|
|
| |
|
Fund
|
Broker,
Dealer or Parent
|
Value
of Securities Owned as of August 31, 2023 |
| Avantis
International Large Cap Value ETF |
Barclays
PLC |
$2,280,201 |
|
| Deutsche
Bank AG |
$868,543 |
|
| The
Toronto-Dominion Bank |
$1,751,364 |
|
| UBS
Group AG |
$1,723,890 |
| Avantis
International Small Cap Equity ETF |
None |
|
| Avantis
International Small Cap Value ETF |
None |
|
| Avantis
Moderate Allocation ETF |
None |
|
| Avantis
Real Estate ETF |
None |
|
| Avantis
Responsible Emerging Markets Equity ETF |
None |
|
| Avantis
Responsible International Equity ETF |
Barclays
PLC |
$352,181 |
|
| Deutsche
Bank AG |
$174,632 |
|
| The
Toronto-Dominion Bank |
$435,645 |
|
| UBS
Group AG |
$577,577 |
| Avantis
Responsible U.S. Equity ETF |
Bank
of America Corp. |
$755,913 |
|
| The
Charles Schwab Corp. |
$412,335 |
|
| Citigroup,
Inc. |
$562,370 |
|
| The
Goldman Sachs Group, Inc. |
$785,193 |
|
| Jefferies
Financial Group Inc. |
$128,020 |
|
| JPMorgan
Chase & Co. |
$1,833,369 |
|
| LPL
Financial Holdings, Inc. |
$175,479 |
|
| Morgan
Stanley |
$696,016 |
|
| Raymond
James Financial, Inc. |
$285,217 |
| Avantis
Short-Term Fixed Income ETF |
Barclays
PLC |
$1,013,397 |
|
| The
Charles Schwab Corp. |
$547,956 |
|
| Citigroup,
Inc. |
$1,148,217 |
|
| The
Goldman Sachs Group, Inc. |
$1,058,676 |
|
| Jefferies
Financial Group Inc. |
$194,553 |
|
| JPMorgan
Chase & Co. |
$1,446,787 |
|
| The
Toronto-Dominion Bank |
$1,242,655 |
|
| Wells
Fargo & Co. |
$1,297,193 |
| Avantis
U.S. Equity ETF |
Bank
of America Corp. |
$16,806,899 |
|
| The
Charles Schwab Corp. |
$10,608,198 |
|
| Citigroup,
Inc. |
$10,135,085 |
|
| The
Goldman Sachs Group, Inc. |
$14,561,466 |
|
| Jefferies
Financial Group Inc. |
$1,268,637 |
|
| JPMorgan
Chase & Co. |
$42,888,153 |
|
| LPL
Financial Holdings, Inc. |
$3,424,031 |
|
| Morgan
Stanley |
$12,973,624 |
|
| Raymond
James Financial, Inc. |
$4,837,392 |
|
| Wells
Fargo & Co. |
$16,639,044 |
|
|
|
|
|
|
|
|
| |
|
Fund
|
Broker,
Dealer or Parent
|
Value
of Securities Owned as of August 31, 2023 |
| Avantis
U.S. Large Cap Value ETF |
Citigroup,
Inc. |
$4,140,479 |
|
| The
Goldman Sachs Group, Inc. |
$7,807,035 |
|
| JPMorgan
Chase & Co. |
$37,766,749 |
|
| Morgan
Stanley |
$8,159,328 |
|
| Raymond
James Financial, Inc. |
$1,707,641 |
| Avantis
U.S. Small Cap Equity ETF |
None |
|
| Avantis
U.S. Small Cap Value ETF |
None |
|
Each
of the funds named on the front of this statement of additional information is a
series of shares issued by the trust, and shares of each fund have equal voting
rights. In addition, each series (or fund) may be divided into separate classes.
Additional funds and classes may be added without a shareholder vote. Each fund
votes separately on matters affecting that fund exclusively. Voting rights are
not cumulative, so that investors holding more than 50% of the trust’s (all
funds’) outstanding shares may be able to elect a Board of Trustees. The trust
undertakes dollar-based voting, meaning that the number of votes a shareholder
is entitled to is based upon the dollar amount of the shareholder’s investment.
The election of trustees is determined by the votes received from all the
trust’s shareholders without regard to whether a majority of shares of any one
fund voted in favor of a particular nominee or all nominees as a
group.
The
assets belonging to each series are held separately by the custodian, and the
shares of each series represent a beneficial interest in the principal, earnings
and profit (or losses) of investments and other assets held for each series.
Within their respective series, all shares have equal redemption rights. Each
share, when issued, is fully paid and non-assessable.
Each
shareholder has rights to dividends and distributions declared by the fund he or
she owns and to the net assets of such fund upon its liquidation or dissolution
proportionate to his or her share ownership interest in the fund.
The
NAV for each fund is calculated by adding the value of all portfolio securities
and other assets, deducting liabilities, and dividing the result by the number
of shares outstanding. Expenses and interest earned on portfolio securities are
accrued daily.
Each
fund’s NAV is calculated as of the close of regular trading on the New York
Stock Exchange (the NYSE), each day the NYSE is open for business. The NYSE
usually closes at 4 p.m. Eastern time. The NYSE typically observes the following
holidays: New Year’s Day, Martin Luther King Jr. Day, Presidents’ Day, Good
Friday, Memorial Day, Juneteenth National Independence Day, Independence Day,
Labor Day, Thanksgiving Day and Christmas Day. Although the funds expect the
same holidays to be observed in the future, the NYSE may modify its holiday
schedule at any time.
Equity
securities (including underlying exchange-traded funds) and other equity
instruments for which market quotations are readily available are valued at the
last reported official closing price or sale price as of the time of valuation.
Futures contracts are generally valued at the settlement price as provided by
the exchange or clearing corporation. Portfolio securities primarily traded on
foreign securities exchanges that are open later than the NYSE are valued at the
last sale price reported at the time the NAV is determined.
Trading
in equity securities on European, African and Asian securities exchanges and
over-the-counter markets is normally completed at various times before the close
of business on each day that the NYSE is open. Model-derived fair value factors
may be applied to the market quotations of certain foreign equity securities
whose last closing price was before the time the NAV was determined. Factors are
based on observable market data and are generally provided by an independent
pricing service. Such factors are designed to estimate the price of the foreign
equity security that would have prevailed at the time the NAV is
determined.
Trading
of these securities in foreign markets may not take place on every day that the
NYSE is open. In addition, trading may take place in various foreign markets and
on some electronic trading networks on Saturdays or on other days when the NYSE
is not open and on which the funds’ NAVs are not calculated. Therefore, such
calculations do not take place contemporaneously with the determination of the
prices of many of the portfolio securities used in such calculation, and the
value of the funds’ portfolios may be affected on days when shares of the funds
may not be purchased or sold.
When
market quotations are not readily available or are believed by the valuation
designee to be unreliable, securities and other assets are valued at fair value
as determined in accordance with its policies and procedures.
Debt
securities and swap agreements are generally valued using evaluated prices
obtained from approved independent pricing services or at the most recent mean
of the bid and asked prices provided by investment dealers in accordance with
the valuation policies and procedures.
Pricing
services will generally provide evaluated prices based on accepted industry
conventions, which may require the pricing service to exercise its own
discretion. Evaluated prices are commonly derived through utilization of market
models that take into consideration various market factors, assumptions, and
security characteristics including, but not limited to; trade data, quotations
from broker-dealers and active market makers, relevant yield curve and spread
data, related sector levels, creditworthiness, trade data or market information
on comparable securities and other relevant security-specific information.
Pricing services may exercise discretion including, but not limited to;
selecting and designing the valuation methodology, determining the source and
relevance of inputs and assumptions, and assessing price challenges received
from its clients. Pricing services may provide prices when market quotations are
not available or when certain pricing inputs may be stale. The use of different
models or inputs may result in pricing services determining a different price
for the same security. Pricing services generally value fixed-income securities
assuming orderly transactions of an institutional round lot size but may
consider trades of smaller sizes in their models. The fund may hold or transact
in such securities in smaller lot sizes, sometimes referred to as “odd-lots.”
Securities may trade at different prices when transacted in different lot sizes.
The methods used by the pricing services and the valuations so established are
reviewed by the valuation designee under the oversight of the Board of
Trustees.
There
are a number of pricing services available, and the valuation designee, on the
basis of ongoing evaluation of these services, may use other pricing services or
discontinue the use of any pricing service in whole or in part.
Securities
maturing within 60 days of the valuation date may also be valued at cost, plus
or minus any amortized discount or premium, unless it is determined, based on
established guidelines and procedures, that this would not result in fair
valuation of a given security. Other assets and securities for which market
quotations or the methods described above are not readily available are valued
in good faith in accordance with the valuation designee’s
procedures.
The
value of any security or other asset denominated in a currency other than U.S.
dollars is then converted to U.S. dollars at the prevailing foreign exchange
rate at the time the fund’s NAV is determined. Securities that are neither
listed on a securities exchange or traded over the counter may be priced using
the mean of the bid and asked prices obtained from an independent broker who is
an established market maker in the security.
Each
fund intends to qualify annually as a regulated investment company (RIC) under
Subchapter M of the Internal Revenue Code of 1986, as amended (the Code). RICs
generally are not subject to federal and state income taxes. To qualify as a RIC
a fund must, among other requirements, distribute substantially all of its net
investment income and net realized capital gains (if any) to investors each
year. If a fund were not eligible to be treated as a RIC, it would be liable for
taxes at the fund level on all of its income, significantly reducing its
distributions to investors and eliminating investors’ ability to treat
distributions received from the fund in the same manner in which they were
realized by the fund. Under certain circumstances, the Code allows funds to cure
deficiencies that would otherwise result in the loss of RIC status, including by
paying a fund-level tax.
