As filed with the Securities and Exchange Commission on August 29, 2022
Securities Act File No. 333-183489
Investment Company Act File No. 811-22739
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
| REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 | | | ☐ | |
| Pre-Effective Amendment No. | | | ☐ | |
| Post-Effective Amendment No. 91 | | | ☒ | |
| | | | and/or | |
| REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 | | | ☐ | |
| Amendment No. 97 | | | ☒ | |
INDEXIQ ACTIVE ETF TRUST
(Exact Name of Registrant as Specified in Charter)
51 Madison Avenue
New York, NY 10010
(Address of Principal Executive Office)
Registrant’s Telephone Number, including Area Code: (888) 474-7725
Matthew V. Curtin, Esq.
IndexIQ Advisors LLC
51 Madison Avenue
New York, NY 10010
It is proposed that this filing will become effective (check appropriate box):
☐
Immediately upon filing pursuant to paragraph (b) of Rule 485.
☒
On August 31, 2022 pursuant to paragraph (b) of Rule 485.
☐
60 days after filing pursuant to paragraph (a)(1) of Rule 485.
☐
On (date) pursuant to paragraph (a) of Rule 485.
☐
75 days after filing pursuant to paragraph (a)(2) of Rule 485.
☐
On (date) pursuant to paragraph (a) of Rule 485.
If appropriate, check the following box:
☐
This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
IndexIQ Active ETF Trust
Prospectus
August 31, 2022
IQ MacKay Municipal Insured ETF (MMIN)
IQ MacKay Municipal Short Duration ETF (MMSD)
IQ MacKay Municipal Intermediate ETF (MMIT)
IQ MacKay California Municipal Intermediate ETF (MMCA)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
As permitted by regulations adopted by the Securities and Exchange Commission, paper copies of each Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you hold accounts through a financial intermediary, you may contact your financial intermediary to enroll in electronic delivery. Please note that not all financial intermediaries may offer this service.
You may elect to receive all future reports in paper free of charge. If you hold accounts through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held with your financial intermediary.
Not FDIC Insured | May Lose Value | No Bank Guarantee
IndexIQ Active ETF Trust (the “Trust”) is a registered investment company that consists of separate investment portfolios called “Funds”. This Prospectus relates to the following Funds:
Name | | | CUSIP | | | Symbol | | | Exchange | |
IQ MacKay Municipal Insured ETF | | | 45409F843 | | | MMIN | | | NYSE Arca | |
IQ MacKay Municipal Short Duration ETF | | | 45409F835 | | | MMSD | | | NYSE Arca | |
IQ MacKay Municipal Intermediate ETF | | | 45409F827 | | | MMIT | | | NYSE Arca | |
IQ MacKay California Municipal Intermediate ETF | | | 45409F777 | | | MMCA | | | NYSE Arca | |
Each Fund is an exchange-traded fund. This means that shares of the Funds are listed on a national securities exchange (the “Exchange”) and trade at market prices. The market price for a Fund’s shares may be different from its net asset value per share (the “NAV”). Each Fund has its own CUSIP number and exchange trading symbol.
| | | | | | 4 | | |
| | | | | | 12 | | |
| | | | | | 19 | | |
| | | | | | 26 | | |
| | | | | | 34 | | |
| | | | | | 34 | | |
| | | | | | 35 | | |
| | | | | | 35 | | |
| | | | | | 44 | | |
| | | | | | 45 | | |
| | | | | | 46 | | |
| | | | | | 48 | | |
| | | | | | 49 | | |
| | | | | | 49 | | |
| | | | | | 50 | | |
| | | | | | 50 | | |
| | | | | | 51 | | |
| | | | | | 51 | | |
| | | | | | 56 | | |
| | | | | | 56 | | |
| | | | | | 56 | | |
| | | | | | 58 | | |
| | | | | | 62 | | |
IQ MacKay Municipal Insured ETF
Investment Objective
The IQ MacKay Municipal Insured ETF (the “Fund”) seeks current income exempt from federal income tax.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
|
Management Fee |
|
|
|
|
0.40% |
|
|
|
Distribution and/or Service (12b-1) Fees |
|
|
|
|
0.00% |
|
|
|
Other Expenses |
|
|
|
|
0.09% |
|
|
|
Total Annual Fund Operating Expenses(a) |
|
|
|
|
0.49% |
|
|
|
Expense Waiver/Reimbursement(a)
|
|
|
|
|
0.19% |
|
|
|
Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement |
|
|
|
|
0.30% |
|
|
(a)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
$31 |
|
|
$97 |
|
|
$169 |
|
|
$381 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 80% of the average value of the portfolio. This rate excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares.
Principal Investment Strategies
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active management strategy to meet its investment objective. Consequently, investors should not expect the Fund’s returns to track the returns of any index or market for any period of time.
The Fund, under normal circumstances, invests at least 80% of its assets (net assets plus borrowings for investment purposes) in: (i) debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal Income tax (“Municipal Bonds”); and (ii) debt securities covered by an insurance policy guaranteeing the payment of principal and interest. The Fund typically invests at least 80% of its net assets in Municipal Bonds that are rated investment grade by at least one independent rating agency (i.e., within the highest four quality ratings by Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services or Fitch Ratings, Inc.). If independent rating agencies assign different ratings to the same security, the Fund will use the higher rating for purposes of determining the security’s credit quality. The Fund generally will maintain a dollar-weighted average duration of 3 to 15 years.
Municipal Bonds are issued by or on behalf of the District of Columbia, states, territories, commonwealths and possessions of the United States and their political subdivisions and agencies, authorities and instrumentalities. The Fund may not invest more than 20% of its net assets in tax-exempt securities subject to the federal alternative minimum tax.
Insured Municipal Bonds are covered by insurance policies that guarantee the timely payment of principal and interest. The Fund generally purchases Municipal Bonds that have insurance in place so the Fund does not pay insurance premiums directly. The premium costs, however, are reflected in a lower yield and/or higher price for the insured Municipal Bonds. When beneficial, the Fund may purchase insurance for an uninsured bond directly from a qualified Municipal Bond insurer, in which case the Fund pays the insurance premium directly to the insurance company. It is important to note that insurance does not guarantee the market value of an insured security, or the Fund’s share price or distributions, and shares of the Fund are not insured.
The Fund may invest more than 25% of its total assets in Municipal Bonds that are related in such a way that an economic, business or political development or change affecting one such security could also affect the other securities. However, the Fund’s investments will be diversified among a minimum of ten different sectors of the Municipal Bond market, such as education, transportation and local general obligation. The Fund’s investments will be diversified among at least 15 different states, with no more than 30% of the Fund’s securities invested in municipal securities from a single state. Some of the Fund’s earnings may be subject to federal tax and most may be subject to state and local taxes.
MacKay Shields LLC’s (the “Subadvisor”) investment process begins with an assessment of macro factors that may impact the Municipal Bond market, including, tax rates, U.S. Treasury rates, and global economic data, as well as other regulatory, tax, governmental, and technical factors that may impact the Municipal Bond market. Additionally, the Subadvisor may give consideration to certain environmental, social and governance (“ESG”) criteria when evaluating an investment opportunity. Following the assessment of these factors, the Subadvisor develops an investment strategy to position the Fund among various sectors of the Municipal Bond market and different states. The Subadvisor then employs a fundamental, “bottom-up” credit research analysis to select individual Municipal Bonds.
The Subadvisor may sell a security if it no longer believes the security will contribute to meeting the investment objective of the Fund. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy and meaningful changes in the issuer’s financial condition.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Fund’s Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not a bank deposit and it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, the Advisor or any of its affiliates. You should consider carefully the following risks before investing in the Fund.
Authorized Participant Concentration Risk
Only certain large institutions may engage in creation or redemption transactions directly with the Fund (each, an “Authorized Participant”). The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or
counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Focused Investment Risk
To the extent that the Fund invests a large percentage of its assets in a single asset class or the securities of issuers within the same country, group of countries, region, industry, group of industries or sector, an adverse economic, market, political or regulatory development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. Different asset classes, countries, groups of countries, regions, industries, groups of industries or sectors tend to go through cycles of outperformance and underperformance in comparison to each other and to the general financial markets.
Income Risk
The Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because the Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of securities held by the Fund to decline. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities.
During periods of falling interest rates, an issuer of a callable security held by the Fund may “call” or repay the security before its stated maturity, which may result in the Fund having to reinvest the proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments.
Issuer Risk
The performance of the Fund depends on the performance of individual securities to which the Fund has exposure. Changes to the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on a Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. As a result, the Fund may be forced to accept a lower price to sell a Municipal Bond, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance.
Municipal Bond Risk
Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. The values of Municipal Bonds held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. This risk would be heightened to the extent that the Fund invests a substantial portion of its assets in Municipal Bonds issued pursuant to similar projects or whose interest is paid solely from revenues of similar projects. In addition, income from Municipal Bonds held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or
other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal securities. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Valuation Risk
The Municipal Bonds in which the Fund invests are typically valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such securities, cash flows and transactions for comparable instruments. There is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the Fund.
Municipal Insurance Risk
The Fund’s investments may include investments in insured Municipal Bonds. Municipal security insurance does not guarantee the value either of individual municipal securities or of Shares of the Fund. In addition, a municipal security insurance policy generally will not cover: (i) repayment of a municipal security before maturity (redemption), (ii) prepayment or payment of an acceleration premium (except for a mandatory sinking fund redemption) or any other provision of a bond indenture that advances the maturity of the bond or (iii) non-payment of principal or interest caused by negligence or bankruptcy of the paying agent. A mandatory sinking fund redemption may be a provision of a municipal security issue whereby part of the municipal security issue may be retired before maturity. Market conditions or changes to ratings criteria could adversely impact the ratings of Municipal Bond insurance companies. Downgrades and withdrawal of ratings from Municipal Bond insurers have substantially limited the availability of insurance sought by Municipal Bond issuers, thereby reducing the supply of insured Municipal Bonds that meet the Fund’s investment guidelines or the ability of the Fund to purchase insurance on Municipal Bonds held by the Fund. A rating downgrade of a Municipal Bond insurer could negatively impact the market value of insured Municipal Bonds held by the Fund. If the insurer of a defaulted Municipal Bond were to become unable or unwilling to pay the principal or interest on the defaulted Municipal Bond, the Fund would incur losses.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. The application of ESG criteria may result in the Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and performing differently than other funds and strategies in its peer group that do not take into account ESG criteria or the Fund’s benchmark. There can be no guarantee that the Fund will meet its investment objective(s).
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds). Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Performance Information
The bar chart that follows shows the annual total returns of the Fund for a full calendar year. The table that follows the bar chart shows the Fund’s average annual total return, both before and after taxes. The bar chart and table provide an indication of the risks of investing in the Fund by comparing the Fund’s performance from year to year and by showing how the Fund’s average annual returns for one calendar year compared with its benchmark and additional broad measures of market performance. The Bloomberg Municipal All Insured Bond Index is a total return performance benchmark for municipal bonds that are backed by insurers with Aaa/AAA ratings and have maturities of at least one year.
All returns assume reinvestment of dividends and distributions. The Fund’s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. Performance reflects fee waivers and/or expense reimbursement in effect, if such waivers or reimbursements were not in place, the Fund’s performance would be reduced. Fund performance current to the most recent month-end is available by calling 1-888-474-7725 or by visiting newyorklifeinvestments.com/etf.
The Fund’s year-to-date total returns as of June 30, 2022 was -11.18%.
Best and Worst Quarter Returns (for the period reflected in the bar chart above)
| | | Return | | | Quarter/Year | |
Highest Return | | | | | 2.96% | | | | | | 1Q/2019 | | |
Lowest Return | | | | | -1.43% | | | | | | 1Q/2018 | | |
Average Annual Total Returns as of December 31, 2021
| | | 1 Year | | | Since Inception(1) | |
Returns before taxes | | | | | 1.71% | | | | | | 4.81% | | |
Returns after taxes on distributions(2) | | | | | 1.00% | | | | | | 4.36% | | |
Returns after taxes on distributions and sales of Fund shares(2) | | | | | 1.01% | | | | | | 3.82% | | |
Bloomberg Municipal All Insured Bond Index (reflects no deduction for fees, expenses or taxes) | | | | | 2.46% | | | | | | 4.71% | | |
(1)
(2)
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
MacKay Shields LLC is the investment subadvisor to the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title | | | Length of Service with Subadvisor | | | Length of Service a Fund’s Portfolio Manager | |
Michael Petty, Senior Managing Director | | | Since 2010 | | | Since Inception | |
Frances Lewis, Senior Managing Director | | | Since 2009 | | | Since August 2018 | |
David Dowden, Managing Director | | | Since 2009 | | | Since Inception | |
Scott Sprauer, Senior Managing Director | | | Since 2009 | | | Since Inception | |
John Lawlor, Managing Director | | | Since 2016 | | | Since Inception | |
Michael Denlinger, Director | | | Since 2019 | | | Since August 2020 | |
Peter Bartlett, Senior Managing Director | | | Since 2019 | | | Since August 2020 | |
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a
seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Tax Information
The Fund intends to distribute tax-exempt income. The Fund intends to meet certain U.S. federal tax requirements so that distributions of the tax-exempt interest it earns may be treated as exempt-interest dividends. A portion of the exempt-interest dividends may be subject to the alternative minimum tax on individuals and may have other tax consequences to certain shareholders. However, a portion of the Fund’s distributions may be subject to U.S. federal income tax, and may be taxed as ordinary income, qualified dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case you may be subject to U.S. federal income tax upon withdrawal from such a tax-advantaged account. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
IQ MacKay Municipal Short Duration ETF
Investment Objective
The IQ MacKay Municipal Short Duration ETF (the “Fund”) seeks current income exempt from federal income tax.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
| Management Fee | | | | | 0.30% | | |
| Distribution and/or Service (12b-1) Fees | | | | | 0.00% | | |
| Other Expenses(a) | | | | | 0.17% | | |
| Total Annual Fund Operating Expenses(b) | | | | | 0.47% | | |
| Expense Waiver/Reimbursement(b) | | | | | 0.17% | | |
| Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement | | | | | 0.30% | | |
(a)
(b)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
$31 |
|
|
$134 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. This rate excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares. As of the date of this Prospectus, the Fund had not yet commenced operations.
Principal Investment Strategies
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active management strategy to meet its investment objective. Consequently, investors should not expect the Fund’s returns to track the returns of any index or market for any period of time.
The Fund, under normal circumstances, invests at least 80% of its assets (net assets plus borrowings for investment purposes) in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal income tax (“Municipal Bonds”). The Fund typically invests at least 80% of its net assets in Municipal Bonds that are rated investment grade by at least one independent rating agency (i.e., within the highest four quality ratings by Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services
or Fitch Ratings, Inc.). If independent rating agencies assign different ratings to the same security, the Fund will use the higher rating for purposes of determining the security’s credit quality. The Fund generally will maintain a dollar-weighted average duration of zero to three years.
Municipal Bonds are issued by or on behalf of the District of Columbia, states, territories, commonwealths and possessions of the United States and their political subdivisions and agencies, authorities and instrumentalities. The Fund may not invest more than 20% of its net assets in tax-exempt securities subject to the federal alternative minimum tax.
The Fund may invest more than 25% of its total assets in Municipal Bonds that are related in such a way that an economic, business or political development or change affecting one such security could also affect the other securities. However, the Fund’s investments will be diversified among a minimum of ten different sectors of the Municipal Bond market, such as education, transportation and local general obligation. The Fund’s investments will be diversified among at least 15 different states, with no more than 30% of the Fund’s securities invested in municipal securities from a single state. Some of the Fund’s earnings may be subject to federal tax and most may be subject to state and local taxes.
MacKay Shields LLC’s (the “Subadvisor”) investment process begins with an assessment of macro factors that may impact the Municipal Bond market, including tax rates, U.S. Treasury rates, and global economic data, as well as other regulatory, tax, governmental, and technical factors that may impact the Municipal Bond market. Additionally, the Subadvisor may give consideration to certain environmental, social and governance (“ESG”) criteria when evaluating an investment opportunity. Following the assessment of these factors, the Subadvisor develops an investment strategy to position the Fund among various sectors of the Municipal Bond market and different states. The Subadvisor then employs a fundamental, “bottom-up” credit research analysis to select individual Municipal Bonds.
The Subadvisor may sell a security if it no longer believes the security will contribute to meeting the investment objective of the Fund. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy and meaningful changes in the issuer’s financial condition.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You should consider carefully the following risks before investing in the Fund. A more complete discussion of Principal Risks is included under “Description of the Principal Risks of the Fund.”
Authorized Participant Concentration Risk
Only certain large institutions may engage in creation or redemption transactions directly with the Fund (each, an “Authorized Participant”). The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Focused Investment Risk
To the extent that the Fund invests a large percentage of its assets in a single asset class or the securities of issuers within the same country, group of countries, region, industry, group of industries or sector, an adverse economic, market, political or regulatory development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. Different asset classes, countries, groups of countries, regions, industries, groups of industries or sectors tend to go through cycles of outperformance and underperformance in comparison to each other and to the general financial markets.
Income Risk
The Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because the Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities
Interest Rate Risk
An increase in interest rates may cause the value of securities held by the Fund to decline. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities.
During periods of falling interest rates, an issuer of a callable security held by the Fund may “call” or repay the security before its stated maturity, which may result in the Fund having to reinvest the proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments.
Issuer Risk
The performance of the Fund depends on the performance of individual securities to which the Fund has exposure. Changes to the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on a Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. As a result, the Fund may be forced to accept a lower price to sell a Municipal Bond, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance.
Municipal Bond Risk
Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. The values of Municipal Bonds held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. This risk would be heightened to the extent that the Fund invests a substantial portion of its assets in Municipal Bonds issued pursuant to similar projects or whose interest is paid solely from revenues of similar projects. In addition, income from Municipal Bonds held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or
other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal securities. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Valuation Risk
The Municipal Bonds in which the Fund invests are typically valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such securities, cash flows and transactions for comparable instruments. There is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the Fund.
New Fund Risk
As a new fund, there can be no assurance that the Fund will grow to or maintain an economically viable size or it could ultimately liquidate. Like other new funds, large inflows and outflows may impact the Fund’s market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. The application of ESG criteria may result in the Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and (ii) performing differently than other funds and strategies in its peer group that do not take into account ESG criteria or the Fund’s benchmark. There can be no guarantee that the Fund will meet its investment objective(s).
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular
trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds). Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Performance Information
As of the date of this Prospectus, the Fund has not yet commenced operations and therefore does not report its performance information.
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
MacKay Shields LLC is the investment subadvisor to the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title | | | Length of Service with Subadvisor | | | Length of Service as Fund’s Portfolio Manager | |
Michael Petty, Senior Managing Director | | | Since 2010 | | | Since Inception | |
Frances Lewis, Senior Managing Director | | | Since 2009 | | | Since Inception | |
David Dowden, Managing Director | | | Since 2009 | | | Since Inception | |
Scott Sprauer, Senior Managing Director | | | Since 2009 | | | Since Inception | |
John Lawlor, Managing Director | | | Since 2016 | | | Since Inception | |
Michael Denlinger, Director | | | Since 2019 | | | Since August 2020 | |
Peter Bartlett, Senior Managing Director | | | Since 2019 | | | Since August 2020 | |
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Tax Information
The Fund intends to distribute tax-exempt income. The Fund intends to meet certain U.S. federal tax requirements so that distributions of the tax-exempt interest it earns may be treated as exempt-interest dividends. A portion of the exempt-interest dividends may be subject to the alternative minimum tax on individuals and may have other tax consequences to certain shareholders. However, a portion of the Fund’s distributions may be subject to U.S. federal income tax, and may be taxed as ordinary income, qualified
dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case you may be subject to U.S. federal income tax upon withdrawal from such a tax-advantaged account. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
IQ MacKay Municipal Intermediate ETF
Investment Objective
The IQ MacKay Municipal Intermediate ETF (the “Fund”) seeks current income exempt from federal income tax.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
|
Management Fee |
|
|
|
|
0.40% |
|
|
|
Distribution and/or Service (12b-1) Fees |
|
|
|
|
0.00% |
|
|
|
Other Expenses |
|
|
|
|
0.11% |
|
|
|
Total Annual Fund Operating Expenses(a) |
|
|
|
|
0.51% |
|
|
|
Expense Waiver/Reimbursement(a)
|
|
|
|
|
0.21% |
|
|
|
Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement |
|
|
|
|
0.30% |
|
|
(a)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
$31 |
|
|
$97 |
|
|
$169 |
|
|
$381 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rate was 74% of the average value of the portfolio. This rate excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares.
Principal Investment Strategies
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active management strategy to meet its investment objective. Consequently, investors should not expect the Fund’s returns to track the returns of any index or market for any period of time.
The Fund, under normal circumstances, invests at least 80% of its assets (net assets plus borrowings for investment purposes) in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal income tax (“Municipal Bonds”). The Fund typically invests at least 80% of its net assets in Municipal Bonds that are rated investment grade by at least one independent rating agency (i.e., within the highest four quality ratings by Moody’s Investors Service, Inc., Standard & Poor’s Ratings Services or Fitch Ratings, Inc.). If independent rating agencies assign different ratings to the same security, the Fund will use the higher rating for purposes of determining the security’s credit quality. The Fund generally will maintain a dollar-weighted average duration of 3 to 10 years.
Municipal Bonds are issued by or on behalf of the District of Columbia, states, territories, commonwealths and possessions of the United States and their political subdivisions and agencies, authorities and instrumentalities. The Fund does not intend to invest in Municipal Bonds whose interest is subject to the federal alternative minimum tax.
The Fund may invest more than 25% of its total assets in Municipal Bonds that are related in such a way that an economic, business or political development or change affecting one such security could also affect the other securities. However, the Fund’s investments will be diversified among a minimum of ten different sectors of the Municipal Bond market, such as education, transportation and local general obligation. The Fund’s investments will be diversified among at least 15 different states, with no more than 30% of the Fund’s securities invested in municipal securities from a single state. Some of the Fund’s earnings may be subject to federal tax and most may be subject to state and local taxes.
MacKay Shields LLC’s (the “Subadvisor”) investment process begins with an assessment of macro factors that may impact the Municipal Bond market, including tax rates, U.S. Treasury rates, and global economic data, as well as other regulatory, tax, governmental, and technical factors that may impact the Municipal Bond market. Additionally, the Subadvisor may give consideration to certain environmental, social and governance (“ESG”) criteria when evaluating an investment opportunity. Following the assessment of these factors, the Subadvisor develops an investment strategy to position the Fund among various sectors of the Municipal Bond market and different states. The Subadvisor then employs a fundamental, “bottom-up” credit research analysis to select individual Municipal Bonds.
The Subadvisor may sell a security if it no longer believes the security will contribute to meeting the investment objective of the Fund. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy and meaningful changes in the issuer’s financial condition.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Fund’s Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not a bank deposit and it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, the Advisor or any of its affiliates. You should consider carefully the following risks before investing in the Fund.
Authorized Participant Concentration Risk
Only certain large institutions may engage in creation or redemption transactions directly with the Fund (each, an “Authorized Participant”). The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective
measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Focused Investment Risk
To the extent that the Fund invests a large percentage of its assets in a single asset class or the securities of issuers within the same country, group of countries, region, industry, group of industries or sector, an adverse economic, market, political or regulatory development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. Different asset classes, countries, groups of countries, regions, industries, groups of industries or sectors tend to go through cycles of outperformance and underperformance in comparison to each other and to the general financial markets.
Income Risk
The Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because the Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of securities held by the Fund to decline. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities.
During periods of falling interest rates, an issuer of a callable security held by the Fund may “call” or repay the security before its stated maturity, which may result in the Fund having to reinvest the proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments.
Issuer Risk
The performance of the Fund depends on the performance of individual securities to which the Fund has exposure. Changes to the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on a Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. As a result, the Fund may be forced to accept a lower price to sell a Municipal Bond, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance.
Municipal Bond Risk
Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. The values of Municipal Bonds held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. This risk would be heightened to the extent that the Fund invests a substantial portion of its assets in Municipal Bonds issued pursuant to similar projects or whose interest is paid solely from revenues of similar projects. In addition, income from Municipal Bonds held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal securities. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Valuation Risk
The Municipal Bonds in which the Fund invests are typically valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such securities, cash flows and transactions for comparable instruments. There is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the Fund.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. The application of ESG criteria may result in the Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and performing differently than other funds and strategies in its peer group that do not take into account ESG criteria or the Fund’s benchmark. There can be no guarantee that the Fund will meet its investment objective(s).
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds). Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Performance Information
The bar chart that follows shows the annual total returns of the Fund for a full calendar year. The table that follows the bar chart shows the Fund’s average annual total return, both before and after taxes. The bar chart and table provide an indication of the risks of investing in the Fund by comparing the Fund’s performance from year to year and by showing how the Fund’s average annual returns for one calendar year compared with its benchmark and additional broad measures of market performance. The Bloomberg Municipal Bond Index 1-15 Year Blend covers the U.S. dollar-denominate long-term tax-exempt bond market. The index has four main sectors state and local general obligation bonds, revenue bonds, insured bonds and pre-refunded bonds.
All returns assume reinvestment of dividends and distributions. The Fund’s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. Performance reflects fee waivers and/or expense reimbursement in effect, if such waivers or reimbursements were not in place, the Fund’s performance would be reduced. Fund performance current to the most recent month-end is available by calling 1-888-474-7725 or by visiting newyorklifeinvestments.com/etf.
The Fund’s year-to-date total returns as of June 30, 2022 was -8.36%.
Best and Worst Quarter Returns (for the period reflected in the bar chart above)
| | | Return | | | Quarter/Year | |
Highest Return | | | | | 3.02% | | | | | | 1Q/2019 | | |
Lowest Return | | | | | -0.88% | | | | | | 1Q/2018 | | |
Average Annual Total Returns as of December 31, 2021
| | | 1 Year | | | Since Inception(1) | |
Returns before taxes | | | | | 1.70% | | | | | | 4.34% | | |
Returns after taxes on distributions(2) | | | | | 0.98% | | | | | | 3.76% | | |
Returns after taxes on distributions and sales of Fund Shares(2) | | | | | 1.03% | | | | | | 3.40% | | |
Bloomberg Municipal Bond Index 1-15 Year Blend (reflects no deduction for fees, expenses or taxes) | | | | | 0.86% | | | | | | 3.13% | | |
(1)
(2)
After-tax returns are calculated using the highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Actual after-tax returns depend on your tax situation and may differ from those
shown and are not relevant if you hold your Shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. In some cases the return after taxes may exceed the return before taxes due to an assumed tax benefit from any losses on a sale of Fund Shares at the end of the measurement period.
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
MacKay Shields LLC is the investment subadvisor to the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title | | | Length of Service with Subadvisor | | | Length of Service as Fund’s Portfolio Manager | |
Michael Petty, Senior Managing Director | | | Since 2010 | | | Since Inception | |
Frances Lewis, Senior Managing Director | | | Since 2009 | | | Since August 2018 | |
David Dowden, Managing Director | | | Since 2009 | | | Since Inception | |
Scott Sprauer, Senior Managing Director | | | Since 2009 | | | Since Inception | |
John Lawlor, Managing Director | | | Since 2016 | | | Since Inception | |
Michael Denlinger, Director | | | Since 2019 | | | Since August 2020 | |
Peter Bartlett, Senior Managing Director | | | Since 2019 | | | Since August 2020 | |
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Tax Information
The Fund intends to distribute tax-exempt income. The Fund intends to meet certain U.S. federal tax requirements so that distributions of the tax-exempt interest it earns may be treated as exempt-interest dividends. A portion of the exempt-interest dividends may be subject to the alternative minimum tax on individuals and may have other tax consequences to certain shareholders. However, a portion of the Fund’s distributions may be subject to U.S. federal income tax, and may be taxed as ordinary income, qualified dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case you may be subject to U.S. federal income tax upon withdrawal from such a tax-advantaged account. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
IQ MacKay California Municipal Intermediate ETF
Investment Objective
The IQ MacKay California Municipal Intermediate ETF (the “Fund”) seeks current income exempt from federal and California income taxes.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
| Management Fee | | | | | 0.45% | | |
| Distribution and/or Service (12b-1) Fees | | | | | 0.00% | | |
| Other Expenses | | | | | 0.28% | | |
| Acquired Fund Fees and Expenses(a) | | | | | 0.01% | | |
| Total Annual Fund Operating Expenses(a)(b) | | | | | 0.74% | | |
| Expense Waiver/Reimbursement(b) | | | | | 0.38% | | |
| Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement | | | | | 0.36% | | |
(a)
(b)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
$37 |
|
|
$116 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal period, the Fund’s portfolio turnover rate was 86% of the average value of the portfolio. This rate excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares.
Principal Investment Strategies
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active management strategy to meet its investment objective. Consequently, investors should not expect the Fund’s returns to track the returns of any index or market for any period of time.
The Fund, under normal circumstances, invests at least 80% of its assets (net assets plus any borrowings for investment purposes) in municipal bonds, whose interest is, in the opinion of bond counsel for the issuers at the time of issuance, exempt from federal and California income taxes. Municipal bonds are generally debt
obligations issued by or on behalf of states, territories and possessions of the United States, and their political subdivisions, agencies and instrumentalities that provide income free from federal, state and potentially local income taxes. If the interest on a particular municipal bond is exempt from federal and California income taxes, the Fund will treat the bond as qualifying for purposes of the 80% policy even though the issuer of the bond may be located outside of California.
Although the Fund may invest in municipal bonds rated in any rating category or in unrated municipal bonds, MacKay Shields LLC (the “Subadvisor”) intends to invest primarily in investment grade quality bonds as rated by at least one nationally recognized statistical rating organization (“NRSRO”) or if unrated, judged to be of comparable quality by the Subadvisor. The Fund may invest up to 20% of its net assets in municipal bonds that are rated below investment grade (commonly referred to as “high-yield securities” or “junk bonds”) as rated by at least one NRSRO, or if unrated, judged to be of comparable quality by the Subadvisor. If NRSROs assign different ratings to the same security, the Fund will use the higher rating for purposes of determining the security’s credit quality. The Fund generally will maintain a portfolio modified duration to worst of 3 to 8 years. Duration to worst is the duration of a bond computed using the bond’s nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates.
Municipal bonds include, among other instruments, general obligation bonds, revenue bonds, industrial revenue bonds, industrial development bonds, private activity bonds, as well as short-term, tax-exempt obligations such as municipal notes and variable rate demand obligations. The Fund may invest up to 20% of its net assets in municipal bonds subject to the federal alternative minimum tax and municipal bonds that pay interest that is subject to federal and/or California income taxes. The Fund may invest more than 25% of its total assets in municipal bonds that are related in such a way that an economic, business or political development or change affecting one such security could also affect the other securities.
If the supply of California state tax-exempt municipal bonds is insufficient to meet the Fund’s investment needs, the Fund may invest in municipal bonds issued by other states. Municipal bonds issued by other states purchased by the Fund will generally be exempt from federal income taxes but may not be exempt from California income taxes.
In choosing investments, the Subadvisor analyzes the credit quality of issuers and considers the yields available on municipal bonds with different maturities.
The Subadvisor uses active management in an effort to identify municipal bonds it believes to be mispriced and to build a consistent yield advantage. The Subadvisor focuses on reducing volatility through a disciplined investment process, which includes fundamental, “bottom-up” credit research and risk management. In addition, the Subadvisor reviews macroeconomic events, technical in the municipal market, tax policies and analyzes individual municipal securities and sectors. The Subadvisor’s investment process includes a risk analysis that gives consideration to a variety of security-specific risks, including but not limited to, environmental, social and governance (“ESG”) risks that may have a material impact on the performance of a security. In addition to proprietary research, the Subadvisor may use screening tools and, to the extent available, third-party data to identify ESG risk factors that may not have been captured through its own research. The Subadvisor’s consideration of ESG risk is weighed against other criteria and therefore does not mean that any sectors, industries or individual securities are explicitly excluded from the Fund.
The Subadvisor may sell a security if it no longer believes the security will contribute to meeting the investment objective of the Fund. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy and meaningful changes in the issuer’s financial condition.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You should consider carefully the following risks before investing in the Fund. A more complete discussion of Principal Risks is included under “Description of the Principal Risks of the Fund.”
Alternative Minimum Tax Risk
Although the interest received from municipal securities is generally exempt from federal income tax, the Fund may invest in municipal securities subject to the federal alternative minimum tax. Accordingly, an investment in the Fund could cause shareholders to be subject to the federal alternative minimum tax.
Authorized Participant Concentration Risk
Only certain large institutions may engage in creation or redemption transactions directly with the Fund (each, an “Authorized Participant”). The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
California State Specific Risk
Because the Fund invests principally in municipal bonds issued by, or on behalf of, the State of California, and its political subdivisions, agencies and instrumentalities, events in California may affect the value of the Fund’s investments and performance. These events may include fiscal or political policy changes, tax base erosion, budget deficits and other financial difficulties. Any deterioration of California’s fiscal situation and economic situation of its municipalities could cause greater volatility and increase the risk of investing in California.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional
round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Focused Investment Risk
To the extent that the Fund invests a large percentage of its assets in a single asset class or the securities of issuers within the same country, group of countries, region, industry, group of industries or sector, an adverse economic, market, political or regulatory development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. Different asset classes, countries, groups of countries, regions, industries, groups of industries or sectors tend to go through cycles of outperformance and underperformance in comparison to each other and to the general financial markets.
High-Yield Municipal Bond Risk
High-yield or non-investment grade municipal bonds (commonly referred to as “junk bonds”) may be subject to increased liquidity risk as compared to other high-yield debt securities. There may be little or no active trading market for certain high-yield municipal bonds, which may make it difficult for the Fund to sell such bonds at or near their perceived value. In such cases, the value of a high-yield municipal bond may decline dramatically, even during periods of declining interest rates. The high-yield municipal bonds in which the Fund intends to invest may be more likely to pay interest that is includable in taxable income for purposes of the federal alternative minimum tax than other municipal bonds.
Income Risk
The Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because the Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of securities held by the Fund to decline. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities.
During periods of falling interest rates, an issuer of a callable security held by the Fund may “call” or repay the security before its stated maturity, which may result in the Fund having to reinvest the proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features.
Issuer Risk
The performance of the Fund depends on the performance of individual securities to which the Fund has exposure. Changes to the financial condition or credit rating of an issuer of those securities may cause the value of the securities to decline.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and
uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the U.S. and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Municipal Bond Market Liquidity Risk
Inventories of municipal bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell municipal bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. As a result, the Fund may be forced to accept a lower price to sell a municipal bond, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance.
Municipal Bond Risk
Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of municipal bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. The values of municipal bonds held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. This risk would be heightened to the extent that the Fund invests a substantial portion of its assets in municipal bonds issued pursuant to similar projects or whose interest is paid solely from revenues of similar projects. In addition, income from municipal bonds held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal securities. There are various different types of municipal bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Valuation Risk
The municipal bonds in which the Fund invests are typically valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such securities, cash flows and transactions for comparable instruments. There is no assurance that the Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to the Fund.
Municipal Insurance Risk
The Fund’s investments may include investments in insured municipal bonds. Municipal security insurance does not guarantee the value either of individual municipal securities or of Shares of the Fund. In addition, a municipal security insurance policy generally will not cover: (i) repayment of a municipal security before maturity (redemption), (ii) prepayment or payment of an acceleration premium (except for a mandatory sinking fund redemption) or any other provision of a bond indenture that advances the maturity of the bond or (iii) non-payment of principal or interest caused by negligence or bankruptcy of the paying agent. A mandatory sinking fund redemption may be a provision of a municipal security issue whereby part of the municipal security issue may be retired before maturity. Market conditions or changes to ratings criteria could adversely impact the ratings of municipal bond insurance companies. Downgrades and withdrawal of ratings from municipal bond insurers have substantially limited the availability of insurance sought by municipal bond issuers, thereby reducing the supply of insured municipal bonds that meet the Fund’s investment guidelines or the ability of the Fund to purchase insurance on municipal bonds held by the Fund. A rating downgrade of a municipal bond insurer could negatively impact the market value of insured municipal bonds held by the Fund. If the insurer of a defaulted municipal bond were to become unable or unwilling to pay the principal or interest on the defaulted municipal bond, the Fund would incur losses.
New Fund Risk
As a new fund, there can be no assurance that the Fund will grow to or maintain an economically viable size. Like other new funds, large inflows and outflows may impact the Fund’s market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. The Subadvisor may give consideration to certain ESG criteria when evaluating an investment opportunity. The application of ESG criteria may result in the Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and (ii) performing differently than other funds and strategies in its peer group that do not take into account ESG criteria or the Fund’s benchmark. There can be no guarantee that the Fund will meet its investment objective(s).
Private Placement and Restricted Securities Risk
The Fund may invest in privately issued securities, including those which may be resold only in accordance with Rule 144A under the Securities Act of 1933, as amended. Securities acquired in a private placement generally are subject to strict restrictions on resale, and there may be no market or a limited market for the resale of such securities. Therefore, the Fund may be unable to dispose of such securities when it desires to do so or at the most favorable price. This potential lack of liquidity also may make it more difficult to accurately value these securities.
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds). Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Variable and Floating Rate Instruments Risk
Variable and floating rate instruments include debt securities issued by corporate and governmental entities, bank loans, mortgage-backed securities and asset-backed securities, preferred equity securities and derivative variable rate securities, such as inverse floaters. Variable and floating rate instruments are structured so that the instrument’s coupon rate fluctuates based upon the level of a reference rate. A variable or floating rate instrument’s coupon rate resets periodically according to its terms. Consequently, in a rising interest rate environment, variable and floating rate instruments with coupon rates that reset infrequently may lag behind the changes in market interest rates.
Performance Information
As of the date of this Prospectus, the Fund has not yet completed a full calendar year of operations and therefore does not report its performance information. The Fund’s performance current to the most recent month-end is available by calling 1-888-474-7725 or by visiting newyorklifeinvestments.com/etf.
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
MacKay Shields LLC is the investment subadvisor to the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title | | | Length of Service with Subadvisor | | | Length of Service as Fund’s Portfolio Manager | |
Michael Denlinger, Director | | | Since 2019 | | | Since Inception | |
John Lawlor, Managing Director | | | Since 2016 | | | Since Inception | |
Michael Petty, Senior Managing Director | | | Since 2010 | | | Since Inception | |
Scott Sprauer, Senior Managing Director | | | Since 2009 | | | Since Inception | |
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a
seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Tax Information
The Fund intends to distribute tax-exempt income. The Fund intends to meet certain U.S. federal tax requirements so that distributions of the tax-exempt interest it earns may be treated as exempt-interest dividends. A portion of the exempt-interest dividends may be subject to the alternative minimum tax on individuals and may have other tax consequences to certain shareholders. However, a portion of the Fund’s distributions may be subject to U.S. federal income tax, and may be taxed as ordinary income, qualified dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account, in which case you may be subject to U.S. federal income tax upon withdrawal from such a tax-advantaged account. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
Overview
The Trust is an investment company consisting of a number of separate investment portfolios (each, a “Fund” and together, the “Funds”) that are structured as exchange-traded funds (“ETFs”). Each share of a Fund represents an ownership interest in the securities and other instruments comprising a Fund’s portfolio. Unlike shares of a mutual fund, which can be bought and redeemed from the issuing fund by all shareholders at a price based on net asset value (“NAV”), shares of an ETF (such as the Funds) are listed on a national securities exchange and trade in the secondary market at market prices that change throughout the day, and may differ from a Fund’s NAV. IndexIQ Advisors LLC (the “Advisor”) is the investment advisor to each Fund and MacKay Shields LLC is the investment subadvisor to each Fund.
Each Fund has a distinct investment objective and policies. Except for the Rule 35d-1 policies discussed below, each of the policies described herein, including the investment objective of each Fund, constitutes a non-fundamental policy that may be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval. Certain fundamental policies of the Funds are set forth in the Funds’ Statement of Additional Information (the “SAI”) under “Investment Restrictions.” There can be no assurance that a Fund’s objective will be achieved.
Description of the Principal Strategies of the Funds
The Funds are actively managed ETFs and thus do not seek to replicate the performance of a specific index. Instead, each Fund uses an active investment strategy to meet its investment objective. The Subadvisor, subject to the oversight of the Advisor and Board, has discretion on a daily basis to manage each Fund’s portfolio in accordance with the Fund’s investment objective and investment policies.
In accordance with Rule 35d-1 under the Investment Company Act of 1940 (the “1940 Act”), the Funds, except for the IQ MacKay California Municipal Intermediate ETF, have each adopted a policy that each will, under normal circumstances, invest at least 80% of the value of its assets (net assets plus the amount of any borrowings for investment purposes) in debt securities whose interest is, in the opinion of bond counsel for the issuer at the time of issuance, exempt from federal income tax. The IQ MacKay California Municipal Intermediate ETF has adopted a policy that it will invest at least 80% of the value of its assets in municipal bonds whose interest is, in the opinion of bond counsel for the issuers at the time of issuance, exempt from federal and California income taxes. These policies are “fundamental,” which means that they may be changed only by the vote of a majority of a Fund’s outstanding shares as defined in the 1940 Act.
IQ MacKay Municipal Insured ETF has also adopted a policy that it will, under normal circumstances, invest at least 80% of its assets (net assets plus the amount of any borrowings for investment purposes) in insured Municipal Bonds. This policy is “non-fundamental,” which means that it may be changed without the vote of a majority of a Fund’s outstanding shares as defined in the 1940 Act. Each Fund has adopted a policy to provide the Fund’s shareholders with at least 60 days’ prior notice of any changes in the Fund’s non-fundamental investment policy with respect to investments of the type suggested by its name. A Fund may count investments in underlying funds toward various guideline tests (such as the 80% test required under Rule 35d-1 under the 1940 Act).
Each Fund’s investments are subject to certain requirements imposed by law and regulation, as well as a Fund’s investment strategy. These requirements are generally applied at the time a Fund invests its assets. If, subsequent to an investment by a Fund, this requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance with this requirement.
The Subadvisor generally gives consideration to ESG criteria when evaluating investment opportunities for the Funds, consistent with each Fund’s investment objective and Principal Investment Strategies. The application of ESG criteria may result in a Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and (ii) performing differently than the Fund’s benchmark or other funds and strategies in the Fund’s peer group that do not take into account ESG criteria. In addition, sectors and securities of companies that meet the ESG criteria may shift into and out of favor depending on market and economic conditions. The consideration of ESG criteria may adversely affect a Fund’s performance. The Subadvisor may give consideration to ESG criteria including, but not limited to, climate change, sustainability, energy resources & management, job creation/employee relations, human rights, health and safety, transparency/disclosures, board expertise, audit practices, transparency and accountability.
Additional Investment Strategies
Borrowing Money
Each Fund may borrow money from a bank as permitted by the 1940 Act or the rules thereunder, or by the U.S. Securities and Exchange Commission (“SEC”) or other regulatory agency with authority over the Fund, but only for temporary or emergency purposes. The 1940 Act presently allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
Temporary Defensive Positions
In times of unusual or adverse market, economic or political conditions or abnormal circumstances (such as large cash inflows or anticipated large redemptions), each Fund may, for temporary defensive purposes or for liquidity purposes (which may be for a prolonged period), invest outside the scope of its principal investment strategies. Under such conditions, a Fund may not invest in accordance with its investment objective or principal investment strategies and, as a result, there is no assurance that the Fund will achieve its investment objective. Under such conditions, each Fund may also invest without limit in cash, money market securities or other investments.
Securities Lending
A Fund may lend its portfolio securities. A securities lending program allows a Fund to receive a portion of the income generated by lending its securities and investing the respective collateral. In connection with such loans, a Fund receives liquid collateral equal to at least 102% (105% for foreign securities) of the value of the portfolio securities being lent. This collateral is marked to market on each trading day.
Description of the Principal Risks of the Funds
Investors in a Fund should carefully consider the risks of investing in the Fund as set forth in the Fund’s Summary Information section under “Principal Risks.” To the extent such risks apply, they are discussed hereunder in greater detail. See also the section on “Additional Risks” for other risk factors.
Alternative Minimum Tax Risk
The following risk applies to the IQ MacKay California Municipal Intermediate ETF
Although the interest received from municipal securities is generally exempt from federal income tax, the Fund may invest in municipal securities subject to the federal alternative minimum tax. Therefore, all or a portion of the Fund’s otherwise exempt interest, may be taxable to shareholders subject to (or result in an increased liability under) the federal alternative minimum tax.
Authorized Participant Concentration Risk
Only an Authorized Participant may engage in creation or redemption transactions directly with a Fund. Each Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with a Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting. This risk may be heightened for ETFs that invest in non-U.S. securities because such securities often involve greater settlement and operational issues for Authorized Participants that may further limit the availability of Authorized Participants.
California State Specific Risk
The following risk applies to the IQ MacKay California Municipal Intermediate ETF
The Fund invests primarily in municipal bonds issued by or on behalf of the State of California and its political subdivisions, agencies, authorities and instrumentalities. As a result, the Fund is more exposed to the risks affecting issuers of California municipal bonds than is a municipal bond fund that invests more widely.
Most local government agencies within the State, particularly counties, continue to face budget constraints due to limited taxing powers, mandated expenditures for health, welfare and public safety and a weakened economy, among other factors. State and local governments are limited in their ability to levy and raise property taxes and other forms of taxes, fees or assessments, and in their ability to appropriate their tax revenues by a series of constitutional amendments enacted by voter initiatives since 1978. Individual local governments may also have local initiatives that affect their fiscal flexibility. The major sources of revenues for
local government, property taxes and sales taxes, as well as fees based on real estate development, have all been adversely impacted by the economic recession. Unfunded pension and other post-retirement liabilities also weigh heavily upon the State as well as many local jurisdictions. While California’s economy is broad, it does have major concentrations in technology, aerospace and defense-related manufacturing, trade, entertainment, real estate and financial services, and may be sensitive to economic problems affecting those industries.
To the extent that California experiences economic problems generally, the risk of investing in bonds issued by the State and its political subdivisions, agencies, authorities and instrumentalities, including the risk of potential issuer default. There is a heightened risk that there could be an interruption in payments to bondholders in some cases. This possibility, along with the risk of a downgrade in the credit rating of the State’s general obligation debt, could result in a reduction in the market value of the bonds held by the Fund, which could adversely affect the Fund’s NAV or the distributions paid by the Fund. In addition, future California political and economic developments, constitutional amendments, legislative measures, executive orders, administrative regulations, litigation and voter initiatives could have an adverse effect on the debt obligations of California issuers.
