Counterparty Risk.
Because
many derivatives are an obligation of the counterparty rather than a direct
investment in the reference asset, the Fund may suffer losses potentially equal
to, or greater than, the full value of the derivative if the counterparty fails
to perform its obligations under the derivative agreement as a result of
bankruptcy or otherwise. Any loss would result in a reduction in the NAV of the
Fund and will likely impair the Fund’s ability to achieve its investment
objective. If there are only a few potential counterparties, the Fund, subject
to applicable law, may enter into swap, option or other derivative transactions
with as few as one counterparty at any time.
Forward Currency Contracts Risk.
A forward foreign currency contract involves a negotiated obligation to
purchase or sell a specific currency at a future date (with or without delivery
required), which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price set at the time of the contract. Forward
foreign currency contracts are not traded on exchanges; rather, a bank or dealer
will act as agent or as principal in order to make or take future delivery,
exposing the Fund to counterparty risk.
Futures Risk
. In addition
to the above, risks associated with the use of futures contracts include the
following: (i) an imperfect correlation between movements in prices of futures
contracts and movements in the value of the reference asset(s) it is designed to
simulate; and (ii) the possibility of an illiquid secondary market for a futures
contract and the resulting inability to close a position prior to its maturity
date. When the Fund purchases or sells a futures contract, it is subject to
daily variation margin calls that could be substantial. If the Fund has
insufficient cash to meet daily variation margin requirements, it might need to
sell securities at a time when such sales are disadvantageous.
Leveraging Risk.
The
Fund’s investment in derivative instruments provide leveraged exposure. The
Fund’s investment in these instruments generally requires a small investment
relative to the amount of investment exposure assumed. As a result, such
investments may give rise to losses that exceed the amount invested in those
instruments. The use of derivatives may expose the Fund to potentially dramatic
losses (or gains) in the value of a derivative or other financial instrument
and, thus, in the value the Fund’s portfolio. The cost of investing in such
instruments generally increases as interest rates increase, which will lower the
Fund’s return.
Options Risk.
An option is
a contract that gives the purchaser (holder) of the option, in return for a
premium, the right to buy from (call) or sell to (put) the seller (writer) of
the option the security or currency underlying the option at a specified
exercise price at any time during the term of the option (normally not exceeding
nine months). The writer of an option has the obligation upon exercise of the
option to deliver the underlying security or currency upon payment of the
exercise price or to pay the exercise price upon delivery of the underlying
security or currency. Options are derivatives, which, as described above, can be
illiquid, can imperfectly correlate with the reference asset(s), and are subject
to segregation requirements.
Options on Futures Contracts
Risk.
An option on a futures contract provides the holder with the right
to enter into a “long” position in the underlying futures contract, in the case
of a call option, or a “short” position in the underlying futures contract in
the case of a put option, at a fixed exercise price to a stated expiration date.
Upon exercise of the option by the holder, the contract market clearing house
establishes a corresponding short position for the writer of the option, in the
case of a call option, or a corresponding long position, in the case of a put
option. Options are derivatives, which, as described above, can be illiquid, can
imperfectly correlate with the reference asset(s), and are subject to
segregation requirements.
Swaps Risk.
Swap
transactions generally do not involve delivery of reference instruments or
payment of the notional amount of the contract. Accordingly, the risk of loss
with respect to swaps generally is limited to the net amount of payments that
the Fund is contractually obligated to make or, in the case of the other party
to a swap defaulting, the net amount of payments that the Fund is contractually
entitled to receive.
Swaps
are of limited duration and there is no guarantee that swaps entered into with a
counterparty will continue indefinitely. Accordingly, the duration of a swap
depends on, among other things, the ability of the Fund to renew the expiration
period of the relevant swap at agreed upon terms.
Dividend Risk.
Companies
that issue dividend-yielding securities are not required to continue to pay
dividends on such securities. There is no guarantee that issuers of the
securities held by the Fund will declare dividends in the future or that, if
declared, such dividends will remain at current levels or increase over
time.
Equity Securities Risk.
Equity securities are subject to volatile changes in value that may be
attributable to market perception of a particular issuer or to general stock
market fluctuations that affect all issuers. Investments in equity securities
are subject to volatile changes in market value and their values may be more
volatile than investments in other asset classes. In the event of liquidation,
equity securities are generally subordinate in rank to debt and other securities
of the same issuer.
ETF Risk
. As an ETF, the
Fund is subject to the following risks:
Authorized Participants
Concentration Risk.
The Fund has a limited number of financial
institutions that may act as Authorized Participants. To the extent they exit
the business or are otherwise unable to proceed in creation and redemption
transactions with the Fund and no other Authorized Participant is able to step
forward to create or redeem, shares of the Fund may be more likely to trade at a
premium or discount to NAV and possibly face trading halts or delisting.
Authorized Participant concentration risk may be heightened for exchange-traded
funds (“ETFs”), such as the Fund, that invest in securities issued by non-U.S.
issuers or other securities or instruments that have lower trading
volumes.
Premium/Discount Risk
. The
NAV of the Fund’s shares will generally fluctuate with changes in the market
value of the Fund’s securities holdings. The market prices of Fund shares will
generally fluctuate in accordance with changes in the Fund’s NAV and supply and
demand of shares on the secondary market. It cannot be predicted whether Fund
shares will trade below (at a discount), at or above (at a premium) their NAV.
As a result, shareholders of the Fund may pay more than NAV when purchasing
shares and receive less than NAV when selling Fund shares. This risk is
heightened in times of market volatility or periods of steep market declines. In
such market conditions, market or stop-loss orders to sell Fund shares may be
executed at market prices that are significantly below NAV. Price differences
may be due, in part, to the fact that supply and demand forces at work in the
secondary trading market for shares may be closely related to, but not identical
to, the same forces influencing the prices of the securities of the Underlying
Index trading individually. The market prices of Fund shares may deviate
significantly from the NAV of the shares during periods of market volatility or
if the Fund’s holdings are or become more illiquid. Disruptions to creations and
redemptions may result in trading prices that differ significantly from the
Fund’s NAV. In addition, market prices of Fund shares may deviate significantly
from the NAV if the number of Fund shares outstanding is smaller or if there is
less active trading in Fund shares. Investors purchasing and selling Fund shares
in the secondary market may not experience investment results consistent with
those experienced by those creating and redeeming directly with the Fund.