To
qualify as a RIC, a fund must meet certain requirements of the Code, among which
are requirements relating to sources of its income and diversification of its
assets. A fund is also required to distribute 90% of its investment company
taxable income (and for Avantis Core Municipal Fixed Income ETF, 90% of its net
tax exempt income) each year. Additionally, a fund must declare dividends by
December 31 of each year equal to at least 98% of ordinary income (as of
December 31) and 98.2% of capital gains (as of October 31) to avoid the
nondeductible 4% federal excise tax on any undistributed amounts.
A
fund would be classified as a personal holding company (PHC) for federal income
tax purposes for its initial taxable year or subsequent taxable years if at
least half of the fund’s outstanding shares are owned (directly or beneficially)
at any time during the last half of such taxable year directly or indirectly by
five or fewer individuals with pension trusts, private foundations and certain
other tax-exempt trusts being considered as individuals for this purpose. A PHC
is potentially subject to a 20% tax on all its investment income and net
short-term gains not distributed to shareholders by the middle of the third
month following the close of its taxable year. To avoid being subject to income
tax or PHC tax liability, the funds intend to distribute all income and net
realized gain in a timely manner, but there can be no assurance that the funds
will be successful each year in doing so.
Certain
funds may raise their initial capital contribution through a nontaxable in-kind
contribution of securities in exchange for shares of the ETF. An investment in
shares of these certain funds may be less tax-efficient than an investment in
other ETFs because the fund expects its initial portfolio to consist of
securities with a low tax basis. As a result, the fund may realize higher
amounts of realized gains and may be required to distribute capital gains,
including long-term capital gains even in the initial year of the fund’s
operations.
Certain
bonds purchased by the funds may be treated as bonds that were originally issued
at a discount. Original issue discount represents interest for federal income
tax purposes and can generally be defined as the difference between the price at
which a security was issued and its stated redemption price at maturity.
Although no cash is actually received by a fund until the maturity of the bond,
original issue discount is treated for federal income tax purposes as income
earned by a fund over the term of the bond, and therefore is subject to the
distribution requirements of the Code. The annual amount of income earned on
such a bond by a fund generally is determined on the basis of a constant yield
to maturity that takes into account the semiannual compounding of accrued
interest.
Original
issue discount on an obligation with interest exempt from federal income tax
will constitute tax-exempt interest income to Avantis Core Municipal Fixed
Income ETF.
In
addition, some of the bonds may be purchased by a fund at a discount that
exceeds the original issue discount on such bonds, if any. This additional
discount represents market discount for federal income tax purposes. The gain
realized on the disposition of any bond having market discount generally will be
treated as taxable ordinary income to the extent it does not exceed the accrued
market discount on such bond (unless a fund elects to include market discount in
income in tax years to which it is attributable or if the amount is considered
de
minimis).
Generally, market discount accrues on a daily basis for each day the bond is
held by a fund on a constant yield to maturity basis. In the case of any debt
security having a fixed maturity date of not more than one year from date of
issue, the gain realized on disposition generally will be treated as a
short-term capital gain. If a fund holds the foregoing kinds of securities,
it may be required to pay out as an income distribution each year an amount that
is greater than the total amount of cash interest the fund actually received,
which distributions may be made from the assets of the fund or, if necessary, by
disposition of portfolio securities, including at a time when such disposition
may not otherwise be advantageous.
Investments
in lower-rated securities may present special tax issues for the funds to the
extent actual or anticipated defaults may be more likely with respect to these
types of securities. Tax rules are not entirely clear about issues such as
whether and to what extent a fund should recognize market discount on such a
debt obligation, when a fund may cease to accrue interest, original issue
discount or market discount, when and to what extent a fund may take deductions
for bad debts or worthless securities and how a fund should allocate payments
received on obligations in default between principal and income.
A
fund’s transactions in foreign currencies, forward contracts, options, futures
contracts (including options and futures contracts on foreign currencies), swaps
and short sales will be subject to special provisions of the Code that, among
other things, may affect the character of gains and losses realized by the fund
(i.e.,
may affect whether gains or losses are ordinary or capital), accelerate
recognition of income to the fund, defer fund losses or accelerate fund gains,
and affect the determination of whether capital gains and losses are
characterized as long-term or short-term capital gains or losses. These rules
could therefore affect the character, amount and timing of distributions to
shareholders. These provisions also may require a fund to mark-to-market certain
types of the positions in its portfolio (i.e.,
treat them as if they were sold), which may cause the fund to recognize income
without receiving cash with which to make distributions in amounts necessary to
satisfy the distribution requirements of the Code for relief from income and
excise taxes. A fund will monitor its transactions and may make such tax
elections as fund management deems appropriate with respect to these
transactions.
A
fund’s investments in foreign securities may be subject to withholding and other
taxes imposed by foreign countries. However, tax conventions between certain
countries and the United States may reduce or eliminate such taxes. Any foreign
taxes paid by a fund will reduce its dividend distributions to
investors.
If
more than 50% of the value of a fund’s total assets at the end of its fiscal
year consists of securities of foreign corporations, the fund may make an
election with the Internal Revenue Service with respect to such fiscal year so
that fund shareholders may be able to claim a foreign tax credit. If such an
election is made, the eligible foreign taxes will be treated as income received
by you. In order for you to utilize the foreign tax credit, you must have held
your shares for 16 days or more during the 31-day period, beginning 15 days
prior to the ex-dividend date. The fund must meet a similar holding period
requirement with respect to securities to which a dividend is attributable. Any
foreign taxes withheld on payments made “in lieu of” dividends or interest with
respect to loaned securities will not qualify for the pass-through foreign tax
credit to shareholders. Any portion of the foreign tax credit that is ineligible
will be deducted in computing net investment income.
If
a fund purchases the securities of certain foreign investment entities called
passive foreign investment companies (PFIC), capital gains on the sale of those
holdings will be deemed ordinary income regardless of how long the fund holds
the investment. The fund also may be subject to corporate income tax and an
interest charge on certain dividends and capital gains earned from these
investments, regardless of whether such income and gains are distributed to the
fund. To avoid such tax and interest, the fund may elect to treat PFICs as
sold on the last day of its fiscal year, mark-to-market these securities, and
recognize any unrealized gains (or losses, to the extent of previously
recognized gains) as ordinary income each year.
The
amount of capital losses that can be carried forward and used in any single year
is subject to an annual limitation if there is a more than 50% “change in
ownership” of the fund. An ownership change generally results when shareholders
owning 5% or more of the fund increase their aggregate holdings by more than 50%
over a three-year lookback period. An ownership change could result in capital
loss carryovers being used at a slower rate, thereby reducing the fund’s ability
to offset capital gains with those losses.
As
of August 31, 2023,
the funds in the table below had the following capital loss carryovers. When a
fund has a capital loss carryover, it does not make capital gains distributions
until the loss has been offset. The Regulated Investment Company Modernization
Act of 2010 allows the funds to carry forward capital losses incurred in future
taxable years for an unlimited period. As
new funds, Avantis Credit ETF, Avantis Emerging Markets ex-China Equity ETF,
Avantis Emerging Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity
ETF, Avantis U.S. Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF are not
included in the table below.
|
|
|
|
|
| |
| Fund |
Unlimited |
| Avantis
All Equity Markets ETF |
$(78,582) |
| Avantis
All Equity Markets Value ETF |
— |
| Avantis
All International Markets Equity ETF |
— |
| Avantis
All International Markets Value ETF |
— |
| Avantis
Core Fixed Income ETF |
$(17,354,753) |
| Avantis
Core Municipal Fixed Income ETF |
$(46,471) |
| Avantis
Emerging Markets Equity ETF |
$(35,744,258) |
| Avantis
Emerging Markets Value ETF |
$(14,239,663) |
| Avantis
Inflation Focused Equity ETF |
$(108,211) |
| Avantis
International Equity ETF |
$(39,898,314) |
| Avantis
International Large Cap Value ETF |
$(6,537,538) |
| Avantis
International Small Cap Equity ETF |
— |
| Avantis
International Small Cap Value ETF |
$(203,047,556) |
| Avantis
Moderate Allocation ETF |
— |
| Avantis
Real Estate ETF |
$(2,266,551) |
| Avantis
Responsible Emerging Markets Equity ETF |
$(349,826) |
| Avantis
Responsible International Equity ETF |
$(276,859) |
| Avantis
Responsible U.S. Equity ETF |
$(611,247) |
| Avantis
Short-Term Fixed Income ETF |
$(2,960,266) |
| Avantis
U.S. Equity ETF |
$(30,507,138) |
| Avantis
U.S. Large Cap Value ETF |
$(37,409,501) |
| Avantis
U.S. Small Cap Equity ETF |
$(2,743,471) |
| Avantis
U.S. Small Cap Value ETF |
$(248,873,183) |
If
you have not complied with certain provisions of the Internal Revenue Code and
Regulations, federal law may require withholding and remission to the IRS at the
applicable federal withholding rate on reportable payments (which may include
dividends, capital gains distributions and proceeds from the sale of fund
shares). Those regulations require you to certify that the Social Security
number or tax identification number you provide is correct and that you are not
subject to withholding for previous under-reporting to the IRS.
