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Eaton
Vance Short Duration Municipal Income ETF
Prospectus | December
16, 2023, as amended March 25, 2024
|
| |
Portfolio |
Ticker
Symbol |
Exchange |
Eaton
Vance Short Duration Municipal
Income ETF |
EVSM |
NYSE
Arca |
The
Securities and Exchange Commission (“SEC”) has not approved or disapproved these
securities or passed upon the adequacy
of this Prospectus. Any representation to the contrary is a criminal
offense.
An
investment in the Fund
is not a bank deposit and is not insured by the Federal Deposit Insurance
Corporation or any other
government agency. An investment in the Fund
involves investment risks, and you may lose money in the Fund.
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF
Investment
Objective
The
Eaton Vance Short Duration Municipal Income ETF (the “Fund”) seeks to provide
current income exempt from regular federal income
tax.
Fees
and Expenses
The
table below describes the fees and expenses that you may pay if you buy, hold
and sell shares of the Fund. You
may pay fees other
than the fees and expenses of the Fund, such as brokerage commissions and other
fees charged by financial intermediaries,
which are not reflected in the tables and examples
below.
Annual
Fund Operating Expenses1 (expenses
that you pay each year as a percentage of the value of your
investment)
|
| |
Management
Fee1
|
% |
|
Other
Expenses2
|
% |
|
Total
Annual Fund Operating Expenses |
0.19% |
|
1 |
The
Fund’s management agreement provides that the Fund’s “Adviser,” Morgan
Stanley Investment Management Inc., will pay substantially all expenses
of
the Fund (including expenses of Morgan Stanley ETF Trust (the “Trust”)
relating to the Fund), except for the distribution fees, if any, brokerage
expenses,
acquired fund fees and expenses, taxes, interest, litigation expenses, and
other extraordinary expenses, including the costs of proxies, not
incurred
in the ordinary course of the Fund’s
business. |
2 |
Other
Expenses have been estimated for the current fiscal
year. |
Example
The
example below is intended to help you compare the cost of investing in the Fund
with the cost of investing in other funds. The example
does not take into account brokerage commissions that you pay when purchasing or
selling shares of the Fund.
The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell all of your shares at the end of those
periods. The example also assumes your investment has a 5% return each year and
the Fund’s operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
|
|
|
|
| |
|
1
Year |
3
Years |
5
Years |
10
Years |
|
|
$19 |
$61 |
$107 |
$243 |
|
Portfolio
Turnover
The
Fund pays transaction costs, such as commissions, when it buys and sells
securities (or “turns over” its portfolio). A higher portfolio
turnover rate may indicate higher transaction costs and may result in higher
taxes when Fund shares are held in a taxable account.
These costs, which are not reflected in Total Annual Fund Operating Expenses or
in the Example, affect the Fund’s performance.
During the most recent fiscal year of the Predecessor Fund (as defined below),
the Predecessor Fund did not hold any long-term
investments and accordingly portfolio turnover is not
applicable.
Principal
Investment Strategies
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus the
amount of any borrowings for investment purposes)
in municipal securities, the interest on which is exempt from regular federal
income tax. This policy is fundamental and may
not be changed without shareholder approval. The Fund may invest up to
100% of its assets in municipal securities, the interest on
which may be subject to the federal alternative minimum tax for individuals. In
addition, the Fund may invest up to 20% of its assets
in securities subject to regular federal income tax. The Fund may also invest in
variable and floating rate demand instruments and
tender option bonds.
The
Fund may invest 25% or more of its total assets in certain types of municipal
obligations (such as general obligations, municipal leases,
principal only municipal investments, revenue bonds and industrial development
bonds) and in one or more states, territories and
economic sectors (such as housing, hospitals, healthcare facilities or
utilities). At least 85% of the Fund’s net assets normally will be
invested in municipal obligations rated at least investment grade at the time of
investment (which are those rated Baa3 or higher by
Moody’s Investors Service, Inc (“Moody’s”), or BBB- or higher by either S&P
Global Ratings (“S&P”) or Fitch Ratings (“Fitch”)) or,
if unrated, determined by the Adviser to be of at least investment grade
quality. The balance of net assets may be invested in municipal
obligations rated below investment grade and in unrated municipal obligations
considered to be of comparable quality by the
Adviser (“junk bonds”). The Fund will not invest more than 5% of its net assets
in obligations rated below B3 by Moody’s, or B- by
either S&P or Fitch, or in unrated obligations considered to be of
comparable quality by the Adviser. For purposes of rating restrictions,
if securities are rated differently by two or more rating agencies, the highest
rating is used.
Under
normal circumstances, the Fund intends to maintain a dollar-weighted average
portfolio duration of less than three years; however,
the Fund may invest in individual municipal obligations of any maturity.
Duration measures the time-weighted expected cash
flows of a fixed-income security, while maturity refers to the amount of time
until a fixed-income security
matures.
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF (Con’t)
The
Adviser’s process for selecting obligations for purchase and sale emphasizes the
creditworthiness of the issuer or other person obligated
to repay the obligation and the relative value of the obligation in the market.
In evaluating creditworthiness, the Adviser considers
ratings assigned by rating agencies and generally performs additional credit and
investment analysis. The portfolio managers also
may trade securities to seek to minimize taxable capital gains to shareholders.
A portion of the Fund’s distributions generally will be
subject to federal alternative minimum tax. The Fund may not be suitable for
investors subject to the federal alternative minimum tax.
When
deemed by the Adviser to be relevant to its evaluation of creditworthiness and
when applicable information is available, the Adviser
considers environmental, social and/or governance issues (referred to as ESG)
which may impact the prospects of an issuer (or
obligor) or financial performance of an obligation. When considered, one or more
ESG issues are taken into account alongside other
factors in the investment decision-making process and are not the sole
determinant of whether an investment can be made or will
remain in the Fund’s portfolio.
The
Fund may, but is not required to, use derivatives and similar instruments, such
as residual interest bonds, futures contracts and options
thereon, interest rate swaps and forward rate agreements, for a variety of
purposes, including hedging, to seek total return or as
a substitute for the purchase or sale of securities. Derivative instruments used
by the Fund will be counted toward the Fund’s 80% policy
discussed above to the extent they have economic characteristics similar to the
securities included within that policy.
Principal
Risks
There
is no assurance that the Fund will achieve its investment objective, and you can
lose money investing in this Fund.
The principal
risks of investing in the Fund include:
• |
Municipals.
Because the Fund invests
in municipal securities (also referred to as municipal obligations), the
Fund may be susceptible
to political, legislative, economic, regulatory, tax or other factors
affecting issuers of these municipal securities, such as state
and local governments and their agencies. To the extent that the Fund
invests in municipal securities of issuers in the same state
or economic sector, it could be more sensitive to economic, business or
political developments that affect such state or sector. Municipal
securities and their issuers may be more susceptible to downgrade, loss of
revenue, default and bankruptcy during periods
of economic stress. Municipal securities also involve the risk that an
issuer may call the securities for redemption, which could
force the Fund to reinvest the proceeds at a lower rate of interest. While
interest earned on municipal securities is generally not
subject to regular
federal income tax, any interest earned on taxable municipal securities is
fully taxable at the federal level and may
be subject to state and/or local income
tax. |
• |
Fixed-Income
Securities.
Fixed-income securities are subject to the risk of the issuer’s inability
to meet principal and interest payments
on its obligations (i.e., credit risk) and are subject to price volatility
resulting from, among other things, interest rate sensitivity
(i.e., interest rate risk), market perception of the creditworthiness of
the issuer and general market liquidity (i.e., market risk).
For
example, a type of fixed-income securities in which the Fund may invest
are corporate debt obligations. In addition to interest
rate, credit and other risks, corporate debt obligations are also subject
to factors directly related to the issuer, such as the credit
rating of the corporation, the corporation’s performance and perceptions
of the corporation in the marketplace, and by factors
not directly related to the issuer, such as general market liquidity,
economic conditions and inflation.
The Fund may face a heightened
level of interest rate risk in times of monetary policy change and/or
uncertainty, such as when the Federal Reserve Board
adjusts a quantitative easing program and/or changes rates. A
changing interest rate environment increases certain risks, including
the potential for periods of volatility, increased redemptions, shortened
durations (i.e., prepayment risk) and extended durations
(i.e., extension risk). The Fund is not limited as to the maturities (when
a debt security provides its final payment) or durations
(measure of interest rate sensitivity of the securities) in which it may
invest but, under normal circumstances, the Fund intends
to maintain a dollar-weighted average portfolio duration of less than
three years. Securities with longer durations are likely to
be more sensitive to changes in interest rates, generally making them more
volatile than securities with shorter durations. Lower rated
fixed-income securities have greater volatility because there is less
certainty that principal and interest payments will be made as
scheduled. The
Fund may be subject to certain liquidity risks that may result from the
lack of an active market and the reduced number
and capacity of traditional market participants to make a market in
fixed-income
securities. |
• |
Credit
and Interest Rate Risk.
Credit risk refers to the possibility that the issuer or guarantor of a
security will be unable or unwilling
or perceived to be unable or unwilling to make interest payments and/or
repay the principal on its debt. In such instances,
the value of the Fund could decline and the Fund could lose money.
Interest rate risk refers to the decline in the value of
a fixed-income security resulting from changes in the general level of
interest rates. When the general level of interest rates goes up,
the prices of most fixed-income securities go down. When the general level
of interest rates goes down, the prices of most fixed-income
securities go up. The Fund may invest in variable and floating rate loans
and other variable and floating rate securities.
Although these instruments are generally less sensitive to interest rate
changes than fixed rate instruments, the value of variable
and floating rate loans and other securities may decline if their interest
rates do not rise as quickly, or as much, as general interest
rates. The Fund may face a heightened level of interest rate risk in times
of monetary policy change and/or uncertainty, such
as when the Federal Reserve Board adjusts a quantitative easing program
and/or changes rates. A changing interest rate environment
increases certain risks, including the potential for periods of
volatility, increased redemptions, shortened durations
|
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF (Con’t)
|
(i.e.,
prepayment risk) and extended durations (i.e., extension risk). For
example, during periods when interest rates are low, the Fund’s
yield (and total return) also may be low or otherwise adversely affected
or the Fund may be unable to maintain positive returns.
Credit ratings may not be an accurate assessment of liquidity or credit
risk. Although credit ratings may not accurately reflect
the true credit risk of an instrument, a change in the credit rating of an
instrument or an issuer can have a rapid, adverse effect
on the instrument’s liquidity and make it more difficult for the Fund to
sell at an advantageous price or
time. |
• |
High
Yield Securities (“Junk Bonds”).
The Fund’s investments in high yield securities expose it to a substantial
degree of credit risk. High
yield securities may be more volatile in price in certain environments.
High yield securities may be issued by companies that are
restructuring, are smaller and less creditworthy or are more highly
indebted than other companies, and therefore they may have
more difficulty making scheduled payments of principal and interest. High
yield securities are subject to greater risk of loss of income
and principal than higher rated securities and are considered speculative
because of increased credit risk relative to other fixed
income investments. High yield securities may experience reduced
liquidity, and sudden and substantial decreases in price. An
economic downturn affecting an issuer of high yield securities may result
in an increased incidence of default. In the event of a default,
the Fund may incur additional expenses to seek
recovery. |
• |
Revenue
Bonds.
Revenue bonds are municipal obligations that are secured by the revenue
from a specific project. To the extent that
such revenues do not materialize, the revenue bonds may not be repaid. If
the Fund invests in revenue bonds that are issued by
municipal issuers in the same economic sector, the Fund would be
particularly susceptible to developments adversely affecting that
sector. Revenue bonds historically have been subject to a greater risk of
default than general obligation bonds because investors
can look only to the revenue generated by the project or other revenue
source backing the project, rather than to the general
taxing authority of the state or local government issuer of the
obligations. |
• |
Tax-Exempt
Variable Rate Demand Notes.
Tax-exempt variable rate demand notes are variable rate tax-exempt debt
obligations that give
investors the right to demand principal repayment. Due to cyclical supply
and demand considerations, at times the yields on these
obligations can exceed the yield on taxable money market obligations. The
interest rate on these instruments may be reset daily,
weekly or on some other reset period and may have a floor or ceiling on
interest rate changes. The interest rate of a floating rate
instrument may be based on a known lending rate, such as a bank’s prime
rate, and is reset whenever such rate is adjusted. The
interest rate on a variable rate demand note is reset at specified
intervals at a market rate. The Fund’s ability to receive payments
of principal and interest and other amounts in connection with debt
obligations held by it will depend primarily on the financial
condition of the issuer. The failure by the Fund to receive scheduled
interest or principal payments on a debt obligation would
adversely affect the income of the Fund and would likely reduce the value
of its assets, which would be reflected in a reduction
in the Fund’s net asset value
(“NAV”). |
• |
Tender
Option Bonds. The
risks of tender option bonds include the risk that the owner of such
instrument may not be considered the
owner for regular
federal income tax purposes and thus will not be entitled to treat such
interest as exempt from regular federal income
tax. Additionally, the occurrence of certain defaults or a credit rating
downgrade on the underlying security may impair the
ability to tender the bond back to the third-party provider of the demand
option, thus causing the bond to become
illiquid. |
• |
Taxability
Risk. Changes
in tax laws or adverse determinations by the Internal Revenue Service
(“IRS”) may make the income from some
municipal obligations
taxable. |
• |
Liquidity.
The Fund may make investments that are illiquid or restricted or that may
become illiquid or less liquid in response to overall
economic conditions or adverse investor perceptions, and which may entail
greater risk than investments in other types of securities.
These investments may be more difficult to value or sell, particularly in
times of market turmoil, and there may be little trading
in the secondary market available for particular securities. Liquidity
risk may be magnified in a market where credit spread and
interest rate volatility is rising and where investor redemptions from
fixed-income funds may be higher than normal.
If the Fund
is forced to sell an illiquid or restricted security to fund redemptions
or for other cash needs, it may be forced to sell the security
at a loss or for less than its fair value and may be unable to sell the
security at all. |
• |
When-Issued
Securities, Delayed Delivery Securities, TBAs and Forward
Commitments. The
Fund may purchase or sell securities that it
is entitled to receive on a when-issued, delayed delivery or through a
forward commitment basis. For example, the Fund may invest
in TBAs, which settle on a delayed delivery basis. These investments may
result in a form of leverage and may increase volatility
in the Fund’s share price. In a TBA transaction, the seller agrees to
deliver the MBS for an agreed upon price on an agreed
upon future date, but makes no guarantee as to which or how many
securities are to be delivered. Accordingly, the Fund’s investments
in TBAs are subject to risks such as failure of the counterparty to
perform its obligation to deliver the security, the characteristics
of a security delivered to the Fund may be less favorable than expected
and the security the Fund buys will lose value
prior to its delivery. The Fund’s purchase of other securities on a
when-issued, delayed delivery or through a forward commitment
basis are subject to similar risks. When the Fund has sold a security on a
when-issued, delayed delivery, or forward commitment
basis, the Fund does not benefit if the value of the security appreciates
above the sale price during the commitment period
and the Fund is subject to failure of the counterparty to pay for the
securities. |
• |
Market
and Geopolitical Risk.
The value of your investment in the Fund is based on the values of the
Fund’s investments, which change
due to economic and other events that affect markets generally, as well as
those that affect particular regions, countries, industries,
companies or governments. These events may be sudden and unexpected, and
could adversely affect the liquidity of the
|
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF (Con’t)
|
Fund’s
investments, which may in turn impact valuation, the Fund’s ability to
sell securities and/or its ability to meet redemptions.
The risks associated with these developments may be magnified if certain
social, political, economic and other conditions
and events (such as war, natural disasters, epidemics and pandemics,
terrorism, conflicts, social unrest, recessions, inflation,
interest rate changes and supply chain disruptions) adversely interrupt
the global economy and financial markets. It is difficult
to predict when events affecting the U.S. or global financial markets may
occur, the effects that such events may have and the
duration of those effects (which may last for extended periods). These
events may negatively impact broad segments of businesses
and populations and have a significant and rapid negative impact on the
performance of the Fund’s investments, adversely
affect and increase the volatility of the Fund’s share price
and exacerbate pre-existing risks to the
Fund. |
• |
Active
Management Risk.
In pursuing the Fund’s investment objective, the Adviser has considerable
leeway in deciding which investments
to buy, hold or sell on a day-to-day basis, and which trading strategies
to use. For example, the Adviser, in its discretion,
may determine to use some permitted trading strategies while not using
others. The success or failure of such decisions will
affect the Fund’s
performance. |
• |
Portfolio
Turnover.
Consistent with its investment policies, the Fund will purchase and sell
securities without regard to the effect on
portfolio turnover. Higher portfolio turnover will cause the Fund to incur
additional transaction
costs. |
|
Authorized
Participant Concentration Risk.
