Form 485BPOS
Matthews
Asia Funds | Prospectus
December 30,
2022 | matthewsasia.com
Listed on the NYSE Arca
The U.S. Securities and Exchange Commission
(the “SEC”) has not approved or disapproved the Fund. Also, the SEC has not
passed upon the adequacy or accuracy of this prospectus. Anyone who informs you
otherwise is committing a crime.
Matthews
Asia Funds
matthewsasia.com
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GLOBAL EMERGING
MARKETS STRATEGY |
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Additional Fund Information |
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Investing in the Fund |
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General Information |
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Please
read this document carefully before you make any investment decision. If you
have any questions, do not hesitate to contact a Matthews Asia Funds
representative at 833.228.5605 or visit matthewsasia.com.
Please
keep this prospectus with your other account documents for future
reference.
Matthews
Emerging Markets ex China Active ETF
FUND SUMMARY
Investment Objective
Long-term
capital appreciation.
Fees and Expenses of the
Fund
This
table describes the fees and expenses that you may pay if you buy, hold and sell
shares of this Fund. You may pay other fees, such as brokerage commissions and
other fees to financial intermediaries, which are not reflected in the table and
example below.
ANNUAL
OPERATING EXPENSES
(expenses that you pay each year as a percentage of
the value of your investment)
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Management
Fees |
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0.79% |
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Distribution
(12b‑1) Fees |
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0.00% |
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Other
Expenses1 |
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None |
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Total Annual Fund Operating
Expenses |
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0.79% |
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(1) |
“Other Expenses” are based
on estimated amounts for the current fiscal year and calculated as a
percentage of the Fund’s
assets. |
EXAMPLE
OF FUND EXPENSES
This
example is intended to help you compare the cost of investing in the Fund with
the cost of investing in other funds. 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 that your
investment has a 5% return each year and that 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:
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One year: $ 81 |
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Three years: $ 252 |
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 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
annual fund operating expenses or in the example of fund expenses, affect the
Fund’s performance. Because the Fund is newly formed and has not commenced
operations as of the date of this prospectus, no portfolio turnover data is
available for the Fund.
Principal Investment
Strategy
Under
normal circumstances, the Matthews Emerging Markets ex China Active ETF seeks to
achieve its investment objective by investing at least 80% of its net assets,
which include borrowings for investment purposes, in the common and preferred
stocks of companies located in emerging market countries excluding China.
Emerging market countries generally include every country in the world except
the United States, Australia, Canada, Hong Kong, Israel, Japan, New Zealand,
Singapore and most of the countries in Western Europe. Certain emerging market
countries may also be classified as “frontier” market countries, which are a
subset of emerging market countries with newer or even less developed economies
and markets, such as Sri Lanka and Vietnam. The list of emerging market
countries and frontier market countries may change from time to time. The Fund
may also invest in companies located in developed countries or China; however,
the Fund may not invest in any company located in a developed country or China
if, at the time of purchase, more than 20% of the Fund’s assets are invested in
a combination of developed market and Chinese companies. China includes its
administrative and other districts such as Hong Kong and Macau. The Fund may
concentrate its investments (meaning more than 25% of its assets) from time to
time in a single country, with the exception of
China.
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MATTHEWS EMERGING MARKETS EX CHINA ACTIVE
ETF |
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A
company or other issuer is considered to be “located” in a country or a region,
and a security or instrument is deemed to be an emerging market (or specific
country) security or instrument, if it has substantial ties to that country or
region. Matthews currently makes that determination based primarily on one or
more of the following criteria: (A) with respect to a company or issuer,
whether (i) it is organized under the laws of that country or any country
in that region; (ii) it derives at least 50% of its revenues or profits
from goods produced or sold, investments made, or services performed, or has at
least 50% of its assets located, within that country or region; (iii) it
has the primary trading markets for its securities in that country or region;
(iv) it has its principal place of business in or is otherwise
headquartered in that country or region; or (v) it is a governmental entity
or an agency, instrumentality or a political subdivision of that country or any
country in that region; and (B) with respect to an instrument or issue,
whether (i) its issuer is headquartered or organized in that country or
region; (ii) it is issued to finance a project that has at least 50% of its
assets or operations in that country or region; (iii) it is at least 50%
secured or backed by assets located in that country or region; (iv) it is a
component of or its issuer is included in the MSCI Emerging Markets ex China
Index; or (v) it is denominated in the currency of an emerging market
country and addresses at least one of the other above criteria. The term
“located” and the associated criteria listed above have been defined in such a
way that Matthews has latitude in determining whether an issuer should be
included within a region or country, including with respect to whether an issuer
or security may be deemed to be a Chinese issuer or security for exclusionary
purposes. The Fund may also invest in depositary receipts that are treated as
emerging markets investments, including American, European and Global Depositary
Receipts.
The
Fund seeks to invest in companies capable of sustainable growth based on the
fundamental characteristics of those companies, including balance sheet
information; number of employees; size and stability of cash flow; management’s
depth, adaptability and integrity; product lines; marketing strategies;
corporate governance; and financial health. Matthews expects that the companies
in which the Fund invests typically will be of medium or large size, but the
Fund may invest in companies of any size. Matthews measures a company’s size
with respect to fundamental criteria such as, but not limited to, market
capitalization, book value, revenues, profits, cash flow, dividends paid and
number of employees. The implementation of the principal investment strategies
of the Fund may result in a significant portion of the Fund’s assets being
invested from time to time in one or more sectors, but the Fund may invest in
companies in any sector.
Principal Risks of
Investment
There
is no guarantee that your investment in the Fund will increase in value.
The value of your
investment in the Fund could go down, meaning you could lose
money. The principal risks of investing in the Fund
are:
Foreign Investing Risk: Investments in foreign
securities may involve greater risks than investing in U.S. securities. As
compared to U.S. companies, foreign issuers generally disclose less financial
and other information publicly and are subject to less stringent and less
uniform accounting, auditing and financial reporting standards. Foreign
countries typically impose less thorough regulations on brokers, dealers, stock
exchanges, corporate insiders and listed companies than does the U.S.,
and
foreign
securities markets may be less liquid and more volatile than U.S. markets.
Investments in foreign securities generally involve higher costs than
investments in U.S. securities, including higher transaction and custody costs
as well as additional taxes imposed by foreign governments. In addition,
security trading practices abroad may offer less protection to investors such as
the Fund. Political or social instability, civil unrest, acts of terrorism,
regional economic volatility, and the imposition of sanctions, confiscations,
trade restrictions (including tariffs) and other government restrictions by the
U.S. and/or other governments are other potential risks that could impact an
investment in a foreign security. Settlement of transactions in some foreign
markets may be delayed or may be less frequent than in the U.S., which could
affect the liquidity of the Fund’s
portfolio.
Public Health Emergency Risks: Pandemics and
other public health emergencies, including outbreaks of infectious diseases such
as the current outbreak of the novel coronavirus (“COVID‑19”), can result, and
in the case of COVID‑19 has resulted and may continue to result, in market
volatility and disruption, and materially and adversely impact economic
conditions in ways that cannot be predicted, all of which could result in
substantial investment losses. Less developed countries and their health systems
may be more vulnerable to these impacts. The ultimate impact of COVID‑19,
including new variants of the underlying virus, or other health emergencies on
global economic conditions and businesses is impossible to predict accurately.
Ongoing and potential additional material adverse economic effects of
indeterminate duration and severity are possible. The resulting adverse impact
on the value of an investment in the Fund could be significant and prolonged.
Other public health emergencies that may arise in the future could have similar
or other unforeseen effects.
Currency Risk: When the Fund conducts
securities transactions in a foreign currency, there is the risk of the value of
the foreign currency increasing or decreasing against the value of the U.S.
dollar. The value of an investment denominated in a foreign currency will
decline in U.S. dollar terms if that currency weakens against the U.S. dollar.
While the Fund is permitted to hedge currency risks, Matthews does not
anticipate doing so at this time. Additionally, emerging market countries may
utilize formal or informal currency-exchange controls or “capital controls.”
Capital controls may impose restrictions on the Fund’s ability to repatriate
investments or income. Such controls may also affect the value of the Fund’s
holdings.
Risks Associated with Emerging and Frontier
Markets: Emerging and frontier markets are often less stable politically
and economically than developed markets such as the U.S., and investing in these
markets involves different and greater risks due to, among other factors,
different accounting standards; variable quality and reliability of financial
information and related audits of companies; higher brokerage costs and thinner
trading markets as compared to those in developed countries; the possibility of
currency transfer restrictions; and the risk of expropriation, nationalization
or other adverse political, economic or social developments. There may be less
publicly available information about companies in many emerging market
countries, and the stock exchanges and brokerage industries in many emerging
market countries typically do not have the level of government oversight as do
those in the U.S. Securities markets of many emerging market countries are also
substantially smaller, less liquid and more volatile
than
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securities
markets in the U.S. Additionally, investors may have substantial difficulties
bringing legal actions to enforce or protect investors’ rights, which can
increase the risks of loss. Frontier markets, a subset of emerging markets,
generally have smaller economies and even less mature capital markets than
emerging markets. As a result, the risks of investing in emerging market
countries are magnified in frontier market countries. Frontier markets are more
susceptible to having abrupt changes in currency values, less mature markets and
settlement practices, and lower trading volumes, which could lead to greater
price volatility and illiquidity.
Political, Social and Economic Risks of Investing in
Asia: The value of the Fund’s assets may be adversely affected by
political, economic, social and religious instability; inadequate investor
protection; changes in laws or regulations of countries within the Asian region
(including countries in which the Fund invests, as well as the broader region);
international relations with other nations; natural disasters; corruption and
military activity. The economies of many Asian countries differ from the
economies of more developed countries in many respects, such as rate of growth,
inflation, capital reinvestment, resource self-sufficiency, financial system
stability, the national balance of payments position and sensitivity to changes
in global trade.
Growth Stock Risk: Growth stocks may be more
volatile than other stocks because they are more sensitive to investor
perceptions of the issuing company’s growth potential. Growth stocks may go in
and out of favor over time and may perform differently than the market as a
whole.
Equity Securities Risk: Equity securities may
include common stock, preferred stock or other securities representing an
ownership interest or the right to acquire an ownership interest in an issuer.
Equity risk is the risk that stocks and other equity securities generally
fluctuate in value more than bonds and may decline in value over short or
extended periods. The value of stocks and other equity securities may be
affected by changes in an issuer’s financial condition, factors that affect a
particular industry or industries, or as a result of changes in overall market,
economic and political conditions that are not specifically related to a company
or industry.
Preferred Stock Risk: Preferred stock normally
pays dividends at a specified rate and has precedence over common stock in the
event the issuer is liquidated or declares bankruptcy. However, in the event a
company is liquidated or declares bankruptcy, the claims of owners of bonds take
precedence over the claims of those who own preferred and common stock. If
interest rates rise, the dividend on preferred stocks may be less attractive,
causing the price of such stocks to
decline.
Depositary Receipts Risk: Although depositary
receipts have risks similar to the securities that they represent, they may also
involve higher expenses and may trade at a discount (or premium) to the
underlying security. In addition, depositary receipts may not pass through
voting and other shareholder rights, and may be less liquid than the underlying
securities listed on an exchange.
Volatility Risk: The smaller size and lower
levels of liquidity in emerging markets, as well as other factors, may result in
changes in the prices of emerging market securities that are more volatile than
those of companies in more developed
regions.
This volatility can cause the price of the Fund’s shares to go up or down
dramatically. Because of this volatility, this Fund is better suited for
long-term investors (typically five years or
longer).
ETF Risks: The Fund is an ETF, and, as a result
of an ETF’s structure, it is exposed to the following
risks:
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Authorized Participants, Market Makers, and
Liquidity Providers Limitation Risk: Only an Authorized Participant
(“AP”) may engage in creation or redemption transactions directly with the
Fund. The Fund has a limited number of financial institutions that may act
as APs, and none of these APs are or will be obligated to engage in
creation or redemption transactions. In addition, there may be a limited
number of market makers and/or liquidity providers in the marketplace with
respect to the Fund’s shares. To the extent either of the following events
occur, shares of the Fund may trade at a material discount to NAV and
possibly face trading halts and/or delisting (that is, investors would no
longer be able to trade the Fund’s shares in the secondary market): (i)
APs exit the business or otherwise become unable to process creation
and/or redemption orders (including in situations where APs have limited
or diminished access to capital required to post collateral), and no other
APs step forward to perform these services, or (ii) market makers
and/or liquidity providers exit the business or significantly reduce their
business activities and no other entities step forward to perform their
functions. |
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Cash Redemption Risk: Unlike many ETFs,
the Fund’s investment strategy may require it to redeem shares of the Fund
for cash or to otherwise include cash as part of its redemption proceeds.
The Fund may be required to sell or unwind portfolio investments to obtain
the cash needed to distribute redemption proceeds. This may cause the Fund
to recognize a capital gain that it might not have recognized if it had
made a redemption in‑kind. As a result, the Fund may pay out higher annual
capital gain distributions than if the in‑kind redemption process was
used. Cash redemptions may also entail higher transaction costs than
in‑kind redemptions, which costs may be passed on to redeemers of creation
units of Fund shares in the form of redemption transaction fees. The cost
of cash redemptions could also reduce the Fund’s NAV to the extent that
those costs are not fully offset by the redemption transaction fee charged
to the redeeming Authorized
Participant. |
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Costs of Buying or Selling Shares: Due to
the costs of buying or selling, including brokerage commissions imposed by
brokers and bid/ask spreads, frequent trading of shares of the Fund may
significantly reduce investment results and an investment in Fund shares
may not be advisable for investors who anticipate regularly making small
investments. The bid/ask spread of the Fund’s shares varies over time
based on the Fund’s trading volume and market liquidity and may increase
if the Fund’s trading volume, the spread of the Fund’s underlying
securities, or market liquidity decrease. In times of severe market
disruption, including when trading of the Fund’s holdings may be halted,
the bid/ask spread may increase significantly. This means that Fund shares
may trade at a discount to the Fund’s NAV, and the discount is likely to
be greatest during significant market volatility. During such periods, you
may be unable to sell your shares or may incur significant losses if you
sell your shares. There are various methods by which investors can
purchase and sell shares of the Fund and various orders that may be
placed. Investors should consult their financial intermediary before
purchasing or selling shares of the
Fund. |
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MATTHEWS EMERGING MARKETS EX CHINA ACTIVE
ETF |
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Shares May Trade at Prices Other Than
NAV: As with all ETFs, shares of the Fund may be bought and sold in
the secondary market at market prices. Although the creation/redemption
feature is designed to help the market price of Fund shares approximate
the Fund’s NAV, market prices are not expected to correlate exactly to the
Fund’s NAV and there may be times when the market price of Fund shares is
more than the intra‑day value of the Fund’s holdings (premium) or less
than the intra‑day value of the Fund’s holdings (discount) due to supply
and demand of the Fund’s shares, during periods of market volatility or
for other reasons. This risk is heightened in times of market volatility
and volatility in the Fund’s portfolio holdings, periods of steep market
declines, and periods when there is limited trading activity for Fund
shares in the secondary market, in which case such premiums or discounts
may be significant. If an investor purchases shares of the Fund at a time
when the market price is at a premium to the NAV of the shares or sells at
a time when the market price is at a discount to the NAV of the shares,
then the investor may sustain losses that are in addition to any losses
caused by a decrease in NAV. Given the nature of the relevant markets for
certain of the securities for the Fund, shares may trade at a larger
premium or discount to NAV than shares of other kinds of ETFs. 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 shares are
listed. Liquidity in those securities may be reduced after the applicable
closing times. Accordingly, during the time when the exchange is open but
after the applicable market closing, fixing or settlement times, bid/ask
spreads and the resulting premium or discount to the NAV of Fund shares
may widen. |
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Trading: Although shares of the Fund are
listed for trading on a national securities exchange, and may be traded on
other U.S. exchanges, there can be no assurance that the shares will trade
with any volume, or at all, on any stock exchange. In stressed market
conditions, the liquidity of shares may begin to mirror the liquidity of
the Fund’s underlying portfolio holdings, which can be significantly less
liquid than shares of the Fund. Trading in Fund shares on the exchange may
be halted due to market conditions or for reasons that, in the view of the
exchange, make trading in shares inadvisable. In addition, trading in Fund
shares on the exchange is subject to trading halts caused by extraordinary
market volatility pursuant to the exchange “circuit breaker” rules. If a
trading halt or unanticipated early closing of the exchange occurs, a
shareholder may be unable to purchase or sell shares of a Fund. There can
be no assurance that the requirements of the Exchange necessary to
maintain the listing of the Fund will continue to be met or will remain
unchanged. |
Risks Associated with Medium‑Size Companies:
Medium‑size companies may be subject to a
number of risks not associated with larger, more established companies,
potentially making their stock prices more volatile and increasing the risk of
loss.