Secondary Market Trading
Risk
. Investors buying or selling shares in the secondary market will
normally pay brokerage commissions, which are often a fixed amount and may be a
significant proportional cost for investors buying or selling relatively small
amounts of shares. In addition, secondary market investors will incur the cost
of the difference between the price that an investor is willing to pay for
shares (the bid price) and the price at which an investor is willing to sell
shares (the ask price). This difference in bid and ask prices is often referred
to as the “spread” or “bid-ask spread.” The bid-ask spread varies over time for
shares based on trading volume and market liquidity, and is generally lower if
the Fund’s shares have more trading volume and market liquidity and higher if
the Fund’s shares have little trading volume and market liquidity. Increased
market volatility may cause increased bid-ask spreads.
Although
Fund shares are listed for trading on the Exchange, there can be no assurance
that an active trading market for such shares will develop or be maintained or
that the Fund’s shares will continue to be listed. Trading in Fund shares may be
halted due to market conditions or for reasons that, in the view of the
Exchange, make trading in shares inadvisable. In addition, trading in shares is
subject to trading halts caused by extraordinary market volatility pursuant to
Exchange “circuit breaker” rules. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of any Fund will
continue to be met or will remain unchanged or that the shares will trade with
any volume, or at all.
ETF Risk - Small Fund
Risk.
The Fund is small and does not yet have a significant number of
shares outstanding. Small funds are at greater risk than larger funds of wider
bid-ask spreads for its shares, trading at a greater premium or discount to NAV,
liquidation and/or a trading halt. The Fund also is subject to the continued
listing standards of the Exchange, with which the Fund must comply in order to
continue being listed on the Exchange. Among other requirements, the continued
listing standards require a minimum number of shareholders.
Financials Sector
Risk.
Companies in the financials sector may be subject to extensive
government regulation that affects the scope of their activities, the prices
they can charge and the amount of capital they must maintain. The profitability
of companies in the financials sector may be adversely affected by increases in
interest rates. The profitability of companies in the financials sector may be
adversely affected by loan losses, which usually increase in economic downturns.
In addition, the financials sector in certain countries is undergoing numerous
changes, including continuing consolidations, development of new products and
structures and changes to its regulatory framework, which may have an impact on
the issuers included in the Fund. Furthermore, increased government involvement
in the financials sector, including measures such as taking ownership positions
in financial institutions, could result in a dilution of the Fund’s investments
in financial institutions.
Fixed Income Securities
Risk.
The value of the Fund’s investments in fixed income securities will
fluctuate with changes in interest rates. Typically, a rise in interest rates
causes a decline in the value of fixed income securities owned indirectly by the
Fund. On the other hand, if rates fall, the value of the fixed income securities
generally increases. The Fund may be subject to a greater risk of rising
interest rates due to the current period of historically low rates and the
effect of potential government fiscal policy initiatives and resulting market
reaction to those initiatives. Below are several specific risks associated with
investments in fixed income securities.
Call Risk.
If interest
rates fall, it is possible that issuers of callable securities with high
interest coupons will “call” (or prepay) their bonds before their maturity date.
If an issuer exercised such a call during a period of declining interest rates,
the Fund may have to replace such called security with a lower yielding
security. If that were to happen, the Fund’s net investment income could
fall.
Credit Risk.
Credit risk
refers to the possibility that the issuer of a security will not be able to make
payments of interest and principal when due. Changes in an issuer’s credit
rating or the market’s perception of an issuer’s creditworthiness may also
affect the value of an investment in that issuer. The degree of credit risk
depends on both the financial condition of the issuer and the terms of the
obligation.
Event Risk.
Event risk is
the risk that an unexpected event could interfere with an issuer’s ability to
make timely interest or principal payments or that causes market speculation
about the issuer’s ability to make such payments. As a result, the credit
quality and market value of an issuer’s bonds and/or other debt securities may
decline significantly.
Income Risk.
The Fund’s
income may decline due to falling interest rates. During a period of falling
interest rates, income risk is generally higher for short term bond funds,
moderate for intermediate term bond funds and low for long term bond funds.
Therefore, investors should expect a Fund’s income to fluctuate
accordingly.
Interest Rate
Risk.
Interest rate risk is the risk that the securities in the Fund’s
portfolio will decline in value because of increases in market interest rates.
Fixed income securities with longer durations tend to be more sensitive to
changes in interest rates, usually making them more volatile than debt
securities with shorter durations. Duration is a measure of a fixed income
security’s sensitivity to changes in interest rates. For every 1% change in
interest rates, a bond’s price generally changes approximately 1% in the
opposite direction for every year of duration. For example, if a portfolio of
fixed income securities has an average weighted duration of three years, its
value can be expected to fall about 3% if interest rates rise by 1%. Conversely,
the portfolio’s value can be expected to rise approximately 3% if interest rates
fall by 1%. Unlike maturity, which considers only the date on which the final
repayment of principal will be made, duration takes account of interim payments
made during the life of the security. Duration is typically not equal to
maturity. Interest rates have recently been historically low but have recently
increased and may continue to increase, potentially quickly and significantly,
thereby heightening the Fund’s exposure to the risks associated with rising
rates. The Fund may take steps to attempt to reduce the exposure of its
portfolio to interest rate changes; however, there can be no guarantee that the
Fund will take such actions or that the Fund will be successful in reducing the
impact of interest rate changes on the portfolio. Changes in government
intervention may have adverse effects on investments, volatility, and
illiquidity in debt markets.
Issuer Risk.
There may be
economic or political changes that impact the ability of issuers to repay
principal and to make interest payments on securities. Changes to the financial
condition or credit rating of issuers may also adversely affect the value of the
Fund’s securities.
Maturity Risk.
The value of
the Fund’s fixed income investments is also dependent on their maturity.
Generally, the longer the maturity of a fixed income security, the greater its
sensitivity to changes in interest rates.
Pay-In-Kind and Step-Up Coupon
Securities Risk.
A pay-in-kind security pays no interest in cash to its
holder during its life. Similarly, a step-up coupon security is a debt security
that may not pay interest for a specified period of time and then, after the
initial period, may pay interest at a series of different rates. Accordingly,
pay-in kind and step-up coupon securities will be subject to greater
fluctuations in market value in response to changing interest rates than debt
obligations of comparable maturities that make current, periodic distribution of
interest in cash.
Perpetual Bonds
Risk.
Perpetual bonds offer a fixed return with no maturity date. Because
they never mature, perpetual bonds can be more volatile than other types of
bonds that have a maturity date and may be more sensitive to changes in interest
rates. If market interest rates rise significantly, the interest rate paid by a
perpetual bond may be much lower than the prevailing interest rate. Perpetual
bonds are also subject to credit risk with respect to the issuer. In addition,
because perpetual bonds may be callable after a set period of time, there is the
risk that the issuer may recall the bond, which may require the Fund to reinvest
the proceeds in lower yielding securities.
The
Fund’s performance may be adversely impacted when interest rates fall because
the Fund must invest in lower-yielding bonds as bonds in its portfolio
mature.