Only an authorized participant may engage in creation or redemption
transactions directly
with the Fund. The Fund has a limited number of intermediaries that act as
authorized participants and none of these authorized
participants is or will be obligated to engage in creation or redemption
transactions. There can be no assurance that an active
trading market for the Fund’s shares will develop or be maintained. To the
extent that these intermediaries exit the business or
are unable to or choose not to proceed with creation and/or redemption
orders with respect to the Fund, such as during periods of
market stress, and no other authorized participant creates or redeems,
shares may trade at a discount to net asset value (“NAV”) and
possibly face trading halts
and/or delisting. |
|
Cash
Transactions Risk.
Unlike certain ETFs, the Fund may effect creations and redemptions in cash
or partially in cash. Therefore,
it may be required to sell portfolio securities and subsequently recognize
gains on such sales that the Fund might not have
recognized if it were to distribute portfolio securities in-kind. As such,
investments in shares may be less tax-efficient than an investment
in an ETF that distributes portfolio securities entirely
in-kind. |
|
Trading
Risk.
The market prices of shares are expected to fluctuate, in some cases
materially, in response to changes in the Fund’s NAV,
the intra-day value of the Fund’s holdings, and supply and demand for
shares. The Adviser cannot predict whether shares will
trade above, below or at their NAV. Disruptions to creations and
redemptions, the existence of significant market volatility or
potential
lack of an active trading market for the shares (including through a
trading halt), as well as other factors, may result in the
shares trading significantly above (at a premium) or below (at a discount)
to NAV or to the intraday value of the Fund’s holdings.
You may pay significantly more or receive significantly less than the
Fund’s NAV per share during periods when there is a
significant premium or discount. Buying or selling shares in the secondary
market may require paying brokerage commissions or other
charges imposed by brokers as determined by that broker. Brokerage
commissions are often a fixed amount and may be a significant
proportional cost when seeking to buy or sell relatively small amounts of
shares. In addition, the market price of shares, like
the price of any exchange-traded security, includes a “bid-ask spread”
charged by the market makers or other participants that trade
the particular security. The spread of the Fund’s shares varies over time
based on the Fund’s trading volume and market liquidity
and may increase if the Fund’s trading volume, the spread of the Fund’s
underlying securities, or market liquidity decrease. |
Shares
of the Fund are not bank deposits and are not guaranteed or insured by the
Federal Deposit Insurance Corporation or any other
government agency.
Performance
Information
On
March 22, 2024, Morgan Stanley Institutional Fund Trust - Short Duration
Municipal Income Portfolio (the “Predecessor Fund”),
which operated as a mutual fund, was reorganized into the Fund
(“Reorganization”). The Predecessor Fund’s investment objective
was substantially similar to the Fund’s and the Predecessor Fund was managed in
a manner that, in all material respects, complied
with the investment guidelines and restrictions of the Fund. The Predecessor
Fund was designated as the accounting survivor
in the Reorganization. As a result, the Fund assumed the Predecessor Fund’s
historical performance and the performance information
shown below reflects that of the Class IR shares of the Predecessor Fund, which
had a different fee structure than the Fund.
The performance of the Predecessor Fund has not been restated to reflect the
annual operating expenses of the Fund, which were
lower than those of the Predecessor Fund. Past performance may have been
different if the Fund’s current fee structure had been
in place during the period.
The
bar chart and table below provide some indication of the risks of investing in
the Fund by showing changes in the Predecessor Fund’s
Class IR shares’ performance from year-to-year and by showing how the
Predecessor Fund’s Class IR shares’ average annual
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF (Con’t)
returns
for the past one and five year periods and since inception compare with those of
a broad measure of market performance, as well
as an additional index. The
Predecessor Fund’s past performance, before and after taxes, is not necessarily
an indication of how the
Fund will perform in the future.
Updated performance information will be available online at
www.eatonvance.com
or by calling toll-free
1-800-869-6397.
Annual
Total Returns—Calendar Years
|
| |
High
Quarter |
12/31/23
|
2.72% |
Low
Quarter |
09/30/21
|
0.00% |
Average
Annual Total Returns
(for
the calendar periods ended December
31, 2023)
|
|
| |
|
Past
One Year |
Past
Five Years |
Since
Inception |
Return
Before Taxes |
4.64% |
1.59% |
1.59% |
Return
After Taxes on Distributions1
|
% |
% |
% |
Return
After Taxes on Distributions and Sale of Fund Shares |
2.72% |
0.98% |
0.98% |
ICE
BofA 1-3 Year US Municipal Securities Index (reflects no deduction
for fees, expenses or taxes)2
|
% |
% |
%3 |
Short
Duration Municipal Income Blend Index (reflects no deduction
for fees, expenses or taxes)4
|
% |
% |
%3 |
Bloomberg
BVAL Municipal AAA Yield Curve (Callable) 3 Month
Index (reflects no deduction for fees, expenses or taxes)5
|
% |
% |
%3 |
1 |
These
returns do not reflect any tax consequences from a sale of your shares at
the end of each
period. |
2 |
The
ICE BofA 1-3 Year US Municipal Securities Index is a subset of ICE BofA US
Municipal Securities Index including all securities with a remaining term
to
final maturity less than 3 years. ICE BofA US Municipal Securities Index
tracks the performance of US dollar denominated investment grade
tax-exempt
debt publicly issued by US states and territories, and their political
subdivisions, in the US domestic market. Qualifying securities must have
at least
one year remaining term to final maturity, at least 18 months to final
maturity at the time of issuance, a fixed coupon schedule and an
investment grade
rating (based on an average of Moody’s, S&P and Fitch). It is not
possible to invest directly in an index. Effective July 31, 2023, the Fund
changed its
primary benchmark to the ICE BofA 1-3 Year US Municipal Securities Index
because the Adviser believes it is a more appropriate
benchmark. |
3 |
Since
Inception reflects the inception date of the Predecessor Fund (commenced
operations on
12/19/2018). |
4 |
The
Short Duration Municipal Income Blended Index is a performance linked
benchmark of the old and new benchmark of the Fund. The old benchmark
represented
by Bloomberg BVAL Municipal AAA Yield Curve (Callable) 3-Month Index from
the Fund’s inception to July 30, 2023 and the new benchmark
represented by ICE BofA 1-3 Year US Municipal Securities Index for the
periods thereafter. It is not possible to invest directly in an
index. |
5 |
Bloomberg
BVAL Municipal AAA Yield Curve (Callable) 3-Month Index is a
municipal “AAA” 5% coupon benchmark yield curve that is the baseline curve
for
BVAL tax-exempt municipals. It is populated with high quality U.S.
municipal bonds with an average rating of “AAA” from Moody’s and S&P.
The yield
curve is built using non-parametric fit of market data obtained from the
Municipal Securities Rulemaking Board, new issues calendars and other
proprietary
contributed prices. The benchmark is updated hourly and utilizes eligible
“AAA” traded observations throughout the day and accessible on
through
Bloomberg services. The 3-month curve is one data point of the overall
Bloomberg’s evaluated pricing service (“BVAL”) AAA Benchmark Curve.
It
is not possible to invest directly in an
index. |
The
after-tax returns shown in the table above are calculated using the historical
highest individual federal marginal income tax rates during
the period shown and do not reflect the impact of state and local taxes.
Actual
after-tax returns depend on the investor’s tax situation
and may differ from those shown, and after-tax returns are not relevant to
investors who hold their Fund shares through tax deferred
arrangements such as 401(k) plans or individual retirement accounts.
After-tax
returns may be higher than before-tax returns due
to foreign tax credits and/or an assumed benefit from capital losses that would
have been realized had Fund shares been sold at the
end of the relevant periods, as
applicable.
Eaton
Vance | Fund
Summary
Eaton
Vance Short Duration Municipal Income ETF (Con’t)
Fund
Management
Adviser.
Morgan Stanley Investment Management Inc.
Portfolio
Managers.
Information about the individuals jointly and primarily responsible for the
day-to-day management of the Fund is
shown below:
|
| |
Name |
Title
with Adviser |
Date
Began Managing Fund |
Julie
P. Callahan, CFA |
Managing
Director |
March
2024 and May 2023 for the Predecessor Fund |
Paul
Metheny, CFA |
Executive
Director |
March
2024 and July 2023 for the Predecessor Fund |
Carl
Thompson, CFA |
Executive
Director |
March
2024 and July 2023 for the Predecessor Fund |
Brandon
Matsui, CFA |
Executive
Director |
March
2024 |
Purchase
and Sale of Fund Shares
Individual
shares of the Fund may only be purchased and sold in secondary market
transactions through a broker or dealer at market price.
Because shares trade at market prices, rather than NAV, shares of the Fund may
trade at a price greater than NAV (i.e., a premium)
or less than NAV (i.e., a discount).
You
may incur costs attributable to the difference between the highest price a buyer
is willing to pay for shares (bid) and the lowest price
a seller is willing to accept for shares (ask) (the “bid-ask spread”) when
buying or selling shares in the secondary market.
Recent
information, including information about the Fund’s NAV, market price, premiums
and discounts, and bid-ask spreads (when
available), will be available on the Fund’s website at
www.eatonvance.com.
Tax
Information
The
Fund’s distributions of interest on municipal obligations generally are not
subject to regular
federal income tax. The Fund’s distributions
from other portfolio securities may be subject to federal, state and/or local
income taxes. Income derived from some municipal
securities is subject to the federal alternative minimum tax. If the Fund makes
any capital gain distributions, those distributions
will normally be subject to federal and state income tax when they are paid,
whether you take them in cash or reinvest them
in Fund shares.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or financial
intermediary (such as a bank), the Adviser and/or Foreside Fund
Services, LLC (the “Distributor”) may pay the financial intermediary for
the sale of Fund shares and related services. These payments,
which may be significant in amount, may create a conflict of interest by
influencing the financial intermediary and your salesperson
to recommend the Fund over another investment. Ask your salesperson or visit
your financial intermediary’s website for more
information.
Eaton
Vance | Details
of the Fund
Eaton
Vance Short Duration Municipal Income ETF
Investment
Objective
The
Fund seeks to provide current income exempt from regular federal income
tax.
The
Fund’s investment objective may be changed by the Trust’s Board of Trustees
without shareholder approval, but no change is anticipated.
If the Fund’s investment objective changes, the Fund will notify shareholders
and shareholders should consider whether the
Fund remains an appropriate investment in light of the change.
Approach
Under
normal circumstances, the Fund invests at least 80% of its net assets (plus the
amount of any borrowings for investment purposes)
in municipal securities, the interest on which is exempt from regular federal
income tax. This policy is fundamental and may
not be changed without shareholder approval. The Fund may invest up to 100% of
its assets (plus the amount of any borrowings
for investment purposes) in municipal securities, the interest on which may be
subject to the federal alternative minimum tax
for individuals. In addition, the Fund may invest up to 20% of its assets in
securities subject to regular federal income tax. The Fund
may also invest in variable and floating rate demand instruments and tender
option bonds.
The
Fund may invest 25% or more of its total assets in certain types of municipal
obligations (such as general obligations, municipal leases,
principal only municipal investments, revenue bonds and industrial development
bonds) and in one or more states, territories and
economic sectors (such as housing, hospitals, healthcare facilities or
utilities). At least 85% of the Fund’s net assets normally will be
invested in municipal obligations rated at least investment grade at the time of
investment (which are those rated Baa3 or higher by
Moody’s, or BBB- or higher by either S&P or Fitch) or, if unrated,
determined by the Adviser to be of at least investment grade quality.
The balance of net assets may be invested in municipal obligations rated below
investment grade and in unrated municipal obligations
considered to be of comparable quality by the Adviser (“junk bonds”). The Fund
will not invest more than 5% of its net assets
in obligations rated below B3 by Moody’s, or B- by either S&P or Fitch, or
in unrated obligations considered to be of comparable
quality by the Adviser. For purposes of rating restrictions, if securities are
rated differently by two or more rating agencies,
the highest rating is used.
Under
normal circumstances, the Fund intends to maintain a dollar-weighted average
portfolio duration of less than three years; however,
the Fund may invest in individual municipal obligations of any maturity.
Duration measures the time-weighted expected cash
flows of a fixed-income security, while maturity refers to the amount of time
until a fixed-income security matures.
Process
The
Adviser’s process for selecting obligations for purchase and sale emphasizes the
creditworthiness of the issuer or other person obligated
to repay the obligation and the relative value of the obligation in the market.
In evaluating creditworthiness, the Adviser considers
ratings assigned by rating agencies and generally performs additional credit and
investment analysis. The portfolio managers also
may trade securities to seek to minimize taxable capital gains to shareholders.
A portion of the Fund’s distributions generally will be
subject to federal alternative minimum tax. The Fund may not be suitable for
investors subject to the federal alternative minimum tax.
When
deemed by the Adviser to be relevant to its evaluation of creditworthiness and
when applicable information is available, the Adviser
considers environmental, social and/or governance issues (referred to as ESG)
which may impact the prospects of an issuer (or
obligor) or financial performance of an obligation. When considered, one or more
ESG issues are taken into account alongside other
factors in the investment decision-making process and are not the sole
determinant of whether an investment can be made or will
remain in the Fund’s portfolio.
The
Fund may, but is not required to, use derivatives and similar instruments, such
as residual interest bonds, futures contracts and options
thereon, interest rate swaps and forward rate agreements, for a variety of
purposes, including hedging, to seek total return or as
a substitute for the purchase or sale of securities. Derivative instruments used
by the Fund will be counted toward the Fund’s 80% policy
discussed above to the extent they have economic characteristics similar to the
securities included within that policy.
Eaton
Vance | Additional
Information About Fund Investment Strategies and Related Risks
Additional
Information About Fund Investment Strategies and Related Risks
|
| |
This
section discusses additional information relating to Fund investment
strategies, other types of investments that the Fund
may make and related risk factors. Fund investment practices and
limitations are described in more detail in the Statement
of Additional Information (“SAI”), which is incorporated by reference and
legally is a part of this Prospectus. For details
on how to obtain a copy of the SAI and other reports and information, see
the back cover of this Prospectus. |
Economies
and financial markets worldwide have recently experienced periods of increased
volatility, uncertainty, distress, government
spending, inflation and disruption to consumer demand, economic output and
supply chains. To the extent these conditions
continue, the risks associated with an investment in the Fund, including those
described below, could be heightened and the
Fund’s investments (and thus a shareholder’s investment in the Fund) may be
particularly susceptible to sudden and substantial losses,
reduced yield or income or other adverse developments. The occurrence, duration
and extent of these or other types of adverse economic
and market conditions and uncertainty over the long term cannot be reasonably
projected or estimated at this time.
The
name, investment objective and/or policies of the Fund may be similar to other
funds advised by the Adviser or its affiliates. However,
the investment results of the Fund may be higher or lower than, and there is no
guarantee that the investment results of the Fund
will be comparable to, any such other funds for any period of time.
The
Fund may be more significantly affected by purchases and redemptions of its
Creation Units (as defined below) than a fund with relatively
greater assets under management would be affected by purchases and redemptions
of its shares. As compared to a larger fund,
the Fund is more likely to sell a comparatively large portion of its portfolio
to meet significant Creation Unit redemptions or invest
a comparatively large amount of cash to facilitate Creation Unit purchases, in
each case when the Fund otherwise would not seek
to do so. Such transactions may cause the Fund to make investment decisions at
inopportune times or prices or miss attractive investment
opportunities. Such transactions may also accelerate the realization of taxable
income if sales of securities resulted in gains and
the Fund redeems Creation Units for cash, or otherwise cause the Fund to perform
differently than intended. While such risks may
apply to funds of any size, such risks are heightened in funds with fewer assets
under management.
Municipals
Municipal
securities (also referred to as municipal obligations) include debt obligations
of states, territories or possessions of the United
States and the District of Columbia and their political subdivisions, agencies
and instrumentalities, such as local or regional governments.
The income on municipal securities is generally exempt from regular
federal income tax at the time of issuance, in the opinion
of bond counsel or other counsel to the issuers of such securities. However, the
Fund may purchase municipal securities that pay
interest that is subject to the federal alternative minimum tax, and municipal
securities on which the interest payments are taxable.
Municipal securities typically are “general obligation” or “revenue” bonds,
notes or commercial paper, including participations
in lease obligations and installment purchase contracts of municipalities.
General obligation bonds are secured
by the issuer’s full faith and credit including its taxing power for payment of
principal and interest. Revenue bonds, however, are
generally payable from a specific revenue source. They are issued for a wide
variety of projects such as financing public utilities, hospitals,
housing, airports, highways and educational facilities. These types of bonds
involve the risk that the tax or other revenues so
derived will not be sufficient to meet interest and or principal payment
obligations. These obligations may have fixed, variable or floating
rates.