Cash Transactions Risk
A Fund currently intends to effect creation and redemptions principally for cash, rather than principally for in-kind securities. As a result, investment in such a fund may be less tax efficient than investment in a conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because a Fund currently intends to effect redemptions principally for cash, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. A Fund may recognize a capital gain on these sales that might not have been incurred if such Fund had made a redemption in-kind and this may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process. Moreover, cash transactions may have to be carried out over several days if the securities market is relatively illiquid, and this may involve considerable brokerage fees and taxes. These brokerage fees and taxes, which will be higher than if a Fund sold and redeemed its Shares principally in-kind, will be passed on to those purchasing and redeeming Creation Units in the form of creation and redemption transaction fees. In addition, these factors may result in wider spreads between the bid and the offered prices of a Fund’s Shares than for ETFs that distribute portfolio securities in-kind.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments or to otherwise honor its obligations. There are varying degrees of credit risk, depending on an issuer’s or counterparty’s financial condition and on the terms of an obligation, which may be reflected in the issuer’s or counterparty’s credit rating. There is the chance that a Fund’s portfolio holdings will have their credit ratings downgraded or will default (i.e., fail to make scheduled interest or principal payments), or that the market’s perception of an issuer’s or counterparty’s creditworthiness may worsen, potentially reducing a Fund’s income level or Share price. The value of an investment in a Fund may change quickly and without warning in response to issuer defaults, changes in the credit ratings of such Fund’s portfolio securities and/or perceptions related thereto.
Cyber Security Risk
The Funds are susceptible to operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause a Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause a Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. These risks typically are not covered by insurance. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber incidents include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the systems of security issuers, the Advisor, distributor and other service providers (including, but not limited to, sub-advisors, index providers, fund accountants, custodians, transfer agents and administrators), market makers, Authorized Participants or the issuers of securities in which a Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with a
Fund’s ability to calculate its NAV, disclosure of confidential trading information, impediments to trading, submission of erroneous trades or erroneous creation or redemption orders, the inability of a Fund or its service providers to transact business, violations of applicable privacy and other laws, regulatory fines and other penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. Substantial costs may be incurred by a Fund in order to resolve or prevent cyber incidents in the future. While the Funds have established business continuity plans in the event of, and risk management systems to prevent, such cyber attacks, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, the Funds cannot control the cyber security plans and systems put in place by service providers to the Funds, issuers in which the Funds invest, Authorized Participants or market makers. There is no guarantee that such preventative efforts will succeed, and the Funds and their shareholders could be negatively impacted as a result.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce a Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Focused Investment Risk
To the extent that a Fund invests a large percentage of its assets in a single asset class or the securities of issuers within the same country, group of countries, region, industry, group of industries or sector, an adverse economic, market, political or regulatory development may affect the value of the Fund’s investments more than if the Fund were more broadly diversified. Different asset classes, countries, groups of countries, regions, industries, groups of industries or sectors tend to go through cycles of outperformance and underperformance in comparison to each other and to the general financial markets.
High-Yield Municipal Bond Risk
The following risk applies to the IQ MacKay California Municipal Intermediate ETF
High-yield or non-investment grade municipal bonds (commonly referred to as “junk bonds”) may be subject to increased liquidity risk as compared to other high-yield debt securities. There may be little or no active trading market for certain high-yield municipal bonds, which may make it difficult for the Fund to sell such bonds at or near their perceived value. In such cases, the value of a high-yield municipal bond may decline dramatically, even during periods of declining interest rates. The high-yield municipal bonds in which the Fund intends to invest may be more likely to pay interest that is includable in taxable income for purposes of the federal alternative minimum tax than other municipal bonds.
Income Risk
A Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because a Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of certain fixed income securities held by a Fund to decline. Many factors can cause interest rates to rise, such as central bank monetary policies, inflation rates, general economic conditions and expectations about the foregoing. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter
durations or floating or adjustable interest rates. Duration is a measure used to determine the sensitivity of a fixed income security’s price to changes in interest rates. For example, the value of a fixed income security with a duration of three years would be expected to decrease by 3% for every 1% increase in interest rates. The negative impact on a Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. Substantial shareholder redemptions may worsen this impact. An increase in interest rates could also cause principal payments on a fixed income security to be repaid at a slower rate than expected. This risk is particularly prevalent for a callable debt security where an increase in interest rates could cause the issuer of that security to not redeem the security as anticipated on the call date, effectively lengthening the security’s expected maturity, in turn making that security more vulnerable to interest rate risk and reducing its market value. A Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. Rising interest rates tend to extend the duration of fixed income securities, making their market value more sensitive to changes in interest rates. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities. Extension risk is particularly prevalent for a callable fixed income security where an increase in interest rates could result in the issuer of that security choosing not to redeem the security as anticipated on the security’s call date. Such a decision by the issuer could have the effect of lengthening the security’s expected maturity, making it more vulnerable to interest rate risk and reducing its market value.
Some securities may be redeemed at the option of the issuer, or “called,” before their stated maturity date. In general, an issuer will call its debt securities if they can be refinanced by issuing new debt securities which bear a lower interest rate. A Fund is subject to the possibility that during periods of falling interest rates an issuer will call its high-yielding debt securities. A Fund may then be forced to invest the unanticipated proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features. Such redemptions and subsequent reinvestments would also increase a Fund’s portfolio turnover. If a called debt security was purchased by a Fund at a premium, the value of the premium may be lost in the event of a redemption.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments. For more information on the risks associated with the discontinuation and transition of LIBOR, please see “LIBOR Replacement Risk.”
Issuer Risk
The performance of a Fund depends on the performance of individual securities to which the Fund has exposure. Any issuer of these securities may perform poorly, causing the value of its securities to decline. Poor performance may be caused by poor management decisions, competitive pressures, changes in technology, expiration of patent protection, disruptions in supply, labor problems or shortages, corporate restructurings, fraudulent disclosures, credit deterioration of the issuer or other factors. Issuers may, in times of distress or at their own discretion, decide to reduce or eliminate dividends, which may also cause their stock prices to decline. An issuer may also be subject to risks associated with the countries, states and regions in which the issuer resides, invests, sells products or otherwise conducts operations.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. To the extent the Fund invests in illiquid securities or securities that become less liquid, such investments may have a negative effect on the returns of the Fund because the Fund may be unable to sell the illiquid securities at an advantageous time or price. Securities with substantial market and/or credit risk may be especially susceptible to liquidity risk. Liquidity risk may be the result of, among other things, an investment being subject to restrictions on resale, trading over-the-counter or in limited volume, or lacking an active trading market. Liquid investments may become illiquid or less liquid after purchase by the Fund, particularly during periods of market turmoil or economic uncertainty. Illiquid and relatively less liquid investments may be harder to value, especially in changing
markets. If the Fund is forced to sell underlying investments at reduced prices or under unfavorable conditions to meet redemption requests or for other cash needs, the Fund may suffer a loss. This may be magnified in a rising interest rate environment or under other circumstances where redemptions from the Fund may be higher than normal. It may also be the case that other market participants may be attempting to liquidate similar holdings at the same time as the Fund, causing increased supply in the market and contributing to liquidity risk and downward pricing pressure. There can be no assurance that a security that is deemed to be liquid when purchased will continue to be liquid or as long as it is held by the Fund.
Market Risk
The value of a Fund’s investments may fluctuate and/or decline because of changes in the markets in which the Fund invests, which could cause the Fund to underperform other funds with similar investment objectives and strategies. Security markets are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic developments. Different sectors of the market and different security types may react differently to such developments. Changes in these markets may be rapid and unpredictable. Fluctuations in the markets generally or in a specific industry or sector may impact the securities in which a Fund invests. From time to time, markets may experience periods of stress for potentially prolonged periods that may result in: (i) increased market volatility; (ii) reduced market liquidity; and (iii) increased redemptions of Fund shares. Such conditions may add significantly to the risk of volatility in the net asset value of a Fund’s shares and the market prices at which shares of a Fund trade on a securities exchange. During periods of market stress shares of a Fund may also experience significantly wider “bid/ask” spreads and premiums and discounts between a Fund’s net asset value and market price.
Market changes may impact equity and fixed income securities in different and, at times, conflicting manners. A Fund potentially will be prevented from executing investment decisions at an advantageous time or price as a result of any domestic or global market disruptions, particularly disruptions causing heightened market volatility and reduced market liquidity, as well as increased or changing regulations or market closures. Thus, investments that the Subadvisor believes represent an attractive opportunity or in which a Fund seeks to obtain exposure may be unavailable entirely or in the specific quantities sought by the Subadvisor and the Fund may need to obtain the exposure through less advantageous or indirect investments or forgo the investment at the time. Securities and investments held by a Fund may be susceptible to declines in value, including declines in value that are not believed to be representative of the issuer’s value or fundamentals, due to investor reactions to such events.
Political and diplomatic events within the United States and abroad, such as the U.S. budget and deficit reduction plans, protectionist measures, trade tensions central bank policy and government intervention in the economy, has in the past resulted, and may in the future result, in developments that present additional risks to a Fund’s investments and operations. Geopolitical and other events, such as war, acts of terrorism, natural disasters, the spread of infectious illnesses, epidemics and pandemics, environmental and other public health issues, recessions or other events, and governments’ reactions to such events, may lead to increased market volatility and instability in world economies and markets generally and may have adverse effects on the performance of a Fund and its investments. Additional and/or prolonged geopolitical or other events may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Any such market, economic and other disruptions could also prevent a Fund from executing its investment strategies and processes in a timely manner.
An investment in a Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Market Disruption Risk and Recent Market Events
Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on a Fund and its investments. Market disruptions could cause a Fund to lose money, experience significant redemptions and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets. Recent market disruption events include the pandemic spread of the novel coronavirus known as COVID-19, and the significant restrictions, market volatility, decreased economic and other activity and increased government activity that it has caused. Specifically, COVID-19 has led to significant death and morbidity, and
concerns about its further spread have resulted in the closing of schools and non-essential businesses, cancellations, shelter-in-place orders, lower consumer spending in certain sectors, social distancing, bans on large social gatherings and travel, quarantines, government economic stimulus measures, reduced productivity, rapid increases in unemployment, increased demand for and strain on government and medical resources, border closings and global trade and supply chain interruptions, among others. The full effects, duration and costs of the COVID-19 pandemic are impossible to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve. The pandemic may affect certain countries, industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social tensions and may increase the probability of an economic recession or depression. A Fund and its investments may be adversely affected by the effects of the COVID-19 pandemic, and a prolonged pandemic may result in a Fund and its service providers experiencing operational difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
Money Market/Short-Term Securities Risk
To the extent that a Fund invests in money market or short-term securities, the Fund may be subject to certain risks associated with such investments. An investment in a money market fund or short-term securities is not a bank deposit and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency. It is possible for a Fund to lose money by investing in money market funds. A money market fund may not achieve its investment objective. Changes in government regulations may affect the value of an investment in a money market fund.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease a Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. In addition, federal banking regulations may cause certain dealers to reduce their inventories of Municipal Bonds, which may further decrease a Fund’s ability to buy or sell Municipal Bonds. As a result, a Fund may be forced to accept a lower price to sell a municipal security, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance. The market for unrated municipal securities may be less liquid than the market for rated Municipal Bonds of comparable quality. Decreased liquidity may negatively affect a Fund’s ability to mitigate risk and meet redemptions. Also, less public information is typically available about unrated Municipal Bonds or their issuers, which can affect the liquidity of the market.
Municipal Bond Risk
The values of Municipal Bonds may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. Other factors that could affect Municipal Bonds include a change in the local, state, or national economy, demographic factors, ecological or environmental concerns, statutory limitations on the issuer’s ability to increase taxes, and other developments generally affecting the revenue of issuers (for example, legislation or court decisions reducing state aid to local governments or mandating additional services). This risk would be heightened to the extent that a Fund invests a substantial portion of its assets in bonds issued pursuant to similar projects (such as those relating to the education, health care, housing, transportation, or utilities industries), in industrial development bonds, or in particular types of municipal securities (such as general obligation bonds, private activity bonds or moral obligation bonds) that are particularly exposed to specific types of adverse economic, business or political events. Changes in a municipality’s financial health may also make it difficult for the municipality to make interest and principal payments when due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. Under some circumstances, municipal securities might not pay interest unless the state legislature or municipality authorizes money for that purpose. Municipal Bonds may be more susceptible to downgrades or defaults during recessions or similar periods of economic stress. In addition, since some municipal securities may be secured or guaranteed by banks and other institutions, the risk to a Fund could increase if the banking or financials sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the guarantee are downgraded or at risk of being downgraded by a national rating organization. Such a downward revision or risk of being downgraded may have an adverse effect on the market prices of the bonds and thus the value of a Fund’s investments. In addition to being downgraded, an
insolvent municipality may file for bankruptcy. The reorganization of a municipality’s debts may significantly affect the rights of creditors and the value of the securities issued by the municipality and the value of a Fund’s investments. In addition, income from Municipal Bonds held by a Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by a Fund to be taxable and may result in a significant decline in the values of such Municipal Bonds. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Valuation Risk
The Municipal Bonds in which a Fund invests are typically valued by a pricing service utilizing a range of market-based inputs and assumptions, including readily available market quotations obtained from broker-dealers making markets in such securities, cash flows and transactions for comparable instruments. There is no assurance that a Fund will be able to sell a portfolio security at the price established by the pricing service, which could result in a loss to a Fund.
Municipal Insurance Risk
The following risk applies to the IQ MacKay Municipal Insured ETF and IQ MacKay California Municipal Intermediate ETF
A Fund’s investments may include investments in insured Municipal Bonds. Municipal security insurance does not guarantee the value either of individual municipal securities or of Shares of the Fund. In addition, a municipal security insurance policy generally will not cover: (i) repayment of a municipal security before maturity (redemption), (ii) prepayment or payment of an acceleration premium (except for a mandatory sinking fund redemption) or any other provision of a bond indenture that advances the maturity of the bond or (iii) non-payment of principal or interest caused by negligence or bankruptcy of the paying agent. A mandatory sinking fund redemption may be a provision of a municipal security issue whereby part of the municipal security issue may be retired before maturity. Market conditions or changes to ratings criteria could adversely impact the ratings of Municipal Bond insurance companies. Downgrades and withdrawal of ratings from Municipal Bond insurers have substantially limited the availability of insurance sought by Municipal Bond issuers, thereby reducing the supply of insured Municipal Bonds that meet the Fund’s investment guidelines or the ability of a Fund to purchase insurance on Municipal Bonds held by the Fund. A rating downgrade of a Municipal Bond insurer could negatively impact the market value of insured Municipal Bonds held by a Fund. If the insurer of a defaulted Municipal Bond were to become unable or unwilling to pay the principal or interest
on the defaulted Municipal Bond, a Fund would incur losses. Because of the consolidation among insurers of municipal securities, to the extent that a Fund invests in insured Municipal Bonds, it is subject to the risk that credit risk may be concentrated among fewer insurers and the risk that events involving one or more insurers could have a significant adverse effect on the value of the securities insured by an insurer and on the municipal markets as a whole.
New Fund Risk
The following risk applies to the IQ MacKay Municipal Short Duration ETF and IQ MacKay California Municipal Intermediate ETF
As a new fund, there can be no assurance that a Fund will grow to or maintain an economically viable size, in which case it could ultimately liquidate. Like other new funds, large inflows and outflows may impact a Fund’s market exposure for limited periods of time. This impact may be positive or negative, depending on the direction of market movement during the period affected. An Authorized Participant, the Advisor or an affiliate of the Advisor may invest in a Fund and hold its investments for a specific period of time in order to facilitate commencement of the Fund’s operations or for the Fund to achieve size or scale. There can be no assurance that any such entity would not redeem its investment or that the size of a Fund would be maintained at such levels which could negatively impact the Fund.
Operational Risk
Each Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund, Advisor and Subadvisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
Each Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing a Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result. There can be no guarantee that the Fund will meet its investment objective(s). In addition, a Fund may not achieve its investment objective if the portfolio managers take temporary positions in response to unusual or adverse market, economic or political conditions, or other unusual or abnormal circumstances. The Subadvisor may give consideration to certain ESG criteria when evaluating an investment opportunity. The application of ESG criteria may result in the Fund (i) having exposure to certain securities or industry sectors that are significantly different than the composition of the Fund’s benchmark; and (ii) performing differently than other funds and strategies in its peer group that do not take into account ESG criteria or the Fund’s benchmark. The investments selected by a Fund’s portfolio managers may underperform the market or other investments.
Private Placement and Restricted Securities Risk
The following risk applies to the IQ MacKay California Municipal Intermediate ETF
The Fund may invest in privately issued securities, including those which may be resold only in accordance with Rule 144A under the Securities Act of 1933, as amended. Securities acquired in a private placement generally are subject to strict restrictions on resale, and there may be no market or a limited market for the resale of such securities. Therefore, the Fund may be unable to dispose of such securities when it desires to do so or at the most favorable price. This potential lack of liquidity also may make it more difficult to accurately value these securities.
Secondary Market Trading Risk
Although each Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. The trading of Shares on securities exchanges is subject to the risk of irregular trading activity. Additionally, market makers are under no obligation to make a market in a Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in a Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, such Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Buying or selling Shares on an exchange involves two types of costs that apply to all securities transactions. When buying or selling Shares through a broker, you will likely incur a brokerage commission and other charges. In addition, you may incur the cost of the “spread”—the difference between what investors are willing to pay for 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 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. The risk of wide bid and ask spreads may be especially pronounced for smaller funds. 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 Shares, frequent trading may detract significantly from investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments through a brokerage account.
Securities exchanges have requirements that must be met in order for Shares to be listed. There can be no assurance that the requirements of an exchange necessary to maintain the listing of Shares will continue to be met. This risk is particularly acute for funds that fail to attract a large number of shareholders. Pursuant to an exchange’s “circuit breaker” rules, trading in a Fund’s Shares may be halted due to extraordinary market volatility.
Trading Price Risk
Shares of a Fund trade on securities exchanges at prices at, above or below the Fund’s most recent NAV. The NAV of a Fund is calculated at the end of each business day and fluctuates with changes in the market value of the Fund’s holdings. The trading price of a Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the Fund’s NAV. As a result, the trading prices of a Fund’s Shares may deviate significantly from NAV during periods of market volatility. The market price of a Fund’s Shares during the trading day, like the price of any exchange-traded security, includes a “bid/ask” spread charged by the exchange specialist, market makers or other participants that trade the Shares. In times of severe market disruption, the bid/ask spread can increase significantly. At those times, Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that an investor most wants to sell their Shares. Although it is generally expected that the market price of a Fund’s Shares will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares. While the creation/redemption feature is designed to make it more likely that a Fund’s Shares normally will trade on securities 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, Authorized Participants, or other market participants, and during periods of significant market volatility, may result in trading prices for Shares of a Fund that differ significantly from its NAV. Authorized Participants may be less willing to create or redeem Shares if there is a lack of an 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. Additionally, similar to shares of other issuers listed on a securities exchange, a Fund’s Shares may be sold short and are therefore subject to the risk of increased volatility and price decreases associated with being sold short. Any of these factors, among others, may lead to a Fund’s Shares trading at a premium or discount to NAV.
Variable and Floating Rate Instruments Risk
The following risk applies to the IQ MacKay California Municipal Intermediate ETF
Variable and floating rate instruments include debt securities issued by corporate and governmental entities, bank loans, mortgage-backed securities and asset-backed securities, preferred equity securities and derivative variable rate securities, such as inverse floaters. Variable and floating rate instruments are structured so that the instrument’s coupon rate fluctuates based upon the level of a reference rate. Most commonly, the coupon rate of a variable or floating rate instrument is set at the level of a widely followed interest rate, plus a fixed spread. As a result, the coupon on a variable or floating rate instrument will generally decline in a falling interest rate environment, causing the Fund to experience a reduction in the income it receives from the instrument. A variable or floating rate instrument’s coupon rate resets periodically according to its terms. Consequently, in a rising interest rate environment, variable and floating rate instruments with coupon rates that reset infrequently may lag behind the changes in market interest rates. Variable and floating rate instruments may also contain terms that impose a maximum coupon rate the issuer will pay, regardless of the level of the reference rate. The
coupon rate of many variable and floating rate instruments is set based upon LIBOR. In 2017, the head of the United Kingdom’s Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate. The potential effect of a transition away from LIBOR cannot yet be determined but may result in disruption to the markets for debt securities and instruments and decreased demand or liquidity for debt securities and instruments that reference LIBOR or new replacement rates.
Additional Risks
Large Investments Risk
From time to time, a Fund may receive large purchase or redemption orders from affiliated or unaffiliated funds or other investors. In addition, any third-party investor, investment advisor affiliate, authorized participant, lead market maker or other entity may make a large investment in a Fund and hold its investment for any number of reasons, including to facilitate such Fund’s commencement of operations or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any large shareholder would not sell or redeem its investment at any given time, either in a single transaction or over time. These large transactions, and particularly redemptions, could have adverse effects on a Fund, including: (i) negative impacts to performance if the Fund were required to sell securities, invest cash or hold significant cash at times when it otherwise would not do so; (ii) wider price spreads or greater premiums/discounts that could materialize as a result of lower secondary market volume of shares; and (iii) negative federal income tax consequences if this activity accelerated the realization of capital gains.
LIBOR Replacement Risk
The terms of floating rate loans, financings or other transactions in the U.S. and globally have been historically tied to LIBOR, which functions as a reference rate or benchmark for various commercial and financial contracts. LIBOR may be a significant factor in determining payment obligations under derivatives transactions, the cost of financing of a Fund’s investments or the value or return on certain other Fund investments. As a result, LIBOR may be relevant to, and directly affect, a Fund’s performance. The Financial Conduct Authority, the United Kingdom’s financial regulatory body and regulator of LIBOR, announced that after 2021 it will cease its active encouragement of banks to provide the quotations needed to sustain LIBOR due to the absence of an active market for interbank unsecured lending and other reasons. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. As a result, it is anticipated that LIBOR will be discontinued or will no longer be sufficiently robust to be representative of its underlying market around that time. Various financial industry groups have begun planning for that transition and certain regulators and industry groups have taken actions to establish alternative reference rates (e.g., the Secured Overnight Financing Rate, which measures the cost of overnight borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities and is intended to replace U.S. dollar LIBOR with certain adjustments). However, there are challenges to converting certain contracts and transactions to a new benchmark and neither the full effects of the transition process nor its ultimate outcome is known.
The transition process might lead to increased volatility and illiquidity in markets for instruments with terms tied to LIBOR. It could also lead to a reduction in the interest rates on, and the value of, some LIBOR-based investments and reduce the effectiveness of hedges mitigating risk in connection with LIBOR-based investments. Although some LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology and/or increased costs for certain LIBOR-related instruments or financing transactions, others may not have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies. Instruments that include robust fallback provisions to facilitate the transition from LIBOR to an alternative reference rate may also include adjustments that do not adequately compensate the holder for the different characteristics of the alternative reference rate. The result may be that the fallback provision results in a value transfer from one party to the instrument to the counterparty. Additionally, because such provisions may differ across instruments (e.g., hedges versus cash positions hedged), LIBOR’s cessation may give rise to basis risk and render hedges less effective. As the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects and related adverse conditions could occur prior to the end of 2021 with respect to certain LIBOR tenors or mid-2023 for the remaining LIBOR tenors. There also remains uncertainty and risk regarding the willingness and ability of issuers to
include enhanced provisions in new and existing contracts or instruments, notwithstanding significant efforts by the industry to develop robust LIBOR replacement clauses. The effect of any changes to, or discontinuation of, LIBOR on a Fund will vary depending, among other things, on (1) existing fallback or termination provisions in individual contracts and the possible renegotiation of existing contracts and (2) whether, how, and when industry participants develop and adopt new reference rates and fallbacks for both legacy and new products and instruments. A Fund’s investments may also be tied to other interbank offered rates and currencies, which also will likely face similar issues. In many cases, in the event that an instrument falls back to an alternative reference rate, including the Secured Overnight Financing Rate, the alternative reference rate will not perform the same as LIBOR because the alternative reference rate does not include a credit sensitive component in the calculation of the rate. Alternative reference rates generally reflect the performance of the market for U.S. treasury securities, which are secured by the U.S. treasury, and not the inter-bank lending markets. In the event of a credit crisis, floating rate instruments using certain alternative reference rates could therefore perform differently than those instruments using a rate indexed to the inter-bank lending market.
Various pending legislation, including in the U.S. Congress and the New York state legislature, may affect the transition of LIBOR-based instruments as well by permitting trustees and calculation agents to transition instruments with no LIBOR transition language to an alternative reference rate selected by such agents. Those legislative proposals include safe harbors from liability, which may limit the recourse a Fund may have if the alternative reference rate does not fully compensate the Fund for the transition of an instrument from LIBOR. It is uncertain whether such legislative proposals will be signed into law.
These developments could negatively impact financial markets in general and present heightened risks, including with respect to a Fund’s investments. As a result of this uncertainty and developments relating to the transition process, a Fund and its investments may be adversely affected.
Underinvestment Risk
If certain aggregate ownership thresholds are reached either through the actions of the Advisor and its affiliates or a Fund, or as a result of third-party transactions, the ability of the Advisor on behalf of clients (including a Fund) to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise impaired. The capacity of a Fund to make investments in certain securities may be affected by the relevant limits, and such limitations may have adverse effects on the liquidity and performance of a Fund’s portfolio holdings.
U.S. Tax Risk
To qualify for the favorable U.S. federal income tax treatment accorded to regulated investment companies, a Fund must satisfy certain income, asset diversification and distribution requirements. If for any taxable year, a Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) for that year would be subject to tax at regular corporate rates without any deduction for distributions to its shareholders, and the Fund’s distributions, including distributions of tax-exempt income, would be taxable to its shareholders as dividend income to the extent of a Fund’s current and accumulated earnings and profits. To the extent a Fund engages in derivatives transactions, the tax treatment such derivatives transactions is unclear for purposes of determining a Fund’s tax status. To the extent a Fund engages in transactions in financial instruments, including, but not limited to, options, futures contracts, hedging transactions, forward contracts and swap contracts, the Fund will be subject to special tax rules (which may include mark-to-market, constructive sale, wash sale and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Fund’s securities, convert long-term capital gains into short-term capital gains or convert short-term capital losses into long-term capital losses. These rules could, therefore, affect the amount, timing and character of distributions to a Fund’s shareholders. A Fund’s use of such transactions may result in the Fund realizing more short-term capital gains and ordinary income, in each case subject to U.S. federal income tax at higher ordinary income tax rates, than it would if it did not engage in such transactions.
Buying and Selling Shares in the Secondary Market
Most investors will buy and sell Shares of each Fund in Secondary Market transactions through brokers. Shares of each Fund will be listed for trading on the Secondary Market on the NYSE Arca. Shares can be bought and sold throughout the trading day like other publicly-traded shares. Unless imposed by your broker or dealer, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy in the Secondary Market. When buying or selling 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 offered price in the Secondary Market on each leg of a round trip (purchase and sale) transaction. In addition, because transactions in the Secondary Market occur at market prices, you may pay more than NAV when you buy Shares and receive less than NAV when you sell those Shares.
Share prices are reported in dollars and cents per Share. For information about buying and selling Shares in the Secondary Market, please contact your broker or dealer.
Book Entry
Shares of each Fund are held in book-entry form and no stock certificates are issued. DTC, through its nominee Cede & Co., is the record owner of all outstanding Shares.
Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC 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 Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any securities that you hold in book entry or “street name” form for any publicly-traded company. Specifically, in the case of a shareholder meeting of a Fund, DTC assigns applicable Cede & Co. voting rights to its participants that have Shares credited to their accounts on the record date, issues an omnibus proxy and forwards the omnibus proxy to the Fund. The omnibus proxy transfers the voting authority from Cede & Co. to the DTC participant. This gives the DTC participant through whom you own Shares (namely, your broker, dealer, bank, trust company or other nominee) authority to vote the shares, and, in turn, the DTC participant is obligated to follow the voting instructions you provide.
Management
The Board is responsible for the general supervision of the Funds. The Board appoints officers who are responsible for the day-to-day operations of the Funds.
Investment Advisor
The Advisor has been registered as an investment advisor with the SEC since August 2007 and is a wholly-owned indirect subsidiary of New York Life Investment Management Holdings LLC. The Advisor’s principal office is located at 51 Madison Avenue, New York, New York 10010. As of June 30, 2022, the Advisor had approximately $8.2 billion in assets under management.
The Advisor has overall responsibility for the general management and administration of the Trust. The Advisor provides an investment program for the Funds. The Advisor has delegated certain advisory duties with regard to the Funds (including management of all of the Fund’s assets) to the Subadvisor. The Advisor has also arranged for custody, fund administration, transfer agency and all other non-distribution related services necessary for the Funds to operate.
As compensation for its services and its assumption of certain expenses, each Fund pays the Advisor a management fee equal to a percentage of a Fund’s average daily net assets that is calculated daily and paid monthly, as follows:
Fund Name | | | Management Fee | |
IQ MacKay Municipal Insured ETF | | | | | 0.40% | | |
IQ MacKay Municipal Short Duration ETF | | | | | 0.30% | | |
IQ MacKay Municipal Intermediate ETF | | | | | 0.40% | | |
IQ MacKay California Municipal Intermediate ETF | | | | | 0.45% | | |
The Advisor may voluntarily waive any portion of its advisory fee from time to time, and may discontinue or modify any such voluntary limitations in the future at its discretion.
The Advisor serves as investment advisor to each Fund pursuant to an Investment Advisory Agreement (the “Advisory Agreement”) and the Subadvisor serves as investment subadvisor to each Fund pursuant to an Investment Subadvisory Agreement (the “Subadvisory Agreement”). The Advisory Agreement and Subadvisory Agreement were approved by the Independent Trustees of the Trust. The basis for the Trustees’ approval of the Advisory Agreement and Subadvisory Agreement are available in the Trust’s Annual or Semiannual Report to shareholders.
Section 15(a) of the 1940 Act requires that all contracts pursuant to which persons serve as investment advisors to investment companies be approved by shareholders. As interpreted, this requirement also applies to the appointment of subadvisors to the Funds. The Advisor and the Trust have obtained an exemptive order (the “Order”) from the SEC permitting the Advisor, on behalf of the Funds and subject to the approval of the Board, including a majority of the Independent Trustees, to hire or terminate unaffiliated subadvisors and to modify any existing or future subadvisory agreement with unaffiliated subadvisors without shareholder approval. This authority is subject to certain conditions. A Fund will notify shareholders and provide them with certain information required by the Order within 90 days of hiring a new subadvisor. A Fund’s sole shareholder has approved the use of the Order. Please see the SAI for more information on the Order.
Expense Limitation Agreement
The Advisor has contractually agreed to waive or reduce its management fee and/or reimburse expenses of the Funds in an amount that limits “Total Annual Fund Operating Expenses” (excluding interest, taxes, brokerage commissions, dividend payments on short sales, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of a Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to not more than the average daily net assets of a Fund as follows. The agreement will remain in effect unless terminated by the Board of Trustees of the Funds:
Fund Name | | | Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement | |
IQ MacKay Municipal Insured ETF | | | | | 0.30% | | |
IQ MacKay Municipal Short Duration ETF | | | | | 0.30% | | |
IQ MacKay Municipal Intermediate ETF | | | | | 0.30% | | |
IQ MacKay California Municipal Intermediate ETF | | | | | 0.35% | | |
Subadvisor
Pursuant to an investment subadvisory agreement with the Advisor, MacKay Shields LLC serves as the subadvisor to each Fund and makes investment decisions, and buys and sells securities for the Funds. Under the supervision of the Advisor, the Subadvisor is responsible for making the specific decisions about the following: (i) buying, selling and holding securities; (ii) selecting brokers and brokerage firms to trade for them; (iii) maintaining accurate records; and, if possible, (iv) negotiating favorable commissions and fees with the brokers and brokerage firms. For these services, the Subadvisor is paid a monthly fee by the Advisor out of the Advisor’s management fee, not a Fund. See the SAI for a breakdown of fees. To the extent that the Advisor has agreed to waive its management fee or reimburse expenses for a Fund, the Subadvisor has agreed to waive or reimburse its fee proportionately. The basis for the Board’s approval of the Subadvisory Agreement is available in the Trust’s Annual report to shareholders.
The Subadvisor was incorporated in 1969 and has been registered as an investment advisor with the SEC since 1969. Today the Subadvisor is an indirect wholly-owned subsidiary of New York Life. The Subadvisor’s principal office is located at 1345 Avenue of the Americas, New York, New York 10105. As of June 30, 2022, the Subadvisor had approximately $132 billion in assets under management.
Portfolio Management
The following portfolio managers are primarily responsible for the day-to-day management of the IQ MacKay Municipal Insured ETF, IQ MacKay Municipal Short Duration ETF and IQ MacKay Municipal Intermediate ETF:
David Dowden, Managing Director
Mr. Dowden joined MacKay Shields in 2009. Before joining the firm, he was Chief Investment Officer at Financial Guaranty Insurance Company. Mr. Dowden was previously with Alliance Capital Management as a Senior Portfolio Manager and at Merrill Lynch & Co. as a Municipal Strategist. Mr. Dowden has an AB from Brown University and an MBA from Columbia University. He has been in the investment management industry since 1989.
John Lawlor, Managing Director
Mr. Lawlor joined MacKay Shields in 2016. Before joining the firm, he was Vice President Equity Sales at Deutsche Bank and was previously at Bank of America Merrill Lynch. From 1997-2011, he was a senior trader on the floor of the New York Stock Exchange. Mr. Lawlor has a broad and diverse set of skills in sales, trading, and electronic trading platforms. He earned a Bachelor’s degree in Finance from Lehigh University. Mr. Lawlor graduated college in 1997. He has been in the financial services industry since 1997.
Frances Lewis, Senior Managing Director
Ms. Lewis joined MacKay Shields in July 2009. Before joining the firm, she was Director of Research for Mariner Municipal Managers and was previously at Merrill Lynch. Ms. Lewis began her municipal analyst career in 1991 at Merrill Lynch Investment Managers where she was a Senior Fund Analyst covering various sectors of the municipal market, becoming a Director in the Municipal Research Group in 1997. Ms. Lewis earned an MBA in Finance from Boston University and a BS in Economics from the University of Michigan.
Michael Petty, Senior Managing Director
Mr. Petty joined MacKay Shields in July 2009. Before joining the firm, he was a Portfolio Manager for Mariner Municipal Managers. He has been a municipal bond portfolio manager since 1992, and has worked in the municipal products market since 1985. Mr. Petty has a broad array of trading, portfolio management, and sales experience. Prior to joining Mariner Municipal Managers, he was a Senior Portfolio Manager at Dreyfus Corporation from 1997 to 2009. From 1992 to 1997, he served as a Portfolio Manager for Merrill Lynch Investment Managers. Mr. Petty graduated from Hobart College with a B.S. in Mathematics and Economics.
Scott Sprauer, Senior Managing Director
Mr. Sprauer joined MacKay Shields in 2009. Before joining the firm, he was Head Trader, Fixed Income, at Financial Guaranty Insurance Company. Mr. Sprauer was previously with Dreyfus Corporation and Merrill Lynch Investment Managers as a Municipal Bond Portfolio Manager/Trader. He has a BSBA from Villanova University. Mr. Sprauer has been in the investment management industry since 1991.
Michael Denlinger, CFA, Director
Mr. Denlinger joined MacKay Shields in 2019. Before joining the firm, he was an institutional municipal credit trader at Bank of America Merrill Lynch with a primary focus on taxable and healthcare securities. Prior to trading credit, he was a high grade municipal trader. Mr. Denlinger earned a Bachelor’s degree in Economics from Johns Hopkins University in 2014. He is a CFA Charterholder. He has been in the financial services industry since 2014.
Peter Bartlett, Senior Managing Director
Mr. Bartlett joined MacKay Shields in November 2019. He has been in the municipal bond industry for over four decades managing Citibank’s Municipal bond department. His specific responsibilities included the management of trading, sales, research, derivatives and the bank’s municipal portfolio. Mr. Bartlett ran a significant high yield position at Citibank and was directly involved with banking and underwriting efforts of the firm. Mr. Bartlett is a graduate of Princeton University and resides in Los Angeles.
The following portfolio managers are primarily responsible for the day-to-day management of the IQ MacKay California Municipal Intermediate ETF: Michael Denlinger, CFA, John Lawlor, Michael Petty and Scott Sprauer.
For more information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the Funds, see the SAI.
Other Service Providers
Fund Administrator, Custodian, Transfer Agent and Securities Lending Agent
The Bank of New York Mellon (“BNY Mellon”), located at 240 Greenwich Street, New York, New York 10286, serves as the Funds’ Administrator, Custodian, Transfer Agent and Securities Lending Agent. BNY Mellon is the principal operating subsidiary of The Bank of New York Mellon Corporation.
Under the Fund Administration and Accounting Agreement (the “Administration Agreement”), BNY Mellon serves as Administrator for the Funds. Under the Administration Agreement, BNY Mellon provides necessary administrative, legal, tax, accounting services, and financial reporting for the maintenance and operations of the Trust. In addition, BNY Mellon makes available the office space, equipment, personnel and facilities required to provide such services.
BNY Mellon supervises the overall administration of the Trust, including, among other responsibilities, assisting in the preparation and filing of documents required for compliance by the Funds with applicable laws and regulations and arranging for the maintenance of books and records of the Funds. BNY Mellon provides persons satisfactory to the Board to serve as officers of the Trust.
Distributor
ALPS Distributors, Inc. (“ALPS” or the “Distributor”), located at 1290 Broadway, Suite 1000, Denver, Colorado 80203, serves as the Distributor of Creation Units for the Funds on an agency basis. The Distributor does not maintain a Secondary Market in the Funds’ Shares. NYLIFE Distributors LLC has entered into a Services Agreement with ALPS to market the Funds.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, located at 300 Madison Avenue, New York, NY 10017, serves as the independent registered public accounting firm for the Trust.
Legal Counsel
Chapman and Cutler LLP, located at 1717 Rhode Island Avenue, Washington, D.C. 20036, serves as counsel to the Trust and the Funds.
Frequent Trading
The Board has not adopted policies and procedures with respect to frequent purchases and redemptions of Shares by Fund shareholders (“market timing”). In determining not to adopt market timing policies and procedures, the Board noted that the Funds are expected to be attractive to active institutional and retail investors interested in buying and selling Shares on a short-term basis. In addition, the Board considered that, unlike traditional mutual funds, Shares can only be purchased and redeemed directly from a Fund in Creation Units by Authorized Participants, and that the vast majority of trading in Shares occurs on the Secondary Market. Because Secondary Market trades do not involve a Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in a Fund’s trading costs and the realization of capital gains. With respect to trades directly with the Funds, to the extent effected in-kind (namely, for securities), those trades do not cause any of the harmful effects that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution of a Fund and increased transaction costs (a Fund may impose higher transaction fees to offset these increased costs), which could negatively impact a Fund’s ability to achieve its investment objective. However, the Board also noted that direct trading on a short-term basis by Authorized Participants is critical to ensuring that Shares trade at or close to NAV. Given this structure, the Board determined that it is not necessary to adopt market timing policies and procedures. Each Fund reserves the right to reject any purchase order at any time and reserves the right to impose restrictions on disruptive or excessive trading in Creation Units.
The Board has instructed the officers of the Trust to review reports of purchases and redemptions of Creation Units on a regular basis to determine if there is any unusual trading in the Funds. The officers of the Trust will report to the Board any such unusual trading in Creation Units that is disruptive to the Funds. In such event, the Board may reconsider its decision not to adopt market timing policies and procedures.
Distribution and Service Plan
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of each Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Funds and there are no plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the respective Fund’s assets, and over time these fees will increase the cost of your investment and they may cost you more than certain other types of sales charges.
The Advisor and its affiliates may, out of their own resources, pay amounts (“Payments”) to third-parties for distribution or marketing services on behalf of the Funds. The making of these payments could create a conflict of interest for a financial intermediary receiving such payments. The Advisor may make Payments for such third-parties to organize or participate in activities that are designed to make registered representatives, other
professionals and individual investors more knowledgeable about ETFs, including ETFs advised by the Advisor, or for other activities, such as participation in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems (“Education Costs”). The Advisor also may make Payments to third-parties to help defray costs typically covered by a trading commission, such as certain printing, publishing and mailing costs or materials relating to the marketing of services related to exchange-traded products (such as commission-free trading platforms) or exchange-traded products in general (“Administrative Costs”).
Determination of Net Asset Value (NAV)
The NAV of the Shares for a Fund is equal to the Fund’s total assets minus its total liabilities divided by the total number of Shares outstanding. Interest and investment income on a Fund’s assets accrue daily and are included in the Fund’s total assets. Expenses and fees (including investment advisory, management, administration and distribution fees, if any) accrue daily and are included in a Fund’s total liabilities. The NAV that is published is rounded to the nearest cent; however, for purposes of determining the price of Creation Units, the NAV is calculated to eight decimal places. The NAV is calculated by the Administrator and Custodian and determined each day the NYSE Arca is open for trading as of the close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. Eastern time).
A Fund typically values fixed-income portfolio securities using last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied by the Fund’s approved independent third-party pricing services. Pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values. Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but a Fund may hold or transact in such securities in smaller odd lot sizes. Odd lots often trade at different prices that may be above or below the price at which the pricing service has valued the security. An amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines in good faith that such method does not represent fair value.
Generally, trading in U.S. government securities, money market instruments and certain fixed-income securities is substantially completed each day at various times prior to the close of business on the NYSE. The values of such securities used in computing the NAV of the Funds are determined as of such times.
When market quotations or prices are not readily available or are deemed unreliable or not representative of an investment’s fair value, investments are valued using fair value pricing as determined in good faith by the Advisor under procedures established by and under the general supervision and responsibility of the Board. The Advisor may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its lack of liquidity or other reason, if a market quotation differs significantly from recent price quotations or otherwise no longer appears to reflect fair value, where the security or other asset or liability is thinly traded, or if the trading market on which a security is listed is suspended or closed and no appropriate alternative trading market is available.
The frequency with which the Funds’ investments are valued using fair value pricing is primarily a function of the types of securities and other assets in which the respective Fund invests pursuant to its investment objective, strategies and limitations. If the Funds invest in other open-end management investment companies registered under the 1940 Act, they may rely on the NAVs of those companies to value the shares they hold of them. Those companies may also use fair value pricing under some circumstances.
Valuing each Fund’s investments using fair value pricing results in using prices for those investments that may differ from current market valuations. Accordingly, fair value pricing could result in a difference between the prices used to calculate NAV and the prices used to determine each Fund’s indicative intra-day value (“IIV”), which could result in the market prices for Shares deviating from NAV.
Premium/Discount Information
Information regarding the extent and frequency with which market prices of Shares have tracked the relevant Fund’s NAV for the most recently completed calendar year and the quarters since that year will be available without charge on the Funds’ website at newyorklifeinvestments.com/etf.
Indicative Intra-Day Value
The approximate value of a Fund’s investments on a per-Share basis, the Indicative Intra-Day Value, or IIV, is disseminated every 15 seconds during hours of trading on the NYSE Arca. The IIV should not be viewed as a “real-time” update of NAV because the IIV may not be calculated in the same manner as NAV, which is computed once per day.
Solactive AG, an independent third party calculator calculates the IIV for each Fund during hours of trading on the NYSE Arca by dividing the “Estimated Fund Value” as of the time of the calculation by the total number of outstanding Shares of that Fund. “Estimated Fund Value” is the sum of the estimated amount of cash held in a Fund’s portfolio, the estimated amount of accrued interest owed to the Fund and the estimated value of the securities held in the Fund’s portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based on the same portfolio holdings disclosed on the Trust’s website.
Each Fund provides the independent third party calculator with information to calculate the IIV, but the Funds are not involved the actual calculation of the IIV and is not responsible for the calculation or dissemination of the IIV. The Funds make no warranty as to the accuracy of the IIV.
Dividends, Distributions and Taxes
Net Investment Income and Capital Gains
As a Fund shareholder, you are entitled to your share of the Fund’s distributions of net investment income and net realized capital gains on its investments. The Funds pay out substantially all of their net earnings to their shareholders as “distributions.”
The Funds typically earn interest from debt securities. These amounts, net of expenses, typically are passed along to Fund shareholders as dividends from net investment income. The Funds realize capital gains or losses whenever they sell securities. Net capital gains typically are passed along to shareholders as “capital gain distributions.”
Net investment income and net capital gains typically are distributed to shareholders at least annually. Dividends may be declared and paid more frequently to comply with the distribution requirements of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). In addition, the Funds may decide to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities, as if the Funds owned the underlying investment securities for the entire dividend period, in which case some portion of each distribution may result in a return of capital. You will be notified regarding the portion of a distribution that represents a return of capital.
Distributions in cash may be reinvested automatically in additional Shares of a Fund only if the broker through which you purchased Shares makes such option available.
U.S. Federal Income Taxation
The following is a summary of certain U.S. federal income tax considerations applicable to an investment in Shares of a Fund. The summary is based on the Code, U.S. Treasury Department regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date of this Prospectus and all of which are subject to change, possibly with retroactive effect. In addition, this summary assumes that a Fund shareholder holds Shares as capital assets within the meaning of the Code and does not hold Shares in connection with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an investment in Shares of a Fund, and does not address the consequences to Fund shareholders subject to special tax rules, including, but not limited to, partnerships and the partners therein, tax-exempt shareholders, regulated investment companies (“RICs”), real estate investment trusts (“REITs”), real estate mortgage investment conduits (“REMICs”), those who hold Shares through an IRA, 401(k) plan or other tax-advantaged account, and, except to the extent discussed below, “non-U.S. shareholders” (as defined below). This discussion does not discuss any aspect of U.S. state, local, estate, and gift, or non-U.S., tax law. Furthermore, this discussion is not intended or written to be legal or tax advice to any shareholder in a Fund or other person and is not intended or written to be used or relied on, and cannot be used or relied on, by any such person for the purpose of avoiding any U.S. federal tax penalties that may be imposed on such person. Prospective Fund shareholders are urged to consult their own tax advisors with respect to the specific U.S. federal, state and local, and non-U.S., tax consequences of investing in Shares, based on their particular circumstances.
The Funds have not requested and will not request an advance ruling from the U.S. Internal Revenue Service (the “IRS”) as to the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective investors should consult their own tax advisors with regard to the U.S. federal tax consequences of the purchase, ownership and disposition of Shares, as well as the tax consequences arising under the laws of any state, locality, non-U.S. country or other taxing jurisdiction. The following information supplements, and should be read in conjunction with, the section in the SAI entitled “U.S. Federal Income Taxation.”
Tax Treatment of a Fund
Each Fund intends to continue to qualify and elect to be treated as a separate RIC under the Code. To qualify and remain eligible for the special tax treatment accorded to RICs, each Fund must meet certain annual income and quarterly asset diversification requirements and must distribute annually at least 90% of the sum of (i) its “investment company taxable income” (which includes dividends, interest and net short-term capital gains) and (ii) its net tax-exempt interest.
As a RIC, a Fund generally will not be required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes to its shareholders. If a Fund fails to qualify as a RIC for any year (subject to certain curative measures allowed by the Code), the Fund will be subject to regular corporate-level U.S. federal income tax in that year on all of its taxable income, regardless of whether the Fund makes any distributions to its shareholders. In addition, in such case, distributions will be taxable to a Fund’s shareholders generally as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The remainder of this discussion assumes that the Funds will qualify for the special tax treatment accorded to RICs.