If
fund shares are purchased through taxable accounts, distributions either of cash
or additional shares of net investment income (if not considered exempt from
federal tax) and net short-term capital gains are taxable to you as ordinary
income, unless they are designated as qualified dividend income and you meet a
minimum required holding period with respect to your shares of a fund, in which
case such distributions are taxed at the same rate as long-term capital gains.
Qualified dividend income is a dividend received by a fund from the stock of a
domestic or qualifying foreign corporation, provided that the fund has held the
stock for a required holding period and the stock was not on loan at the time of
the dividend. The required holding period for qualified dividend income is met
if the underlying shares are held more than 60 days in the 121-day period
beginning 60 days prior to the ex-dividend date. Dividends received by the funds
on shares of stock of domestic corporations may qualify for the 70% dividends
received deduction when distributed to corporate shareholders to the extent that
the fund held those shares for more than 45 days.
Although
dividends generally will be treated as distributed when paid, any dividend
declared by a fund in October, November or December and payable to shareholders
of record in such a month that is paid during the following January will be
treated for U.S. federal income tax purposes as received by shareholders on
December 31 of the calendar year in which it was declared.
Distributions
from gains on assets held by a fund longer than 12 months are taxable as
long-term gains regardless of the length of time you have held your shares in
the fund. If you purchase shares in the fund and sell them at a loss within six
months, your loss on the sale of those shares will be treated as a long-term
capital loss to the extent of any long-term capital gains dividend you received
on those shares.
Each
fund,
other than a fund classified as a PHC,
may use the “equalization method” of accounting to allocate a portion of its
earnings and profits to redemption proceeds. Although using this method
generally will not affect a fund’s total returns, it may reduce the amount that
a fund would otherwise distribute to continuing shareholders by reducing the
effect of redemptions of fund shares on fund distributions to
shareholders.
A
sale of shares of a fund will be a taxable transaction for federal income tax
purposes, and you generally will recognize a gain or loss in an amount equal to
the difference between the basis of the shares and the amount received. If a
loss is realized on the sale of fund
shares,
the reinvestment in additional fund shares within 30 days before or after the
sale may be subject to the “wash sale” rules of the Code, postponing the
recognition of such loss for federal income tax purposes.
A
3.8% Medicare contribution tax is imposed on net investment income, including
interest, dividends and capital gains, provided you meet specified income
levels. This tax is not imposed on tax-exempt interest.
Any
non-U.S. investors in the funds may be subject to U.S. withholding and estate
tax and are encouraged to consult their tax advisors prior to investing. Foreign
shareholders (i.e.,
nonresident alien individuals and foreign corporations, partnerships, trusts and
estates) are generally subject to U.S. withholding tax at the rate of 30% (or a
lower tax treaty rate) on distributions derived from taxable ordinary income. A
fund may, under certain circumstances, report all or a portion of a dividend as
an interest-related dividend or a short-term capital gain dividend, which would
generally be exempt from this 30% U.S. withholding tax, provided certain other
requirements are met. Short-term capital gain dividends received by a
nonresident alien individual who is present in the U.S. for a period or periods
aggregating 183 days or more during the taxable year are not exempt from this
30% withholding tax. Gains realized by foreign shareholders from the sale or
other disposition of shares of a fund generally are not subject to U.S.
taxation, unless the recipient is an individual who is physically present in the
U.S. for 183 days or more per year. Foreign shareholders who fail to provide an
applicable IRS form may be subject to backup withholding on certain payments
from a fund. Backup withholding will not be applied to payments that are subject
to the 30% (or lower applicable treaty rate) withholding tax described in this
paragraph. Different tax consequences may result if the foreign shareholder is
engaged in a trade or business within the United States. In addition, the tax
consequences to a foreign shareholder entitled to claim the benefits of a tax
treaty may be different than those described above. Unless certain non-U.S.
entities that hold fund shares comply with IRS requirements that will generally
require them to report information regarding U.S. persons investing in, or
holding accounts with, such entities, a 30% withholding tax may apply to fund
distributions payable to such entities and with respect to redemptions and
certain capital gain dividends payable to such entities after December 31, 2018.
A non-U.S. shareholder may be exempt from the withholding described in this
paragraph under an applicable intergovernmental agreement between the U.S. and a
foreign government, provided that the shareholder and the applicable foreign
government comply with the terms of the agreement. To qualify for an exemption
from the backup withholding described above, the foreign shareholder must comply
with special certification and filing requirements.
Creations
and Redemptions of Creation Units
An
Authorized Participant who exchanges securities for Creation Units generally
will recognize a gain or a loss. The gain or loss will be equal to the
difference between the market value of the Creation Units at the time and the
sum of the exchanger’s aggregate basis in the securities surrendered plus the
amount of cash paid for such Creation Units. A person who redeems Creation Units
will generally recognize a gain or loss equal to the difference between the
exchanger’s basis in the Creation Units and the sum of the aggregate market
value of any securities received plus the amount of any cash received for such
Creation Units. The IRS, however, may assert that a loss realized upon an
exchange of 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.
Any
capital gain or loss realized upon the creation of Creation Units will generally
be treated as long-term capital gain or loss if the securities exchanged for
such Creation Units have been held for more than one year. Any capital gain or
loss realized upon the redemption of Creation Units will generally be treated as
long-term capital gain or loss if the shares comprising the Creation Units have
been held for more than one year. Otherwise, such capital gains or losses will
generally be treated as short-term capital gain or loss. Any loss upon a
redemption of Creation Units held for six months or less will be treated as a
long-term capital loss to the extent of any amounts treated as distributions to
the applicable Authorized Participant of long-term capital gain with respect to
the Creation Units (including any amounts credited to the Authorized Participant
as undistributed capital gains).
The
funds have the right to reject an order for Creation Units if the purchaser (or
group of purchasers) would, upon obtaining the shares so ordered, own 80% or
more of the outstanding shares of a fund and if, pursuant to sections 351 and
362 of the Code, the fund would have a basis in the deposit securities different
from the market value of such securities on the date of deposit. A fund also has
the right to require information necessary to determine beneficial share
ownership for purposes of the 80% determination. If a fund does issue Creation
Units to a purchaser (or group of purchasers) that would, upon obtaining the
Shares so ordered, own 80% or more of the outstanding shares of the fund, the
purchaser (or group of purchasers) may not recognize gain or loss upon the
exchange of securities for Creation Units.
If
a fund redeems Creation Units in cash, it may recognize more capital gains than
it will if it redeems Creation Units in-kind.
Alternative
Minimum Tax
While
the interest on bonds issued to finance essential state and local government
operations is generally exempt from regular federal income tax, interest on
certain private activity bonds issued after August 7, 1986, while exempt from
regular federal income tax, constitutes a tax-preference item for taxpayers in
determining alternative minimum tax (AMT) liability under the Code and the
income tax provisions of several states.
Avantis
Core Municipal Fixed Income ETF may invest in private activity bonds. The
interest on private activity bonds could subject a shareholder to, or increase
liability under, the federal AMT, depending on the shareholder’s tax
situation.
All
distributions derived from interest exempt from regular federal income tax may
subject corporate shareholders to, or increase their liability under, the AMT
because these distributions are included in the corporation’s adjusted current
earnings.
American
Century Investments or your financial intermediary will inform fund shareholders
annually of the amount of distributions derived from interest payments on
private activity bonds.
Investments
in REITs
An
investment by the funds in the equity securities of real estate investment
trusts (REITs) may result in the funds’ receipt of cash distributions from the
REIT in excess of the REIT’s earnings. Avantis Real Estate ETF may choose to
distribute these amounts, which could be considered a return of capital (ROC) to
fund shareholders for U.S. federal income tax purposes. Although ROC
distributions are not taxable to the fund shareholders, these distributions will
reduce shareholders’ cost basis in the funds, thus reducing any loss or
increasing any gain on a subsequent taxable disposition of such shares by a
shareholder. Dividends received by the funds from REITs will not qualify for the
corporate dividends-received deduction and generally will not constitute
qualified dividend income.
Taxation
of Certain Mortgage REITs
The
funds may invest in REITs that hold residual interests in real estate mortgage
investment conduits. Under Treasury regulations, a portion of a fund’s income
from a REIT that is attributable to the REIT’s residual interest in a real
estate mortgage investment conduit (REMIC) (referred to in the Code as an
“excess inclusion”) will be subject to federal income tax in all events. These
regulations provide that excess inclusion income of a RIC, such as a fund, will
be allocated to shareholders of the RIC in proportion to the dividends received
by them with the same consequences as if these shareholders held the related
REMIC residual interest directly. In general, excess inclusion income allocated
to shareholders (i) cannot be offset by net operating losses (subject to a
limited exception for certain thrift institutions) and (ii) will constitute
unrelated business taxable income to entities (including a qualified pension
plan, an individual retirement account, a 401(k) plan, a Keogh plan or other
tax-exempt entity) subject to tax on unrelated business inclusion income, thus
requiring the entity to pay tax on some income. In addition, if at any time
during any taxable year a “disqualified organization” (as defined in the Code)
is a record holder of a share in a RIC, then the RIC will be subject to a tax
equal to that portion of its excess inclusion income for the taxable year that
is allocable to the disqualified organization, multiplied by the highest federal
income tax rate imposed on corporations.