Because
the Fund invests in municipal securities, the Fund may be affected significantly
by the economic, regulatory, legislative, tax or
political developments affecting the ability of issuers of municipal securities
to pay interest or repay principal. The risks of municipal
securities generally depend on the financial and credit status of the issuer and
may rely on a specific stream of revenue associated
with a project or other revenue source. Thus, adverse developments related to a
municipality’s ability to raise revenue, including
through its taxing authority, or the failure of specific revenues to materialize
would negatively impact such investments. These
factors, which may also impact other municipal obligations, include, among
others, changing demographic trends, such as population
shifts or changing tastes and values, or increasing vacancies or declining rents
resulting from legal, cultural, technological, global
or local economic developments, as well as reduced demand for properties,
revenues or goods. Changes in the financial health of
an issuer of municipal securities may make it difficult for the issuer to make
interest and principal payments when due. Some municipalities
have had significant financial problems recently, and these and other
municipalities could, potentially, continue to experience
significant financial problems resulting from lower tax revenues and/or
decreased aid from state and local governments in the
event of an economic downturn. In addition, adverse legislative, tax,
regulatory, demographic or political changes may negatively impact
the Fund’s investments in municipal securities. These events could decrease the
Fund’s income and/or adversely affect the Fund’s
performance and investments. Municipal securities also involve the risk that an
issuer may call securities for redemption, which
could force the Fund to reinvest the proceeds at a lower rate of interest, and
the value of municipal securities may be affected by
the rights of municipal security holders.
Municipal
securities may be more susceptible to downgrades, defaults or loss of tax or
other revenue during recessions or similar periods
of economic stress. Factors contributing to the financial stress on
municipalities may include lower property tax collections as a
result of lower home values, lower sales tax revenue as a result of consumers
cutting back spending and lower income tax revenue as
Eaton
Vance | Additional
Information About Fund Investment Strategies and Related Risks
Additional
Information About Fund Investment Strategies and Related Risks (Con’t)
a
result of a higher unemployment rate. In addition, because some municipal
obligations may be secured or guaranteed by banks and other
institutions, the risk to the Fund associated with investments in such municipal
securities could increase if the banking or financial
sector suffers an economic downturn and/or if the credit ratings of the
institutions issuing the guarantee are downgraded or at
risk of being downgraded by a national rating organization. If such events
occur, the value of the security could decrease or the value
could be lost entirely, and it may be difficult or impossible for the Fund to
sell the security at the time and the price that normally
prevails in the market.
For
example, recent public health emergencies have significantly stressed the
financial resources of many municipalities and other issuers
of municipal securities, which may impair their ability to meet their financial
obligations and may harm the value or liquidity of
the Fund’s investments in municipal securities (or the income generated by such
investments). In particular, responses by municipalities
to recent public health emergencies have caused disruptions in business
activities. These and other effects of recent public
health emergencies such as increased unemployment levels, have impacted tax and
other revenues of municipalities and other issuers
of municipal securities and the financial conditions of such issuers. As a
result, there is an increased budgetary and financial pressure
on municipalities and other issuers of municipal securities and heightened risk
of default or other adverse credit or similar events
for issuers of municipal securities, which would adversely impact the Fund’s
investments.
In
addition, the ability of an issuer to make payments or repay interest may be
affected by litigation or bankruptcy. In the event of bankruptcy
of such an issuer, the Fund investing in the issuer’s securities could
experience delays in collecting principal and interest, and
the Fund may not, in all circumstances, be able to collect all principal and
interest to which it is entitled. To enforce its rights in the
event of a default in the payment of interest or repayment of principal, or
both, the Fund may, in some instances, take possession of,
and manage, the assets securing the issuer’s obligations on such securities,
which may increase the Fund’s operating expenses. Any income
derived from the Fund’s ownership or operation of such assets may not be
tax-exempt. Municipal securities are subject to, among
other risks, credit and interest rate risk and market and geopolitical
risk.
Because
many municipal securities are issued to finance similar projects (such as those
relating to education, health care, housing, transportation,
and utilities), conditions in those sectors may affect the overall municipal
securities market. In addition, changes in the
financial condition of an individual municipal issuer can affect the overall
municipal market. Municipal securities backed by current
or anticipated revenues from a specific project or specific assets can be
negatively affected by the discontinuance of the supporting
taxation or the inability to collect revenues for the specific project or
specific assets.
Some
municipal securities are subject to the risk that the Internal Revenue Service
may determine that an issuer has not complied with
applicable tax requirements (or the occurrence of other adverse tax
developments) and that interest from the municipal security is
taxable, which may result in a significant decline in the value of the security.
In addition, interest on municipal obligations, while generally
exempt from regular federal income tax, may not be exempt from the federal
alternative minimum tax. Municipal securities may
be less liquid than taxable bonds and there may be less publicly available
information on the financial condition of municipal security
issuers than for issuers of other securities, and the investment performance of
the Fund investing in municipal securities may therefore
be more dependent on the analytical abilities of the Adviser than if the Fund
held other types of investments such as stocks or
taxable bonds. The secondary market for municipal securities also tends to be
less well developed or liquid than many other securities
markets, which may adversely affect the Fund’s ability to sell municipal
securities it holds at attractive prices or value municipal
securities. In addition, the demand for municipal securities is strongly
influenced by the value of tax-exempt income to investors
and lower income tax rates could reduce the advantage of owning municipal
securities, which may also adversely affect the value
and liquidity of municipal securities.
Fixed-Income
Securities
Fixed-income
securities are securities that pay a fixed or a variable rate of interest until
a stated maturity date. Fixed-income securities include
U.S. government securities, securities issued by federal or federally sponsored
agencies and instrumentalities, corporate bonds and
notes, asset-backed securities, mortgage-backed securities, securities
rated below investment grade (commonly referred to as “junk
bonds” or “high yield/high risk securities”), municipal bonds, loan
participations and assignments, zero coupon bonds, Eurobonds,
Yankee Bonds, repurchase agreements, commercial paper and cash
equivalents.
Fixed-income
securities are subject to the risk of the issuer’s inability to meet principal
and interest payments on its obligations (i.e., credit
risk) and are subject to price volatility resulting from, among other things,
interest rate sensitivity (i.e., interest rate risk), market
perception of the creditworthiness of the issuer and general market liquidity
(i.e., market risk). For example, a type of fixed-income
securities in which the Fund may invest are corporate debt obligations. In
addition to interest rate, credit and other risks, corporate
debt obligations are also subject to factors directly related to the issuer,
such as the credit rating of the corporation, the corporation’s
performance and perceptions of the corporation in the marketplace, and by
factors not directly related to the issuer, such
as general market liquidity, economic conditions and inflation. The Fund
may face a heightened level of interest rate risk in times
of monetary policy change and/or uncertainty, such as when the Federal Reserve
Board adjusts a quantitative easing program and/or
changes rates. A changing interest rate environment increases certain risks,
including the potential for periods of volatility, increased
redemptions, shortened durations (i.e., prepayment risk) and extended durations
(i.e., extension risk). The Fund is not limited
as to the maturities (when a debt security provides its final payment) or
durations (measure of interest rate sensitivity) of the
Eaton
Vance | Additional
Information About Fund Investment Strategies and Related Risks
Additional
Information About Fund Investment Strategies and Related Risks (Con’t)
securities
in which it may invest but, under normal circumstances, the Fund intends to
maintain a dollar-weighted average portfolio duration
of less than three years.
Fixed
income and other debt instruments, including mortgage- and other asset-backed
securities, are subject to prepayment risk, which
is the risk that the principal of such obligation is paid earlier than expected,
such as in the case of refinancing. This risk is increased
during periods of declining interest rates and prepayments may reduce the Fund’s
yield or income as a result of reinvesting the
income or other proceeds in lower yielding securities or instruments. These
investments are also subject to extension risk, which is the
risk that the principal of such obligation is paid slower or later than
expected. This may negatively affect Fund returns, as the value
of the investment decreases when principal payments are made later than
expected. This risk is elevated during periods of increasing
interest rates. In addition, because principal payments are made later than
expected, the investment’s duration may extend (and
result in increased interest rate risk) and the Fund may be prevented from
investing proceeds it would otherwise have received at the
higher prevailing interest rates. Prepayments and extensions may result in a
security or debt instrument offering less potential for gains
during periods of declining interest rates or rising interest rates,
respectively.
Securities
with longer durations are likely to be more sensitive to changes in
interest rates, generally making them more volatile than securities
with shorter durations. Lower rated fixed-income securities have greater
volatility because there is less certainty that principal
and interest payments will be made as scheduled. The Fund may be subject to
liquidity risk, which may result from the lack of
an active market and the reduced number and capacity of traditional market
participants to make a market in fixed-income securities.
Fixed-income securities may be called (i.e., redeemed by the issuer) prior to
final maturity. If a callable security is called, the
Fund may have to reinvest the proceeds at a lower rate of interest.
Credit
and Interest Rate Risk
Fixed-income
securities, such as bonds, generally are subject to two types of risk: credit
risk and interest rate risk. Credit risk refers to the
possibility that the issuer or guarantor of a security will be unable or
unwilling or perceived to be unable or unwilling to make interest
payments and/or repay the principal on its debt. The risk of defaults across
issuers and/or counterparties increases in adverse market
and economic conditions. Interest rate risk refers to fluctuations in the value
of (or yield or income generated by) a fixed-income
or other debt security resulting from changes in the general level of interest
rates. When the general level of interest rates goes up,
the prices of most fixed-income securities go down. When the general level of
interest rates goes down, the prices of most fixed-income
securities go up. To the extent the Fund invests in variable and floating rate
securities, although these instruments are generally
less sensitive to interest rate changes than fixed rate instruments, the value
of these securities may decline if their interest rates
do not rise as quickly, or as much, as general interest rates. A low interest
rate environment may prevent the Fund from providing
a positive yield or paying Fund expenses out of current income. The Fund may
face a heightened level of interest rate risk in
times of monetary policy change and/or uncertainty, such as when the Federal
Reserve Board adjusts a quantitative easing program and/or
changes rates. For example, during periods when interest rates are low, the
Fund’s yield (and total return) also may be low or otherwise
adversely affected or the Fund may be unable to maintain positive returns.
Monetary policies, and market interest rates, are subject
to change at any time and potentially frequently based on a variety of market
and economic conditions. The impact on fixed income
and other debt instruments from interest rate changes, regardless of the cause,
could be significant and could adversely affect the
Fund and its investments. Credit ratings may not be an accurate assessment of
liquidity or credit risk. Although credit ratings may
not accurately reflect the true credit risk of an instrument, a change in the
credit rating of an instrument or an issuer can have a rapid,
adverse effect on the instrument’s liquidity and make it more difficult for the
Fund to sell at an advantageous price or time.
In
addition, under certain conditions, there may be an increasing amount of issuers
that are unprofitable, have little cash on hand and/or
are unable to pay the interest owed on their debt obligations and the number of
such issuers may increase if demand for their goods
and services falls, borrowing costs rise due to governmental action or inaction
or other reasons.
Low
or high interest rates could magnify the risks associated with changes in
interest rates. In general, changing interest rates could have
unpredictable effects on markets and may expose debt and related markets to
heightened volatility and may detract from Fund performance
to the extent the Fund is exposed to such interest rates and/or
volatility.
Governmental
authorities and regulators may enact significant fiscal and monetary policy
changes, which present heightened risks to debt
instruments, and such risks could be even further heightened if these actions
are unexpectedly or suddenly reversed or are ineffective
in achieving their desired outcomes.
Market
and Geopolitical Risk
The
value of your investment in the Fund is based on the values of the Fund’s
investments, which change due to economic and other events
that affect markets generally, as well as those that affect particular regions,
countries, industries, companies or governments. Price
movements, sometimes called volatility, may be greater or less depending on the
types of securities the Fund owns and the markets
in which the securities trade. Volatility and disruption in financial markets
and economies may be sudden and unexpected, expose
the Fund to greater risk, including risks associated with reduced market
liquidity and fair valuation, and adversely affect the Fund’s
operations. For example, the Adviser potentially will be prevented from
executing investment decisions at an advantageous
Eaton
Vance | Additional
Information About Fund Investment Strategies and Related Risks
Additional
Information About Fund Investment Strategies and Related Risks (Con’t)
time
or price as a result of any domestic or global market disruptions and reduced
market liquidity may impact the Fund’s ability to sell
securities to meet redemptions.
The
increasing interconnectivity between global economies and markets increases the
likelihood that events or conditions in one region
or market may adversely impact other companies and issuers in a different
country, region, sector, industry, market or with respect
to one company may adversely impact other companies and issuers in a different
country, region, sector, industry, or market. For
example, adverse developments in the banking or financial services sector could
impact companies operating in various sectors or industries
and adversely impact the Fund’s investments. Securities in the Fund’s portfolio
may underperform due to inflation (or expectations
for inflation), interest rates, global demand for particular products or
resources, natural disasters and extreme weather events,
health emergencies (such as epidemics and pandemics), terrorism, regulatory
events and governmental or quasi-governmental actions.
The occurrence of global events, such as terrorist attacks around the world,
natural disasters, health emergencies, social and political
(including geopolitical) discord and tensions or debt crises and downgrades,
among others, may result in market volatility and
may have long term effects on both the U.S. and global financial markets.
Inflation rates may change frequently and significantly because
of various factors, including unexpected shifts in the domestic or global
economy and changes in monetary or economic policies
(or expectations that these policies may change). Changes in expected inflation
rates may adversely affect market and economic
conditions, the Fund’s investments and an investment in the Fund. The
market price of debt securities generally falls as inflation
increases because the purchasing power of the future income and repaid principal
is expected to be worth less when received by
the Fund. The risk of inflation is greater for debt instruments with longer
maturities and especially those that pay a fixed rather than
variable interest rate. Other financial, economic and other global market
and social developments or disruptions may result in similar
adverse circumstances, and it is difficult to predict when similar events
affecting the U.S. or global financial markets may occur,
the effects that such events may have and the duration of those effects (which
may last for extended periods). In general, the securities
or other instruments that the Adviser believes represent an attractive
investment opportunity or in which the Fund seeks to invest
may be unavailable entirely or in the specific quantities sought by the Fund. As
a result, the Fund may need to obtain the desired
exposure through a less advantageous investment, forgo the investment at the
time or seek to replicate the desired exposure through
a derivative transaction or investment in another investment vehicle. Any such
event(s) could have a significant adverse impact
on the value and risk profile of the Fund’s portfolio. There is a risk that you
may lose money by investing in the Fund.
Social,
political, economic and other conditions and events, such as war, natural
disasters, health emergencies (e.g., the novel coronavirus
outbreak, epidemics and other pandemics), terrorism, conflicts, social unrest,
recessions, inflation, interest rate changes and
supply chain disruptions could reduce consumer demand or economic output, result
in market closures, travel restrictions or quarantines,
and generally have a significant impact on the economies and financial markets
and the Adviser’s investment advisory activities
and services of other service providers, which in turn could adversely affect
the Fund’s investments and other operations.
Government
and other public debt, including municipal obligations in which the Fund may
invest, can be adversely affected by changes
in local and global economic conditions that result in increased debt levels.
Although high levels of government and other public
debt do not necessarily indicate or cause economic problems, high levels of debt
may create certain systemic risks if sound debt management
practices are not implemented. A high debt level may increase market pressures
to meet an issuer’s funding needs, which
may increase borrowing costs and cause a government or public or municipal
entity to issue additional debt, thereby increasing the
risk of refinancing. A high debt level also raises concerns that the issuer may
be unable or unwilling to repay the principal or interest
on its debt, which may adversely impact instruments held by the Fund that rely
on such payments.
Governmental
and quasi-governmental responses to certain economic or other conditions may
lead to increasing government and other
public debt, which heighten these risks. Unsustainable debt levels can lead to
declines in the value of currency, and can prevent a
government from implementing effective counter-cyclical fiscal policy during
economic downturns, can generate or contribute to an
economic downturn or cause other adverse economic or market developments, such
as increases in inflation or volatility. Increasing
government and other public debt may adversely affect issuers, obligors,
guarantors or instruments across a variety of asset classes.
Global
events may negatively impact broad segments of businesses and populations, cause
a significant negative impact on the performance
of the Fund’s investments, adversely affect and increase the volatility of the
Fund’s share price, exacerbate pre-existing political,
social and economic risks to the Fund. The Fund’s operations may be interrupted
as a result, which may contribute to the negative
impact on investment performance. In addition, governments, their regulatory
agencies, or self-regulatory organizations may take
actions that affect the instruments in which the Fund invests, or the issuers of
such instruments, in ways that could have a significant
negative impact on the Fund’s investment performance. In addition, government
actions (such as changes to interest rates) could
have unintended economic and market consequences that adversely affect the
Fund’s investments.