A Fund generally will be subject to a 4% excise tax on certain undistributed income if the Fund does not distribute to its shareholders in each calendar year an amount at least equal to the sum of 98% of its ordinary income for the calendar year (taking into account certain deferrals and elections), 98.2% of its capital gain net income (adjusted for certain ordinary losses) for the twelve months ended October 31 of such year (or later if the Fund is permitted to elect and so elects), plus 100% of any undistributed amounts from prior years. For these purposes, a Fund will be treated as having distributed any amount on which it has been subject to U.S. corporate income tax for the taxable year ending within the calendar year. Each Fund intends to make distributions necessary to avoid this 4% excise tax, although there can be no assurance that it will be able to do so.
A Fund may be required to recognize income in advance of receiving the related cash payment. For example, if a Fund invests in original issue discount obligations (such as zero coupon debt instruments or debt instruments with payment-in-kind interest), the Fund will be required to include in income each year a portion of the original issue discount that accrues over the term of the obligation, even if the related cash payment is not received by the Fund until a later year. Under the “wash sale” rules, a Fund may not be able to deduct currently a loss on a disposition of a portfolio security. As a result, a Fund may be required to make an annual income distribution greater than the total cash actually received during the year. Such distribution may be made from the existing cash assets of the Fund or cash generated from selling portfolio securities. The Fund may realize gains or losses from such sales, in which event its shareholders may receive a larger capital gain distribution than they would in the absence of such transactions.
Tax Treatment of Fund Shareholders
Taxation of U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “U.S. shareholders.” For purposes of this discussion, a “U.S. shareholder” is a beneficial owner of Shares who, for U.S. federal income tax purposes, is (i) an individual who is a citizen or resident of the U.S.; (ii) a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia; (iii) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or (iv) a trust, if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in place to be treated as a U.S. person.
Fund Distributions. A majority of each Fund’s distributions to its shareholders is expected to be excluded from gross income for U.S. federal income tax purposes as “exempt-interest dividends.” Notwithstanding the foregoing, Fund shareholders should be aware of the following points:
•
Some tax-exempt distributions from a Fund may be subject to the federal alternative minimum tax on individuals. For tax years beginning after December 31, 2022, tax exempt interest dividends may affect the corporate alternative minimum tax for certain corporations.
•
Exempt-interest dividends may have other tax consequences to certain shareholders (for example, they may result in a portion of a shareholder’s social security income being subject to federal income tax), and a shareholder may not be entitled to deduct the interest expense on debt deemed to be incurred or continued to purchase or carry Shares.
•
Tax-exempt distributions from a Fund may be subject to state and local taxes.
•
The Funds may earn taxable income. In other words, shareholders of a Fund may earn taxable income from the Fund even though the Fund generally intends to be tax-free to shareholders.
•
Capital gains of a Fund are not tax-free to shareholders.
•
Any time a shareholder sells Shares (even Shares of a generally tax-free Fund), such shareholder will be subject to tax on any gain.
•
If a shareholder sells Shares of a Fund at a loss after receiving an exempt-interest dividend, and the shareholder has held the Shares for six months or less, then such shareholder may not be allowed to claim a loss on the sale.
In general, taxable Fund distributions are subject to U.S. federal income tax when paid, regardless of whether they consist of cash or property, and regardless of whether they are re-invested in Shares. However, any Fund distribution declared in October, November or December of any calendar year and payable to shareholders of record on a specified date during such month will be deemed to have been received by each Fund shareholder on December 31 of such calendar year, provided such dividend is actually paid during January of the following calendar year.
Distributions of a Fund’s taxable net investment income (except, as discussed below, qualified dividend income, if any) and net short-term capital gains in excess of net long-term capital losses (collectively referred to as “ordinary income dividends”) are taxable as ordinary income to the extent of the Fund’s current and accumulated earnings and profits. To the extent designated as capital gain dividends by a Fund, distributions of a Fund’s net long-term capital gains in excess of net short-term capital losses (“net capital gain”) are taxable at long-term capital gain tax rates to the extent of a Fund’s current and accumulated earnings and profits, regardless of a Fund shareholder’s holding period in the Shares. Distributions of qualified dividend income are, to the extent of the Fund’s current and accumulated earnings and profits, taxed to certain non-corporate Fund shareholders at the rates generally applicable to long-term capital gain, provided that the Fund shareholder meets certain holding period and other requirements with respect to the distributing Shares and the distributing Fund meets certain holding period and other requirements with respect to its dividend-paying stocks. Substitute payments received on Shares that are lent out will be ineligible for being reported as qualified dividend income. Given their investment strategy, the Funds do not anticipate that a significant portion of their distributions will be eligible for qualifying dividend treatment. If a Fund pays a dividend that would be “qualified” dividend income for individuals, corporate shareholders may be entitled to a dividends received deduction.
An election may be available to you to defer recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
Each Fund intends to distribute its net capital gain at least annually. However, by providing written notice to its shareholders no later than 60 days after its year-end, a Fund may elect to retain some or all of its net capital gain and designate the retained amount as a “deemed distribution.” In that event, the Fund pays U.S. federal income tax on the retained net capital gain, and each Fund shareholder recognizes a proportionate share of the Fund’s undistributed net capital gain. In addition, each Fund shareholder can claim a tax credit or refund
for the shareholder’s proportionate share of the Fund’s U.S. federal income taxes paid on the undistributed net capital gain and increase the shareholder’s tax basis in the Shares by an amount equal to the shareholder’s proportionate share of the Fund’s undistributed net capital gain, reduced by the amount of the shareholder’s tax credit or refund.
Distributions in excess of a Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholder’s tax basis in its Shares of the Fund, and generally as capital gain thereafter. Any such distribution will reduce the shareholder’s tax basis in the Shares, and thus will increase the shareholder’s capital gain, or decrease the capital loss, recognized upon a sale or exchange of Shares.
In addition, individuals with adjusted gross incomes above certain threshold amounts (and certain trusts and estates) generally are subject to a 3.8% Medicare tax on “net investment income” in addition to otherwise applicable U.S. federal income tax. “Net investment income” generally will include taxable dividends (including capital gain dividends) received from a Fund and net gains from the redemption or other disposition of Shares. Please consult your tax advisor regarding this tax.
Investors considering buying Shares just prior to a distribution should be aware that, although the price of the Shares purchased at such time may reflect the forthcoming distribution, such distribution nevertheless may be taxable (as opposed to a non-taxable return of capital).
Sales of Shares. Any capital gain or loss realized upon a sale or exchange of Shares (including an exchange of Shares of one Fund for Shares of another Fund) generally is treated as a long-term gain or loss if the Shares have been held for more than one year. Any capital gain or loss realized upon a sale or exchange of Shares held for one year or less generally is treated as a short-term gain or loss, except that any capital loss on the sale or exchange of Shares held for six months or less, to the extent not disallowed as discussed in the next sentence, is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to the Shares. Furthermore, a loss realized by a shareholder on the sale or exchange of Shares of a Fund with respect to which exempt-interest dividends have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held by the shareholder for six months or less at the time of their disposition. An election may be available to you to defer recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
Creation Unit Issues and Redemptions. On an issue of Shares of a Fund as part of a Creation Unit where the creation is conducted in-kind, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) the Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid by the Authorized Participant as part of the issue). On a redemption of Shares as part of a Creation Unit where the redemption is conducted in-kind, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s basis in the redeemed Shares (plus any cash paid by the Authorized Participant as part of the redemption). However, the IRS may assert, under the “wash sale” rules or on the basis that there has been no significant change in the Authorized Participant’s economic position, that any loss on creation or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss recognized upon the issue or redemption of Shares (as components of a Creation Unit) is treated either as long-term capital gain or loss, if the deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than one year, or otherwise as short-term capital gain or loss. However, any capital loss on a redemption of Shares held for six months or less, to the extent not disallowed as discussed in the next sentence, is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to such Shares. Furthermore, a loss realized on the redemption of Shares of a Fund with respect to which exempt-interest dividends have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held for six months or less at the time of their disposition.
Taxation of California Residents
For a summary of certain California income tax consequences of the purchase, ownership and disposition of Shares of the IQ MacKay California Municipal Intermediate ETF applicable to full-time residents of the State of California, please see the section in the SAI entitled “California Tax Status.”
Back-Up Withholding
A Fund (or a financial intermediary such as a broker through which a shareholder holds Shares in a Fund) may be required to report certain information on a Fund shareholder to the IRS and withhold U.S. federal income tax (“backup withholding”) at a current rate of 24% from taxable distributions and redemption or sale proceeds payable to the Fund shareholder if (i) the Fund shareholder fails to provide the Fund with a correct taxpayer identification number or make required certifications, or if the IRS notifies the Fund that the Fund shareholder is otherwise subject to backup withholding, and (ii) the Fund shareholder is not otherwise exempt from backup withholding. Non-U.S. shareholders can qualify for exemption from backup withholding by submitting a properly completed IRS Form W-8BEN or W-8BEN-E. Backup withholding is not an additional tax and any amount withheld may be credited against a Fund shareholder’s U.S. federal income tax liability.
Taxation of Non-U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “non-U.S. shareholders.” For purposes of this discussion, a “non-U.S. shareholder” is a beneficial owner of Shares that is not a U.S. shareholder (as defined above) and is not an entity or arrangement treated as a partnership for U.S. federal income tax purposes. The following discussion is based on current law and is for general information only. It addresses only selected, and not all, aspects of U.S. federal income taxation applicable to non-U.S. shareholders.
As indicated above, a majority of each Fund’s distributions to its shareholders, including its non-U.S. shareholders, is expected to be excluded from gross income for U.S. federal income tax purposes as exempt-interest dividends. However, with respect to non-U.S. shareholders of a Fund, the Fund’s other ordinary income dividends generally will be subject to U.S. federal withholding tax at a rate of 30% (or at a lower rate established under an applicable tax treaty), subject to certain exceptions for “interest-related dividends” and “short-term capital gain dividends” discussed below. The Funds will not pay any additional amounts to shareholders in respect of any amounts withheld. U.S. federal withholding tax generally will not apply to any gain realized by a non-U.S. shareholder in respect of a Fund’s net capital gain. Special rules (not discussed herein) apply with respect to dividends of a Fund that are attributable to gain from the sale or exchange of “U.S. real property interests.”
In general, all “interest-related dividends” and “short-term capital gain dividends” (each defined below) will not be subject to U.S. federal withholding tax, provided that, among other requirements, the non-U.S. shareholder furnished the Fund with a completed IRS Form W-8BEN or W-8BEN-E, as applicable, (or acceptable substitute documentation) establishing the non-U.S. shareholder’s non-U.S. status and the Fund does not have actual knowledge or reason to know that the non-U.S. shareholder would be subject to such withholding tax if the non-U.S. shareholder were to receive the related amounts directly rather than as dividends from the Fund. “Interest-related dividends” generally means dividends designated by a Fund as attributable to such Fund’s U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which such Fund is at least a 10% shareholder, reduced by expenses that are allocable to such income. “Short-term capital gain dividends” generally means dividends designated by a Fund as attributable to the excess of such Fund’s net short-term capital gain over its net long-term capital loss. Depending on its circumstances, a Fund may treat such dividends, in whole or in part, as ineligible for these exemptions from withholding.
For years after December 31, 2022, amounts paid to or recognized by a non-U.S. affiliate that are excluded from tax under the portfolio interest, capital gains dividends, short-term capital gains or tax-exempt interest dividend exceptions or applicable treaties, may be taken into consideration in determining whether a corporation is an “applicable corporation” subject to a 15% minimum tax on adjusted financial statement income.
In general, subject to certain exceptions, non-U.S. shareholders will not be subject to U.S. federal income or withholding tax in respect of a sale or other disposition of Shares of a Fund.
To claim a credit or refund for any Fund-level taxes on any undistributed net capital gain (as discussed above) or any taxes collected through back-up withholding (discussed below), a non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S. shareholder would not otherwise be required to do so.
Foreign Account Tax Compliance Act
The U.S. Foreign Account Tax Compliance Act (“FATCA”) generally imposes a 30% withholding tax on “withholdable payments” (defined below) made to (i) a “foreign financial institution” (“FFI”), unless the FFI enters into an agreement with the IRS to provide information regarding certain of its direct and indirect U.S.
account holders and satisfy certain due diligence and other specified requirements, and (ii) a “non-financial foreign entity” (“NFFE”) unless such NFFE provides certain information about its direct and indirect “substantial U.S. owners” to the withholding agent or certifies that it has no such U.S. owners. The beneficial owner of a “withholdable payment” may be eligible for a refund or credit of the withheld tax. The U.S. government also has entered into intergovernmental agreements with other jurisdictions to provide an alternative, and generally easier, approach for FFIs to comply with FATCA. If the shareholder is a tax resident in a jurisdiction that has entered into an intergovernmental agreement with the U.S. government, the shareholder will be required to provide information about the shareholder’s classification and compliance with the intergovernmental agreement.
“Withholdable payments” generally include, among other items, U.S.-source interest and dividends, and gross proceeds from the sale or disposition of property of a type that can produce U.S.-source interest or dividends. However, proposed regulations may eliminate the requirements to withhold on payments of gross proceeds from dispositions.
A Fund or a shareholder’s broker may be required to impose a 30% withholding tax on withholdable payments to a shareholder if the shareholder fails to provide the Fund with the information, certifications or documentation required under FATCA, including information, certification or documentation necessary for the Fund to determine if the shareholder is a non-U.S. shareholder or a U.S. shareholder and, if it is a non-U.S. shareholder, if the non-U.S. shareholder has “substantial U.S. owners” and/or is in compliance with (or meets an exception from) FATCA requirements. A Fund will not pay any additional amounts to shareholders in respect of any amounts withheld. The Fund may disclose any shareholder information, certifications or documentation to the IRS or other parties as necessary to comply with FATCA.
The requirements of, and exceptions from, FATCA are complex. All prospective shareholders are urged to consult their own tax advisors regarding the potential application of FATCA with respect to their own situation.
For a more detailed tax discussion regarding an investment in the Funds, please see the section of the SAI entitled “U.S. Federal Income Taxation.”
Code of Ethics
The Trust, Advisor, Subadvisor and Distributor each have adopted a code of ethics under Rule 17j-1 of the 1940 Act that is designed to prevent affiliated persons of the Trust, the Advisor, the Subadvisor and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Funds (which may also be held by persons subject to a code). There can be no assurance that the codes will be effective in preventing such activities. The codes permit personnel subject to them to invest in securities, including securities that may be held or purchased by the Funds. The codes are on file with the SEC and are available to the public.
Fund Website and Disclosure of Portfolio Holdings
The Advisor maintains a website for the Funds at newyorklifeinvestments.com/etf. The website for the Funds contains the following information, on a per-Share basis, for each Fund: (1) the prior Business Day’s NAV; (2) the reported midpoint of the bid-ask spread at the time of NAV calculation (the “Bid-Ask Price”); (3) a calculation of the premium or discount of the Bid-Ask Price against such NAV; and (4) data in chart format displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or for the life of a Fund if, shorter). In addition, on each Business Day, before the commencement of trading in Shares on the NYSE Arca, each Fund will disclose on its website (newyorklifeinvestments.com/etf) the identities and quantities of the portfolio securities and other assets held by each Fund that will form the basis for the calculation of NAV at the end of the Business Day.
A description of each Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
Other Information
The Funds are not sponsored, endorsed, sold or promoted by the NYSE Arca. The NYSE Arca makes no representation or warranty, express or implied, to the owners of Shares or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Funds to achieve their objectives. The NYSE Arca has no obligation or liability in connection with the administration, marketing or trading of the Funds.
For purposes of the 1940 Act, the Funds are treated as registered investment companies, and the acquisition of shares by other registered investment companies and companies relying on Sections 3(c)(1) and 3(c)(7) of the 1940 Act are subject to the restrictions of Section 12(d)(1) of the 1940 Act and the related rules and interpretations.
Financial Highlights
Selected Data for a Share of Capital Stock Outstanding
The financial highlights tables are intended to help you understand the Funds’ financial performance for the period of the Funds’ operations. Certain information reflects financial results for a single Fund Share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the respective Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose report, along with each Fund’s financial statements, is included in the Funds’ Annual Report, which is available upon request.
Financial Highlights (continued)
Selected Data for a Share of Capital Stock Outstanding
Financial highlights are not presented for IQ MacKay Municipal Short Duration ETF since it has not yet commended operations.
| | | IQ MacKay Municipal Insured ETF | |
| | | For the Year Ended April 30, | | | For the Period October 18, 2017(a) to April 30, 2018 | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | |
Net asset value, beginning of period | | | | $ | 27.51 | | | | | $ | 25.89 | | | | | $ | 25.61 | | | | | $ | 24.67 | | | | | $ | 25.00 | | |
Income from Investment Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income(b) | | | | | 0.36 | | | | | | 0.38 | | | | | | 0.53 | | | | | | 0.72 | | | | | | 0.36 | | |
Net realized and unrealized gain (loss) | | | | | (2.71) | | | | | | 1.76 | | | | | | 0.50(c) | | | | | | 0.90 | | | | | | (0.39) | | |
Net increase (decrease) in net assets resulting from investment operations | | | | | (2.35) | | | | | | 2.14 | | | | | | 1.03 | | | | | | 1.62 | | | | | | (0.03) | | |
Distributions from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | | | (0.49) | | | | | | (0.52) | | | | | | (0.64) | | | | | | (0.68) | | | | | | (0.30) | | |
Net realized gain | | | | | (0.01) | | | | | | — | | | | | | (0.11) | | | | | | — | | | | | | — | | |
Total distributions from net investment income and realized gains | | | | | (0.50) | | | | | | (0.52) | | | | | | (0.75) | | | | | | (0.68) | | | | | | (0.30) | | |
Net asset value, end of period | | | | $ | 24.66 | | | | | $ | 27.51 | | | | | $ | 25.89 | | | | | $ | 25.61 | | | | | $ | 24.67 | | |
Market price, end of period | | | | $ | 24.65 | | | | | $ | 27.54 | | | | | $ | 26.00 | | | | | $ | 25.64 | | | | | $ | 24.86 | | |
Total Return | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investment return based on net asset value(d) | | | | | (8.70)% | | | | | | 8.32% | | | | | | 4.05% | | | | | | 6.72% | | | | | | (0.13)% | | |
Total investment return based on market price(e) | | | | | (8.85)% | | | | | | 7.97% | | | | | | 4.36% | | | | | | 6.02% | | | | | | 0.64%(f) | | |
Ratios/Supplemental Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s omitted) | | | | $ | 365,028 | | | | | $ | 444,327 | | | | | $ | 88,035 | | | | | $ | 43,539 | | | | | $ | 14,801 | | |
Ratio to average net assets of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses net of waivers | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30%(g) | | |
Expenses excluding waivers | | | | | 0.49% | | | | | | 0.51% | | | | | | 0.57% | | | | | | 0.77% | | | | | | 0.99%(g) | | |
Net investment income | | | | | 1.31% | | | | | | 1.40% | | | | | | 2.01% | | | | | | 2.89% | | | | | | 2.74%(g) | | |
Portfolio turnover rate(h) | | | | | 80% | | | | | | 36% | | | | | | 71% | | | | | | 56% | | | | | | 77% | | |
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Calculation of the net realized and unrealized gain (loss) per share does not correlate with the Fund’s net realized and unrealized gain (loss) presented on the Statements of Changes in Net Assets due to the timing of creation of Fund shares in relation to fluctuating market values.
(d)
Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions, if any, at net asset value during the period, and redemption on the last day of the period. Total return calculated for a period less than one year is not annualized.
(e)
The market price returns are calculated using the mean between the last bid and ask prices.
(f)
Since the Shares of the Funds did not trade in the secondary market until the day after the Fund’s inception, for the period from the inception to the first day of the secondary market trading, the NAV is used as a proxy for the secondary market trading price to calculate the market returns.
(g)
Annualized.
(h)
Portfolio turnover rate is not annualized and excludes the value of portfolio securities received or delivered as in-kind creations or redemptions in connection with the Fund’s capital share transactions.
Financial Highlights (continued)
Selected Data for a Share of Capital Stock Outstanding
| | | IQ MacKay Municipal Intermediate ETF | |
| | | For the Year Ended April 30, | | | For the Period October 18, 2017(a) to April 30, 2018 | |
| | | 2022 | | | 2021 | | | 2020 | | | 2019 | |
Net asset value, beginning of period | | | | $ | 26.82 | | | | | $ | 25.22 | | | | | $ | 25.61 | | | | | $ | 24.67 | | | | | $ | 25.00 | | |
Income from Investment Operations | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income(b) | | | | | 0.28 | | | | | | 0.47 | | | | | | 0.53 | | | | | | 0.69 | | | | | | 0.30 | | |
Net realized and unrealized gain (loss) | | | | | (2.16) | | | | | | 1.73 | | | | | | 0.16(c) | | | | | | 0.91 | | | | | | (0.39) | | |
Net increase (decrease) in net assets resulting from investment operations | | | | | (1.88) | | | | | | 2.20 | | | | | | 0.69 | | | | | | 1.60 | | | | | | (0.09) | | |
Distributions from: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net investment income | | | | | (0.39) | | | | | | (0.58) | | | | | | (0.67) | | | | | | (0.66) | | | | | | (0.24) | | |
Net realized gain | | | | | (0.08) | | | | | | (0.02) | | | | | | (0.41) | | | | | | — | | | | | | — | | |
Total distributions from net investment income and realized gains | | | | | (0.47) | | | | | | (0.60) | | | | | | (1.08) | | | | | | (0.66) | | | | | | (0.24) | | |
Net asset value, end of period | | | | $ | 24.47 | | | | | $ | 26.82 | | | | | $ | 25.22 | | | | | $ | 25.61 | | | | | $ | 24.67 | | |
Market price, end of period | | | | $ | 24.47 | | | | | $ | 26.84 | | | | | $ | 25.22 | | | | | $ | 25.66 | | | | | $ | 24.71 | | |
Total Return | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investment return based on net asset value(d) | | | | | (7.13)% | | | | | | 8.80% | | | | | | 2.65% | | | | | | 6.59% | | | | | | (0.34)% | | |
Total investment return based on market price(e) | | | | | (7.19)% | | | | | | 8.90% | | | | | | 2.44% | | | | | | 6.62% | | | | | | (0.18)%(f) | | |
Ratios/Supplemental Data | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net assets, end of period (000’s omitted) | | | | $ | 229,984 | | | | | $ | 124,700 | | | | | $ | 51,708 | | | | | $ | 43,541 | | | | | $ | 29,606 | | |
Ratio to average net assets of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses net of waivers | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30% | | | | | | 0.30%(g) | | |
Expenses excluding waivers | | | | | 0.51% | | | | | | 0.57% | | | | | | 0.62% | | | | | | 0.71% | | | | | | 0.77%(g) | | |
Net investment income | | | | | 1.05% | | | | | | 1.78% | | | | | | 2.02% | | | | | | 2.76% | | | | | | 2.28%(g) | | |
Portfolio turnover rate(h) | | | | | 74% | | | | | | 43% | | | | | | 77% | | | | | | 72% | | | | | | 80% | | |
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Calculation of the net realized and unrealized gain (loss) per share does not correlate with the Fund’s net realized and unrealized gain (loss) presented on the Statements of Changes in Net Assets due to the timing of creation of Fund shares in relation to fluctuating market values.
(d)
Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions, if any, at net asset value during the period, and redemption on the last day of the period. Total return calculated for a period less than one year is not annualized.
(e)
The market price returns are calculated using the mean between the last bid and ask prices.
(f)
Since the Shares of the Funds did not trade in the secondary market until the day after the Fund’s inception, for the period from the inception to the first day of the secondary market trading, the NAV is used as a proxy for the secondary market trading price to calculate the market returns.
(g)
Annualized.
(h)
Portfolio turnover rate is not annualized and excludes the value of portfolio securities received or delivered as in-kind creations or redemptions in connection with the Fund’s capital share transactions.
Financial Highlights (continued)
Selected Data for a Share of Capital Stock Outstanding
| | | IQ MacKay California Municipal Intermediate ETF | |
| | | For the Period December 21, 2021(a) to April 30, 2022 | |
Net asset value, beginning of period | | | | $ | 25.00 | | |
Income from Investment Operations | | | | | | | |
Net investment income(b) | | | | | 0.13 | | |
Net realized and unrealized gain(loss) | | | | | (3.18) | | |
Net increase (decrease) in net assets resulting from investment operations | | | | | (3.05) | | |
Distributions from: | | | | | | | |
Net investment income | | | | | (0.17) | | |
Net asset value, end of period | | | | $ | 21.78 | | |
Market price, end of period | | | | $ | 21.80 | | |
Total Return | | | | | | | |
Total investment return based on net asset value(c) | | | | | (12.25)% | | |
Total investment return based on market price(d) | | | | | (12.17)% | | |
Ratios/Supplemental Data | | | | | | | |
Net assets, end of year (000’s omitted) | | | | $ | 43,566 | | |
Ratio to average net assets of: | | | | | | | |
Expenses net of waivers/reimbursements(g) | | | | | 0.35%(f) | | |
Expenses excluding waivers/reimbursements(g) | | | | | 0.73%(f) | | |
Net investment income (loss)(c) | | | | | 1.54%(f) | | |
Portfolio turnover rate(i) | | | | | 86% | | |
(a)
Commencement of operations
(b)
Based on average shares outstanding.
(c)
Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions, if any, at net asset value during the period, and redemption on the last day of the period. Total return calculated for a period less than one year is not annualized.
(d)
The market price returns are calculated using the mean between the last bid and ask prices.
(e)
Since the Shares of the Funds did not trade in the secondary market until the day after the Fund’s inception, for the period from the inception to the first day of the secondary market trading, the NAV is used as a proxy for the secondary market trading price to calculate the market returns.
(f)
Annualized.
(g)
Portfolio turnover rate is not annualized and excludes the value of portfolio securities received or delivered as in-kind creations or redemptions in connection with the Fund’s capital share transactions.
Privacy Policy
The Trust is committed to respecting the privacy of personal information you entrust to us in the course of doing business with us.
The Trust may collect non-public personal information from various sources. The Trust uses such information provided by you or your representative to process transactions, to respond to inquiries from you, to deliver reports, products, and services, and to fulfill legal and regulatory requirements.
We do not disclose any non-public personal information about our customers to anyone unless permitted by law or approved by the customer. We may share this information within the Trust’s family of companies in the course of providing services and products to best meet your investing needs. We may share information with certain third-parties who are not affiliated with the Trust to perform marketing services, to process or service a transaction at your request or as permitted by law. For example, sharing information with companies that maintain or service customer accounts for the Trust is essential. We may also share information with companies that perform administrative or marketing services for the Trust, including research firms. When we enter into such a relationship, we restrict the companies’ use of our customers’ information and prohibit them from sharing it or using it for any purposes other than those for which they were hired.
We maintain physical, electronic, and procedural safeguards to protect your personal information. Within the Trust, we restrict access to personal information to those employees who require access to that information in order to provide products or services to our customers such as handling inquiries. Our employment policies restrict the use of customer information and require that it be held in strict confidence.
We will adhere to the policies and practices described in this notice for both current and former customers of the Trust.
IndexIQ Active ETF Trust
Mailing Address
51 Madison Avenue
New York, New York 10010
1-888-474-7725
newyorklifeinvestments.com/etf
IndexIQ Active ETF Trust
PROSPECTUS | AUGUST 31, 2022
FOR MORE INFORMATION
If you would like more information about the Trust, the Funds and the Shares, the following documents are available free upon request:
Annual/Semi-annual Report
Additional information about a Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders (once available). In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during the last fiscal year.
Statement of Additional Information
Additional information about the Funds and their policies is also available in the Funds’ SAI. The SAI is incorporated by reference into this Prospectus (and is legally considered part of this Prospectus). The Funds’ annual and semi-annual reports (once available) and the SAI are available free upon request by calling IndexIQ at 1-888-474-7725. You can also access and download the annual and semi-annual reports (once available) and the SAI at the Funds’ website: newyorklifeinvestments.com/etf.
To obtain other information and for shareholder inquiries:
By telephone: 1-888-474-7725
By mail: IndexIQ Active ETF Trust
c/o IndexIQ
51 Madison Avenue
New York, NY 10010
On the Internet: SEC Edgar database: http://www.sec.gov; or newyorklifeinvestments.com/etf
You may review and obtain copies of Fund documents (including the SAI) by visiting the SEC’s public reference room in Washington, D.C. You may also obtain copies of Fund documents, after paying a duplicating fee, by writing to the SEC’s Public Reference Section, Washington, D.C. 20549-0102 or by electronic request to: publicinfo@sec.gov. Information on the operation of the public reference room may be obtained by calling the SEC at (202) 551-8090.
No person is authorized to give any information or to make any representations about the Funds and their Shares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference.
Dealers effecting transactions in the Funds’ Shares, whether or not participating in this distribution, may be generally required to deliver a Prospectus. This is in addition to any obligation dealers have to deliver a Prospectus when acting as underwriters.
“New York Life Investments” is both a servicemark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.
IQ® and IndexIQ® are registered servicemarks of New York Life Insurance Company.
The Trust’s investment company registration number is 811-22739.
IndexIQ Active ETF Trust
PROSPECTUS
August 31, 2022
IQ MacKay ESG Core Plus Bond ETF (ESGB)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
As permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you hold accounts through a financial intermediary, you may contact your financial intermediary to enroll in electronic delivery. Please note that not all financial intermediaries may offer this service.
You may elect to receive all future reports in paper free of charge. If you hold accounts through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held with your financial intermediary.
Not FDIC Insured | May Lose Value | No Bank Guarantee
IndexIQ Active ETF Trust (the “Trust”) is a registered investment company that consists of separate investment portfolios called “Funds”. This Prospectus relates to the following Fund:
Name | | | CUSIP | | | Symbol | | | Exchange | |
IQ MacKay ESG Core Plus Bond ETF | | | 45409F785 | | | ESGB | | | NYSE Arca | |
The Fund is an exchange-traded fund. This means that shares of the Fund are listed on a national securities exchange (the “Exchange”) and trade at market prices. The market price for the Fund’s shares may be different from its net asset value per share (the “NAV”). The fund has its own CUSIP number and exchange trading symbol.
| | | | | | 4 | | |
| | | | | | 14 | | |
| | | | | | 14 | | |
| | | | | | 14 | | |
| | | | | | 14 | | |
| | | | | | 25 | | |
| | | | | | 26 | | |
| | | | | | 26 | | |
| | | | | | 28 | | |
| | | | | | 28 | | |
| | | | | | 29 | | |
| | | | | | 29 | | |
| | | | | | 30 | | |
| | | | | | 30 | | |
| | | | | | 34 | | |
| | | | | | 35 | | |
| | | | | | 35 | | |
| | | | | | 36 | | |
| | | | | | 37 | | |
IQ MacKay ESG Core Plus Bond ETF
Investment Objective
The IQ MacKay ESG Core Plus Bond ETF (the “Fund”) seeks total return, while incorporating the Subadvisor’s ESG investment strategy.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
| Management Fee | | | | | 0.39% | | |
| Distribution and/or Service (12b-1) Fees | | | | | 0.00% | | |
| Other Expenses | | | | | 0.25% | | |
| Acquired Fund Fees and Expenses(a) | | | | | 0.01% | | |
| Total Annual Fund Operating Expenses(a)(b) | | | | | 0.65% | | |
| Expense Waiver/Reimbursement(b) | | | | | 0.25% | | |
| Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement | | | | | 0.40% | | |
(a)
(b)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
$41 |
|
|
$128 |
|
|
$224 |
|
|
$505 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments. A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal period, the Fund’s portfolio turnover rate was 333% of the average value of the portfolio. This rate excludes the value of portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares.
Principal Investment Strategies
The Fund, under normal circumstances, invests at least 80% of its assets (net assets plus any borrowings for investment purposes) in bonds, which include all types of debt securities, such as: debt or debt-related securities issued or guaranteed by the U.S. or foreign governments, their agencies or instrumentalities; obligations of international or supranational entities; debt securities issued by U.S. or foreign corporate entities;
zero coupon bonds; municipal bonds; mortgage-related and other asset-backed securities; and loan participation interests. The Fund’s bond investments may have fixed or floating rates of interest. The Fund generally seeks to invest in a broad portfolio of corporate, government, and mortgage-related and asset-backed securities.
Under normal circumstances, the Fund will invest at least 80% of its assets in securities that meet MacKay Shields LLC’s (the “Subadvisor”) environmental, social, and corporate governance (ESG) criteria. The Subadvisor analyzes and applies its ESG criteria to corporate, sovereign, and mortgage-related and other securitized issuers. The Subadvisor’s ESG analysis includes its own proprietary assessments of ESG factors as well as standards developed and set forth by recognized organizations such as entities sponsored by the United Nations.
The Fund will not invest in instruments of corporate issuers that have been determined by the Subadvisor, through its own analysis or using third party data, to not be in compliance with the Principles of the UN Global Compact. The Fund will also not invest in instruments of corporate issuers that have been determined by the Subadvisor, through its own analysis or using third party data, to: (i) engage in unconventional oil and gas production (such as oil sands, oil shale, shale gas, deep water and Arctic drilling); (ii) derive greater than 5% of their revenue from (a) the manufacture or production of military weapons, (b) the manufacture or production of tobacco, (b) the mining of coal, or (c) the production and distribution of pornography; or (iii) manufacture controversial weapons (such as anti-personnel mines, biological weapons, chemical weapons, cluster munitions, depleted uranium ammunition and armor, incendiary weapons, nuclear weapons, and white phosphorus munitions).
The Fund may invest up to 30% of its total assets in securities rated below investment grade by a nationally recognized statistical rating organization (“NRSRO”) (such securities rated lower than BBB- and Baa3) or, if unrated, determined by the Subadvisor to be of comparable quality. Securities that are rated below investment grade by NRSROs are commonly referred to as “high-yield securities” or “junk bonds.” If NRSROs assign different ratings for the same security, the Fund will use the higher rating for purposes of determining the credit quality. The Fund may invest in mortgage dollar rolls, to-be-announced (“TBA”) securities transactions, variable rate notes and floating rate notes. The Fund may invest up to 20% of its net assets in securities of foreign issuers, including up to 10% of its net assets in securities of emerging market issuers. The Fund may invest up to 20% of its net assets in securities denominated in a currency other than the U.S. dollar. The Fund may invest up to 5% of its net assets in common stocks. To the extent possible, the Fund will attempt to hedge its foreign currency exposure against the U.S. dollar. The Fund may also invest in derivatives such as futures, options and swap agreements to try to enhance returns or reduce the risk of loss by hedging certain of its holdings. Commercial paper must be, when purchased, rated in the highest rating category by a NRSRO or if unrated, determined by the Subadvisor to be of comparable quality.
The Fund will generally seek to maintain a portfolio modified duration to worst within 2.5 years (plus or minus) of the duration of the Bloomberg U.S. Aggregate Bond Index. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates. Duration to worst is the duration of a bond computed using the bond’s nearest call date or maturity, whichever comes first. This measure ignores future cash flow fluctuations due to embedded optionality.
Investment Process: The Subadvisor utilizes an investment process that combines a top-down analytical framework with a rigorous bottom-up process.
Fundamental economic cycle analysis, credit quality and interest rate trends are the principal factors considered by the Subadvisor in managing the Fund and determining whether to increase or decrease the emphasis placed upon a particular type of security or industry sector within the Fund’s investment portfolio. The Subadvisor’s target duration for the Fund is based on a set of investment decisions that take into account a broad range of economic, fundamental and technical indicators.
The Subadvisor’s ESG analysis evaluates securities of corporate, sovereign, and mortgage-related and other securitized issuers using environmental, social, corporate governance factors. The Subadvisor considers these ESG criteria systematically throughout the Fund’s investment process. The Subadvisor’s ESG analysis evaluates each issuer relative to other issuers in the relevant peer group and asset class. The Subadvisor’s ESG analysis is a proprietary process developed by the Subadvisor that assigns each issuer separate “environmental,” “social,” and “governance” scores based on ESG factors deemed most material to that asset class and peer group.
Although the Subadvisor does not use third party ESG scores to calculate an issuer’s ESG score, as described further below, the Subadvisor may use third-party research to help identify sustainability issues that are likely to affect the financial condition or operating performance of an issuer.
The Subadvisor’s scoring process seeks to rate issuers as “outperforming,” “average,” or “underperforming” within each of the environmental, social and governance factors versus peers. The issuer’s score in each of the three factors is combined on an equally weighted basis to determine the issuer’s overall ESG score. In addition to an issuer’s current overall score, the Subadvisor also considers the historical trend in an issuer’s score and seeks to identify opportunities where a company has improved its ESG practices and is expected to continue to demonstrate further improvement. A security meets the Subadvisor’s ESG criteria if it: (i) has received a score of at least “average”; or (ii) if the issuer’s current score is below “average,” the issuer has demonstrated a trend of improving scores. During the portfolio construction process, the Subadvisor will assess overall environmental, social and governance scores across the portfolio, as well as by overall issuer score.
The Subadvisor’s process for corporate credit ESG analysis includes evaluating material ESG factors on an industry-by-industry basis and issuer performance of those factors is based on under/outperformance of industry peers. Factors considered as part of the Subadvisor’s ESG analysis of corporate issuers include:
•
Environmental factors such as the issuer’s ability to identify and mitigate pecuniary environmental risk exposure, predominantly arising from regulatory factors in a transition to a low carbon economy.
•
Social factors such as an issuer’s ability to effectively identify and mitigate pecuniary social risk exposure.
•
Governance factors such as assessing an issuer’s quality of management and business oversight.
The Subadvisor’s process for developed and emerging sovereign debt ESG utilizes a framework that reflects factors that are specific to sovereign debt, including ESG data released by the World Bank. The combined ESG score for a sovereign provides an assessment of the current and anticipated future stability and resiliency of the sovereign and the strength of its economy.
The Subadvisor’s process for mortgage-related and other securitized asset ESG considers material ESG factors at an asset type and security level.
The Subadvisor’s engagement activities may include, but are not limited to, in-person meetings and phone calls with issuers to understand their sustainability goals and business practices as well as other industry participants engaged in ESG and sustainability initiatives. This engagement allows the Subadvisor to better align mutual interests while impacting change.
The Subadvisor may sell a security if it no longer believes that the security will contribute to meeting the investment objective of the Fund or no longer meets its ESG standards. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy, meaningful changes in the issuer’s financial condition, changes in the condition and outlook in the issuer’s industry, and a change in the Subadvisor’s ESG scoring.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. You should consider carefully the following risks before investing in the Fund. A more complete discussion of Principal Risks is included under “Description of the Principal Risks of the Fund.”
Asset-Backed Securities Risk
Asset-backed securities are securities that represent interests in, and whose values and payments are based on, a “pool” of underlying assets, which may include, among others, lower-rated debt securities and corporate loans, consumer loans or mortgages and leases of property. Asset-backed securities include collateralized debt obligations, collateralized bond obligations, and collateralized loan obligations and other similarly structured vehicles. As with other debt securities, asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk and valuation risk. The impairment of the value of collateral or other assets underlying an asset-backed security, such as a result of non-payment of loans or non-performance of underlying assets, may result in a reduction in the value of such asset-backed securities and losses to the Fund.
Investments in mortgage-related securities make an investor more susceptible to adverse economic, interest rate, political or regulatory events that affect the value of real estate. Mortgage-related securities are also
significantly affected by the rate of prepayments. Impairment of the underlying obligations or collateral, such as by non-payment, will reduce a mortgage-related security’s value.
Authorized Participant Concentration Risk
Only certain large institutions may engage in creation or redemption transactions directly with the Fund (each, an “Authorized Participant”). The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Currency Risk
Investments directly in foreign (non-U.S.) currencies or in securities that trade in, and receive revenues in, foreign (non-U.S.) currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged. Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including changes in interest rates, intervention (or the failure to intervene) by U.S. or foreign governments, central banks or supranational entities such as the International Monetary Fund, or by the imposition of currency controls or other political developments in the United States or abroad.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Derivatives Risk
Derivatives are investments whose value depends on (or is derived from) the value of an underlying instrument, such as a security, asset, reference rate or index and involve risks different from, and possibly greater than, the risks associated with other investments. These risks include: (i) the risk that the counterparty to a derivatives transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk
that changes in the value of the derivative may not correlate perfectly with the underlying asset. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited changing supply and demand relationships, government programs and policies, national and international political and economic events, changes in interest rates, inflation and deflation, and changes in supply and demand relationships. Unlike other investments, derivative contracts often have leverage inherent in their terms. The use of leveraged derivatives can magnify potential for gain or loss and, therefore, amplify the effects of market volatility on the Fund’s Share price. The effects of leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so.
Foreign Securities Risk
Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Some countries and regions have experienced security concerns, war or threats of war and aggression, terrorism, economic uncertainty, natural and environmental disasters and/or systemic market dislocations that have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on the U.S. and world economies and markets generally. Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. issuers, and therefore not all material information will be available. Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments. Less developed securities markets are more likely to experience problems with the clearing and settling of trades, as well as the holding of securities by local banks, agents and depositories. The less developed a country’s securities market is, the greater the likelihood of custody problems.
Futures Contracts Risk
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts and the Fund may not be able to enter into a closing transaction. Exchanges may also limit the number of positions that can be held or controlled by the Fund, thus limiting the ability of the Fund to implement its investment strategy. Futures markets are highly volatile and the use of futures may increase the Fund’s volatility. The value of an investment in the Fund may change quickly and without warning.
High Yield Securities Risk
High yield securities, or “junk” bonds, generally offer a higher current yield than the yield available from higher grade issues, but are subject to greater market fluctuations, are less liquid and provide a greater risk of loss than investment grade securities, and therefore are considered to be highly speculative. In general, high yield securities may have a greater risk of default than other types of securities and could cause income and principal losses for the Fund.
Investment Style Risk
The Fund seeks to allocate investment exposure based upon a particular style of investing. Different investment styles tend to shift in and out of favor depending upon market and economic conditions and investor sentiment. As a consequence, the Fund may underperform as compared to the market generally or to other funds that invest in similar asset classes but employ different investment styles. Further, there is no guarantee that the Fund will accurately or optimally utilize the investment style or that it will successfully provide the desired investment exposure.
•
ESG Investing Style Risk. The Fund seeks exposure to the securities of companies meeting environmental, social and corporate governance investing criteria. The Fund excludes or limits exposure to securities of certain issuers for non-financial reasons, and the Fund may forgo some market opportunities available to funds that do not use these criteria. The application of ESG investing criteria may affect the Fund’s exposure to certain sectors or types of investments and may impact the Fund’s relative investment performance depending on whether such sectors or investments are in or out of favor in the market. ESG
investing is subjective by nature, and therefore offers no guarantee that the ESG criteria utilized by the Subadvisor will accurately provide exposure to issuers meeting environmental, social and corporate governance criteria or any judgment exercised by the Subadvisor will reflect the beliefs or values of any particular investor. In addition, ESG investing is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could adversely affect the analysis of the factors relevant to a particular investment.
LIBOR Replacement Risk
The terms of floating rate loans, financings or other transactions in the U.S. and globally have been historically tied to LIBOR, which functions as a reference rate or benchmark for various commercial and financial contracts. LIBOR may be a significant factor in determining payment obligations under derivatives transactions, the cost of financing of the Fund’s investments or the value or return on certain other Fund investments. As a result, LIBOR may be relevant to, and directly affect, the Fund’s performance. The Financial Conduct Authority, the United Kingdom’s financial regulatory body and regulator of LIBOR, announced that after 2021 it will cease its active encouragement of banks to provide the quotations needed to sustain LIBOR due to the absence of an active market for interbank unsecured lending and other reasons. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. As a result, it is anticipated that LIBOR will be discontinued or will no longer be sufficiently robust to be representative of its underlying market around that time. There remains a great deal of uncertainty regarding how the phasing-out of LIBOR will be implemented and it’s possible that the Fund’s investments tied to LIBOR could decrease in value or become increasingly illiquid or volatile, among other potential negative consequences. It is also possible that certain hedging positions that the Fund has entered into will be become less effective.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Municipal Securities Risk
Issuers, including governmental issuers, may be unable to pay their obligations as they come due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. The values of Municipal Bonds held by the Fund may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. This risk would be heightened to the extent that the
Fund invests a substantial portion of its assets in Municipal Bonds issued pursuant to similar projects or whose interest is paid solely from revenues of similar projects. In addition, income from Municipal Bonds held by the Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by the Fund to be taxable and may result in a significant decline in the values of such municipal securities. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. As a result, the Fund may be forced to accept a lower price to sell a Municipal Bond, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. There can be no guarantee that the Fund will meet its investment objective(s).
Portfolio Turnover Risk
The Fund’s strategy may frequently involve buying and selling portfolio securities to rebalance the Fund’s investment exposures. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause a Fund’s performance to be less than expected.
Risks of Investing in Loans
Investments in loans are subject to the same risks as investments in other types of debt securities, including credit risk, interest rate risk, liquidity risk and valuation risk that may be heightened because of the limited public information available regarding loans and because loan borrowers may be leveraged and tend to be more adversely affected by changes in market or economic conditions. Default in the payment of interest or principal on a loan will result in a reduction in the value of the loan and consequently a reduction in the value of an investment in that loan. If an investor holds a loan through another financial institution or relies on a financial institution to administer the loan, its receipt of principal and interest on the loan may be subject to the credit risk of that financial institution. It is possible that any collateral securing a loan may be insufficient or unavailable to the investor, and that the investor’s rights to collateral may be limited by bankruptcy or insolvency laws. Additionally, there is no central clearinghouse for loan trades and the loan market has not established enforceable settlement standards or remedies for failure to settle. Consequently, the secondary market for loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods (in some cases longer than 7 days), which may cause an investor to be unable to realize the full value of its investment. In addition, loans are generally not registered with the SEC under the Securities Act of 1933, as amended, and may not be considered “securities,” and an investor may not be entitled to rely on the anti-fraud protections of the federal securities laws. An investment in loans made to non-U.S. borrowers may be affected by political and social instability, changes in economic or taxation policies, difficulties in enforcing obligations, decreased liquidity and increased volatility. Foreign borrowers may be subject to less regulation, resulting in less publicly available information about the borrowers.
The loan market has seen a significant increase in loans with weaker lender protections including, but not limited to, limited financial maintenance covenants or, in some cases, no financial maintenance covenants (i.e., “covenant-lite loans”) that would typically be included in a traditional loan agreement and general weakening of other restrictive covenants applicable to the borrower such as limitations on incurrence of additional debt, restrictions on payments of junior debt or restrictions on dividends and distributions. Weaker lender protections such as the absence of financial maintenance covenants in a loan agreement and the inclusion of “borrower-favorable” terms may impact recovery values and/or trading levels of loans in the future. The absence of financial maintenance covenants in a loan agreement generally means that the lender may not be able to declare a default if financial performance deteriorates. This may hinder an investor’s ability to reprice credit risk associated with a particular borrower and reduce the investor’s ability to restructure a problematic loan and mitigate potential loss. As a result, an investor’s exposure to losses on investments in loans may be increased, especially during a downturn in the credit cycle or changes in market or economic conditions.