Subordinated Obligations
Risk.
Payments under some debt may be structurally subordinated to other
existing and future liabilities and obligations of an issuer of debt. Claims of
creditors of subordinated debt will have less priority as to the assets of the
issuer and its creditors who seek to enforce the terms of the debt. Certain debt
may not contain any restrictions on the ability of the issuers to incur
additional unsecured indebtedness.
Variable and Floating Rate
Securities Risk.
During periods of increasing interest rates, changes in
the coupon rates of variable or floating rate securities may lag behind the
changes in market rates or may have limits on the maximum increases in coupon
rates. Alternatively, during periods of declining interest rates, the coupon
rates on such securities will typically readjust downward resulting in a lower
yield. Floating rate notes are generally subject to legal or contractual
restrictions on resale, may trade infrequently, and their value may be impaired
when the Fund needs to liquidate such securities.
Foreign Investment Risk.
Foreign investments may involve higher costs than U.S. investments,
including higher transaction and custody costs as well as the imposition of
additional taxes by foreign governments. Foreign investments may also involve
risks associated with currency exchange rates, less complete financial
information, less market liquidity, more market volatility and political and
economic instability. Future political and economic developments, the possible
seizure or nationalization of foreign holdings, the possible establishment of
exchange controls or freezes on the convertibility of currency, or the adoption
of other governmental restrictions might adversely affect an investment in
foreign securities. Additionally, foreign investments may be subject to less
stringent regulation, and to different accounting, auditing, recordkeeping,
financial reporting, and investor protection requirements. The value of foreign
investments may change materially when the U.S. markets are not open for
trading.
Income
from non-U.S. investments, including gains on the sale of such investments, may
be subject to foreign taxes. Even if the Fund qualifies to pass these taxes
through to shareholders, the ability to claim a credit for such taxes may be
limited, particularly in the case of taxes on capital gains.
Foreign
markets may have clearance and settlement procedures that make it difficult for
the Fund to buy and sell securities. This could result in a loss to the Fund by
causing the Fund to be unable to dispose of an investment or to miss an
attractive investment opportunity, or by causing the Fund’s assets to be
uninvested for some period of time, or cause the Fund to face delays or
difficulties in meeting redemptions.
Futures Strategy Risk.
Successful use of futures contracts draws upon the Adviser’s skill
and experience with respect to such instruments and is subject to special risk
considerations. The primary risks associated with the use of futures contracts
include: (a) an imperfect correlation between the change in market value of the
reference asset and the price of the futures contract; (b) possible lack of a
liquid secondary market for a futures contract and the resulting inability to
close a futures contract when desired; (c) losses caused by unanticipated market
movements, which are potentially unlimited; (d) the inability to predict
correctly the direction of market prices, interest rates, currency exchange
rates and other economic factors; and (e) if the Fund has insufficient cash, it
may have to sell securities from its portfolio to meet daily variation margin
requirements, and the Fund may have to sell securities at a loss.
As
a futures contract the Fund owns approaches its settlement date, the Fund may
sell that futures contract and reinvest the proceeds in a similar contract with
a more distant settlement date. This process is referred to as “rolling” a
futures contract. The successful use of such a strategy depends upon the
Adviser’s skill and experience. Although the Fund will attempt to roll from an
expiring futures contract to another contract that the Adviser believes will
generate the greatest yield for the Fund, the Fund nevertheless may incur a cost
to “roll” the contract. In a commodity futures market where current month
expiring contracts trade at a lower price than next month’s contract, a
situation referred to as “contango,” absent the impact of the overall movement
in commodity prices, the Fund may experience an adverse impact because it would
be selling less expensive contracts and buying more expense contracts. In the
event of a prolonged period of contango, and absent the impact of rising or
falling commodity prices, there could be a significant negative impact on the
Fund when it “rolls” its futures contract positions.
Geographic Focus
Risk.
The Fund’s investments are expected to be focused in a
particular country, countries, or region to approximately the same degree as the
Index and, therefore the Fund will be susceptible to adverse market, political,
regulatory, and geographic events affecting those regions. The Fund is less
diversified across countries or geographic regions and generally riskier than
more geographically diversified funds.
Recently,
new concerns have emerged in regard to the economic and political stability of
the European Union. These concerns have led to downward pressure on the earnings
of certain European issuers and on European financial markets. Secessionist
movements in various member countries to leave the European Union may have an
adverse effect on the economies of those member countries and on the European
Union as a whole. The economies of the European Union are dependent to a
significant extent on those of certain key trading partners, including China,
the United States, and other European countries. A reduction in spending on
products and services exported from the European Union, or volatility in the
financial markets of member countries, may have an adverse impact on the broader
European Union economy and could adversely affect the Fund. Recent developments
in relations between the United States and its trading partners have heightened
concerns of increased tariffs and restrictions on trade between those countries.
An increase in tariffs or trade restrictions, or even the threat of such
developments, could lead to a significant reduction in international trade,
which could have a negative impact on the European Union’s export industry and a
commensurately negative impact on the Fund. In addition, heavy regulation of
labor, energy and product markets in the European Union may have an adverse
impact on European Union markets. Such regulations may negatively impact
economic growth or cause prolonged periods of recession, which could adversely
affect the Fund.
High Portfolio Turnover Risk.
The Fund may incur high turnover rates. This may increase the Fund’s
brokerage commission costs. The performance of the Fund could be negatively
impacted by the increased brokerage commission costs incurred by the Fund. Rapid
portfolio turnover also exposes shareholders to a higher current realization of
net short-term capital gains, distributions of which would generally be taxed to
you as ordinary income and thus cause you to pay higher taxes.
High Yield and Unrated
Securities Risk.
Securities that are unrated or rated below investment
grade (or “junk bonds”) are subject to greater risk of loss of income and
principal (
e.g.
, default) than rated
securities, particularly highly rated securities. Junk bonds are inherently
speculative. The prices of unrated and high yield securities are generally more
sensitive to adverse economic changes and individual issuer developments than
highly rated securities. Also, the secondary market for such securities may be
less liquid than the markets for rated and/or higher quality securities. As a
result, during periods of economic uncertainty, their prices may be more
volatile, which may cause the net asset value of the Fund to fluctuate.
Industrials Sector
Risk.
The industrials sector includes companies engaged in the manufacture
and distribution of capital goods, such as those used in defense, construction
and engineering, companies that manufacture and distribute electrical equipment
and industrial machinery and those that provide commercial and transportation
services and supplies. Companies in the industrials sector may be adversely
affected by changes in government regulation, world events and economic
conditions. Government regulation may in particular affect the aerospace and
defense companies, which rely to a significant extent on government demand for
their products and services. Transportation companies, another component of the
industrials sector, are subject to sharp price movements resulting from changes
in the economy, fuel prices, labor agreements and insurance costs.