Country Concentration Risk: The Fund may invest
a significant portion of its total net assets in the securities of issuers
located in a single country. An investment in the Fund therefore may entail
greater risk than an investment in a fund that does not concentrate its
investments in a single or small number of countries because these securities
may be more sensitive to adverse social, political, economic or regulatory
developments affecting that country or countries. As a result, events affecting
a single or small number of countries may have a significant and potentially
adverse impact on the
Fund’s
investments, and the Fund’s performance may be more volatile than that of funds
that invest globally.
Risks Associated with Europe: The economies of
countries in Europe are in different stages of economic development and are
often closely connected and interdependent, and events in one country in Europe
can have an adverse impact on other European countries. Efforts by the member
countries of the European Union (“EU”) to continue to unify their economic and
monetary policies may increase the potential for similarities in the movements
of European markets and reduce the potential investment benefits of
diversification within the region. However, the substance of these policies may
not address the needs of all European economies. European financial markets have
in recent years experienced increased volatility due to concerns with some
countries’ high levels of sovereign debt, budget deficits and unemployment.
Markets have been affected by the official withdrawal of the United Kingdom
(“UK”) from the EU (a process now commonly referred to as “Brexit”). Although it
remains unclear what the potential consequences of Brexit may be, the economies
of Europe and the United Kingdom as well as the broader global economy could be
significantly impacted by Brexit, which may result in lower economic growth and
increased volatility and illiquidity across global markets. An exit by any
member countries from the EU or the Economic and Monetary Union of the EU, or
even the prospect of such an exit, could also lead to increased volatility in
European markets and negatively affect investments both in issuers in the
exiting country and throughout Europe. In addition, the ongoing war in Ukraine
has led to, and may lead to additional sanctions being levied by the United
States, European Union and other countries against Russia. Russia’s military
incursion and the resulting sanctions could adversely affect global energy and
financial markets and thus could affect the value of the Fund’s investments,
even beyond any direct exposure the Fund may have to Russian issuers or the
adjoining geographic regions. While many countries in western Europe are
considered to have developed markets, many eastern European countries are less
developed, and investments in eastern European countries, even if denominated in
Euros, may involve special risks associated with investments in emerging
markets. See “Risks Associated with Emerging
and Frontier Markets”
above.
Risks Associated with Latin America: The
economies of Latin American countries have in the past experienced considerable
difficulties, including high inflation rates, high interest rates, high
unemployment, government overspending and political instability. Similar
conditions in the present or future could
impact the Fund’s performance. Many Latin American countries are highly reliant
on the exportation of commodities and their economies may be significantly
impacted by fluctuations in commodity prices and the global demand for certain
commodities. Investments in Latin American countries may be subject to currency
risks, such as restrictions on the flow of money in and out of a country,
extreme volatility relative to the U.S. dollar, and devaluation, all of which
could decrease the value of the Fund’s investments. Other Latin American
investment risks may include inadequate investor protection, less developed
regulatory, accounting, auditing and financial standards, unfavorable changes in
laws or regulations, natural disasters, corruption and military activity. The
governments of many Latin American countries may also exercise substantial
influence over many aspects of the private sector, and any such exercise could
have a significant effect on
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companies
in which the Fund invests. Securities of companies in Latin American countries
may be subject to significant price volatility, which could impact Fund
performance.
Active Management Risk: The Fund is actively
managed by Matthews. There is the risk that Matthews may select securities that
underperform the relevant stock market(s), the Fund’s benchmark index or other
funds with similar investment objectives and investment
strategies.
Sector Concentration Risk: To the extent
that the Fund emphasizes, from time to time, investments in a particular sector,
the Fund will be subject to a greater degree to the risks particular to that
sector, including the sectors described below. Market conditions, interest
rates, and economic, regulatory, or financial developments could significantly
affect a single sector. By focusing its investments in a particular sector, the
Fund may face more risks than if it were diversified broadly over numerous
sectors.
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Financial Services Sector
Risk: Financial services companies are subject to extensive
government regulation and can be significantly affected by the
availability and cost of capital funds, changes in interest rates, the
rate of corporate and consumer debt defaults, price competition and other
sector-specific factors. |
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Information Technology Sector Risk:
Information technology companies may be significantly affected by
aggressive pricing as a result of intense competition and by rapid product
obsolescence due to rapid development of technological innovations and
frequent new product introduction. Other factors, such as short product
cycle, possible loss or impairment of intellectual property rights, and
changes in government regulations, may also adversely impact information
technology
companies. |
Past Performance
The Fund is new and does not have a full
calendar year of performance or financial information to present. Once it has
been in operation for a full calendar year, performance (including total return)
and financial information will be presented. The Fund’s primary
benchmark is the MSCI Emerging Markets ex China Index.
Investment Advisor
Matthews
International Capital Management, LLC (“Matthews”)
Portfolio Managers
Lead Manager: John Paul Lech has been a
Portfolio Manager of the Matthews Emerging Markets ex China Active ETF since its
inception in 2023.
Co‑Manager: Alex Zarechnak has been a Portfolio
Manager of the Matthews Emerging Markets ex China Active ETF since its inception
in 2023.
The
Lead Manager is primarily responsible for the Fund’s day‑to‑day investment
management decisions. The Lead Manager is supported by and consults with the
Co‑Manager, who is not primarily responsible for portfolio management.
For
important information about the Purchase and Sale of Fund Shares; Tax
Information; and Payments to Broker-Dealers and Other Financial Intermediaries,
please turn to page 6.
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MATTHEWS EMERGING MARKETS EX CHINA ACTIVE
ETF |
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Important
Information about the Fund
Purchase
and Sale of Fund Shares
Shares
of the Fund are listed and trade on the NYSE Arca (the “Exchange”). Individual
shares of the Fund may only be bought and sold on the Exchange through a broker
or dealer at market prices, rather than at net asset value (“NAV”). Because
shares of the Fund trade at market prices rather than at NAV, Fund shares may
trade at a price greater than NAV (premium) or less than NAV (discount).
Investors may also incur costs attributable to the difference between the
highest price a buyer is willing to pay to purchase shares (bid) and the lowest
price a seller is willing to accept for shares (ask) when buying or selling
shares of the Fund in the secondary market (the “Bid‑Ask Spread”).
The
Fund issues and redeems shares at NAV only in large blocks known as “Creation
Units.” The Fund generally issues and redeems Creation Units in exchange for a
designated amount of U.S. cash and/or a portfolio of securities (the “Deposit
Securities”). Only Authorized Participants (“APs”) may acquire Creation Units
directly from the Fund, and only APs may tender Creation Units for redemption
directly to the Fund, at NAV. APs must be a member or participant of a clearing
agency registered with the SEC and must execute a Participant Agreement that has
been agreed to by the Fund’s distributor, and that has been accepted by the
Fund’s transfer agent, with respect to purchases and redemptions of Creation
Units. Once created, Fund shares trade in the secondary market in quantities
less than a Creation Unit.
Most
investors buy and sell individual shares of the Fund in secondary market
transactions through brokers. Shares of the Fund are listed for trading on the
Exchange and can be bought and sold throughout the trading day like other
publicly traded securities.
When
buying or selling Fund shares through a broker, you will incur customary
brokerage commissions and charges, and you may pay some or all of the spread
between the bid and the offer price in the secondary market on each leg of a
round trip (purchase and sale) transaction. In addition, because secondary
market transactions occur at market prices, you may pay more than NAV when you
buy shares of the Fund, and receive less than NAV when you sell those
shares.
Information
on the Fund’s NAV, market price, premiums and discounts to NAV, and bid‑ask
spreads is available on the Fund’s website at matthewsasia.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an IRA
or other tax‑advantaged account. Distributions on investments made through
tax‑deferred arrangements may be taxed later upon withdrawal of assets from
those accounts.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase Fund shares through a broker-dealer or other financial intermediary
(such as a bank), Matthews may pay the intermediary for the sale of Fund shares
and related services. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson to
recommend the Fund over another investment. Ask your salesperson or visit your
financial intermediary’s website for more information.
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Matthews has long-term
investment goals, and its process aims to identify potential portfolio
investments that can be held over an indefinite time horizon.
Investment
Objective of the Fund
Matthews
Asia Funds (the “Trust” or “Matthews Asia Funds”) offers a range of global,
regional and country-specific funds (each, a “Fund,” and collectively, the
“Funds”). The Fund included in this prospectus has the following
objective:
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GLOBAL EMERGING MARKETS
STRATEGY |
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Matthews Emerging Markets ex China Active
ETF |
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Long-term capital appreciation |
Fundamental
Investment Policies
The
investment objective of the Fund and the manner in which Matthews International
Capital Management, LLC, the investment advisor to the Fund (“Matthews”),
attempts to achieve the Fund’s investment objective is not fundamental and may
be changed without shareholder approval. While an investment policy or
restriction may be changed by the Board of Trustees of the Trust (the “Board” or
“Board of Trustees”) (which oversees the management of the Fund) without
shareholder approval, you will be notified before we make any material
change.
Matthews’
Investment Approach
Principal Investment
Strategies
The
principal investment strategies for the Fund is described in the Fund Summary
for the Fund.
In
seeking to achieve the investment objective for the Fund, Matthews also employs
the investment approach and other principal investment strategies as described
below.
Matthews
invests primarily in the Asia Pacific region (as defined on page 8) for those
Funds and other advisory clients with such an investment focus based on its
assessment of the future development and growth prospects of companies located
in the markets of that region. In addition to the Asia Pacific focus for those
Funds and clients, Matthews also invests broadly in emerging countries and
markets outside the Asia Pacific region on behalf of certain Funds, including
the Matthews Emerging Markets ex China Active ETF. Matthews believes that the
countries in these markets are on paths toward economic development and, in
general, deregulation and greater openness to market forces. Matthews believes
in the potential for these economies, and that the intersection of development
and deregulation will give rise to new opportunities for further growth.
Matthews attempts to capitalize on its beliefs by investing in companies it
considers to be well-positioned to participate in the economic evolution of
these markets. Matthews uses a range of approaches to participate in the
anticipated growth of Asian and other foreign markets to suit clients’ differing
needs and investment objectives.
Matthews
believes that the Matthews Emerging Markets ex China Active ETF may provide
investors with additional flexibility to express an investment view on China
within emerging markets and within their overall investment portfolio, including
aiming to reduce or eliminate China exposure or specific single country risk(s)
or increase exposure to other countries within emerging markets.
Matthews
researches the fundamental characteristics of individual companies to help to
understand the foundation of a company’s long-term growth, and to assess whether
it is generally consistent with Matthews’ expectations for the economic
evolution of the countries and markets in which the Fund invests. Matthews
evaluates potential portfolio holdings on the basis of their individual merits,
and invests in those companies that it believes are positioned to help the Fund
achieve its investment objective.
Matthews
has long-term investment goals, and its process aims to identify potential
portfolio investments that can be held over an indefinite time horizon. Matthews
regularly tests its beliefs and adjusts portfolio holdings in light of
prevailing market con-
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MATTHEWS’ INVESTMENT APPROACH |
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ditions
and other factors, including, among other things, economic, political or market
events (e.g., changes in credit conditions or military action), changes in
relative valuation (of a company’s growth prospects relative to other issuers),
liquidity requirements and corporate governance.