Distributions
by the funds also may be subject to state and local taxes, even if all or a
substantial part of those distributions are derived from interest on U.S.
government obligations which, if you received such interest directly, would be
exempt from state income tax. However, most, but not all, states allow this tax
exemption to pass through to fund shareholders when a fund pays distributions to
its shareholders. You should consult your tax advisor about the tax status of
these distributions in your own state.
The
information above is only a summary of some of the tax considerations affecting
the funds and their U.S. shareholders. No attempt has been made to discuss
individual tax consequences. A prospective investor should consult with his or
her tax advisors or state or local tax authorities to determine whether the
funds are suitable investments.
The
financial statements and financial highlights of the funds, except for
Avantis
Credit ETF, Avantis Emerging Markets ex-China Equity ETF, Avantis Emerging
Markets Small Cap Equity ETF, Avantis U.S. Large Cap Equity ETF, Avantis U.S.
Mid Cap Equity ETF and Avantis U.S. Mid Cap Value ETF, for the fiscal period
ended August 31, 2023
have been audited by Deloitte & Touche LLP, independent registered public
accounting firm. Their Reports of Independent Registered Public Accounting Firm
and the financial statements included in the annual
reports
of each of these funds for the fiscal period
ended August 31, 2023
are incorporated herein by reference.
The
table below shows the names, addresses, and percentage ownership of each DTC
Participant that owns of record 5% or more of the outstanding shares of the
funds, as of November
30, 2023.
Generally, the funds do not have information concerning the beneficial ownership
of accounts held in the names of DTC Participants.
|
|
|
|
|
|
|
|
| |
| Fund |
Shareholder |
Percentage
of
Outstanding
Shares
Owned
of Record
|
| Avantis
All Equity Markets ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
45% |
|
| National
Financial Services LLC
New York, NY |
33% |
|
| Vanguard
Marketing Corporation
Malvern, PA |
9% |
| Avantis
All Equity Markets Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
52% |
|
| National
Financial Services LLC
New York, NY |
28% |
|
| Vanguard
Marketing Corporation
Malvern, PA |
12% |
| Avantis
All International Markets Equity ETF |
|
| Pershing
LLC
Jersey City, NJ |
58% |
|
| JP
Morgan Clearing Corporation
Brooklyn, NY |
12% |
|
| National
Financial Services LLC
New York, NY |
10% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
9% |
| Avantis
All International Markets Value ETF |
|
| Vanguard
Marketing Corporation
Malvern, PA |
40% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
37% |
|
| JP
Morgan Clearing Corporation
Brooklyn, NY |
8% |
| Avantis
Core Fixed Income ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
58% |
|
| National
Financial Services LLC
New York, NY |
14% |
|
| State
Street Bank and Trust Company
North Quincy, MA |
8% |
|
| Pershing
LLC
Jersey City, NJ |
7% |
| Avantis
Core Municipal Fixed Income ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
40% |
|
| Pershing
LLC
Jersey City, NJ |
21% |
|
| National
Financial Services LLC
New York, NY |
15% |
|
| SEI
Private Trust Company/C/O/ GWP
Oaks, PA |
10% |
| Avantis
Credit ETF |
|
| None |
|
|
|
|
|
|
|
|
|
| |
| Avantis
Emerging Markets Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
58% |
|
| National
Financial Services LLC
New York, NY |
16% |
| Avantis
Emerging Markets ex-China Equity ETF |
|
| None |
|
| Avantis
Emerging Markets Small Cap Equity ETF |
|
| Goldman
Sachs & Co
New York, NY |
34% |
|
| JP
Morgan Clearing Corporation
Brooklyn, NY |
27% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
22% |
|
|
State
Street Bank and Trust Company
North
Quincy, MA
Includes
16.48% beneficially owned by Avantis All Equity Markets
ETF. |
16% |
| Avantis
Emerging Markets Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
51% |
|
| National
Financial Services LLC
New York, NY |
20% |
|
| Vanguard
Marketing Corporation
Malvern, PA |
9% |
| Avantis
Inflation Focused Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
53% |
|
| Pershing
LLC
Jersey City, NJ |
13% |
|
| Merrill
Lynch, Pierce, Fenner & Smith Inc.
New York, NY |
12% |
|
| National
Financial Services LLC
New York, NY |
8% |
|
| LPL
Financial LLC
San Diego, CA |
5% |
| Avantis
International Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
52% |
|
| National
Financial Services LLC
New York, NY |
18% |
|
| Pershing
LLC
Jersey City, NJ |
7% |
| Avantis
International Large Cap Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
59% |
|
| National
Financial Services LLC
New York, NY |
19% |
|
| State
Street Bank and Trust Company
North Quincy, MA |
8% |
| Avantis
International Small Cap Equity ETF |
|
| State
Street Bank and Trust Company
North Quincy, MA |
46% |
|
| JP
Morgan Clearing Corporation
Brooklyn, NY |
23% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
23% |
|
| Vanguard
Marketing Corporation
Malvern, PA |
7% |
|
|
|
|
|
|
|
|
| |
| Avantis
International Small Cap Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
46% |
|
| Edward
D. Jones
St. Louis, MO |
21% |
|
| National
Financial Services LLC
New York, NY |
13% |
|
| Pershing
LLC
Jersey City, NJ |
6% |
| Avantis
Moderate Allocation ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
66% |
|
| National
Financial Services LLC
New York, NY |
15% |
|
| Vanguard
Marketing Corporation
Malvern, PA |
12% |
| Avantis
Real Estate ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
75% |
|
| National
Financial Services LLC
New York, NY |
11% |
| Avantis
Responsible Emerging Markets Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
38% |
|
| Raymond
James & Associates, LLC
St. Petersburg, FL |
17% |
|
| National
Financial Services LLC
New York, NY |
15% |
|
| SEI
Private Trust Company/C/O/ GWP
Oaks, PA |
12% |
| Avantis
Responsible International Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
36% |
|
| National
Financial Services LLC
New York, NY |
26% |
|
| Raymond
James & Associates, LLC
St. Petersburg, FL |
18% |
|
| Goldman
Sachs & Co
New York, NY |
6% |
| Avantis
Responsible U.S. Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
33% |
|
| SEI
Private Trust Company/C/O GWP
Oaks, PA |
22% |
|
| National
Financial Services LLC
New York, NY |
22% |
|
| Raymond
James & Associates, LLC
St. Petersburg, FL |
18% |
|
|
|
|
|
|
|
|
| |
| Avantis
Short-Term Fixed Income ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
54% |
|
| SEI
Private Trust Company/C/O GWP
Oaks, PA |
11% |
|
| National
Financial Services LLC
New York, NY |
10% |
|
| Pershing
LLC
Jersey City, NJ |
10% |
|
| State
Street Bank and Trust Company
North Quincy, MA |
6% |
| Avantis
U.S. Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
45% |
|
| National
Financial Services LLC
New York, NY |
21% |
|
| Pershing
LLC
Jersey City, NJ |
8% |
| Avantis
U.S. Large Cap Equity ETF |
|
| Citibank,
N.A.
Tampa, FL |
93% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
6% |
| Avantis
U.S. Large Cap Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
55% |
|
| National
Financial Services LLC
New York, NY |
17% |
|
| Pershing
LLC
Jersey City, NJ |
8% |
|
| LPL
Financial LLC
San Diego, CA |
7% |
| Avantis
U.S. Mid Cap Equity ETF |
|
| State
Street Bank and Trust/State Street Total ETF
North Quincy, MA |
68% |
|
| Merrill
Lynch, Pierce, Fenner & Smith Inc.
New York, NY |
29% |
| Avantis
U.S. Mid Cap Value ETF |
|
| State
Street Bank and Trust/State Street Total ETF
North Quincy, MA |
76% |
|
| Merrill
Lynch, Pierce, Fenner & Smith Inc.
New York, NY |
16% |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
6% |
| Avantis
U.S. Small Cap Equity ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
64% |
|
| National
Financial Services LLC
New York, NY |
18% |
|
| Raymond
James & Associates, LLC
St. Petersburg, FL |
6% |
|
| Pershing
LLC
Jersey City, NJ |
5% |
|
|
|
|
|
|
|
|
| |
| Avantis
U.S. Small Cap Value ETF |
|
| Charles
Schwab & Co., Inc.
San Francisco, CA |
45% |
|
| National
Financial Services LLC
New York, NY |
24% |
|
| Pershing
LLC
Jersey City, NJ |
5% |
|
| LPL
Financial LLC
San Diego, CA |
5% |
As
of November
30, 2023,
Eduardo Repetto beneficially owned 25.88%
of Avantis Inflation Focused Equity ETF, 8.88% of Avantis All International
Markets Value ETF and 5.09% of Avantis Core Municipal Fixed Income
ETF.
A
shareholder owning beneficially more than 25% of the trust’s outstanding shares
may be considered a controlling person. The vote of any such person could have a
more significant effect on matters presented at a shareholders’ meeting than
votes of other shareholders. Although Charles Schwab & Co Inc, San
Francisco, California, is the record owner of more than 25% of the shares of the
trust, it is not a control person because it is not the beneficial owner of such
shares. As of November
30, 2023,
the officers and trustees of the funds, as a group, owned
4.34% of Avantis Responsible Emerging Markets Equity ETF; 3.80% of Avantis
Responsible International Equity ETF; 3.32% of Avantis All Equity Markets
ETF;
and less than 1% of the remaining funds’ outstanding shares.
As
described in the prospectuses, the funds invest in fixed-income securities.
Those investments, however, are subject to certain credit quality restrictions,
as noted in the prospectuses and in this statement of additional information.