Investments in Investment
Companies Risk.
The Fund may purchase shares of investment companies, such
as ETFs, unit investment trusts, closed-end investment companies and foreign
investment companies, including those that are advised, sponsored or otherwise
serviced by Krane and/or its affiliates, to gain exposure to particular
component securities of the Underlying Index or when such investments present a
more cost efficient alternative to investing directly in securities. When the
Fund invests in an investment company, in addition to directly bearing the
expenses associated with its own operations, it will bear a pro rata portion of
the underlying fund’s expenses. An investor in the Fund may receive taxable
gains as a result of an underlying fund’s portfolio transactions in addition to
the taxable gains attributable to the Fund’s transactions in shares of the
underlying fund. Further, in part because of these additional expenses, the
performance of an investment company may differ from the performance the Fund
would achieve if it invested directly in the underlying investments of the
investment company. In addition, while the risks of owning shares of an
investment company generally reflect the risks of owning the underlying
investments of the investment company, the Fund may be subject to additional or
different risks than if the Fund had invested directly in the underlying
investments. For example, shares of an ETF are traded at market prices, which
may vary from the NAV of its underlying investments. Also, the lack of liquidity
in an ETF can contribute to the increased volatility of its value in comparison
to the value of the underlying portfolio securities. To the extent that the Fund
invests in investment companies or other pooled investment vehicles that are not
registered pursuant to the 1940 Act, including foreign investment companies, it
will not enjoy the protections of the 1940 Act. In addition, to the extent the
Fund invests in other investment companies, including ETFs, sponsored, advised
or otherwise serviced by Krane, its sub-adviser, as applicable, or their
affiliates, they may be subject to conflicts of interest in allocating Fund
assets, particularly if they are paid an advisory fee both by the Fund and the
fund in which the Fund invests.
Large Capitalization Company
Risk.
Investments in large capitalization companies may go in and out of
favor based on market and economic conditions and may underperform other market
segments. Some large capitalization companies may be unable to respond quickly
to new competitive challenges and attain the high growth rate of successful
smaller companies, especially during extended periods of economic expansion. As
such, returns on investments in stocks of large capitalization companies could
trail the returns on investments in stocks of small and mid capitalization
companies.
Liquidity Risk.
The Fund’s
investments are subject to liquidity risk, which exists when an investment is or
becomes difficult to purchase or sell at a reasonable time and price. If a
transaction is particularly large or if the relevant market is or becomes
illiquid, it may reduce the potential returns of the Fund because it may be
unable to sell the illiquid securities at an advantageous time or price, which
may cause the Fund to suffer significant losses and difficulties in meeting
redemptions. This is especially true given the limited number of market
participants in certain markets in which the Fund may invest. Certain countries
in which the Fund may invest may be subject to extended settlement delays and/or
foreign holidays, during which the Fund will unlikely be able to convert such
holdings to cash and may make it additionally difficult for the Fund to meet
redemptions in a timely fashion.
Market
developments may cause the Fund’s investments to become less liquid and subject
to erratic price movements, and may also cause the Fund to encounter
difficulties in timely honoring redemptions, especially if market events cause
an increased incidence of shareholder redemptions. If a number of securities
held by the Fund stop trading or become illiquid, it may have a cascading effect
and cause the Fund to halt trading. Volatility in market prices will increase
the risk of the Fund being subject to a trading halt.
Management Risk.
To the
extent the Fund may not fully replicate the Underlying Index and may hold less
than the total number of securities in the Underlying Index, the Fund is subject
to management risk. This is the risk that Krane or its sub-adviser’s, as
applicable, security selection process, which is subject to a number of
constraints, may not produce the intended results. Alternatively, to the extent
Krane or its sub-adviser, as applicable, determines to manage the Fund by
replicating the Underlying Index, it is likely to experience higher portfolio
turnover and brokerage costs, which erode performance.
Market Risk.
The
values of the Fund’s holdings could decline generally or could underperform
other investments. Market fluctuations could be caused by such factors as
economic and political developments, changes in interest rates and perceived
trends in securities prices. Recent developments in relations between the United
States and its trading partners have heightened concerns of increased tariffs
and restrictions on trade between the U.S. and other countries. An increase in
tariffs or trade restrictions, or even the threat of such developments, could
lead to a significant reduction in international trade, which could have a
negative impact on the world’s export industry and a commensurately negative
impact on financial markets. Different types of securities tend to go through
cycles of outperformance and under-performance in comparison to the general
securities markets. In addition, securities may decline in value due to factors
affecting a specific issuer, market or securities markets generally. Therefore,
the Fund is susceptible to the risk that certain holdings may be difficult or
impossible to sell at a favorable time or price.
Turbulence
in the financial markets and reduced liquidity in equity, credit and
fixed-income markets may negatively affect issuers worldwide, which could have
an adverse effect on the Fund. The Federal Reserve and other domestic and
foreign government agencies may attempt to stabilize the global economy. These
actions may expose markets to heightened volatility and may reduce liquidity for
certain Fund investments, causing the value of the Fund’s investments and share
price to decline. To the extent that the Fund experiences high redemptions
because of these actions, the Fund may experience increased portfolio turnover,
which will increase the costs that the Fund incurs and will lower the Fund’s
performance.
Geopolitical
risks, including terrorism, tensions or open conflict between nations, or
political or economic dysfunction within some nations that are major players on
the world stage or major producers of oil, may lead to overall instability in
world economies and markets generally and have led, and may in the future lead,
to increased market volatility and may have adverse long-term effects.
Similarly, environmental and public health risks, such as natural disasters or
pandemics/epidemics, or widespread fear that such events may occur, may impact
markets adversely and cause market volatility in both the short- and
long-term.
Certain
illnesses spread rapidly and have the potential to significantly and adversely
affect the global economy. Epidemics and/or pandemics have and may further
result in, among other things, closing borders, enhanced health screenings,
healthcare service preparation and delivery, quarantines, cancellations,
disruptions to supply chains and customer activity, as well as general concern
and uncertainty. The impact of such epidemics and/or pandemics that may arise in
the future, have the potential to affect the economies of many nations,
individual companies and the global securities and commodities markets,
including liquidity, in ways that cannot necessarily be foreseen at the present
time. The impact of infectious diseases in developing or emerging market
countries may be greater due to less established health care systems. Health
crises caused by the recent coronavirus outbreak may exacerbate other
preexisting political, social and economic risks in certain countries. The
impact of the outbreak may be short term or may last for an extended period of
time and may have material adverse impacts on a Fund.