Matthews
Seeks to Invest in the Long-Term Growth Potential of Asian and Other Foreign
Markets
T |
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Matthews believes that
the countries in which the Fund invests will continue to benefit from
economic development over longer investment horizons. |
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Matthews seeks to invest
in those companies that it believes will benefit from the long-term
economic evolution of Asian and other foreign markets, and that will help
the Fund achieve its investment objective. |
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Matthews generally does
not hedge currency risks. |
Matthews
and the Funds Believe in Investing for the Long Term
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Matthews constructs
portfolios with long investment horizons—typically five years or
longer. |
Matthews
Is an Active Investor with Strong Convictions
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Matthews uses an active
approach to investment management (rather than relying on passive or index
strategies) because it believes that the current composition of the stock
markets and indices may not be the best guide to the most successful
industries and companies of the future. |
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Matthews invests in
individual companies based on fundamental analysis that aims to develop an
understanding of a company’s long-term business
prospects. |
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Matthews monitors the
composition of benchmark indices but is not constrained by their
composition or weightings, and constructs portfolios independently of
indices. |
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Matthews believes that
investors benefit in the long term when a Fund is fully invested, subject
to market conditions and its particular investment
objective. |
Matthews
Is a Fundamental Investor
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Matthews believes that
fundamental investing is based on identifying, analyzing and understanding
basic information about a company or security. These factors may include
matters such as balance sheet information; number of employees; size and
stability of cash flow; management’s depth, adaptability and integrity;
product lines; marketing strategies; corporate governance; and financial
health. |
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Matthews may also
consider factors such as: |
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Management: Does management exhibit
integrity? Is there a strong corporate governance culture? What is the
business strategy? Does management exhibit the ability to adapt to change
and handle risk appropriately? |
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Evolution of Industry: Can company
growth be sustained as the industry and environment
evolve? |
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Following this
fundamental analysis, Matthews seeks to invest in companies and securities
that it believes are positioned to help a Fund achieve its investment
objective. |
Matthews
Focuses on Individual Companies
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Matthews develops views
about the course of growth in a region over the long
term. |
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Matthews then seeks to
combine these beliefs with its analysis of individual companies and their
fundamental characteristics. |
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Matthews then seeks to
invest in companies and securities that it believes are positioned to help
a Fund achieve its investment objective. |
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The Fund may invest in
companies of any equity market capitalization (the number of shares
outstanding times the market price per share). A company’s size (including
its market capitalization) is not a primary consideration for Matthews
when it decides whether to include that company’s securities in one or
more of the Funds. |
THE ASIA PACIFIC REGION
IS DIVIDED INTO THE FOLLOWING GROUPS:
ASIA
Consists
of all countries and markets in Asia, including developed, emerging, and
frontier countries and markets in the Asian region
ASIA
PACIFIC
Includes
all countries and markets in Asia plus all countries and markets in the Pacific
region, including Australia and New Zealand
EMERGING MARKET COUNTRIES
INCLUDE, BUT ARE NOT LIMITED TO, THE FOLLOWING:
AMERICAS
Argentina,
Brazil, Chile, Colombia, Mexico and Peru
AFRICA
Egypt,
Kenya, Nigeria and South Africa
ASIA
Bangladesh,
China, India, Indonesia, Malaysia, Philippines, Pakistan, South Korea, Sri
Lanka, Taiwan, Thailand and Vietnam
EUROPE
Czech
Republic, Greece, Hungary, Poland, Romania, and Turkey
MIDDLE
EAST
Kuwait,
Qatar, Saudi Arabia and the United Arab Emirates
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Non‑Principal Investment
Strategies
In
extreme market conditions, Matthews may sell some or all of the Fund’s
securities and temporarily invest the Fund’s money in U.S. government securities
or money-market instruments backed by U.S. government securities, if it believes
it is in the best interest of Fund shareholders to do so. When the Fund takes a
temporary defensive position, the Fund may not achieve its investment
objective.
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MATTHEWS’ INVESTMENT APPROACH |
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There is no guarantee
that your investment in the Fund will increase in value. The value of your
investment in the Fund could go down, meaning you could lose some or all of your
investment.
For additional
information about strategies and risks, see individual Fund descriptions in the
Fund Summary for the Fund and the Fund’s SAI. The SAI is available to you free
of charge. To receive an SAI, please call 833.228.5605, visit the Fund’s website
at matthewsasia.com, or visit the website of the Securities and Exchange
Commission (the “SEC”) at sec.gov and access the EDGAR database.
Risks
of Investing in the Fund
The
main risks associated with investing in the Fund are described below and are in
addition to, or describe further, the risks stated in the Fund Summary at the
front of this prospectus. Additional information is also included in the Fund’s
Statement of Additional Information (“SAI”).
General
Risks
There
is no guarantee that the Fund’s investment objective will be achieved or that
the value of the investments of the Fund will increase. If the value of the
Fund’s investments declines, the net asset value per share (“NAV”) of the Fund
will decline, as may the market price of the Fund’s shares, and investors may
lose some or all of the value of their investments.
Foreign
securities held by the Fund may be traded on days and at times when the New York
Stock Exchange (the “NYSE”) is closed, and the NAV of the Fund is therefore not
calculated. Accordingly, the NAV of the Fund may be significantly affected on
days when shareholders are not able to buy or sell shares of the Fund. For
additional information on the calculation of the Fund’s NAV, see page
27.
Your
investment in the Fund is exposed to different risks, many of which are
described below. Because of these risks, your investment in the Fund should
constitute only a portion of your overall investment portfolio, not all of it.
We recommend that you invest in a Fund only for the long term (typically five
years or longer), so that you can better manage volatility in the Fund’s NAV (as
described below). Investing in regionally concentrated, single-country or small
company funds may not be appropriate for all investors.
The
Fund is an actively managed ETF and, therefore, does not seek to replicate the
performance of a specified index. Accordingly, the management team has
discretion on a daily basis to manage the Fund’s portfolio in accordance with
the Fund’s investment objective.
ETFs
are funds that trade like other publicly-traded securities. Similar to shares of
a mutual fund, each share of the Fund represents an ownership interest in an
underlying portfolio of securities and other instruments. Unlike shares of a
mutual fund, which can be bought and redeemed from the issuing fund by all
shareholders at a price based on NAV, shares of the Fund may be purchased or
redeemed directly from the Fund at NAV solely by Authorized Participants and
only in aggregations of a specified number of shares (“Creation Units”). Also
unlike shares of a mutual fund, shares of the Fund are listed on a national
securities exchange and trade in the secondary market at market prices that
change throughout the day.
Risks
Associated with Matthews’ Investment Approach
Matthews
is an active manager, and its investment process does not rely on passive or
index strategies. For this reason, you should not expect that the composition of
the Fund’s portfolio will closely track the composition or weightings of market
indices (including the Fund’s benchmark index) or of the broader markets
generally. As a result, investors should expect that changes in the Fund’s NAVs
and performance (over short and longer periods) will vary from the performance
of such indices and of broader markets. Use of fair value prices and certain
current market valuations could result in a difference between the prices used
to calculate the Fund’s NAV and the prices used by any index (or the markets
generally), which, in turn, could result in a difference between the Fund’s
performance and the performance of the index.
Principal Risks
Risks
Associated with Foreign Investments
Investments
in foreign securities may involve greater risks than investing in U.S.
securities. As compared to U.S. companies, foreign issuers generally disclose
less financial
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and
other information publicly and are subject to less stringent and less uniform
accounting, auditing and financial reporting standards. Foreign countries
typically impose less thorough regulations on brokers, dealers, stock exchanges,
corporate insiders and listed companies than does the United States, and foreign
securities markets may be less liquid and more volatile than U.S. markets.
Investments in foreign securities generally involve higher costs than
investments in U.S. securities, including higher transaction and custody costs
as well as additional taxes imposed by foreign governments. In addition,
security trading practices abroad may offer less protection to investors such as
the Fund. Political or social instability, civil unrest, acts of terrorism,
regional economic volatility, and the imposition of sanctions, confiscations,
trade restrictions (including tariffs) and other government restrictions by the
U.S. and/or other governments are other potential risks that could impact an
investment in a foreign security. Settlement of transactions in some foreign
markets may be delayed or may be less frequent than in the United States, which
could affect the liquidity of the Fund’s portfolio.
In
addition, foreign securities may be subject to the risk of nationalization or
expropriation of assets, imposition of currency exchange controls or
restrictions on the repatriation of foreign currency, confiscatory taxation,
political or financial instability and diplomatic developments which could
affect the value of the Fund’s investments in certain foreign countries.
Governments of many countries have exercised and continue to exercise
substantial influence over many aspects of the private sector through the
ownership or control of many companies, including some of the largest in these
countries. As a result, government actions in the future could have a
significant effect on economic conditions which may adversely affect prices of
certain portfolio securities. There is also generally less government
supervision and regulation of stock exchanges, brokers, and listed companies
than in the United States. Dividends or interest on, or proceeds from the sale
of, foreign securities may be subject to foreign withholding taxes, and special
U.S. tax considerations may apply. Moreover, foreign economies may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross national product, rate of inflation, capital reinvestment, resource
self-sufficiency and balance of payments position.
Many
foreign countries are heavily dependent upon exports and, accordingly, have been
and may continue to be adversely affected by trade barriers, managed adjustments
in relative currency values, and other protectionist measures imposed or
negotiated by the United States and other countries with which they trade. These
economies also have been and may continue to be negatively impacted by economic
conditions in the United States and other trading partners, which can lower the
demand for goods produced in those countries.
Currency
Risk
When
a Fund conducts securities transactions in a foreign currency, there is the risk
of the value of the foreign currency
increasing
or decreasing against the value of the U.S. dollar. The value of an investment
denominated in a foreign currency will decline in U.S. dollar terms if that
currency weakens against the U.S. dollar. While the Fund is permitted to hedge
currency risks, Matthews does not anticipate doing so at this time.
Additionally, Asian and emerging market countries may utilize formal or informal
currency-exchange controls or “capital controls.” Capital controls may impose
restrictions on the Fund’s ability to repatriate investments or income. Such
controls may also affect the value of the Fund’s holdings.
Emerging
and Frontier Market Country Risk
Investing
in emerging and frontier market countries involves substantial risk due to,
among other factors, different accounting standards; thinner trading markets as
compared to those in developed countries; the possibility of currency transfer
restrictions; and the risk of expropriation, nationalization or other adverse
political, economic or social developments. Political and economic structures in
some emerging and frontier market countries may be undergoing significant
evolution and rapid development, and such countries may lack the social,
political and economic stability characteristics of developed countries. Some of
these countries have in the past failed to recognize private property rights and
have nationalized or expropriated the assets of private companies.
Among
other risks of investing in less developed markets are the variable quality and
reliability of financial information and related audits of companies. In some
cases, financial information and related audits can be unreliable and not
subject to verification. Auditing firms in some of these markets are not subject
to independent inspection or oversight of audit quality. This can result in
investment decisions being made based on flawed or misleading information.
Additionally, investors may have substantial difficulties bringing legal actions
to enforce or protect investors’ rights, which can increase the risks of
loss.
The
securities markets of emerging and frontier market countries can be
substantially smaller, less developed, less liquid and more volatile than the
major securities markets in the United States and other developed nations. The
limited size of many securities markets in emerging and frontier market
countries and limited trading volume in issuers compared to the volume in U.S.
securities or securities of issuers in other developed countries could cause
prices to be erratic for reasons other than factors that affect the quality of
the securities. In addition, emerging and frontier market countries’ exchanges
and broker-dealers are generally subject to less regulation than their
counterparts in developed countries. Brokerage commissions, custodial expenses
and other transaction costs are generally higher in emerging and frontier market
countries than in developed countries. As a result, funds that invest in
emerging and frontier market countries generally have operating expenses that
are higher than funds investing in other securities markets. Securities markets
in emerging markets may also be susceptible to manipulation or other fraudulent
trade practices, which could disrupt the functioning of these mar-
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kets
or adversely affect the value of investments traded in these markets, including
investments of the Fund. The Fund’s rights with respect to its investments in
emerging markets will generally be governed by local law, which may make it
difficult or impossible for the Fund to pursue legal remedies or to obtain and
enforce judgments in local courts.
Many
emerging and frontier market countries have a greater degree of economic,
political and social instability than the United States and other developed
countries. Such social, political and economic instability could disrupt the
financial markets in which the Fund invests and adversely affect the value of
its investment portfolio. In addition, currencies of emerging and frontier
market countries experience devaluations relative to the U.S. dollar from time
to time. A devaluation of the currency in which investment portfolio securities
are denominated will negatively impact the value of those securities in U.S.
dollar terms. Emerging and frontier market countries have and may in the future
impose foreign currency controls and repatriation controls.
The
emerging and frontier market countries in which the Fund invests may become
subject to economic and trade sanctions or embargoes imposed by the United
States, foreign governments or the United Nations. These sanctions or other
actions could result in the devaluation of a country’s currency or a decline in
the value and liquidity of securities of issuers in that country. In addition,
sanctions could result in a freeze on an issuer’s securities, which would
prevent the Fund from selling securities it holds. The value of the securities
issued by companies that operate in, or have dealings with, these countries may
be negatively impacted by any such sanction or embargo and may reduce Fund
returns.
Frontier
markets are a subset of emerging markets and generally have smaller economies
and even less mature capital markets than emerging markets. As a result, the
risks of investing in emerging market countries are magnified in frontier market
countries. Frontier markets are more susceptible to having abrupt changes in
currency values, less mature markets and settlement practices, and lower trading
volumes that could lead to greater price volatility and illiquidity.
Volatility
Risk
The
smaller size and lower levels of liquidity in emerging markets, as well as other
factors, may result in changes in the prices of Asian and emerging market
securities that are more volatile than those of companies in more developed
regions. This volatility can cause the price of the Fund’s shares to go up or
down dramatically. Because of this volatility, this Fund is better suited for
long-term investors (typically five years or longer).
General
Risks Associated with Public Health Emergencies; Impact of the Coronavirus
(COVID‑19)
Pandemics
and other local, national, and international public health Pandemics and other
local, national, and international public health emergencies, including
outbreaks of infectious
diseases
such as SARS, H1N1/09 Flu, the Avian Flu, Ebola and the current outbreak of the
novel coronavirus (“COVID‑19”), can result, and in the case of COVID‑19 is
resulting, in market volatility and disruption, and any similar future
emergencies may materially and adversely impact economic production and activity
in ways that cannot be predicted, all of which could result in substantial
investment losses.
This
outbreak has caused a worldwide public health emergency, straining healthcare
resources and resulting in extensive and growing numbers of infections,
hospitalizations and deaths. In an effort to contain COVID‑19, local, regional,
and national governments, as well as private businesses and other organizations,
have imposed and continue to impose severely restrictive measures, including
instituting local and regional quarantines, restricting travel (including
closing certain international borders), prohibiting public activity (including
“stay‑at‑home,” “shelter‑in‑place,” and similar orders), and ordering the
closure of a wide range of offices, businesses, schools, and other public
venues. Consequently, COVID‑19 has significantly diminished and disrupted global
economic production and activity of all kinds and has contributed to both
volatility and a severe decline in financial markets.
The
longer-term impact of COVID‑19 (and of the resulting precipitous decline and
disruption in economic and commercial activity across many of the world’s
economies) on global economic conditions, and on the operations, financial
condition, and performance of any particular market, industry or business, is
impossible to predict. However, continuing and potential additional materially
adverse effects, including further global, regional and local economic downturns
(including recessions) of indeterminate duration and severity, are possible. The
ongoing COVID‑19 crisis and any other public health emergency could have a
significant adverse impact on the Fund’s investments and result in significant
investment losses.
Equity
Securities Risk
Equity
securities may include common stock, preferred stock or other securities
representing an ownership interest or the right to acquire an ownership interest
in an issuer. Equity risk is the risk that stocks and other equity securities
generally fluctuate in value more than bonds and may decline in value over short
or extended periods. The value of stocks and other equity securities may be
affected by changes in an issuer’s financial condition, factors that affect a
particular industry or industries, such as labor shortages or an increase in
production costs and competitive conditions within an industry, or as a result
of changes in overall market, economic and political conditions that are not
specifically related to a company or industry, such as real or perceived adverse
economic conditions, changes in the general outlook for corporate earnings,
changes in interest or currency rates or generally adverse investor
sentiment.