When-Issued
Securities, TBAs, Delayed Delivery Securities and Forward
Commitments
The
Fund may purchase or sell securities that it is entitled to receive on a
when-issued basis. The Fund may also purchase or sell securities
on a delayed delivery basis or through a forward commitment (including on a TBA
(to be announced) basis). These transactions
involve the purchase or sale of securities by the Fund at an established price
with payment and delivery taking place in
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the
future. The Fund enters into these transactions to obtain what is considered an
advantageous price to the Fund at the time of entering
into the transaction.
Such
transactions entered into by the Fund will be counted towards the Fund’s
exposure in the types of securities listed herein to the extent
they have economic characteristics similar to such securities. For example, the
Fund may invest in TBAs, which settle on a delayed
delivery basis. In a TBA transaction, the seller agrees to deliver the MBS for
an agreed upon price on an agreed upon future date,
but makes no guarantee as to which or how many securities are to be delivered.
Accordingly, the Fund’s investments in TBAs are
subject to risks such as failure of the counterparty to perform its obligation
to deliver the security, the characteristics of a security delivered
to the Fund may be less favorable than expected and the security the Fund buys
will lose value prior to its delivery. Investments
in TBAs may give rise to a form of leverage. Leverage may cause the Fund to be
more volatile than if the Fund had not been
leveraged and may increase the impact that gains (losses) have on the Fund.
Further, TBAs may increase the Fund’s portfolio turnover
rate. FINRA rules include mandatory margin requirements that will require the
Fund to post collateral in connection with its
TBA transactions, which could increase the cost of TBA transactions to the Fund
and impose added operational complexity.
The
Fund’s purchase of other securities on a when-issued, delayed delivery or
through a forward commitment basis are subject to similar
risks, including counterparty risk and that the value of securities in these
transactions on the delivery date may be less than the price
paid by the Fund to purchase the securities. In addition, there can be no
assurance that a security purchased on a when-issued basis
will be issued. When the Fund has sold a security on a when-issued, delayed
delivery, or forward commitment basis, the Fund does
not benefit if the value of the security appreciates above the sale price during
the commitment period and the Fund is subject to failure
of the counterparty to pay for the securities.
Taxability
Risk
Changes
in tax laws or adverse determinations by the Internal Revenue Service (“IRS”)
may make the income from some municipal obligations
taxable and adversely affect the value of such obligations.
Inverse
Floaters
Inverse
floaters are obligations which pay interest at rates that vary inversely with
changes in market rates of interest. Because the interest
rate paid to holders of such obligations is generally determined by subtracting
a variable or floating rate from a predetermined amount,
the interest rate paid to holders of such obligations will decrease as such
variable or floating rate increases and increase as such
variable or floating rate decreases.
Like
most other fixed-income securities, the value of inverse floaters will decrease
as interest rates increase. They are more volatile, however,
than most other fixed-income securities because the coupon rate on an inverse
floater typically changes at a multiple of the change
in the relevant index rate. Thus, any rise in the index rate (as a consequence
of an increase in interest rates) causes a correspondingly
greater drop in the coupon rate of an inverse floater while a drop in the index
rate causes a correspondingly greater increase
in the coupon of an inverse floater. Some inverse floaters may also increase or
decrease substantially because of changes in the rate
of prepayments.
Liquidity
The
Fund may make investments that are illiquid or restricted or that may become
illiquid or less liquid in response to, among other developments,
overall economic conditions or adverse investor perceptions, and which may
entail greater risk than investments in other
types of securities. Illiquidity can also be caused by, among other things, a
drop in overall market trading volume, an inability to
find a willing buyer, or legal restrictions on the securities’ resale. These
investments may be more difficult to value or sell, particularly
in times of market turmoil, and there may be little trading in the secondary
market available for particular securities. Liquidity
risk may be magnified in a market where credit spread and interest rate
volatility is rising and where investor redemptions
from fixed-income funds may be higher than normal.
If the Fund is forced to sell an illiquid or restricted security to fund
redemptions or for other cash needs, it may be forced to sell the security at a
loss or for less than its fair value and may be unable to
sell the security at all.
Tender
Option Bonds
A
tender option bond is a municipal obligation (generally held pursuant to a
custodial arrangement) having a relatively long maturity and
bearing interest at a fixed rate substantially higher than prevailing
short-term, tax-exempt rates. The bond is typically issued in conjunction
with the agreement of a third-party, such as a bank, broker-dealer or other
financial institution, pursuant to which the institution
grants the security holder the option, at periodic intervals, to tender its
securities to the institution. As consideration for providing
the option, the financial institution receives periodic fees equal to the
difference between the bond’s fixed coupon rate and the
rate, as determined by a remarketing or similar agent, that would cause the
securities, coupled with the tender option, to trade at par
on the date of such determination. Thus, after payment of this fee, the security
holder effectively holds a demand obligation that bears
interest at the prevailing short-term, tax-exempt rate. An institution will
normally not be obligated to accept tendered bonds in the
event of certain defaults or significant downgrading in the credit rating
assigned to the issuer of the bond. The tender option will be
taken into account in determining the maturity of the tender option bonds and
average portfolio maturity. There is a risk that the Fund
will not be considered the owner of a tender option bond for regular federal
income tax purposes, and thus will not be entitled
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treat such interest as exempt from regular
federal income tax. Certain tender option bonds may be illiquid or may become
illiquid as
a result of a credit rating downgrade, a payment default or a disqualification
from tax-exempt status.
The
residual interest certificates may be more volatile and less liquid than other
municipal bonds of comparable maturity. In most circumstances,
the residual interest certificates holder bears substantially all of the
underlying fixed-rate municipal bond’s downside investment
risk and also benefits from any appreciation in the value of the underlying
fixed-rate municipal bond. Investments in a residual
interest certificate typically will involve greater risk than investments in
fixed-rate municipal bonds.
The
residual interest certificates held by the Fund provide the Fund with the right
to: (1) cause the holders of the floating rate certificates
to tender their notes at par, and (2) cause the sale of the fixed-rate municipal
bond held by the tender option bond trust, thereby
collapsing the tender option bond trust. Tender option bond trusts are generally
supported by a liquidity facility provided by a
third party bank or other financial institution (the “Liquidity Provider”) that
provides for the purchase of floating rate certificates that
cannot be remarketed. The holders of the floating rate certificates have the
right to tender their certificates in exchange for payment
of par plus accrued interest on a periodic basis (typically weekly) or on the
occurrence of certain mandatory tender events. The
tendered floating rate certificates are remarketed by a remarketing agent, which
is typically an affiliated entity of the Liquidity Provider.
If the floating rate certificates cannot be remarketed, the floating rate
certificates are purchased by the tender option bond trust
either from the proceeds of a loan from the Liquidity Provider or from a
liquidation of the fixed-rate municipal bond.
The
tender option bond trust may also be collapsed without the consent of the Fund,
as the residual interest certificate holder, upon the
occurrence of certain “tender option termination events” (or “TOTEs”) as defined
in the tender option bond trust agreements. Such
termination events typically include the bankruptcy or default of the municipal
bond, a substantial downgrade in the credit quality
of the municipal bond, or a judgment or ruling that interest on the fixed-rate
municipal bond is subject to federal income taxation.
Upon the occurrence of a termination event, the tender option bond trust would
generally be liquidated in full with the proceeds
typically applied first to any accrued fees owed to the trustee, remarketing
agent and liquidity provider, and then to the holders
of the floating rate certificates up to par plus accrued interest owed on the
floating rate certificates and a portion of gain share, if
any, with the balance paid out to the residual interest certificate holder. In
the case of a mandatory termination event, after the payment
of fees, the floating rate certificates holders would be paid before the
residual interest certificates holders (i.e., the Fund). In contrast,
in the case of a TOTE, after payment of fees, the floating rate certificates
holders and the residual interest certificates holders
would be paid pro rata in proportion to the respective face values of their
certificates.
Corporate
Debt Obligations
Corporate
debt obligations are fixed-income securities issued by corporations. The
investment return of corporate debt obligations reflects
interest earnings and changes in the market value of the security. The market
value of a corporate debt obligation may be expected
to rise and fall inversely with interest rates generally. There also exists the
risk that the issuers of the securities may not be able
to meet their obligations on interest or principal payments at the time called
for by an instrument. Debtholders, as creditors, have
a prior legal claim over common and preferred stockholders of the corporation as
to both income and assets for the principal and
interest due to the bondholder.
Distressed
and Defaulted Securities
Distressed
and defaulted securities are speculative and involve substantial risks in
addition to the risks of investing in high yield securities.
The Fund will generally not receive interest payments on the distressed
securities and the repayment of principal may also be
at risk. These securities may present a substantial risk of default or may be in
default at the time of investment. The repayment of defaulted
securities is also subject to significant uncertainties. The Fund may incur
substantial expenses in seeking recovery upon a default
in the payment of principal of or interest on its portfolio holdings. If the
portfolio company is forced to reorganize or liquidate,
the Fund may lose its entire investment or may be required to accept cash or
securities with a value less than its original investment.
Distressed securities and any securities received in an exchange for such
securities may be subject to restrictions on resale.
Revenue
Bonds
Revenue
bonds are municipal obligations that are secured by the revenue from a specific
project. To the extent that such revenues do not
materialize, the revenue bonds may not be repaid. If the Fund invests in revenue
bonds that are issued by municipal issuers in the same
economic sector, the Fund would be particularly susceptible to developments
adversely affecting that sector. Revenue bonds historically
have been subject to a greater risk of default than general obligation bonds
because investors can look only to the revenue generated
by the project or other revenue source backing the project, rather than to the
general taxing authority of the state or local government
issuer of the obligations. For example, investments in revenue bonds backed by
receipts from hospitals are sensitive to hospital
bond ratings, which are often based on feasibility studies that contain
projections of expenses, revenues and occupancy levels. Additional
factors which could affect a hospital’s gross receipts and net income available
to service its debt are demand for hospital services,
the ability of the hospital to provide the services required, management
capabilities, economic developments in the service area,
efforts by insurers and government agencies to limit rates and expenses,
reputational issues, competition, availability and expenses
of malpractice insurance, Medicaid and Medicare funding and possible federal
legislation regulating hospital charges.
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Asset-Backed
Securities
Asset-backed
securities apply the securitization techniques used to develop mortgage-backed
securities to a broad range of other assets.
Various types of assets, primarily automobile and credit card receivables and
home equity loans, are pooled and securitized in pass-through
structures similar to pass-through structures developed with respect to mortgage
securitizations. Asset-backed securities have
risk characteristics similar to mortgage-backed securities. Like mortgage-backed
securities, they generally decrease in value as a result
of interest rate increases, but may benefit less than other fixed-income
securities from declining interest rates, principally because
of prepayments (i.e., when a borrower pays back the principal of a debt
obligation earlier than expected). Also, as in the case of
mortgage-backed securities, prepayments generally increase during a period of
declining interest rates, although other factors, such as
changes in credit use and payment patterns, may also influence prepayment rates.
Asset-backed securities also involve the risk that various
federal and state consumer laws and other legal and economic factors may result
in the collateral backing the securities being insufficient
to support payment on the securities.
To
the extent the Fund invests in asset-backed securities issued by
non-governmental issuers, such as commercial banks, savings and loan
institutions, and other secondary market issuers, the Fund will be exposed to
additional risks because, among other things, there are
no direct or indirect government or agency guarantees of payments in the pools
underlying the securities. Privately-issued asset-backed
securities may be less readily marketable, subject to heightened credit risk and
the market for such securities is typically smaller
and less liquid than other asset-backed securities.
The
Fund may invest in other asset-backed or similarly structured securities, such
as collateralized debt obligations (“CDOs”), collateralized
bond obligations (“CBOs”), and collateralized loan obligations (“CLOs”) These
investments are subject to many of the same
risks as other forms of asset-backed securities, including interest rate risk,
credit risk and default risk, and are also subject to 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 risk that the collateral may default or
decline in value or be downgraded, if rated by a nationally
recognized statistical rating organization; (iii) the Fund may invest in
tranches of CDOs that are subordinate to other tranches;
(iv) the structure and complexity of the transaction and the legal documents
could lead to disputes among investors regarding
the characterization of proceeds; (v) the investment return achieved by the Fund
could be significantly different than those predicted
by financial models; (vi) the lack of a readily available secondary market for
CDOs; (vii) the risk of forced “fire sale” liquidation
due to technical defaults such as coverage test failures; and (viii) the CDO’s
manager may perform poorly. Investments in CDOs,
CBOs and CLOs are also subject to risks particular to their respective asset
class and structure.
For
example, because CLOs are backed primarily by commercial loans, CLOs also bear
many of the same risks as investing in loans directly.
However, in addition to the risks associated with investing in commercial loans,
the complex structure and highly leveraged nature
of a CLO poses additional risks. CLOs may experience substantial losses
attributable to loan defaults or trading losses. Such losses
on the underlying assets are borne first by the holders of subordinate tranches.
In addition, the Fund’s investments in CLOs may
decrease in market value when the CLO’s assets experience loan defaults or
credit impairment, losses that exceed the most subordinate
tranches, or market anticipation of loan defaults and investor aversion to CLO
securities as a class. CDOs are structured similarly
to CLOs and bear many of the same risks as CLOs as well as additional risks
because they are backed by pools of assets other than
commercial loans, including securities (such as other asset-backed securities),
synthetic instruments or bonds, and may be highly leveraged.
Like CLOs, losses incurred by a CDO are borne first by holders of the most
subordinate tranches. Accordingly, the risks of CDOs
depend largely on the type of underlying collateral and the tranche of CDOs in
which the Fund invests. Moreover, CDOs that
obtain their exposure through synthetic investments are exposed to risks
associated with derivative instruments.
Repurchase
Agreements
Repurchase
agreements are fixed-income securities in the form of agreements backed by
collateral. These agreements typically involve the
acquisition by the
Fund of securities from the selling institution (such as a bank or a
broker-dealer), coupled with the agreement that
the selling institution will repurchase the underlying securities at a specified
price and at a fixed time in the future (or on demand,
if applicable). The underlying securities which serve as collateral for the
repurchase agreements entered into by the
Fund may
include U.S. government securities, municipal securities, corporate debt
obligations, and common and preferred stock and may be
of below investment grade quality. These securities are marked-to-market daily
in order to maintain full collateralization (typically purchase
price plus accrued interest). The use of repurchase agreements involves certain
risks. For example, if the selling institution defaults
on its obligation to repurchase the underlying securities at a time when the
value of the securities has declined, the
Fund may incur
a loss upon disposition of them. The risk of such loss may be greater when
utilizing collateral other than U.S. government securities.
In the event of an insolvency or bankruptcy by the selling institution, the
Fund’s right to control the collateral could be affected
and result in certain costs and delays. Additionally, if the proceeds from the
liquidation of such collateral after an insolvency were
less than the repurchase price, the
Fund could suffer a loss. Fund procedures are followed that are designed to
minimize such risks.
High
Yield Securities
Fixed-income
securities that are not investment grade are commonly referred to as “junk
bonds” or high yield, high risk securities. These
securities offer a higher yield than other higher rated securities, but they
carry a greater degree of risk. High yield securities are subject
to greater risk of loss of income and principal than higher rated securities and
are considered speculative by the major credit
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rating
agencies because of increased credit risk relative to other fixed income
investments. High yield securities may be issued by companies
that are restructuring, are smaller and less creditworthy or are more highly
indebted than other companies. This means that
they may have more difficulty making scheduled payments of principal and
interest. Changes in the value of high yield securities are
influenced more by changes in the financial and business position of the issuing
company than by changes in interest rates when compared
to investment grade securities.
In
recent years, there has been a broad trend of weaker or less restrictive
covenant protections in the high yield market. Among other things,
under such weaker or less restrictive covenants, borrowers might be able to
exercise more flexibility with respect to certain activities
than borrowers who are subject to stronger or more protective covenants. For
example, borrowers might be able to incur more
debt, including secured debt, return more capital to shareholders, remove or
reduce assets that are designated as collateral securing
high yield securities, increase the claims against assets that are permitted
against collateral securing high yield securities or otherwise
manage their business in ways that could impact creditors negatively. In
addition, certain privately held borrowers might be permitted
to file less frequent, less detailed or less timely financial reporting or other
information, which could negatively impact the value
of the high yield securities issued by such borrowers. Each of these factors
might negatively impact the high yield securities held by
the Fund. During adverse market or economic conditions, high yield securities
are typically particularly susceptible to default risk.