Momentum Risk.
Momentum
investing entails investing in securities that exhibit persistence in certain
performance indicators. These securities may be more volatile than a broad
cross-section of securities and momentum may indicate that the performance
indicator being measured is peaking. The Fund may experience losses if the price
of securities exhibiting momentum stops, turns or otherwise behaves differently
than predicted.
Non-Diversified Fund Risk.
Because the Fund is non-diversified and may invest a greater portion of
its assets in fewer issuers than a diversified fund, changes in the market value
of a single portfolio holding could cause greater fluctuations in the Fund’s
share price than would occur in a diversified fund. This may increase the Fund’s
volatility and cause the performance of a single portfolio holding or a
relatively small number of portfolio holdings to have a greater impact on the
Fund’s performance.
Operational and Cybersecurity
Risk.
A Fund, Krane, sub-adviser, if applicable, and their service
providers and your ability to transact with a Fund may be negatively impacted
due to operational matters arising from, among other problems, human errors,
systems and technology disruptions or failures, or cybersecurity incidents.
Cybersecurity incidents may allow an unauthorized party to gain access to fund
assets, customer data, or proprietary information, or cause a Fund or its
service providers, as well as the securities trading venues and their service
provides, to suffer data corruption or lose operational functionality. It is not
possible for Krane or the other Fund service providers to identify all of the
cybersecurity or other operational risks that may affect a Fund or to develop
processes and controls to completely eliminate or mitigate their occurrence or
effects.
Passive Investment Risk.
The Fund is not actively managed, does not seek to “beat” the Underlying
Index, and does not take temporary positions when markets decline. Therefore,
the Fund may not sell a security due to current or projected underperformance of
a security, industry or sector. If a specific security is removed from the
Underlying Index, the Fund may be forced to sell such security at an inopportune
time or for a price other than the security’s current market value. It is
expected that the value of Fund shares will decline, more or less, in
correspondence with any decline in value of the Underlying Index. The Underlying
Index may not contain the appropriate mix of securities for any particular
economic cycle, and the timing of movements from one type of security to another
in seeking to track the Underlying Index could have a negative effect on the
Fund. However, the Fund’s investment objective and principal investment
strategies impose limits on the Fund’s ability to invest in securities not
included in the Underlying Index. There is no guarantee that the Underlying
Index will create the desired exposure.
Unlike
an actively managed fund,
the
Fund
does not use techniques or defensive strategies designed to lessen
the effects of market volatility or to reduce the impact of periods of market
decline. This means that, based on market and economic conditions, the Fund’s
performance could be lower than other types of registered investment companies
that may actively shift their portfolio assets to take advantage of market
opportunities or to lessen the impact of a market decline. To the extent the
Fund employs a representative sampling approach, it will hold a smaller number
of securities than are in the Underlying Index. As a result, an adverse
development to an issuer of securities that the Fund holds could result in a
greater decline in NAV than would be the case if the Fund held more of the
securities in the Underlying Index.
Privately-Issued Securities
Risk.
The Fund may invest in privately-issued securities, including those
that are normally purchased pursuant to Rule 144A or Regulation S promulgated
under the Securities Act. Privately-issued securities are securities that have
not been registered under the Securities Act and as a result are subject to
legal restriction on resale. They typically may be resold only to “qualified
institutional buyers,” in a privately negotiated transaction, to a limited
number of purchasers or in limited quantities after they have been held for a
specified period of time and other conditions are met for an exemption from
registration. Because they are not traded on established markets and there may
be relatively few potential purchasers for such securities, especially under
adverse market or economic conditions or in the event of adverse changes in the
financial condition of the issuer, the Fund may find it more difficult to sell
such securities when it may be advisable to do so or it may be able to sell such
securities only at prices lower than if such securities were more widely held
and traded. At times, privately-issued securities may be less liquid, subject to
wide fluctuations in value, and may be more difficult to determine the fair
value of such securities for purposes of computing the Fund’s NAV, due to the
absence of an active trading market. There can be no assurance that a
privately-issued security that is deemed to be liquid when purchased will
continue to be liquid for as long as it is held by the Fund, and its value may
decline as a result or cause the Fund difficulty in meeting shareholder
redemptions. The Fund may have to bear the expense of registering
privately-issued securities for resale and the risk of substantial delays in
effecting the registration.
Quality Factor Risk.
The
Fund uses appreciating annual dividends as a measurement of quality. This style
of investing is subject to the risk that the past performance of these companies
does not continue and that the returns on such securities are less than returns
on other styles of investing or the overall stock market. In addition, there may
be periods when quality dividend investing is out of favor and during which the
investment performance of a fund using a quality dividend strategy may
suffer.
Ranking Risk.
The
Fund uses Value Line
’s
Safety
™
ranking system in
selecting securities. This is subject to the risk that the rankings may not be
accurate and that the performance of these companies may not continue. The
returns on these securities may be less than returns on other companies or the
overall stock market. In addition, there may be periods when companies highly
ranked by Value Line
are
out of favor and during which the investment performance of the Fund may
suffer.
Regulatory Risk.
The Fund
is subject to the risk that a change in U.S. law and related regulations will
impact the way the Fund operates, increase the particular costs of the Fund’s
operations and/or change the competitive landscape. Additional legislative or
regulatory changes could occur that may materially and adversely affect the
Fund. For example, the regulatory environment for derivative instruments in
which the Fund may invest is evolving, and changes in the regulation or taxation
of derivative instruments may materially and adversely affect the ability of the
Fund to pursue its investment objective or strategies. Such legislative or
regulatory changes could pose additional risks and result in material adverse
consequences to the Fund.
Sector Risk.
From time to
time, based on market or economic conditions, the Fund may have significant
positions in one or more sectors of the market. To the extent the Fund invests
more heavily in one sector, industry, or sub-sector of the market, its
performance will be especially sensitive to developments that significantly
affect those sectors, industries, or sub-sectors. An individual sector,
industry, or sub-sector of the market may be more volatile, and may perform
differently, than the broader market. The industries that constitute a sector
may all react in the same way to economic, political or regulatory events. The
Fund’s performance could also be affected if the sectors, industries, or
sub-sectors do not perform as expected. Alternatively, the lack of exposure to
one or more sectors or industries may adversely affect performance. For a
summary of the Fund’s recent sector allocations, see its most recent shareholder
report. (The information in the report is as of the date of the report and may
have changed.) For information about the risks of investing in particular
sectors, see the Fund’s Statement of Additional Information.
Securities Lending Risk.