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Preferred
Stock Risk
Preferred
stock normally pays dividends at a specified rate and has precedence over common
stock in the event the issuer is liquidated or declares bankruptcy. However, in
the event a company is liquidated or declares bankruptcy, the claims of owners
of bonds take precedence over the claims of those who own preferred and common
stock. If interest rates rise, the dividend on preferred stocks may be less
attractive, causing the price of such stocks to decline. Preferred stock may
have mandatory sinking fund provisions, as well as provisions allowing the stock
to be called or redeemed, which can limit the benefit of a decline in interest
rates. Preferred stock is subject to many of the risks to which common stock and
debt securities are subject.
Depositary
Receipts Risk
Although
depositary receipts have risks similar to the securities that they represent,
they may also involve higher expenses and may trade at a discount (or premium)
to the underlying security. In addition, depositary receipts may not pass
through voting and other shareholder rights, and may be less liquid than the
underlying securities listed on an exchange.
Active
Management Risk
Because
the Fund is actively managed, its investment return depends on the ability of
Matthews to manage its portfolio successfully. There is the risk that Matthews
may select securities that underperform the relevant stock market(s), the Fund’s
benchmark index or other funds with similar investment objectives and investment
strategies.
ETF
Risks
Authorized
Participant Risk
The
Fund may directly engage in creation or redemption transactions only with
Authorized Participants (“APs”). The Fund may have a limited number of
intermediaries acting as APs, and none are, or will be, obligated to engage in
creation or redemption transactions. It is possible that these intermediaries
may choose to exit the business or not proceed with a creation or redemption
order with respect to the Fund. In such a case, and if no other AP creates or
redeems, Fund shares may trade at a discount and be subject to the risk of
potential trading halts and/or delisting.
Trading
Risk
Absence of Active Market. Although shares of
the Fund are listed for trading on one or more stock exchanges, there can be no
assurance that an active trading market for such shares will develop or be
maintained by market makers or APs.
Risk of Secondary Listings. The Fund’s shares
may be listed or traded on U.S. and non‑U.S. stock exchanges other than the U.S.
stock exchange where the Fund’s primary listing is maintained, and may otherwise
be made available to non‑U.S. investors through funds or structured investment
vehicles similar to depositary receipts. There can be no assurance that the
Fund’s shares will continue to trade on any such stock
exchange
or in any market or that the Fund’s shares will continue to meet the
requirements for listing or trading on any exchange or in any market. The Fund’s
shares may be less actively traded in certain markets than in others, and
investors are subject to the execution and settlement risks and market standards
of the market where they or their broker direct their trades for execution.
Certain information available to investors who trade Fund shares on a U.S. stock
exchange during regular U.S. market hours may not be available to investors who
trade in other markets, which may result in secondary market prices in such
markets being less efficient.
Secondary Market Trading Risk. Secondary
market trading in shares of the Fund may be halted by a stock exchange because
of market conditions or for other reasons. In addition, trading in shares of the
Fund on a stock exchange may be subject to trading halts caused by extraordinary
market volatility pursuant to “circuit breaker” rules on the stock exchange or
market.
Shares
of the Fund, similar to shares of other issuers listed on a stock exchange, may
be sold short and are therefore subject to the risk of increased volatility and
price decreases associated with being sold short.
Shares of the Fund May Trade at Prices Other Than
NAV. Shares of the Fund trade on stock exchanges at prices at, above or
below the Fund’s most recent NAV. The NAV of the Fund is calculated at the end
of each business day and fluctuates with changes in the market value of the
Fund’s holdings. The market price of the Fund’s shares fluctuates continuously
throughout trading hours based on both market supply of and demand for Fund
shares and the underlying value of the Fund’s portfolio holdings or NAV. As a
result, the market prices of the Fund’s shares may deviate significantly from
NAV during periods of market volatility, including during periods of significant
redemption requests or other unusual market conditions. ANY OF THESE FACTORS, AMONG OTHERS, MAY LEAD TO THE
FUND’S SHARES TRADING AT A PREMIUM OR DISCOUNT TO NAV.
However,
because shares can be created and redeemed in Creation Units at NAV, Matthews
believes that large discounts or premiums to the NAV of the Fund are not likely
to be sustained over the long term (unlike shares of many closed‑end funds,
which frequently trade at appreciable discounts from, and sometimes at premiums
to, their NAVs). While the creation/redemption feature is designed to make it
more likely that the Fund’s shares normally will trade on stock exchanges at
prices close to the Fund’s next calculated NAV, exchange prices are not expected
to correlate exactly with the Fund’s NAV due to timing reasons, supply and
demand imbalances and other factors. In addition, disruptions to creations and
redemptions, including disruptions at market makers, APs, or other market
participants, and during periods of significant market volatility, may result in
market prices for shares of the Fund that differ significantly from its NAV. APs
may be less willing to create or redeem Fund shares if there is a lack of
an
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active
market for such shares or its underlying investments, which may contribute to
the Fund’s shares trading at a premium or discount to NAV.
Costs of Buying or Selling Fund Shares. Buying
or selling Fund shares on an exchange involves two types of costs that apply to
all securities transactions. When buying or selling shares of the Fund through a
broker, you will likely incur a brokerage commission and other charges. In
addition, you may incur the cost of the “spread”; that is, the difference
between what investors are willing to pay for Fund shares (the “bid” price) and
the price at which they are willing to sell Fund shares (the “ask” price). The
spread, which varies over time for shares of the Fund based on trading volume
and market liquidity, is generally narrower if the Fund has more trading volume
and market liquidity and wider if the Fund has less trading volume and market
liquidity. In addition, increased market volatility may cause wider spreads.
There may also be regulatory and other charges that are incurred as a result of
trading activity. Because of the costs inherent in buying or selling Fund
shares, frequent trading may detract significantly from investment results and
an investment in Fund shares may not be advisable for investors who anticipate
regularly making small investments through a brokerage account.
Cash
Redemption Risk
Unlike
many ETFs, the Fund may issue and redeem entirely in cash or partially in cash.
As a result, an investment in the Fund may be less tax‑efficient than an
investment in an ETF that distributes portfolio securities in‑kind. If the Fund
effects a portion of redemptions for cash, the Fund may be required to sell
portfolio securities to obtain the cash needed to distribute the redemption
proceeds. Such sales may cause the Fund to incur transaction costs. The Fund may
recognize gains on these sales it might not otherwise have recognized if it were
to distribute portfolio securities in‑kind, or to recognize the gain sooner than
would otherwise be required. Cash redemptions may also entail higher transaction
costs than in‑kind redemptions, which costs may be passed on to redeemers of
creation units of Fund shares in the form of redemption transaction fees. The
cost of cash redemptions could also reduce the Fund’s NAV to the extent that
those costs are not fully offset by the redemption transaction fee charged to
the redeeming Authorized Participant.
Risks
Associated with Smaller and Medium‑Size Companies
The
Fund may invest in securities of smaller and medium‑size companies. Smaller and
medium size companies may offer substantial opportunities for capital growth;
they also involve substantial risks, and investments in smaller and medium‑size
companies may be considered speculative. Such companies often have limited
product lines, markets or financial resources. Smaller and medium‑size companies
may be more dependent on one or few key persons and may lack depth of
management. Larger portions of their stock may be held by a small number of
investors (including founders and management) than is typical of larger
companies. Credit may be more difficult to obtain (and on less advantageous
terms) than for
larger
companies. As a result, the influence of creditors (and the impact of financial
or operating restrictions associated with debt financing) may be greater on such
companies than that on larger or more established companies. Both of these
factors may dilute the holdings, or otherwise adversely impact the rights of the
Fund and smaller shareholders in corporate governance or corporate actions.
Smaller and medium‑size companies also may be unable to generate funds necessary
for growth or development, or may be developing or marketing new products or
services for which markets are not yet established and may never become
established. The Fund may have more difficulty obtaining information about
smaller and medium‑size companies, making it more difficult to evaluate the
impact of market, economic, regulatory and other factors on them. Informational
difficulties may also make valuing or disposing of their securities more
difficult than it would for larger companies. Securities of smaller and
medium‑size companies may trade less frequently and in lesser volume than more
widely held securities, and securities of smaller and medium‑size companies
generally are subject to more abrupt or erratic price movements than more widely
held or larger, more established companies or the market indices in general.
Among the reasons for the greater price volatility are the less certain growth
prospects of smaller and medium‑size companies, the lower degree of liquidity in
the markets for securities of such companies, and the greater sensitivity of
such companies to changing economic conditions. For these and other reasons, the
value of securities of smaller and medium‑size companies may react differently
to political, market and economic developments than the markets as a whole or
than other types of stocks.
Growth
Stock Risk
Growth
stocks may be more volatile than other stocks because they are more sensitive to
investor perceptions of the issuing company’s growth potential. Growth stocks
may go in and out of favor over time and may perform differently than the market
as a whole.
Information
Technology Sector Risk
The
Fund may invest a significant portion of its assets in the information
technology sector, and therefore the performance of the Fund could be negatively
impacted by events affecting this sector. Information technology companies may
be significantly affected by aggressive pricing as a result of intense
competition and by rapid product obsolescence due to rapid development of
technological innovations and frequent new product introduction. Other factors,
such as short product cycle, possible loss or impairment of intellectual
property rights, and changes in government regulations, may also adversely
impact information technology companies.
Financial
Services Sector Risk
The
Fund may invest a significant portion of its assets in the financial services
sector, and therefore the performance of the Fund could be negatively impacted
by events affecting this sector. Financial services companies are subject to
extensive governmental regulation which may limit both the amounts
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and
types of loans and other financial commitments they can make, the interest rates
and fees they can charge, the scope of their activities, the prices they can
charge and the amount of capital they must maintain. Profitability is largely
dependent on the availability and cost of capital funds and can fluctuate
significantly when interest rates change or due to increased competition. In
addition, deterioration of the credit markets generally may cause an adverse
impact on a broad range of markets, including U.S. and international credit and
interbank money markets generally, thereby affecting a wide range of financial
institutions and markets. Certain events in the financial sector may cause an
unusually high degree of volatility in the financial markets, both domestic and
foreign, and cause certain financial services companies to incur large losses.
Securities of financial services companies may experience a dramatic decline in
value when such companies experience substantial declines in the valuations of
their assets, take actions to raise capital (such as the issuance of debt or
equity securities), or cease operations. Credit losses resulting from financial
difficulties of borrowers and financial losses associated with investment
activities can negatively impact the sector. Adverse economic, business or
political developments affecting real estate could have a major effect on the
value of real estate securities (which include real estate investment trusts
(REITs)). Declining real estate values could adversely affect financial
institutions engaged in mortgage finance or other lending or investing
activities directly or indirectly connected to the value of real estate.
Risks
Associated with Asian Regions and Countries
Asia Pacific Region—Regional and Country Risks.
In addition to the risks discussed above and elsewhere in this prospectus, there
are specific risks associated with investing in the Asia Pacific region,
including the risk of severe economic, political or military disruption. The
Asia Pacific region comprises countries in all stages of economic development.
Some Asia Pacific economies may experience overextension of credit, currency
devaluations and restrictions, rising unemployment, high inflation,
underdeveloped financial services sectors, heavy reliance on international trade
and prolonged economic recessions. Deflationary factors could also reemerge in
certain Asian markets, the potential effects of which are difficult to forecast.
While certain Asian governments will have the ability to offset deflationary
conditions through fiscal or budgetary measures, others will lack the capacity
to do so. Many Asia Pacific countries are dependent on foreign supplies of
energy. A significant increase in energy prices could have an adverse impact on
these economies and the region as a whole. In addition, some countries in the
region are competing to claim or develop regional supplies of energy or other
natural resources. This competition could lead to economic, political or
military instability or disruption. Any military action or other instability
could adversely impact the ability of a Fund to achieve its investment
objective.
The
economies of many Asia Pacific countries (especially those whose development has
been export-driven) are dependent on the economies of the United States, Europe
and other Asian
countries,
and, as seen in the developments in global credit and equity markets in 2008 and
2009, events in any of these economies could negatively impact the economies of
Asia Pacific countries.
Currency
fluctuations, devaluations and trading restrictions in any one country can have
a significant effect on the entire Asia Pacific region. Increased political and
social instability in any Asia Pacific country could cause further economic and
market uncertainty in the region, or result in significant downturns and
volatility in the economies of Asia Pacific countries. As an example, in the
late 1990s, the economies in the Asian region suffered significant downturns and
increased volatility in their financial markets.
The
development of Asia Pacific economies, and particularly those of China, Japan
and South Korea, may also be affected by political, military, economic and other
factors related to North Korea. Negotiations to ease tensions and resolve the
political division of the Korean peninsula have been carried on from time to
time producing sporadic and inconsistent results. There have also been efforts
to increase economic, cultural and humanitarian contacts among North Korea,
South Korea, Japan and other nations. There can be no assurance that such
negotiations or efforts will continue or will ease tensions in the region. Any
military action or other instability could adversely impact the ability of the
Fund to achieve its investment objective. Lack of available information
regarding North Korea is also a significant risk factor.
Some
companies in the region may have less established shareholder governance and
disclosure standards than in the U.S. Some companies are controlled by family
and financial institutional investors whose investment decisions may be hard to
predict based on standard U.S.-based equity analysis. Consequently, investments
may be vulnerable to unfavorable decisions by the management or shareholders.
Corporate protectionism (e.g., the
adoption of poison pills and restrictions on shareholders seeking to influence
management) appears to be increasing, which could adversely impact the value of
affected companies. Many Asian countries are considered emerging or frontier
markets (newer or less developed emerging markets are also sometimes referred to
as frontier markets), and the governments of these countries may be more
unstable and more likely to impose controls on market prices (including, for
example, limitations on daily price movements), which may negatively impact the
Fund’s ability to acquire or dispose of a position in a timely manner. Emerging
market countries may also impose capital controls, nationalize a company or
industry, place restrictions on foreign ownership and on withdrawing sale
proceeds of securities from the country, and/or impose punitive taxes that could
adversely affect the prices of securities. Additionally, there may be less
publicly available information about companies in many Asian countries, and the
stock exchanges and brokerage industries in many Asian countries typically do
not have the level of government oversight as do those in the United States.
Securities markets of many Asian countries are also less
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mature,
substantially smaller, less liquid and more volatile than securities markets in
the U.S., and as a result, there may be increased settlement risks for
transactions in local securities.
Economies
in this region may also be more susceptible to natural disasters (including
earthquakes and tsunamis), or adverse changes in climate or weather. The risks
of such phenomena and resulting social, political, economic and environmental
damage (including nuclear pollution) cannot be quantified. Economies in which
agriculture occupies a prominent position, and countries with limited natural
resources (such as oil and natural gas), may be especially vulnerable to natural
disasters and climatic changes.
There
are specific risks associated with the Fund’s concentration of its investments
in a country or group of countries within the Asia Pacific region. Provided
below are risks of investing in various countries within the Asia Pacific region
and are principal risks of the Fund to the extent the Fund’s portfolio is
concentrated in such country or countries.