Risks of Loan Assignments and Participations
The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchaser of an assignment may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. Because assignments may be arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender. In addition, if the loan is foreclosed, the purchaser of an assignment could become part owner of any collateral and could bear the costs and liabilities of owning and disposing of the collateral. To the extent an investor sells a loan by way of assignment, the investor may be required to pass along a portion of any fees to which the investor was entitled under the loan. In connection with purchasing participations, such purchaser generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the purchaser may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the purchaser will be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, the purchaser may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds).
Additionally market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Variable and Floating Rate Instruments Risk
Variable and floating rate instruments include debt securities issued by corporate and governmental entities, bank loans, mortgage-backed securities and asset-backed securities, preferred equity securities and derivative variable rate securities, such as inverse floaters. Variable and floating rate instruments are structured so that the instrument’s coupon rate fluctuates based upon the level of a reference rate. A variable or floating rate instrument’s coupon rate resets periodically according to its terms. Consequently, in a rising interest rate environment, variable and floating rate instruments with coupon rates that reset infrequently may lag behind the changes in market interest rates.
Zero Coupon Securities Risk
Zero coupon securities do not pay interest on a current basis. The interest earned on zero coupon securities is, implicitly, automatically compounded and paid out at maturity. Zero coupon securities are subject to substantially greater market price fluctuations during periods of changing prevailing interest rates than are comparable securities that make current distributions of interest.
Performance Information
As of the date of this Prospectus, the Fund has not yet completed a full calendar year of operations and therefore does not report its performance information. The Fund’s performance current to the most recent month-end is available by calling 1-888-474-7725 or by visiting newyorklifeinvestments.com/etf.
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
MacKay Shields LLC is the investment subadvisor of the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title | | | Length of Service with Subadvisor | | | Length of Service as Fund’s Portfolio Manager | |
Stephen Cianci, CFA | | | Since 2018 | | | Since Fund’s inception | |
Neil Moriarty, III | | | Since 2018 | | | Since Fund’s inception | |
Lesya Paisley, CFA | | | Since 2021 | | | Since August 2022 | |
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a
seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Shares of the Fund will trade at market price rather than NAV. As such, Shares may trade at a price greater than NAV (premium) or less than NAV (discount).
Tax Information
The Fund’s distributions are expected to be taxed as ordinary income, qualified dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account. However, subsequent withdrawals from such a tax-advantaged account may be subject to U.S. federal income tax. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
Overview
The Trust is an investment company consisting of a number of separate investment portfolios (each, a “Fund” and collectively, the “Funds”) that are exchange-traded funds (“ETFs”). ETFs are index funds whose shares are listed on a stock exchange and traded like equity securities at market prices. ETFs, such as the Fund, allow you to buy or sell shares that represent the collective performance of a selected group of securities. ETFs are designed to add the flexibility, ease and liquidity of stock-trading to the benefits of traditional index fund investing.
This Prospectus provides the information you need to make an informed decision about investing in the Fund. It contains important facts about the Trust as a whole and the Fund in particular.
IndexIQ Advisors LLC (the “Advisor”) is the investment advisor to the Fund. MacKay Shields LLC is the subadvisor to the Fund.
Description of the Principal Investment Strategies of the Fund
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active investment strategy to meet its investment objective. The Subadvisor, subject to the oversight of the Advisor and Board of Trustees of the Trust (the “Board”), has discretion on a daily basis to manage the Fund’s portfolio in accordance with the Fund’s investment objective and investment policies.
Unless otherwise indicated, all of the percentage limitations above and in the section entitled “Principal Investment Strategies” apply only at the time of an acquisition or encumbrance of securities or assets of the Fund, except that any borrowings by the Fund that exceeds applicable limitations must be reduced to meet such limitations within the period required by the 1940 Act. Therefore, a change in the percentage that results from a relative change in values or from a change in the Fund’s assets will not be considered a violation of the Fund’s policies or restrictions. “Value” for the purposes of all investment restrictions shall mean the value used in determining the Fund’s NAV.
To the extent the Fund makes investments on behalf of the Fund that are regulated by the Commodities Futures Trading Commission, it intends to do so in accordance with Rule 4.5 under the Commodity Exchange Act (“CEA”). The Advisor has filed a notice of eligibility for exclusion from the definition of the term “commodity pool operator” in accordance with Rule 4.5 and is therefore not subject to registration as a commodity pool operator under the CEA.
The Fund’s portfolio holdings will be disclosed on the Trust’s website (newyorklifeinvestments.com/etf) daily after the close of trading on the NYSE Arca, Inc. (“NYSE Arca” or the “Exchange”) and prior to the opening of trading on the Exchange the following day.
Additional Investment Strategies
Each of the policies described herein, including the investment objective of the Fund, constitutes a non-fundamental policy that may be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval. Certain fundamental policies of the Fund are set forth in the Fund’s Statement of Additional Information (the “SAI”) under “Investment Restrictions.”
Description of the Principal Risks of the Fund
Investors in the Fund should carefully consider the risks of investing in the Fund as set forth in the Fund’s Summary Information section under “Principal Risks.”
Asset-Backed Securities Risk
Asset-backed securities are securities that represent interests in, and whose values and payments are based on, a “pool” of underlying assets, which may include, among others, lower-rated debt securities and corporate loans, consumer loans or mortgages and leases of property. Asset-backed securities include collateralized debt obligations, collateralized bond obligations, and collateralized loan obligations and other similarly structured vehicles. As with other debt securities, asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk and valuation risk. Certain asset-backed securities do not have the benefit of the same
security interest in the related collateral as do mortgage-backed securities, nor are they provided government guarantees of repayment. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. In addition, some issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. The impairment of the value of collateral or other assets underlying an asset-backed security, such as a result of non-payment of loans or non-performance of underlying assets, may result in a reduction in the value of such asset-backed securities and losses to a Fund.
Investments in mortgage-related securities make an investor more susceptible to adverse economic, political or regulatory events that affect the value of real estate. Mortgage-related securities are also significantly affected by the rate of prepayments and modifications of the mortgage loans underlying those securities, as well as by other factors such as borrower defaults, delinquencies, realized or liquidation losses and other shortfalls. Mortgage-related securities are particularly sensitive to prepayment risk, given that the term to maturity for mortgage loans is generally substantially longer than the expected lives of those securities. As the timing and amount of prepayments cannot be accurately predicted, the timing of changes in the rate of prepayments of the mortgage loans may significantly affect a Fund’s actual yield to maturity on any mortgage-related securities. Along with prepayment risk, mortgage-related securities are significantly affected by interest rate risk. In a low interest rate environment, mortgage loan prepayments would generally be expected to increase due to factors such as refinancings and loan modifications at lower interest rates. In contrast, if prevailing interest rates rise, prepayments of mortgage loans would generally be expected to decline and therefore extend the weighted average lives of mortgage-related securities held or acquired by a Fund. Fund investments in mortgage-backed securities issued by Ginnie Mae are backed by the full faith and credit of the U.S. government. Fund investments in mortgage-backed securities issued by Fannie Mae and Freddie Mac are not backed by the full faith and credit of the U.S. government, and there can be no assurance that the U.S. government would provide financial support to its agencies or instrumentalities where it is not obligated to do so. Impairment of the underlying obligations or collateral, such as by non-payment, will reduce a mortgage-related security’s value. Enforcing rights against such collateral in events of default may be difficult or insufficient. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile.
Authorized Participant Concentration Risk
Only an Authorized Participant may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting. This risk may be heightened for ETFs that invest in non-U.S. securities because such securities often involve greater settlement and operational issues for Authorized Participants that may further limit the availability of Authorized Participants.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments or to otherwise honor its obligations. There are varying degrees of credit risk, depending on an issuer’s or counterparty’s financial condition and on the terms of an obligation, which may be reflected in the issuer’s or counterparty’s credit rating. There is the chance that the Fund’s portfolio holdings will have their credit ratings downgraded or will default (i.e., fail to make scheduled interest or principal payments), or that the market’s perception of an issuer’s or counterparty’s creditworthiness may worsen, potentially reducing the Fund’s income level or Share price. The value of an investment in the Fund may change quickly and without warning in response to issuer defaults, changes in the credit ratings of such Fund’s portfolio securities and/or perceptions related thereto.
Currency Risk
Investments directly in foreign (non-U.S.) currencies or in securities that trade in, and receive revenues in, foreign (non-U.S.) currencies are subject to the risk that those currencies will decline in value relative to the U.S. dollar or, in the case of hedging positions, that the U.S. dollar will decline in value relative to the currency being hedged.
Currency rates in foreign countries may fluctuate significantly over short periods of time for a number of reasons, including national debt levels and trade deficits, changes in balances of payments and trade, domestic and foreign interest and inflation rates, global or regional political, economic or financial events, monetary policies of governments, actual or potential government intervention and global energy prices. Political instability, the possibility of government intervention and restrictive or opaque business and investment policies may also reduce the value of a country’s currency. Government monetary policies and the buying or selling of currency by a country’s government may also influence exchange rates. As a result, a Fund’s investments in foreign currency denominated securities may reduce the return of such Fund. Because a Fund’s NAV is determined on the basis of U.S. dollars, the Fund’s NAV may decrease if the value of the non-U.S. currency to which the Fund has exposure depreciates in value relative to the U.S. dollar. This may occur even if the value of the underlying non-U.S. securities increases. Conversely, a Fund’s NAV may increase if the value of a non-U.S. currency appreciates relative to the U.S. dollar.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. These risks typically are not covered by insurance. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber incidents include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the systems of security issuers, the Advisor, distributor and other service providers (including, but not limited to, sub-advisors, index providers, fund accountants, custodians, transfer agents and administrators), market makers, Authorized Participants or the issuers of securities in which the Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Fund’s ability to calculate its NAV, disclosure of confidential trading information, impediments to trading, submission of erroneous trades or erroneous creation or redemption orders, the inability of the Fund or its service providers to transact business, violations of applicable privacy and other laws, regulatory fines and other penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber incidents in the future. While the Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber attacks, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, the Fund cannot control the cyber security plans and systems put in place by service providers to the Fund, issuers in which the Fund invests, Authorized Participants or market makers. There is no guarantee that such preventative efforts will succeed, and the Fund and its shareholders could be negatively impacted as a result.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Derivatives Risk
Derivatives are investments whose value depends on (or is derived from) the value of an underlying instrument, such as a security, asset, reference rate or index and involve risks different from, and possibly greater than, the risks associated with other investments. These risks include: (i) the risk that the counterparty to a derivatives transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to, changing supply and demand relationships, government programs and policies, national and international political and economic events, changes in interest rates, inflation and deflation, and changes in supply and demand relationships. Unlike other investments, derivative contracts often have leverage inherent in their terms. This leverage creates a disconnect between the initial amount of an investment relative to the risk assumed and introduces the possibility that a relatively small movement in the value of an underlying reference asset can result in an immediate and substantial loss to a party to a derivative contract. In general, the use of leveraged derivatives can magnify potential for gain or loss and, therefore, amplify the effects of market volatility on the Fund’s Share price. The effects of leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so. In the event of the bankruptcy or insolvency of a counterparty, the Fund could experience the loss of some or all of its investment in a derivative or experience delays in liquidating its positions, including declines in the value of its investment during the period in which the Fund seeks to enforce its rights, and an inability to realize any gains on its investment during such period. The Fund may also incur fees and expenses in enforcing its rights. Certain derivatives are subject to mandatory clearing. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central clearing does not make derivatives transactions risk-free.
Foreign Securities Risk
Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Some countries and regions have experienced security concerns, war or threats of war and aggression, terrorism, economic uncertainty, natural and environmental disasters and/or systemic market dislocations that have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on the U.S. and world economies and markets generally. Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, custody, financial reporting and record keeping than are U.S. issuers, and therefore not all material information will be available. Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments. Non-U.S. transaction costs, such as brokerage commissions and custody costs, may be higher than in the United States. In some non-U.S. markets, custody arrangements for securities provide significantly less protection than custody arrangements in U.S. markets. Prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) could similarly expose the Fund to credit and other risks it does not have in the United States with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. In addition, the Fund may not receive shareholder communications or be permitted to vote the securities it holds, as the issuers may be under no legal obligation to distribute them.
Less developed securities markets are more likely to experience problems with the clearing and settling of trades, as well as the holding of securities by local banks, agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle, and governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. Local agents are held only to the standards of care of their local markets. The less developed a country’s securities market is, the greater the likelihood of custody problems.
Futures Contracts Risk
Futures contracts are typically exchange-traded contracts that call for the future delivery of an asset by one party to another at a certain price and date, or cash settlement of the terms of the contract. The risk of a position in a futures contract may be very large compared to the relatively low level of margin a Fund is required to deposit. In many cases, a relatively small price movement in a futures contract may result in immediate and substantial loss or gain to the investor relative to the size of a required margin deposit. The ability to establish and close out positions in futures contracts is subject to the development and maintenance of a
liquid secondary market. There is no assurance that a liquid secondary market on an exchange will exist for any particular futures contract at any particular time. If a Fund uses futures contracts for hedging purposes, there is a risk of imperfect correlation between movements in the prices of the derivatives and movements in the securities or index underlying the derivatives or movements in the prices of the Fund’s investments that are the subject of such hedge. The prices of futures contracts, for a number of reasons, may not correlate perfectly with movements in the securities or index underlying them. For example, participants in the futures markets are subject to margin deposit requirements less onerous than margin requirements in the securities markets in general. As a result, futures markets may attract more speculators than the securities markets. Increased participation by speculators in those markets may cause temporary price distortions. Due to the possibility of price distortion, even a correct forecast of general market trends by a Fund’s portfolio managers still may not result in successful derivatives activity over a very short time period. The Commodity Futures Trading Commission and the various exchanges have established limits referred to as “speculative position limits” on the maximum net long or net short positions that any person and certain affiliated entities may hold or control in a particular futures contract. It is possible that, as a result of such limits, a Fund will be precluded from taking positions in certain futures contracts it might have otherwise taken to the disadvantage of shareholders.
High Yield Securities Risk
The Fund’s investment in high yield securities, or “junk” bonds, may entail increased credit risks and the risk that the value of the Fund’s assets will decline, and may decline precipitously, with increases in interest rates. High yield securities are, under most circumstances, subject to greater market fluctuations and risk of loss of income and principal than are investments in lower-yielding, higher-rated debt securities. As interest rates rise, the value of high yield securities may decline precipitously. Increased rates may also indicate a slowdown in the economy, which may adversely affect the credit of issuers of high yield securities and result in a higher incidence of defaults among such issuers. A slowdown in the economy, or a development adversely affecting an issuer’s creditworthiness, may result in the issuer being unable to maintain earnings or sell assets at the rate and at the prices, respectively, that are required to produce sufficient cash flow to meet its interest and principal requirements. The Fund’s portfolio managers cannot predict future economic policies or their consequences or, therefore, the course or extent of any similar market fluctuations in the future. In addition, high yield securities are generally less liquid than investment grade securities.
Investment Style Risk
The Fund seeks to allocate investment exposure based upon a particular style of investing. Different investment styles tend to shift in and out of favor depending upon market and economic conditions and investor sentiment. As a consequence, the Fund may underperform as compared to the market generally or to other funds that invest in similar asset classes but employ different investment styles. Further, there is no guarantee that the Fund will accurately or optimally utilize the investment style or that it will successfully provide the desired investment exposure.
•
ESG Investing Style Risk. The Fund seeks exposure to the securities of companies meeting environmental, social and corporate governance investing criteria. The Fund excludes or limits exposure to securities of certain issuers for non-financial reasons, and the Fund may forgo some market opportunities available to funds that do not use these criteria. The application of ESG investing criteria may affect the Fund’s exposure to certain sectors or types of investments and may impact the Fund’s relative investment performance depending on whether such sectors or investments are in or out of favor in the market. ESG investing is subjective by nature, and therefore offers no guarantee that the ESG criteria utilized by the Subadvisor will accurately provide exposure to issuers meeting environmental, social and corporate governance criteria or any judgment exercised by the Subadvisor will reflect the beliefs or values of any particular investor. In addition, ESG investing is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could adversely affect the analysis of the factors relevant to a particular investment.
LIBOR Replacement Risk
The terms of floating rate loans, financings or other transactions in the U.S. and globally have been historically tied to LIBOR, which functions as a reference rate or benchmark for various commercial and financial contracts. LIBOR may be a significant factor in determining payment obligations under derivatives transactions, the cost of financing of the Fund’s investments or the value or return on certain other Fund investments. As a result, LIBOR may be relevant to, and directly affect, the Fund’s performance. The Financial Conduct Authority, the United Kingdom’s financial regulatory body and regulator of LIBOR, announced that after 2021 it will cease its active encouragement of banks to provide the quotations needed to sustain LIBOR due to the absence of
an active market for interbank unsecured lending and other reasons. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. As a result, it is anticipated that LIBOR will be discontinued or will no longer be sufficiently robust to be representative of its underlying market around that time. Various financial industry groups have begun planning for that transition and certain regulators and industry groups have taken actions to establish alternative reference rates (e.g., the Secured Overnight Financing Rate, which measures the cost of overnight borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities and is intended to replace U.S. dollar LIBOR with certain adjustments). However, there are challenges to converting certain contracts and transactions to a new benchmark and neither the full effects of the transition process nor its ultimate outcome is known.
The transition process might lead to increased volatility and illiquidity in markets for instruments with terms tied to LIBOR. It could also lead to a reduction in the interest rates on, and the value of, some LIBOR-based investments and reduce the effectiveness of hedges mitigating risk in connection with LIBOR-based investments. Although some LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology and/or increased costs for certain LIBOR-related instruments or financing transactions, others may not have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies. Instruments that include robust fallback provisions to facilitate the transition from LIBOR to an alternative reference rate may also include adjustments that do not adequately compensate the holder for the different characteristics of the alternative reference rate. The result may be that the fallback provision results in a value transfer from one party to the instrument to the counterparty. Additionally, because such provisions may differ across instruments (e.g., hedges versus cash positions hedged), LIBOR’s cessation may give rise to basis risk and render hedges less effective. As the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects and related adverse conditions could occur prior to the end of 2021 with respect to certain LIBOR tenors or mid-2023 for the remaining LIBOR tenors. There also remains uncertainty and risk regarding the willingness and ability of issuers to include enhanced provisions in new and existing contracts or instruments, notwithstanding significant efforts by the industry to develop robust LIBOR replacement clauses. The effect of any changes to, or discontinuation of, LIBOR on the Fund will vary depending, among other things, on (1) existing fallback or termination provisions in individual contracts and the possible renegotiation of existing contracts and (2) whether, how, and when industry participants develop and adopt new reference rates and fallbacks for both legacy and new products and instruments. The Fund’s investments may also be tied to other interbank offered rates and currencies, which also will likely face similar issues. In many cases, in the event that an instrument falls back to an alternative reference rate, including the Secured Overnight Financing Rate, the alternative reference rate will not perform the same as LIBOR because the alternative reference rate does not include a credit sensitive component in the calculation of the rate. Alternative reference rates generally reflect the performance of the market for U.S. treasury securities, which are secured by the U.S. treasury, and not the inter-bank lending markets. In the event of a credit crisis, floating rate instruments using certain alternative reference rates could therefore perform differently than those instruments using a rate indexed to the inter-bank lending market.
Various pending legislation, including in the U.S. Congress and the New York state legislature, may affect the transition of LIBOR-based instruments as well by permitting trustees and calculation agents to transition instruments with no LIBOR transition language to an alternative reference rate selected by such agents. Those legislative proposals include safe harbors from liability, which may limit the recourse the Fund may have if the alternative reference rate does not fully compensate the Fund for the transition of an instrument from LIBOR. It is uncertain whether such legislative proposals will be signed into law.
These developments could negatively impact financial markets in general and present heightened risks, including with respect to the Fund’s investments. As a result of this uncertainty and developments relating to the transition process, the Fund and its investments may be adversely affected.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. To the extent the Fund invests in illiquid securities or securities that become less liquid, such investments may have a negative effect on the returns of the Fund because the Fund may be unable to sell the illiquid securities at an advantageous time or price. Securities with substantial market and/or credit risk may be especially susceptible to liquidity risk. Liquidity risk may be the result of, among other things, an investment being subject to restrictions on resale, trading over-the-counter or in limited volume, or lacking an active trading market. Liquid investments may become
illiquid or less liquid after purchase by the Fund, particularly during periods of market turmoil or economic uncertainty. Illiquid and relatively less liquid investments may be harder to value, especially in changing markets. If the Fund is forced to sell underlying investments at reduced prices or under unfavorable conditions to meet redemption requests or for other cash needs, the Fund may suffer a loss. This may be magnified in a rising interest rate environment or under other circumstances where redemptions from the Fund may be higher than normal. It may also be the case that other market participants may be attempting to liquidate similar holdings at the same time as the Fund, causing increased supply in the market and contributing to liquidity risk and downward pricing pressure. There can be no assurance that a security that is deemed to be liquid when purchased will continue to be liquid or as long as it is held by the Fund.
Market Risk
The value of the Fund’s investments may fluctuate and/or decline because of changes in the markets in which the Fund invests, which could cause the Fund to underperform other funds with similar investment objectives and strategies. Security markets are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic developments. Different sectors of the market and different security types may react differently to such developments. Changes in these markets may be rapid and unpredictable. Fluctuations in the markets generally or in a specific industry or sector may impact the securities in which the Fund invests. From time to time, markets may experience periods of stress for potentially prolonged periods that may result in: (i) increased market volatility; (ii) reduced market liquidity; and (iii) increased redemptions of Fund shares. Such conditions may add significantly to the risk of volatility in the net asset value of the Fund’s shares and the market prices at which shares of the Fund trade on a securities exchange. During periods of market stress shares of the Fund may also experience significantly wider “bid/ask” spreads and premiums and discounts between the Fund’s net asset value and market price.
Market changes may impact fixed income securities in different and, at times, conflicting manners. The Fund potentially will be prevented from executing investment decisions at an advantageous time or price as a result of any domestic or global market disruptions, particularly disruptions causing heightened market volatility and reduced market liquidity, as well as increased or changing regulations or market closures. Securities and investments held by the Fund may be susceptible to declines in value, including declines in value that are not believed to be representative of the issuer’s value or fundamentals, due to investor reactions to such events.
Political and diplomatic events within the United States and abroad, such as the U.S. budget and deficit reduction plans, protectionist measures, trade tensions central bank policy and government intervention in the economy, has in the past resulted, and may in the future result, in developments that present additional risks to the Fund’s investments and operations. Geopolitical and other events, such as war, acts of terrorism, natural disasters, the spread of infectious illnesses, epidemics and pandemics, environmental and other public health issues, recessions or other events, and governments’ reactions to such events, may lead to increased market volatility and instability in world economies and markets generally and may have adverse effects on the performance of the Fund and its investments. Additional and/or prolonged geopolitical or other events may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Any such market, economic and other disruptions could also prevent the Fund from executing its investment strategies and processes in a timely manner.
An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Market Disruption Risk and Recent Market Events
Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets. Recent market disruption events include the pandemic spread of the novel coronavirus known as COVID-19, and the significant restrictions, market volatility, decreased economic and other activity and increased government activity that it has caused. Specifically, COVID-19 has led to significant death and morbidity, and concerns about its further spread have resulted in the closing of schools and non-essential businesses, cancellations, shelter-in-place orders, lower consumer spending in certain sectors, social distancing, bans on
large social gatherings and travel, quarantines, government economic stimulus measures, reduced productivity, rapid increases in unemployment, increased demand for and strain on government and medical resources, border closings and global trade and supply chain interruptions, among others. The full effects, duration and costs of the COVID-19 pandemic are impossible to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve. The pandemic may affect certain countries, industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social tensions and may increase the probability of an economic recession or depression. The Fund and its investments may be adversely affected by the effects of the COVID-19 pandemic, and a prolonged pandemic may result in the Fund and its service providers experiencing operational difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
Money Market/Short-Term Securities Risk
To the extent that the Fund invests in money market or short-term securities, the Fund may be subject to certain risks associated with such investments. An investment in a money market fund or short-term securities is not a bank deposit and is not insured or guaranteed by any bank, the Federal Deposit Insurance Corporation or any other government agency. It is possible for the Fund to lose money by investing in money market funds. A money market fund may not achieve its investment objective. Changes in government regulations may affect the value of an investment in a money market fund.
Municipal Bond Risk
The values of Municipal Bonds may be adversely affected by local political and economic conditions and developments. Adverse conditions in an industry significant to a local economy could have a correspondingly adverse effect on the financial condition of local issuers. Other factors that could affect Municipal Bonds include a change in the local, state, or national economy, demographic factors, ecological or environmental concerns, statutory limitations on the issuer’s ability to increase taxes, and other developments generally affecting the revenue of issuers (for example, legislation or court decisions reducing state aid to local governments or mandating additional services). This risk would be heightened to the extent that a Fund invests a substantial portion of its assets in bonds issued pursuant to similar projects (such as those relating to the education, health care, housing, transportation, or utilities industries), in industrial development bonds, or in particular types of municipal securities (such as general obligation bonds, private activity bonds or moral obligation bonds) that are particularly exposed to specific types of adverse economic, business or political events. Changes in a municipality’s financial health may also make it difficult for the municipality to make interest and principal payments when due. The values of Municipal Bonds that depend on a specific revenue source to fund their payment obligations may fluctuate as a result of actual or anticipated changes in the cash flows generated by the revenue source or changes in the priority of the municipal obligation to receive the cash flows generated by the revenue source. Under some circumstances, municipal securities might not pay interest unless the state legislature or municipality authorizes money for that purpose. Municipal Bonds may be more susceptible to downgrades or defaults during recessions or similar periods of economic stress. In addition, since some municipal securities may be secured or guaranteed by banks and other institutions, the risk to a Fund could increase if the banking or financial sector suffers an economic downturn and/or if the credit ratings of the institutions issuing the guarantee are downgraded or at risk of being downgraded by a national rating organization. Such a downward revision or risk of being downgraded may have an adverse effect on the market prices of the bonds and thus the value of a Fund’s investments. In addition to being downgraded, an insolvent municipality may file for bankruptcy. The reorganization of a municipality’s debts may significantly affect the rights of creditors and the value of the securities issued by the municipality and the value of a Fund’s investments. In addition, income from Municipal Bonds held by a Fund could be declared taxable because of, among other things, unfavorable changes in tax laws, adverse interpretations by the Internal Revenue Service or state tax authorities, or noncompliant conduct of an issuer or other obligated party. Loss of tax-exempt status may cause interest received and distributed to shareholders by a Fund to be taxable and may result in a significant decline in the values of such Municipal Bonds. There are various different types of Municipal Bonds, each with its own unique risk profile. Some of these risks include:
•
General Obligation Bonds Risk—timely payments depend on the issuer’s credit quality, ability to raise tax revenues and ability to maintain an adequate tax base;
•
Revenue Bonds (including Industrial Development Bonds) Risk—timely payments depend on the money earned by the particular facility or class of facilities, or the amount of revenues derived from another source, and may be negatively impacted by the general credit of the user of the facility;
•
Private Activity Bonds Risk—municipalities and other public authorities issue private activity bonds to finance development of industrial facilities for use by a private enterprise, which is solely responsible for paying the principal and interest on the bonds, and payment under these bonds depends on the private enterprise’s ability to do so;
•
Moral Obligation Bonds Risk—moral obligation bonds are generally issued by special purpose public authorities of a state or municipality. If the issuer is unable to meet its obligations, repayment of these bonds becomes a moral commitment, but not a legal obligation, of the state or municipality;
•
Municipal Notes Risk—municipal notes are shorter-term municipal debt obligations that pay interest that is, in the opinion of bond counsel for the issuer at the time of issuance, generally excludable from gross income for federal income tax purposes (except that the interest may be includable in taxable income for purposes of the federal alternative minimum tax) and that have a maturity that is generally one year or less. If there is a shortfall in the anticipated proceeds, the notes may not be fully repaid and the Fund may lose money; and
•
Municipal Lease Obligations Risk—in a municipal lease obligation, the issuer agrees to make payments when due on the lease obligation. Although the issuer does not pledge its unlimited taxing power for payment of the lease obligation, the lease obligation is secured by the leased property.
Municipal Bond Market Liquidity Risk
Inventories of Municipal Bonds held by brokers and dealers may decrease, lessening their ability to make a market in these securities. Any reduction in market-making capacity has the potential to decrease the Fund’s ability to buy or sell Municipal Bonds and increase price volatility and trading costs, particularly during periods of economic or market stress. In addition, federal banking regulations may cause certain dealers to reduce their inventories of Municipal Bonds, which may further decrease the Fund’s ability to buy or sell Municipal Bonds. As a result, the Fund may be forced to accept a lower price to sell a municipal security, to sell other securities to raise cash, or to give up an investment opportunity, any of which could have a negative effect on performance. The market for unrated municipal securities may be less liquid than the market for rated Municipal Bonds of comparable quality. Decreased liquidity may negatively affect the Fund’s ability to mitigate risk and meet redemptions. Also, less public information is typically available about unrated Municipal Bonds or their issuers, which can affect the liquidity of the market.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund and Advisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. The Subadvisor may give consideration to certain ESG criteria when evaluating an investment opportunity. The application of ESG investing criteria by the Subadvisor may result in the Fund having exposure to certain securities or industry sectors that are different than other funds and strategies that do not take into account ESG investment criteria. There can be no guarantee that the Fund will meet its investment objective(s).
Portfolio Turnover Risk
The Fund’s strategy may frequently involve buying and selling portfolio securities to rebalance the Fund’s investment exposures. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause a Fund’s performance to be less than expected.
Risks of Investing in Loans
Investments in loans are subject to the same risks as investments in other types of debt securities, including credit risk, interest rate risk, liquidity risk and valuation risk that may be heightened because of the limited public information available regarding loans and because loan borrowers may be leveraged and tend to be more
adversely affected by changes in market or economic conditions. Default in the payment of interest or principal on a loan will result in a reduction in the value of the loan and consequently a reduction in the value of an investment in that loan. If an investor holds a loan through another financial institution or relies on a financial institution to administer the loan, its receipt of principal and interest on the loan may be subject to the credit risk of that financial institution. It is possible that any collateral securing a loan may be insufficient or unavailable to the investor, and that the investor’s rights to collateral may be limited by bankruptcy or insolvency laws. Additionally, there is no central clearinghouse for loan trades and the loan market has not established enforceable settlement standards or remedies for failure to settle. Consequently, the secondary market for loans may be subject to irregular trading activity, wide bid/ask spreads and extended trade settlement periods (in some cases longer than 7 days), which may cause an investor to be unable to realize the full value of its investment. In addition, loans are generally not registered with the SEC under the Securities Act of 1933, as amended, and may not be considered “securities,” and an investor may not be entitled to rely on the anti-fraud protections of the federal securities laws. An investment in loans made to non-U.S. borrowers may be affected by political and social instability, changes in economic or taxation policies, difficulties in enforcing obligations, decreased liquidity and increased volatility. Foreign borrowers may be subject to less regulation, resulting in less publicly available information about the borrowers.
The loan market has seen a significant increase in loans with weaker lender protections including, but not limited to, limited financial maintenance covenants or, in some cases, no financial maintenance covenants (i.e., “covenant-lite loans”) that would typically be included in a traditional loan agreement and general weakening of other restrictive covenants applicable to the borrower such as limitations on incurrence of additional debt, restrictions on payments of junior debt or restrictions on dividends and distributions. Weaker lender protections such as the absence of financial maintenance covenants in a loan agreement and the inclusion of “borrower-favorable” terms may impact recovery values and/or trading levels of loans in the future. The absence of financial maintenance covenants in a loan agreement generally means that the lender may not be able to declare a default if financial performance deteriorates. This may hinder an investor’s ability to reprice credit risk associated with a particular borrower and reduce the investor’s ability to restructure a problematic loan and mitigate potential loss. As a result, an investor’s exposure to losses on investments in loans may be increased, especially during a downturn in the credit cycle or changes in market or economic conditions.
Risks of Loan Assignments and Participations
The purchaser of an assignment typically succeeds to all the rights and obligations of the assigning institution and becomes a lender under the credit agreement with respect to the debt obligation; however, the purchaser of an assignment may not be able to unilaterally enforce all rights and remedies under the loan and with regard to any associated collateral. Because assignments may be arranged through private negotiations between potential assignees and potential assignors, the rights and obligations acquired by the purchaser of an assignment may differ from, and be more limited than, those held by the assigning lender. In addition, if the loan is foreclosed, the purchaser of an assignment could become part owner of any collateral and could bear the costs and liabilities of owning and disposing of the collateral. To the extent an investor sells a loan by way of assignment, the investor may be required to pass along a portion of any fees to which the investor was entitled under the loan. In connection with purchasing participations, such purchaser generally will have no right to enforce compliance by the borrower with the terms of the loan agreement relating to the loan, nor any rights of set-off against the borrower, and the purchaser may not directly benefit from any collateral supporting the loan in which it has purchased the participation. As a result, the purchaser will be subject to the credit risk of both the borrower and the lender that is selling the participation. In the event of the insolvency of the lender selling a participation, the purchaser may be treated as a general creditor of the lender and may not benefit from any set-off between the lender and the borrower.
Secondary Market Trading Risk
Although each Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. The trading of Shares on securities exchanges is subject to the risk of irregular trading activity. Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting
purchase or redemption orders for Creation Units, such Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Buying or selling Shares on an exchange involves two types of costs that apply to all securities transactions. When buying or selling Shares through a broker, you will likely incur a brokerage commission and other charges. In addition, you may incur the cost of the “spread”—the difference between what investors are willing to pay for 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 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. The risk of wide bid and ask spreads may be especially pronounced for smaller funds. 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 Shares, frequent trading may detract significantly from investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments through a brokerage account.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the Fund’s NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. The market price of the Fund’s Shares during the trading day, like the price of any exchange-traded security, includes a “bid/ask” spread charged by the exchange specialist, market makers or other participants that trade the Shares. In times of severe market disruption, the bid/ask spread can increase significantly. At those times, Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that an investor most wants to sell their Shares. Although it is generally expected that the market price of the Fund’s Shares will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares. While the creation/redemption feature is designed to make it more likely that the Fund’s Shares normally will trade on securities 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, Authorized Participants, or other market participants, and during periods of significant market volatility, may result in trading prices for Shares of the Fund that differ significantly from its NAV. Authorized Participants may be less willing to create or redeem Shares if there is a lack of an 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. Additionally, similar to shares of other issuers listed on a securities exchange, the Fund’s Shares may be sold short and are therefore subject to the risk of increased volatility and price decreases associated with being sold short. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV.
Variable and Floating Rate Instruments Risk
Variable and floating rate instruments include debt securities issued by corporate and governmental entities, bank loans, mortgage-backed securities and asset-backed securities, preferred equity securities and derivative variable rate securities, such as inverse floaters. Variable and floating rate instruments are structured so that the instrument’s coupon rate fluctuates based upon the level of a reference rate. Most commonly, the coupon rate of a variable or floating rate instrument is set at the level of a widely followed interest rate, plus a fixed spread. As a result, the coupon on a variable or floating rate instrument will generally decline in a falling interest rate environment, causing the Fund to experience a reduction in the income it receives from the instrument. A variable or floating rate instrument’s coupon rate resets periodically according to its terms. Consequently, in a rising interest rate environment, variable and floating rate instruments with coupon rates that reset infrequently may lag behind the changes in market interest rates. Variable and floating rate instruments may also contain terms that impose a maximum coupon rate the issuer will pay, regardless of the level of the reference rate. The coupon rate of many variable and floating rate instruments is set based upon LIBOR. In 2017, the head of the United Kingdom’s Financial Conduct Authority announced a desire to phase out the use of LIBOR by the end of 2021. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and
other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. There remains uncertainty regarding the future utilization of LIBOR and the nature of any replacement rate. The potential effect of a transition away from LIBOR cannot yet be determined but may result in disruption to the markets for debt securities and instruments and decreased demand or liquidity for debt securities and instruments that reference LIBOR or new replacement rates.
Zero Coupon Securities Risk
Zero coupon securities do not pay interest on a current basis. The interest earned on zero coupon securities is, implicitly, automatically compounded and paid out at maturity. While such compounding at a constant rate eliminates the risk of receiving lower yields upon reinvestment of interest if prevailing interest rates decline, the owner of a zero coupon security will be unable to participate in higher yields upon reinvestment of interest received if prevailing interest rates rise. For this reason, zero coupon securities are subject to substantially greater market price fluctuations during periods of changing prevailing interest rates than are comparable securities that make current distributions of interest. Current federal tax law requires that a holder of a zero coupon security accrue a portion of the discount at which the security was purchased as income each year even though the Fund receives no interest payments in cash on the security during the year.
Additional Risks
Large Investments Risk
From time to time, the Fund may receive large purchase or redemption orders from affiliated or unaffiliated funds or other investors. In addition, any third-party investor, investment advisor affiliate, authorized participant, lead market maker or other entity may make a large investment in the Fund and hold its investment for any number of reasons, including to facilitate such Fund’s commencement of operations or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any large shareholder would not sell or redeem its investment at any given time, either in a single transaction or over time. These large transactions, and particularly redemptions, could have adverse effects on the Fund, including: (i) negative impacts to performance if the Fund were required to sell securities, invest cash or hold significant cash at times when it otherwise would not do so; (ii) wider price spreads or greater premiums/discounts that could materialize as a result of lower secondary market volume of shares; and (iii) negative federal income tax consequences if this activity accelerated the realization of capital gains.
Underinvestment Risk
If certain aggregate ownership thresholds are reached either through the actions of the Advisor and its affiliates or the Fund, or as a result of third-party transactions, the ability of the Advisor on behalf of clients (including the Fund) to purchase or dispose of investments, or exercise rights or undertake business transactions, may be restricted by regulation or otherwise impaired. The capacity of the Fund to make investments in certain securities may be affected by the relevant limits, and such limitations may have adverse effects on the liquidity and performance of the Fund’s portfolio holdings.
U.S. Tax Risks
To qualify for the favorable U.S. federal income tax treatment accorded to regulated investment companies, the Fund must satisfy certain income, asset diversification and distribution requirements. If for any taxable year, the Fund does not qualify as a regulated investment company, all of its taxable income (including its net capital gain) for that year would be subject to tax at regular corporate rates without any deduction for distributions to its shareholders, and such distributions would be taxable to its shareholders as dividend income to the extent of the Fund’s current and accumulated earnings and profits. To the extent the Fund engages in derivatives transactions, the tax treatment such derivatives transactions is unclear for purposes of determining the Fund’s tax status. To the extent the Fund engages in transactions in financial instruments, including, but not limited to, options, futures contracts, hedging transactions, forward contracts and swap contracts, the Fund will be subject to special tax rules (which may include mark-to-market, constructive sale, wash sale and short sale rules), the effect of which may be to accelerate income to the Fund, defer losses to the Fund, cause adjustments in the holding periods of the Fund’s securities, convert long-term capital gains into short-term capital gains or convert short-term capital losses into long-term capital losses. These rules could, therefore, affect the amount, timing and character of distributions to the Fund’s shareholders. The Fund’s use of such transactions may result in the Fund realizing more short-term capital gains and ordinary income, in each case subject to U.S. federal income tax at higher ordinary income tax rates, than it would if it did not engage in such transactions. Please refer to the SAI for a more complete discussion of the risks of investing in Shares.
Buying and Selling Shares in the Secondary Market
Most investors will buy and sell Shares of the Fund in Secondary Market transactions through brokers. Shares of the Fund will be listed for trading on the Secondary Market on the NYSE Arca. Shares can be bought and sold throughout the trading day like other publicly-traded shares. Unless imposed by your broker or dealer, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy in the Secondary Market. When buying or selling 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 offered price in the Secondary Market on each leg of a round trip (purchase and sale) transaction. In addition, because transactions in the Secondary Market occur at market prices, you may pay more than NAV when you buy Shares and receive less than NAV when you sell those Shares.
Share prices are reported in dollars and cents per Share. For information about buying and selling Shares in the Secondary Market, please contact your broker or dealer.
Book Entry
Shares of the Fund are held in book-entry form and no stock certificates are issued. DTC, through its nominee Cede & Co., is the record owner of all outstanding Shares.
Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC 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 Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any securities that you hold in book entry or “street name” form for any publicly-traded company. Specifically, in the case of a shareholder meeting of the Fund, DTC assigns applicable Cede & Co. voting rights to its participants that have Shares credited to their accounts on the record date, issues an omnibus proxy and forwards the omnibus proxy to the Fund. The omnibus proxy transfers the voting authority from Cede & Co. to the DTC participant. This gives the DTC participant through whom you own Shares (namely, your broker, dealer, bank, trust company or other nominee) authority to vote the shares, and, in turn, the DTC participant is obligated to follow the voting instructions you provide.
Management
The Board is responsible for the general supervision of the Fund. The Board appoints officers who are responsible for the day-to-day operations of the Fund.
Investment Advisor
The Advisor has been registered as an investment advisor with the SEC since August 2007, has provided investment advisory services to registered investment companies since June 2008, and is a wholly-owned indirect subsidiary of New York Life Investment Management Holdings LLC. The Advisor’s principal office is located at 51 Madison Avenue, New York, New York 10010. As of June 30, 2022, the Advisor had approximately $8.2 billion in assets under management.
The Advisor has overall responsibility for the general management and administration of the Trust. The Advisor provides an investment program for the Fund. The Advisor has delegated certain advisory duties with regard to the Fund (including management of all of the Fund’s assets) to the Subadvisor. The Advisor has arranged for custody, fund administration, transfer agency and all other non-distribution related services necessary for the Fund to operate.
As compensation for its services and its assumption of certain expenses, the Fund pays the Advisor a management fee equal to 0.39% of the Fund’s average daily net assets that is calculated daily and paid monthly.
The Advisor may voluntarily waive any portion of its advisory fee from time to time, and may discontinue or modify any such voluntary limitations in the future at its discretion.
The Advisor serves as investment advisor to the Fund pursuant to an Investment Advisory Agreement (the “Advisory Agreement”) and the Subadvisor serves as investment subadvisor to the Fund pursuant to an
Investment Subadvisory Agreement (the “Subadvisory Agreement”). The Advisory Agreement and Subadvisory Agreement were approved by the Independent Trustees of the Trust. The basis for the Trustees’ approval of the Advisory Agreement and Subadvisory Agreement are available in the Trust’s Annual or Semiannual Report to shareholders.
Section 15(a) of the 1940 Act requires that all contracts pursuant to which persons serve as investment advisors to investment companies be approved by shareholders. As interpreted, this requirement also applies to the appointment of subadvisors to the Fund. The Advisor and the Trust have obtained an exemptive order (the “Order”) from the SEC permitting the Advisor, on behalf of the Fund and subject to the approval of the Board, including a majority of the Independent Trustees, to hire or terminate unaffiliated subadvisors and to modify any existing or future subadvisory agreement with unaffiliated subadvisors without shareholder approval. This authority is subject to certain conditions. The Fund will notify shareholders and provide them with certain information required by the Order within 90 days of hiring a new subadvisor. The Fund’s sole shareholder has approved the use of the Order. Please see the SAI for more information on the Order.
Expense Limitation Agreement
The Advisor has contractually agreed to waive or reduce its management fee and/or reimburse expenses of the Fund in an amount that limits “Total Annual Fund Operating Expenses” (excluding interest, taxes, brokerage commissions, dividend payments on short sales, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to not more than 0.39% of the average daily net assets of the Fund. The agreement will remain in effect unless terminated by the Board of Trustees of the Fund.
Subadvisor
Pursuant to the Subadvisory Agreement, MacKay Shields LLC serves as the subadvisor to the Fund and makes investment decisions, and buys and sells securities for the Fund. For its services to the Fund, the Subadvisor is compensated by the Advisor. To the extent that the Advisor has agreed to waive its management fee or reimburse expenses, the Subadvisor has agreed to waive or reimburse its fee proportionately.
The Subadvisor was incorporated in 1969 and has been registered as an investment advisor with the SEC since 1969. Today the Subadvisor is an indirect wholly-owned subsidiary of New York Life. The Subadvisor’s principal office is located at 1345 Avenue of the Americas, New York, New York 10105. As of June 30, 2022, the Subadvisor had approximately $132 billion in assets under management.
Portfolio Management
The Advisor acts as investment advisor to the Fund and is responsible for the overall management of the investment portfolios of the Fund. Under the supervision of the Advisor, the Subadvisor is responsible for making the specific decisions about the following: (i) buying, selling and holding securities; (ii) selecting brokers and brokerage firms to trade for them; (iii) maintaining accurate records; and, if possible, (iv) negotiating favorable commissions and fees with the brokers and brokerage firms for all the Fund it oversees. For these services, the Subadvisor is paid a monthly fee by the Advisor out of the Advisor’s management fee, not the Fund. See the SAI for a breakdown of fees.
The following portfolio managers are primarily responsible for the day-to-day management of the Fund: Stephen Cianci, CFA, Neil Moriarty, III and Lesya Paisley, CFA.
Mr. Cianci has served as a portfolio manager of the Fund since its inception. Mr. Cianci is a Senior Managing Director and Senior Portfolio Manager for the Global Fixed Income team of MacKay Shields LLC. He has managed the MainStay Income Builder Fund and MainStay MacKay Total Return Bond Fund since 2018. Prior to joining MacKay Shields in 2018, Mr. Cianci was with Aberdeen Asset Management Inc. (“Aberdeen”) for seven years where his responsibilities included Head of US Core Plus and Opportunistic fixed income on the North American Fixed Income team. Before joining Aberdeen, Mr. Cianci worked as Co-Head of Core and Core Plus fixed income strategies, lead portfolio manager for Short Duration products and the Head of Structured Products at Logan Circle Partners. Previously, Mr. Cianci held similar roles as a Senior Vice President and Senior Portfolio Manager at Delaware Investments. He is an adjunct professor of finance and a member of the Business Advisory Council at Widener University.
Mr. Moriarty has served as a portfolio manager of the Fund since its inception. Mr. Moriarty is a Senior Managing Director and Senior Portfolio Manager for the Global Fixed Income Team of MacKay Shields LLC. He has managed the MainStay Income Builder Fund and MainStay MacKay Total Return Bond Fund since 2018. Prior to
joining MacKay Shields in 2018, Mr. Moriarty was with Aberdeen via the 2005 acquisition of Deutsche Asset Management’s London and Philadelphia Fixed income businesses. While at Aberdeen, his responsibilities included Head of US Core, Structured Products and Co-Head of US Core Short Duration. Mr. Moriarty joined Deutsche in 2002 from Swarthmore/Cypress Capital Management where he worked in fixed income portfolio management. Previously, Mr. Moriarty worked for Chase Securities in fixed income trading and research. Prior to that, Mr. Moriarty worked for Paine Webber in fixed income trading and research. Mr. Moriarty has been working in the investment industry since 1987.