The Fund may lend its portfolio securities to brokers, dealers and
financial institutions to seek income. There is a risk that a borrower may
default on its obligations to return loaned securities. There is a risk that the
assets of the Fund’s securities lending agent may be insufficient to satisfy any
contractual indemnification requirements to that Fund. Borrowers of the Fund’s
securities typically provide collateral in the form of cash that is reinvested.
The Fund will be responsible for the risks associated with the investment of
cash collateral, including any collateral invested in a money market fund. The
Fund may lose money on its investment of cash collateral or may fail to earn
sufficient income on its investment to meet obligations to the borrower. In
addition, delays may occur in the recovery of securities from borrowers, which
could interfere with the Fund’s ability to vote proxies or to settle
transactions and there is the risk of possible loss of rights in the collateral
should the borrower fail financially. Krane and its sub-adviser, if applicable,
are subject to potential conflicts of interest because the compensation paid to
them increases in connection with any net income received by the Fund from a
securities lending program.
Short Sale Risk.
Short
sales involve selling a security the Fund does not own in anticipation that the
security’s price will decline. To complete the transaction, the Fund must borrow
the security to make delivery to the buyer. The Fund is then obligated to
replace the security borrowed by purchasing the security at the market price at
the time of replacement. The price at such time may be higher or lower than the
price at which the security was sold by the Fund. If the underlying security
goes up in price during the period during which the short position is
outstanding, the Fund will realize a loss on the transaction.
Short
sales, at least theoretically, present a risk of unlimited loss on an individual
security basis, since the Fund may be required to buy the security sold short at
a time when the security has appreciated in value, and there is potentially no
limit to the amount of such appreciation. Because the Fund may invest the
proceeds of a short sale, another effect of short selling on the Fund is
leverage, in that it amplifies changes in the Fund’s net asset value since it
increases the exposure of the Fund to the market and may increase losses and the
volatility of returns.
The
Fund may not always be able to close out a short position at a favorable time or
price. A lender may request that borrowed securities be returned to it on short
notice, and the Fund may have to buy the borrowed securities at an unfavorable
price, which will potentially reduce or eliminate any gain or cause a loss to
the Fund. The Fund incurs expenses for borrowing securities that may include
fees paid to the lender and amounts equal to dividends or interest paid by the
borrowed security.
When
the Fund is selling a security short, it must maintain a segregated account of
cash or high-grade securities equal to the margin requirement. (Margin posted
with the broker, not including the proceeds of the short sale, counts toward
this requirement.) As a result, the Fund may maintain high levels of cash or
other liquid assets (such as U.S. Treasury bills, money market instruments,
certificates of deposit, high quality commercial paper and long equity
positions) or may utilize the collateral obtained from securities lending for
this cash. The need to maintain cash or other liquid assets in segregated
accounts could limit the Fund’s ability to pursue other opportunities as they
arise.
Small- and Mid-Capitalization
Company Risk.
Investing in the securities of small- and mid-capitalization
companies involves greater risk and the possibility of greater price volatility
than investing in larger capitalization companies and more established
companies. Since small- and medium-sized companies may have limited operating
histories, product lines and financial resources, the securities of these
companies may lack sufficient market liquidity and can be sensitive to expected
changes in interest rates, borrowing costs and earnings. These companies’
securities may be more volatile and less liquid than those of more established
companies, and they may be more sensitive to market conditions.
Subsidiary Investment Risk.
Investment in the Subsidiary will not exceed 25% of the value of the
Fund’s total assets (ignoring any subsequent market appreciation in the
Subsidiary’s value). This limitation is set pursuant to the Internal Revenue
Code of 1986, as amended, and is measured at each taxable year quarter-end. The
Subsidiary, which is organized under the laws of the Cayman Islands, is
wholly-owned and controlled by the Fund. The Fund will invest in the Subsidiary
in order to gain exposure to the investment returns of the commodities markets
within the limitations of the federal tax law requirements applicable to
regulated investment companies. The Subsidiary will invest principally in
commodity futures, options and swap contracts, as well as certain fixed-income
investments intended to serve as margin or collateral for the Subsidiary’s
derivatives positions. Unlike the Fund, the Subsidiary may invest without
limitation in commodity-linked derivatives, though the Subsidiary will comply
with the same 1940 Act asset coverage requirements with respect to its
investments in commodity-linked derivatives that apply to the Fund’s
transactions in these instruments. To the extent applicable, the Subsidiary
otherwise is subject to the same fundamental and non-fundamental investment
restrictions as the Fund, and, in particular, to the same requirements relating
to portfolio leverage, liquidity, and the timing and method of valuation of
portfolio investments and Fund shares, described elsewhere in this Prospectus
and in the SAI. By investing in the Subsidiary, the Fund is indirectly exposed
to the risks associated with the Subsidiary’s commodity-linked derivatives
investments.
The
Subsidiary is not registered with the SEC as an investment company under the
1940 Act, and is not subject to the investor protections of the 1940 Act. As an
investor in the Subsidiary, the Fund does not have the same protections offered
to shareholders of registered investment companies.
The
Fund and the Subsidiary may not be able to operate as described in this
Prospectus in the event of changes to the laws of the United States and/or the
Cayman Islands. If the laws of the Cayman Islands required the Subsidiary to pay
taxes to a governmental authority, the Fund would be likely to suffer decreased
returns.
Tax Risk.
In order to
qualify for the favorable tax treatment generally available to regulated
investment companies, the Fund must satisfy certain income and distribution
requirements each year and certain asset diversification requirements at the end
of each quarter of its taxable year. With respect to the latter, the Fund
generally may not acquire a security if, as a result of the acquisition, at the
end of a quarter the Fund would not satisfy the following requirements: (a) that
at least 50% of the value of its total assets be represented by (i) cash, cash
items, Government Securities and securities of other regulated investment
companies, and (ii) other securities limited in respect of any of the security
to an amount not greater than 5% of the Fund’s total assets and to not more than
10% of the voting securities of such issuer; and (b) not more than 25% of the
total value of the Fund’s assets can be invested in the securities (other than
Government Securities or the securities of other regulated investment companies)
of any one issuer, the securities of two or more issuers that the Fund controls
and are engaged in the same or similar (or related) trades or businesses, or the
securities of one or more qualified publically traded partnerships. If the Fund
were to fail to qualify as a regulated investment company, it would be taxed in
the same manner as an ordinary corporation, and distributions to its
shareholders would not be deductible by the Fund in computing its taxable
income, which would adversely affect its performance.