India. In India, the government has exercised
and continues to exercise significant influence over many aspects of the
economy. Government actions, bureaucratic obstacles and inconsistent economic
reform within the Indian government have had a significant effect on its economy
and could adversely affect market conditions, economic growth and the
profitability of private enterprises in India. Global factors and foreign
actions may inhibit the flow of foreign capital on which India is dependent to
sustain its growth. Large portions of many Indian companies remain in the hands
of their founders (including members of their families). Corporate governance
standards of family-controlled companies may be weaker and less transparent,
which increases the potential for loss and unequal treatment of investors. India
experiences many of the risks associated with developing economies, including
relatively low levels of liquidity, which may result in extreme volatility in
the prices of Indian securities.
Religious,
cultural and military disputes persist in India, and between India and Pakistan
(as well as sectarian groups within each country). The longstanding border
dispute with Pakistan remains unresolved. Terrorists believed to be based in
Pakistan have struck Mumbai (India’s financial capital) in the past, further
damaging relations between the two countries. If the Indian government is unable
to control the violence and disruption associated with these tensions (including
both domestic and external sources of terrorism), the result may be military
conflict, which could destabilize the economy of India. Both India and Pakistan
have tested nuclear arms, and the threat of deployment of such weapons could
hinder development of the Indian economy, and escalating tensions could impact
the broader region, including China.
South Korea. Investing in South Korean
securities has special risks, including those related to political, economic and
social instability in South Korea and the potential for increased militarization
in North Korea (see Regional and Country Risks
above).
Securities trading on South Korean securities markets are concentrated in a
relatively small number of issuers, which results in potentially fewer
investment opportunities for the Fund. South Korea’s financial sector has shown
certain signs of systemic weakness and illiquidity, which, if exacerbated, could
prove to be a material risk for investments in South Korea. South Korea is
dependent on foreign sources for its energy needs. A significant increase in
energy prices could have an adverse impact on South Korea’s economy.
There
are also a number of risks to the Fund associated with the South Korean
government. The South Korean government has historically exercised and continues
to exercise substantial influence over many aspects of the private sector. The
South Korean government from time to time has informally influenced the prices
of certain products, encouraged companies to invest or to concentrate in
particular industries and induced mergers between companies in industries
experiencing excess capacity.
Vietnam. In 1992, Vietnam initiated the process
of privatization of state-owned enterprises, and expanded that process in 1996.
However, some Vietnamese industries, including commercial banking, remain
dominated by state-owned enterprises, and for most of the private enterprises, a
majority of the equity is owned by employees and management boards and on
average more than one‑third of the equity is owned by the government with only a
small percentage of the equity being owned by investors. In addition, Vietnam
continues to impose limitations on foreign ownership of Vietnamese companies and
has in the past imposed arbitrary repatriation taxes on foreign owners. Although
Vietnam has experienced significant economic growth in the past three decades,
Vietnam continues to face various challenges, including corruption, lack of
transparency, uniformity and consistency in governmental regulations, heavy
dependence on exports, a growing population, and increasing pollution. Inflation
threatens long-term economic growth and may deter foreign investment in the
country. In addition, foreign currency reserves in Vietnam may not be sufficient
to support conversion into the U.S. dollar (or other more liquid currencies).
Vietnamese markets have relatively low levels of liquidity, which may result in
extreme volatility in the prices of Vietnamese securities. Market volatility may
also be heightened by the actions of a small number of investors.
Risks
Associated with Other Regions
Europe
Investing
in Europe involves risks not typically associated with investments in the United
States. A majority of western European countries and a number of eastern
European countries are members of the European Union (“EU”), an
intergovernmental union aimed at developing economic and political coordination
and cooperation among its member states. European countries that are members of
the Economic and Monetary Union of the European Union (“EMU”) are subject to
restrictions on inflation rates, interest rates, deficits,
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and
debt levels. The EMU sets out different stages and commitments for member states
to follow in an effort to achieve greater coordination of economic, fiscal and
monetary policies. A member state that participates in the third (and last)
stage is permitted to adopt a common currency, the Euro. EMU member states that
have adopted the Euro are referred to as the “Eurozone.” As a condition to
adopting the Euro, EMU member states must also relinquish control of their
monetary policies to the European Central Bank and become subject to certain
monetary and fiscal controls imposed by the EMU. As economic conditions across
member states may vary widely, it is possible that these controls may not
adequately address the needs of all EMU member states from time to time. These
controls remove EMU member states’ flexibility in implementing monetary policy
measures to address regional economic conditions, which may impair their ability
to respond to crises. In addition, efforts by the EU and the EMU to unify
economic and monetary policies may also increase the potential for similarities
in the movements of European markets and reduce the potential investment
benefits of diversification within the region. Conversely, any failure of these
efforts may increase volatility and uncertainty in European financial markets
and negatively affect the value of the Fund’s investments in European
issuers.
European
financial markets are vulnerable to volatility and losses arising from concerns
about the potential exit of member countries from the EU and/or the Eurozone
and, in the latter case, the reversion of those countries to their national
currencies. Defaults by EMU member countries on sovereign debt, as well as any
future discussions about exits from the Eurozone, may negatively affect the
Fund’s investments in the defaulting or exiting country, in issuers, both
private and governmental, with direct exposure to that country, and in European
issuers generally. The United Kingdom (“UK”) has formally withdrawn from the EU
(a process commonly referred to as “Brexit”). The political, economic and legal
consequences of Brexit are not yet fully known. In the short term, financial
markets may experience heightened volatility, particularly those in the UK and
Europe, but possibly worldwide. The UK and Europe may be less stable than they
have been in recent years, and investments in the UK and the EU may be difficult
to value, or subject to greater or more frequent volatility. In the longer term,
there is likely to be a period of significant political, regulatory and
commercial uncertainty as the UK seeks to negotiate the terms of its future
trading relationships. The consequences of the UK’s or another country’s exit
from the EU and/or Eurozone could also threaten the stability of the Euro for
remaining countries and could negatively affect the financial markets of other
countries in the European region and beyond.
Emerging Market Countries in Europe. While many
countries in western Europe are considered to have developed markets, many
eastern European countries are less developed. Investments in eastern European
countries, even if denominated in Euros, may involve special risks associated
with investments in emerging markets. Economic and political
structures
in many emerging European countries are in the early stages of economic
development and developing rapidly, and these countries may lack the social,
political, and economic stability characteristics of many more developed
countries. In addition, the small size and inexperience of the securities
markets in emerging European countries and the limited volume of trading in
securities in those markets may make the Fund’s investments in these countries
illiquid and more volatile than investments in more developed countries and may
make obtaining prices on portfolio securities from independent sources more
difficult than in other, more developed markets. In the past, certain emerging
European countries have failed to recognize private property rights and at times
have nationalized or expropriated the assets of private companies. There may
also be little financial or accounting information available with respect to
companies located in certain eastern European countries, which, as a result, may
make it difficult to assess the value or prospects of an investment in those
companies.
The
European financial markets have been experiencing volatility and adverse trends
due to concerns about economic downturns or rising government debt levels in
both emerging and developed European countries. These events have adversely
affected currency exchange rates and may continue to significantly affect every
country in Europe, including countries that do not use the Euro. Defaults or
restructurings by governments could have adverse effects on economies, financial
markets, and asset valuations throughout Europe and lead to additional countries
abandoning the Euro or withdrawing from the European Union. During periods of
instability or upheaval, a country’s government may act in a detrimental or
hostile manner toward private enterprise or foreign investment.
In
addition, the war in Ukraine has led to, and may lead to additional, sanctions
being levied by the United States, European Union and other countries against
Russia. Russia’s military incursion and the resulting sanctions could adversely
affect global energy and financial markets and thus could affect the value of
the Fund’s investments, even beyond any direct exposure the Fund may have to
Russian issuers or the adjoining geographic regions. The extent and duration of
the military action, sanctions and resulting market disruptions are impossible
to predict, but could be substantial.
At
certain times, the Fund may have to “fair value” certain securities by
determining value on the basis of factors other than market quotations.
Portfolio holdings that are valued using techniques other than market
quotations, including “fair valued” securities, may be subject to greater
fluctuation than if market quotations had been used, and there is no assurance
that the Fund could sell or close out a portfolio position for the value
established for it at any time.
Latin
America
Latin
American economies are generally considered emerging markets and have in the
past experienced considerable diffi-
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culties,
including high inflation rates, high interest rates, high unemployment,
government overspending and political instability. Similar conditions in the
present or future could impact the Fund’s performance. Because Latin American
countries are highly reliant on the exportation of commodities such as oil and
gas, minerals, and metals, their economies may be significantly impacted by
fluctuations in commodity prices and the global demand for certain commodities.
Investments in Latin American countries may be subject to currency risks, such
as restrictions on the flow of money in and out of a country, extreme volatility
relative to the U.S. dollar, and devaluation, all of which could decrease the
value of the Fund’s investments. Other Latin American investment risks may
include inadequate investor protection, less developed regulatory, accounting,
auditing and financial standards, unfavorable changes in laws or regulations,
natural disasters, corruption and military activity. The governments of many
Latin American countries may also exercise substantial influence over many
aspects of the private sector, and any such exercise could have a significant
effect on companies in which the Fund invests. A relatively small number of
Latin American companies represents a large portion of Latin America’s total
market and thus may be more sensitive to adverse political or economic
circumstances and market movements. Securities of companies in Latin American
countries may be subject to significant price volatility, which could impact the
Fund’s performance. During periods of instability or upheaval, a country’s
government may act in a detrimental or hostile manner toward private enterprise
or foreign investment. In addition, at certain times, the Fund may have to “fair
value” certain securities by assigning a value on the basis of factors other
than market quotations. Portfolio holdings that are valued using techniques
other than market quotations, including “fair valued” securities, may be subject
to greater fluctuation than if market quotations had been used, and there is no
assurance that the Fund could sell or close out a portfolio position for the
value established for it at any time.
Additional Risks
The
following additional or non‑principal risks also apply to investments in the
Fund.
Risks
Associated with Developments in Global Credit and Equity Markets
Developments
in global credit and equity markets, such as the credit and valuation problems
experienced by the global capital markets in 2008 and 2009, may adversely and
significantly impact the Fund’s investments. Although market conditions may
start to improve relatively quickly, many difficult conditions may remain for an
extended period of time or may return. Because the scope of these conditions may
be, and in the past have been, expansive, past investment strategies and models
may not be able to identify all significant risks that the Fund may encounter,
or to predict the duration of these events. These conditions could prevent the
Fund from successfully executing its investment strategies, result in future
declines in the market values of the investment assets held by
the
Fund, or require the Fund to dispose of investments at a loss while such adverse
market conditions prevail.
Risks
Associated with China, Hong Kong and Macau
China. The Fund may invest up to 20% of the
Fund’s assets in companies located in China. China includes its administrative
and other districts, such as Hong Kong and Macau. A company or other issuer is
considered to be “located” in China and a security or instrument is deemed to be
a Chinese security or instrument, if it has substantial ties to China. Matthews
currently makes that determination based primarily on one or more of the
following criteria: (A) with respect to a company or issuer, whether
(i) it is organized under the laws of China; (ii) it derives at least
50% of its revenues or profits from goods produced or sold, investments made, or
services performed, or has at least 50% of its assets located, within China;
(iii) it has the primary trading markets for its securities in China;
(iv) it has its principal place of business in or is otherwise
headquartered in China; or (v) it is a governmental entity or an agency,
instrumentality or a political subdivision of China; and (B) with respect
to an instrument or issue, whether (i) its issuer is headquartered or
organized in China; (ii) it is issued to finance a project that has at
least 50% of its assets or operations in China; (iii) it is at least 50%
secured or backed by assets located in China; (iv) it is a component of or
its issuer is included in the MSCI China Index; or (v) it is denominated in
the currency of China and addresses at least one of the other above criteria.
The term “located” and the associated criteria listed above have been defined in
such a way that Matthews has latitude in determining whether an issuer should be
included within China, including with respect to whether an issuer or security
may be deemed to be a Chinese issuer or security for exclusionary
purposes.
The
Chinese government exercises significant control over China’s economy through
its industrial policies (e.g., allocation of resources and other preferential
treatment), monetary policy, management of currency exchange rates, and
management of the payment of foreign currency-denominated obligations. For over
three decades, the Chinese government has been reforming economic and market
practices, providing a larger sphere for private ownership of property, and
interfering less with market forces. While currently contributing to growth and
prosperity, these reforms could be altered or discontinued at any time. Changes
in these policies could adversely impact affected industries or companies in
China. In addition, the Chinese government may actively attempt to influence the
operation of Chinese markets through currency controls, direct investments,
limitations on specific types of transactions (such as short selling), limiting
or prohibiting investors (including foreign institutional investors) from
selling holdings in Chinese companies, or other similar actions. Such actions
could adversely impact the Fund’s ability to achieve its investment
objective.
Military
conflicts, either in response to internal social unrest or conflicts with other
countries, could disrupt the economic development in China. China’s long-running
conflict over
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Taiwan
remains unresolved and political tensions with Hong Kong have recently
increased, while territorial border disputes persist with several neighboring
countries. While economic relations with Japan have deepened, the political
relationship between the two countries has become more strained in recent years,
which could weaken economic ties. There is also a greater risk involved in
currency fluctuations, currency convertibility, interest rate fluctuations and
higher rates of inflation. The Chinese government also sometimes takes actions
intended to increase or decrease the values of Chinese stocks. China’s economy,
particularly its export-oriented sectors may be adversely impacted by trade or
political disputes with China’s major trading partners, including the U.S.
In
addition, as its consumer class continues to grow, China’s domestically oriented
industries may be especially sensitive to changes in government policy and
investment cycles. Social cohesion in China is being tested by growing income
inequality and larger scale environmental degradation. Social instability could
threaten China’s political system and economic growth, which could decrease the
value of the Fund’s investments.
Accounting,
auditing, financial, and other reporting standards, practices and disclosure
requirements in China are different, sometimes in fundamental ways, from those
in the U.S. and certain Western European countries. Although the Chinese
government adopted a new set of Accounting Standards for Business Enterprises
effective January 1, 2007, which are similar to the International Financial
Reporting Standards, the accounting practices in China continue to be frequently
criticized and challenged. In addition, China does not allow the Public Company
Accounting Oversight Board to inspect the work that auditors perform in China
for Chinese companies in which the Fund may invest. That inspection organization
conducts on‑going reviews of audits by U.S. accounting firms. As a result,
financial reporting by Chinese companies do not have the same degree of
transparency and regulatory oversight as reporting by companies in the U.S.