Investment
Company Securities
Subject
to the limitations set forth in the 1940 Act, or as otherwise permitted by the
SEC, the Fund may acquire shares in other investment
companies, including foreign investment companies, ETFs and money market funds
which may be managed by the Adviser
or its affiliates. The market value of the shares of other investment
companies may differ from the NAV of the Fund. The shares
of certain investment companies, principally closed-end investment companies,
frequently trade at a discount to their NAV. As a
shareholder in an investment company, the Fund would be subject to the risks
associated with such investment company and bear its
ratable share of that entity’s expenses, including its investment advisory and
administration fees. At the same time, the Fund would
continue to pay its own advisory and administration fees and other expenses. As
a result, the Fund and its shareholders will directly
bear the expenses of their investment in the Fund and indirectly bear the
expenses of the Fund’s investments in other investment
companies.
Promissory
Notes
Promissory
notes are generally debt obligations of the issuing entity and are subject to
the risks of investing in the banking industry.
Tax-Exempt
Variable Rate Demand Notes
Tax-exempt
variable rate demand notes are variable rate tax-exempt debt obligations that
give investors the right to demand principal repayment.
Due to cyclical supply and demand considerations, at times the yields on these
obligations can exceed the yield on taxable money
market obligations. The interest rate on these instruments may be reset daily,
weekly or on some other reset period and may have
a floor or ceiling on interest rate changes. The interest rate of a floating
rate instrument may be based on a known lending rate, such
as a bank’s prime rate, and is reset whenever such rate is adjusted. The
interest rate on a variable rate demand note is reset at specified
intervals at a market rate. The Fund’s ability to receive payments of principal
and interest and other amounts in connection with
loans held by it will depend primarily on the financial condition of the issuer.
The failure by the
Fund to receive scheduled interest
or principal payments on a loan would adversely affect the income of the Fund
and would likely reduce the value of its assets, which
would be reflected in a reduction in the Fund’s NAV.
Floating
rate and variable rate demand notes and bonds may have a stated maturity in
excess of one year, but may have features that permit
a holder to demand payment of principal plus accrued interest upon a specified
number of days’ notice. Frequently, such obligations
are secured by letters of credit or other credit support arrangements provided
by banks. If these obligations are not secured
by letters of credit or other credit support arrangements, the Fund’s right to
demand payment will be dependent on the ability
of the issuer to pay principal and interest on demand. In addition, these
obligations frequently are not rated by credit rating agencies
and may involve heightened risk of default by the issuer. The issuer of such
obligations normally has a corresponding right, after
a given period, to prepay in its discretion the outstanding principal of the
obligation plus accrued interest upon a specific number
of days’ notice to the holders. There is no assurance that the
Fund will be able to reinvest the proceeds of any prepayment at the
same interest rate or on the same terms as those of the original
instrument.
In
the absence of an active secondary market for floating rate and variable rate
demand notes, the
Fund may find it difficult to dispose
of the instruments, and the Fund could suffer a loss if the issuer defaults or
during periods in which the Fund is not entitled to
exercise its demand rights. If a reliable trading market for the floating rate
and variable rate instruments held by the
Fund does not exist
and the Fund may not demand payment of the principal amount of such instruments
within seven days, the instruments may be deemed
illiquid and therefore subject to the Fund’s limitation on investments in
illiquid securities.
Exchange-Traded
Funds
The
Fund may invest in exchange-traded funds (“ETFs”). ETFs seek to track the
performance of various portions or segments of the equity
and fixed-income markets. Shares of ETFs have many of the same risks as direct
investments in common stocks or bonds. In addition,
the market value of ETF shares may differ from their NAV because the supply and
demand in the market for ETF shares at
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any
point in time is not always identical to the supply and demand in the market for
the underlying securities. Also, ETFs that track particular
indices typically will be unable to match the performance of the index exactly
due to, among other things, the ETF’s operating
expenses and transaction costs. ETFs typically incur fees that are separate from
those fees incurred directly by the Fund. Therefore,
as a shareholder in an ETF, the Fund would bear its ratable share of that
entity’s expenses. At the same time, the Fund would
continue to pay its own investment management fees and other expenses. As a
result, shareholders will directly bear the expenses
of their investment in the Fund and indirectly bear the expenses of the Fund’s
investments in ETFs with respect to investments
in ETFs. The Fund and its shareholders will be subject to the risks of the
purchased investment company and its portfolio
of securities. Further, certain ETFs in which the Fund may invest are leveraged.
While leveraged ETFs may offer the potential
for greater return, the potential for loss and the speed at which losses can be
realized also are greater. Leveraged ETFs can deviate
substantially from the performance of their underlying benchmark over longer
periods of time, particularly in volatile periods. Furthermore,
disruptions in the markets for the securities underlying ETFs purchased or sold
by the Fund could result in losses on the
Fund’s investment in ETFs.
ESG
Investment Risk
To
the extent that the Adviser considers environmental, social and/or governance
(“ESG”) issues as a component in their
investment decision-making
process, the Fund’s performance may be impacted. Additionally, the Adviser’s
consideration of ESG issues in its investment
decision-making process may require subjective analysis and the ability of the
Adviser to consider ESG issues may be difficult
if data about a particular issuer (or obligor) is limited. The Adviser’s
consideration of ESG issues may contribute to the Adviser’s
decision to forgo opportunities to buy certain securities. ESG issues with
respect to an issuer (or obligor) or the Adviser’s assessment
of such may change over time.
Large
Shareholder Transactions Risk
The Fund
may experience adverse effects when certain shareholders, or shareholders
collectively, purchase or redeem large amounts of shares
of the
Fund. In addition, a third party investor, the Adviser, or an affiliate of the
Adviser, an authorized participant, a lead market
maker, or another entity (i.e., a seed investor) may invest in the Fund and hold
its investment solely to facilitate commencement
of the Fund or to facilitate the Fund’s achieving a specified size or scale. Any
such investment may be held for a limited
period of time. There can be no assurance that any large shareholder would not
redeem its investment, that the size of the Fund
would be maintained at such levels or that the Fund would continue to meet
applicable listing requirements. Such larger than normal
redemptions may cause the
Fund to sell portfolio securities at times when it would not otherwise do so,
which may negatively impact
the Fund’s NAV and liquidity. Similarly, large Fund share purchases may
adversely affect the Fund’s performance to the extent
that the
Fund is delayed in investing new cash and is required to maintain a larger cash
position than it ordinarily would. These
transactions may also accelerate the realization of taxable income to
shareholders if such sales of investments resulted in gains, and
may also increase transaction costs. In addition, a large redemption could
result in the Fund’s current expenses being allocated over
a smaller asset base, leading to an increase in the Fund’s expense ratio.
Although large shareholder transactions may be more frequent
under certain circumstances, the
Fund is generally subject to the risk that shareholders can purchase or redeem a
significant percentage
of Fund shares at any time. In addition, transactions by large shareholders may
account for a large percentage of the trading
volume on NYSE
Arca and may, therefore, have a material upward or downward effect on the
market price of the shares.
LIBOR
Discontinuance or Unavailability Risk.
The
Fund’s investments, payment obligations and financing terms may be based on
floating rates, such as the London Interbank Offered
Rates (collectively, “LIBOR”), Euro Interbank Offered Rate, Secured Overnight
Financing Rate (“SOFR”) and other similar types
of reference rates (each, a “Reference Rate”). These Reference Rates are
generally intended to represent the rate at which contributing
banks may obtain short-term borrowings from each other within certain financial
markets. LIBOR was the basic rate of interest
used in lending transactions between banks on the London interbank market and
has been widely used as a reference for setting
the interest rate on loans globally. As a result of benchmark reforms,
publication of most LIBOR settings has ceased. Various financial
industry groups have been planning for the transition from LIBOR and certain
regulators and industry groups have taken actions
to establish alternative reference rates (e.g., the SOFR, which measures the
cost of overnight borrowings through repurchase agreement
transactions collateralized with U.S. Treasury securities and is intended to
replace U.S. dollar LIBORs with certain adjustments).
These developments could negatively impact financial markets in general and
present heightened risks, including with respect
to the Fund’s investments. As a result of the uncertainty and developments
relating to the transition process, performance, price
volatility, liquidity and value of the Fund and its assets may be adversely
affected.
Active
Management Risk
In
pursuing the Fund’s investment objective, the Adviser has considerable
leeway in deciding which investments they buy, hold or sell
on a day-to-day basis, and which trading strategies they use. For example, the
Adviser, in its discretion, may determine to use some
permitted trading strategies while not using others. The success or failure of
such decisions will affect the Fund’s performance. In
addition, it is expected that confidential or material non-public
information regarding an investment or potential investment opportunity
may become available to the Adviser. If such information becomes available, the
Adviser may be precluded (including by applicable
law or internal policies or procedures) from pursuing an investment or
disposition opportunity with respect to such investment
or investment opportunity and the Adviser may be restricted in its ability to
cause the Fund to buy or sell securities of an
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issuer
for substantial periods of time when the Fund otherwise could realize profit or
avoid loss. This may adversely affect the Fund’s flexibility
with respect to buying or selling securities and may impair the Fund’s
liquidity.
Temporary
Defensive Investments
Under
adverse or unstable market conditions or abnormal circumstances or when the
Adviser believes that changes in market, economic,
political or other conditions warrant, the Fund may, in the discretion of the
Adviser, take temporary positions that are inconsistent
with the Fund’s principal investment strategy in attempting to respond to such
conditions or circumstances. For example,
the Fund may invest without limit in cash, cash equivalents or other
fixed-income instruments, derivatives, repurchase agreements
or securities of other investment companies, including money market funds, for
temporary purposes. In addition, when the
Adviser believes that conditions warrant, including when suitable municipal
obligations are unavailable, the Fund may invest without
limit in securities subject to regular
federal income tax or in securities that pay interest income subject to the
federal “alternative
minimum tax.” Under such circumstances, a higher portion of the Fund’s
distributions will likely be subject to regular federal
income tax and/or the federal alternative minimum tax. If the Adviser
incorrectly predicts the effects of these changes or during
periods of temporary defensive or other temporary positions, such temporary
investments may adversely affect the Fund’s performance
and the Fund may not achieve its investment objective.
State
and Municipal Project-Specific Risk
The
Fund may invest in municipal securities that are related in such a way that an
economic, business, or political development or change
affecting one such security would likewise affect the other municipal
securities. For example, the Fund may invest 25% or more
of its total assets in certain types of municipal obligations (such as general
obligations, municipal leases, principal only municipal
investments, revenue bonds and industrial development bonds) and in one or more
states, territories and economic sectors (such
as housing, hospitals, healthcare facilities or utilities). Because the Fund may
invest a significant portion of its assets in obligations
issued in one or more states and/or U.S. territories and in certain types of
municipal or other obligations and/or in certain sectors,
the value of Fund shares may be affected by events that adversely affect that
state, U.S. territory, sector or type of obligation and
may fluctuate more than that of a fund that invests more broadly. These
developments or changes may include, among other things,
legislative developments involving the financing of projects, judicial decisions
regarding the validity of the projects or the means
of financing such projects, shortages or price increases of materials needed for
the project or declining needs for the projects as well
as other developments that may adversely affect municipalities and other issuers
of municipal securities located within the same state,
such as natural disasters, health emergencies, and adverse economic, political
or social environments. General obligation bonds issued
by municipalities can be adversely affected by, among other things, economic
downturns and other developments that result in a
decline in tax revenues. Revenue bonds can be adversely affected by, among other
things, the negative economic performance or viability
of the facility or revenue source.
Duration
Duration
is a measure of the expected life of a bond that is used to determine the
sensitivity of an instrument’s price to changes in interest
rates. Thus, the average duration of a portfolio of fixed-income securities
represents its exposure to changing interest rates. For
example, when the level of interest rates increases by 1%, a fixed-income
security having a positive duration of four years generally
will decrease in value by 4%; when the level of interest rates decreases by 1%,
the value of that same security generally will increase
by 4%. A portfolio with a shorter average duration generally will experience
less price volatility in response to changes in interest
rates than a portfolio with a longer average duration.
Measures
such as average duration may not accurately reflect the true interest rate
sensitivity of the Fund, particularly if the Fund consists
of securities with widely varying durations. As a result, if the Fund has an
average duration that suggests a certain level of interest
rate risk, the Fund may in fact be subject to greater interest rate risk than
the average would suggest. This risk is greater to the extent
the Adviser uses leverage or derivatives in connection with the management of
the Fund.
Residual
Interest Bonds
The
Fund may enter into residual interest bond transactions, which expose the
Fund to leverage and greater risk than an investment in
a fixed-rate municipal bond. The interest payments that the Fund receives on the
residual interest bonds acquired in such transactions
vary inversely with short-term interest rates, normally decreasing when
short-term rates increase. The value and market for
residual interest bonds are volatile and such bonds may have limited liquidity.
As required by applicable accounting standards, the Fund
records interest expense as a liability with respect to floating-rate notes and
also records offsetting interest income in an amount equal
to this expense.
Derivatives
The Fund may,
but is not required to, use derivatives and other similar instruments for a
variety of purposes, including hedging, risk management,
portfolio management or to seek to earn income. Derivative instruments used by
the Fund will be counted towards the Fund’s
exposure in the types of securities listed herein to the extent they have
economic characteristics similar to such securities. A derivative
is a financial instrument whose value is based, in part, on the value of an
underlying asset, interest rate, index or financial instrument.
Prevailing interest rates and volatility levels, among other things, also affect
the value of derivative instruments. Derivatives
and other similar instruments that create synthetic exposure often are subject
to risks similar to those of the underlying
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asset
or instrument and may be subject to additional risks, including imperfect
correlation between the value of the derivative and the underlying
asset, risks of default by the counterparty to certain transactions,
magnification of losses incurred due to changes in the market
value of the securities, instruments, indices or interest rates to which the
derivative instrument relates, risks that the transactions
may not be liquid, risks arising from margin and payment requirements, risks
arising from mispricing or valuation complexity
and operational and legal risks. The use of derivatives involves risks that are
different from, and possibly greater than, the risks
associated with other portfolio investments. Derivatives may involve the use of
highly specialized instruments that require investment
techniques and risk analyses different from those associated with other
portfolio investments.
Certain
derivative transactions may give rise to a form of leverage. Leverage magnifies
the potential for gain and the risk of loss. Leverage
associated with derivative transactions may cause the Fund to liquidate
portfolio positions when it may not be advantageous to
do so, or may cause the Fund to be more volatile than if the Fund had not been
leveraged. Although the Adviser seeks to use derivatives
to further the Fund’s investment objective, there is no assurance that the use
of derivatives will achieve this result.
The
derivative instruments and techniques that the Fund may use
include:
Futures.
A futures contract is a standardized, exchange-traded agreement to buy or sell a
specific quantity of an underlying asset, reference
rate or index at a specific price at a specific future time. While the value of
a futures contract tends to increase or decrease in tandem
with the value of the underlying instrument, differences between the futures
market and the market for the underlying asset may
result in an imperfect correlation. Depending on the terms of the particular
contract, futures contracts are settled through either physical
delivery of the underlying instrument on the settlement date or by payment of a
cash settlement amount on the settlement date.
A decision as to whether, when and how to use futures contracts involves the
exercise of skill and judgment and even a well-conceived
futures transaction may be unsuccessful because of market behavior or unexpected
events. In addition to the derivatives risks
discussed above, the prices of futures contracts can be highly volatile, using
futures contracts can lower total return, and the potential
loss from futures contracts can exceed the Fund’s initial investment in such
contracts. No assurance can be given that a liquid
market will exist for any particular futures contract at any particular time.
There is also the risk of loss by the Fund of margin deposits
in the event of bankruptcy of a broker with which the Fund has open positions in
the futures contract.
Options.
If the Fund buys an option, it buys a legal contract giving it the right to buy
or sell a specific amount of the underlying instrument,
or contract, such as a swap agreement or futures contract, on the underlying
instrument at an agreed-upon price typically in
exchange for a premium paid by the Fund. If the Fund sells an option, it sells
to another person the right to buy from or sell to the Fund
a specific amount of the underlying instrument, swap, or futures contract on the
underlying instrument at an agreed-upon price
during a period of time or on a specified date typically in exchange for a
premium received by the Fund. When options are purchased
OTC, the Fund bears the risk that the counterparty that wrote the option
will be unable or unwilling to perform its obligations
under the option contract. Options may also be illiquid and the Fund may have
difficulty closing out its position. A decision
as to whether, when and how to use options involves the exercise of skill and
judgment and even a well-conceived option transaction
may be unsuccessful because of market behavior or unexpected events. The prices
of options can be highly volatile and the
use of options can lower total returns.
Swaps.