In
order to qualify for the favorable tax treatment generally available to
regulated investment companies and avoid Fund-level taxes, the Fund must also
satisfy certain distribution requirements. If the Fund fails to satisfy the
distribution requirement necessary to qualify for treatment as a regulated
investment company for any taxable year, the Fund would be treated as a
corporation subject to U.S. federal income tax, thereby subjecting any income
earned by the Fund to tax at the corporate level. If the Fund fails to satisfy a
separate distribution requirement, it will be subject to a Fund-level excise
tax. These Fund-level taxes will apply in addition to taxes payable at the
shareholder level on distributions.
o
the extent the Fund does not distribute to shareholders all of its investment
company taxable income and net capital gain in a given year, it will be required
to pay U.S. federal income tax on the retained income and gains, thereby
reducing the Fund’s return. The Fund may elect to treat its net capital gain as
having been distributed to shareholders. In that case, shareholders of record on
the last day of the Fund’s taxable year will be required to include their
attributable share of the retained gain in income for the year as a long-term
capital gain despite not actually receiving the dividend, and will be entitled
to a tax credit or refund for the tax deemed paid on their behalf by the Fund as
well as an increase in the basis of their shares to reflect the difference
between their attributable share of the gain and the related credit or
refund.
Investments
in swaps and other derivatives may be subject to special U.S. federal income tax
rules that could adversely affect the character, timing and amount of income
earned by the Fund (e.g., by causing amounts that would be capital gain to be
taxed as ordinary income or to be taken into income earlier than would otherwise
be necessary). Also, the Fund may be required to periodically adjust its
positions in its swaps and derivatives to comply with certain regulatory
requirements which may further cause these investments to be less efficient than
a direct investment in the securities themselves. For example, swaps in which
the Fund may invest may need to be reset on a regular basis in order to maintain
compliance with the 1940 Act, which may increase the likelihood that the Fund
will generate short-term capital gains. In addition, because the application of
these special rules may be uncertain, it is possible that the manner in which
they are applied by the Fund may be determined to be incorrect. In that event,
the Fund may be found to have failed to maintain its qualification as a RIC or
to be subject to additional U.S. tax liability. Moreover, the Fund may make
investments, both directly and through swaps or other derivative positions, in
companies classified as passive foreign investment companies for U.S. federal
income tax purposes (“PFICs”). Investments in PFICs are subject to special tax
rules which may result in adverse tax consequences to the Fund and its
shareholders.
The
Fund intends to treat its income from the Subsidiary as qualifying income. The
tax treatment of the Fund’s investment in the Subsidiary may be adversely
affected by future legislation, court decisions, Treasury Regulations and/or
guidance issued by the IRS that could affect whether income derived from such
investments is “qualifying income” under Subchapter M of the Internal Revenue
Code, or otherwise affect the character, timing and/or amount of the Fund’s
taxable income or any gains or distributions made by the Fund.
Tracking Error Risk.
Tracking error refers to the risk that the Fund’s performance may not
match or correlate to that of its Underlying Index, either on a daily or
aggregate basis. Tracking error may cause the Fund’s performance to be less than
expected. There are a number of factors that may contribute to the Fund’s
tracking error, such as Fund expenses, imperfect correlation between the Fund’s
investments and those of the Underlying Index, the use of representative
sampling strategy, if applicable, asset valuation differences, tax
considerations, the unavailability of securities in the Underlying Index from
time to time, holding cash and cash equivalents, and other liquidity
constraints. In addition, securities included in the Underlying Index may be
suspended from trading. To the extent the Fund calculates its NAV based on fair
value prices and the value of the Underlying Index is based on securities’
closing prices on local foreign markets, the Fund’s ability to track the
Underlying Index may be adversely affected. Mathematical compounding may prevent
the Fund from correlating with the monthly, quarterly, annual or other period
performance of its Underlying Index. In addition, the Fund may not invest in
certain securities and other instruments included in the Underlying Index, or
invest in them in the exact proportions they represent of the Underlying Index,
including due to legal restrictions or limitations imposed by a foreign
government or a lack of liquidity in certain securities. Moreover, the Fund may
be delayed in purchasing or selling securities and other instruments included in
the Underlying Index. Any issues the Fund encounters with regard to currency
convertibility (including the cost of borrowing funds, if any) and repatriation
may also increase the Fund’s tracking error.
U.S. Government Obligations
Risk.
The Fund may invest in securities issued by the U.S.
government. The total public debt of the United States as a percentage of gross
domestic product has grown rapidly since the beginning of the 2008–2009
financial downturn. Although high debt levels do not necessarily indicate or
cause economic problems, they may create certain systemic risks if sound debt
management practices are not implemented. A high national debt can raise
concerns that the U.S. government will not be able to make principal or interest
payments when they are due. This increase has also necessitated the need for the
U.S. Congress to negotiate adjustments to the statutory debt limit to increase
the cap on the amount the U.S. government is permitted to borrow to meet its
existing obligations and finance current budget deficits. In August 2011,
S&P lowered its long term sovereign credit rating on the U.S. In explaining
the downgrade at that time, S&P cited, among other reasons, controversy over
raising the statutory debt limit and growth in public spending. Any controversy
or ongoing uncertainty regarding the statutory debt ceiling negotiations may
impact the U.S. long-term sovereign credit rating and may cause market
uncertainty. As a result, market prices and yields of securities supported by
the full faith and credit of the U.S. government may be adversely
affected.
Utilities Sector
Risk.
Companies in the utilities industry may have difficulty obtaining an
adequate return on invested capital, raising capital, and financing large
construction programs during periods of inflation or unsettled capital markets;
face restrictions on operations and increased cost and delays attributable to
environmental considerations and regulation; find that existing plants,
equipment or products have been rendered obsolete by technological innovations;
and be subject to increased costs because of the scarcity of certain fuels or
the effects of man-made disasters. Deregulation is subjecting utility companies
to greater competition and may adversely affect profitability. As deregulation
allows utility companies to diversify outside of their original geographic
regions and their traditional lines of business, utility companies may engage in
riskier ventures. Government regulators monitor and control utility operations,
revenues and costs, and therefore may limit utility profits. Regulatory
authorities may also restrict utility companies’ access to new markets, thereby
diminishing these companies’ long-term prospects. Energy conservation and
changes in climate policy may have a significant adverse impact on the revenues
and expenses of utility companies.
Valuation Risk.
Financial
information about the Fund’s portfolio holdings may not always be reliable,
which may make it difficult to obtain a current price for the investments held
by the Fund. Independent market quotations for such investments may not be
readily available, such as on days during which a security does not trade or a
foreign holiday, and securities may be fair valued or valued by a pricing
service at an evaluated price. These valuations are subjective and different
funds may assign different fair values to the same investment. Such valuations
also may be different from what would be produced if the security had been
valued using market quotations. As a result, there is a risk that the Fund may
not be able to sell an investment at the price assigned to the investment by the
Fund. Additionally, Fund securities that are valued using techniques other than
market quotations, including “fair valued” securities, may be subject to greater
fluctuations in their value from one day to the next. Because securities in
which the Fund invests may trade on days when the Fund does not price its
shares, the value of the securities in the Fund’s portfolio may change on days
when shareholders will not be able to purchase or sell the Fund’s shares.