Because of Chinese governmental disagreements with the Public Company Accounting
Oversight Board concerning the inspection of audits of U.S. listed Chinese
companies, it is possible those companies could be delisted from trading in the
U.S. if those disagreements are not resolved. Delisting would likely adversely
affect the liquidity and values of those shares. Recently, the Public Company
Accounting Oversight Board signed a Statement of Protocol with the China
Securities Regulatory Commission and the Ministry of Finance of the People’s
Republic of China which is intended to allow access for the PCAOB to inspect and
investigate completely registered public accounting firms in mainland China and
Hong Kong. This agreement would grant the Public Company Accounting Oversight
Board access to the audit work papers, audit personnel, and other information
related to U.S. listed Chinese companies, but the implementation and
effectiveness of the agreement is currently unclear.
Variable Interest Entities. The Fund may invest
in certain operating companies in China through legal structures known as
variable interest entities (“VIEs”). In China, ownership of companies in certain
sectors by foreign individuals and entities (including U.S. persons and entities
such as the Fund) is prohibited. In order to facilitate foreign investment in
these businesses, many Chinese companies have created VIEs. In such an
arrangement, a China-based operating company typically establishes an offshore
shell company in another jurisdiction, such as the Cayman Islands. That shell
company enters into service and other contracts with the China-based operating
company, then issues shares on a foreign exchange, such as the New York Stock
Exchange. Foreign investors hold stock in the shell company rather than directly
in the China-based operating company. This arrangement allows U.S. investors to
obtain economic exposure to the China-based company through contractual means
rather than through formal equity ownership.
VIEs
are a longstanding industry practice and well known to officials and regulators
in China; however, VIEs are not formally recognized under Chinese law. Recently,
the government of China provided new guidance to and placed restrictions on
China-based companies raising capital offshore, including through VIE
structures. Investors face uncertainty about future actions by the government of
China that could significantly affect an operating company’s financial
performance and the enforceability of the shell company’s contractual
arrangements. It is uncertain whether Chinese officials or regulators will
withdraw their implicit acceptance of the VIE structure, or whether any new
laws, rules or regulations relating to VIE structures will be adopted or, if
adopted, what impact they would have on the interests of foreign shareholders.
Under extreme circumstances, China might prohibit the existence of VIEs, or
sever their ability to transmit economic and governance rights to foreign
individuals and entities; if so, the market value of the Fund’s associated
portfolio holdings would likely suffer significant, detrimental, and possibly
permanent effects, which could result in substantial investment losses.
Hong Kong. Hong Kong has been governed by the
Basic Law, which provides a high degree of autonomy from China in certain
matters until 2047. However, as demonstrated by Hong Kong protests in recent
years over political, economic, and legal freedoms, and the Chinese government’s
response to them, considerable political uncertainty continues to exist within
Hong Kong. Due to the interconnected nature of the Hong Kong and Chinese
economies, this instability in Hong Kong may cause uncertainty in the Hong Kong
and Chinese markets. If China were to exert its authority so as to alter the
economic, political or legal structures or the existing social policy of Hong
Kong, investor and business confidence in Hong Kong could be negatively
affected, which in turn could negatively affect markets and business performance
and have an adverse effect on the Fund’s investments. In addition, the Hong Kong
dollar trades within a fixed trading band rate to
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(or
is “pegged” to) the U.S. dollar. This fixed exchange rate has contributed to the
growth and stability of the Hong Kong economy. However, some market participants
have questioned the continued viability of the currency peg. It is uncertain
what effect any discontinuance of the currency peg and the establishment of an
alternative exchange rate system would have on capital markets generally and the
Hong Kong economy.
Macau. Although Macau is a Special
Administrative Region (SAR) of China, it maintains a high degree of autonomy
from China in economic matters. Macau’s economy is heavily dependent on the
gaming sector and tourism industries, and its exports are dominated by textiles
and apparel. Accordingly, Macau’s growth and development are highly dependent
upon external economic conditions, particularly those in China.
Risks
Associated with Taiwan
The
political reunification of China and Taiwan, over which China continues to claim
sovereignty, is a highly complex issue and is unlikely to be settled in the near
future. Although the relationship between China and Taiwan has been improving,
there is the potential for future political or economic disturbances that may
have an adverse impact on the values of investments in either China or Taiwan,
or make investments in China and Taiwan impractical or impossible. Any
escalation of hostility between China and/or Taiwan would likely have a
significant adverse impact on the value of investments in both countries and the
region.
Risks
Associated with Other Asia Pacific and Emerging Market Countries
Australia. The Australian economy is dependent,
in particular, on the price and demand for agricultural products and natural
resources. The United States and China are Australia’s largest trade and
investment partners, which may make the Australian markets sensitive to economic
and financial events in those two countries. Australian markets may also be
susceptible to sustained increases in oil prices as well as weakness in
commodity and labor markets.
Bangladesh. Bangladesh is facing many economic
hurdles, including weak political institutions, poor infrastructure, lack of
privatization of industry and a labor force that has outpaced job growth in the
country. High poverty and inflationary tensions may cause social unrest, which
could weigh negatively on business sentiment and capital investment.
Bangladesh’s developing capital markets rely primarily on domestic investors.
The recent overheating of the stock market and subsequent correction underscored
weakness in capital markets and regulatory oversight. Corruption remains a
serious impediment to investment and economic growth in Bangladesh, and the
country’s legal system makes debt collection unpredictable, dissuading foreign
investment. Bangladesh is geographically located in a part of the world that is
historically prone to natural disasters and is economically sensitive to
environmental events.
Brazil. Brazilian issuers are subject to
possible regulatory and economic interventions by the Brazilian government,
including the imposition of wage and price controls and the limitation of
imports. In addition, the market for Brazilian securities is directly influenced
by the flow of international capital and economic and market conditions of
certain countries, especially other emerging market countries in Central and
South America. The Brazilian economy historically has been exposed to high rates
of inflation and a high level of debt, each of which may reduce and/or prevent
economic growth. Brazil also has suffered from chronic structural public sector
deficits. Such challenges have contributed to a high degree of price volatility
in both the Brazilian equity and foreign currency markets. A rising unemployment
rate could also have the same effect.
Cambodia. Cambodia is experiencing a period of
political stability and relative peace following years of violence under the
Khmer Rouge regime. Despite its recent growth and stability, Cambodia faces
risks from a weak infrastructure (particularly power generation capacity and the
high cost of electric power), a poorly developed education system, inefficient
bureaucracy and charges of government corruption. Very low foreign exchange
reserves make Cambodia vulnerable to sudden capital flight, and the banking
system suffers from a lack of oversight and very high dollarization. Further,
destruction of land-ownership records during the Khmer Rouge regime has resulted
in numerous land disputes, which strain the country’s institutional capacity and
threaten violence and demonstrations.
Indonesia. Indonesia’s political institutions
and democracy have a relatively short history, increasing the risk of political
instability. Indonesia has in the past faced political and militant unrest
within several of its regions, and further unrest could present a risk to the
local economy and stock markets. The country has also experienced acts of
terrorism, predominantly targeted at foreigners, which has had a negative impact
on tourism. Corruption and the perceived lack of a rule of law in dealings with
international companies in the past may have discouraged much needed foreign
direct investment. Should this issue remain, it could negatively impact the
long-term growth of the economy. In addition, many economic development problems
remain, including high unemployment, a developing banking sector, endemic
corruption, inadequate infrastructure, a poor investment climate and unequal
resource distribution among regions.
Laos. Laos is a poor, developing country ruled
by an authoritarian, Communist, one‑party government. It is politically stable,
with political power centralized in the Lao People’s Revolutionary Party. Laos’
economic growth is driven largely by the construction, mining and hydroelectric
sectors. However, the increased development of natural resources could lead to
social imbalances, particularly in light of Laos’ underdeveloped health care and
education systems. Laos is a poorly regulated economy with limited rule of law.
Corruption, patronage and a weak legal system threaten to slow
economic
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development.
Another major risk for Laos is the stability of its banks, which, despite the
significant credit growth since 2009, are under-capitalized and inadequately
supervised.
Malaysia. Malaysia has previously imposed
currency controls and a 10% “exit levy” on profits repatriated by foreign
entities such as the Fund and has limited foreign ownership of Malaysian
companies (which may artificially support the market price of such companies).
The Malaysian capital controls have been changed in significant ways since they
were first adopted without prior warning on September 1, 1998. Malaysia has
also abolished the exit levy. However, there can be no assurance that the
Malaysian capital controls will not be changed adversely in the future or that
the exit levy will not be re‑established, possibly to the detriment of the Fund
and its shareholders. In addition, Malaysia is currently exhibiting political
instability which could have an adverse impact on the country’s economy.
Mexico. The Mexican economy is dependent upon
external trade with other economies, specifically with the United States and
certain Latin American countries. As a result, Mexico is dependent on the U.S.
economy, and any change in the price or demand for Mexican exports may have an
adverse impact on the Mexican economy. Recently, Mexico has experienced an
outbreak of violence related to drug trafficking. Incidents involving Mexico’s
security may have an adverse effect on the Mexican economy and cause uncertainty
in its financial markets. In the past, Mexico has experienced high interest
rates, economic volatility, and high unemployment rates. In addition, one
political party dominated its government until the elections of 2000, when
political reforms were put into place to improve the transparency of the
electoral process. Since then, competition among political parties has
increased, resulting in elections that have been contentious, and this continued
trend could lead to greater market volatility.
Mongolia. Mongolia has experienced political
instability in conjunction with its election cycles. Mongolian governments have
had a history of cycling favorable treatment among China, Russia, Japan, the
United States and Europe and may at any time abruptly change current policies in
a manner adverse to investors. In addition, assets in Mongolia may be subject to
nationalization, requisition or confiscation (whether legitimate or not) by any
government authority or body. Government corruption and inefficiencies are also
a problem. Mongolia’s unstable economic policies and regulations towards foreign
investors threaten to impede necessary growth of production capacity.
Additionally, the Mongolian economy is extremely dependent on the price of
minerals and Chinese demand for Mongolian exports.
Myanmar. Myanmar (formerly Burma) is emerging
from nearly half a century of isolation under military rule and from the gradual
suspension of sanctions imposed for human-rights violations. However, Myanmar
struggles with rampant corruption, poor infrastructure (including basic
infrastructure, such as transport, telecoms and electricity), ethnic tensions,
a
shortage
of technically proficient workers and a dysfunctional bureaucratic system.
Myanmar has no established corporate bond market or stock exchange and has a
limited banking system. Additionally, despite democratic trends and progress on
human rights, Myanmar’s political situation remains fluid, and there remains the
possibility of reinstated sanctions.
New Zealand. New Zealand is generally
considered to be a developed market, and investments in New Zealand generally do
not have risks associated with them that are present with investments in
developing or emerging markets. New Zealand is a country heavily dependent on
free trade, particularly in agricultural products. This makes New Zealand
particularly vulnerable to international commodity prices and global economic
slowdowns. Its principal export industries are agriculture, horticulture,
fishing and forestry.
Pakistan. Changes in the value of investments
in Pakistan and in companies with significant economic ties to that country
largely depend on continued economic growth and reform in Pakistan, which
remains uncertain and subject to a variety of risks. Pakistan has faced, and
continues to face, high levels of political instability and social unrest at
both the regional and national levels. Ongoing border disputes with India may
result in armed conflict between the two nations, and Pakistan’s geographic
location and its shared borders with Afghanistan and Iran increase the risk that
it will be involved in, or otherwise affected by, international conflict.
Pakistan’s economic growth is in part attributable to high levels of
international support, which may be significantly reduced or terminated in
response to changes in the political leadership of Pakistan. Pakistan faces a
wide range of other economic problems and risks, such as the uncertainty over
the privatization efforts, the substantial natural resource constraints it is
subject to, its large budgetary and current account deficits as well as trade
deficits, its judicial system that is still developing and widely perceived as
lacking transparency, and inflation.
Papua New Guinea. Papua New Guinea is a small
country that faces challenges in maintaining political stability. The government
intrudes in many aspects of the economy through state ownership and regulation.
Despite promises from the government to address rampant corruption, corruption
and nepotism remain pervasive and often go unpunished. Other challenges facing
Papua New Guinea include providing physical security for foreign investors,
regaining investor confidence, restoring integrity to state institutions,
privatizing state institutions, improving its legal system and maintaining good
relations with Australia. Exploitation of Papua New Guinea’s natural resources
is limited by terrain, land tenure issues and the high cost of developing
infrastructure. Papua New Guinea has several thousand distinct and heterogeneous
indigenous communities, which create additional challenges in dealing with
tribal conflicts, some of which have been going on for millennia.
Philippines. Philippines’ consistently large
budget deficit has produced a high debt level and has forced the country
to
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spend
a large portion of its national government budget on debt service. Large,
unprofitable public enterprises, especially in the energy sector, contribute to
the government’s debt because of slow progress on privatization.
Singapore. As a small open economy, Singapore
is particularly vulnerable to external economic influences, such as the Asian
economic crisis of the late 1990s. Singapore has been a leading manufacturer of
electronics goods. However, competition from other countries in this and related
industries, and adverse Asian economic influences generally, may negatively
affect Singapore’s economy.
Sri Lanka. Civil war and terrorism have
disrupted the economic, social and political stability of Sri Lanka for decades.
While these tensions appear to have lessened, there is the potential for
continued instability resulting from ongoing ethnic conflict. Sri Lanka faces
severe income inequality, high inflation and a sizable public debt load. Sri
Lanka relies heavily on foreign assistance in the form of grants and loans from
a number of countries and international organizations such as the World Bank and
the Asian Development Bank. Changes in international political sentiment may
have significant adverse effects on the Sri Lankan economy.
Thailand. In recent years Thailand has
experienced increased political, social and militant unrest, negatively
impacting tourism and the broader economy. Thailand’s political institutions
remain unseasoned, increasing the risk of political instability. Since 2005,
Thailand has experienced several rounds of political turmoil, including a
military coup in September 2006 that replaced Thailand’s elected government with
new leadership backed by a military junta. Political and social unrest have
continued following the 2006 coup and have resulted in disruptions, violent
protests and clashes between citizens and the government. In May 2014, after
months of large-scale anti-government protests, another military coup was
staged, and a new military junta was established to govern the nation. In March
2019, after many rounds of delays, the first general election since the 2014
coup was held in Thailand. The election has been widely considered a contest
between the pro‑military and pro‑democracy forces, and the outcome of the
election could lead to further political instability in Thailand. These events
have negatively impacted the Thai economy, and the long-term effect of these
developments remains unclear. The Thai government has historically imposed
investment controls apparently designed to control volatility in the Thai baht
and to support certain export-oriented Thai industries. These controls have
largely been suspended, although there is no guarantee that such controls will
not be re‑imposed. However, partially in response to these controls, an offshore
market for the exchange of Thai baht developed. The depth and transparency of
this market have been uncertain.
Risks
Associated with Other Regions
Africa
and the Middle East
The
economies of certain African and Middle Eastern countries are in the earliest
stages of economic development, which
may
result in a high concentration of trading volume and market capitalization in a
small number of issuers or a limited number of industries. There are typically
fewer brokers in African and Middle Eastern countries, and they are typically
less well capitalized than brokers in the United States or other developed
markets. Many African nations have a history of military intervention,
dictatorship, civil war, and corruption, which all limit the effectiveness of
markets in those countries. Many Middle Eastern countries are facing political
and economic uncertainty, with little or no democratic tradition or free market
history, which could result in significant economic downturn.