Ms. Paisley, CFA is a Portfolio Manager on the Global Fixed Income team. She is responsible for managing Multi-Sector strategies at MacKay Shields. Prior to joining MacKay Shields, Ms. Paisley served as Investment Director and ESG Portfolio Manager, North America at Aberdeen Standard Investments. She was responsible for managing US dollar strategies including Credit, Corporates, and Core/Core+ strategies and was instrumental in the firm’s ESG policy and product development including Sustainable and Responsible Investment and Climate Transition Fund. Before Aberdeen, she worked at Deutsche Asset Management as a Credit Research Analyst. Combined, Ms. Paisley spent well over a decade in Credit Research covering a variety of sectors including Emerging Markets, High Yield, Investment Grade, and Municipals. Ms. Paisley is a CFA charterholder and earned a BSc degree in Finance and Accounting from the University of Virginia, McIntire School of Commerce. She has been in the investment industry since 2003.
For more information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the Fund, see the SAI.
Other Service Providers
Fund Administrator, Custodian, Transfer Agent and Securities Lending Agent
The Bank of New York Mellon (“BNY Mellon”), located at 240 Greenwich Street, New York, New York 10286, serves as the Fund’s Administrator, Custodian, Transfer Agent and Securities Lending Agent. BNY Mellon is the principal operating subsidiary of The Bank of New York Mellon Corporation.
Under the Fund Administration and Accounting Agreement (the “Administration Agreement”), BNY Mellon serves as Administrator for the Fund. Under the Administration Agreement, BNY Mellon provides necessary administrative, legal, tax, accounting services, and financial reporting for the maintenance and operations of the Trust. In addition, BNY Mellon makes available the office space, equipment, personnel and facilities required to provide such services. BNY Mellon supervises the overall administration of the Trust, including, among other responsibilities, assisting in the preparation and filing of documents required for compliance by the Fund with applicable laws and regulations and arranging for the maintenance of books and records of the Fund. BNY Mellon provides persons satisfactory to the Board to serve as officers of the Trust.
Distributor
ALPS Distributors, Inc. (“ALPS” or the “Distributor”), located at 1290 Broadway, Suite 1000, Denver, Colorado 80203 serves as the Distributor of Creation Units for the Fund on an agency basis. The Distributor does not maintain a Secondary Market in the Fund’s Shares. NYLIFE Distributors LLC has entered into a Services Agreement with ALPS to market the Fund.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, located at 300 Madison Avenue, New York, NY 10017, serves as the independent registered public accounting firm for the Trust.
Legal Counsel
Chapman and Cutler LLP, located at 1717 Rhode Island Avenue, Washington, D.C. 20036, serves as counsel to the Trust and the Fund.
Frequent Trading
The Board has not adopted policies and procedures with respect to frequent purchases and redemptions of Shares by Fund shareholders (“market timing”). In determining not to adopt market timing policies and procedures, the Board noted that the Fund is expected to be attractive to active institutional and retail investors interested in buying and selling Shares on a short-term basis. In addition, the Board considered that, unlike traditional mutual funds, Shares can only be purchased and redeemed directly from the Fund in Creation Units by Authorized Participants, and that the vast majority of trading in Shares occurs on the Secondary
Market. Because Secondary Market trades do not involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Fund’s trading costs and the realization of capital gains. With respect to trades directly with the Fund, to the extent effected in-kind (namely, for securities), those trades do not cause any of the harmful effects that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution of the Fund and increased transaction costs (the Fund may impose higher transaction fees to offset these increased costs), which could negatively impact the Fund’s ability to achieve its investment objective. However, the Board also noted that direct trading on a short-term basis by Authorized Participants is critical to ensuring that Shares trade at or close to NAV. Given this structure, the Board determined that it is not necessary to adopt market timing policies and procedures. The Fund reserves the right to reject any purchase order at any time and reserves the right to impose restrictions on disruptive or excessive trading in Creation Units.
The Board has instructed the officers of the Trust to review reports of purchases and redemptions of Creation Units on a regular basis to determine if there is any unusual trading in the Fund. The officers of the Trust will report to the Board any such unusual trading in Creation Units that is disruptive to the Fund. In such event, the Board may reconsider its decision not to adopt market timing policies and procedures.
Distribution and Service Plan
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.10% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of the Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Fund and there are no plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the respective Fund’s assets, and over time these fees will increase the cost of your investment and they may cost you more than certain other types of sales charges.
The Advisor and its affiliates may, out of their own resources, pay amounts (“Payments”) to third-parties for distribution or marketing services on behalf of the Fund. The making of these payments could create a conflict of interest for a financial intermediary receiving such payments. The Advisor may make Payments for such third-parties to organize or participate in activities that are designed to make registered representatives, other professionals and individual investors more knowledgeable about ETFs, including ETFs advised by the Advisor, or for other activities, such as participation in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems (“Education Costs”). The Advisor also may make Payments to third-parties to help defray costs typically covered by a trading commission, such as certain printing, publishing and mailing costs or materials relating to the marketing of services related to exchange-traded products (such as commission-free trading platforms) or exchange-traded products in general (“Administrative Costs”).
Determination of Net Asset Value (NAV)
The NAV of the Shares for the Fund is equal to the Fund’s total assets minus its total liabilities divided by the total number of Shares outstanding. Interest and investment income on the Fund’s assets accrue daily and are included in the Fund’s total assets. Expenses and fees (including investment advisory, management, administration and distribution fees, if any) accrue daily and are included in the applicable Fund’s total liabilities. The NAV that is published is rounded to the nearest cent; however, for purposes of determining the price of Creation Units, the NAV is calculated to five decimal places. The NAV is calculated by the Administrator and Custodian and determined each Business Day as of the close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. Eastern time).
The Fund typically values fixed income portfolio securities using last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied by the Fund’s approved independent third-party pricing services. Pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values. Pricing services generally value fixed income securities assuming orderly transactions of an institutional round lot size, but the Fund may hold or transact in such securities in smaller odd lot sizes. Odd lots often trade at different prices that may be above or below the price at which the pricing service has valued the security. An amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines in good faith that such method does not represent fair value.
Generally, trading in U.S. government securities, money market instruments and certain fixed income securities is substantially completed each day at various times prior to the close of business on the NYSE Arca. The values of such securities used in computing the NAV of the Fund are determined as of such times.
When market quotations are not readily available or are deemed unreliable or not representative of an investment’s fair value, investments are valued using fair value pricing as determined in good faith by the Advisor under procedures established by and under the general supervision and responsibility of the Board. Investments that may be valued using fair value pricing include, but are not limited to: (1) securities that are not actively traded, including “restricted” securities and securities received in private placements for which there is no public market; (2) securities of an issuer that becomes bankrupt or enters into a restructuring; (3) securities whose trading has been halted or suspended; and (4) foreign securities traded on exchanges that close before the Fund’s NAV is calculated.
The frequency with which the Fund’s investments are valued using fair value pricing is primarily a function of the types of securities and other assets in which the respective Fund invests pursuant to its investment objective, strategies and limitations. If the Fund invests in other open-end management investment companies registered under the 1940 Act, they may rely on the NAVs of those companies to value the shares they hold of them. Those companies may also use fair value pricing under some circumstances.
Valuing the Fund’s investments using fair value pricing results in using prices for those investments that may differ from current market valuations. Accordingly, fair value pricing could result in a difference between the prices used to calculate NAV and the prices used to determine the Fund’s indicative intra-day value (“IIV”), which could result in the market prices for Shares deviating from NAV.
Premium/Discount Information
Information regarding the extent and frequency with which market prices of Shares has tracked the relevant Fund’s NAV for the most recently completed calendar year and the quarters since that year will be available without charge on the Fund’s website at newyorklifeinvestments.com/etf.
Dividends, Distributions and Taxes
Net Investment Income and Capital Gains
As the Fund shareholder, you are entitled to your share of the Fund’s distributions of net investment income and net realized capital gains on its investments. The Fund pays out substantially all of their net earnings to their shareholders as “distributions.”
The Fund typically earns income dividends from stocks and interest from debt securities. These amounts, net of expenses, typically are passed along to Fund shareholders as dividends from net investment income. The Fund realizes capital gains or losses whenever they sell securities. Net capital gains typically are passed along to shareholders as “capital gain distributions.”
Net investment income and net capital gains typically are distributed to shareholders at least annually. Dividends may be declared and paid more frequently to improve index tracking or to comply with the distribution requirements of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). In addition, the Fund may decide to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities, as if the Fund owned the underlying investment securities for the entire dividend period, in which case some portion of each distribution may result in a return of capital. You will be notified regarding the portion of a distribution that represents a return of capital.
Distributions in cash may be reinvested automatically in additional Shares of the Fund only if the broker through which you purchased Shares makes such option available. Distributions which are reinvested nevertheless will be subject to U.S. federal income tax to the same extent as if such distributions had not been reinvested.
U.S. Federal Income Taxation
The following is a summary of the material U.S. federal income tax considerations applicable to an investment in Shares of the Fund. The summary is based on the laws in effect on the date of this Prospectus and existing judicial and administrative interpretations thereof, all of which are subject to change, possibly with retroactive effect. In addition, this summary assumes that the Fund shareholder holds Shares as capital assets within the meaning of the Code and does not hold Shares in connection with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an investment in Shares of
the Fund, and does not address the consequences to Fund shareholders subject to special tax rules, including, but not limited to, partnerships and the partners therein, tax-exempt shareholders, regulated investment companies (“RICs”, real estate investment trusts (“REITS”), real estate mortgage investment conduits (“REMICs”), those who hold Shares through an IRA, 401(k) plan or other tax-advantaged account, and, except to the extent discussed below, “non-U.S. shareholder” (as defined below). This discussion does not discuss any aspect of U.S. state, local, estate, gift, or non-U.S. tax law. Furthermore, this discussion is not intended or written to be legal or tax advice to any shareholder in the Fund or other person and is not intended or written to be used or relied on, and cannot be used or relied on, by any such person for the purpose of avoiding any U.S. federal tax penalties that may be imposed on such person. Prospective Fund shareholders are urged to consult their own tax advisors with respect to the specific U.S. federal, state, local and non-U.S. tax consequences of investing in Shares, based on their particular circumstances.
The Fund has not requested and will not request an advance ruling from the U.S. Internal Revenue Service (the “IRS”) as to the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective investors should consult their own tax advisors with regard to the U.S. federal tax consequences of the purchase, ownership and disposition of Shares, as well as the tax consequences arising under the laws of any state, locality, non-U.S. or other taxing jurisdiction. The following information supplements and should be read in conjunction with the section in the SAI entitled “U.S. Federal Income Taxation.”
Tax Treatment of the Fund
The Fund intends to qualify and elect to be treated as a separate RIC under the Code. To qualify and remain eligible for the special tax treatment accorded to RICs, the Fund must meet certain annual income and quarterly asset diversification requirements and must distribute annually at least 90% of the sum of (i) its “investment company taxable income” (which includes dividends, interest and net short-term capital gains) and (ii) certain net tax-exempt income, if any.
As a RIC, the Fund generally will not be required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes to its shareholders. If the Fund fails to qualify as a RIC for any year (subject to certain curative measures allowed by the Code), the Fund will be subject to regular corporate-level U.S. federal income tax in that year on all of its taxable income, regardless of whether the Fund makes any distributions to its shareholders. In addition, in such case, distributions will be taxable to the Fund’s shareholders generally as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The remainder of this discussion assumes that the Fund will qualify for the special tax treatment accorded to RICs.
The Fund generally will be subject to a 4% excise tax on certain undistributed income if the Fund does not distribute to its shareholders in each calendar year an amount at least equal to the sum of 98% of its ordinary income for the calendar year (taking into account certain deferrals and elections), 98.2% of its capital gain net income (adjusted for certain ordinary losses) for the twelve months ended October 31 of such year (or later if the Fund is permitted to elect and no elects), plus 100% of any undistributed amounts from prior years. For these purposes, a Fund will be treated as having distributed any amount on which it has been subject to U.S. corporate income tax for the taxable year ending within the calendar year. The Fund intends to make distributions necessary to avoid this 4% excise tax, although there can be no assurance that it will be able to do so.
The Fund may be required to recognize taxable income in advance of receiving the related cash payment. For example, if the Fund invests in original issue discount obligations (such as zero coupon debt instruments or debt instruments with payment-in-kind interest), the Fund will be required to include in income each year a portion of the original issue discount that accrues over the term of the obligation, even if the related cash payment is not received by the Fund until a later year. Under the “wash sale” rules, the Fund may not be able to deduct a loss on a disposition of a portfolio security. As a result, the Fund may be required to make an annual income distribution greater than the total cash actually received during the year. Such distribution may be made from the cash assets of the Fund or by selling portfolio securities. The Fund may realize gains or losses from such sales, in which event its shareholders may receive a larger capital gain distribution than they would in the absence of such transactions.
Tax Treatment of Fund Shareholders
Taxation of U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “U.S. shareholders.” For purposes of this discussion, a “U.S. shareholder” is a beneficial owners of Shares who, for U.S. federal income tax purposes, is (i) an individual who is a citizen or
resident of the United States; (ii) a corporation (or an entity treated as a corporation for U.S. federal tax purposes) created or organized in the United States or under the laws of the United States, or of any state thereof, or the District of Columbia; (iii) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or (iv) a trust, if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in place to be treated as a U.S. person.
Fund Distributions. In general, Fund distributions are subject to U.S. federal income tax when paid, regardless of whether they consist of cash or property, and regardless of whether they are re-invested in Shares. However, any Fund distribution declared in October, November or December of any calendar year and payable to shareholders of record on a specified date during such month will be deemed to have been received by the Fund shareholder on December 31 of such calendar year, provided such dividend is actually paid during January of the following calendar year.
Distributions of the Fund’s net investment income and net short-term capital gains in excess of net long-term capital losses (collectively referred to as “ordinary income dividends”) are taxable as ordinary income to the extent of the Fund’s current and accumulated earnings and profits (subject to an exception for distributions of “qualified dividend income,” as discussed below). To the extent designated as capital gain dividend by the Fund, distributions of the Fund’s net long-term capital gains in excess of net short-term capital losses (“net capital gain”) are taxable at long-term capital gain tax rates to the extent of the Fund’s current and accumulated earnings and profits, regardless of the Fund shareholder’s holding period in the Fund’s Shares. Distributions of “qualified dividend income” (defined below) are, to the extent of the Fund’s current and accumulated earnings and profits, taxed to certain non-corporate Fund shareholders at the rates generally applicable to long-term capital gain, provided that the Fund shareholder meeting certain holding period and of the requirements with respect to the distributing Fund’s Shares and the distributing Fund meeting certain holdings period and other requirements with respect to its dividend-paying stocks. For this purpose, “qualified dividend income” generally means income from dividends received by the Fund from U.S. corporations and qualified non-U.S. corporations. Substitute payments received on Shares that are lent out will be ineligible for being reported as qualified dividend income. If the Fund pays a dividend that would be “qualified” dividend income for individuals, corporate shareholders may be entitled to a dividend received deduction.
An election may be available to you to defer recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
The Fund intends to distribute its net capital gain at least annually. However, by providing written notice to its shareholders no later than 60 days after its year-end, the Fund may elect to retain some or all of its net capital gain and designate the retained amount as a “deemed distribution.” In that event, the Fund pays U.S. federal income tax on the retained net capital gain, and the Fund shareholder recognizes a proportionate share of the Fund’s undistributed net capital gain. In addition, the Fund shareholder can claim a tax credit or refund for the shareholder’s proportionate share of the Fund’s U.S. federal income taxes paid on the undistributed net capital gain and increase the shareholder’s tax basis of the Shares by an amount equal to shareholder’s proportionate share of the Fund’s undistributed net capital gain, reduced by the amount of the shareholder’s tax credit or refund.
Distributions in excess of the Fund’s current and accumulated earns and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholders tax basis in its shares of the fund, and generally as capital gain thereafter. Any such distribution will reduce the shareholder’s tax basis in the Shares, and thus will increase the shareholder’s capital gain, or decrease the capital loss, recognized upon a sale or exchange of Shares.
In addition, individuals with adjusted gross incomes above certain threshold amounts (and certain trusts and estates) generally are be subject to a 3.8% Medicare tax on net investment income in addition to otherwise applicable U.S. federal income tax. “Net investment income” generally will include dividends (including capital gain dividends) received from the Fund and net gains from the redemption or other disposition of Shares. Please consult your tax advisor regarding this tax.
Investors considering buying Shares just prior to a distribution should be aware that, although the price of the Shares purchased at such time may reflect the forthcoming distribution, such distribution nevertheless may be taxable (as opposed to a non-taxable return of capital).
Sales or Exchange of Shares. Any capital gain or loss realized upon a sale or exchange of Shares (including an exchange of Shares of one Fund for Shares of another Fund) generally is treated as a long-term gain or loss if the Shares have been held for more than one year. Any capital gain or loss realized upon a sale or exchange of Shares held for one year or less generally is treated as a short-term gain or loss, except that any capital loss on the sale or exchange of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to the Shares. An election may be available to you to defer recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
Creation Unit Issues and Redemptions. On an issue of Shares of the Fund as part of a Creation Unit where the creation is conducted in-kind, an Authorized Participant generally recognizes capital gain or loss (assuming the Authorized Participant does not hold the securities as inventory) equal to the difference between (i) the fair market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) the Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid by the Authorized Participant as part of the issue). On a redemption of Shares as part of a Creation Unit where the redemption is conducted in-kind, an Authorized Participant recognizes capital gain or loss (assuming the Authorized Participant does not hold the securities as inventory) equal to the difference between (i) the fair market value (at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s basis in the redeemed Shares (plus any cash paid by the Authorized Participant as part of the redemption). However, the IRS may assert, under the “wash sale” rules or on the basis that there has been no significant change in the Authorized Participant’s economic position, that any loss on creation or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss recognized upon the issue or redemption of Shares (as components of a Creation Unit) is treated either as long-term capital gain or loss, if the deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than one year, or otherwise as short-term capital gain or loss. However, any capital loss on a redemption of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to such Shares.
Back-Up Withholding. The Fund (or a financial intermediary such as a broker through which a shareholder holds Shares in the Fund) may be required to report certain information on the Fund shareholder to the IRS and withhold U.S. federal income tax (“backup withholding”) at a current rate of 24% from taxable distributions and redemption or sale proceeds payable to the Fund shareholder if (i) the Fund shareholder fails to provide the Fund with a correct taxpayer identification number or make required certifications, or if the IRS notifies the Fund that the Fund shareholder is otherwise subject to backup withholding, and (ii) the Fund shareholder is not otherwise exempt from backup withholding. Non-U.S. shareholders can qualify for exemption from backup withholding by submitting a properly completed IRS Form W-8BEN or W-8BEN-E. Backup withholding is not an additional tax and any amount withheld may be credited against the Fund shareholder’s U.S. federal income tax liability.
Taxation of Non-U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “non-U.S. shareholders.” For purposes of this discussion, a “non-U.S. shareholder” is a beneficial owner of Shares that is not a U.S. shareholder (as defined above) and is not an entity or arrangement treated as a partnership for U.S. federal income tax purposes. The following discussion is based on current law and is for general information only. If addresses only selected, and not all, aspects of U.S. federal income taxation applicable to non-U.S. shareholders.
With respect to non-U.S. shareholders of the Fund, the Fund’s ordinary income dividends generally will be subject to U.S. federal withholding tax at a rate of 30% (or at a lower rate established under an applicable tax treaty), subject to certain exceptions for “interest-related dividends” and “short-term capital gain dividends” discussed below. The Fund will not pay any additional amounts to shareholders in respect of any amounts withheld.
U.S. federal withholdings tax generally will not apply to any gain realized by a non-U.S. shareholder in receipt of the Fund’s net capital gain. Special rules (not discussed herein) apply with respect to dividends of the Fund that are attributable to gain from the sale or exchange of “U.S. real property interests.”
In general, all “interest related dividends” and “short-term capital gains dividends” (each defined below) will not be subject to U.S. federal withholding tax, provided that, among other requirements, the non-U.S. shareholder furnished the Fund with a completed IRS Form W8BEN or W-8BEN-E, as applicable, (or acceptable substitute documentation) establishing the non-U.S. shareholder’s non-U.S. status and the Fund does not have actual knowledge or reason to know that the non-U.S. shareholder would be subject to such withholding tax if the non-U.S. shareholder were to receive the related amounts directly rather than as dividends from the Fund.
“Interest-related dividends” generally means dividends designated by the Fund as attributable to such Fund’s U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which such Fund is at least 10% shareholder, reduced by expenses that are allocable to such income. “Short-term capital gain dividends” generally means dividends designated by the Fund as attributable to the excess of such Fund’s net short-term capital gain over its net long-term capital loss. Depending on its circumstances, the Fund may treat such dividends, in whole or in part, as ineligible for these exceptions from withholding.
In general, subject to certain exceptions, non-U.S. shareholders will not be subject to U.S. federal income or withholdings tax in respect of a sale or other disposition of Shares of the Fund.
To claim a credit or refund for any Fund-level taxes on any undistributed net capital gain (as discussed above) or any taxes collected through back-up withholdings (discussed below), a non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S. shareholder would not otherwise be required to do so.
Foreign Account Tax Compliance Act. The U.S. Foreign Account Tax Compliance Act (“FATCA”) generally imposes a 30% withholding tax on “withholdable payments” (defined below) made to (i) a “foreign financial institution” (“FFI”), unless the FFI enters into an agreement with the IRS to provide information regarding certain of direct and indirect its U.S. accounts and satisfy certain due diligence and other specified requirements, and (ii) a “non-financial foreign entity” (“NFFE”) unless such NFFE provides certain information about its direct and indirect “substantial U.S. owners” to the withholding agent or certifies that it has no such U.S. owners. The beneficial owner of a “withholdable payment” may be eligible for a refund or credit of the withheld tax. The U.S. government also has entered into intergovernmental agreements with other jurisdictions to provide an alternative, and generally easier, approach for FFIs to comply with FATCA. If the shareholder is a tax resident in a jurisdiction that has entered into an intergovernmental agreement with the U.S. government, the shareholder will be required to provide information about the shareholder’s classification and compliance with the intergovernmental agreement.
“Withholdable payments” generally include, among other items, U.S.-source interest and dividends, and gross proceeds from the sale or disposition of property of a type that can produce U.S. source interest or dividends. However. Proposed regulations may eliminate the requirement to withhold on payments of gross proceeds from dispositions.
The Fund or a shareholder’s broker may be required to impose a 30% withholding tax on withholdable payments to a shareholder if the shareholder fails to provide the Fund with the information, certifications or documentation required under FATCA, including information, certification or documentation necessary for the Fund to determine if the shareholder is a non-U.S. shareholder or a U.S. shareholder and, if it is a non-U.S. shareholder, if the non-U.S. shareholder has “substantial U.S. owners” and/or is in compliance with (or meets an exception from) FATCA requirements. The Fund will not pay any additional amounts to shareholders in respect of any amounts withheld. The Fund may disclose any shareholder information, certifications or documentation to the IRS or other parties as necessary to comply with FATCA.
The requirements of, and exceptions from, FATCA are complex. All prospective shareholders are urged to consult their own tax advisors regarding the potential application of FATCA with respect to their own situation. For a more detailed tax discussion regarding an investment in the Fund. Please see the section of the SAI entitled “U.S. Federal Income Taxation.”
Code of Ethics
The Trust, Advisor, Subadvisor and Distributor each have adopted a code of ethics under Rule 17j-1 of the 1940 Act that is designed to prevent affiliated persons of the Trust, the Advisor, the Subadvisor and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be
acquired by the Fund (which may also be held by persons subject to a code). There can be no assurance that the codes will be effective in preventing such activities. The codes permit personnel subject to them to invest in securities, including securities that may be held or purchased by the Fund. The codes are on file with the SEC and are available to the public.
Fund Website and Disclosure of Portfolio Holdings
The Advisor maintains a website for the Fund at newyorklifeinvestments.com/etf. The website for the Fund contains the following information, on a per-Share basis, for the Fund: (1) the prior Business Day’s NAV; (2) the reported mid-point of the bid-ask spread at the time of NAV calculation (the “Bid-Ask Price”); (3) a calculation of the premium or discount of the Bid-Ask Price against such NAV; and (4) data in chart format displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or for the life of the Fund if, shorter). In addition, on each Business Day, before the commencement of trading in Shares on the NYSE Arca, the Fund will disclose on its website (newyorklifeinvestments.com/etf) the identities and quantities of the portfolio securities and other assets held by the Fund that will form the basis for the calculation of NAV at the end of the Business Day.
A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
Other Information
The Fund is not sponsored, endorsed, sold or promoted by the NYSE Arca. The NYSE Arca makes no representation or warranty, express or implied, to the owners of Shares or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Fund to achieve its objectives. The NYSE Arca has no obligation or liability in connection with the administration, marketing or trading of the Fund.
For purposes of the 1940 Act, the Fund is treated as a registered investment company, and the acquisition of shares by other registered investment companies and companies relying on Sections 3(c)(1) and 3(c)(7) of the 1940 Act are subject to the restrictions of Section 12(d)(1) of the 1940 Act and the related rules and interpretations.
Financial Highlights
Selected Data for a Share of Capital Stock Outstanding
The financial highlights tables are intended to help you understand the Fund’s financial performance for the past five fiscal years, of if shorter, the period of the Fund’s operations. Certain information reflects financial results for a single Fund Share. The total returns in the tables represent the rate that an investor would have earned (or lost) on an investment in the respective Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is available upon request.
| | | IQ MacKay ESG Core Plus Bond ETF | |
| | | For the Period June 29, 2021(a) to April 30, 2022 | |
Net asset value, beginning of period | | | | $ | 25.00 | | |
Income from Investment Operations | | | | | | | |
Net investment income(b) | | | | | 0.40 | | |
Net realized and unrealized gain(loss) | | | | | (2.70) | | |
Net increase (decrease) in net assets resulting from investment operations | | | | | (2.30) | | |
Distributions from: | | | | | | | |
Net investment income | | | | | (0.32) | | |
Net realized gain | | | | | (0.03) | | |
Total distributions from net investment income and realized gains | | | | | (0.35) | | |
Net asset value, end of period | | | | $ | 22.35 | | |
Market price, end of period | | | | $ | 22.38 | | |
Total Return | | | | | | | |
Total investment return based on net asset value(c) | | | | | (9.31)% | | |
Total investment return based on market price(d) | | | | | (9.21)% | | |
Ratios/Supplemental Data | | | | | | | |
Net assets, end of year (000’s omitted) | | | | $ | 148,625 | | |
Ratio to average net assets of: | | | | | | | |
Expenses net of waivers/reimbursements(g) | | | | | 0.39%(f) | | |
Expenses excluding waivers/reimbursements(g) | | | | | 0.64%(f) | | |
Net investment income (loss)(c) | | | | | 2.00%(f) | | |
Portfolio turnover rate(i) | | | | | 333% | | |
(a)
Commencement of operations.
(b)
Based on average shares outstanding.
(c)
Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions, if any, at net asset value during the period, and redemption on the last day of the period. Total return calculated for a period less than one year is not annualized.
(d)
The market price returns are calculated using the mean between the last bid and ask prices.
(e)
Since the Shares of the Funds did not trade in the secondary market until the day after the Fund’s inception, for the period from the inception to the first day of the secondary market trading, the NAV is used as a proxy for the secondary market trading price to calculate the market returns.
(f)
Annualized.
(g)
Portfolio turnover rate is not annualized and excludes the value of portfolio securities received or delivered as in-kind creations or redemptions in connection with the Fund’s capital share transactions.
Privacy Policy
The following notice does not constitute part of the Prospectus, nor is it incorporated into the Prospectus.
The Trust is committed to respecting the privacy of personal information you entrust to us in the course of doing business with us.
The Trust may collect non-public personal information from various sources. The Trust uses such information provided by you or your representative to process transactions, to respond to inquiries from you, to deliver reports, products, and services, and to fulfill legal and regulatory requirements.
We do not disclose any non-public personal information about our customers to anyone unless permitted by law or approved by the customer. We may share this information within the Trust’s family of companies in the course of providing services and products to best meet your investing needs. We may share information with certain third-parties who are not affiliated with the Trust to perform marketing services, to process or service a transaction at your request or as permitted by law. For example, sharing information with companies that maintain or service customer accounts for the Trust is essential. We may also share information with companies that perform administrative or marketing services for the Trust, including research firms. When we enter into such a relationship, we restrict the companies’ use of our customers’ information and prohibit them from sharing it or using it for any purposes other than those for which they were hired.
We maintain physical, electronic, and procedural safeguards to protect your personal information. Within the Trust, we restrict access to personal information to those employees who require access to that information in order to provide products or services to our customers, such as handling inquiries. Our employment policies restrict the use of customer information and require that it be held in strict confidence.
We will adhere to the policies and practices described in this notice for both current and former customers of the Trust.
IndexIQ Active ETF Trust
Mailing Address
51 Madison Avenue
New York, New York 10010
1-888-474-7725
newyorklifeinvestments.com/etf
IndexIQ Active ETF Trust
PROSPECTUS | August 31, 2022
FOR MORE INFORMATION
If you would like more information about the Trust, the Fund and the Shares, the following documents are available free upon request:
Annual/Semi-annual Report
Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders (once available). In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during the last fiscal year.
Statement of Additional Information
Additional information about the Fund and its policies is also available in the SAI. The SAI is incorporated by reference into this Prospectus (and is legally considered part of this Prospectus). The Fund’s annual and semi-annual reports (when available) and the SAI are available free upon request by calling IndexIQ at 1-888-474-7725. You can also access and download the annual and semi-annual reports and the SAI at the Fund’s website: newyorklifeinvestments.com/etf.
To obtain other information and for shareholder inquiries:
By telephone: 1-888-474-7725
By mail: IndexIQ Active ETF Trust
c/o IndexIQ
51 Madison Avenue,
New York, NY 10010
On the Internet: SEC Edgar database: http://www.sec.gov; or newyorklifeinvestments.com/etf
You may review and obtain copies of Fund documents (including the SAI) by visiting the SEC’s public reference room in Washington, D.C. You may also obtain copies of Fund documents, after paying a duplicating fee, by writing to the SEC’s Public Reference Section, Washington, D.C. 20549-0102 or by electronic request to: publicinfo@sec.gov. Information on the operation of the public reference room may be obtained by calling the SEC at (202) 551-8090.
No person is authorized to give any information or to make any representations about the Fund and its Shares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference.
Dealers effecting transactions in the Fund’s Shares, whether or not participating in this distribution, may be generally required to deliver a Prospectus. This is in addition to any obligation dealers have to deliver a Prospectus when acting as underwriters.
“New York Life Investments” is both a service mark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.
IQ® and IndexIQ® are registered service marks of New York Life Insurance Company. The Fund’s investment company registration number is 811-22739.
IndexIQ Active ETF Trust
Prospectus
August 31, 2022
IQ Ultra Short Duration ETF (ULTR)
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
As permitted by regulations adopted by the Securities and Exchange Commission, paper copies of the Fund’s shareholder reports will no longer be sent by mail, unless you specifically request paper copies of the reports from your financial intermediary, such as a broker-dealer or bank. Instead, the reports will be made available on a website, and you will be notified by mail each time a report is posted and provided with a website link to access the report.
If you already elected to receive shareholder reports electronically, you will not be affected by this change and you need not take any action. If you hold accounts through a financial intermediary, you may contact your financial intermediary to enroll in electronic delivery. Please note that not all financial intermediaries may offer this service.
You may elect to receive all future reports in paper free of charge. If you hold accounts through a financial intermediary, you can contact your financial intermediary to request that you continue to receive paper copies of your shareholder reports. Your election to receive reports in paper will apply to all funds held with your financial intermediary.
Not FDIC Insured | May Lose Value | No Bank Guarantee
IndexIQ Active ETF Trust (the “Trust”) is a registered investment company that consists of separate investment portfolios called “Funds”. This Prospectus relates to the following Fund:
Name
|
|
|
CUSIP
|
|
|
Symbol
|
|
|
Exchange
|
|
IQ Ultra Short Duration ETF |
|
|
45409F819
|
|
|
ULTR
|
|
|
NYSE Arca
|
|
The Fund is an exchange-traded fund. This means that shares of the Fund are listed on a national securities exchange (the “Exchange”) and trade at market prices. The market price for the Fund’s shares may be different from its net asset value per share (the “NAV”). The Fund has its own CUSIP number and exchange trading symbol.
|
|
|
|
|
|
4
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
11
|
|
|
|
|
|
|
|
|
12
|
|
|
|
|
|
|
|
|
19
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
22
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
23
|
|
|
|
|
|
|
|
|
24
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
25
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
29
|
|
|
|
|
|
|
|
|
30
|
|
|
|
|
|
|
|
|
31
|
|
|
|
|
|
|
|
|
32
|
|
|
IQ Ultra Short Duration ETF
Investment Objective
The IQ Ultra Short Duration ETF (the “Fund”) seeks to provide current income while maintaining limited price volatility.
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 the Fund (“Shares”). Investors may pay other fees, such as brokerage commissions and other fees to financial intermediaries, which are not reflected in the table and example set forth below.
Shareholder Fees (fees paid directly from your investment):
None
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment):
| Management Fee | | | | | 0.24% | | |
| Distribution and/or Service (12b-1) Fees | | | | | 0.00% | | |
| Other Expenses | | | | | 0.11% | | |
| Acquired Fund Fees and Expenses(a) | | | | | 0.01% | | |
| Total Annual Fund Operating Expenses(a)(b) | | | | | 0.36% | | |
| Expense Waiver/Reimbursement(b) | | | | | 0.11% | | |
| Total Annual Fund Operating Expenses After Expense Waiver/Reimbursement | | | | | 0.25% | | |
(a)
(b)
Example. 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 at current levels. The return of 5% and estimated expenses are for illustration purposes only, and should not be considered indicators of expected Fund expenses or performance, which may be greater or less than the estimates. Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 Year
|
|
|
3 Years
|
|
|
5 Years
|
|
|
10 Years
|
|
$26 |
|
|
$80 |
|
|
$141 |
|
|
$318 |
|
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities or other instruments (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Shares are held in a taxable account. These costs, which are not reflected in annual Fund operating expenses or in the example, affect the Fund’s performance. During the most recent fiscal year, the Fund’s portfolio turnover rates was 132% of the average value of the portfolio. This rate excludes the value of the portfolio securities received or delivered as a result of in-kind creations or redemptions of the Shares.
Principal Investment Strategies
The Fund is an actively managed ETF and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active management strategy to meet its investment objective. Consequently, investors should not expect the Fund’s returns to track the returns of any index or market for any period of time.
The Fund, under normal circumstances, invests at least 80% of its net assets in fixed income securities. The Fund typically invests at least 80% of its assets in fixed income securities rated BBB- or A-2 or higher by S&P Global Ratings (“S&P”), BBB- or F-2 or higher by Fitch Ratings, Inc. (“Fitch”), or Baa3 or Prime-2 or higher by Moody’s
Investors Service, Inc. (“Moody’s”), or, if unrated, determined by the Fund’s management to be of equivalent quality. The Fund may invest in ETFs and closed-end funds that invest substantially all of their assets in investment grade fixed-income securities. Debt securities in which the Fund may invest include all types of debt obligations such as U.S. government securities (including Treasury notes, and obligations, such as repurchase agreements, secured by such instruments), agency securities, corporate bonds, instruments of non-U.S. issuers, asset-backed securities (“ABS”) (including collateralized debt and loan obligations, residential mortgage-backed securities, and commercial mortgage-backed securities), commercial paper, debentures, floating rate bonds, and convertible corporate bonds. The Fund will generally seek to maintain a weighted average duration of 1 year or less. Duration is a measure used to determine the sensitivity of a security’s price to changes in interest rates. The longer a security’s duration, the more sensitive it will be to changes in interest rates. Duration differs from maturity in that it considers, among other characteristics, an instrument’s yield, coupon payments, principal payments and call features in addition to the amount of time until the instrument matures. As the value of an instrument changes over time, so will its duration.
NYL Investors LLC (the “Subadvisor”) seeks to identify investment opportunities through analyzing individual securities and evaluating each security’s relative value and relevance for the Fund. The Subadvisor takes into account multiple factors when allocating across sectors and individual securities, including spread, duration, yield, liquidity, among other factors. The Subadvisor implements a disciplined, value-oriented investment process designed to maintain limited price volatility, which is expected to lead to the preservation of capital by seeking to avoid principal loss through strategic duration management, yield curve positioning, tactical sector allocation and security selection.
The Subadvisor may sell a security if it no longer believes the security will contribute to meeting the investment objective of the Fund. In considering whether to sell a security, the Subadvisor may evaluate, among other things, the condition of the economy and meaningful changes in the issuer’s financial condition.
Principal Risks
As with all investments, there are certain risks of investing in the Fund. The Fund’s Shares will change in value and you could lose money by investing in the Fund. An investment in the Fund does not represent a complete investment program. An investment in the Fund is not a bank deposit and it is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency, the Advisor or any of its affiliates. You should consider carefully the following risks before investing in the Fund.
Asset-Backed Securities Risk
Asset-backed securities are securities that represent interests in, and whose values and payments are based on, a “pool” of underlying assets, which may include, among others, lower-rated debt securities and corporate loans, consumer loans or mortgages and leases of property. Asset-backed securities include collateralized debt obligations, collateralized bond obligations, and collateralized loan obligations and other similarly structured vehicles. As with other debt securities, asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk and valuation risk. The impairment of the value of collateral or other assets underlying an asset-backed security, such as a result of non-payment of loans or non-performance of underlying assets, may result in a reduction in the value of such asset-backed securities and losses to the Fund.
Investments in mortgage-related securities make an investor more susceptible to adverse economic, interest rate, political or regulatory events that affect the value of real estate. Mortgage-related securities are also significantly affected by the rate of prepayments. Impairment of the underlying obligations or collateral, such as by non-payment, will reduce a mortgage-related security’s value.
Authorized Participant Concentration Risk
Only certain large institutions (an “Authorized Participant”) may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that those Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to engage in creation and redemption transactions with the Fund, Shares may be more likely to trade at a premium or discount to NAV and possibly face trading halts and/or delisting.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash
needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Convertible Securities Risk
A convertible security has characteristics of both equity and debt securities and, as a result, is exposed to risks that are typically associated with both types of securities. Convertible securities are typically subordinate to an issuer’s other debt obligations. Issuers of convertible securities may be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates, which could affect their ability to make interest and principal payments. If an issuer stops making interest and/or principal payments, the Fund could lose its entire investment.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments when due or otherwise honor its obligations. Changes in an issuer’s or counterparty’s credit rating or the market’s perception of an issuer’s or counterparty’s creditworthiness may also adversely affect the value of the Fund’s investment in that issuer. The degree of credit risk depends on an issuer’s or counterparty’s financial condition and on the terms of an obligation.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. Such events may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity and could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. In addition, cyber security breaches of the securities issuers or the Fund’s third-party service providers can also subject the Fund to many of the same risks associated with direct cyber security breaches. Although the Fund has established risk management systems designed to reduce the risks associated with cyber security, there is no guarantee that such efforts will succeed.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce the Fund’s income if the proceeds are reinvested at lower interest rates; and extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Derivatives Risk
Derivatives are investments whose value depends on (or is derived from) the value of an underlying instrument, such as a security, asset, reference rate or index and involve risks different from, and possibly greater than, the risks associated with other investments. These risks include: (i) the risk that the counterparty to a derivatives transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to, changing supply and demand relationships, government programs and policies, national and international political and economic events, changes in interest rates, inflation and deflation, and changes in supply and demand relationships. Unlike other investments, derivative contracts often have leverage inherent in their terms. The use of leveraged derivatives can magnify potential for gain or loss and, therefore, amplify the effects of market volatility on the Fund’s Share price. The effects of leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so.
Foreign Securities Risk
Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Some countries and regions have experienced security concerns, war or threats of war and aggression, terrorism, economic uncertainty, natural and environmental disasters and/or systemic market dislocations that have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on the U.S. and world economies and markets generally. Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, financial reporting and record keeping than are U.S. issuers, and therefore not all material information will be available. Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent the Fund from repatriating its investments. Less developed securities markets are more likely to experience problems with the clearing and settling of trades, as well as the holding of securities by local banks, agents and depositories. The less developed a country’s securities market is, the greater the likelihood of custody problems.
Foreign Securities Valuation Risk
The Fund’s value may be impacted by events that cause the fair value of foreign securities to materially change between the close of the local exchange on which they trade and the time at which the Fund prices its Shares. Additionally, because foreign exchanges on which securities held by the Fund may be open on days when the Fund does not price its Shares, the potential exists for the value of the securities in the Fund’s portfolio to change on days when shareholders will not be able to purchase or sell the Fund’s Shares.
Income Risk
The Fund’s income may decline when interest rates fall or if there are defaults in its portfolio. This decline can occur because the Fund may subsequently invest in lower-yielding securities when securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of securities held by the Fund to decline. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities.
During periods of falling interest rates, an issuer of a callable security held by the Fund may “call” or repay the security before its stated maturity, which may result in the Fund having to reinvest the proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments.
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Accordingly, the Fund may not be able to sell or close out of such investments at favorable times or prices (or at all), or at the prices approximating those at which the Fund currently values them. Illiquid securities may trade at a discount from comparable, more liquid investments and may be subject to wide fluctuations in market value.
Market Risk
Market risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market, which may affect the Fund’s value. Turbulence in financial markets, tariffs and other protectionist measures, political developments and uncertainty, central bank policy, and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. During a general downturn in the securities markets, multiple asset classes may be negatively affected. Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets.
Money Market/Short-Term Securities Risk
To the extent the Fund holds cash or invests in money market or short-term securities, the Fund may be less likely to achieve its investment objective. In addition, it is possible that the Fund’s investments in these instruments could lose money.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund, Advisor and Subadvisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result or, while it may be the desired result, may underperform other types of investment strategies. There can be no guarantee that the Fund will meet its investment objective(s).
Portfolio Turnover Risk
The Fund’s strategy may frequently involve buying and selling portfolio securities to rebalance the Fund’s investment exposures. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause the Fund’s performance to be less than expected.
Repurchase Agreement Risk
Repurchase agreements are subject to the risks that the seller will become bankrupt or insolvent before the date of repurchase or otherwise will fail to repurchase the security as agreed, which could cause losses to the Fund.
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. In general, the trading of Shares on securities exchanges is subject to the risk of irregular trading activity and wide “bid/ask” spreads (which may be especially pronounced for smaller funds). Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV. Wide bid-ask spreads and large premiums or discounts to NAV are likely to lead to an investor buying his or her shares at a market price that is more than their value, and selling those shares at a market price that is less than their value.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours
based on both market supply of and demand for Shares and the underlying value of the Fund’s portfolio holdings or NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV. Although it is generally expected that the market price of the Shares of the Fund will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares.
Valuation Risk
Independent market quotations for certain investments held by the Fund may not be readily available, and such investments may be fair valued or valued by a pricing service at an evaluated price. These valuations involve subjectivity and different market participants may assign different prices to the same investment. As a result, there is a risk that the Fund may not be able to sell an investment at the price assigned to the investment by the Fund. In addition, the value of the securities or other assets in the Fund’s portfolio may change on days or during time periods when shareholders will not be able to purchase or sell the Fund’s Shares.
Performance Information
The bar chart that follows shows the annual total returns of the Fund for a full calendar year. The table that follows the bar chart shows the Fund’s average annual total return, both before and after taxes. The bar chart and table provide an indication of the risks of investing in the Fund by comparing the Fund’s performance from year to year and by showing how the Fund’s average annual returns for one calendar year compared with its benchmark and additional broad measures of market performance. The Bloomberg Short Treasury 3-6 Month Index is a component of the Barclays Short Treasury Index, which includes aged U.S. Treasury bills, notes and bonds with a remaining maturity from 1 up to (but not including) 12 months and excludes zero coupon strips.
All returns assume reinvestment of dividends and distributions. The Fund’s past performance (before and after taxes) is not necessarily an indication of how the Fund will perform in the future. Performance reflects fee waivers and/or expense reimbursement in effect, if such waivers or reimbursements were not in place, the Fund’s performance would be reduced. Fund performance current to the most recent month-end is available by calling 1-888-474-7725 or by visiting newyorklifeinvestments.com/etf.
The Fund’s year-to-date total return as of June 30, 2022 was -1.58%.
Best and Worst Quarter Returns (for the period reflected in the bar chart above)
| | | Return | | | Quarter/Year | |
Highest Return | | | | | 2.52% | | | | | | 2Q/2020 | | |
Lowest Return | | | | | -2.82% | | | | | | 1Q/2020 | | |
Average Annual Total Returns as of December 31, 2021
| | | 1 Year | | | Since Inception(1) | |
Returns before taxes | | | | | 0.19% | | | | | | 0.91% | | |
Returns after taxes on distributions(2) | | | | | -0.56% | | | | | | 0.10% | | |
Returns after taxes on distributions and sale of Fund Shares(2) | | | | | 0.27% | | | | | | 0.40% | | |
Bloomberg Short Treasury 3-6 Month Index (reflects no deduction for fees, expenses or taxes) | | | | | 0.06% | | | | | | 0.76% | | |
(1)
(2)
Investment Advisor and Subadvisor
IndexIQ Advisors LLC is the investment advisor to the Fund.
NYL Investors LLC serves as the investment subadvisor to the Fund.
Portfolio Managers
The professionals jointly and primarily responsible for the day-to-day management of the Fund are:
Name & Title
|
|
|
Length of Service with Subadvisor
|
|
|
Length of Service as Fund’s Portfolio Manager
|
|
Kenneth Sommer, Managing Director |
|
|
4 years
|
|
|
Since inception
|
|
Matthew Downs, Senior Director |
|
|
4 years
|
|
|
Since inception
|
|
Purchase and Sale of Fund Shares
Unlike conventional mutual funds, the Fund issues and redeems Shares on a continuous basis, at NAV, only in large blocks of Shares called “Creation Units.” Individual Shares of the Fund may only be purchased and sold on the secondary market through a broker-dealer. Since Shares of the Fund trade on securities exchanges in the secondary market at their market price rather than their NAV, the Fund’s Shares may trade at a price greater than (premium) or less than (discount) the Fund’s NAV. An investor may incur costs attributable to the difference between the highest price a buyer is willing to pay to purchase Shares of the Fund (bid) and the lowest price a seller is willing to accept for Shares of the Fund (ask) when buying or selling Shares in the secondary market (the “bid-ask spread”). Recent information, including the Fund’s NAV, market price, premiums and discounts, and bid-ask spreads, is available online at newyorklifeinvestments.com/etf.
Tax Information
The Fund’s distributions are expected to be taxed as ordinary income, qualified dividend income and/or capital gains, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or individual retirement account. However, subsequent withdrawals from such a tax-advantaged account may be subject to U.S. federal income tax. You should consult your tax advisor about your specific situation.
Financial Intermediary Compensation
If you purchase the Fund through a broker-dealer or other financial intermediary (such as a bank), the Advisor or other related companies may pay the intermediary for marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems or other services related to the sale or promotion of the Fund. 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.