Krane
Funds Advisors, LLC (“Krane” or “Adviser”), which is a UN PRI signatory, is a
registered investment adviser located at 280 Park Avenue, 32nd Floor, New York,
NY 10017 and serves as investment adviser of each Fund. Krane has served as the
investment adviser of each Fund since its inception.
Under
the Investment Advisory Agreement between the Trust and Krane, Krane is
responsible for reviewing, supervising and administering each Fund’s investment
program and the general management and administration of the Trust. In this
regard, among other things, Krane arranges for transfer agency, custody, fund
administration and accounting, and other non-distribution related services
necessary for each Fund to operate. Krane may engage a subadviser to assist it
in managing a Fund’s investments, but will be responsible for overseeing any
subadvisers. Krane manages each Fund’s business affairs, provides office
facilities and equipment and certain clerical, bookkeeping and administrative
services, and permits its officers and employees to serve as officers or
Trustees of the Trust. Under the Investment Advisory Agreement, Krane bears all
of its own costs associated with providing advisory services to the Funds. In
addition, Krane has contractually agreed to pay all operating expenses of each
Fund, except (i) interest and taxes (including, but not limited to, income,
excise, transaction, transfer and withholding taxes); (ii) expenses of the Fund
incurred with respect to the acquisition and disposition of portfolio securities
and the execution of portfolio transactions, including brokerage commissions and
short sale dividend or interest expense; (iii) expenses incurred in connection
with any distribution plan adopted by the Trust in compliance with Rule 12b-1
under the 1940 Act, including distribution fees; (iv) Acquired Fund Fees and
Expenses; (v) litigation expenses; (vi) the compensation payable to the Adviser
under the investment advisory agreement; (vii) compensation and expenses of the
Independent Trustees (including any Trustees’ counsel fees); and (viii) any
expenses determined to be extraordinary expenses by the Board. Nevertheless,
there exists a risk that a Trust service provider will seek recourse against the
Trust if is not timely paid by Krane for the fees and expenses for which it is
responsible, which could materially adversely affect a Fund.
Under
the Investment Advisory Agreement, each Fund pays Krane the fee shown in the
table below (in addition to the securities lending compensation Krane receives
under the Agreement discussed below), which is calculated daily and paid
monthly, at an annual rate based on a percentage of the average daily net assets
of the Fund.
KFA
Dynamic Fixed Income ETF |
0.45% |
KFA
Large Cap Quality Dividend Index ETF |
0.40% |
KFA
Mount Lucas Index Strategy ETF |
0.89% |
KFA
Small Cap Quality Dividend Index ETF |
0.50% |
KFA
Value Line® Dynamic Core Equity Index ETF |
0.55% |
For
the fiscal year or period, as applicable, ended March 31, 2021, the Adviser
received the fees (in addition to the securities lending compensation Krane
receives under the Agreement discussed below), as a percentage of average daily
net assets of each operational Fund, as set forth below, which is net of any
fees waiver or expenses reimbursed:
KFA
Dynamic Fixed Income ETF |
0.45% |
KFA
Large Cap Quality Dividend Index ETF |
0.40% |
KFA
Mount Lucas Index Strategy ETF |
0.89% |
KFA
Small Cap Quality Dividend Index ETF |
0.50% |
KFA
Value Line® Dynamic Core Equity Index ETF |
0.55% |
In
addition to the above-described services, to the extent a Fund engages in
securities lending, Krane will: (i) determine which securities are available for
loan and notify the securities lending agent for the Fund (the "Agent"), (ii)
monitor the Agent’s activities to ensure that securities loans are effected in
accordance with Krane’s instructions and in accordance with applicable
procedures and guidelines adopted by the Board, (iii) make recommendations to
the Board regarding the Fund’s participation in securities lending; (iv) prepare
appropriate periodic reports for, and seek appropriate periodic approvals from,
the Board with respect to securities lending activities, (v) respond to Agent
inquiries concerning Agent’s activities, and (vi) such other related duties as
Krane deems necessary or appropriate.
Under
the agreement, while the fees and expenses related to a Fund’s securities
lending-related activities reduce the revenues and income of the Fund from such
activities, they are not fees and expenses for which Krane is responsible.
Further, as compensation for the services provided by Krane in connection with
any securities lending-related activities, each Fund pays Krane 10% of the
monthly investment income received from the investment of cash collateral and
loan fees received from borrowers in respect of securities loans (net of any
amounts paid to the custodian and/or securities lending agent or rebated to
borrowers). For the fiscal period ended March 31, 2021, Krane did not receive
any revenue from the Funds related to securities lending activities.
The
Investment Advisory Agreement has been approved by the Board of Trustees and
shareholders of each Fund (in this regard, Krane as the sole initial shareholder
of the applicable Funds approved various matters and agreements, including the
Investment Advisory Agreement for each Fund prior to its public offering). A
discussion regarding the basis for the Board’s approval of the investment
advisory agreement with Krane with respect to the KFA Large Cap Quality Dividend
Index ETF and KFA Small Cap Quality Dividend Index ETF is available in the
Funds’ Semi-Annual Report to Shareholders dated September 30, 2020. A discussion
regarding the basis for the Board’s approval of the investment advisory
agreement with Krane with respect to the KFA Dynamic Fixed Income ETF is
available in the Funds’ Annual Report to Shareholders dated March 31, 2020. A
discussion regarding the basis for the Board’s approval of the investment
advisory agreement with Krane with respect to the KFA Mount Lucas Index Strategy
ETF and KFA Value Line® Dynamic Core Equity Index ETF is available in the Funds’
Annual Report to Shareholders dated March 31, 2021.
China
International Capital Corporation (USA) Holdings Inc., a wholly-owned, indirect
subsidiary of China International Capital Corporation Limited owns a majority
stake in Krane. As of April 30, 2021, Central Huijin Investment Limited, a
mainland Chinese-domiciled entity, and HKSCC Nominees Limited, held
approximately 40.17% and 30.74%, respectively, of the shares of China
International Capital Corporation Limited. Central Huijin Investment Limited is
a wholly-owned subsidiary of China Investment Corporation, which is a mainland
Chinese sovereign wealth fund. KFA One Holdings, LLC, located at 280 Park
Avenue, 32nd Floor, New York, New York 10017, holds the remaining equity
interests in Krane and Jonathan Krane, through his equity interests in KFA One
Holdings, LLC, beneficially owns more than 10% of the equity interests in
Krane.