The following is a summary of the rating categories referenced in the prospectus
disclosure.
|
|
|
|
|
| |
| Ratings
of Corporate and Municipal Debt Securities |
| Standard
& Poor’s Long-Term Issue Credit Ratings* |
| Category |
Definition |
| AAA |
An
obligation rated ‘AAA’ has the highest rating assigned by Standard &
Poor’s. The obligor’s capacity to meet its financial commitment on the
obligation is extremely strong. |
| AA |
An
obligation rated ‘AA’ differs from the highest-rated obligations only to a
small degree. The obligor’s capacity to meet its financial commitment on
the obligation is very strong. |
| A |
An
obligation rated ‘A’ is somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions than obligations in
higher-rated categories. However, the obligor’s capacity to meet its
financial commitment on the obligation is still strong. |
| BBB |
An
obligation rated ‘BBB’ exhibits adequate protection parameters. However,
adverse economic conditions or changing circumstances are more likely to
lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. |
| BB;B;
CCC; CC; and C |
Obligations
rated ‘BB’, ‘B’, ‘CCC’, ‘CC’, and ‘C’ are regarded as having significant
speculative characteristics. ‘BB’ indicates the least degree of
speculation and ‘C’ the highest. While such obligations will likely have
some quality and protective characteristics, these may be outweighed by
large uncertainties or major exposures to adverse conditions. |
| BB |
An
obligation rated ‘BB’ is less vulnerable to nonpayment than other
speculative issues. However, it faces major ongoing uncertainties or
exposure to adverse business, financial, or economic conditions which
could lead to the obligor’s inadequate capacity to meet its financial
commitment on the obligation. |
| B |
An
obligation rated ‘B’ is more vulnerable to nonpayment than obligations
rated ‘BB’, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or
economic conditions will likely impair the obligor’s capacity or
willingness to meet its financial commitment on the
obligation. |
| CCC |
An
obligation rated ‘CCC’ is currently vulnerable to nonpayment, and is
dependent upon favorable business, financial, and economic conditions for
the obligor to meet its financial commitment on the obligation. In the
event of adverse business, financial, or economic conditions, the obligor
is not likely to have the capacity to meet its financial commitment on the
obligation. |
| CC |
An
obligation rated ‘CC’ is currently highly vulnerable to nonpayment. The
‘CC’ rating is used when a default has not yet occurred, but Standard
& Poor’s expects default to be a virtual certainty, regardless of the
anticipated time to default. |
| C |
An
obligation rated ‘C’ is currently highly vulnerable to nonpayment, and the
obligation is expected to have lower relative seniority or lower ultimate
recovery compared to obligations that are rated higher. |
| D |
An
obligation rated ‘D’ is in default or in breach of an imputed promise. For
non-hybrid capital instruments, the ‘D’ rating category is used when
payments on an obligation are not made on the date due, unless Standard
& Poor’s believes that such payments will be made within five business
days in the absence of a stated grace period or within the earlier of the
stated grace period or 30 calendar days. The ‘D’ rating also will be used
upon the filing of a bankruptcy petition or the taking of similar action
and where default on an obligation is a virtual certainty, for example due
to automatic stay provisions. An obligation’s rating is lowered to ‘D’ if
it is subject to a distressed exchange offer. |
| NR |
This
indicates that no rating has been requested, or that there is insufficient
information on which to base a rating, or that Standard & Poor’s does
not rate a particular obligation as a matter of
policy. |
* The
ratings from “AA” to “CCC” may be modified by the addition of a plus (+) or
minus (-) sign to show relative standing within the major rating
categories.
|
|
|
|
|
| |
| Moody’s
Investors Service, Inc. Global Long-Term Rating Scale |
| Category |
| Aaa |
Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest
level of credit risk. |
| Aa |
Obligations
rated Aa are judged to be of high quality and are subject to very low
credit risk. |
| A |
Obligations
rated A are judged to be upper-medium grade and are subject to low credit
risk. |
| Baa |
Obligations
rated Baa are judged to be medium-grade and subject to moderate credit
risk and as such may possess certain speculative
characteristics. |
| Ba |
Obligations
rated Ba are judged to be speculative and are subject to substantial
credit risk. |
| B |
Obligations
rated B are considered speculative and are subject to high credit
risk. |
| Caa |
Obligations
rated Caa are judged to be speculative of poor standing and are subject to
very high credit risk. |
| Ca |
Obligations
rated Ca are highly speculative and are likely in, or very near, default,
with some prospect of recovery of principal and interest. |
| C |
Obligations
rated C are the lowest rated and are typically in default, with little
prospect for recovery of principal or
interest. |
Note:
Moody’s appends numerical modifiers 1, 2, and 3 to each generic rating
classification from Aa through Caa. The modifier 1 indicates that the obligation
ranks in the higher end of its generic rating category; the modifier 2 indicates
a mid-range ranking; and the modifier 3 indicates a ranking in the lower end of
that generic rating category. Additionally, a “(hyb)” indicator is appended to
all ratings of hybrid securities issued by banks, insurers, finance companies,
and securities firms.
|
|
|
|
|
| |
| Fitch
Investors Service, Inc. Long-Term Ratings |
| Category |
| AAA |
Highest
credit quality. ‘AAA’
ratings denote the lowest expectation of credit risk. They are assigned
only in cases of exceptionally strong capacity for payment of financial
commitments. This capacity is highly unlikely to be adversely affected by
foreseeable events. |
| AA |
Very
high credit quality. ‘AA’
ratings denote expectations of very low credit risk. They indicate very
strong capacity for payment of financial commitments. This capacity is not
significantly vulnerable to foreseeable events. |
| A |
High
credit quality. ‘A’
ratings denote expectations of low credit risk. The capacity for payment
of financial commitments is considered strong. This capacity may,
nevertheless, be more vulnerable to adverse business or economic
conditions than is the case for higher ratings. |
| BBB |
Good
credit quality. ‘BBB’
ratings indicate that expectations of credit risk are currently low. The
capacity for payment of financial commitments is considered adequate but
adverse business or economic conditions are more likely to impair this
capacity. |
| BB |
Speculative.
‘BB’
ratings indicate an elevated vulnerability to credit risk, particularly in
the event of adverse changes in business or economic conditions over time;
however, business or financial alternatives may be available to allow
financial commitments to be met. |
| B |
Highly
speculative. ‘B’
ratings indicate that material credit risk is present. |
| CCC |
Substantial
credit risk. ‘CCC’
ratings indicate that substantial credit risk is
present. |
| CC |
Very
high levels of credit risk. ‘CC’
ratings indicate very high levels of credit risk. |
| C |
Exceptionally
high levels of credit risk. ‘C’
indicates exceptionally high levels of credit
risk. |
Defaulted
obligations typically are not assigned ‘RD’ or ‘D’ ratings, but are instead
rated in the ‘B’ to ‘C’ rating categories, depending upon their recovery
prospects and other relevant characteristics. This approach better aligns
obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Notes:
The modifiers “+” or “-” may be appended to a rating to denote relative status
within major rating categories. Such suffixes are not added to the ‘AAA’
obligation rating category, or to corporate finance obligation ratings in the
categories below ‘CCC’.