The Fund may enter into OTC swap contracts or cleared swap transactions. An OTC
swap contract is an agreement between two
parties pursuant to which the parties exchange payments at specified dates on
the basis of a specified notional amount, with the payments
calculated by reference to specified securities, indices, reference rates,
currencies or other instruments. Typically swap agreements
provide that when the period payment dates for both parties are the same, the
payments are made on a net basis (i.e., the two
payment streams are netted out, with only the net amount paid by one party to
the other). The Fund’s obligations or rights under
a swap contract entered into on a net basis will generally be equal only to the
net amount to be paid or received under the agreement,
based on the relative values of the positions held by each party. Cleared swap
transactions may help reduce counterparty credit
risk. In a cleared swap, the Fund’s ultimate counterparty is a clearinghouse
rather than a swap dealer, bank or other financial institution.
OTC swap agreements are not entered into or traded on exchanges and often there
is no central clearing or guaranty function
for swaps. These OTC swaps are often subject to credit risk or the risk of
default or non-performance by the counterparty. Certain
swaps have begun trading on exchanges called swap execution facilities. Exchange
trading is expected to increase liquidity of swaps
trading. Both OTC and cleared swaps could result in losses if interest rates,
foreign currency exchange rates or other factors are not
correctly anticipated by the Fund or if the reference index, security or
investments do not perform as expected. The Dodd-Frank Wall
Street Reform and Consumer Protection Act and related regulatory developments
require the clearing and exchange trading of certain
standardized swap transactions. Mandatory exchange-trading and clearing is
occurring on a phased-in basis. The Fund may pay
fees or incur costs each time it enters into, amends or terminates a swap
agreement.
The
Fund’s use of swaps may include those based on the credit of an underlying
security, commonly referred to as “credit default swaps.”
Where the Fund is the buyer of a credit default swap contract, it would
typically be entitled to receive the par (or other agreed-upon)
value of a referenced debt obligation from the counterparty to the contract only
in the event of a default or similar event
by a third-party on the debt obligation. If no default occurs, the Fund would
have paid to the counterparty a periodic stream of payments
over the term of the contract and received no benefit from the contract. When
the Fund is the seller of a credit default swap
contract, it typically receives the stream of payments but is obligated to pay
an amount equal to the par (or other agreed-upon) value
of a referenced debt obligation upon the default or similar event of the issuer
of the referenced debt obligation.
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Securities
Lending
The
Fund may lend its portfolio securities to broker-dealers and other institutional
borrowers. During the existence of a loan, the Fund
will continue to receive the equivalent of the interest paid by the issuer on
the securities loaned, or all or a portion of the interest
on investment of the collateral, if any. The Fund may pay lending fees to such
borrowers. Loans will only be made to firms that
have been approved by the Adviser, and the Adviser or the securities lending
agent will periodically monitor the financial condition
of such firms while such loans are outstanding. Securities loans will only be
made when the Adviser believes that the expected
returns, net of expenses, justify the attendant risks. Securities loans
currently are required to be secured continuously by collateral
in cash, cash equivalents (such as money market instruments) or other liquid
securities held by the custodian and maintained
in an amount at least equal to the market value of the securities loaned. The
Fund may engage in securities lending to seek
to generate income. Upon return of the loaned securities, the Fund would be
required to return the related collateral to the borrower
and may be required to liquidate portfolio securities in order to do so. The
Fund may lend up to one-third of the value of its
total assets or such other amount as may be permitted by law.
As
with other extensions of credit, there are risks of delay in recovery or even
loss of rights in the securities loaned if the borrower of the
securities fails financially. To the extent that the portfolio securities
acquired with such collateral have decreased in value, it may result
in the Fund realizing a loss at a time when it would not otherwise do so. As
such, securities lending may introduce leverage into the
Fund. The Fund also may incur losses if the returns on securities that it
acquires with cash collateral are less than the applicable rebate
rates paid to borrowers and related administrative costs.
ETF
Structure Risks
Authorized
Participant Concentration Risk
Only
an authorized participant may engage in creation or redemption transactions
directly with the Fund. The Fund has a limited number
of intermediaries that act as authorized participants and none of these
authorized participants is or will be obligated to engage
in creation or redemption transactions. There can be no assurance that an active
trading market for the Fund’s shares will develop
or be maintained. To the extent that these intermediaries exit the business or
are unable to or choose not to proceed with creation
and/or redemption orders with respect to the Fund, such as during periods of
market stress, and no other authorized participant
creates or redeems, shares may trade at a discount to net asset value (“NAV”)
and possibly face trading halts and/or delisting.
Cash
Transactions Risk
Unlike
certain ETFs, the Fund may effect its creations and redemptions in cash or
partially in cash. As a result, an investment in the Fund
may be less tax-efficient than an investment in such ETFs. Other ETFs generally
are able to make in-kind redemptions and avoid
realizing gains in connection with transactions designed to raise cash to meet
redemption requests. To the extent the Fund effects
its redemptions in-kind, the in-kind redemption mechanism generally will not
lead to a tax event for the Fund or its non-redeeming
shareholders. If the Fund effects a portion of redemptions for cash, it may be
required to sell portfolio securities in order to
obtain the cash needed to distribute redemption proceeds, which also involves
transaction costs. If the Fund recognizes gain on these
sales, this generally will cause the Fund to recognize gain it might not
otherwise have recognized if it were to distribute portfolio securities
in-kind, or to recognize such gain sooner than would otherwise be required. The
Fund generally intends to distribute these gains
to shareholders to avoid being taxed on this gain at the Fund level and
otherwise comply with the special tax rules that apply to it.
This strategy may cause shareholders to be subject to tax on gains they would
not otherwise be subject to, or at an earlier date than,
if they had made an investment in a different ETF.
Trading
Risk
Shares
are listed for trading on NYSE Arca and are bought and sold in the secondary
market at market prices. The market prices of shares
are expected to fluctuate, in some cases materially, in response to changes in
the Fund’s NAV, the intra-day value of the Fund’s holdings,
and supply and demand for shares. The Adviser cannot predict whether shares will
trade above, below or at their NAV. Disruptions
to creations and redemptions, the existence of significant market volatility or
potential lack of an active trading market for
the shares (including through a trading halt), as well as other factors, may
result in the shares trading significantly above (at a premium)
or below (at a discount) to NAV or to the intraday value of the Fund’s holdings.
You may pay significantly more or receive significantly
less than the Fund’s NAV per share during periods when there is a significant
premium or discount. During such periods,
you may incur significant losses if you sell your shares.
Buying
or selling shares in the secondary market may require paying brokerage
commissions or other charges imposed by brokers as determined
by that broker. Brokerage commissions are often a fixed amount and may be a
significant proportional cost when seeking to
buy or sell relatively small amounts of shares. In addition, the market price of
shares, like the price of any exchange-traded security, includes
a “bid-ask spread” charged by the market makers or other participants that trade
the particular security. The spread of the Fund’s
shares varies over time based on the Fund’s trading volume and market liquidity
and may increase if the Fund’s trading volume,
the spread of the Fund’s underlying securities, or market liquidity
decrease.
Trading
in shares on NYSE Arca may be halted due to market conditions or for reasons
that, in the view of NYSE Arca, make trading
in shares inadvisable. In addition, trading in shares on NYSE Arca is subject to
trading halts caused by extraordinary market
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volatility
pursuant to NYSE Arca “circuit breaker” rules. If a trading halt or
unanticipated closing of the exchange occurs, a shareholder
may be unable to purchase or sell shares. There can be no assurance that the
requirements of NYSE Arca necessary to maintain
the listing of the Fund will continue to be met or will remain
unchanged.
Borrowing
The
Fund is permitted to borrow for temporary purposes (such as to satisfy
redemption requests, to remain fully invested in anticipation
of expected cash inflows and to settle transactions). Any borrowings by the Fund
are subject to the requirements of the 1940
Act. Borrowings are also subject to the terms of any credit agreement between
the Fund and lender(s). Fund borrowings may be equal
to as much as 33 1/3% of the value of the Fund’s total assets (including such
borrowings) less the Fund’s liabilities (other than borrowings).
The Fund will not purchase additional investments while outstanding borrowings
exceed 5% of the value of its total assets.
Cybersecurity
Risk
With
the increased use of technologies such as the internet to conduct business, the
Fund, the Adviser, authorized participants, service
providers and the relevant listing exchange are susceptible to operational,
information security and related “cyber” risks both directly
and through the service providers. Similar types of cybersecurity risks are also
present for issuers of securities in which the Fund
invests, which could result in material adverse consequences for such issuers
and may cause the Fund’s investment in such issuers
to lose value. In general, cyber incidents can result from deliberate attacks or
unintentional events. Cyber incidents include, but
are not limited to, gaining unauthorized access to digital systems (e.g.,
through “hacking” or malicious software coding) for purposes
of misappropriating assets or sensitive information, corrupting data, or causing
operational disruption. Cyberattacks may also
be carried out in a manner that does not require gaining unauthorized access,
such as causing denial-of-service attacks on websites
(i.e., efforts to make network services unavailable to intended users).
Recently, geopolitical tensions may have increased the scale
and sophistication of deliberate attacks, particularly those from nation-states
or from entities with nation-state backing.
Cybersecurity
failures by, or breaches of, the systems of the Adviser, distributor and other
service providers (including, but not limited
to, index and benchmark providers, fund accountants, custodians, transfer agents
and administrators), exchanges, market participants,
market makers, authorized participants or the issuers of securities in which the
Fund invests have the ability to cause disruptions
and impact business operations, potentially resulting in: financial losses,
interference with the Fund’s ability to calculate its NAV,
disclosure of confidential trading information, impediments to trading,
submission of erroneous trades or erroneous creation
or redemption orders, the inability of the Fund or its service providers to
transact business, violations of applicable privacy and
other laws, regulatory fines, penalties, reputational damage, reimbursement or
other compensation costs, or additional compliance
costs. In addition, cyberattacks may render records of Fund assets and
transactions, shareholder ownership of Fund shares,
and other data integral to the functioning of the Fund inaccessible, inaccurate
or incomplete. Substantial costs may be incurred
by the Fund in order to resolve or prevent cyber incidents in the future. While
the Fund has established business continuity plans
in the event of, and risk management systems to prevent, such cyber incidents,
there are inherent limitations in such plans and systems,
including the possibility that certain risks have not been identified, that
prevention and remediation efforts will not be successful
or that cyberattacks will go undetected. Furthermore, the Fund cannot control
the cybersecurity plans and systems put in place
by service providers to the Fund, issuers in which the Fund invests, market
makers or authorized participants. The Fund and its shareholders
could be negatively impacted as a result.
Portfolio
Turnover
Consistent
with its investment policies, the Fund will purchase and sell securities without
regard to the effect on portfolio turnover. Higher
portfolio turnover (e.g., over 100% per year) will cause the Fund to incur
additional transaction costs and may result in taxable
gains being passed through to shareholders. The Fund may engage in frequent
trading of securities to achieve its investment objective.
Regulatory
and Legal Risk
U.S.
and non-U.S. governmental agencies and other regulators regularly implement
additional regulations and legislators pass new laws
that affect the investments held by the Fund, the strategies used by the Fund or
the level of regulation or taxation applying to the
Fund (such as regulations related to investments in derivatives and other
transactions). These regulations and laws impact the investment
strategies, performance, costs and operations of the Fund or taxation of
shareholders.
The
SEC has recently proposed amendments to Rule 22e-4 of the 1940 Act that, if
adopted, would result in changes to the Fund’s liquidity
classification framework and could potentially increase the percentage of the
Fund’s investments classified as illiquid. In addition,
the Fund’s operations and investment strategies may be adversely impacted if the
proposed amendments are adopted.
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Fund
Management
Adviser
Morgan
Stanley Investment Management Inc., with principal offices at 1585
Broadway, New York, NY 10036, conducts a worldwide
portfolio management business and provides a broad range of portfolio management
services to customers in the United States
and abroad. Morgan Stanley (NYSE: “MS”) is the parent of the Adviser. Morgan
Stanley is a preeminent global financial services
firm engaged in securities trading and brokerage activities, as well as
providing investment banking, research and analysis, financing
and financial advisory services. As of December
31, 2023, the Adviser, together with its affiliated asset management
companies,
had approximately $1.5 trillion in assets under management or
supervision.
A
discussion regarding the basis for the Board of Trustees’ approval of the
Management Agreement will be available in the Fund’s semi-annual
report to shareholders for the period ending March
31, 2024.
Management
Fees
The
Adviser receives a fee for management services equal to 0.19%
of the average daily net assets of the Fund.
For
the fiscal year ended September 30, 2023, the Predecessor Fund paid total
investment advisory compensation (net of fee waivers, if
applicable) amounting to 0%
of the Predecessor Fund’s average daily net assets. The Predecessor Fund
operated pursuant to a different
fee structure than the Fund.
Under
the Management Agreement, the Adviser will pay substantially all the expenses of
the Fund (including expenses of the Trust relating
to the Fund), except for the distribution fees, if any, brokerage expenses,
acquired fund fees and expenses, taxes, interest, litigation
expenses, and other extraordinary expenses, including the costs of proxies, not
incurred in the ordinary course of the Fund’s business.
Portfolio
Management
The
Fund is managed by members of the Fixed Income team. The team consists of
portfolio managers and analysts. The current members
of the team who are jointly and primarily responsible for the day-to-day
management of the Fund are Julie P. Callahan, CFA,
Paul Metheny, CFA. Carl Thompson, CFA and Brandon Matsui, CFA.
Ms.
Callahan has been a Managing Director of the Adviser since 2020. Prior to
joining the Adviser, Ms. Callahan was a senior member
of the municipal bond portfolio management team at PIMCO from 2011 to 2020. Ms.
Callahan served as portfolio manager
of the Predecessor Fund since May 2023. Messrs. Metheny and Thompson are
Executive Directors of the Adviser. Messrs. Metheny
and Thompson are also Senior Quantitative Portfolio Analysts and have been
employed by the Morgan Stanley organization
for more than five years. Messrs. Metheny and Thompson served as portfolio
managers of the Predecessor Fund since July
2023. Mr. Matsui is an Executive Director of the Adviser. Prior to joining the
Adviser in 2023, Mr. Matsui served as the Head of
Fixed Income for DWS’ Systematic Investment Solutions group since
2016.
The
composition of the team may change from time to time.
The
Fund’s SAI provides additional information about the portfolio managers’
compensation structure, other accounts managed by the
portfolio managers and the portfolio managers’ ownership of securities in the
Fund.
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Shareholder
Information
Distribution
of Fund Shares
The
Distributor is the exclusive distributor of Creation Units of the Fund. The
Distributor or its agent distributes Creation Units for the
Fund on an agency basis. The Distributor does not maintain a secondary market in
shares of the Fund. The Distributor has no role
in determining the investment policies of the Fund or the securities that are
purchased or sold by the Fund. The Distributor’s principal
address is 3 Canal Plaza Suite 100, Portland, ME 04101.
The
Board of Trustees of the Trust has adopted a distribution and service plan
(“Plan”) pursuant to Rule 12b-1 under the 1940 Act. Under
the Plan, the Fund is authorized to pay distribution fees in connection with the
sale and distribution of its shares and pay service
fees in connection with the provision of ongoing services to shareholders of the
Fund and the maintenance of shareholder accounts
in an amount up to 0.25% of its average daily net assets each year.
No
Rule 12b-1 fees are currently paid by the Fund, and there are no current plans
to impose these fees. However, in the event Rule 12b-1
fees are charged in the future, because these fees are paid out of the Fund’s
assets on an ongoing basis, these fees will increase the
cost of your investment in the Fund. By purchasing shares subject to
distribution fees and service fees, you may pay more over time
than you would by purchasing shares with other types of sales charge
arrangements. Long-term shareholders may pay more than the
economic equivalent of the maximum front-end sales charge permitted by the rules
of FINRA. The net income attributable to shares
will be reduced by the amount of distribution fees and service fees and other
expenses of the Fund.
About
Net Asset Value
The
Fund’s NAV per share is determined by dividing the total of the value of the
Fund’s investments and other assets, less any liabilities
attributable to the Fund, by the total number of outstanding shares of the Fund.
In making this calculation, the Fund generally
values its portfolio securities and other assets at market price.
When
no market quotations are readily available for a security or other asset,
including circumstances under which the Adviser determines
that a market quotation is not accurate, fair value for the security or other
asset will be determined in good faith using methods
approved by the Board of Trustees. The Adviser, consistent with its procedures
and applicable regulatory guidance, may (but
need not) determine to make an adjustment to the previous closing prices of
either domestic or foreign securities in light of significant
events, to reflect what it believes to be the fair value of the securities at
the time of determining the Fund’s NAV. In these cases,
the Fund’s NAV will reflect certain portfolio securities’ fair value rather than
their market price. In addition, the securities held by
the Fund may be traded in markets that close at a different time than the
exchange on which the Fund’s shares are listed. Accordingly,
during the time when the Fund’s listing exchange is open but after the
applicable market closes, bid-ask spreads may widen
and Fund shares may trade at a premium or discount to NAV. To the extent the
Fund invests in open-end management companies
(other than ETFs) that are registered under the 1940 Act, the Fund’s NAV is
calculated based in relevant part upon the NAV
of such funds. The prospectuses for such funds explain the circumstances under
which they will use fair value pricing and its effects.