Overview
The Trust is an investment company consisting of a number of separate investment portfolios (each, a “Fund” and together, the “Funds”) that are structured as exchange-traded funds (“ETFs”). Each share of a Fund represents an ownership interest in the securities and other instruments comprising a Fund’s portfolio. Unlike shares of a mutual fund, which can be bought and redeemed from the issuing fund by all shareholders at a price based on net asset value (“NAV”), shares of an ETF (such as the Fund) are listed on a national securities exchange and trade in the secondary market at market prices that change throughout the day, and may differ from a Fund’s NAV. IndexIQ Advisors LLC (the “Advisor”) is the investment advisor to the Fund and NYL Investors LLC (the “Subadvisor”) is the investment subadvisor to the Fund.
The Fund has a distinct investment objective and policies. Each of the policies described herein, including the investment objective of the Fund, constitutes a non-fundamental policy that may be changed by the Board of Trustees of the Trust (the “Board”) without shareholder approval. Certain fundamental policies of the Fund are set forth in the Fund’s Statement of Additional Information (the “SAI”) under “Investment Restrictions.” There can be no assurance that the Fund’s objective will be achieved.
Description of the Principal Strategies of the Fund
The Fund is actively managed ETFs and thus does not seek to replicate the performance of a specific index. Instead, the Fund uses an active investment strategy to meet its investment objective. The Subadvisor, subject to the oversight of the Advisor and Board, has discretion on a daily basis to manage the Fund’s portfolio in accordance with the Fund’s investment objective and investment policies.
Rule 35d-1 under the Investment Company Act of 1940 (the “1940 Act”) requires that funds with certain names adopt a policy that they will, under normal circumstances, invest at least 80% of the value of their assets (net assets plus the amount of any borrowings for investment purposes) in investments of the type suggested by the fund’s name. To the extent the Fund adopts such a policy, it will be “non-fundamental,” which means that it may be changed without the vote of a majority of the Fund’s outstanding shares as defined in the 1940 Act. Such policies generally provide a fund’s shareholders with at least 60 days’ prior notice of any changes in a fund’s non-fundamental investment policy with respect to investments of the type suggested by its name. The Fund may count investments in underlying funds toward various guideline tests (such as the 80% test required under Rule 35d-1 under the 1940 Act).
The Fund’s investments are subject to certain requirements imposed by law and regulation, as well as the Fund’s investment strategy. These requirements are generally applied at the time the Fund invests its assets. If, subsequent to an investment by the Fund, this requirement is no longer met, the Fund’s future investments will be made in a manner that will bring the Fund into compliance with this requirement.
Additional Investment Strategies
Borrowing Money
The Fund may borrow money from a bank as permitted by the 1940 Act or the rules thereunder, or by the U.S. Securities and Exchange Commission (“SEC”) or other regulatory agency with authority over the Fund, but only for temporary or emergency purposes. The 1940 Act presently allows a fund to borrow from any bank (including pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total assets (not including temporary borrowings not in excess of 5% of its total assets).
Temporary Defensive Positions
In times of unusual or adverse market, economic or political conditions or abnormal circumstances (such as large cash inflows or anticipated large redemptions), the Fund may, for temporary defensive purposes or for liquidity purposes (which may be for a prolonged period), invest outside the scope of its principal investment strategies. Under such conditions, the Fund may not invest in accordance with its investment objective or principal investment strategies and, as a result, there is no assurance that the Fund will achieve its investment objective. Under such conditions, the Fund may also invest without limit in cash, money market securities or other investments.
Securities Lending
The Fund may lend its portfolio securities. A securities lending program allows a Fund to receive a portion of the income generated by lending its securities and investing the respective collateral. In connection with such loans, a Fund receives liquid collateral equal to at least 102% (105% for foreign securities) of the value of the portfolio securities being lent. This collateral is marked to market on each trading day.
Description of the Principal Risks of the Fund
Investors in the Fund should carefully consider the risks of investing in the Fund as set forth in the Fund’s Summary Information section under “Principal Risks.” To the extent such risks apply, they are discussed hereunder in greater detail. See also the section on “Additional Risks” for other risk factors.
Asset-Backed Securities Risk
Asset-backed securities are securities that represent interests in, and whose values and payments are based on, a “pool” of underlying assets, which may include, among others, lower-rated debt securities and corporate loans, consumer loans or mortgages and leases of property. Asset-backed securities include collateralized debt obligations, collateralized bond obligations, and collateralized loan obligations and other similarly structured vehicles. As with other debt securities, asset-backed securities are subject to credit risk, extension risk, interest rate risk, liquidity risk and valuation risk. Certain asset-backed securities do not have the benefit of the same security interest in the related collateral as do mortgage-backed securities, nor are they provided government guarantees of repayment. Credit card receivables are generally unsecured, and the debtors are entitled to the protection of a number of state and federal consumer credit laws, many of which give such debtors the right to set off certain amounts owed on the credit cards, thereby reducing the balance due. In addition, some issuers of automobile receivables permit the servicers to retain possession of the underlying obligations. If the servicer were to sell these obligations to another party, there is a risk that the purchaser would acquire an interest superior to that of the holders of the related automobile receivables. The impairment of the value of collateral or other assets underlying an asset-backed security, such as a result of non-payment of loans or non-performance of underlying assets, may result in a reduction in the value of such asset-backed securities and losses to a Fund.
Investments in mortgage-related securities make an investor more susceptible to adverse economic, political or regulatory events that affect the value of real estate. Mortgage-related securities are also significantly affected by the rate of prepayments and modifications of the mortgage loans underlying those securities, as well as by other factors such as borrower defaults, delinquencies, realized or liquidation losses and other shortfalls. Mortgage-related securities are particularly sensitive to prepayment risk, given that the term to maturity for mortgage loans is generally substantially longer than the expected lives of those securities. As the timing and amount of prepayments cannot be accurately predicted, the timing of changes in the rate of prepayments of the mortgage loans may significantly affect a Fund’s actual yield to maturity on any mortgage-related securities. Along with prepayment risk, mortgage-related securities are significantly affected by interest rate risk. In a low interest rate environment, mortgage loan prepayments would generally be expected to increase due to factors such as refinancings and loan modifications at lower interest rates. In contrast, if prevailing interest rates rise, prepayments of mortgage loans would generally be expected to decline and therefore extend the weighted average lives of mortgage-related securities held or acquired by a Fund. Fund investments in mortgage-backed securities issued by Ginnie Mae are backed by the full faith and credit of the U.S. government. Fund investments in mortgage-backed securities issued by Fannie Mae and Freddie Mac are not backed by the full faith and credit of the U.S. government, and there can be no assurance that the U.S. government would provide financial support to its agencies or instrumentalities where it is not obligated to do so. Impairment of the underlying obligations or collateral, such as by non-payment, will reduce a mortgage-related security’s value. Enforcing rights against such collateral in events of default may be difficult or insufficient. These securities may have a structure that makes their reaction to interest rate changes and other factors difficult to predict, making their value highly volatile.
Authorized Participant Concentration Risk
Only an Authorized Participant may engage in creation or redemption transactions directly with the Fund. The Fund has a limited number of institutions that may act as Authorized Participants on an agency basis (i.e., on behalf of other market participants). To the extent that Authorized Participants exit the business or are unable to proceed with creation and/or redemption orders with the Fund and no other Authorized Participant is able to step forward to create or redeem Creation Units, Shares may be more likely to trade at a premium or discount
to NAV and possibly face trading halts and/or delisting. This risk may be heightened for ETFs that invest in non-U.S. securities because such securities often involve greater settlement and operational issues for Authorized Participants that may further limit the availability of Authorized Participants.
Cash Transactions Risk
The Fund currently intends to effect creations and redemptions principally for cash, rather than for in-kind securities. For this reason, the Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Fund may recognize a capital gain on these sales that might not have been incurred if the Fund had made a redemption in-kind. This may decrease the tax efficiency of the Fund compared to ETFs that utilize an in-kind redemption process.
Convertible Securities Risk
Convertible securities are bonds, debentures, notes, preferred stocks or other securities that may be converted or exchanged (by the holder or by the issuer, depending on the terms of the securities) into shares of the underlying common stock (or cash or securities of equivalent value) at a stated exchange ratio. If a convertible security held by a Fund is called for redemption or conversion, such Fund could be required to tender it for redemption, convert it into the underlying equity security or sell it to a third party, which may have an adverse effect on the Fund’s ability to achieve its investment objective. The market values of convertible securities tend to decline as interest rates increase. However, a convertible security’s market value also tends to reflect the market price of the equity security of the issuing company, particularly when the price of the equity security is greater than the convertible security’s conversion price (i.e., the predetermined price or exchange ratio at which the convertible security can be converted or exchanged for the underlying equity security). Convertible securities are also exposed to the risk that an issuer will be unable to meet its obligation to make dividend or principal payments when due as a result of changing financial or market conditions. Convertible debt securities generally offer lower interest or dividend yields than non-convertible debt securities of similar credit quality because of their potential for capital appreciation. Moreover, there can be no assurance that convertible securities will provide current income prior to conversion because the issuers of the convertible securities may default on their obligations. If the convertible security has a conversion or call feature that allows the issuer to redeem the security before the conversion date, the potential for capital appreciation may be diminished. In the event that convertible securities are not optional but mandatory based upon the price of the underlying common stock, a Fund may be subject to additional exposure to loss of income in situations where it would prefer to hold debt.
Credit Risk
Credit risk is the risk that the issuer or guarantor of a debt instrument or the counterparty to a derivatives contract, repurchase agreement or loan of portfolio securities will be unable or unwilling to make its timely interest and/or principal payments or to otherwise honor its obligations. There are varying degrees of credit risk, depending on an issuer’s or counterparty’s financial condition and on the terms of an obligation, which may be reflected in the issuer’s or counterparty’s credit rating. There is the chance that the Fund’s portfolio holdings will have their credit ratings downgraded or will default (i.e., fail to make scheduled interest or principal payments), or that the market’s perception of an issuer’s or counterparty’s creditworthiness may worsen, potentially reducing the Fund’s income level or Share price. The value of an investment in the Fund may change quickly and without warning in response to issuer defaults, changes in the credit ratings of the Fund’s portfolio securities and/or perceptions related thereto.
Cyber Security Risk
The Fund is susceptible to operational risks through breaches in cyber security. A breach in cyber security refers to both intentional and unintentional events that may cause the Fund to lose proprietary information, suffer data corruption or lose operational capacity. Such events could cause the Fund to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures and/or financial loss. These risks typically are not covered by insurance. In general, cyber incidents can result from deliberate attacks or unintentional events. Cyber incidents include, but are not limited to, gaining unauthorized access to digital systems (e.g., through “hacking” or malicious software coding) for purposes of misappropriating assets or sensitive information, corrupting data or causing operational disruption. Cyber attacks may also be carried out in a manner that does not require gaining unauthorized access, such as causing denial-of-service attacks on websites (i.e., efforts to make network services unavailable to intended users). Cyber security failures by or breaches of the systems of security issuers, the Advisor, distributor and other service providers (including, but not limited to, sub-advisors, index providers, fund accountants, custodians, transfer agents and administrators),
market makers, Authorized Participants or the issuers of securities in which the Fund invests, have the ability to cause disruptions and impact business operations, potentially resulting in financial losses, interference with the Fund’s ability to calculate its NAV, disclosure of confidential trading information, impediments to trading, submission of erroneous trades or erroneous creation or redemption orders, the inability of the Fund or its service providers to transact business, violations of applicable privacy and other laws, regulatory fines and other penalties, reputational damage, reimbursement or other compensation costs, or additional compliance costs. Substantial costs may be incurred by the Fund in order to resolve or prevent cyber incidents in the future. While the Fund has established business continuity plans in the event of, and risk management systems to prevent, such cyber attacks, there are inherent limitations in such plans and systems, including the possibility that certain risks have not been identified and that prevention and remediation efforts will not be successful. Furthermore, the Fund cannot control the cyber security plans and systems put in place by service providers to the Fund, issuers in which the Fund invests, Authorized Participants or market makers. There is no guarantee that such preventative efforts will succeed, and the Fund and its shareholders could be negatively impacted as a result.
Debt Securities Risk
The risks of investing in debt securities include (without limitation): (i) credit risk, e.g., the issuer or guarantor of a debt security may be unable or unwilling (or be perceived as unable or unwilling) to make timely principal and/or interest payments or otherwise honor its obligations; (ii) interest rate risk, e.g., when interest rates go up, the value of a debt security generally goes down, and when interest rates go down, the value of a debt security generally goes up; (iii) liquidity risk and valuation risk, e.g., debt securities generally do not trade on a securities exchange, making them generally less liquid and more difficult to value than common stock; (iv) call risk and income risk, e.g., during a period of falling interest rates, the issuer may redeem a security by repaying it early, which may reduce a Fund’s income if the proceeds are reinvested at lower interest rates; and (v) extension risk, e.g., if interest rates rise, repayments of debt securities may occur more slowly than anticipated by the market, which may drive the prices of these securities down because their interest rates are lower than the current interest rate and the securities remain outstanding longer. Debt securities most frequently trade in institutional round lot size transactions. If the Fund purchases bonds in amounts less than the institutional round lot size, which are frequently referred to as “odd” lots, the odd lot size positions may have more price volatility than institutional round lot size positions. The Fund uses a third-party pricing service to value bond holdings and the pricing service values bonds assuming orderly transactions of an institutional round lot size.
Derivative Risks
Derivatives are investments whose value depends on (or is derived from) the value of an underlying instrument, such as a security, asset, reference rate or index and involve risks different from, and possibly greater than, the risks associated with other investments. These risks include: (i) the risk that the counterparty to a derivatives transaction may not fulfill its contractual obligations; (ii) risk of mispricing or improper valuation; and (iii) the risk that changes in the value of the derivative may not correlate perfectly with the underlying asset. Derivative prices are highly volatile and may fluctuate substantially during a short period of time. Such prices are influenced by numerous factors that affect the markets, including, but not limited to, changing supply and demand relationships, government programs and policies, national and international political and economic events, changes in interest rates, inflation and deflation, and changes in supply and demand relationships. Unlike other investments, derivative contracts often have leverage inherent in their terms. This leverage creates a disconnect between the initial amount of an investment relative to the risk assumed and introduces the possibility that a relatively small movement in the value of an underlying reference asset can result in an immediate and substantial loss to a party to a derivative contract. In general, the use of leveraged derivatives can magnify potential for gain or loss and, therefore, amplify the effects of market volatility on the Fund’s Share price. The effects of leverage may also cause the Fund to liquidate portfolio positions when it would not be advantageous to do so. In the event of the bankruptcy or insolvency of a counterparty, the Fund could experience the loss of some or all of its investment in a derivative or experience delays in liquidating its positions, including declines in the value of its investment during the period in which the Fund seeks to enforce its rights, and an inability to realize any gains on its investment during such period. The Fund may also incur fees and expenses in enforcing its rights. Certain derivatives are subject to mandatory clearing. Central clearing is intended to reduce counterparty credit risk and increase liquidity, but central clearing does not make derivatives transactions risk-free.
Foreign Securities Risk
Investments in the securities of non-U.S. issuers involve risks beyond those associated with investments in U.S. securities. These additional risks include greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market
liquidity and political instability. Some countries and regions have experienced security concerns, war or threats of war and aggression, terrorism, economic uncertainty, natural and environmental disasters and/or systemic market dislocations that have led, and in the future may lead, to increased short-term market volatility and may have adverse long-term effects on the U.S. and world economies and markets generally. Foreign issuers are often subject to less stringent requirements regarding accounting, auditing, custody, financial reporting and record keeping than are U.S. issuers, and therefore not all material information will be available. Securities exchanges or foreign governments may adopt rules or regulations that may negatively impact the Fund’s ability to invest in foreign securities or may prevent a Fund from repatriating its investments. Non-U.S. transaction costs, such as brokerage commissions and custody costs, may be higher than in the United States. In some non-U.S. markets, custody arrangements for securities provide significantly less protection than custody arrangements in U.S. markets. Prevailing custody and trade settlement practices (e.g., the requirement to pay for securities prior to receipt) could similarly expose a Fund to credit and other risks it does not have in the United States with respect to participating brokers, custodians, clearing banks or other clearing agents, escrow agents and issuers. In addition, the Fund may not receive shareholder communications or be permitted to vote the securities it holds, as the issuers may be under no legal obligation to distribute them.
Less developed securities markets are more likely to experience problems with the clearing and settling of trades, as well as the holding of securities by local banks, agents and depositories. Low trading volumes and volatile prices in less developed markets make trades harder to complete and settle, and governments or trade groups may compel local agents to hold securities in designated depositories that are not subject to independent evaluation. Local agents are held only to the standards of care of their local markets. The less developed a country’s securities market is, the greater the likelihood of custody problems.
Foreign Securities Valuation Risk
The Fund’s value may be impacted by events that cause the fair value of foreign securities to materially change between the close of the local exchange on which they trade and the time at which the Fund prices its Shares. Additionally, because foreign exchanges on which securities held by the Fund may be open on days when the Fund does not price its Shares, the potential exists for the value of the securities in the Fund’s portfolio to change on days when shareholders will not be able to purchase or sell such Shares.
Income Risk
The Fund’s income may decline when interest rates fall. This decline can occur because the Fund must invest in lower-yielding securities as bonds or other fixed-income securities in its portfolio mature or the Fund otherwise needs to purchase additional securities.
Interest Rate Risk
An increase in interest rates may cause the value of certain fixed income securities held by the Fund to decline. Many factors can cause interest rates to rise, such as central bank monetary policies, inflation rates, general economic conditions and expectations about the foregoing. Fixed income securities with longer durations tend to be more sensitive to changes in interest rates, making them more volatile than securities with shorter durations or floating or adjustable interest rates. Duration is a measure used to determine the sensitivity of a fixed income security’s price to changes in interest rates. For example, the value of a fixed income security with a duration of one year would be expected to decrease by 1% for every 1% increase in interest rates. The negative impact on the Fund from potential interest rate increases could be swift and significant, including falling market values, increased redemptions and reduced liquidity. Substantial shareholder redemptions may worsen this impact. An increase in interest rates could also cause principal payments on a fixed income security to be repaid at a slower rate than expected. This risk is particularly prevalent for a callable debt security where an increase in interest rates could cause the issuer of that security to not redeem the security as anticipated on the call date, effectively lengthening the security’s expected maturity, in turn making that security more vulnerable to interest rate risk and reducing its market value. The Fund may be subject to a greater risk of rising interest rates than would normally be the case due to the current period of historically low rates and the effect of potential government fiscal policy initiatives and resulting market reaction to those initiatives.
When interest rates rise, certain obligations will be paid off by the issuer (or other obligated party) more slowly than anticipated, causing the value of these securities to fall. Rising interest rates tend to extend the duration of fixed income securities, making their market value more sensitive to changes in interest rates. As a result, in a period of rising interest rates, securities may exhibit additional volatility and may lose value. The value of securities with longer maturities generally changes more in response to changes in interest rates than does the value of securities with shorter maturities. Extension risk is particularly prevalent for a callable fixed income
security where an increase in interest rates could result in the issuer of that security choosing not to redeem the security as anticipated on the security’s call date. Such a decision by the issuer could have the effect of lengthening the security’s expected maturity, making it more vulnerable to interest rate risk and reducing its market value.
Some securities may be redeemed at the option of the issuer, or “called,” before their stated maturity date. In general, an issuer will call its debt securities if they can be refinanced by issuing new debt securities which bear a lower interest rate. The Fund is subject to the possibility that during periods of falling interest rates an issuer will call its high-yielding debt securities. The Fund may then be forced to invest the unanticipated proceeds in securities with lower yields, resulting in a decline in the Fund’s income, or in securities with greater risks or with other less favorable features. Such redemptions and subsequent reinvestments would also increase the Fund’s portfolio turnover. If a called debt security was purchased by the Fund at a premium, the value of the premium may be lost in the event of a redemption.
The terms of floating rate notes and other instruments may be tied to the London Interbank Offered Rate (“LIBOR”), which functions as a reference rate or benchmark. The discontinuation of LIBOR may cause increased volatility and illiquidity in the markets for instruments with terms tied to LIBOR or other adverse consequences, such as decreased yields and reduction in value, for these instruments. These events may adversely affect the Fund and its investments in such instruments. For more information on the risks associated with the discontinuation and transition of LIBOR, please see “LIBOR Replacement Risk.”
Liquidity Risk
Liquidity risk exists when particular investments are difficult to purchase or sell. To the extent the Fund invests in illiquid securities or securities that become less liquid, such investments may have a negative effect on the returns of the Fund because the Fund may be unable to sell the illiquid securities at an advantageous time or price. Securities with substantial market and/or credit risk may be especially susceptible to liquidity risk. Liquidity risk may be the result of, among other things, an investment being subject to restrictions on resale, trading over-the-counter or in limited volume, or lacking an active trading market. Liquid investments may become illiquid or less liquid after purchase by the Fund, particularly during periods of market turmoil or economic uncertainty. Illiquid and relatively less liquid investments may be harder to value, especially in changing markets. If the Fund is forced to sell underlying investments at reduced prices or under unfavorable conditions to meet redemption requests or for other cash needs, the Fund may suffer a loss. This may be magnified in a rising interest rate environment or under other circumstances where redemptions from the Fund may be higher than normal. It may also be the case that other market participants may be attempting to liquidate similar holdings at the same time as the Fund, causing increased supply in the market and contributing to liquidity risk and downward pricing pressure. There can be no assurance that a security that is deemed to be liquid when purchased will continue to be liquid or as long as it is held by the Fund.
Market Risk
The value of the Fund’s investments may fluctuate and/or decline because of changes in the markets in which the Fund invests, which could cause the Fund to underperform other funds with similar investment objectives and strategies. Security markets are volatile and may decline significantly in response to adverse issuer, regulatory, political, or economic developments. Different sectors of the market and different security types may react differently to such developments. Changes in these markets may be rapid and unpredictable. Fluctuations in the markets generally or in a specific industry or sector may impact the securities in which the Fund invests. From time to time, markets may experience periods of stress for potentially prolonged periods that may result in: (i) increased market volatility; (ii) reduced market liquidity; and (iii) increased redemptions of Fund shares. Such conditions may add significantly to the risk of volatility in the NAV of the Fund’s Shares and the market prices at which Shares of the Fund trade on a securities exchange. During periods of market stress Shares of the Fund may also experience significantly wider “bid/ask” spreads and premiums and discounts between the Fund’s NAV and market price.
Market changes may impact equity and fixed income securities in different and, at times, conflicting manners. The Fund potentially will be prevented from executing investment decisions at an advantageous time or price as a result of any domestic or global market disruptions, particularly disruptions causing heightened market volatility and reduced market liquidity, as well as increased or changing regulations or market closures. Thus, investments that the Advisor or Subadvisor believes best enable the Fund to meet its investment objective may be unavailable entirely or in the specific quantities sought by the Advisor or Subadvisor and the Fund may need
to obtain the exposure through less advantageous or indirect investments or forgo the investment at the time. Securities and investments included in the Fund may be susceptible to declines in value, including declines in value that are not believed to be representative of the issuer’s value or fundamentals, due to investor reactions to such events.
Political and diplomatic events within the United States and abroad, such as the U.S. budget and deficit reduction plans, protectionist measures, trade tensions central bank policy and government intervention in the economy, has in the past resulted, and may in the future result, in developments that present additional risks to the Fund’s investments and operations. Geopolitical and other events, such as war, acts of terrorism, natural disasters, the spread of infectious illnesses, epidemics and pandemics, environmental and other public health issues, recessions or other events, and governments’ reactions to such events, may lead to increased market volatility and instability in world economies and markets generally and may have adverse effects on the performance of the Fund and its investments. Additional and/or prolonged geopolitical or other events may affect investor and consumer confidence and may adversely impact financial markets and the broader economy, perhaps suddenly and to a significant degree. Any such market, economic and other disruptions could also prevent the Fund from executing its investment strategies and processes in a timely manner.
An investment in the Fund is not a deposit in a bank and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Market Disruption Risk and Recent Market Events
Geopolitical and other events, including war, terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration and effects may not be the same for all types of assets. Recent market disruption events include the pandemic spread of the novel coronavirus known as COVID-19, and the significant restrictions, market volatility, decreased economic and other activity and increased government activity that it has caused. Specifically, COVID-19 has led to significant death and morbidity, and concerns about its further spread have resulted in the closing of schools and non-essential businesses, cancellations, shelter-in-place orders, lower consumer spending in certain sectors, social distancing, bans on large social gatherings and travel, quarantines, government economic stimulus measures, reduced productivity, rapid increases in unemployment, increased demand for and strain on government and medical resources, border closings and global trade and supply chain interruptions, among others. The full effects, duration and costs of the COVID-19 pandemic are impossible to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve. The pandemic may affect certain countries, industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social tensions and may increase the probability of an economic recession or depression. The Fund and its investments may be adversely affected by the effects of the COVID-19 pandemic, and a prolonged pandemic may result in the Fund and its service providers experiencing operational difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
Money Market/Short-Term Securities Risk
To the extent that the Fund invests in money market or short-term securities, the Fund may be subject to certain risks associated with such investments. An investment in a money market fund or short-term securities is not a bank deposit and is not insured or guaranteed by any bank, the FDIC or any other government agency. It is possible for the Fund to lose money by investing in money market funds. A money market fund may not achieve its investment objective. Changes in government regulations may affect the value of an investment in a money market fund.
Operational Risk
The Fund is exposed to operational risks arising from a number of factors, including, but not limited to, human error, processing and communication errors, errors of the Fund’s service providers, counterparties or other third-parties, failed or inadequate processes and technology or systems failures. The Fund, Advisor and Subadvisor seek to reduce these operational risks through controls and procedures. However, these measures do not address every possible risk and may be inadequate to address significant operational risks.
Portfolio Management Risk
The Fund is subject to portfolio management risk because it is an actively managed portfolio. In managing the Fund’s investment portfolio, the portfolio managers will apply investment techniques and risk analyses that may not produce the desired result, or, while it may be the desired result, may underperform other types of investment strategies. There can be no guarantee that the Fund will meet its investment objective(s). In addition, the Fund may not achieve its investment objective if the portfolio managers take temporary positions in response to unusual or adverse market, economic or political conditions, or other unusual or abnormal circumstances. The investments selected by the Fund’s portfolio managers may underperform the market or other investments.
Portfolio Turnover Risk
The Fund’s strategy may frequently involve buying and selling portfolio securities to rebalance the Fund’s investment exposures. High portfolio turnover may result in the Fund paying higher levels of transaction costs and generating greater tax liabilities for shareholders. Portfolio turnover risk may cause a Fund’s performance to be less than expected.
Repurchase Agreement Risk
Repurchase agreements are subject to counterparty risks, including the risk that the seller of the underlying security will become bankrupt or insolvent before the date of repurchase or otherwise will fail to repurchase the security as agreed, which could cause losses to a Fund. If the seller defaults on its obligations under the agreement, a Fund may incur costs, lose money or suffer delays in exercising its rights under the agreement. If the seller fails to repurchase the underlying instruments collateralizing the repurchase agreement, a Fund may lose money. The credit, liquidity and other risks associated with repurchase agreements are heightened when a repurchase agreement is secured by collateral other than cash or U.S. government securities.
Secondary Market Trading Risk
Although the Fund’s Shares are listed for trading on one or more securities exchanges, there can be no assurance that an active trading market for such Shares will develop or be maintained by market makers or Authorized Participants. The trading of Shares on securities exchanges is subject to the risk of irregular trading activity. Additionally, market makers are under no obligation to make a market in the Fund’s Shares and Authorized Participants are not obligated to submit purchase or redemption orders for Creation Units. In the event market makers cease making a market in the Fund’s Shares or Authorized Participants stop submitting purchase or redemption orders for Creation Units, the Fund’s Shares may trade at a larger premium or discount to its NAV.
Buying or selling Shares on an exchange involves two types of costs that apply to all securities transactions. When buying or selling Shares through a broker, you will likely incur a brokerage commission and other charges. In addition, you may incur the cost of the “spread” — the difference between what investors are willing to pay for 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 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. The risk of wide bid and ask spreads may be especially pronounced for smaller funds. 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 Shares, frequent trading may detract significantly from investment results and an investment in Shares may not be advisable for investors who anticipate regularly making small investments through a brokerage account.
Securities exchanges have requirements that must be met in order for Shares to be listed. There can be no assurance that the requirements of an exchange necessary to maintain the listing of Shares will continue to be met. This risk is particularly acute for funds that fail to attract a large number of shareholders. Pursuant to an exchange’s “circuit breaker” rules, trading in the Fund’s Shares may be halted due to extraordinary market volatility.
Trading Price Risk
Shares of the Fund trade on securities 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 trading price of the Fund’s Shares fluctuates continuously throughout trading hours based on both market supply of and demand for Shares and the Fund’s NAV. As a result, the trading prices of the Fund’s Shares may deviate significantly from NAV during periods of market volatility. The market price of the
Fund’s Shares during the trading day, like the price of any exchange-traded security, includes a “bid/ask” spread charged by the exchange specialist, market makers or other participants that trade the Shares. In times of severe market disruption, the bid/ask spread can increase significantly. At those times, Shares are most likely to be traded at a discount to NAV, and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that an investor most wants to sell their Shares. Although it is generally expected that the market price of the Fund’s Shares will approximate the Fund’s NAV, there may be times when the market price and the NAV vary significantly. Thus, an investor may pay more than NAV when purchasing Shares and receive less than NAV when selling Shares. While the creation/redemption feature is designed to make it more likely that the Fund’s Shares normally will trade on securities 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, Authorized Participants, or other market participants, and during periods of significant market volatility, may result in trading prices for Shares of the Fund that differ significantly from its NAV. Authorized Participants may be less willing to create or redeem Shares if there is a lack of an 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. Additionally, similar to shares of other issuers listed on a securities exchange, the Fund’s Shares may be sold short and are therefore subject to the risk of increased volatility and price decreases associated with being sold short. Any of these factors, among others, may lead to the Fund’s Shares trading at a premium or discount to NAV.
Valuation Risk
Independent market quotations for certain investments held by the Fund may not be readily available, and such investments may be fair valued or valued by a pricing service at an evaluated price. These valuations involve subjectivity and different market participants may assign different prices to the same investment. As a result, there is a risk that the Fund may not be able to sell an investment at the price assigned to the investment by the Fund. In addition, the value of the securities or other assets in the Fund’s portfolio may change on days or during time periods when shareholders will not be able to purchase or sell the Fund’s Shares. Authorized Participants who purchase or redeem Shares on days when the Fund is holding fair-valued securities may receive fewer or more shares, or lower or higher redemption proceeds, than they would have received had the Fund not fair-valued securities or used a different valuation methodology. The Fund’s ability to value investments may be impacted by technological issues or errors by pricing services or other third-party service providers.
Additional Risks
Absence of Prior Active Market
Although Shares are approved for listing on the NYSE Arca, there can be no assurance that an active trading market will develop and be maintained for the Shares. There can be no assurance that the Fund will grow to or maintain an economically viable size, in which case the Fund may experience more difficulty achieving its investment objectives than it otherwise would at higher asset levels, or the Fund may ultimately liquidate.
Large Investments Risk
From time to time, the Fund may receive large purchase or redemption orders from affiliated or unaffiliated funds or other investors. In addition, any third-party investor, investment adviser affiliate, authorized participant, lead market maker or other entity may make a large investment in the Fund and hold its investment for any number of reasons, including to facilitate the Fund’s commencement of operations or to facilitate the Fund’s achieving a specified size or scale. There can be no assurance that any large shareholder would not sell or redeem its investment at any given time, either in a single transaction or over time. These large transactions, and particularly redemptions, could have adverse effects on the Fund, including: (i) negative impacts to performance if the Fund were required to sell securities, invest cash or hold significant cash at times when it otherwise would not do so; (ii) wider price spreads or greater premiums/discounts that could materialize as a result of lower secondary market volume of shares; and (iii) negative federal income tax consequences if this activity accelerated the realization of capital gains.
LIBOR Replacement Risk
The terms of floating rate loans, financings or other transactions in the U.S. and globally have been historically tied to LIBOR, which functions as a reference rate or benchmark for various commercial and financial contracts. LIBOR may be a significant factor in determining payment obligations under derivatives transactions,
the cost of financing of a Fund’s investments or the value or return on certain other Fund investments. As a result, LIBOR may be relevant to, and directly affect, a Fund’s performance. The Financial Conduct Authority, the United Kingdom’s financial regulatory body and regulator of LIBOR, announced that after 2021 it will cease its active encouragement of banks to provide the quotations needed to sustain LIBOR due to the absence of an active market for interbank unsecured lending and other reasons. However, subsequent announcements by the Financial Conduct Authority, LIBOR administrators, and other regulators indicate that it is possible that the most widely used LIBOR rates may continue until mid-2023. As a result, it is anticipated that LIBOR will be discontinued or will no longer be sufficiently robust to be representative of its underlying market around that time. Various financial industry groups have begun planning for that transition and certain regulators and industry groups have taken actions to establish alternative reference rates (e.g., the Secured Overnight Financing Rate, which measures the cost of overnight borrowings through repurchase agreement transactions collateralized with U.S. Treasury securities and is intended to replace U.S. dollar LIBOR with certain adjustments). However, there are challenges to converting certain contracts and transactions to a new benchmark and neither the full effects of the transition process nor its ultimate outcome is known.
The transition process might lead to increased volatility and illiquidity in markets for instruments with terms tied to LIBOR. It could also lead to a reduction in the interest rates on, and the value of, some LIBOR-based investments and reduce the effectiveness of hedges mitigating risk in connection with LIBOR-based investments. Although some LIBOR-based instruments may contemplate a scenario where LIBOR is no longer available by providing for an alternative rate-setting methodology and/or increased costs for certain LIBOR-related instruments or financing transactions, others may not have such provisions and there may be significant uncertainty regarding the effectiveness of any such alternative methodologies. Instruments that include robust fallback provisions to facilitate the transition from LIBOR to an alternative reference rate may also include adjustments that do not adequately compensate the holder for the different characteristics of the alternative reference rate. The result may be that the fallback provision results in a value transfer from one party to the instrument to the counterparty. Additionally, because such provisions may differ across instruments (e.g., hedges versus cash positions hedged), LIBOR’s cessation may give rise to basis risk and render hedges less effective. As the usefulness of LIBOR as a benchmark could deteriorate during the transition period, these effects and related adverse conditions could occur prior to the end of 2021 with respect to certain LIBOR tenors or mid-2023 for the remaining LIBOR tenors. There also remains uncertainty and risk regarding the willingness and ability of issuers to include enhanced provisions in new and existing contracts or instruments, notwithstanding significant efforts by the industry to develop robust LIBOR replacement clauses. The effect of any changes to, or discontinuation of, LIBOR on a Fund will vary depending, among other things, on (1) existing fallback or termination provisions in individual contracts and the possible renegotiation of existing contracts and (2) whether, how, and when industry participants develop and adopt new reference rates and fallbacks for both legacy and new products and instruments. A Fund’s investments may also be tied to other interbank offered rates and currencies, which also will likely face similar issues. In many cases, in the event that an instrument falls back to an alternative reference rate, including the Secured Overnight Financing Rate, the alternative reference rate will not perform the same as LIBOR because the alternative reference rate does not include a credit sensitive component in the calculation of the rate. Alternative reference rates generally reflect the performance of the market for U.S. treasury securities, which are secured by the U.S. treasury, and not the inter-bank lending markets. In the event of a credit crisis, floating rate instruments using certain alternative reference rates could therefore perform differently than those instruments using a rate indexed to the inter-bank lending market.
Various pending legislation, including in the U.S. Congress and the New York state legislature, may affect the transition of LIBOR-based instruments as well by permitting trustees and calculation agents to transition instruments with no LIBOR transition language to an alternative reference rate selected by such agents. Those legislative proposals include safe harbors from liability, which may limit the recourse a Fund may have if the alternative reference rate does not fully compensate the Fund for the transition of an instrument from LIBOR. It is uncertain whether such legislative proposals will be signed into law.
These developments could negatively impact financial markets in general and present heightened risks, including with respect to a Fund’s investments. As a result of this uncertainty and developments relating to the transition process, a Fund and its investments may be adversely affected.
U.S. Tax Risk
To qualify for the favorable U.S. federal income tax treatment accorded to regulated investment companies, the Fund must satisfy certain income, asset diversification and distribution requirements. If for any taxable year, the Fund does not qualify as a regulated investment company, all of its taxable income (including its net
capital gain) for that year would be subject to tax at regular corporate rates without any deduction for distributions to its shareholders, and such distributions would be taxable to its shareholders as dividend income to the extent of the Fund’s current and accumulated earnings and profits.
Buying and Selling Shares in the Secondary Market
Most investors will buy and sell Shares of the Fund in Secondary Market transactions through brokers. Shares of the Fund will be listed for trading on the Secondary Market on the NYSE Arca. Shares can be bought and sold throughout the trading day like other publicly-traded shares. Unless imposed by your broker or dealer, there is no minimum dollar amount you must invest and no minimum number of Shares you must buy in the Secondary Market. When buying or selling 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 offered price in the Secondary Market on each leg of a round trip (purchase and sale) transaction. In addition, because transactions in the Secondary Market occur at market prices, you may pay more than NAV when you buy Shares and receive less than NAV when you sell those Shares.
Share prices are reported in dollars and cents per Share. For information about buying and selling Shares in the Secondary Market, please contact your broker or dealer.
Book Entry
Shares of the Fund are held in book-entry form and no stock certificates are issued. DTC, through its nominee Cede & Co., is the record owner of all outstanding Shares.
Investors owning Shares are beneficial owners as shown on the records of DTC or its participants. DTC serves as the securities depository for all Shares. Participants in DTC 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 Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants.
These procedures are the same as those that apply to any securities that you hold in book entry or “street name” form for any publicly-traded company. Specifically, in the case of a shareholder meeting of the Fund, DTC assigns applicable Cede & Co. voting rights to its participants that have Shares credited to their accounts on the record date, issues an omnibus proxy and forwards the omnibus proxy to the Fund. The omnibus proxy transfers the voting authority from Cede & Co. to the DTC participant. This gives the DTC participant through whom you own Shares (namely, your broker, dealer, bank, trust company or other nominee) authority to vote the shares, and, in turn, the DTC participant is obligated to follow the voting instructions you provide.
Management
The Board is responsible for the general supervision of the Fund. The Board appoints officers who are responsible for the day-to-day operations of the Fund,
Investment Advisor
The Advisor has been registered as an investment advisor with the SEC since August 2007 and is a wholly-owned indirect subsidiary of New York Life Investment Management Holdings LLC. The Advisor’s principal office is at 51 Madison Avenue, New York, New York 10010. As of June 30, 2022, the Advisor had approximately $8.2 billion in assets under management.
The Advisor has overall responsibility for the general management and administration of the Trust. The Advisor provides an investment program for the Fund. The Advisor has delegated certain advisory duties with regard to the Fund (including management of all of the Fund’s assets) to the Subadvisor. The Advisor has also arranged for custody, fund administration, transfer agency and all other non-distribution related services necessary for the Fund to operate.
As compensation for its services and its assumption of certain expenses, the Fund pays the Advisor a management fee equal to 0.24% of the Fund’s average daily net assets that is calculated daily and paid monthly. The Advisor may voluntarily waive any portion of its advisory fee from time to time, and may discontinue or modify any such voluntary limitations in the future at its discretion.
The Advisor serves as advisor to the Fund pursuant to an Investment Advisory Agreement (the “Advisory Agreement”). The Advisory Agreement was approved by the Independent Trustees of the Trust at its annual meeting. The basis for the Board’s approval of the Advisory Agreement will be available in the Trust’s Annual or Semiannual Report to Shareholders.
Section 15(a) of the 1940 Act requires that all contracts pursuant to which persons serve as investment advisors to investment companies be approved by shareholders. As interpreted, this requirement also applies to the appointment of subadvisors to the Fund. The Advisor and the Fund have obtained an exemptive order (the “Order”) from the SEC permitting the Advisor, on behalf of the Fund and subject to the approval of the Board, including a majority of the Independent Trustees, to hire or terminate unaffiliated subadvisors and to modify any existing or future subadvisory agreement with unaffiliated subadvisors without shareholder approval. This authority is subject to certain conditions. The Fund will notify shareholders and provide them with certain information required by the Order within 90 days of hiring a new subadvisor. The Fund’s sole shareholder has approved the use of the Order. Please see the SAI for more information on the Order.
Expense Limitation Agreement
The Advisor has contractually agreed to waive or reduce its management fee and/or reimburse expenses of the Fund in an amount that limits “Total Annual Fund Operating Expenses” (excluding interest, taxes, brokerage commissions, dividend payments on short sales, acquired fund fees and expenses, other expenditures which are capitalized in accordance with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of the Fund’s business, and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to not more than 0.24% of the average daily net assets of the Fund. The agreement will remain in effect unless terminated by the Board of Trustees of the Fund.
Subadvisor
Pursuant to an Investment Subadvisory Agreement (the “Subadvisory Agreement”) with the Advisor, NYL Investors LLC (the “Subadvisor”), located at 51 Madison Avenue, New York, NY 10010, serves as the subadvisor to the Fund and makes investment decisions, and buys and sells securities for the Fund. Under the supervision of the Advisor, the Subadvisor is responsible for making the specific decisions about the following: (i) buying, selling and holding securities; (ii) selecting brokers and brokerage firms to trade for them; (iii) maintaining accurate records; and, if possible, (iv) negotiating favorable commissions and fees with the brokers and brokerage firms. For these services, the Subadvisor is paid a monthly fee by the Advisor out of the Advisor’s management fee, not the Fund. See the SAI for a breakdown of fees. To the extent that the Advisor has agreed to waive its management fee or reimburse expenses, the Subadvisor has agreed to waive or reimburse its fee proportionately. The basis for the Board’s approval of the Subadvisory Agreement is available in the Trust’s Annual report to shareholders.
NYL Investors LLC was established in 2014 as an independent investment advisor. Previously, NYL Investors LLC operated as a division of New York Life Investment Management LLC. NYL Investors is a wholly-owned subsidiary of New York Life. As of June 30, 2022, NYL Investors managed approximately $291.30 billion in assets.
Portfolio Management
The following portfolio managers are primarily responsible for the day-to-day management of the Fund:
Kenneth Sommer, Managing Director
Mr. Sommer is a Managing Director and the Head of the Investment Grade Portfolio Management team of NYL Investors LLC. He joined NYL Investors in 2005. Previously, he was an investment analyst at MetLife Investments. Mr. Sommer earned his B.S. from Binghamton University, SUNY and a MA from Fordham University.
Matthew Downs, Senior Director
Mr. Downs is a Senior Director of NYL Investors LLC. He joined New York Life Investment Management LLC in 2005 and is a portfolio manager in the Investment Grade Portfolio Management Group. Mr. Downs earned his BBA from Fordham University and a MBA from Pace University Lubin School of Business.
For more information about the portfolio managers’ compensation, other accounts managed by the portfolio managers and the portfolio managers’ ownership of securities in the Fund, see the SAI.
Other Service Providers
Fund Administrator, Custodian, Transfer Agent and Securities Lending Agent
The Bank of New York Mellon (“BNY Mellon”), located at 240 Greenwich Street, New York, New York 10286, serves as the Fund’s Administrator, Custodian, Transfer Agent and Securities Lending Agent. BNY Mellon is the principal operating subsidiary of The Bank of New York Mellon Corporation.
Under the Fund Administration and Accounting Agreement (the “Administration Agreement”), BNY Mellon serves as Administrator for the Fund. Under the Administration Agreement, BNY Mellon provides necessary administrative, legal, tax, accounting services, and financial reporting for the maintenance and operations of the Trust. In addition, BNY Mellon makes available the office space, equipment, personnel and facilities required to provide such services.
BNY Mellon supervises the overall administration of the Trust, including, among other responsibilities, assisting in the preparation and filing of documents required for compliance by the Fund with applicable laws and regulations and arranging for the maintenance of books and records of the Fund. BNY Mellon provides persons satisfactory to the Board to serve as officers of the Trust.
Distributor
ALPS Distributors, Inc., 1290 Broadway, Suite 1000, Denver, Colorado 80203 serves as the Distributor of Creation Units for the Fund on an agency basis. The Distributor does not maintain a Secondary Market in Shares. NYLIFE Distributors LLC has entered into a Services Agreement with ALPS to market the Fund.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, 300 Madison Avenue, New York, NY 10017, serves as the independent registered public accounting firm for the Trust.
Legal Counsel
Chapman and Cutler LLP, 1717 Rhode Island Avenue N.W., Washington, D.C. 20036, serves as counsel to the Trust and the Fund.
Frequent Trading
The Trust’s Board has not adopted policies and procedures with respect to frequent purchases and redemptions of Fund Shares by Shareholders (“market timing”). In determining not to adopt market timing policies and procedures, the Board noted that the Fund is expected to be attractive to active institutional and retail investors interested in buying and selling Shares on a short-term basis. In addition, the Board considered that, unlike traditional mutual funds, Shares can only be purchased and redeemed directly from the Fund in Creation Units by Authorized Participants, and that the vast majority of trading in the Fund’s Shares occurs on the Secondary Market. Because Secondary Market trades do not involve the Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption of portfolio management, increases in the Fund’s trading costs and the realization of capital gains. With respect to trades directly with the Fund, to the extent effected in-kind (namely, for securities), those trades do not cause any of the harmful effects that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that those trades could result in dilution to the Fund and increased transaction costs (the Fund may impose higher transaction fees to offset these increased costs), which could negatively impact the Fund’s ability to achieve its investment objective. However, the Board noted that direct trading on a short-term basis by Authorized Participants is critical to ensuring that the Fund’s Shares trade at or close to NAV. Given this structure, the Board determined that it is not necessary to adopt market timing policies and procedures. The Fund reserves the right to reject any purchase order at any time and reserves the right to impose restrictions on disruptive or excessive trading in Creation Units.
The Board has instructed the officers of the Trust to review reports of purchases and redemptions of Creation Units on a regular basis to determine if there is any unusual trading in the Fund. The officers of the Trust will report to the Board any such unusual trading in Creation Units that is disruptive to the Fund. In such event, the Board may reconsider its decision not to adopt market timing policies and procedures.
Distribution and Service Plan
The Board has adopted a Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation Units of the Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Fund and there are no plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the respective Fund’s assets, and over time these fees will increase the cost of your investment and they may cost you more than certain other types of sales charges.
The Advisor and its affiliates may, out of their own resources, pay amounts (“Payments”) to third-parties for distribution or marketing services on behalf of the Fund. The making of these payments could create a conflict of interest for a financial intermediary receiving such payments. The Advisor may make Payments for such third-parties to organize or participate in activities that are designed to make registered representatives, other professionals and individual investors more knowledgeable about ETFs, including ETFs advised by the Advisor, or for other activities, such as participation in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Advisor also may make Payments to third-parties to help defray costs typically covered by a trading commission, such as certain printing, publishing and mailing costs or materials relating to the marketing of services related to exchange-traded products (such as commission-free trading platforms) or exchange-traded products in general.