|
|
|
|
|
| |
| Standard
& Poor’s Corporate Short-Term Note Ratings |
| Category |
| A-1 |
A
short-term obligation rated ‘A-1’ is rated in the highest category by
Standard & Poor’s. The obligor’s capacity to meet its financial
commitment on the obligation is strong. Within this category, certain
obligations are designated with a plus sign (+). This indicates that the
obligor’s capacity to meet its financial commitment on these obligations
is extremely strong. |
| A-2 |
A
short-term obligation rated ‘A-2’ is somewhat more susceptible to the
adverse effects of changes in circumstances and economic conditions than
obligations in higher rating categories. However, the obligor’s capacity
to meet its financial commitment on the obligation is
satisfactory. |
| A-3 |
A
short-term obligation rated ‘A-3’ exhibits adequate protection parameters.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial
commitment on the obligation. |
| B |
A
short-term obligation rated ‘B’ is regarded as vulnerable and has
significant speculative characteristics. The obligor currently has the
capacity to meet its financial commitments; however, it faces major
ongoing uncertainties which could lead to the obligor’s inadequate
capacity to meet its financial commitments. |
| C |
A
short-term obligation rated ‘C’ is currently vulnerable to nonpayment and
is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the
obligation. |
| D |
A
short-term obligation rated ‘D’ is in default or in breach of an imputed
promise. For non-hybrid capital instruments, the ‘D’ rating category is
used when payments on an obligation are not made on the date due, unless
Standard & Poor’s believes that such payments will be made within any
stated grace period. However, any stated grace period longer than five
business days will be treated as five business days. The ‘D’ rating also
will be used upon the filing of a bankruptcy petition or the taking of a
similar action and where default on an obligation is a virtual certainty,
for example due to automatic stay provisions. An obligation’s rating is
lowered to ‘D’ if it is subject to a distressed exchange
offer. |
|
|
|
|
|
| |
| Moody’s
Global Short-Term Rating Scale |
| Category |
| P-1 |
Issuers
(or supporting institutions) rated Prime-1 have a superior ability to
repay short-term debt obligations. |
| P-2 |
Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay
short-term debt obligations. |
| P-3 |
Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to
repay short-term obligations. |
| NP |
Issuers
(or supporting institutions) rated Not Prime do not fall within any of the
Prime rating categories. |
|
|
|
|
|
| |
| Fitch
Investors Service, Inc. Short-Term Ratings |
| Category |
| F1 |
Highest
short-term credit quality. Indicates
the strongest intrinsic capacity for timely payment of financial
commitments; may have an added “+” to denote any exceptionally strong
credit feature. |
| F2 |
Good
short-term credit quality. Good
intrinsic capacity for timely payment of financial
commitments. |
| F3 |
Fair
short-term credit quality. The
intrinsic capacity for timely payment of financial commitments is
adequate. |
| B |
Speculative
short-term credit quality. Minimal
capacity for timely payment of financial commitments, plus heightened
vulnerability to near term adverse changes in financial and economic
conditions. |
| C |
High
short-term default risk. Default
is a real possibility. |
| RD |
Restricted
default. Indicates
an entity that has defaulted on one or more of its financial commitments,
although it continues to meet other financial obligations. Typically
applicable to entity ratings only. |
| D |
Default
Indicates
a broad-based default event for an entity, or the default of a short-term
obligation. |
|
|
|
|
|
| |
| Standard
& Poor’s Municipal Short-Term Note Ratings |
| Category |
| SP-1 |
Strong
capacity to pay principal and interest. An issue determined to possess a
very strong capacity to pay debt service is given a plus (+)
designation. |
| SP-2 |
Satisfactory
capacity to pay principal and interest, with some vulnerability to adverse
financial and economic changes over the term of the notes. |
| SP-3 |
Speculative
capacity to pay principal and interest. |
|
|
|
|
|
| |
| Moody’s
US Municipal Short-Term Debt Ratings |
| Category |
| MIG
1 |
This
designation denotes superior credit quality. Excellent protection is
afforded by established cash flows, highly reliable liquidity support, or
demonstrated broad-based access to the market for
refinancing. |
| MIG
2 |
This
designation denotes strong credit quality. Margins of protection are
ample, although not as large as in the preceding group. |
| MIG
3 |
This
designation denotes acceptable credit quality. Liquidity and cash-flow
protection may be narrow, and market access for refinancing is likely to
be less well-established. |
| SG |
This
designation denotes speculative-grade credit quality. Debt instruments in
this category may lack sufficient margins of
protection. |
|
|
|
|
|
| |
| Moody’s
Demand Obligation Ratings |
| Category |
| VMIG
1 |
This
designation denotes superior credit quality. Excellent protection is
afforded by the superior short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment of purchase price upon demand. |
| VMIG
2 |
This
designation denotes strong credit quality. Good protection is afforded by
the strong short-term credit strength of the liquidity provider and
structural and legal protections that ensure the timely payment of
purchase price upon demand. |
| VMIG
3 |
This
designation denotes acceptable credit quality. Adequate protection is
afforded by the satisfactory short-term credit strength of the liquidity
provider and structural and legal protections that ensure the timely
payment of purchase price upon demand. |
| SG |
This
designation denotes speculative-grade credit quality. Demand features
rated in this category may be supported by a liquidity provider that does
not have an investment grade short-term rating or may lack the structural
and/or legal protections necessary to ensure the timely payment of
purchase price upon demand. |
American
Century Investment Management, Inc. (the “Adviser”) is the investment manager
for a variety of advisory clients, including the American Century family of
funds. In such capacity, the Adviser has been delegated the authority to vote
proxies with respect to investments held in the accounts it manages. The
following is a statement of the proxy voting policies that have been adopted by
the Adviser. In the exercise of proxy voting authority which has been delegated
to it by particular clients, the Adviser will apply the following policies in
accordance with, and subject to, any specific policies that have been adopted by
the client and communicated to and accepted by the Adviser in
writing.
I. General
Principles
In
providing the service of voting client proxies, the Adviser is guided by general
fiduciary principles, must act prudently, solely in the interest of its clients,
and must not subordinate client interests to unrelated objectives. Except as
otherwise indicated in these Policies, the Adviser will vote all proxies with
respect to investments held in the client accounts it manages. The Adviser will
attempt to consider all factors of its vote that could affect the value of the
investment. Although in most instances the Adviser will vote proxies
consistently across all client accounts, the votes will be based on the best
interests of each client. As a result, accounts managed by the Adviser may at
times vote differently on the same proposals. Examples of when an account’s vote
might differ from other accounts managed by the Adviser include, but are not
limited to, proxy contests and proposed mergers. In short, the Adviser will vote
proxies in the manner that it believes will do the most to maximize shareholder
value.
II. Specific
Proxy Matters
A. Routine
Matters
1. Election
of Trustees
a) Generally.
The
Adviser will generally support the election of trustees that result in a board
made up of a majority of independent trustees. In general, the Adviser will vote
in favor of management’s trustee nominees if they are running unopposed. The
Adviser believes that management is in the best possible position to evaluate
the qualifications of trustees and the needs and dynamics of a particular board.
The Adviser of course maintains the ability to vote against any candidate whom
it feels is not qualified or if there are specific concerns about the
individual, such as allegations of criminal wrongdoing or breach of fiduciary
responsibilities. Additional information the Adviser may consider concerning
trustee nominees include, but is not limited to, whether (i) there is an
adequate explanation for repeated absences at board meetings, (ii) the nominee
receives non-board fee compensation, or (iii) there is a family relationship
between the nominee and the company’s chief executive officer or controlling
shareholder, and/or
(iv) the nominee has sufficient time and commitment to serve effectively in
light of the nominee’s service on other public company boards.
When management’s nominees are opposed in a proxy contest, the Adviser will
evaluate which nominees’ publicly-announced management policies and goals are
most likely to maximize shareholder value, as well as the past performance of
the incumbents.
b) Committee
Service. The
Adviser will withhold votes for non-independent trustees who serve on the audit
and/or
compensation committees of the board.
c) Classification
of Boards. The
Adviser will support proposals that seek to declassify boards. Conversely, the
Adviser will oppose efforts to adopt classified board structures.
d) Majority
Independent Board. The
Adviser will support proposals calling for a majority of independent trustees on
a board. The Adviser believes that a majority of independent trustees can help
to facilitate objective decision making and enhances accountability to
shareholders.
e) Majority
Vote Standard for Trustee Elections.
The
Adviser will vote in favor of proposals calling for trustees to be elected by an
affirmative majority of the votes cast in a board election, provided that the
proposal allows for a plurality voting standard in the case of contested
elections. The Adviser may consider voting against such shareholder proposals
where a company’s board has adopted an alternative measure, such as a trustee
resignation policy, that provides a meaningful alternative to the majority
voting standard and appropriately addresses situations where an incumbent
trustee fails to receive the support of the majority of the votes cast in an
uncontested election.
f) Withholding
Campaigns. The
Adviser will support proposals calling for shareholders to withhold votes for
trustees where such actions will advance the principles set forth in paragraphs
(1) through (5) above.
2. Ratification
of Selection of Auditors
The
Adviser will generally rely on the judgment of the issuer’s audit committee in
selecting the independent auditors who will provide the best service to the
company. The Adviser believes that independence of the auditors is paramount
and
will vote against auditors whose independence appears to be impaired. The
Adviser will vote against proposed auditors in those circumstances where (1) an
auditor has a financial interest in or association with the company, and is
therefore not independent; (2) non-audit fees comprise more than 50% of the
total fees paid by the company to the audit firm; or (3) there is reason to
believe that the independent auditor has previously rendered an opinion to the
issuer that is either inaccurate or not indicative of the company’s financial
position.
B. Compensation
Matters
1. Executive
Compensation
a) Advisory
Vote on Compensation. The
Adviser believes there are more effective ways to convey concerns about
compensation than through an advisory vote on compensation (such as voting
against specific excessive incentive plans or withholding votes from
compensation committee members). The Adviser will consider and vote on a
case-by-case basis on say-on-pay proposals and will generally support management
proposals unless there
are inadequate risk-mitigation features or other
specific concerns exist, including if the Adviser concludes that executive
compensation is (i) misaligned with shareholder interests, (ii) unreasonable in
amount, or (iii) not in the aggregate meaningfully tied to the company’s
performance.
b) Frequency
of Advisory Votes on Compensation. The
Adviser generally supports the triennial option for the frequency of say-on-pay
proposals, but will consider management recommendations for an alternative
approach.
2. Equity
Based Compensation Plans
The
Adviser believes that equity-based incentive plans are economically significant
issues upon which shareholders are entitled to vote. The Adviser recognizes that
equity-based compensation plans can be useful in attracting and maintaining
desirable employees. The cost associated with such plans must be measured if
plans are to be used appropriately to maximize shareholder value. The Adviser
will conduct a case-by-case analysis of each stock option, stock bonus or
similar plan or amendment, and generally approve management’s recommendations
with respect to adoption of or amendments to a company’s equity-based
compensation plans, provided that the total number of shares reserved under all
of a company’s plans is reasonable and not excessively dilutive.
The
Adviser will review equity-based compensation plans or amendments thereto on a
case-by-case basis. Factors that will be considered in the determination include
the company’s overall capitalization, the performance of the company relative to
its peers, and the maturity of the company and its industry; for example,
technology companies often use options broadly throughout its employee base
which may justify somewhat greater dilution.
Amendments
which are proposed in order to bring a company’s plan within applicable legal
requirements will be reviewed by the Adviser’s legal counsel; amendments to
executive bonus plans to comply with IRS Section 162(m) disclosure requirements,
for example, are generally approved.