Fair
value pricing involves subjective judgments and it is possible that the fair
value determined for a security or other asset is materially
different than the value that could be realized upon the sale of that security
or other asset. With respect to securities that are
primarily listed on foreign exchanges, the values of the Fund’s portfolio
securities may change on days when you will not be able to
purchase or sell your shares. The NAV of the Fund is based on the value of the
Fund’s portfolio securities or other assets.
The
Fund relies on various sources to calculate its NAV. The ability of the Fund’s
provider of administrative services to calculate the NAV
per share of the Fund is subject to operational risks associated with processing
or human errors, systems or technology failures, cyber
attacks and errors caused by third party service providers, data sources, or
trading counterparties. Such failures may result in delays
in the calculation of the Fund’s NAV and/or the inability to calculate NAV over
extended time periods. The Fund may be unable
to recover any losses associated with such failures. In addition, if the third
party service providers and/or data sources upon which
the Fund directly or indirectly relies to calculate its NAV or price individual
securities are unavailable or otherwise unable to calculate
the NAV correctly, it may be necessary for alternative procedures to be utilized
to price the securities at the time of determining
the Fund’s NAV.
The
Fund’s NAV per share is subject to various investment and other risks. Please
refer to the “Additional Information About Fund Investment
Strategies and Related Risks” and “Investment Strategies and Techniques”
sections of the Prospectus and SAI, respectively,
for more information regarding risks associated with an investment in the
Fund.
Book
Entry
The
Depository Trust Company (“DTC”) serves as securities depository for the shares.
The shares may be held only in book-entry form;
stock certificates will not be issued. DTC, or its nominee, is the record or
registered owner of all outstanding shares. Beneficial ownership
of shares will be shown on the records of DTC or its participants (described
below). Beneficial owners of shares are not entitled
to have shares registered in their names, will not receive or be entitled to
receive physical delivery of certificates in definitive form
and are not considered the registered holder thereof. Accordingly, to exercise
any rights of a holder of shares, each beneficial owner
must rely on the procedures of: (i) DTC; (ii) “DTC Participants,” i.e.,
securities brokers and dealers, banks, trust companies,
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clearing
corporations and certain other organizations, some of whom (and/or their
representatives) own DTC; and (iii) “Indirect Participants,”
i.e., brokers, dealers, banks and trust companies that clear through or maintain
a custodial relationship with a DTC Participant,
either directly or indirectly, through which such beneficial owner holds its
interests. The Trust understands that under existing
industry practice, in the event the Trust requests any action of holders of
shares, or a beneficial owner desires to take any action
that DTC, as the record owner of all outstanding shares, is entitled to take,
DTC would authorize the DTC Participants to take
such action and that the DTC Participants would authorize the Indirect
Participants and beneficial owners acting through such DTC
Participants to take such action and would otherwise act upon the instructions
of beneficial owners owning through them. As described
above, the Trust recognizes DTC or its nominee as the owner of all shares for
all purposes.
Buying
and Selling Shares
Shares
of the Fund may be acquired or redeemed directly from the Fund at NAV only in
Creation Units or multiples thereof, as discussed
in the Creations and Redemptions section of the Prospectus. Only an Authorized
Participant (as defined in the Creations and
Redemptions section below) may engage in creation or redemption transactions
directly with the Fund. Once created, shares of the
Fund generally trade in the secondary market in amounts less than a Creation
Unit.
Shares
of the Fund are listed for trading on a national securities exchange during the
trading day. Shares can be bought and sold throughout
the trading day at market price like shares of other publicly traded companies.
However, there can be no guarantee that an
active trading market will develop or be maintained, or that the Fund shares
listing will continue or remain unchanged. The Trust does
not impose any minimum investment for shares of the Fund purchased on an
exchange. Buying or selling the Fund’s shares involves
certain costs that apply to all securities transactions. When buying or selling
shares of the Fund through a financial intermediary,
you may incur a brokerage commission or other charges determined by your
financial intermediary. Due to these brokerage
costs, if any, frequent trading may detract significantly from investment
returns. In addition, you may also incur the cost of the
spread (the difference between the bid price and the ask price). The commission
is frequently a fixed amount and may be a significant
cost for investors seeking to buy or sell small amounts of shares. The spread
varies over time for shares of the Fund based on
its trading volume and market liquidity, and is generally less if the Fund has
more trading volume and market liquidity and more if
the Fund has less trading volume and market liquidity.
The
Fund’s primary listing exchange is NYSE
Arca. NYSE
Arca is open for trading Monday through Friday and is closed on 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.
A
“business day” with respect to the Fund is each day the New York Stock Exchange,
NYSE
Arca and the Trust are open and includes
any day that the Fund is required to be open under Section 22(e) of the 1940
Act. Orders from authorized participants to create
or redeem Creation Units will only be accepted on a business day. On days when
NYSE
Arca closes earlier than normal, the Fund
may require orders to create or redeem Creation Units to be placed earlier in
the day. See the SAI for more information.
The
Trust’s Board of Trustees has not adopted a policy of monitoring for frequent
purchases and redemptions of Fund shares (“frequent
trading”) that appear to attempt to take advantage of potential arbitrage
opportunities presented by a lag between a change in
the value of the Fund’s portfolio securities after the close of the primary
markets for the Fund’s portfolio securities and the reflection
of that change in the Fund’s NAV (“market timing”). The Trust believes this is
appropriate because ETFs, such as the Fund,
are intended to be attractive to arbitrageurs, as trading activity is critical
to ensuring that the market price of Fund shares remains
at or close to NAV. Since the Fund issues and redeems Creation Units at NAV plus
applicable transaction fees, and the Fund’s
shares may be purchased and sold on NYSE
Arca at prevailing market prices, the risks of frequent trading are
limited.
Section
12(d)(1) of the 1940 Act generally restricts investments by investment
companies, including foreign and unregistered investment
companies, in the securities of other investment companies. For example, a
registered investment company (the “Acquired
Fund”), such as the Fund, may not knowingly sell or otherwise dispose of any
security issued by the Acquired Fund to any investment
company (the “Acquiring Fund”) or any company or companies controlled by the
Acquiring Fund if, immediately after such
sale or disposition: (i) more than 3% of the total outstanding voting stock of
the Acquired Fund is owned by the Acquiring Fund
and any company or companies controlled by the Acquiring Fund, or (ii) more than
10% of the total outstanding voting stock of
the Acquired Fund is owned by the Acquiring Fund and other investment companies
and companies controlled by them. However,
registered investment companies are permitted to invest in the Fund beyond the
limits set forth in Section 12(d)(1), subject
to certain terms and conditions set forth in SEC rules. In order for a
registered investment company to invest in shares of the Fund
beyond the limitations of Section 12(d)(1) in reliance on Rule 12d1-4 under the
1940 Act, the registered investment company must,
among other things, enter into an agreement with the Trust. Foreign investment
companies are permitted to invest in the Fund
only up to the limits set forth in Section 12(d)(1), subject to any applicable
SEC Staff no-action relief.
The
Fund and the Distributor will have the sole right to accept orders to purchase
shares and reserve the right to reject any purchase order
in whole or in part.
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Creations
and Redemptions
Prior
to trading in the secondary market, shares of the Fund are “created” at NAV by
market makers, large investors and institutions only
in block-size Creation Units or multiples thereof. Each “creator” or authorized
participant (an “Authorized Participant”) enters into
an authorized participant agreement with the Fund’s Distributor. An Authorized
Participant is a member or participant of a clearing
agency registered with the SEC, which has a written agreement with the Fund or
one of its service providers that allows such member
or participant to place orders for the purchase and redemption of Creation
Units.
A
creation transaction, which is subject to acceptance by JPMorgan Chase Bank
N.A., as the Trust’s transfer agent, generally takes place
when an Authorized Participant deposits into the Fund a designated portfolio of
securities (including any portion of such securities
for which cash may be substituted) and a specified amount of cash in exchange
for a specified number of Creation Units.
Similarly,
shares can be redeemed only in Creation Units, generally for a designated
portfolio of securities (including any portion of such
securities for which cash may be substituted) held by the Fund and a specified
amount of cash. Except when aggregated in Creation
Units, shares are not redeemable by the Fund.
The
prices at which creations and redemptions occur are based on the next
calculation of NAV after a creation or redemption order is received
in an acceptable form under the authorized participant agreement.
Only
an Authorized Participant may create or redeem Creation Units directly with the
Fund.
In
the event of a system failure or other interruption, including disruptions at
market makers or authorized participants, orders to purchase
or redeem Creation Units either may not be executed according to the Fund’s
instructions or may not be executed at all, or the
Fund may not be able to place or change orders.
To
the extent the 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 Securities Act of 1933, as amended (the “Securities Act”). Further, an
Authorized Participant that is not a “qualified
institutional buyer,” as such term is defined under Rule 144A of the Securities
Act, will not be able to receive restricted securities
eligible for resale under Rule 144A.
The
in-kind arrangements are intended to protect ongoing shareholders from adverse
effects on the Fund’s portfolio that could arise from
frequent cash creation and redemption transactions and generally will not lead
to a tax event for the Fund or its ongoing shareholders.
Creations
and redemptions must be made through a firm that is either a member of the
Continuous Net Settlement System of the National
Securities Clearing Corporation or a DTC Participant and has executed an
agreement with the Distributor with respect to creations
and redemptions of Creation Unit aggregations. Information about the procedures
regarding creation and redemption of Creation
Units (including the cut-off times for receipt of creation and redemption
orders) and the applicable transaction fees is included
in the Fund’s SAI.
Portfolio
Holdings
A
description of the Trust’s policies and procedures with respect to the
disclosure of the Fund’s portfolio securities is available in the Trust’s
SAI.
Inactive
Accounts and Risk of Escheatment
In
accordance with state “unclaimed property” laws, your Fund shares may legally be
considered abandoned and required to be transferred
to the relevant state (also known as “escheatment”) under various circumstances.
These circumstances, which vary by state,
can include inactivity (e.g., no owner-initiated contact for a certain period),
returned mail (e.g., when mail sent to a shareholder is
returned by the post office as undeliverable), uncashed checks or a combination
of these. An incorrect address may cause a shareholder’s
account statements and other mailings to be returned to the Fund or your
Financial Intermediary. Since states’ statutory
requirements regarding inactivity differ, it is important to regularly contact
your Financial Intermediary or the Fund’s transfer
agent. The process described above, and the application of state escheatment
laws, may vary by state and/or depending on how
shareholders hold their shares in the Fund.
It
is your responsibility to ensure that you maintain a valid mailing address for
your account, keep your account active by contacting your
Financial Intermediary or the Fund’s transfer agent (e.g., by mail or
telephone), and promptly cash all checks for dividends, capital
gains and redemptions. Neither the Fund nor the Adviser will be liable to
shareholders or their representatives for good faith compliance
with escheatment laws.
For
more information, please contact us at 800-836-2414.
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Dividends
and Distributions
General
Policies
Dividends
from net investment income, if any, generally are declared and paid monthly by
the Fund. Distributions of net realized securities
gains, if any, generally are declared and paid once a year, but the Trust may
make distributions on a more frequent basis for the
Fund. The Trust reserves the right to declare special distributions if, in its
reasonable discretion, such action is necessary or advisable
to preserve its status as a regulated investment company or to avoid imposition
of income or excise taxes on undistributed income
or realized gains. Dividends and other distributions on shares of the Fund are
distributed on a pro rata basis to beneficial owners
of such shares. Dividend payments are made through DTC participants and indirect
participants to beneficial owners then of record
with proceeds received from the Fund.
Dividend
Reinvestment Service
No
dividend reinvestment service is provided by the Trust. Broker-dealers may make
available the DTC book-entry dividend reinvestment
service for use by beneficial owners of the Fund for reinvestment of their
dividend distributions. Beneficial owners should
contact their broker to determine the availability and costs of the service and
the details of participation therein. Brokers may require
beneficial owners to adhere to specific procedures and timetables. If this
service is available and used, dividend distributions of both
income and realized gains will be automatically reinvested in additional whole
shares of the Fund purchased in the secondary market.
Taxes
As
with any investment, you should consider how your Fund investment will be taxed.
The tax information in this Prospectus is provided
as general information. You should consult your own tax professional about the
tax consequences of an investment in the Fund.
Unless your investment in the Fund is through a tax deferred retirement account,
such as a 401(k) plan or IRA, you need to be aware
of the possible tax consequences when the Fund makes distributions and when you
sell shares.
Taxation
of Distributions.
Your income dividend distributions are normally exempt from regular
federal income tax to the extent they are
derived from municipal obligations. Income derived from other portfolio
securities may be subject to federal, state and/or local income
taxes. Income derived from some municipal securities is subject to the federal
alternative minimum tax. Certain tax-exempt securities
whose proceeds are used to finance private, for-profit organizations are subject
to this special tax system that ensures that individuals
pay at least some federal taxes. Although interest on these securities is
generally exempt from regular federal income tax, some
individual taxpayers who have many tax deductions or exemptions nevertheless may
have to pay tax on the income. However, the
alternative minimum tax consequences discussed in this paragraph do not apply
with respect to interest paid on bonds issued after December
31, 2008 and before January 1, 2011 (including refunding bonds issued during
that period to refund bonds originally issued
after December 31, 2003 and before January 1, 2009).
The
Fund may derive gains in part from municipal obligations that the Fund
purchased below their principal or face values. All or a portion
of these gains may be taxable to you as ordinary income rather than capital
gains. If the Fund makes any capital gain distributions,
those distributions will normally be subject to federal and state income tax
when they are paid, whether you take them in
cash or reinvest them in Fund shares. Any short-term capital gain distributions
are taxable to you as ordinary income. Any long-term
capital gain distributions are taxable to you as long-term capital gains, no
matter how long you have owned shares in the Fund. The
Fund does not anticipate that it will make any distributions eligible for the
reduced rate of taxation applicable to qualified dividend
income or for a dividends-received deduction.
If
you borrow money to purchase shares of the Fund, the interest on the borrowed
money is generally not deductible for income tax purposes.
If
you buy shares of the Fund before a distribution, you may be subject to tax on
the entire amount of the taxable distribution you receive.
Distributions are taxable to you even if they are paid from income or gain
earned by the Fund before your investment (and thus
were included in the price you paid for your Fund shares).
Investment
income received by the Fund from sources within foreign countries may be subject
to foreign income, withholding, and other
taxes. Tax conventions between certain countries and the U.S. may reduce or
eliminate such taxes.
You
will be sent a statement IRS Form 1099-DIV) by February of each year showing the
taxable distributions paid to you in the previous
year. The statement provides information on your dividends and any capital gains
for tax purposes.
Taxation
of Sales.
Your sale of Fund shares normally is subject to federal and state income tax and
may result in a taxable gain or loss to
you. A sale also may be subject to local income tax. When you sell your shares,
you will generally recognize a capital gain or loss in an
amount equal to the difference between your adjusted tax basis in the shares and
the amount received. Generally, this capital gain or
loss is long-term or short-term depending on whether your holding period exceeds
one year, except that any loss realized on shares held
for six months or less will be treated as a long-term capital loss to the extent
of any long-term capital gain dividends that were
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received
on the shares. Further, any loss realized on the sale of shares held for six
months or less may be disallowed to the extent of any
distributions treated as exempt-interest dividends with respect to the shares.
Additionally, any loss realized on a sale of shares of the
Fund may be disallowed under “wash sale” rules to the extent the shares disposed
of are replaced with other shares of the Fund within
a period of 61 days beginning 30 days before and ending 30 days after the date
of disposition, such as pursuant to a dividend reinvestment
in Fund shares. If disallowed, the loss will be reflected in an adjustment to
the basis of the shares acquired.
Creations
and Redemptions.
A person who exchanges securities for Creation Units generally will recognize a
gain or loss. The gain or loss
will be equal to the difference between the market value of the Creation Units
at the time of exchange and the sum of the exchanger’s
aggregate basis in the securities surrendered and the amount of any cash paid
for such Creation Units. A person who exchanges
Creation Units for securities will generally recognize a gain or loss equal to
the difference between the exchanger’s basis in the
Creation Units and the sum of the aggregate market value of the securities
received. The IRS, however, may assert that a loss realized
upon an exchange of primarily securities for Creation Units cannot be deducted
currently under the rules governing “wash sales,”
or on the basis that there has been no significant change in economic position.
Persons exchanging securities for Creation Units
or redeeming Creation Units should consult their own tax adviser with respect to
whether wash sale rules apply and when a loss might
be deductible and the tax treatment of any creation or redemption
transaction.