Determination of Net Asset Value (NAV)
The NAV of the Shares for the Fund is equal to the Fund’s total assets minus the Fund’s total liabilities divided by the total number of Shares outstanding. Interest and investment income on the Trust’s assets accrue daily and are included in the Fund’s total assets. Expenses and fees (including investment advisory, management, administration and distribution fees, if any) accrue daily and are included in the Fund’s total liabilities. The NAV that is published is rounded to the nearest cent; however, for purposes of determining the price of Creation Units, the NAV is calculated to eight decimal places. The NAV is calculated by the Administrator and Custodian and determined each day the NYSE Arca is open for trading as of the close of regular trading on the NYSE Arca (ordinarily 4:00 p.m. Eastern time).
The Fund typically values fixed-income portfolio securities using last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied by the Fund’s approved independent third-party pricing services. Pricing services may use matrix pricing or valuation models that utilize certain inputs and assumptions to derive values. Pricing services generally value fixed-income securities assuming orderly transactions of an institutional round lot size, but the Fund may hold or transact in such securities in smaller odd lot sizes. Odd lots often trade at different prices that may be above or below the price at which the pricing service has valued the security. An amortized cost method of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines in good faith that such method does not represent fair value.
Generally, trading in U.S. government securities, money market instruments and certain fixed-income securities is substantially completed each day at various times prior to the close of business on the NYSE Arca. The values of such securities used in computing the NAV of the Fund are determined as of such times.
When market quotations or prices are not readily available or are deemed unreliable or not representative of an investment’s fair value, investments are valued using fair value pricing as determined in good faith by the Advisor under procedures established by and under the general supervision and responsibility of the Board. The Advisor may conclude that a market quotation is not readily available or is unreliable if a security or other asset or liability does not have a price source due to its lack of liquidity or other reason, if a market quotation differs significantly from recent price quotations or otherwise no longer appears to reflect fair value, where the security or other asset or liability is thinly traded, or if the trading market on which a security is listed is suspended or closed and no appropriate alternative trading market is available.
The frequency with which the Fund’s investments are valued using fair value pricing is primarily a function of the types of securities and other assets in which the Fund invests pursuant to its investment objective, strategies and limitations. If the Fund invests in other open-end management investment companies registered under the 1940 Act, they may rely on the NAVs of those companies to value the shares they hold of them. Those companies may also use fair value pricing under some circumstances.
Valuing the Fund’s investments using fair value pricing results in using prices for those investments that may differ from current market valuations. Accordingly, fair value pricing could result in a difference between the prices used to calculate NAV and the prices used to determine the Fund’s indicative intra-day value (“IIV”), which could result in the market prices for Shares deviating from NAV.
Indicative Intra-Day Value
The approximate value of the Fund’s investments on a per-Share basis, the Indicative Intra-Day Value, or IIV, is disseminated every 15 seconds during hours of trading on the NYSE Arca. The IIV should not be viewed as a “real-time” update of NAV because the IIV may not be calculated in the same manner as NAV, which is computed once per day.
Solactive AG, an independent third party calculator calculates the IIV for the Fund during hours of trading on the NYSE Arca by dividing the “Estimated Fund Value” as of the time of the calculation by the total number of outstanding Shares of that Fund. “Estimated Fund Value” is the sum of the estimated amount of cash held in the Fund’s portfolio, the estimated amount of accrued interest owed to the Fund and the estimated value of the securities held in the Fund’s portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based on the same portfolio holdings disclosed on the Trust’s website.
The Fund provides the independent third party calculator with information to calculate the IIV, but the Fund is not involved in the actual calculation of the IIV and is not responsible for the calculation or dissemination of the IIV. The Fund makes no warranty as to the accuracy of the IIV.
Premium/Discount Information
Information regarding the extent and frequency with which market prices of Shares have tracked the Fund’s NAV for the most recently completed calendar year and the quarters since that year will be available without charge on the Fund’s website at newyorklifeinvestments.com/etf.
Dividends, Distributions and Taxes
Net Investment Income and Capital Gains
As the Fund’s shareholder, you are entitled to your share of the Fund’s distributions of net investment income and net realized capital gains on its investments. The Fund pays out substantially all of their net earnings to their shareholders as “distributions.”
The Fund typically earns interest from debt securities. These amounts, net of expenses, typically are passed along to Fund shareholders as dividends from net investment income. The Fund realizes capital gains or losses whenever they sell securities. Net capital gains typically are passed along to shareholders as “capital gain distributions.”
Net investment income and net capital gains typically are distributed to shareholders at least annually. Dividends may be declared and paid more frequently to comply with the distribution requirements of the U.S. Internal Revenue Code of 1986, as amended (the “Code”). In addition, the Fund may decide to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities, as if the Fund owned the underlying investment securities for the entire dividend period, in which case some portion of each distribution may result in a return of capital. You will be notified regarding the portion of a distribution that represents a return of capital.
Distributions in cash may be reinvested automatically in additional Shares of the Fund only if the broker through which you purchased Shares makes such option available.
U.S. Federal Income Taxation
The following is a summary of certain U.S. federal income tax considerations applicable to an investment in Shares of the Fund. The summary is based on the Code, U.S. Treasury Department regulations promulgated thereunder, and judicial and administrative interpretations thereof, all as in effect on the date of this Prospectus and all of which are subject to change, possibly with retroactive effect. In addition, this summary assumes that the Fund shareholder holds Shares as capital assets within the meaning of the Code and does not hold Shares in connection with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an investment in Shares of the Fund, and does not address the consequences to Fund shareholders subject to special tax rules, including, but not limited to, partnerships and the partners therein, tax-exempt shareholders, those who hold Shares through an IRA, 401(k) plan or other tax-advantaged account, and, except to the extent discussed below, “non-U.S. shareholders” (as defined below). This discussion does not discuss any aspect of U.S. state, local, estate, and gift, or non-U.S., tax law. Furthermore, this discussion is not intended or written to be legal or tax advice to any shareholder in the Fund or
other person and is not intended or written to be used or relied on, and cannot be used or relied on, by any such person for the purpose of avoiding any U.S. federal tax penalties that may be imposed on such person. Prospective Fund shareholders are urged to consult their own tax advisors with respect to the specific U.S. federal, state and local, and non-U.S., tax consequences of investing in Shares, based on their particular circumstances.
The Fund has not requested and will not request an advance ruling from the U.S. Internal Revenue Service (the “IRS”) as to the U.S. federal income tax matters described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective investors should consult their own tax advisors with regard to the U.S. federal tax consequences of the purchase, ownership and disposition of Shares, as well as the tax consequences arising under the laws of any state, locality, non-U.S. country or other taxing jurisdiction. The following information supplements, and should be read in conjunction with, the section in the SAI entitled “U.S. Federal Income Taxation.”
Tax Treatment of the Fund
The Fund intends to continue to qualify and elect to be treated as a separate “regulated investment company” (a “RIC”) under the Code. To qualify and remain eligible for the special tax treatment accorded to RICs, the Fund must meet certain annual income and quarterly asset diversification requirements and must distribute annually at least 90% of the sum of (i) its “investment company taxable income” (which includes dividends, interest and net short-term capital gains) and (ii) its net tax-exempt interest.
As a RIC, the Fund generally will not be required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes to its shareholders. If the Fund fails to qualify as a RIC for any year (subject to certain curative measures allowed by the Code), the Fund will be subject to regular corporate-level U.S. federal income tax in that year on all of its taxable income, regardless of whether the Fund makes any distributions to its shareholders. In addition, in such case, distributions will be taxable to the Fund’s shareholders generally as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits. The remainder of this discussion assumes that the Fund will qualify for the special tax treatment accorded to RICs.
The Fund will be subject to a 4% excise tax on certain undistributed income if the Fund does not distribute to its shareholders in each calendar year at least 98% of its ordinary income for the calendar year, 98.2% of its capital gain net income for the twelve months ended October 31 of such year, plus 100% of any undistributed amounts from prior years. For these purposes, the Fund will be treated as having distributed any amount on which it has been subject to U.S. corporate income tax for the taxable year ending within the calendar year. The Fund intends to make distributions necessary to avoid this 4% excise tax, although there can be no assurance that it will be able to do so.
The Fund may be required to recognize taxable income in advance of receiving the related cash payment. For example, if the Fund invests in taxable original issue discount obligations (such as zero coupon debt instruments or debt instruments with payment-in-kind interest), the Fund will be required to include in income each year a portion of the original issue discount that accrues over the term of the obligation, even if the related cash payment is not received by the Fund until a later year. Under the “wash sale” rules, the Fund may not be able to deduct currently a loss on a disposition of a portfolio security. As a result, the Fund may be required to make an annual income distribution greater than the total cash actually received during the year. Such distribution may be made from the existing cash assets of the Fund or cash generated from selling portfolio securities. The Fund may realize gains or losses from such sales, in which event its shareholders may receive a larger capital gain distribution than they would in the absence of such transactions.
Tax Treatment of Fund Shareholders
Taxation of U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “U.S. shareholders.” For purposes of this discussion, a “U.S. shareholder” is a beneficial owner of Shares who, for U.S. federal income tax purposes, is (i) an individual who is a citizen or resident of the U.S.; (ii) a corporation (or an entity treated as a corporation for U.S. federal income tax purposes) created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia; (iii) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or (iv) a trust, if (1) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons have the authority to control all substantial decisions of the trust, or (2) the trust has a valid election in place to be treated as a U.S. person.
Fund Distributions. In general, taxable Fund distributions are subject to U.S. federal income tax when paid, regardless of whether they consist of cash or property, and regardless of whether they are re-invested in Shares. However, any Fund distribution declared in October, November or December of any calendar year and payable to shareholders of record on a specified date during such month will be deemed to have been received by the Fund shareholder on December 31 of such calendar year, provided such dividend is actually paid during January of the following calendar year.
Distributions of the Fund’s net investment income (except, as discussed below, qualified dividend income) and net short-term capital gains are taxable as ordinary income to the extent of the Fund’s current and accumulated earnings and profits. To the extent designated as capital gain dividends by the Fund, distributions of the Fund’s net long-term capital gains in excess of net short-term capital losses (“net capital gain”) are taxable at long-term capital gain tax rates to the extent of the Fund’s current and accumulated earnings and profits, regardless of the Fund’s shareholder’s holding period in the Shares. Distributions of qualified dividend income are, to the extent of the Fund’s current and accumulated earnings and profits, taxed to certain non-corporate Fund shareholders at the rates generally applicable to long-term capital gain, provided that the Fund shareholder meets certain holding period and other requirements with respect to the distributing Shares and the distributing Fund meets certain holding period and other requirements with respect to its dividend-paying stocks. Substitute payments received on Shares that are lent out will be ineligible for being reported as qualified dividend income. Given their investment strategy, the Fund does not anticipate that a significant portion of their distributions will be eligible for qualifying dividend treatment. If the Fund pays a dividend that would be “qualified” dividend income for individuals, corporate shareholders may be entitled to a dividend received deduction.
An election may be available to you to defer recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
The Fund intends to distribute its net capital gain at least annually. However, by providing written notice to its shareholders no later than 60 days after its year-end, the Fund may elect to retain some or all of its net capital gain and designate the retained amount as a “deemed distribution.” In that event, the Fund pays U.S. federal income tax on the retained net capital gain, and the Fund shareholder recognizes a proportionate share of the Fund’s undistributed net capital gain. In addition, the Fund shareholder can claim a tax credit or refund for the shareholder’s proportionate share of the Fund’s U.S. federal income taxes paid on the undistributed net capital gain and increase the shareholder’s tax basis in the Shares by an amount equal to the shareholder’s proportionate share of the Fund’s undistributed net capital gain, reduced by the amount of the shareholder’s tax credit or refund.
Distributions in excess of the Fund’s current and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholder’s tax basis in its Shares of the Fund, and generally as capital gain thereafter.
In addition, high-income individuals (and certain trusts and estates) generally are subject to a 3.8% Medicare tax on “net investment income” in addition to otherwise applicable U.S. federal income tax. “Net investment income” generally will include taxable dividends (including capital gain dividends) received from the Fund and net gains from the redemption or other disposition of Shares. Please consult your tax advisor regarding this tax.
Investors considering buying Shares just prior to a distribution should be aware that, although the price of the Shares purchased at such time may reflect the forthcoming distribution, such distribution nevertheless may be taxable (as opposed to a non-taxable return of capital).
Sales of Shares. Any capital gain or loss realized upon a sale or exchange of Shares (including an exchange of Shares of one Fund for Shares of another Fund) generally is treated as a long-term gain or loss if the Shares have been held for more than one year. Any capital gain or loss realized upon a sale or exchange of Shares held for one year or less generally is treated as a short-term gain or loss, except that any capital loss on the sale or exchange of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to the Shares. Furthermore, a loss realized by a shareholder on the sale or exchange of Shares of the Fund with respect to which exempt-interest dividends have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held by the shareholder for six months or less at the time of their disposition. An election may be available to you to defer recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about the availability of this deferral election and its requirements.
Creation Unit Issues and Redemptions. On an issue of Shares of the Fund as part of a Creation Unit where the creation is conducted in-kind, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) the Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid by the Authorized Participant as part of the issue). On a redemption of Shares as part of a Creation Unit where the redemption is conducted in-kind, an Authorized Participant recognizes capital gain or loss equal to the difference between (i) the fair market value (at redemption) of the securities received (plus any cash received by the Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s basis in the redeemed Shares (plus any cash paid by the Authorized Participant as part of the redemption). However, the IRS may assert, under the “wash sale” rules or on the basis that there has been no significant change in the Authorized Participant’s economic position, that any loss on creation or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss recognized upon the issue or redemption of Shares (as components of a Creation Unit) is treated either as long-term capital gain or loss, if the deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than one year, or otherwise as short-term capital gain or loss. However, any capital loss on a redemption of Shares held for six months or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to such Shares. Furthermore, a loss realized on the redemption of Shares of the Fund with respect to which exempt-interest dividends have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held for six months or less at the time of their disposition.
Taxation of Non-U.S. Shareholders
The following is a summary of certain U.S. federal income tax consequences of the purchase, ownership and disposition of Shares applicable to “non-U.S. shareholders.” For purposes of this discussion, a “non-U.S. shareholder” is a beneficial owner of Shares that is not a U.S. shareholder (as defined above) and is not an entity or arrangement treated as a partnership for U.S. federal income tax purposes. The following discussion is based on current law and is for general information only. It addresses only selected, and not all, aspects of U.S. federal income taxation.
With respect to non-U.S. shareholders of the Fund, the Fund’s ordinary income dividends generally will be subject to U.S. federal withholding tax at a rate of 30% (or at a lower rate established under an applicable tax treaty), subject to certain exceptions for “interest-related dividends” and “short-term capital gain dividends” discussed below. U.S. federal withholding tax generally will not apply to any gain realized by a non-U.S. shareholder in respect of the Fund’s net capital gain. Special rules apply with respect to dividends of the Fund that are attributable to gain from the sale or exchange of “U.S. real property interests.”
In general, all “interest-related dividends” and “short-term capital gain dividends” (each defined below) will not be subject to U.S. federal withholding tax, provided that the non-U.S. shareholder furnished the Fund with a completed IRS Form W-8BEN or W-8BEN-E, as applicable, (or acceptable substitute documentation) establishing the non-U.S. shareholder’s non-U.S. status and the Fund does not have actual knowledge or reason to know that the non-U.S. shareholder would be subject to such withholding tax if the non-U.S. shareholder were to receive the related amounts directly rather than as dividends from the Fund. “Interest-related dividends” generally means dividends designated by the Fund as attributable to the Fund’s U.S.-source interest income, other than certain contingent interest and interest from obligations of a corporation or partnership in which the Fund is at least a 10% shareholder, reduced by expenses that are allocable to such income. “Short-term capital gain dividends” generally means dividends designated by the Fund as attributable to the excess of the Fund’s net short-term capital gain over its net long-term capital loss. Depending on its circumstances, the Fund may treat such dividends, in whole or in part, as ineligible for these exemptions from withholding.
In general, subject to certain exceptions, non-U.S. shareholders will not be subject to U.S. federal income or withholding tax in respect of a sale or other disposition of Shares of the Fund.
To claim a credit or refund for any Fund-level taxes on any undistributed net capital gain (as discussed above) or any taxes collected through back-up withholding (discussed below), a non-U.S. shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S. shareholder would not otherwise be required to do so.
Back-Up Withholding.
The Fund (or a financial intermediary such as a broker through which a shareholder holds Shares in the Fund) may be required to report certain information on the Fund shareholder to the IRS and withhold U.S. federal income tax (“backup withholding”) at a current rate of 24% from taxable distributions and redemption or sale
proceeds payable to the Fund shareholder if (i) the Fund shareholder fails to provide the Fund with a correct taxpayer identification number or make required certifications, or if the IRS notifies the Fund that the Fund shareholder is otherwise subject to backup withholding, and (ii) the Fund shareholder is not otherwise exempt from backup withholding. Non-U.S. shareholders can qualify for exemption from backup withholding by submitting a properly completed IRS Form W-8BEN or W-8BEN-E. Backup withholding is not an additional tax and any amount withheld may be credited against the Fund shareholder’s U.S. federal income tax liability.
Foreign Account Tax Compliance Act.
The U.S. Foreign Account Tax Compliance Act (“FATCA”) generally imposes a 30% withholding tax on “withholdable payments” (defined below) made to (i) a “foreign financial institution” (“FFI”), unless the FFI enters into an agreement with the IRS to provide information regarding certain of its direct and indirect U.S. account holders and satisfy certain due diligence and other specified requirements, and (ii) a “non-financial foreign entity” (“NFFE”) unless such NFFE provides certain information about its direct and indirect “substantial U.S. owners” to the withholding agent or certifies that it has no such U.S. owners. The beneficial owner of a “withholdable payment” may be eligible for a refund or credit of the withheld tax. The U.S. government also has entered into intergovernmental agreements with other jurisdictions to provide an alternative, and generally easier, approach for FFIs to comply with FATCA. If the shareholder is a tax resident in a jurisdiction that has entered into an intergovernmental agreement with the U.S. government, the shareholder will be required to provide information about the shareholder’s classification and compliance with the intergovernmental agreement.
“Withholdable payments” generally include, among other items, (i) U.S.-source interest and dividends, and (ii) gross proceeds from the sale or disposition, occurring on or after January 1, 2019, of property of a type that can produce U.S.-source interest or dividends.
The Fund or a shareholder’s broker may be required to impose a 30% withholding tax on withholdable payments to a shareholder if the shareholder fails to provide the Fund with the information, certifications or documentation required under FATCA, including information, certification or documentation necessary for the Fund to determine if the shareholder is a non-U.S. shareholder or a U.S. shareholder and, if it is a non-U.S. shareholder, if the non-U.S. shareholder has “substantial U.S. owners” and/or is in compliance with (or meets an exception from) FATCA requirements. The Fund will not pay any additional amounts to shareholders in respect of any amounts withheld. The Fund may disclose any shareholder information, certifications or documentation to the IRS or other parties as necessary to comply with FATCA.
The requirements of, and exceptions from, FATCA are complex. All prospective shareholders are urged to consult their own tax advisors regarding the potential application of FATCA with respect to their own situation.
For a more detailed tax discussion regarding an investment in the Fund, please see the section of the SAI entitled “U.S. Federal Income Taxation.”
Code of Ethics
The Trust, Advisor, Subadvisor and Distributor each have adopted a code of ethics under Rule 17j-1 of the 1940 Act that is designed to prevent affiliated persons of the Trust, the Advisor, Subadvisor and the Distributor from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to be acquired by the Fund (which may also be held by persons subject to a code). There can be no assurance that the codes will be effective in preventing such activities. The codes permit personnel subject to them to invest in securities, including securities that may be held or purchased by the Fund. The codes are on file with the SEC and are available to the public.
Fund Website and Disclosure of Portfolio Holdings
The Advisor maintains a website for the Fund at newyorklifeinvestments.com/etf. The website for the Fund contains the following information, on a per-Share basis, for the Fund: (1) the prior Business Day’s NAV; (2) the reported midpoint of the bid-ask spread at the time of NAV calculation (the “Bid-Ask Price”); (3) a calculation of the premium or discount of the Bid-Ask Price against such NAV; and (4) data in chart format displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate ranges, for each of the four previous calendar quarters (or for the life of the Fund if, shorter). In addition, on
each Business Day, before the commencement of trading in Shares on the NYSE Arca, the Fund will disclose on its website (newyorklifeinvestments.com/etf) the identities and quantities of the portfolio securities and other assets held by the Fund that will form the basis for the calculation of NAV at the end of the Business Day.
A description of the Fund’s policies and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
Other Information
The Fund is not sponsored, endorsed, sold or promoted by the NYSE Arca. The NYSE Arca makes no representation or warranty, express or implied, to the owners of Shares or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Fund to achieve their objectives. The NYSE Arca has no obligation or liability in connection with the administration, marketing or trading of the Fund.
For purposes of the 1940 Act, the Fund is treated as a registered investment company, and the acquisition of shares by other registered investment companies and companies relying on Sections 3(c)(1) and 3(c)(7) of the 1940 Act are subject to the restrictions of Section 12(d)(1) of the 1940 Act and the related rules and interpretations.
Financial Highlights
Selected Data for a Share of Capital Stock Outstanding
The financial highlights tables are intended to help you understand the Fund’s financial performance for the past five fiscal years or, if shorter, the period of the Fund’s operations. Certain information reflects financial results for a single Fund Share. The total returns in the table represents the rate that an investor would have earned (or lost) on an investment in the Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose report, along with the Fund’s financial statements, is included in the Fund’s Annual Report, which is available upon request.
|
|
|
IQ Ultra Short Duration ETF
|
|
|
|
|
For the Year Ended April 30,
|
|
|
For the Period July 31, 2019(a) to April 30, 2020
|
|
|
|
|
2022
|
|
|
2021
|
|
Net asset value, beginning of period
|
|
|
|
$ |
49.60 |
|
|
|
|
$ |
48.91 |
|
|
|
|
$ |
50.01 |
|
|
Income from Investment Operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income(b)
|
|
|
|
|
0.49 |
|
|
|
|
|
0.51 |
|
|
|
|
|
0.74 |
|
|
Net realized and unrealized gain (loss)
|
|
|
|
|
(0.96) |
|
|
|
|
|
0.97 |
|
|
|
|
|
(1.07) |
|
|
Net increase (decrease) in net assets resulting from investment operations
|
|
|
|
|
(0.47) |
|
|
|
|
|
1.48 |
|
|
|
|
|
(0.33) |
|
|
Distributions from: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investment income
|
|
|
|
|
(0.51) |
|
|
|
|
|
(0.56) |
|
|
|
|
|
(0.75) |
|
|
Net realized gain
|
|
|
|
|
(0.61) |
|
|
|
|
|
(0.23) |
|
|
|
|
|
(0.02) |
|
|
Total distributions from net investment income and realized gains
|
|
|
|
|
(1.12) |
|
|
|
|
|
(0.79) |
|
|
|
|
|
(0.77) |
|
|
Net asset value, end of period
|
|
|
|
$ |
48.01 |
|
|
|
|
$ |
49.60 |
|
|
|
|
$ |
48.91 |
|
|
Market price, end of period
|
|
|
|
$ |
47.94 |
|
|
|
|
$ |
49.60 |
|
|
|
|
$ |
48.99 |
|
|
Total Return |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investment return based on net asset value(c)
|
|
|
|
|
(0.97)% |
|
|
|
|
|
3.08% |
|
|
|
|
|
(0.68)% |
|
|
Total investment return based on market price(d)
|
|
|
|
|
(1.10)% |
|
|
|
|
|
2.88% |
|
|
|
|
|
(0.52)%(e) |
|
|
Ratios/Supplemental Data |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets, end of period (000’s omitted)
|
|
|
|
$ |
124,817 |
|
|
|
|
$ |
252,978 |
|
|
|
|
$ |
149,182 |
|
|
Ratio to average net assets of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses net of waivers
|
|
|
|
|
0.24% |
|
|
|
|
|
0.24% |
|
|
|
|
|
0.24%(f) |
|
|
Expenses excluding waivers
|
|
|
|
|
0.35% |
|
|
|
|
|
0.33% |
|
|
|
|
|
0.49%(f) |
|
|
Net investment income
|
|
|
|
|
1.00% |
|
|
|
|
|
1.03% |
|
|
|
|
|
2.00%(f) |
|
|
Portfolio turnover rate(g)
|
|
|
|
|
132% |
|
|
|
|
|
185% |
|
|
|
|
|
292% |
|
|
(a)
Commencement of operations
(b)
Based on average shares outstanding.
(c)
Total investment return is calculated assuming an initial investment made at the net asset value at the beginning of the period, reinvestment of all dividends and distributions, if any, at net asset value during the period, and redemption on the last day of the period. Total return calculated for a period less than one year is not annualized.
(d) The market price returns are calculated using the mean between the last bid and ask prices.
(e)
Since the Shares of the Funds did not trade in the secondary market until the day after the Fund’s inception, for the period from the inception to the first day of the secondary market trading, the NAV is used as a proxy for the secondary market trading price to calculate the market returns.
(f)
Annualized.
(g)
Portfolio turnover rate is not annualized and excludes the value of portfolio securities received or delivered as in-kind creations or redemptions in connection with the Fund’s capital share transactions.
Privacy Policy
The Trust is committed to respecting the privacy of personal information you entrust to us in the course of doing business with us.
The Trust may collect non-public personal information from various sources. The Trust uses such information provided by you or your representative to process transactions, to respond to inquiries from you, to deliver reports, products, and services, and to fulfill legal and regulatory requirements.
We do not disclose any non-public personal information about our customers to anyone unless permitted by law or approved by the customer. We may share this information within the Trust’s family of companies in the course of providing services and products to best meet your investing needs. We may share information with certain third-parties who are not affiliated with the Trust to perform marketing services, to process or service a transaction at your request or as permitted by law. For example, sharing information with companies that maintain or service customer accounts for the Trust is essential. We may also share information with companies that perform administrative or marketing services for the Trust, including research firms. When we enter into such a relationship, we restrict the companies’ use of our customers’ information and prohibit them from sharing it or using it for any purposes other than those for which they were hired.
We maintain physical, electronic, and procedural safeguards to protect your personal information. Within the Trust, we restrict access to personal information to those employees who require access to that information in order to provide products or services to our customers such as handling inquiries. Our employment policies restrict the use of customer information and require that it be held in strict confidence.
We will adhere to the policies and practices described in this notice for both current and former customers of the Trust.
IndexIQ Active ETF Trust
Mailing Address
51 Madison Avenue
New York, New York 10010
1-888-474-7725
newyorklifeinvestments.com/etf
IndexIQ Active ETF Trust
PROSPECTUS | AUGUST 31, 2022
FOR MORE INFORMATION
If you would like more information about the Trust, the Fund and the Shares, the following documents are available free upon request:
Annual/Semi-annual Report
Additional information about the Fund’s investments is available in the Fund’s annual and semi-annual reports to shareholders (once available). In the Fund’s annual report, you will find a discussion of the market conditions and investment strategies that significantly affected the Fund’s performance during the last fiscal year.
Statement of Additional Information
Additional information about the Fund and its policies is also available in the Fund’s SAI. The SAI is incorporated by reference into this Prospectus (and is legally considered part of this Prospectus). The Fund’s annual and semi-annual reports (once available) and the SAI are available free upon request by calling IndexIQ at 1-888-474-7725. You can also access and download the annual and semi-annual reports (once available) and the SAI at the Fund’s website: newyorklifeinvestments.com/etf.
To obtain other information and for shareholder inquiries:
By telephone: 1-888-474-7725
By mail: IndexIQ Active ETF Trust
c/o IndexIQ
51 Madison Avenue
New York, NY 10010
On the Internet: SEC Edgar database: http://www.sec.gov; or newyorklifeinvestments.com/etf
You may review and obtain copies of Fund documents (including the SAI) by visiting the SEC’s public reference room in Washington, D.C. You may also obtain copies of Fund documents, after paying a duplicating fee, by writing to the SEC’s Public Reference Section, Washington, D.C. 20549-0102 or by electronic request to: publicinfo@sec.gov. Information on the operation of the public reference room may be obtained by calling the SEC at (202) 551-8090.
No person is authorized to give any information or to make any representations about the Fund and its Shares not contained in this Prospectus and you should not rely on any other information. Read and keep the Prospectus for future reference.
Dealers effecting transactions in the Fund’s Shares, whether or not participating in this distribution, may be generally required to deliver a Prospectus. This is in addition to any obligation dealers have to deliver a Prospectus when acting as underwriters.
“New York Life Investments” is both a servicemark, and the common trade name, of certain investment advisors affiliated with New York Life Insurance Company.
IQ® and IndexIQ® are registered servicemarks of New York Life Insurance Company. The Trust’s investment company registration number is 811-22739.
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20001 column dei_LegalEntityAxis compact ck0001426439_S000057660Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20002 column dei_LegalEntityAxis compact ck0001426439_S000057660Member row primary compact * ~
0.0168
0.0806
0.0745
0.0171
~ http://www.indexiq.com/20220829/role/ScheduleAnnualTotalReturnsBarChart20003 column dei_LegalEntityAxis compact ck0001426439_S000057660Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAverageAnnualReturnsTransposed20004 column dei_LegalEntityAxis compact ck0001426439_S000057660Member column rr_PerformanceMeasureAxis compact * row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20007 column dei_LegalEntityAxis compact ck0001426439_S000057662Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20008 column dei_LegalEntityAxis compact ck0001426439_S000057662Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20011 column dei_LegalEntityAxis compact ck0001426439_S000057661Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20012 column dei_LegalEntityAxis compact ck0001426439_S000057661Member row primary compact * ~
0.0206
0.0798
0.0587
0.0170
~ http://www.indexiq.com/20220829/role/ScheduleAnnualTotalReturnsBarChart20013 column dei_LegalEntityAxis compact ck0001426439_S000057661Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAverageAnnualReturnsTransposed20014 column dei_LegalEntityAxis compact ck0001426439_S000057661Member column rr_PerformanceMeasureAxis compact * row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20017 column dei_LegalEntityAxis compact ck0001426439_S000069622Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20018 column dei_LegalEntityAxis compact ck0001426439_S000069622Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20021 column dei_LegalEntityAxis compact ck0001426439_S000071156Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20022 column dei_LegalEntityAxis compact ck0001426439_S000071156Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAnnualFundOperatingExpenses20025 column dei_LegalEntityAxis compact ck0001426439_S000066048Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleExpenseExampleTransposed20026 column dei_LegalEntityAxis compact ck0001426439_S000066048Member row primary compact * ~
0.0088
0.0019
~ http://www.indexiq.com/20220829/role/ScheduleAnnualTotalReturnsBarChart20027 column dei_LegalEntityAxis compact ck0001426439_S000066048Member row primary compact * ~
~ http://www.indexiq.com/20220829/role/ScheduleAverageAnnualReturnsTransposed20028 column dei_LegalEntityAxis compact ck0001426439_S000066048Member column rr_PerformanceMeasureAxis compact * row primary compact * ~
false
2022-04-30
485BPOS
0001426439
0001426439
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057660Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057660Member
ck0001426439:C000184310Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057660Member
rr:AfterTaxesOnDistributionsMember
ck0001426439:C000184310Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057660Member
rr:AfterTaxesOnDistributionsAndSalesMember
ck0001426439:C000184310Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057660Member
ck0001426439:index_Bloomberg_Municipal_All_Insured_Bond_Index_reflects_no_deduction_for_fees_expenses_or_taxesMember
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057662Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057662Member
ck0001426439:C000184312Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057661Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057661Member
ck0001426439:C000184311Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057661Member
rr:AfterTaxesOnDistributionsMember
ck0001426439:C000184311Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057661Member
rr:AfterTaxesOnDistributionsAndSalesMember
ck0001426439:C000184311Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000057661Member
ck0001426439:index_Bloomberg_Municipal_Bond_Index_115_Year_Blend_reflects_no_deduction_for_fees_expenses_or_taxesMember
2022-04-30
2022-04-30
0001426439
ck0001426439:S000069622Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000069622Member
ck0001426439:C000222073Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000071156Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000071156Member
ck0001426439:C000225893Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000066048Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000066048Member
ck0001426439:C000213519Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000066048Member
rr:AfterTaxesOnDistributionsMember
ck0001426439:C000213519Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000066048Member
rr:AfterTaxesOnDistributionsAndSalesMember
ck0001426439:C000213519Member
2022-04-30
2022-04-30
0001426439
ck0001426439:S000066048Member
ck0001426439:index_Bloomberg_Short_Treasury_36_Month_Index_reflects_no_deduction_for_fees_expenses_or_taxesMember
2022-04-30
2022-04-30
xbrli:pure
iso4217:USD
STATEMENT OF ADDITIONAL INFORMATION
INDEXIQ ACTIVE ETF TRUST
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
PHONE: (888) 474-7725
August 31, 2022
This Statement of Additional Information (this
“SAI”) is not a prospectus. It should be read in conjunction with and is incorporated by reference into the prospectuses
dated August 31, 2022, as they may be revised from time to time (the “Prospectuses”) for the funds listed below (each,
a “Fund” and collectively, the “Funds”), each a series of IndexIQ Active ETF Trust (the “Trust”).
Fund Name
IQ MacKay Municipal Insured ETF (MMIN)
IQ MacKay Municipal Short Duration ETF (MMSD)
IQ MacKay Municipal Intermediate ETF (MMIT)
IQ MacKay California Municipal Intermediate
ETF (MMCA)
IQ Ultra Short Duration ETF (ULTR)
As of the date of this SAI, IQ MacKay Municipal
Short Duration ETF has not commenced operations.
The Prospectuses and the Funds’ Annual
Reports or Semi-Annual Reports may be obtained without charge by writing to the Trust, c/o ALPS Distributors, Inc., 1290 Broadway,
Suite 1000, Denver, Colorado 80203, by calling (888) 474-7725, or by visiting the Trust’s website at newyorklifeinvestments.com/etf.
Shares of the Funds are principally listed on a national securities exchange, the NYSE Arca, Inc. (“NYSE Arca” or the
“Exchange”).
Capitalized terms used but not defined herein
have the same meaning as in the Prospectuses, unless otherwise noted.
TABLE OF CONTENTS
No person has been authorized to give any
information or to make any representations other than those contained in this SAI and the Prospectuses and, if given or made, such information
or representations may not be relied upon as having been authorized by the Trust. The SAI does not constitute an offer to sell securities.
GENERAL DESCRIPTION OF THE TRUST AND THE
FUNDS
The Trust was organized as a Delaware statutory
trust on January 30, 2008 and is authorized to have multiple segregated series or portfolios. The Trust is an open-end management
investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently
consists of a number of separate investment portfolios, of which 8 are in operation.
Each Fund is deemed to be diversified for
the purposes of the 1940 Act. Other portfolios may be added to the Trust in the future. The shares of the Funds are referred to herein
as “Shares.” The offering of Shares is registered under the Securities Act of 1933, as amended (the “Securities Act”).
The Funds are managed by IndexIQ Advisors
LLC (the “Advisor”). The Advisor has been registered as an investment adviser with the Securities and Exchange Commission
(the “SEC”) since August 2007 and is a wholly-owned indirect subsidiary of New York Life Investment Management Holdings
LLC.
The IQ MacKay Municipal Insured ETF, IQ
MacKay Municipal Short Duration ETF, IQ MacKay Municipal Intermediate ETF and IQ MacKay California Municipal Intermediate ETF (collectively,
“the MacKay Municipal Funds”) are subadvised by MacKay Shields LLC (“MacKay Shields”). MacKay Shields was incorporated
in 1969 and has been registered as an investment adviser with the SEC since 1969. Today MacKay Shields is an indirect wholly-owned subsidiary
of New York Life. MacKay Shields’ principal office is located at 1345 Avenue of the Americas, New York, New York, 1015. As of June 30,
2022, MacKay Shields had approximately $132 billion in assets under management.
The IQ Ultra Short Duration ETF (the “Ultra
Short Fund”) is subadvised by NYL Investors LLC (“NYL Investors”). NYL Investors is a wholly owned subsidiary of New
York Life. NYL Investors was established in 2014 as an independent investment advisor and previously operated as an investment division
of New York Life Investments.
Each of MacKay Shield and NYL Investors are
referred to as “Subadvisor” as the context requires, and collectively are referred to herein as “Subadvisors.”
The Funds offer and issue Shares at net asset
value (the “NAV”) only in aggregations of a specified number of Shares (each, a “Creation Unit” or a “Creation
Unit Aggregation”). The consideration for purchase of a Creation Unit of Shares generally consists of cash only although a Fund
also reserves the right to permit or require the in-kind deposit of a designated portfolio of securities (the “Deposit Securities”)
along with a specified cash payment (the “Cash Component”). Shares are redeemable only in Creation Unit Aggregations and,
generally, in exchange for a basket of Deposit Securities together with a Cash Component. In the event of the liquidation of any Fund,
the Trust may lower the number of Shares in a Creation Unit.
The Trust’s Amended and Restated Declaration
of Trust (the “Declaration”) provides that by virtue of becoming a shareholder of the Trust, each shareholder is bound by
the provisions of the Declaration. The Declaration provides a detailed process for the bringing of derivative actions by shareholders.
Prior to bringing a derivative action, a written demand by the complaining shareholder must first be made on the Trustees. The Declaration
details conditions that must be met with respect to the demand, including the requirement that 10% of the outstanding Shares of the Fund
who are eligible to bring such derivative action under the Delaware Statutory Trust Act join in the demand for the Trustees to commence
such derivative action. There may be questions regarding the enforceability of this provision based on certain interpretations of the
Securities Act of 1933 Act, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934
Act”) and the 1940 Act.
Additionally, the Declaration provides that
the Court of Chancery of the State of Delaware, to the extent there is subject matter jurisdiction in such court for the claims asserted
or, if not, then in the Superior Court of the State of Delaware shall be the exclusive forum in which certain types of litigation may
be brought, which may require shareholders to have to bring an action in an inconvenient or less favorable forum. There may be questions
regarding the enforceability of this provision because the 1933 Act, the 1934 Act and the 1940 Act allow claims to be brought in state
and federal courts. The Declaration provides that shareholders waive any and all right to trial by jury in any claim, suit, action or
proceeding.
EXCHANGE LISTING AND TRADING
There can be no assurance that a Fund will
be able to maintain the listing of its Shares on the Exchange. The Exchange will consider the suspension of trading and delisting of
the Shares of a Fund from listing if, (i) a Fund does not comply with the Exchange’s continuous listing standards; or (ii) such
other event shall occur or condition exist that, in the opinion of the Exchange, makes further trading on the Exchange inadvisable. The
Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.
As in the case of other stocks traded on the
Exchange, brokers’ commissions on transactions will be based on commission rates negotiated by an investor and his or her broker.
The Trust reserves the right to adjust the price
levels of the Shares in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through
stock splits or reverse stock splits, which would have no effect on the net assets of each Fund.
INVESTMENT OBJECTIVES AND POLICIES
Investment Objectives
Each Fund has a distinct investment objective
and policies that are distinct from the other series of the Trust. There can be no assurance that a Fund’s objective will be achieved.
All investment objectives and investment policies
not specifically designated as fundamental may be changed without shareholder approval. Additional information about each Fund, its policies,
and the investment instruments it may hold, is provided below.
The Funds’ share prices will fluctuate with market and economic
conditions. The Funds should not be relied upon as a complete investment program.
Investment Restrictions
The investment restrictions set forth below
have been adopted by the Board of Trustees of the Trust (the “Board”) as fundamental policies that cannot be changed with
respect to a Fund without the affirmative vote of the holders of a majority (as defined in the 1940 Act) of the outstanding voting securities
of the Fund. The investment objective of each Fund and all other investment policies or practices of the Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the 1940 Act, a “majority of
the outstanding voting securities” means the lesser of the vote of (i) 67% or more of the Shares of the Fund present at a
meeting, if the holders of more than 50% of the outstanding Shares of the Fund are present or represented by proxy, or (ii) more
than 50% of the Shares of a Fund.
As a matter of fundamental policy, a Fund (except as to any specific
Fund otherwise noted below):
| A. | May not invest 25% or more of its total
assets in the securities of one or more issuers conducting their principal business activities
in the same industry or group of industries. The Fund will not invest 25% or more of its
total assets in investment companies that have a policy to invest 25% or more of their total
assets in issuers conducting their principal business activities in the same industry or
group of industries. This limitation does not apply to investments in securities issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or shares of investment
companies. Also, for purposes of industry concentration, tax-exempt securities issued by
states, municipalities and their political subdivisions are not considered to be part of
any industry. |
| B. | May borrow money, to the extent permitted
by the 1940 Act, as such may be interpreted or modified by regulatory authorities having
jurisdiction, from time to time. |
| C. | May make loans as permitted under the 1940 Act, as such may be interpreted
or modified by regulatory authorities having jurisdiction, from time to time. |
| D. | May act as an underwriter of securities
within the meaning of the Securities Act of 1933 (the "Securities Act"), to the
extent permitted under the Securities Act, as such may be interpreted or modified by regulatory
authorities having jurisdiction, from time to time. |
| E. | May purchase or sell real estate or any
interest therein to the extent permitted under the 1940 Act, as such may be interpreted or
modified by regulatory authorities having jurisdiction, from time to time. |
| F. | May not purchase physical commodities
or contracts regarding physical commodities, except as permitted under the 1940 Act and other
applicable laws, rules and regulations, as such may be interpreted or modified by regulatory
authorities having jurisdiction, from time to time. |
| G. | May issue senior securities, to the extent
permitted by the 1940 Act, as such may be interpreted or modified by regulatory authorities
having jurisdiction, from time to time. |
| H. | Each of the MacKay Municipal Funds (except
the IQ MacKay California Municipal Intermediate ETF), will invest, under normal circumstances,
at least 80% of its assets in investments the income of which is exempt from federal income
tax. |
As a matter of fundamental policy, the IQ
MacKay California Municipal Intermediate ETF:
| H. | Will invest, under normal circumstances,
at least 80% of its assets in investments the income of which is exempt from federal and
California income taxes. |
Unless otherwise indicated, all of the percentage
limitations above and in the investment restrictions recited in the Prospectus apply only at the time of an acquisition or encumbrance
of securities or assets of a Fund, except that any borrowings by a Fund that exceeds applicable limitations must be reduced to meet such
limitations within the period required by the 1940 Act. Therefore, a change in the percentage that results from a relative change in
values or from a change in a Fund’s assets will not be considered a violation of the Fund’s policies or restrictions. “Value”
for the purposes of all investment restrictions shall mean the value used in determining a Fund’s NAV.
Additional
Information Regarding Investment Restrictions
Below is additional information regarding the MacKay Municipal Funds’
investment restrictions. This information is in addition to, rather than part of, the fundamental investment restrictions themselves.
| ● | Concentration.
Although the 1940 Act does not define what constitutes “concentration” in
an industry or group of industries, the staff of the SEC takes the position that any fund
that invests more than 25% of its total assets in a particular industry or group of industries
(other than securities issued or guaranteed by the U.S. government, its agencies or instrumentalities)
is deemed to be “concentrated” in that industry or group of industries. The exclusion
set forth above with respect to tax-exempt securities does not include municipal securities
whose payments of interest and/or principal are dependent upon revenues derived from projects,
rather than the general obligations of the municipal issuers (such as private activity and
revenue bonds). |
For purposes of a Fund’s industry concentration
policy, the Advisor or a Subadvisor may analyze the characteristics of a particular issuer and instrument and may assign an industry
classification consistent with those characteristics. The Advisor or MacKay Shields may, but need not, consider industry classifications
provided by third parties.
INVESTMENT STRATEGIES AND RISKS
A discussion of the risks associated with
an investment in each Fund is contained in each Fund’s Prospectus under the headings “Principal Risks,” “Description
of the Principal Risks of the Funds” and “Additional Risks.” The discussion below supplements and should be read in
conjunction with such sections of each Fund's Prospectus.
General
Investment in each Fund should be made with an
understanding that the value of the portfolio of securities held by such Fund may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of common stocks or fixed-income securities generally and other factors.
Municipal
Securities (The following applies to the MacKay Municipal Funds only.)
A Fund may purchase municipal securities. Municipal
securities include securities issued by, or on behalf of, the District of Columbia, the states, the territories (including Puerto Rico,
Guam and the U.S. Virgin Islands), commonwealths and possessions of the United States and their political subdivisions, and agencies,
authorities and instrumentalities (collectively, “municipalities”). Municipal securities, which may be issued in various
forms, including bonds and notes, are issued to obtain funds for various public purposes.
Municipal bonds are debt obligations issued by
municipalities. Typically, the interest payable on municipal bonds is, in the opinion of bond counsel to the issuer at the time of issuance,
exempt from U.S. federal income tax.
A Fund’s investments in municipal securities
may be affected by political and economic developments within the applicable municipality and by the financial condition of the municipality.
Certain of the issuers in which a Fund may invest have recently experienced, or may experience, significant financial difficulties and
repeated credit rating downgrades. For example, Puerto Rico, in particular, has been experiencing significant financial difficulties,
which have further strained Puerto Rico’s economic stagnation and fiscal challenges (including budget deficits, underfunded pensions,
high unemployment, population decline, significant debt service obligations, liquidity issues, and reduced access to financial markets).
The default by issuers of Puerto Rico municipal securities on their obligations under securities held by a Fund may adversely affect
the Fund and cause the Fund to lose the value of its investment in such securities.
Municipal bonds include securities from a variety
of sectors, each of which has unique risks. They include, but are not limited to, general obligation bonds, limited obligation bonds,
and revenue bonds (including industrial development bonds issued pursuant to U.S. federal tax law). General obligation bonds are obligations
involving the credit of an issuer possessing taxing power and are payable from such issuer's general revenues and not from any particular
source. Limited obligation bonds are payable only from the revenues derived from a particular facility or class of facilities or, in
some cases, from the proceeds of a special excise or other specific revenue source. Revenue bonds are issued for either project or enterprise
financings in which the bond issuer pledges to the bondholders the revenues generated by the operating projects financed from the proceeds
of the bond issuance. Revenue bonds involve the credit risk of the underlying project or enterprise (or its corporate user) rather than
the credit risk of the issuing municipality. Under the U.S. Internal Revenue Code of 1986, as amended, certain limited obligation bonds
are considered "private activity bonds" and interest paid on such bonds is treated as an item of tax preference for purposes
of calculating U.S. federal alternative minimum tax liability. Tax exempt private activity bonds and industrial development bonds generally
are also classified as revenue bonds and thus are not payable from the issuer's general revenues. The credit and quality of private activity
bonds and industrial development bonds are usually related to the credit of the corporate user of the facilities. Payment of interest
on and repayment of principal of such bonds are the responsibility of the corporate user (and/or any guarantor).
Some municipal bonds may be issued as variable
or floating rate securities and may incorporate market-dependent liquidity features. Some longer-term municipal bonds give the investor
the right to "put" or sell the security at par (face value) within a specified number of days following the investor's request—
usually one to seven days. This demand feature enhances a security's liquidity by shortening its effective maturity and enables it to
trade at a price equal to or very close to par. If a demand feature terminates prior to being exercised, a Fund would hold the longer-term
security, which could experience substantially more volatility. Municipal bonds that are issued as variable or floating rate securities
incorporating market-dependent liquidity features may have greater liquidity risk than other municipal bonds.