The
Adviser will generally vote against the adoption of plans or plan amendments
that:
•Provide
for immediate vesting of all stock options in the event of a change of control
of the company without reasonable safeguards against abuse (see “Anti-Takeover
Proposals” below);
•Reset
outstanding stock options at a lower strike price unless accompanied by a
corresponding and proportionate reduction in the number of shares designated.
The Adviser will generally oppose adoption of stock option plans that explicitly
or historically permit repricing of stock options, regardless of the number of
shares reserved for issuance, since their effect is impossible to
evaluate;
•Establish
restriction periods shorter than three years for restricted stock
grants;
•Do
not reasonably associate awards to performance of the company; or
•Are
excessively dilutive to the company.
C. Anti-Takeover
Proposals
In
general, the Adviser will vote against any proposal, whether made by management
or shareholders, which the Adviser believes would materially discourage a
potential acquisition or takeover. In most cases an acquisition or takeover of a
particular company will increase share value. The adoption of anti-takeover
measures may prevent or frustrate a bid from being made, may prevent
consummation of the acquisition, and may have a negative effect on share price
when no acquisition proposal is pending. The items below discuss specific
anti-takeover proposals.
1. Cumulative
Voting
The
Adviser will vote in favor of any proposal to adopt cumulative voting and will
vote against any proposal to eliminate cumulative voting that is already in
place, except in cases where a company has a staggered board. Cumulative voting
gives minority shareholders a stronger voice in the company and a greater chance
for representation on the board. The Adviser believes that the elimination of
cumulative voting constitutes an anti-takeover measure.
2. Staggered
Board
If
a company has a “staggered board,” its trustees are elected for terms of more
than one year and only a segment of the board stands for election in any year.
Therefore, a potential acquiror cannot replace the entire board in one year even
if it controls a majority of the votes. Although staggered boards may provide
some degree of continuity and stability of leadership and direction to the board
of trustees, the Adviser believes that staggered boards are primarily an
anti-takeover device and will vote against establishing them and for eliminating
them. However, the Adviser does not necessarily vote against the re-election of
trustees serving on staggered boards.
3. “Blank
Check” Preferred Stock
Blank
check preferred stock gives the board of trustees the ability to issue preferred
stock, without further shareholder approval, with such rights, preferences,
privileges and restrictions as may be set by the board. In response to a hostile
takeover attempt, the board could issue such stock to a friendly party or “white
knight” or could establish conversion or other rights in the preferred stock
which would dilute the common stock and make an acquisition impossible or less
attractive. The argument in favor of blank check preferred stock is that it
gives the board flexibility in pursuing financing, acquisitions or other proper
corporate purposes without incurring the time or expense of a shareholder vote.
Generally, the Adviser will vote against blank check preferred stock. However,
the Adviser may vote in favor of blank check preferred if the proxy statement
discloses that such stock is limited to use for a specific, proper corporate
objective as a financing instrument.
4. Elimination
of Preemptive Rights
When
a company grants preemptive rights, existing shareholders are given an
opportunity to maintain their proportional ownership when new shares are issued.
A proposal to eliminate preemptive rights is a request from management to revoke
that right.
While
preemptive rights will protect the shareholder from having its equity diluted,
it may also decrease a company’s ability to raise capital through stock
offerings or use stock for acquisitions or other proper corporate purposes.
Preemptive rights may therefore result in a lower market value for the company’s
stock. In the long term, shareholders could be adversely affected by preemptive
rights. The Adviser generally votes against proposals to grant preemptive
rights, and for proposals to eliminate preemptive rights.
5. Non-targeted
Share Repurchase
A
non-targeted share repurchase is generally used by company management to prevent
the value of stock held by existing shareholders from deteriorating. A
non-targeted share repurchase may reflect management’s belief in the favorable
business prospects of the company. The Adviser finds no disadvantageous effects
of a non-targeted share repurchase and will generally vote for the approval of a
non-targeted share repurchase subject to analysis of the company’s financial
condition.
6. Increase
in Authorized Common Stock
The
issuance of new common stock can also be viewed as an anti-takeover measure,
although its effect on shareholder value would appear to be less significant
than the adoption of blank check preferred. The Adviser will evaluate the amount
of the proposed increase and the purpose or purposes for which the increase is
sought. If the increase is not excessive and is sought for proper corporate
purposes, the increase will be approved. Proper corporate purposes might
include, for example, the creation of additional stock to accommodate a stock
split or stock dividend, additional stock required for a proposed acquisition,
or additional stock required to be reserved upon exercise of employee stock
option plans or employee stock purchase plans. Generally, the Adviser will vote
in favor of an increase in authorized common stock of up to 100%; increases in
excess of 100% are evaluated on a case-by-case basis, and will be voted
affirmatively if management has provided sound justification for the
increase.
7. “Supermajority”
Voting Provisions or Super Voting Share Classes
A
“supermajority” voting provision is a provision placed in a company’s charter
documents which would require a “supermajority” (ranging from 66 to 90%) of
shareholders and shareholder votes to approve any type of acquisition of the
company. A super voting share class grants one class of shareholders a greater
per-share vote than those of shareholders of other voting classes. The Adviser
believes that these are standard anti-takeover measures and will generally vote
against them. The supermajority provision makes an acquisition more
time-consuming and expensive for the acquiror. A super voting share class favors
one group of shareholders disproportionately to economic interest. Both are
often proposed in conjunction with other anti-takeover measures.
8. “Fair
Price” Amendments
This
is another type of charter amendment that would require an offeror to pay a
“fair” and uniform price to all shareholders in an acquisition. In general, fair
price amendments are designed to protect shareholders from coercive,
two-tier
tender offers in which some shareholders may be merged out on disadvantageous
terms. Fair price amendments also have an anti-takeover impact, although their
adoption is generally believed to have less of a negative effect on stock price
than other anti-takeover measures. The Adviser will carefully examine all fair
price proposals. In general, the Adviser will vote against fair price proposals
unless the Adviser concludes that it is likely that the share price will not be
negatively affected and the proposal will not have the effect of discouraging
acquisition proposals.
9. Limiting
the Right to Call Special Shareholder Meetings.
The
corporation statutes of many states allow minority shareholders at a certain
threshold level of ownership (frequently 10%) to call a special meeting of
shareholders. This right can be eliminated (or the threshold increased) by
amendment to the company’s charter documents. The Adviser believes that the
right to call a special shareholder meeting is significant for minority
shareholders; the elimination of such right will be viewed as an anti-takeover
measure and the Adviser will generally vote against proposals attempting to
eliminate this right and for proposals attempting to restore it.
10. Poison
Pills or Shareholder Rights Plans
Many
companies have now adopted some version of a poison pill plan (also known as a
shareholder rights plan). Poison pill plans generally provide for the issuance
of additional equity securities or rights to purchase equity securities upon the
occurrence of certain hostile events, such as the acquisition of a large block
of stock.
The
basic argument against poison pills is that they depress share value, discourage
offers for the company and serve to “entrench” management. The basic argument in
favor of poison pills is that they give management more time and leverage to
deal with a takeover bid and, as a result, shareholders may receive a better
price. The Adviser believes that the potential benefits of a poison pill plan
are outweighed by the potential detriments. The Adviser will generally vote
against all forms of poison pills.
The
Adviser will, however, consider on a case-by-case basis poison pills that are
very limited in time and preclusive effect. The Adviser will generally vote in
favor of such a poison pill if it is linked to a business strategy that will -
in our view - likely result in greater value for shareholders, if the term is
less than three years, and if shareholder approval is required to reinstate the
expired plan or adopt a new plan at the end of this term.
11. Golden
Parachutes
Golden
parachute arrangements provide substantial compensation to executives who are
terminated as a result of a takeover or change in control of their company. The
existence of such plans in reasonable amounts probably has only a slight
anti-takeover effect. In voting, the Adviser will evaluate the specifics of the
plan presented.
12. Reincorporation
Reincorporation
in a new state is often proposed as one part of a package of anti-takeover
measures. Several states (such as Pennsylvania, Ohio and Indiana) now provide
some type of legislation that greatly discourages takeovers. Management believes
that Delaware in particular is beneficial as a corporate domicile because of the
well-developed body of statutes and case law dealing with corporate
acquisitions.
The
Adviser will examine reincorporation proposals on a case-by-case basis.
Generally, if the Adviser believes that the reincorporation will result in
greater protection from takeovers, the reincorporation proposal will be opposed.
The Adviser will also oppose reincorporation proposals involving jurisdictions
that specify that trustees can recognize non-shareholder interests over those of
shareholders. When reincorporation is proposed for a legitimate business purpose
and without the negative effects identified above, the Adviser will generally
vote affirmatively.
13. Confidential
Voting
Companies
that have not previously adopted a “confidential voting” policy allow management
to view the results of shareholder votes. This gives management the opportunity
to contact those shareholders voting against management in an effort to change
their votes.
Proponents
of secret ballots argue that confidential voting enables shareholders to vote on
all issues on the basis of merit without pressure from management to influence
their decision. Opponents argue that confidential voting is more expensive and
unnecessary; also, holding shares in a nominee name maintains shareholders’
confidentiality. The Adviser believes that the only way to insure anonymity of
votes is through confidential voting, and that the benefits of confidential
voting outweigh the incremental additional cost of administering a confidential
voting system. Therefore, the Adviser will generally vote in favor of any
proposal to adopt confidential voting.
14. Opting
In or Out of State Takeover Laws
State
takeover laws typically are designed to make it more difficult to acquire a
corporation organized in that state. The Adviser believes that the decision of
whether or not to accept or reject offers of merger or acquisition should be
made by the shareholders, without unreasonably restrictive state laws that may
impose ownership thresholds or waiting periods on potential acquirors.