During
periods of instability or upheaval, a country’s government may act in a
detrimental or hostile manner toward private enterprise or foreign investment.
In addition, at certain times, the Fund may have to “fair value” certain
securities by assigning a value on the basis of factors other than market
quotations. Portfolio holdings that are valued using techniques other than
market quotations, including “fair valued” securities, may be subject to greater
fluctuation than if market quotations had been used, and there is no assurance
that the Fund could sell or close out a portfolio position for the value
established for it at any time. Further, the economies of many Middle Eastern
and African countries are largely dependent on, and linked together by, certain
commodities (such as gold, silver, copper, diamonds, and oil). As a result,
African and Middle Eastern economies are vulnerable to changes in commodity
prices, and fluctuations in demand for these commodities could significantly
impact economies in these regions. A downturn in one country’s economy could
have a disproportionally large effect on others in the region.
U.S.
Securities Risk
The
Fund may invest to a limited extent in stocks issued by U.S. companies. U.S.
stocks have certain risks similar to equity securities issued in other
countries, such as declines in value over short or extended periods as a result
of changes in a company’s financial condition or the overall market as well as
economic and political conditions. Although U.S. stocks have enjoyed many years
of favorable returns, they have more recently experienced volatility based on
political and economic events such as trade disputes. In addition, interest rate
increases in the U.S. may adversely affect stocks.
Convertible
Securities Risk
As
part of its investment strategy, the Fund may invest in convertible preferred
stocks and bonds and debentures of any maturity and quality, including those
that are unrated, or would be below investment grade (referred to as “junk
bonds”) if rated. Convertible securities may, under specific circumstances, be
converted into the common or preferred stock of the issuing company and may be
denominated in U.S. dollars, euros or a local currency. The value of convertible
securities varies with a number of factors, including the value and volatility
of the underlying stock, the level and volatility of interest rates, the passage
of time, dividend policy and other variables.
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The
risks of convertible bonds and debentures include repayment risk and interest
rate risk. Repayment risk is the risk that a borrower does not repay the amount
of money that was borrowed (or “principal”) when the bond was issued. This
failure to repay the amount borrowed is called a “default” and could result in
losses for the Fund. Interest rate risk is the risk that market rates of
interest may increase over the rate paid by a bond held by the Fund. When
interest rates increase, the market value of a bond paying a lower rate
generally will decrease. If the Fund were to sell such a bond, the Fund might
receive less than it originally paid for it.
Investing
in a convertible security denominated in a currency different from that of the
security into which it is convertible may expose the Fund to currency risk as
well as risks associated with the level and volatility of the foreign exchange
rate between the security’s currency and the underlying stock’s currency.
Convertible securities are subject to greater liquidity risk than many other
securities and may trade less frequently and in lower volumes, or have periods
of less frequent trading. Lower trading volume may also make it more difficult
for the Fund to value such securities.
Credit
Risk
Credit
risk refers to the risk that an issuer may default in the payment of principal
and/or interest on an instrument. Financial strength and solvency of an issuer
are the primary factors influencing credit risk. In addition, lack or inadequacy
of collateral or credit enhancement for a debt instrument may affect its credit
risk. Credit risk may change over the life of an investment and securities that
are rated by rating agencies are often reviewed periodically and may be subject
to downgrade.
Interest
Rate Risk
Interest
rate risk refers to the risks associated with market changes in interest rates.
Interest rate changes may affect the value of a debt instrument indirectly
(especially in the case of fixed rate securities) and directly (especially in
the case of instruments whose rates are adjustable). In general, rising interest
rates will negatively impact the price of a fixed rate debt instrument and
falling interest rates will have a positive effect on price. Adjustable rate
instruments also react to interest rate changes in a similar manner although
generally to a lesser degree (depending, however, on the characteristics of the
reset terms, including, without limitation, the index chosen, frequency of reset
and reset caps or floors). Interest rate sensitivity is generally more
pronounced and less predictable in instruments with uncertain payment or
prepayment schedules.
Risks
Associated with Investment in a Smaller Number of Companies or Industries
From
time to time, a relatively small number of companies and industries may
represent a large portion of the total stock market in a particular country or
region, and these companies and industries may be more sensitive to adverse
social, political, economic or regulatory developments than funds whose
portfolios are more diversified. Events affecting a small num-
ber
of companies or industries may have a significant and potentially adverse impact
on your investment in the Fund, and the Fund’s performance may be more volatile
than that of funds that invest globally.
Passive
Foreign Investment Companies Risk
The
Fund may invest in PFICs. Investments in PFICs may subject the Fund to taxes and
interest charges that cannot be avoided, or that can be avoided only through
complex methods that may have the effect of imposing a less favorable tax rate
or accelerating the recognition of gains and payment of taxes.
Initial
Public Offerings (“IPOs”) Risk
IPOs
of securities issued by unseasoned companies with little or no operating history
are risky, and their prices are highly volatile, but they can result in very
large gains in their initial trading. Attractive IPOs are often oversubscribed
and may not be available to the Fund or may be available only in very limited
quantities. Thus, when a fund’s size is smaller, any gains or losses from IPOs
may have an exaggerated impact on the fund’s performance than when it is larger.
The Fund’s portfolio managers are permitted to engage in short-term trading of
IPOs. Although IPO investments have had a positive impact on the performance of
some funds, there can be no assurance that the Fund will have favorable IPO
investment opportunities in the future or that the Fund’s investments in IPOs
will have a positive impact on its performance.
Risks
Associated with Investment in China A Shares
Matthews
has applied for and received a license as a Qualified Foreign Investor (“QFI”)
from the China Securities Regulatory Commission and has been registered with the
State Administration of Foreign Exchange of China for the inward and outward
remittance of funds in foreign currencies and/or offshore renminbi (the “QFI
Status”), by which Matthews may invest in stocks of Chinese companies listed on
the Shanghai Stock Exchange and the Shenzhen Stock Exchange and traded and
denominated in the currency of China, the renminbi (“China A Shares”) on behalf
of clients whose portfolios it manages, including for this purpose any series,
sub‑fund, sleeve, or other sub‑account of such client (each an “A Share
Investor”). For a further discussion of China A Shares and risks associated with
investing in China A Shares, see “Risks Associated with Investing in China A
Shares” in the Fund’s SAI.
Matthews,
as a QFI license holder, maintains custody of China A Share assets with a local
custodian in its own name for the benefit of the A Share Investors (the “A Share
Account”). In addition, the local Chinese custodian will maintain, on its books
and records, a sub‑account on behalf of each A Share Investor with respect to
the China A Share assets held by each individual A Share Investor.
Matthews
has agreed with each A Share Investor that Matthews has and shall have no
beneficial interest in such China A Share assets and that they belong
exclusively to the individual A Share Investors in whose name they are held
on
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the
books and records of the Chinese custodian. In addition, each A Share Investor
has agreed that such A Share Investor has an interest solely in the China A
Share assets held through the QFI Status of Matthews that are registered in its
name on the books and records of the Chinese custodian, and that they have no
interest in any China A Share assets held on the books and records of the
Chinese custodian in the name of any other A Share Investor. A Share Investors,
including the Fund, bear the costs of maintaining their sub‑account on
the
books
and records of the Chinese custodian, as well as their share of the costs of
maintaining the A Share Account.
Although
China A Shares generally trade in liquid markets, because of the repatriation
requirements imposed by the Chinese government, the Fund’s investment in China A
Shares may be illiquid and subject to the Fund’s policy of investing no more
than 15% of its net assets in illiquid securities.
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Management
of the Fund
Matthews
International Capital Management, LLC is the investment advisor to the Fund.
Matthews is located at Four Embarcadero Center, Suite 550, San Francisco,
California 94111 and can be reached toll free by telephone at 833.228.5605.
Matthews was founded in 1991 by G. Paul Matthews. Since its inception, Matthews
has specialized in managing portfolios of Asian securities. Matthews invests the
Fund’s assets, manages the Fund’s business affairs, supervises the Fund’s
overall day‑to‑day operations, provides the personnel needed by the Fund with
respect to Matthews’ responsibilities, and furnishes the Fund with office space
and provides certain administrative, clerical and shareholder services to the
Fund pursuant to an Investment Management Agreement dated as of June 30, 2022
between Matthews and the Trust, on behalf of the Fund (as amended from time to
time, the “Management Agreement”).
Pursuant
to the Management Agreement, the Fund pays Matthews 0.79% of the aggregate
average daily net assets of the Fund. The Fund shall pay to Matthews a monthly
fee at the annual rate using the applicable management fee calculated based on
the actual number of days of that month and based on the Fund’s average daily
net assets for the month.
A
discussion regarding the basis for the Board’s approval of the Management
Agreement with respect to the Fund will be available in the Fund’s Annual Report
to Shareholders for the period ending December 31, 2023.
Matthews
may delegate certain portfolio management activities with respect to the Fund to
a wholly owned subsidiary based outside of the United States. Any such
participating affiliate would enter into a participating affiliate agreement
with Matthews related to the Fund, and Matthews would
remain
fully responsible for the participating affiliate’s services as if Matthews had
performed the services directly. Any delegation of services in this manner would
not increase the fees or expenses paid by the Fund, and would normally be used
only where a portfolio manager or other key professional is located in the
country where the subsidiary is based.
Pursuant
to the Management Agreement, in addition to investment advisory services,
Matthews also provides certain administrative and shareholder services to the
Fund and current shareholders of the Fund, including overseeing the activities
of the Fund’s transfer agent, accounting agent, custodian and administrator;
assisting with the daily calculation of the Fund’s net asset values; overseeing
the Fund’s compliance with its legal, regulatory and ethical policies and
procedures; assisting with the preparation of agendas and other materials
drafted by the Fund’s third-party administrator and other parties for Board
meetings; coordinating and executing fund launches and closings (as applicable);
general oversight of the vendor community at large as well as industry trends to
ensure that shareholders are receiving quality service and technology;
responding to shareholder communications including coordinating shareholder
mailings, proxy statements, annual reports, prospectuses and other
correspondence from the Fund to shareholders; providing regular communications
and investor education materials to shareholders, which may include
communications via electronic means, such as electronic mail; providing certain
shareholder services not handled by the Fund’s transfer agent or other
intermediaries; communicating with investment advisors whose clients own or hold
shares of the Fund; and providing such other information and assistance to
shareholders as may be reasonably requested by such shareholders.
Portfolio Managers
The
Fund is managed by a Lead Manager, who is primarily responsible for its
day‑to‑day investment management decisions. The Lead Manager is supported by and
consults with a Co‑Manager, who is not primarily responsible for portfolio
management.
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JOHN PAUL
LECH |
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John Paul Lech is a Portfolio Manager
at Matthews and manages the firm’s Emerging Markets Equity and Emerging
Markets ex China Strategies. Prior to joining the firm in 2018, he spent
most of his 10 years at OppenheimerFunds as an Analyst and Portfolio
Manager on a diversified emerging market equity strategy. John Paul
started his career as an Analyst and Associate at Citigroup Global
Markets, Inc. He is fluent in Spanish and conversational in French and
Portuguese. John Paul earned both an M.A. and a B.S.F.S. from the Walsh
School of Foreign Service at Georgetown University. John Paul has been a
Portfolio Manager of the Matthews Emerging Markets Equity Fund since its
inception in 2020, of the Matthews Emerging Markets Equity Active ETF
since its inception in 2022 and of the Matthews Emerging Markets ex China
Active ETF since its inception in 2023. |
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Lead
Manager
Matthews
Emerging Markets Equity Fund
Matthews
Emerging Markets Equity Active ETF
Matthews
Emerging Markets ex China Active ETF |
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MANAGEMENT OF THE FUND |
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ALEX
ZARECHNAK |
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Alex Zarechnak is a Portfolio Manager
at Matthews Asia and co‑manages the firm’s Emerging Markets Equity and
Emerging Markets ex China Strategies. Prior to joining the firm in 2020,
he spent a total of 15 years (1998 – 2006 and 2012 – 2019) at Wellington
Management as an analyst for the firm’s flagship Emerging Markets Equity
Fund as a generalist first covering CEEMEA, then Latin America. From 2006-
2012, he was a regional equity analyst at Capital Group, covering Emerging
Markets with a focus on energy, telecoms and consumer sectors in Latin
America and CEEMEA. Alex began his Emerging Markets career as a Russia
equity analyst with Templeton Emerging Markets, based in Moscow. He earned
a B.A. in Economics and Government from the College of William and Mary.
Alex is fluent in Russian. Alex has been a Portfolio Manager of the
Matthews Emerging Markets Equity Fund and the Matthews Emerging Markets
Equity Active ETF since 2022 and Matthews Emerging Markets ex China Active
ETF since its inception in 2023. |
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Co‑Manager
Matthews
Emerging Markets Equity Fund
Matthews
Emerging Markets Equity Active ETF
Matthews
Emerging Markets ex China Active ETF |
The
investment team travels to Asian and emerging market countries from time to time
to conduct research relating to those markets. The Fund’s SAI provides
additional information about the Lead Manager’s compensation, other accounts
managed by the Lead Manager, and the Lead Manager’s ownership of securities in
the Fund.
Important Information
Book
Entry
Shares
of the Fund are held in book-entry form, which means that no stock certificates
are issued. The Depository Trust Company (“DTC”) or its nominee is the record
owner of all outstanding Fund shares.
Investors
owning shares of the Fund are beneficial owners as shown on the records of DTC
or its participants. DTC serves as the securities depository for all Shares.
DTC’s participants include securities brokers and dealers, banks, trust
companies, clearing corporations, and other institutions that directly or
indirectly maintain a custodial relationship with DTC. As a beneficial owner of
Fund shares, you are not entitled to receive physical delivery of stock
certificates or to have the shares registered in your name, and you are not
considered a registered owner of the shares. Therefore, to exercise any right as
an owner of Fund shares, you must rely upon the procedures of DTC and its
participants. These procedures are the same as those that apply to any other
securities that you hold in book-entry or “street name” through your brokerage
account.
Share
Market Prices on the Exchange
Market
prices of Fund shares on the Exchange may differ from the Fund’s daily NAV.