Under
current U.S. federal income tax laws, any capital gain or loss realized upon a
redemption (or creation) of Creation Units is generally
treated as long-term capital gain or loss if the Fund shares (or securities
surrendered) have been held for more than one year and
as a short-term capital gain or loss if the Fund shares (or securities
surrendered) have been held for one year or less.
Other
Information.
An additional 3.8% Medicare tax is imposed on certain net investment income
(including ordinary dividends and capital
gain distributions received from the Fund and net gains from redemptions or
other taxable dispositions of Fund shares) of U.S.
individuals, estates and trusts to the extent that such person’s “modified
adjusted gross income” (in the case of an individual) or “adjusted
gross income” (in the case of an estate or trust) exceeds certain threshold
amounts.
You
may be subject to backup withholding at a rate of 24% with respect to taxable
distributions if you do not provide your correct taxpayer
identification number, or certify that it is correct, or if you have been
notified by the IRS that you are subject to backup withholding.
Shareholders
who are not citizens or residents of the United States and certain foreign
entities will generally be subject to withholding of
U.S. tax of 30% on distributions made by the Fund of investment income (other
than exempt interest dividends) and short-term capital
gains.
Withholding
of U.S. tax is required (at a 30% rate) on payments of taxable dividends made to
certain non-U.S. entities that fail to comply
(or be deemed compliant) with extensive reporting and withholding requirements
designed to inform the U.S. Department of
the Treasury of U.S.-owned foreign investment accounts. Shareholders may be
requested to provide additional information to the Fund
to enable the Fund to determine whether withholding is required.
Reporting
to you and the IRS is required annually on Form 1099-B not only with respect to
the gross proceeds of Fund shares you sell
or redeem but also their cost basis. Shareholders should contact their
intermediaries with respect to reporting of cost basis and available
elections with respect to their accounts. You should carefully review the cost
basis information provided by the applicable intermediary
and make any additional basis, holding period or other adjustments that are
required when reporting these amounts on your
federal income tax returns.
Because
each investor’s tax circumstances are unique and the tax laws may change, you
should consult your tax advisor about your investment.
Potential
Conflicts of Interest
As
a diversified global financial services firm, Morgan Stanley, the parent company
of the Adviser, engages in a broad spectrum of activities,
including financial advisory services, investment management activities,
lending, commercial banking, sponsoring and managing
private investment funds, engaging in broker-dealer transactions and principal
securities, commodities and foreign exchange
transactions, research publication and other activities. In the ordinary course
of its business, Morgan Stanley is a full-service investment
banking and financial services firm and therefore engages in activities where
Morgan Stanley’s interests or the interests of its
clients may conflict with the interests of the Fund. Morgan Stanley advises
clients and sponsors, manages or advises other investment
funds and investment programs, accounts and businesses (collectively, together
with any new or successor funds, programs,
accounts or businesses, the ‘‘Affiliated Investment Accounts’’) with a wide
variety of investment objectives that in some instances
may overlap or conflict with the Fund’s investment objectives and present
conflicts of interest. In addition, Morgan Stanley may
also from time to time create new or successor Affiliated Investment Accounts
that may compete with the Fund and present similar
conflicts of interest. The discussion below enumerates certain actual, apparent
and potential conflicts of interest. There is no
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assurance
that conflicts of interest will be resolved in favor of Fund shareholders and,
in fact, they may not be. Conflicts of interest not
described below may also exist.
For
more information about conflicts of interest, see the section entitled
“Potential Conflicts of Interest” in the SAI.
Material
Nonpublic Information.
It is expected that confidential or material nonpublic information regarding an
investment or potential
investment opportunity may become available to the Adviser. If such information
becomes available, the Adviser may be precluded
(including by applicable law or internal policies or procedures) from pursuing
an investment or disposition opportunity with
respect to such investment or investment opportunity. Morgan Stanley has
established certain information barriers and other policies
to address the sharing of information between different businesses within Morgan
Stanley. In limited circumstances, however,
including for purposes of managing business and reputational risk, and subject
to policies and procedures and any applicable
regulations, personnel, including personnel of the Adviser, on one side of an
information barrier may have access to information
and personnel on the other side of the information barrier through “wall
crossings.” The Adviser faces conflicts of interest
in determining whether to engage in such wall crossings. Information obtained in
connection with such wall crossings may limit
or restrict the ability of the Adviser to engage in or otherwise effect
transactions on behalf of the Fund (including purchasing or selling
securities that the Adviser may otherwise have purchased or sold for the Fund in
the absence of a wall crossing).
Investments
by Morgan Stanley and its Affiliated Investment Accounts.
In serving in multiple capacities to Affiliated Investment Accounts,
Morgan Stanley, including the Adviser and the Investment team, may have
obligations to other clients or investors in Affiliated
Investment Accounts, the fulfillment of which may not be in the best interests
of the Fund or its shareholders. The Fund’s investment
objectives may overlap with the investment objectives of certain Affiliated
Investment Accounts. As a result, the members of
an Investment team may face conflicts in the allocation of investment
opportunities among the Fund and other investment funds, programs,
accounts and businesses advised by or affiliated with the Adviser. Certain
Affiliated Investment Accounts may provide for higher
management or incentive fees or greater expense reimbursements or overhead
allocations, all of which may contribute to this conflict
of interest and create an incentive for the Adviser to favor such other
accounts. To seek to reduce potential conflicts of interest
and to attempt to allocate such investment opportunities in a fair and equitable
manner, the Adviser has implemented allocation
policies and procedures. These policies and procedures are intended to give all
clients of the Adviser, including the Fund, fair
access to investment opportunities consistent with the requirements of
organizational documents, investment strategies, applicable
laws and regulations, and the fiduciary duties of the Adviser.
Payments
to Broker-Dealers and Other Financial Intermediaries.
The Adviser and/or the Distributor may pay compensation, out of their
own funds and not as an expense of the Fund, to certain Financial Intermediaries
(which may include affiliates of the Adviser and
Distributor), including recordkeepers and administrators of various deferred
compensation plans, in connection with the sale, distribution,
marketing and retention of shares of the Fund and/or shareholder servicing. The
prospect of receiving, or the receipt of, additional
compensation, as described above, by Financial Intermediaries may provide such
Financial Intermediaries and their financial
advisors and other salespersons with an incentive to favor sales of shares of
the Fund over other investment options with respect
to which these Financial Intermediaries do not receive additional compensation
(or receives lower levels of additional compensation).
These payment arrangements, however, will not change the price that an investor
pays for shares of the Fund or the amount
that the Fund receives to invest on behalf of an investor. Investors may wish to
take such payment arrangements into account when
considering and evaluating any recommendations relating to Fund shares and
should review carefully any disclosures provided by
Financial Intermediaries as to their compensation. In addition, in certain
circumstances, the Adviser restricts, limits or reduces the amount
of the Fund’s investment, or restricts the type of governance or voting rights
it acquires or exercises, where the Fund (potentially
together with Morgan Stanley) exceeds a certain ownership interest, or possesses
certain degrees of voting or control or has
other interests.
Morgan
Stanley Trading and Principal Investing Activities.
Notwithstanding anything to the contrary herein, Morgan Stanley will
generally
conduct its sales and trading businesses, publish research and analysis, and
render investment advice without regard for the Fund’s
holdings, although these activities could have an adverse impact on the value of
one or more of the Fund’s investments, or could
cause Morgan Stanley to have an interest in one or more portfolio investments
that is different from, and potentially adverse to,
that of the Fund.
Morgan
Stanley’s Investment Banking and Other Commercial Activities.
Morgan Stanley advises clients on a variety of mergers, acquisitions,
restructuring, bankruptcy and financing transactions. Morgan Stanley may act as
an advisor to clients, including other investment
funds that may compete with the Fund and with respect to investments that the
Fund may hold. Morgan Stanley may give
advice and take action with respect to any of its clients or proprietary
accounts that may differ from the advice given, or may involve
an action of a different timing or nature than the action taken, by the Fund.
Morgan Stanley may give advice and provide recommendations
to persons competing with the Fund and/or any of the Fund’s investments that are
contrary to the Fund’s best interests
and/or the best interests of any of its investments. Morgan Stanley’s activities
on behalf of its clients (such as engagements as an
underwriter or placement agent) may restrict or otherwise limit investment
opportunities that may otherwise be available to the Fund.
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Morgan
Stanley may be engaged to act as a financial advisor to a company in connection
with the sale of such company, or subsidiaries
or divisions thereof, may represent potential buyers of businesses through its
mergers and acquisition activities and may provide
lending and other related financing services in connection with such
transactions. Morgan Stanley’s compensation for such activities
is usually based upon realized consideration and is usually contingent, in
substantial part, upon the closing of the transaction.
Under these circumstances, the Fund may be precluded from participating in a
transaction with or relating to the company
being sold or participating in any financing activity related to a merger or an
acquisition.
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Financial
Highlights
The
financial highlights table that follows is intended to help you understand the
financial performance of the Fund for the past five years
or since inception if less than five years. Certain information reflects
financial results for a single Fund share. The total returns in
the tables represent the rate that an investor would have earned (or lost) on an
investment in the Fund (assuming reinvestment of all
dividends and distributions).
On
March 22, 2024, the Predecessor Fund was reorganized into the Fund. Accordingly,
Eaton Vance Short Duration Municipal Income
ETF adopted the operating history of the Predecessor Fund for financial
reporting purposes. Therefore, the financial highlights
shown below are those of the Class IR shares of the Predecessor
Fund.
The
information below has been derived from the financial statements audited by
Ernst & Young LLP, the Predecessor Fund’s independent
registered public accounting firm. Ernst & Young LLP’s report, along with
the Predecessor Fund’s financial statements, are
incorporated by reference into the Fund’s SAI. The Annual Report to Shareholders
(which include the Predecessor Fund’s financial
statements) and SAI will be available at no cost from the Trust at the toll-free
number noted on the back cover to this Prospectus.
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Financial
Highlights
Eaton
Vance Short Duration Municipal Income ETF
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Class
IR |
|
Year
Ended September 30, |
Period
from December 19, 2018(1) to
September 30, 2019 |
Selected
Per Share Data and Ratios |
2023 |
2022 |
2021 |
2020 |
Net
Asset Value, Beginning of Period |
$ |
|
$ |
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$ |
|
$ |
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$ |
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Income
(Loss) from Investment Operations: |
Net
Investment Income(2)
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|
|
|
Net
Realized and Unrealized Gain (Loss) |
|
|
|
|
|
|
|
|
|
|
Total
from Investment Operations |
|
|
|
|
|
|
|
|
|
|
Distributions
from and/or in Excess of: |
Net
Investment Income |
|
|
|
|
|
|
|
|
|
|
Net
Realized Gain |
|
|
|
|
|
|
|
|
|
|
Total
Distributions |
|
|
|
|
|
|
|
|
|
|
Net
Asset Value, End of Period |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Total
Return(4)
|
|
|
|
|
|
|
|
|
|
|
Ratios
to Average Net Assets and Supplemental Data: |
Net
Assets, End of Period (Thousands) |
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
Ratio
of Expenses Before Expense Limitation |
|
|
|
|
|
|
|
|
|
|
Ratio
of Expenses After Expense Limitation |
|
|
|
|
|
|
|
|
|
|
Ratio
of Net Investment Income |
|
|
|
|
|
|
|
|
|
|
Ratio
of Rebate from Morgan Stanley Affiliates |
|
|
|
|
|
|
|
|
|
|
Portfolio
Turnover Rate |
|
|
|
|
|
|
|
|
|
|
| |
(1) |
Commencement
of Operations. |
(2) |
Per
share amount is based on average shares outstanding. |
(3) |
Amount
is less than $0.005 per share. |
(4) |
Calculated
based on the net asset value as of the last business day of the
period. |
(5) |
Not
annualized. |
(6) |
Annualized. |
(7) |
The
Ratio of Expenses After Expense Limitation and Ratio of Net Investment
Income reflect the rebate of certain Fund expenses in connection with the
investments
in Morgan Stanley affiliates during the period. The effect of the rebate
on the ratios is disclosed in the above table as “Ratio of Rebate from
Morgan Stanley
Affiliates.” |
(8) |
Amount
is less than 0.005%. |
(9) |
During
the reporting period, the Fund did not hold any long-term investments and
accordingly portfolio turnover is not
applicable. |
Eaton
Vance | Premium/Discount
Information
Premium/Discount
Information
The
Fund has not yet commenced operations as an ETF on or about the date of this
Prospectus as amended and, therefore, does not have
information about the differences between the Fund’s daily market price on the
NYSE
Arca and its NAV. Information regarding
how often the closing trading price of the shares of the Fund was above (i.e.,
at a premium) or below (i.e., at a discount) the
NAV of the shares of the Fund for the most recently completed calendar year and
the most recently completed calendar quarter(s)
since that year (or the life of the Fund, if shorter) can be found at www.eatonvance.com.
Eaton
Vance | Continuous
Offering Information
Continuous
Offering Information
The
method by which Creation Units are created and traded may raise certain issues
under applicable securities laws. Because new Creation
Units are issued and sold by the Trust on an ongoing basis, a “distribution,” as
such term is used in the Securities Act may occur
at any point. Broker dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances,
result in their being deemed participants in a distribution in a manner which
could render them statutory underwriters
and subject them to the prospectus delivery and liability provisions of the
Securities Act.
For
example, a broker dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Units after placing an order with
the Distributor, breaks them down into constituent shares, and sells such shares
directly to customers, or if it chooses to couple the
creation of a supply of new shares with an active selling effort involving
solicitation of secondary market demand for shares. A determination
of whether one is an underwriter for purposes of the Securities Act must take
into account all the facts and circumstances
pertaining to the activities of the broker dealer or its client in the
particular case, and the examples mentioned above should
not be considered a complete description of all the activities that could lead
to a categorization as an underwriter.
Broker
dealers who are not “underwriters” but are participating in a distribution (as
contrasted to ordinary secondary trading transactions),
and thus dealing with shares that are part of an “unsold allotment” within the
meaning of Section 4(a)(3)(C) of the Securities
Act, would be unable to take advantage of the prospectus delivery exemption
provided by Section 4(a)(3) of the Securities Act.
This is because the prospectus delivery exemption in Section 4(a)(3) of the
Securities Act is not available in respect of such transactions
as a result of Section 24(d) of the 1940 Act. As a result, broker dealer firms
should note that dealers who are not underwriters
but are participating in a distribution (as contrasted with ordinary secondary
market transactions) and thus dealing with the
shares that are part of an overallotment within the meaning of Section
4(a)(3)(A) of the Securities Act would be unable to take advantage
of the prospectus delivery exemption provided by Section 4(a)(3) of the
Securities Act. Firms that incur a prospectus delivery
obligation with respect to shares are reminded that, under Rule 153 of the
Securities Act, a prospectus delivery obligation under
Section 5(b)(2) of the Securities Act owed to an exchange member in connection
with a sale on the Exchange is satisfied by the fact
that the prospectus is available at the Exchange upon request. The prospectus
delivery mechanism provided in Rule 153 is only available
with respect to transactions on an exchange.
In
addition, certain affiliates of the Fund and the Adviser may purchase and resell
Fund shares pursuant to this Prospectus.
(This
page intentionally left blank)
Where
to Find Additional Information
In
addition to this Prospectus, the Fund has an SAI, dated December
16, 2023 (as may be supplemented from time to time), which contains
additional, more detailed information about the Trust and the Fund. The SAI is
incorporated by reference into this Prospectus
and, therefore, legally forms a part of this Prospectus. Certain affiliates of
the Fund and the Adviser may purchase and resell
Fund shares pursuant to this Prospectus.
The
Trust publishes Annual and Semi-Annual Reports (“Shareholder Reports”) that
contain additional information about the Fund’s investments.
In the Fund’s Annual Report to Shareholders (once available), you will find a
discussion of the market conditions and the
investment strategies that significantly affected the Fund’s performance during
the last fiscal year. For additional Trust information,
including information regarding the investments comprising the Fund, please call
the toll-free number below.
You
may obtain the SAI and Shareholder Reports without charge by contacting the
Trust at the toll-free number below or on our website
at: www.eatonvance.com. If you purchased shares through a Financial
Intermediary, you may also obtain these documents, without
charge, by contacting your Financial Intermediary.
Shareholder
Reports and other information about the Fund are available on the EDGAR Database
on the SEC’s website at http://www.sec.gov,
and copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail
address: [email protected].
Morgan
Stanley ETF Trustc/o
Morgan Stanley Investment Management Inc.1585
BroadwayNew
York, New York 10036For
Shareholder Inquiries,call
toll-free 800-836-2414.Prices
and Investment Results are available at www.eatonvance.com.
The
Trust’s 1940 Act registration number is 811-23820.