Therefore, the Adviser will generally vote in favor of opting out of restrictive
state takeover laws.
D. Transaction
Related Proposals
The
Adviser will review transaction related proposals, such as mergers,
acquisitions, and corporate reorganizations, on a case-by-case basis, taking
into consideration the impact of the transaction on each client account. In some
instances, such as the approval of a proposed merger, a transaction may have a
differential impact on client accounts depending on the securities held in each
account. For example, whether a merger is in the best interest of a client
account may be influenced by whether an account holds, and in what proportion,
the stock of both the acquirer and the acquiror. In these circumstances, the
Adviser may determine that it is in the best interests of the accounts to vote
the accounts’ shares differently on proposals related to the same
transaction.
E. Other
Matters
1. Proposals
Involving Environmental, Social, and Governance (ESG”) Matters
The
Adviser believes that certain
ESG issues can potentially impact an issuer's long-term financial performance
and has developed an analytical framework, as well as a proprietary assessment
tool, to integrate risks and opportunities stemming from ESG issues into our
investment process. This ESG integration process extends to our proxy voting
practices in that our Sustainable
Research
Team analyzes on a case-by-case basis the financial materiality and potential
risks or economic impact of the ESG issues underpinning proxy proposals and
makes voting recommendations based thereon for the Adviser's consideration. The
Sustainable
Research
Team evaluates
ESG-related
proposals based
on
a rational linkage between the
proposal, its potential
economic impact, and its potential to maximize long-term shareholder
value.
Where
the economic effect of such proposals is unclear and there is not a specific
written client-mandate, the Adviser believes it is generally impossible to know
how to vote in a manner that would accurately reflect the views of the Adviser’s
clients, and, therefore, the Adviser will generally rely on management’s
assessment of the economic effect if the Adviser believes the assessment is not
unreasonable.
Shareholders
may also introduce proposals which are the subject of existing law or
regulation. Examples of such proposals would include a proposal to require
disclosure of a company’s contributions to political action committees or a
proposal to require a company to adopt a non-smoking workplace policy. The
Adviser believes that such proposals may be better addressed outside the
corporate arena and, absent a potential economic impact, will generally vote
with management’s recommendation. In addition, the Adviser will generally vote
against any proposal which would require a company to adopt practices or
procedures which go beyond the requirements of existing, directly applicable
law.
2. Anti-Greenmail
Proposals
“Anti-greenmail”
proposals generally limit the right of a corporation, without a shareholder
vote, to pay a premium or buy out a 5% or greater shareholder. Management often
argues that they should not be restricted from negotiating a deal to buy out a
significant shareholder at a premium if they believe it is in the best interest
of the company. Institutional shareholders generally believe that all
shareholders should be able to vote on such a significant use of corporate
assets. The Adviser believes that any repurchase by the company at a premium
price of a large block of stock should be subject to a shareholder vote.
Accordingly, it will generally vote in favor of anti-greenmail
proposals.
3. Indemnification
The
Adviser will generally vote in favor of a corporation’s proposal to indemnify
its officers and trustees in accordance with applicable state law.
Indemnification arrangements are often necessary in order to attract and retain
qualified trustees. The adoption of such proposals appears to have little effect
on share value.
4. Non-Stock
Incentive Plans
Management
may propose a variety of cash-based incentive or bonus plans to stimulate
employee performance. In general, the cash or other corporate assets required
for most incentive plans is not material, and the Adviser will vote in favor of
such proposals, particularly when the proposal is recommended in order to comply
with IRC Section 162(m) regarding salary disclosure requirements. Case-by-case
determinations will be made of the appropriateness of the amount of shareholder
value transferred by proposed plans.
5. Trustee
Tenure
These
proposals ask that age and term restrictions be placed on the board of trustees.
The Adviser believes that these types of blanket restrictions are not
necessarily in the best interests of shareholders and therefore will vote
against such proposals, unless they have been recommended by
management.
6. Trustees’
Stock Options Plans
The
Adviser believes that stock options are an appropriate form of compensation for
trustees, and the Adviser will generally vote for trustee stock option plans
which are reasonable and do not result in excessive shareholder dilution.
Analysis of such proposals will be made on a case-by-case basis, and will take
into account total board compensation and
the
company’s total exposure to stock option plan dilution.
7. Trustee
Share Ownership
The
Adviser will generally vote against shareholder proposals which would require
trustees to hold a minimum number of the company’s shares to serve on the Board
of Trustees, in the belief that such ownership should be at the discretion of
Board members.
8. Non-U.S.
Proxies
The
Adviser will generally evaluate non-U.S. proxies in the context of the voting
policies expressed herein but will also, where feasible, take into consideration
differing laws, regulations, and practices in the relevant foreign market in
determining if and how to vote. There may also be circumstances when
practicalities and costs involved with non-U.S. investing make it
disadvantageous to vote shares. For instance, the Adviser generally does not
vote proxies in circumstances where share blocking restrictions apply, when
meeting attendance is required in person, or when current share ownership
disclosure is required.
III. Use
of Proxy Advisory Services
The
Adviser may retain proxy advisory firms to provide services in connection with
voting proxies, including, without limitation, to provide information on
shareholder meeting dates and proxy materials, translate proxy materials printed
in a foreign language, provide research on proxy proposals and voting
recommendations in accordance with the voting policies expressed herein, provide
systems to assist with casting the proxy votes, and provide reports and assist
with preparation of filings concerning the proxies voted.
Prior
to the selection of a proxy advisory firm and periodically thereafter, the
Adviser will consider whether the proxy advisory firm has the capacity and
competency to adequately analyze proxy issues and the ability to make
recommendations based on material accurate information in an impartial manner.
Such considerations may include some or all of the following (i) periodic
sampling of votes cast through the firm’s systems to determine that votes are in
accordance with the Adviser’s policies and its clients best interests, (ii)
onsite visits to the proxy advisory firm’s office and/or discussions with the
firm to determine whether the firm continues to have the resources (e.g.,
staffing, personnel, technology, etc.) capacity and competency to carry out its
obligations to the Adviser, (iii) a review of the firm’s policies and
procedures, with a focus on those relating to identifying and addressing
conflicts of interest and monitoring that current and accurate information is
used in creating recommendations, (iv) requesting that the firm notify the
Adviser if there is a change in the firm’s material policies and procedures,
particularly with respect to conflicts, or material business practices
(e.g.,
entering or exiting new lines of business), and reviewing any such change, and
(v) in case of an error made by the firm, discussing the error with the firm and
determining whether appropriate corrective and preventative action is being
taken. In the event the Adviser discovers an error in the research or voting
recommendations provided by the firm, it will take reasonable steps to
investigate the error and seek to determine whether the firm is taking
reasonable steps to reduce similar errors in the future.
While
the Adviser takes into account information from many different sources,
including independent proxy advisory services, the decision on how to vote
proxies will be made in accordance with these policies.
IV. Monitoring
Potential Conflicts of Interest
Corporate
management has a strong interest in the outcome of proposals submitted to
shareholders. As a consequence, management often seeks to influence large
shareholders to vote with their recommendations on particularly controversial
matters. In the vast majority of cases, these communications with large
shareholders amount to little more than advocacy for management’s positions and
give the Adviser’s staff the opportunity to ask additional questions about the
matter being presented. Companies with which the Adviser has direct business
relationships could theoretically use these relationships to attempt to unduly
influence the manner in which the Adviser votes on matters for its clients. To
ensure that such a conflict of interest does not affect proxy votes cast for the
Adviser’s clients, our proxy voting personnel regularly catalog companies with
whom the Adviser has significant business relationships; all discretionary
(including case-by-case) voting for these companies will be voted by the client
or an appropriate fiduciary responsible for the client (e.g.,
a committee of the independent trustees of a fund or the trustee of a retirement
plan).
In
addition, to avoid any potential conflict of interest that may arise when one
American Century fund owns shares of another American Century fund, the Adviser
will “echo vote” such shares, if possible. Echo voting means the Adviser will
vote the shares in the same proportion as the vote of all of the other holders
of the fund’s shares. So, for example, if shareholders of a fund cast 80% of
their votes in favor of a proposal and 20% against the proposal, any American
Century fund that owns shares of such fund will cast 80% of its shares in favor
of the proposal and 20% against. When this is not possible where American
Century funds are the only shareholders, the shares of the underlying fund will
be voted in the same proportion as the vote of the shareholders of a
corresponding American Century policy portfolio for proposals common to both
funds. In
the
case where there
is no policy portfolio or
the policy portfolio does not have a common proposal, shares will be voted in
consultation with a committee of the independent trustees.
************************************************************
The
voting policies expressed above are of course subject to modification in certain
circumstances and will be reexamined from time to time. With respect to matters
that do not fit in the categories stated above, the Adviser will exercise its
best judgment as a fiduciary to vote in the manner which will most enhance
shareholder value.
Case-by-case
determinations will be made by the Adviser’s staff, which is overseen by the
General Counsel of the Adviser, in consultation with equity managers. Electronic
records will be kept of all votes made.
Notes
|
|
| |
|
Avantis
Investors by American Century Investments
avantisinvestors.com
|
Financial
Professionals
P.O. Box 419786
Kansas City, Missouri
64141-6786
833-9AVANTIS |
|
|
|
|
|
|
|
|
| |
Investment
Company Act File No. 811-23305
CL-SAI-95487 2401 |
|
|