Market forces of supply and demand, economic conditions, and other factors may
affect the market prices of Fund shares. To provide additional information
regarding the indicative value of Fund shares, the Exchange or a market data
vendor disseminates information every 15 seconds through the facilities of the
Consolidated Tape Association or other widely disseminated means an updated
“intraday indicative value” (“IIV”) for Fund shares as calculated by an
information provider or market data vendor. The Fund is not involved in or
responsible for any aspect of the calculation or dissemination of the IIVs and
make no representation or warranty as to the accuracy of the IIVs. If the
calculation of the IIV is based on the basket of Deposit Securities and/or a
designated amount of U.S. cash, such IIV may not represent the best possible
valuation of the Fund’s portfolio because the basket of Deposit Securities does
not necessarily reflect the precise composition of the Fund’s current portfolio
at a particular point in time and does not include a reduction for the fees,
operating expenses, or transaction costs incurred by the Fund. The IIV should
not be viewed as a “real-time” update of the Fund’s NAV because the IIV may not
be calculated in the same manner as the NAV, which is computed only once a day,
typically at the end of the business day. The IIV is generally determined by
using both current market quotations and/or price quotations obtained from
broker-dealers that may trade in the Deposit Securities.
Market
Timing Activities
The
Fund imposes no restrictions on the frequency of purchases and redemptions of
Fund shares. In determining not to adopt a policy restricting frequent trading
in the Fund, the Board evaluated the risks of market timing activities by the
Fund’s shareholders. Purchases and redemptions by APs, who are the only parties
that may purchase or redeem Fund shares directly with the Fund, are an essential
part of the ETF process and help keep share market prices in line with NAV. As
such, the Fund accommodates frequent purchases and redemptions by APs. However,
frequent purchases and redemptions for cash may affect returns, increase
portfolio transaction costs and may lead to the realization of capital gains. To
minimize these potential consequences of frequent purchases and redemptions, the
Fund employs fair value pricing and may impose transaction fees on purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by
the Fund in effecting purchase/redemption activity.
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Determination
of Net Asset Value
NAV
is computed once daily as of the close of regular trading on the NYSE, generally
4:00 PM Eastern Time, on each day that the exchange is open for trading. In
addition to Saturday and Sunday, the NYSE is closed on the days that the
following holidays are observed: New Year’s Day, Martin Luther King, Jr. Day,
Washington’s Birthday, Good Friday, Memorial Day, Juneteenth National
Independence Day, Independence Day, Labor Day, Thanksgiving and Christmas
Day.
The
NAV of the Fund is computed by adding the value of all securities and other
assets of the Fund, deducting any liabilities of the Fund, and dividing by the
total number of outstanding shares of the Fund.
The
Fund’s portfolio securities and other assets for which market quotations are
readily available are valued at market value. A market quotation is readily
available only when that quotation is a quoted price (unadjusted) in active
markets for identical investments that the Fund can access at the measurement
date, provided that a quotation will not be readily available if it is not
reliable. Market value is generally determined on the basis of last reported
sales prices. For exchange-traded securities, market value also may be
determined on the basis of the exchange’s official closing price or settlement
price instead of the last reported sales prices. Market quotations are provided
by pricing sources that are independent of the Fund and Matthews. Foreign
exchange-traded securities are valued as of the close of trading of the primary
exchange on which they trade. Securities that trade in over‑the‑counter markets,
including most debt securities (bonds), may be valued using indicative bid
quotations from bond dealers or market makers, or other available market
information, or on their fair value as determined under the direction of
Matthews as the valuation designee (“Valuation Designee”) for the Fund, as
designated by the Board pursuant to Rule 2a‑5 under the Investment Company Act
of 1940, as amended. The Fund may also utilize independent pricing sources to
assist it in determining a current market value for each security based on
sources believed to be reliable.
Foreign
values of the Fund’s securities are converted to U.S. dollars using exchange
rates determined as of 4 p.m. London time and in accordance with the Fund’s
Pricing and Valuation Policy and Procedures. The Fund generally uses the foreign
currency exchange rates deemed to be most appropriate by a foreign currency
pricing service that is independent of the Fund and Matthews.
When
market quotations are not readily available or are believed by Matthews to be
unreliable, the Fund’s investments are valued at fair value. The Fund values any
exchange-traded security for which market quotations are unavailable (e.g., when trading of a security is suspended)
or have become unreliable, and any over‑the‑counter security for which
indicative quotes are unavailable, at that security’s fair market value. In
general, the fair value of such securities is determined, in accordance with the
Fund’s Pricing and Valu-
ation
Policy and Procedures and subject to the determination of the Valuation Designee
and the oversight of the Board, by a pricing source retained by the Fund that is
independent of the Fund and Matthews. There may be circumstances in which the
Fund’s independent pricing service is unable to provide a reliable price of a
security.
In
addition, when establishing a security’s fair value, the independent pricing
source may not take into account events that occur after the close of Asian and
other foreign markets but prior to the time the Fund calculates its NAV.
Similarly, there may be circumstances in which a foreign currency exchange rate
is deemed inappropriate for use by the Fund or multiple appropriate rates exist.
In such circumstances, the Valuation Designee will make fair value
determinations. In these circumstances, the Valuation Designee will determine
the fair value of a security, or a fair exchange rate, in good faith, in
accordance with the Fund’s Pricing and Valuation Policy and Procedures and
subject to the oversight of the Board. Changes in the Fund’s NAV may not track
changes in published indices of, or benchmarks for, Asia Pacific and other
foreign market securities.
Foreign
securities held by the Fund may be traded on days and at times when the NYSE is
closed, and the NAV is therefore not calculated. Accordingly, the NAV of the
Fund may be significantly affected on days when shareholders have no access to
the Fund. For valuation purposes, quotations of foreign portfolio securities,
other assets and liabilities, and forward contracts stated in foreign currency
are translated into U.S. dollar equivalents at the prevailing market
rates.
Indian
securities in the Fund may be subject to a short-term capital gains tax in India
on gains realized upon disposition of securities lots held less than one year.
The Fund accrue for this potential expense, which reduces its net asset value.
For further information regarding this tax, please see page 28.
Other Shareholder
Information
Disclosure
of Portfolio Holdings
A
description of the Fund’s policies and procedures with respect to the disclosure
of the Fund’s portfolio securities is available in the Fund’s SAI, which is
available on the Matthews Asia Funds website at matthewsasia.com.
Other
Compensation to Intermediaries
Matthews,
out of its own resources and without additional cost to the Fund or its
shareholders, may provide additional cash payments or non‑cash compensation to
intermediaries who sell shares of the Fund. The level of payments will vary for
each particular intermediary. These additional cash payments generally represent
some or all of the following: (a) payments to intermediaries to help defray
the costs incurred to educate and train personnel about the Fund;
(b) marketing support fees for providing assistance in promoting the sale
of Fund shares; (c) access to sales meetings, sales representatives and
management representatives of the intermediary; and (d) inclusion of the
Fund on the sales list,
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including
a preferred or select sales list, or other sales program of the intermediary. A
number of factors will be considered in determining the level of payments,
including the intermediary’s sales, assets and redemption rates, as well as the
nature and quality of the intermediary’s relationship with Matthews. Aggregate
payments may change from year to year and Matthews will, on an annual basis,
determine the advisability of continuing these payments. Shareholders who
purchase or hold shares through an intermediary may inquire about such payments
from that intermediary.
Distributions
The
Fund generally distributes its net investment income once annually in December.
Any net realized gain from the sale of portfolio securities and net realized
gains from foreign currency transactions are distributed at least once each year
unless they are used to offset losses carried forward from prior years. The Fund
will declare and pay income and capital gain distributions in cash.
Distributions in cash may be reinvested automatically in additional whole shares
of the Fund only if the broker through whom you purchased your shares makes such
option available. Your broker is responsible for distributing the income and
capital gain distributions to you. Distributions are treated the same for tax
purposes whether received in cash or reinvested. If you buy shares when the Fund
has realized but not yet distributed ordinary income or capital gains, you will
be “buying a dividend” by paying the full price of the shares and then receiving
a portion of the price back in the form of a taxable dividend.
Taxes
This
section summarizes certain income tax considerations that may affect your
investment in the Fund. You are urged to consult your tax advisor regarding the
tax effects to you of an investment in the Fund based on your individual tax
situation. The tax consequences of an investment in the Fund depends on the type
of account that you have and your
particular
tax circumstances. Distributions are subject to federal income tax and may also
be subject to state and local income taxes. The Fund intends to make
distributions that may be taxed as ordinary income and capital gains (which may
be taxable at different rates depending on the length of time the Fund holds its
assets). Distributions are generally taxable when they are paid, whether in cash
or by reinvestment. Distributions declared in October, November or December and
paid the following January are taxable as if they were paid on December
31.
Part
of a distribution may include realized capital gains, which may be taxed at
different rates depending on how long the Fund has held specific
securities.
In
mid‑February, if applicable, you will be sent a Form 1099‑DIV or other Internal
Revenue Service (“IRS”) forms, as required, indicating the tax status of any
distributions made to you. This information will be reported to the IRS. If the
total distributions you received for the year are less than $10, you may not
receive a Form 1099‑DIV. Please note retirement account shareholders will not
receive a Form 1099‑DIV.
Speak
with your tax advisor concerning state and local tax laws, which may produce
different consequences than those under federal income tax laws.
In
addition, the Fund may be subject to short-term capital gains tax in India on
gains realized upon disposition of Indian securities held less than one year.
The tax is computed on net realized gains; any realized losses in excess of
gains may be carried forward for a period of up to eight years to offset future
gains. Any net taxes payable must be remitted to the Indian government prior to
repatriation of sales proceeds. The Fund accrues a deferred tax liability for
net unrealized short-term gains in excess of available carryforwards on Indian
securities. This accrual may reduce the Fund’s net asset value.
You
should read the tax information in the Statement of Additional Information,
which supplements the information above and is a part of this prospectus. The
Fund does not expect to request an opinion of counsel or rulings from the IRS
regarding their tax status or the tax consequences to investors in the
Fund.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The IRS may
assert, however, that a loss that is realized upon an exchange of
secu-
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rities
for Creation Units may not be currently deducted under the rules governing “wash
sales” (for an AP who does not mark‑to‑market their holdings), or on the basis
that there has been no significant change in economic position. Persons
exchanging securities should consult their own tax advisor with respect to
whether wash sale rules apply and when a loss might be deductible.
Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares comprising the Creation
Units have been held for more than one year and as a short-term capital gain or
loss if such Shares have been held for one year or less. The Fund may include a
payment of cash in addition to, or in place of, the delivery of a basket of
securities upon the redemption of Creation Units. The Fund may sell portfolio
securities to obtain the cash needed to distribute redemption proceeds. This may
cause the Fund to recognize investment income and/or capital gains or losses
that it might not have recognized if it had completely satisfied the redemption
in‑kind. As a result, the Fund may be less tax efficient if it includes such a
cash payment in the proceeds paid upon the redemption of Creation Units.
Distributor
Foreside
Funds Distributors LLC (the “Distributor”) is a broker-dealer registered with
the U.S. Securities and Exchange Commission and a member of the Financial
Industry Regulatory Authority, Inc. (“FINRA”). The Distributor distributes
Creation Units for the Fund on an agency basis and does not maintain a secondary
market in Fund shares. The Distributor has no
role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is Three Canal Plaza,
Suite 100, Portland, ME 04101.
Premium/Discount
Information
Information
regarding how often Shares traded on the Exchange at a price above (i.e., at a premium) or below (i.e., at a discount) the NAV per Share is
available, free of charge, on the Fund’s website at matthewsasia.com.
Additional
Notices
Shares
of the Fund are not sponsored, endorsed, or promoted by the Exchange. The
Exchange is not responsible for, nor has it participated in the determination
of, the timing, prices, or quantities of Fund shares to be issued, nor in the
determination or calculation of the equation by which Fund shares are
redeemable. The Exchange has no obligation or liability to owners of Fund shares
in connection with the administration, marketing, or trading of those
shares.
Without
limiting any of the foregoing, in no event shall the Exchange have any liability
for any lost profits or indirect, punitive, special, or consequential damages
even if notified of the possibility thereof.
Financial Highlights
The
Fund has not yet commenced operations as of the date of this prospectus. As a
result, audited financial highlights are not available for the Fund as of the
date of this prospectus.
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Index
Definitions
It
is not possible to invest directly in an index. The performance of foreign
indices may be based on different exchange rates than those used by the Fund
and, unlike the Fund’s NAV, is not adjusted to reflect fair value at the close
of regular trading on the NYSE (generally 4:00 PM Eastern Time) on each day that
the exchange is open for trading.
The
MSCI Emerging Markets ex China Index is a free float-adjusted market
capitalization-weighted index of the stock markets of: Brazil, Chile, Colombia,
Czech Republic, Egypt, Greece, Hungary, India, Indonesia, Kuwait, Malaysia,
Mexico, Peru, Philippines, Poland, Qatar, Saudi Arabia, South Africa, South
Korea, Taiwan, Thailand, Turkey and United Arab Emirates.
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Investment Advisor
Matthews
International Capital Management, LLC
Administrator, Transfer
Agent and Custodian
BNY
Mellon
301
Bellevue Parkway
Wilmington,
DE 19809
For
additional information about
Matthews
Asia Funds:
matthewsasia.com
833.228.5605
Matthews Asia Funds
Three Canal Plaza, Suite
100
Portland, ME 04101
Fund
Information:
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Fund |
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Symbol |
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CUSIP |
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Matthews
Emerging Markets ex China Active ETF |
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MEMX |
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577125792 |
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Shareholder
Reports
Additional
information about the Fund’s investments will be available in the Fund’s annual
reports (audited by independent accountants) and semi-annual reports. These
reports will contain a discussion of the market conditions and investment
strategies that significantly affected the Fund’s performance during its
reporting period. To reduce the Fund’s expenses, we try to identify related
shareholders in a household and send only one copy of the Fund’s prospectus and
annual and semi-annual reports to that address. This process, called
“householding,” will continue indefinitely unless you instruct us otherwise. At
any time you may view the Fund’s current prospectus and annual and semi-annual
reports, free of charge, on the Fund’s website at matthewsasia.com. The Fund’s
current prospectus and annual and semi-annual reports are also available to you,
without charge, upon request.
Statement
of Additional Information (SAI)
The
SAI, which is incorporated into this prospectus by reference and dated December
30, 2022, is available to you, without charge, upon request or through the
Fund’s website at matthewsasia.com. It contains additional information about the
Fund.
HOW
TO OBTAIN ADDITIONAL INFORMATION
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Contacting
Matthews Asia Funds |
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You
can obtain free copies of the publications described above by visiting the
Fund’s website at matthewsasia.com. To request the
SAI, the Fund’s annual and semi-annual reports and other information about
the Fund or to make shareholder inquiries, contact the Fund at:
Matthews
Asia Funds
Three
Canal Plaza,
Suite
100
Portland,
ME 04101
833.228.5605 |
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Obtaining Information from the SEC |
|
Reports and other information about the
Fund are available on the EDGAR Database on the SEC’s Internet site at
http://www.sec.gov, and copies of this information may be obtained, after
paying a duplication fee, by electronic request at the following E‑mail
address: [email protected]. |
Three
Canal Plaza, Suite 100 | Portland, ME
04101 | matthewsasia.com | 833.228.5605
Investment
Company Act File Number: 811‑08510