Some municipal bonds feature credit enhancements,
such as lines of credit, letters of credit, municipal bond insurance, and standby bond purchase agreements ("SBPAs"). SBPAs
include lines of credit that are issued by a third party, usually a bank, to enhance liquidity and ensure repayment of principal and
any accrued interest if the underlying municipal bond should default. Municipal bond insurance, which is usually purchased by the bond
issuer from a private, nongovernmental insurance company, provides an unconditional and irrevocable assurance that the insured bond's
principal and interest will be paid when due. Insurance does not guarantee the price of the bond or the share price of any Fund.
The credit rating of an insured bond may reflect
the credit rating of the insurer, based on its claims-paying ability. The obligation of a municipal bond insurance company to pay a claim
extends over the life of each insured bond. Although defaults on insured municipal bonds have historically been low and municipal bond
insurers historically have met their claims, there is no assurance this will continue. A higher-than expected default rate could strain
the insurer's loss reserves and adversely affect its ability to pay claims to bondholders. The number of municipal bond insurers is relatively
small, and not all of them have the highest credit rating. An SBPA can include a liquidity facility that is provided to pay the purchase
price of any bonds that cannot be remarketed. The obligation of the liquidity provider (usually a bank) is only to advance funds to purchase
tendered bonds that cannot be remarketed and does not cover principal or interest under any other circumstances. The liquidity provider's
obligations under the SBPA are usually subject to numerous conditions, including the continued creditworthiness of the underlying borrower
or bond issuer.
Municipal bonds also include tender option bonds,
which are municipal derivatives created by dividing the income stream provided by an underlying municipal bond to create two securities
issued by a special-purpose trust, one short-term and one long-term. The interest rate on the short-term component is periodically reset.
The short-term component has negligible interest rate risk, while the long-term component has all of the interest rate risk of the original
bond. After income is paid on the short-term securities at current rates, the residual income goes to the long-term securities.
Therefore, rising short-term interest rates result
in lower income for the longer-term portion, and vice versa. The longer-term components can be very volatile and may be less liquid than
other municipal bonds of comparable maturity. These securities have been developed in the secondary market to meet the demand for short-term,
tax-exempt securities.
Prices and yields on municipal bonds are dependent
on a variety of factors, including general money-market conditions, the financial condition of the issuer, general conditions of the
municipal bond market, the size of a particular offering, the maturity of the obligation and the rating of the issue. A number of these
factors, including the ratings of particular issues, are subject to change from time to time. Information about the financial condition
of an issuer of municipal bonds may not be as extensive as that which is made available by corporations whose securities are publicly
traded. Tax Anticipation Notes are used to finance working capital needs of municipalities and are issued in anticipation of various
seasonal tax revenues, to be payable from these specific future taxes. They are usually general obligations of the issuer, secured by
the taxing power for the payment of principal and interest.
Municipal securities also include various forms
of notes. These notes include, but are not limited to, the following types:
| ● | Revenue
anticipation notes which are issued in expectation of receipt of other kinds of revenue,
such as federal revenues. They, also, are usually general obligations of the issuer. |
| ● | Bond
anticipation notes which are normally issued to provide interim financial assistance until
long-term financing can be arranged. The long-term bonds then provide funds for the repayment
of the notes. |
| ● | Construction
loan notes which are sold to provide construction financing for specific projects. After
successful completion and acceptance, many projects receive permanent financing through the
Federal Housing Administration ("FHA") under the FNMA or GNMA. |
| ● | Project
notes which are instruments sold by HUD but issued by a state or local housing agency to
provide financing for a variety of programs. They are backed by the full faith and credit
of the U.S. government, and generally carry a term of one year or less. |
| ● | Short-term
discount notes (tax-exempt commercial paper), which are short-term (365 days or less) promissory
notes issued by municipalities to supplement their cash flow. |
An entire issue of municipal securities may be
purchased by one or a small number of institutional investors such as the Funds. Thus, the issue may not be said to be publicly offered.
Unlike securities that must be registered under the Securities Act prior to offer and sale, unless an exemption from such registration
is available, municipal securities that are not publicly offered may nevertheless be readily marketable. A secondary market may exist
for municipal securities that were not publicly offered initially.
Municipal securities are subject to credit risk.
Information about the financial condition of an issuer of municipal securities may not be as extensive as that which is made available
by corporations whose securities are publicly traded. Obligations of issuers of municipal securities are generally subject to the provisions
of bankruptcy, insolvency, and other laws affecting the rights and remedies of creditors. Congress or state legislatures may seek to
extend the time for payment of principal or interest, or both, or to impose other constraints upon enforcement of such obligations. There
is also the possibility that, as a result of litigation or other conditions, the power or ability of issuers to meet their obligations
for the payment of interest and principal on their municipal securities may be materially affected or their obligations may be found
to be invalid or unenforceable. Such litigation or conditions may from time to time have the effect of introducing uncertainties in the
market for municipal securities or certain segments thereof, or of materially affecting the credit risk with respect to particular bonds.
Adverse economic, business, legal, or political developments might affect all or a substantial portion of a Fund's municipal securities
in the same manner.
An insolvent municipality may take steps to reorganize
its debt, which might include extending debt maturities, reducing the amount of principal or interest, refinancing the debt or taking
other measures that may significantly affect the rights of creditors and the value of the securities issued by the municipality and the
value of a Fund’s investments in those securities. Under bankruptcy law, certain municipalities that meet specific conditions may
be provided protection from creditors while they develop and negotiate plans for reorganizing their debts. U.S. bankruptcy law generally
provides that individual U.S. states are not permitted to pass their own laws purporting to bind non-consenting creditors to a restructuring
of a municipality’s indebtedness, and thus all such restructurings must be pursuant to Chapter 9 of the Bankruptcy Code.
Municipal bankruptcies are relatively rare, and
certain provisions of U.S. bankruptcy law governing such bankruptcies are unclear and remain untested. Although Puerto Rico is a U.S.
Territory, neither Puerto Rico nor its subdivisions or agencies are eligible to file under U.S. bankruptcy law in order to seek protection
from creditors or restructure their debt. Although recent Puerto Rico legislation that would have allowed certain Puerto Rico public
corporations to seek protection from creditors and to restructure their debt should they become insolvent has been ruled unconstitutional,
the U.S. Supreme Court has agreed to review this ruling. If the U.S. Supreme Court permits municipalities or public corporations in Puerto
Rico to restructure their outstanding obligations, it could adversely affect the Fund.
Municipal securities are subject to interest
rate risk. Interest rate risk is the chance that security prices overall will decline over short or even long periods because of rising
interest rates. Interest rate risk is higher for long-term bonds, whose prices are more sensitive to interest rate changes than are the
prices of shorter-term bonds. Generally, prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues.
Prices and yields on municipal securities are dependent on a variety of factors, such as the financial condition of the issuer, general
conditions of the municipal securities market, the size of a particular offering, the maturity of the obligation and the rating of the
issue. A number of these factors, including the ratings of particular issues, are subject to change from time to time.
Municipal bonds are subject to call risk. Call
risk is the chance that during periods of falling interest rates, a bond issuer will call—or repay—a higher-yielding bond
before its maturity date. Forced to reinvest the unanticipated proceeds at lower interest rates, a Fund would experience a decline in
income and lose the opportunity for additional price appreciation associated with falling rates. Call risk is generally high for long-term
bonds. Municipal bonds may be deemed to be illiquid as determined by or in accordance with methods adopted by the Board.
The liquidity of municipal lease obligations
purchased by the Funds will be determined pursuant to guidelines approved by the Board. Factors considered in making such determinations
may include: the frequency of trades and quotes for the obligation; the number of dealers willing to purchase or sell the security and
the number of other potential buyers; the willingness of dealers to undertake to make a market in the security; the nature of marketplace
trades; the obligation's rating; and, if the security is unrated, the factors generally considered by a rating agency. If municipal lease
obligations are determined to be illiquid, then a Fund will limit its investment in these securities subject to its limitation on investments
in illiquid securities.
The Tax Reform Act of 1986 limited the types
and volume of municipal securities qualifying for the U.S. federal income tax exemption for interest, and the U.S. Internal Revenue Code
of 1986, as amended, treats tax-exempt interest on certain municipal securities as a tax preference item included in the alternative
minimum tax base for noncorporate shareholders. For tax years beginning after December 31, 2022, tax exempt interest dividends may
affect the corporate alternative minimum tax for certain corporations. Further, an issuer's failure to comply with the detailed and numerous
requirements imposed by the U.S. Internal Revenue Code of 1986, as amended, after bonds have been issued may cause the retroactive revocation
of the tax-exempt status of certain municipal securities after their issuance. The Funds intend to monitor developments in the municipal
bond market to determine whether any defensive action should be taken.
Municipal
lease obligations. Municipal lease obligations generally are issued to support a government's infrastructure by financing
or refinancing equipment or property acquisitions or the construction, expansion or rehabilitation of public facilities. In such transactions,
equipment or property is leased to a state or local government, which, in turn, pays lease payments to the lessor consisting of interest
and principal payments on the obligations. Municipal lease obligations differ from other municipal securities because each year the lessee's
governing body must appropriate (set aside) the money to make the lease payments. If the money is not appropriated, the issuer or the
lessee typically can end the lease without penalty. If the lease is cancelled, investors who own the municipal lease obligations may
not be paid.
The Fund may also gain exposure to municipal
lease obligations through certificates of participation, which represent a proportionate interest in the payments under a specified lease
or leases.
Because annual appropriations are required to
make lease payments, municipal lease obligations generally are not subject to constitutional limitations on the issuance of debt, and
may allow an issuer to increase government liabilities beyond constitutional debt limits. When faced with increasingly tight budgets,
local governments have more discretion to curtail lease payments under a municipal lease obligation than they do to curtail payments
on other municipal securities. If not enough money is appropriated to make the lease payments, the leased property may be repossessed
as security for holders of the municipal lease obligations. If this happens, there is no assurance that the property's private sector
or re-leasing value will be enough to make all outstanding payments on the municipal lease obligations or that the payments will continue
to be tax-free.
While cancellation risk is inherent to municipal
lease obligations, the Fund believes that this risk may be reduced, although not eliminated, by its policies on the credit quality of
municipal securities in which it may invest.
Tax-exempt
or qualified private activity and industrial development revenue bonds. Tax-exempt industrial development revenue and
other similar bonds are part of a category of securities sometimes known as tax-exempt or qualified private activity bonds. These bonds
are typically issued by or on behalf of public authorities to finance various privately operated facilities which are expected to benefit
the municipality and its residents, such as business, manufacturing, housing, sports and pollution control, as well as public facilities
such as airports, mass transit systems, ports and parking. The payment of principal and interest is solely dependent on the ability of
the facility's user to meet its financial obligations and the pledge, if any, of the facility or other property as security for payment.
As a result, these bonds may involve a greater degree of corporate credit risk than other municipal securities.
Please see Appendix B for specific risks associated
with investments in California.
Insurance
(The following applies to the MacKay Municipal Funds only.)
The Fund may also invest in insured municipal
securities. Normally, the underlying rating of an insured security is one of the top three ratings of Fitch, Moody's or S&P. An insurer
may insure municipal securities that are rated below the top three ratings or that are unrated if the securities otherwise meet the insurer's
quality standards.
The Fund will only enter into a contract to buy
an insured municipal security if either permanent insurance or an irrevocable commitment to insure the municipal security by a qualified
municipal bond insurer is in place. The insurance feature guarantees the scheduled payment of principal and interest, but does not guarantee
(i) the market value of the insured municipal security, (ii) the value of the Fund's shares, or (iii) the Fund's distributions.
Types
of insurance. There are three types of insurance: new issue, secondary and portfolio. A new issue insurance policy is purchased
by the issuer when the security is issued. A secondary insurance policy may be purchased by the Fund after a security is issued. With
both new issue and secondary policies, the insurance continues in force for the life of the security and, thus, may increase the credit
rating of the security, as well as its resale value. However, in response to market conditions rating agencies have lowered their ratings
on some municipal bond insurers below BBB or withdrawn ratings. In such cases the insurance is providing little or no enhancement of
credit or resale value to the municipal security and the security's rating will reflect the higher of the insurer rating or the underlying
rating of the security.
The Fund may buy a secondary insurance policy
at any time if the investment manager believes the insurance would be in the best interest of the Fund. The Fund is likely to buy a secondary
insurance policy if, in the investment manager's opinion, the Fund could sell a security at a price that exceeds the current value of
the security, without insurance, plus the cost of the insurance. The purchase of a secondary policy, if available, may enable the Fund
to sell a defaulted security at a price similar to that of comparable securities that are not in default. The Fund would value a defaulted
security covered by a secondary insurance policy at its market value.
The Fund also may buy a portfolio insurance policy.
Unlike new issue and secondary insurance, which continue in force for the life of the security, portfolio insurance only covers securities
while they are held by the Fund. If the Fund sells a security covered by portfolio insurance, the insurance protection on that security
ends and, thus, cannot affect the resale value of the security. As a result, the Fund may continue to hold any security insured under
a portfolio insurance policy that is in default or in significant risk of default and, absent any unusual or unforeseen circumstances
as a result of the portfolio insurance policy, would likely value the defaulted security, or security for which there is a significant
risk of default, at the same price as comparable securities that are not in default. While a defaulted security is held in the Fund's
portfolio, the Fund continues to pay the insurance premium on the security but also collects interest payments from the insurer and retains
the right to collect the full amount of principal from the insurer when the security comes due.
The insurance premium the Fund pays for a portfolio
insurance policy is a Fund expense. The premium is payable monthly and is adjusted for purchases and sales of covered securities during
the month. If the Fund fails to pay its premium, the insurer may take action against the Fund to recover any premium payments that are
due. The insurer may not change premium rates for securities covered by a portfolio insurance policy, regardless of the issuer's ability
or willingness to meet its obligations.
Qualified
municipal bond insurers. Insurance policies may be issued by a qualified municipal bond insurer. The bond insurance industry
is a regulated industry. Any bond insurer must be licensed in each state in order to write financial guarantees in that jurisdiction.
Regulations vary from state to state. Most regulators, however, require minimum standards of solvency and limitations on leverage and
investment of assets. Regulators also place restrictions on the amount an insurer can guarantee in relation to the insurer's capital
base. Neither the Fund nor the investment manager makes any representations as to the ability of any insurance company to meet its obligation
to the Fund if called upon to do so.
If an insurer is called upon to pay the principal
or interest on an insured security that is due for payment but that has not been paid by the issuer, the terms of payment would be governed
by the provisions of the insurance policy. After payment, the insurer becomes the owner of the security, appurtenant coupon, or right
to payment of principal or interest on the security and is fully subrogated to all of the Fund's rights with respect to the security,
including the right to payment. The insurer's rights to the security or to payment of principal or interest are limited, however, to
the amount the insurer has paid.
State regulators have from time to time required
municipal bond insurers to suspend claims payments on outstanding insurance in force. Certain municipal bond insurers have withdrawn
from the market. Consequently, there may be insufficient qualified bond insurers (rated BBB or better) offering insurance on new issues
of municipal securities so that the Insured Fund may be unable to find sufficient insured municipal securities. These circumstances have
led to a decrease in the supply of insured municipal securities and a consolidation among municipal bond insurers concentrating the insurance
company credit risk on securities in the Fund's portfolio amongst fewer municipal bond insurers. Due to this consolidation, events involving
one or more municipal bond insurers could have a significant adverse effect on the value of the securities insured by the insurer and
on the municipal markets as a whole.
Bonds
(The following applies to the IQ Ultra Short Duration ETF only.)
The Fund invests a substantial portion of its
assets in corporate bonds. A bond is an interest-bearing security issued by a U.S. or non-U.S. company. The issuer of a bond has a contractual
obligation to pay interest at a stated rate on specific dates and to repay principal (the bond’s face value) periodically or on
a specified maturity date. Bonds generally are used by corporations and governments to borrow money from investors. The investment return
of corporate bonds reflects interest earned on the security and changes in the market value of the security. The market value of a corporate
bond may be affected by changes in the market rate of interest, the credit rating of the corporation, the corporation’s performance
and perceptions of the corporation in the market place. There is a risk that the issuers of the securities may not be able to meet their
obligations on interest or principal payments at the time called for by an instrument.
An issuer may have the right to redeem or “call”
a bond before maturity, in which case the Fund may have to reinvest the proceeds at lower market rates. Similarly, the Fund may have
to reinvest interest income or payments received when bonds mature, sometimes at lower market rates. Most bonds bear interest income
at a “coupon” rate that is fixed for the life of the bond. The value of a fixed-rate bond usually rises when market interest
rates fall, and falls when market interest rates rise. Accordingly, a fixed-rate bond’s yield (income as a percent of the bond’s
current value) may differ from its coupon rate as its value rises or falls. When an investor purchases a fixed-rate bond at a price that
is greater than its face value, the investor is purchasing the bond at a premium. Conversely, when an investor purchases a fixed-rate
bond at a price that is less than its face value, the investor is purchasing the bond at a discount. Fixed rate bonds that are purchased
at a discount pay less current income than securities with comparable yields that are purchased at face value, with the result that prices
for such fixed-rate securities can be more volatile than prices for such securities that are purchased at face value. Other types of
bonds bear interest at an interest rate that is adjusted periodically. Interest rates on “floating rate” or “variable
rate” bonds may be higher or lower than current market rates for fixed-rate bonds of comparable quality with similar final maturities.
Because of their adjustable interest rates, the value of “floating rate” or “variable rate” bonds fluctuates
much less in response to market interest rate movements than the value of fixed-rate bonds, but their value may decline if their interest
rates do not rise as much, or as quickly, as interest rates in general. The Fund may treat some of these bonds as having a shorter maturity
for purposes of calculating the weighted average maturity of its investment portfolio. Generally, prices of higher quality issues tend
to fluctuate less with changes in market interest rates than prices of lower quality issues and prices of longer maturity issues tend
to fluctuate more than prices of shorter maturity issues. Bonds may be senior or subordinated obligations. Senior obligations generally
have the first claim on a corporation’s earnings and assets and, in the event of liquidation, are paid before subordinated obligations.
Bonds may be unsecured (backed only by the issuer’s general creditworthiness) or secured (backed by specified collateral).
The value of the debt securities generally will
fluctuate depending on a number of factors, including, among others, changes in the perceived creditworthiness of the issuers of those
securities, movements in interest rates, and the maturity of the debt security. Generally, a rise in interest rates will reduce the value
of fixed-income securities, and a decline in interest rates will increase the value of fixed-income securities. Longer term debt securities
generally pay higher interest rates than do shorter term debt securities but also may experience greater price volatility as interest
rates change.
Ratings
(The following applies to the IQ Ultra Short Duration ETF only.)
The Fund may invest in bonds that do not have
an investment-grade rating. Bonds rated lower than Baa3 by Moody’s or BBB- by Standard & Poor’s Ratings Services
or Fitch are considered below investment-grade quality and are obligations of issuers that are considered predominantly speculative with
respect to the issuer’s capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry
greater investment risk, including the possibility of issuer default and bankruptcy and increased market price volatility. Such securities
(“lower-rated securities”) are commonly referred to as “junk bonds” and are subject to a substantial degree of
credit risk. Lower-rated securities are often issued by smaller, less creditworthy companies or by highly leveraged (indebted) firms,
which are generally less able than more financially stable firms to make scheduled payments of interest and principal. The risks posed
by securities issued under such circumstances are substantial. Bonds rated below investment-grade tend to be less marketable than higher-quality
bonds because the market for them is less broad. The ratings of fixed-income securities by a credit rating agency are a generally accepted
barometer of credit risk. They are, however, subject to certain limitations from an investor's standpoint. The rating of an issuer is
heavily weighted by past developments and does not necessarily reflect future conditions. There is frequently a lag between the time
a rating is assigned and the time it is updated. In addition, there may be varying degrees of difference in credit risk of securities
in each rating category. In the event independent rating agencies assign different ratings to the same security, if the security is rated
by three rating agencies the IQ Ultra Short Duration ETF will apply the middle rating and if the security is rated by two agencies the
IQ Ultra Short Duration ETF will apply the lower rating.
Floating
and Variable Rate Securities (The following applies to the IQ Ultra Short Duration ETF only.)
Floating and variable rate securities provide
for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations must provide that interest rates
are adjusted periodically based upon an interest rate adjustment index as provided in the respective obligations. The adjustment intervals
may be regular and range from daily up to annually, or may be based on an event, such as a change in the prime rate.
Some variable or floating rate securities are
structured with liquidity features such as (1) put options or tender options that permit holders (sometimes subject to conditions)
to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain financial intermediaries or (2) auction
rate features, remarketing provisions, or other maturity-shortening devices designed to enable the issuer to refinance or redeem outstanding
debt securities (market dependent liquidity features). Variable or floating rate securities that include market-dependent liquidity features
may have greater liquidity risk than other securities, due to (for example) the failure of a market-dependent liquidity feature to operate
as intended (as a result of the issuer's declining creditworthiness, adverse market conditions, or other factors) or the inability or
unwillingness of a participating broker/dealer to make a Secondary Market for such securities. As a result, variable or floating rate
securities that include market-dependent liquidity features may lose value and the holders of such securities may be required to retain
them until the later of the repurchase date, the resale date, or maturity.
The interest rate on a floating rate debt instrument
(“floater”) is a variable rate that is tied to another interest rate, such as a money market index or Treasury bill rate.
The interest rate on a floater may reset periodically, typically every three to six months, or whenever a specified interest rate changes.
While, because of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rises in interest
rates; the Fund will participate in any declines in interest rates as well.
Futures
Contracts (The following applies to the IQ Ultra Short Duration ETF only.)
The Fund may enter into futures contracts. Futures
contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific instrument or index
at a specified future time and at a specified price. Assets committed to futures contracts will be segregated by the custodian to the
extent required by law.
During periods of credit market turmoil or when
the aggregate futures contract notional amount needed by the Fund is relatively small given the level of the Fund’s net assets,
the Fund may have only one or a few counterparties. In such circumstances, the Fund will be exposed to greater counterparty risk. Moreover,
the Fund may be unable to enter into any futures contract on terms that make economic sense (e.g., they may be too costly). To the extent
that the Fund is unable to enter into any futures contracts, it may not be able to meet its investment objective. If the Fund is unable
to enter into futures contracts, it may engage in other types of derivative transactions, although the added costs and higher asset segregation
requirements of these other derivatives may adversely affect the Fund’s ability to meet its investment objective.
To the extent the Advisor makes investments on
behalf of a Fund that are regulated by the Commodities Futures Trading Commission, it intends to do so in accordance with Rule 4.5
under the Commodity Exchange Act (“CEA”). The Advisor has filed a notice of eligibility for exclusion from the definition
of the term “commodity pool operator” in accordance with Rule 4.5 and is therefore not subject to registration as a
commodity pool operator under the CEA.
Lending
of Portfolio Securities (The following applies to the IQ Ultra Short Duration ETF only.)
The Fund may lend portfolio securities constituting
up to 33 1/3% of its total assets (as permitted by the 1940 Act). Under present regulatory policies, such loans may be made to institutions,
such as brokers or dealers, pursuant to agreements requiring the loans to be continuously secured by collateral in cash, securities issued
or guaranteed by the U.S. Government or one of its agencies or instrumentalities, irrevocable bank letters of credit (upon consent of
the Board) or any combination thereof, marked to market daily, at least equal to the market value of the securities loaned. Cash received
as collateral for securities lending transactions may be invested in liquid, short-term investments approved by the Advisor.
Investing the collateral subjects the Fund to
risks, and the Fund will be responsible for any loss that may result from its investment of the borrowed collateral. The Fund will have
the right to terminate a loan at any time and recall the loaned securities within the normal and customary settlement time for securities
transactions.
For the duration of a loan, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and will also receive compensation
from investment of the collateral. These events could also trigger adverse tax consequences for the Fund.
The Fund will generally not have the right to
vote securities during the existence of the loan, but the Advisor may call the loan to exercise the Fund’s voting or consent rights
on material matters affecting the Fund’s investment in such loaned securities. As with other extensions of credit there are risks
of delay in recovering, or even loss of rights in, the collateral and loaned securities should the borrower of the securities fail financially.
Loans will be made only to firms deemed creditworthy,
and when the consideration which can be earned from securities loans is deemed to justify the attendant risk. The creditworthiness of
a borrower will be considered in determining whether to lend portfolio securities and will be monitored during the period of the loan.
It is intended that the value of securities loaned by the Fund will not exceed one-third of the value of the Fund’s total assets
(including the loan collateral). Loan collateral (including any investment of the collateral) is not subject to the percentage limitations
stated elsewhere in this SAI or the Prospectus regarding investing in fixed-income securities and cash equivalents.
Money Market Instruments
A Fund may invest a portion of its assets in
high-quality money market instruments on an ongoing basis, when it would be more efficient or less expensive for a Fund to do so, or
as collateral for financial instruments, for liquidity purposes, or to earn interest. The instruments in which a Fund may invest include:
(1) short-term obligations issued by the U.S. government; (2) negotiable certificates of deposit (“CDs”), fixed
time deposits and bankers’ acceptances of U.S. and foreign banks and similar institutions; (3) commercial paper; (4) repurchase
agreements; and (5) money market mutual funds. CDs are short-term negotiable obligations of commercial banks. Time deposits are
non-negotiable deposits maintained in banking institutions for specified periods of time at stated interest rates. Banker’s acceptances
are time drafts drawn on commercial banks by borrowers, usually in connection with international transactions.
Tax
Risks (This applies to IQ Ultra Short Duration ETF only.)
As with any investment, you should consider how
your investment in Shares of the Fund will be taxed. The tax information in the Prospectus and this SAI is provided as general information.
You should consult your own tax professional about the tax consequences of an investment in Shares of the Fund.
Cyber Security and Disruptions in Operations
With the increasing use of the Internet and
technology in connection with the Funds’ operations, a Fund may be more susceptible to greater operational and information security
risks resulting from breaches in cyber security. Cyber incidents can result from unintentional events (such as an inadvertent release
of confidential information) or deliberate attacks by insiders or third-parties, including cyber criminals, competitors, nation-states
and “hacktivists,” and can be perpetrated by a variety of complex means, including the use of stolen access credentials,
malware or other computer viruses, ransomware, phishing, structured query language injection attacks, and distributed denial of service
attacks, among other means. Cyber incidents may result in actual or potential adverse consequences for critical information and communications
technology, or systems and networks that are vital to the Funds’ or their service providers’ operations, or otherwise impair
Fund or service provider operations. For example, a cyber incident may cause operational disruptions and failures impacting information
systems or information that a system processes, stores, or transmits, such as by theft, damage or destruction, or corruption or modification
of or denial of access to data maintained online or digitally, denial of service on websites rendering the websites unavailable to intended
users or not accessible for such users in a timely manner, and the unauthorized release or other exploitation of confidential information
(i.e., identity theft or other privacy breaches). In addition, a cyber security breach may cause disruptions and impact the Funds’
business operations, which could potentially result in financial losses, inability to determine the Funds’ NAV including over an
extended period, impediments to trading, the inability of shareholders to transact business, violation of applicable law, regulatory
penalties and/or fines, compliance and other costs. The Funds and their shareholders could be negatively impacted as a result. Further,
substantial costs may be incurred in order to prevent future cyber incidents.
In addition, because a Fund work closely with
third-party service providers (e.g., custodians), cyber security breaches at such third-party service providers or trading counterparties
may subject the Funds’ shareholders to the same risks associated with direct cyber security breaches. Further, cyber security breaches
at an issuer of securities in which the Funds invest may similarly negatively impact the Funds’ shareholders because of a decrease
in the value of these securities. These incidents could result in adverse consequences for such issuers, and may cause the Funds’
investment in such securities to lose value. For example, a cyber incident involving an issuer may include the theft, destruction or
misappropriation of financial assets, intellectual property or other sensitive information belonging to the issuer or their customers
(i.e., identity theft or other privacy breaches). As a result, the issuer may experience the types of adverse consequences summarized
above, among others (such as loss of revenue), despite having implemented preventative and other measures reasonably designed to protect
from and/or defend against the risks or adverse effects associated with cyber incidents.
While the Funds have established risk management
systems and business continuity policies designed to reduce the risks associated with cyber security breaches and other operational disruptions,
there can be no assurances that such measures will be successful particularly since the Funds do not control the cyber security and operational
systems of issuers or third-party service providers, and certain security breaches may not be detected. The Funds and their service providers,
as well as exchanges and market participants through or with which the Funds trade and other infrastructures on which the Funds or their
service providers rely, are also subject to the risks associated with technological and operational disruptions or failures arising from,
for example, processing errors and human errors, inadequate or failed internal or external processes, failures in systems and technology,
errors in algorithms used with respect to the Funds, changes in personnel, and errors caused by third-parties or trading counterparties.
In addition, there are inherent limitations to these plans and systems and certain risks may not yet be identified and new risks may
emerge in the future. The Funds and their respective shareholders could be negatively impacted as a result of any security breaches or
operational disruptions and may bear certain costs tied to such events.
Liquidation of a Fund
The Board may determine to close and liquidate
a Fund at any time, which may have adverse consequences for shareholders. In the event of the liquidation of a Fund, shareholders will
receive a liquidating distribution in cash or in-kind equal to their proportionate interest in the Fund. A liquidating distribution may
be a taxable event to shareholders, resulting in a gain or loss for tax purposes, depending upon a shareholder's basis in his or her
Shares of the Fund. A shareholder of a liquidating Fund will be entitled to any refund or reimbursement of expenses born, directly or
indirectly, by the shareholder (such as sales loads, account fees, or fund expenses), and a shareholder may receive an amount in liquidation
less than the shareholder’s original investment.
Market Disruption Risk and Recent Market Events
Geopolitical and other events, including war,
terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may
lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse
direct or indirect effects on a Fund and its investments. Market disruptions could cause a Fund to lose money, experience significant
redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration
and effects may not be the same for all types of assets. Recent market disruption events include the pandemic spread of the novel coronavirus
known as COVID-19, and the significant restrictions, market volatility, decreased economic and other activity and increased government
activity that it has caused. Specifically, COVID-19 has led to significant death and morbidity, and concerns about its further spread
have resulted in the closing of schools and non-essential businesses, cancellations, shelter-in-place orders, lower consumer spending
in certain sectors, social distancing, bans on large social gatherings and travel, quarantines, government economic stimulus measures,
reduced productivity, rapid increases in unemployment, increased demand for and strain on government and medical resources, border closings
and global trade and supply chain interruptions, among others. The full effects, duration and costs of the COVID-19 pandemic are impossible
to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve. The pandemic may affect certain countries,
industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social
tensions and may increase the probability of an economic recession or depression. A Fund and its investments may be adversely affected
by the effects of the COVID-19 pandemic, and a prolonged pandemic may result in a Fund and its service providers experiencing operational
difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
Additional Market Disruption Risk
In late February 2022, the Russian military
invaded the Ukraine, which amplified existing geopolitical tensions among Russia, Ukraine, Europe, and many other countries including
the U.S. and other members of the North Atlantic Treaty Organization (“NATO”). In response, various countries, including
the U.S., the United Kingdom, and members of the European Union issued broad-ranging economic sanctions against Russia, Russian companies
and financial institutions, Russian individuals and others. Additional sanctions may be imposed in the future. Such sanctions (and any
future sanctions) and other actions against Russia in light of Russia’s invasion of Ukraine will adversely impact the economies
of Russia and Ukraine. Certain sectors of each country’s economy may be particularly affected, including but not limited to, financials,
energy, metals and mining, engineering and defense and defense-related materials sectors.
Further, a number of large corporations and
U.S. and foreign governmental entities have announced plans to divest interests or otherwise curtail business dealings in Russia or with
certain Russian businesses. These events have resulted in (and may continue to result in) a loss of liquidity and value of Russian and
Ukrainian securities and, in some cases, a complete inability to trade or settle trades in certain Russian securities. Further actions
are likely to be taken by the international community, including governments and private corporations, that will adversely impact the
Russian economy in particular. Such actions may include boycotts, tariffs, and purchasing and financing restrictions on Russia’s
government, companies and certain individuals, or other unforeseeable actions.
The ramifications of the hostilities and sanctions
also may negatively impact other regional and global economic markets (including Europe and the U.S.), companies in other countries (particularly
those that have done business with Russia) and various sectors, industries and markets for securities and commodities globally, such
as oil and natural gas and precious metals. Accordingly, the actions discussed above and the potential for a wider conflict could increase
financial market volatility and have severe negative consequences for regional and global markets, industries and companies in which
a Fund invests. Moreover, the extent and duration of the Ukrainian invasion or future escalation of such hostilities, the extent and
impact of existing and future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted.
These and any related events could have a significant impact on a Fund’s performance and the value of an investment in a Fund.
MANAGEMENT
Board
Responsibilities. The business of the Trust is managed under the direction of the Board. The Board has considered and approved
contracts, as described herein, under which certain companies provide essential management and administrative services to the Trust.
The day-to-day business of the Trust, including the day-to-day management of risk, is performed by the service providers of the Trust,
such as the Advisor, Subadvisors, Distributor and Administrator. The Board is responsible for overseeing the Trust’s service providers
and, thus, has oversight responsibility with respect to the risk management performed by those service providers. Risk management seeks
to identify and eliminate or mitigate the potential effects of risks such as events or circumstances that could have material adverse
effects on the business, operations, shareholder services, investment performance or reputation of the Trust or the Funds. The Board’s
role in risk management oversight begins before the inception of an investment portfolio, at which time the Advisor and each Subadvisor
presents the Board with information concerning the investment objectives, strategies and risks of their applicable investment portfolio.
Additionally, the Advisor and each Subadvisor provides the Board with an overview of, among other things, the respective firm’s
investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the Board oversees the risk management of the investment
portfolio’s operations, in part, by requesting periodic reports from and otherwise communicating with various personnel of the
service providers, including the Trust’s Chief Compliance Officer and the independent registered public accounting firm of the
Trust. The Board and, with respect to identified risks that relate to its scope of expertise, the Audit Committee of the Board, oversee
efforts by management and service providers to manage risks to which the Funds may be exposed.
Under the overall supervision of the Board and
the Audit Committee (discussed in more detail below), the service providers to the Trust employ a variety of processes, procedures and
controls to identify risks relevant to the operations of the Trust and the Funds to lessen the probability of their occurrence and/or
to mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete
aspects of the Trust’s business and, consequently, for managing the risks associated with that activity.
The Board is responsible for overseeing the
nature, extent and quality of the services provided to the Funds by the Advisor and each Subadvisor and receives information about those
services at its regular meetings. In addition, on at least an annual basis, in connection with its consideration of whether to renew
the Advisory Agreement with the Advisor and each Subadvisory Agreement with each Subadvisor, the Board receives detailed information
from the Advisor and each Subadvisor. Among other things, the Board regularly considers each of the Advisor’s and Subadvisor’s
adherence to each Fund’s investment restrictions and compliance with various policies and procedures of the Trust and with applicable
securities regulations. The Board also reviews information about each Fund’s performance and investments.
The Trust’s Chief Compliance Officer
meets regularly with the Board to review and discuss compliance and other issues. At least annually, the Trust’s Chief Compliance
Officer provides the Board with a report reviewing the adequacy and effectiveness of the Trust’s policies and procedures and those
of its service providers, including the Advisor and each Subadvisor. The report addresses the operation of the policies and procedures
of the Trust and each service provider since the date of the last report; material changes to the policies and procedures since the date
of the last report; any recommendations for material changes to the policies and procedures; and material compliance matters since the
date of the last report.
The Board receives reports from the Trust’s
service providers regarding operational risks, portfolio valuation and other matters. Annually, the independent registered public accounting
firm reviews with the Audit Committee its audit of the financial statements of the Funds, focusing on major areas of risk encountered
by the Trust and noting any significant deficiencies or material weaknesses in the Trust’s internal controls.
The Board recognizes that not all risks that
may affect the Funds can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it
may be necessary to bear certain risks (such as investment-related risks) to achieve each Fund’s goals, and that the processes,
procedures and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite the periodic reports
the Board receives and the Board’s discussions with the service providers to the Trust, it may not be made aware of all of the
relevant information of a particular risk. Most of the Trust’s investment management and business affairs are carried out by or
through the Advisor and other service providers each of which has an independent interest in risk management but whose policies and the
methods by which one or more risk management functions are carried out may differ from the Trust’s and each other’s in the
setting of priorities, the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors,
the Board’s risk management oversight is subject to substantial limitations.
Additionally, as required by Rule 22e-4
under the 1940 Act, the Trust has implemented a written liquidity risk management program and related procedures (“Liquidity Program”)
that is reasonably designed to assess and manage the Fund’s “liquidity risk” (defined by the SEC as the risk that the
Fund could not meet requests to redeem shares issued by the Fund without significant dilution of remaining investors’ interests
in the Fund). The Liquidity Program is reasonably designed to assess and manage the Fund’s liquidity risk. The Board, including
a majority of the Independent Trustees, approved the designation of IndexIQ Advisors as the Liquidity Program’s Administrator.
The Board will review, no less frequently than annually, a written report prepared by the Liquidity Program's Administrator that addresses
the operation of the Liquidity Program and assesses its adequacy and effectiveness of implementation.
The Board also benefits from other risk management
resources and functions within New York Life, such as its risk management personnel and internal auditor department. The Board recognizes
that it is not possible to identify all of the risks that may affect the Fund or to develop processes and controls to mitigate or eliminate
all risks and their possible effects, and that it may be necessary to bear certain risks (such as investment risks) to achieve the Fund’s
investment objectives. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight.
Members
of the Board and Officers of the Trust. Set forth below are the names, years of birth, position with the Trust, term of office,
portfolios supervised and the principal occupations and other directorships for a minimum of the last five years of each of the persons
currently serving as members of the Board and as Executive Officers of the Trust. Also included below is the term of office for each
of the Executive Officers of the Trust. The members of the Board serve as Trustees for the life of the Trust or until retirement, removal,
or their office is terminated pursuant to the Trust’s Declaration of Trust.
Kirk C. Lehneis, an Interested Trustee
(as defined below) and President of the Trust, is Chair of the Board. Mr. Lehneis (the “Interested Trustee”) is an
interested person of the Trust as that term is defined under Section 2(a)(19) of the 1940 Act because of his affiliation with
the Advisor. Four of the Trustees, Lofton Holder, Michael Pignataro, Paul Schaeffer and Michelle A. Shell, and their immediate
family members have no affiliation or business connection with the Advisor or the Funds’ principal underwriter or any of their
affiliated persons and do not own any stock or other securities issued by the Advisor or the Funds’ principal underwriter.
These Trustees are not “interested persons” of the Trust and are referred to herein as “Independent Trustees.”
There is an Audit Committee and Nominating
Committee of the Board, each of which is chaired by an Independent Trustee and comprised solely of Independent Trustees. The Committee
chair for each is responsible for running the Committee meeting, formulating agendas for those meetings, and coordinating with management
to serve as a liaison between the Independent Trustees and management on matters within the scope of the responsibilities of such Committee
as set forth in its Board-approved charter. There is a Valuation Committee, which is comprised of the Independent Trustees and representatives
of the Advisor tooversee the valuation of portfolio securities held by a Fund in accordance with the Board-approved Valuation Procedures.
The Board has determined that this leadership structure is appropriate given the specific characteristics and circumstances of the Funds.
The Board made this determination in consideration of, among other things, the fact that the Independent Trustees constitute a majority
of the Board, the assets under management of the Funds, the number of portfolios overseen by the Board and the total number of trustees
on the Board.
Independent
Trustees |
Name
and Year of
Birth(1) |
Position(s) Held
with Trust |
Term
of Office
and Length of
Time Served(2) |
Principal
Occupation(s)
During Past 5
Years |
Number
of
Portfolios in
Fund Complex
Overseen by
Trustee(3) |
Other
Directorships Held by
Trustee During Past 5 Years |
Lofton
Holder, 1964 |
Trustee |
Since
June 2022 |
Retired;
formerly, Managing Partner and Co-Founder, Pine Street Alternative Asset Management (2011 – 2019). |
31 |
Board
Member, Golub Capital BDC, Inc., Golub Capital BDC 3, Inc., and Golub Capital Direct Lending Corporation (each, a business
development company) (2021 – present); Board Member, Manning & Napier (investment manager) (2021 – present). |
Michael
A. Pignataro, 1959 |
Trustee |
Since
April 2015 |
Retired;
formerly, Director, Credit Suisse Asset Management (2001 to 2012); and Chief Financial Officer, Credit Suisse Funds (1996 to 2013). |
31 |
The
New Ireland Fund, Inc. (closed-end fund) (2015 to present). |
Paul
D. Schaeffer, 1951 |
Trustee |
Since
April 2015 |
President,
ASP (dba Aspiring Solution Partners) (financial services consulting) (2013 to present); Consultant and Executive Advisor, Aquiline
Capital Partners LLC (private equity investment) (2014 to present). |
31 |
Management
Board Member, RIA in a Box LLC (financial services consulting) (2018 to 2021); Context Capital Funds (mutual fund trust) (2 Portfolios)
(2014 to 2018); Management Board Member, Altegris Investments, LLC (registered broker-dealer) (2016 to 2018); Management Board Member,
AssetMark Inc. (financial services consulting) (2016 to 2017); PopTech! (conference operator) (2012 to 2016); Board Member, Pathways
Core Training (nonprofit) (2019 to present); Board Member, Center for Collaborative Investigative Journalism (non-profit) (2020-present). |
Michelle
A. Shell, 1975 |
Trustee |
Since
June 2022 |
Visiting
Scholar, Harvard Business School (2020 to present); Visiting Assistant Professor of Operations Management, Boston University Questrom
School of Business (2020 to present); Business researcher and consultant, self-employed (2013 – 2020). |
31 |
U.S.
Charitable Gift Trust (public charity offering donor-advised funds and trust products) (2017 –present). |
Interested
Trustee |
|
|
|
|
|
Kirk
C. Lehneis, 1974(4) |
President
Chairman of the Board |
Since
January 2018
Since December 2021 |
Chief
Operating Officer and Senior Managing Director, New York Life Investment Management LLC (since 2016); Chief Executive Officer, IndexIQ
Advisors LLC (since 2018); Chairman of the Board, NYLIM Service Company LLC (since September 2017); President, MainStay DefinedTerm
Municipal Opportunities Fund, MainStay Funds, MainStay Funds Trust, and MainStay VP Funds Trust (since September 2017); President,
MainStay CBRE Global Infrastructure Megatrends Fund (since 2021). |
31 |
None. |
Officers |
|
|
|
Name
and Year of Birth(1) |
Position(s) Held
with Trust |
Term
of Office and Length
of Time Served(2) |
Principal
Occupation(s) During Past 5
Years |
Jomil
M. Guerrero, 1976 |
Vice
President |
Since
March 2022 |
Chief
Operating Officer and Managing Director, IndexIQ Advisors LLC (2021 to present); Managing Director, Global Marketing operations,
New York Life Investment Management LLC (2016 to 2021); and Director of Finance (2011 to 2016) New York Life Investment Management
LLC. |
Adefolahan
Oyefeso, 1974 |
Treasurer,
Principal Financial Officer and Principal Accounting Officer |
Since
April 2018 |
Vice
President of Operations & Finance, IndexIQ Advisors (2015 to present); Director of the Fund Administration Client
Service Department at The Bank of New York Mellon (2007 to 2015). |
Matthew
V. Curtin, 1982 |
Secretary
and Chief Legal Officer |
Since
June 2015 |
Secretary
and Chief Legal Officer, IndexIQ Advisors LLC (since 2015), Chief Compliance Officer, IndexIQ Trust, IndexIQ ETF Trust
and IndexIQ Active ETF Trust (June 2015 to January 2017); Associate General Counsel, New York Life Insurance Company (since
2015); Associate, Dechert LLP (2007 to 2015). |
Kevin
M. Gleason,
1966 |
Chief
Compliance Officer |
Since
June 2022 |
Chief
Compliance Officer, IndexIQ ETF Trust and IndexIQ Active ETF Trust, The MainStay Funds, MainStay Funds Trust, MainStay MacKay
DefinedTerm Municipal Opportunities Fund, MainStay CBRE Global Infrastructure Megatrends Fund and MainStay VP Funds Trust (since
2022); Senior Vice President, Voya Investment Management, LLC and Chief Compliance Officer, Voya Family of Funds (2012 to 2022). |
| (1) | The
address of each Trustee or officer is c/o IndexIQ Advisors, 51 Madison Avenue, New York,
New York 10010. |
| (2) | Trustees
and Officers serve until their successors are duly elected and qualified. |
| (3) | The
Fund is part of a “fund complex” as defined in the 1940 Act. The fund complex
includes all operational open-end funds (including all of their portfolios) advised by the
Advisor and any funds that have an investment advisor that is an affiliated person of the
Advisor. |
| (4) | Mr. Lehneis
is an “interested person” of the Trust (as that term is defined in the 1940 Act)
because of his affiliations with the Advisor. |
The Board met six times during the fiscal year ended April 30,
2022.
Description of Standing Board Committees
Audit Committee. The principal responsibilities
of the Audit Committee are the appointment, compensation and oversight of the Trust’s independent auditors, including the resolution
of disagreements regarding financial reporting between Trust management and such independent auditors. The Audit Committee’s responsibilities
include, without limitation, to (i) oversee the accounting and financial reporting processes of the Trust and its internal control
over financial reporting and, as the Committee deems appropriate, to inquire into the internal control over financial reporting of certain
third-party service providers; (ii) oversee the quality and integrity of each funds’ financial statements and the independent
audits thereof; (iii) oversee, or, as appropriate, assist Board oversight of, the Trust’s compliance with legal and regulatory
requirements that relate to the Trust’s accounting and financial reporting, internal control over financial reporting and independent
audits; (iv) approve prior to appointment the engagement of the Trust’s independent auditors and, in connection therewith,
to review and evaluate the qualifications, independence and performance of the Trust’s independent auditors; and (v) act as
a liaison between the Trust’s independent auditors and the full Board. The Board has adopted a written charter for the Audit Committee.
All of the Independent Trustees serve on the Trust’s Audit Committee. During the fiscal year ended April 30, 2022, the Audit
Committee met three times.
Nominating Committee. The Nominating Committee
has been established to: (i) assist the Board in matters involving mutual fund governance and industry practices; (ii) select
and nominate candidates for appointment or election to serve as Trustees who are not “interested persons” of the Trust or
its Advisor or distributor (as defined by the 1940 Act); and (iii) advise the Board of Trustees on ways to improve its effectiveness.
All of the Independent Trustees serve on the Nominating Committee. As stated above, each Trustee holds office for an indefinite term
until the occurrence of certain events. In filling Board vacancies, the Nominating Committee will consider nominees recommended by shareholders.
Nominee recommendations should be submitted to the Trust at its mailing address stated in the Fund’s Prospectus and should be directed
to the attention of the IndexIQ Active ETF Trust Nominating Committee. During the fiscal year ended April 30, 2022, the Nominating
Committee met one time.
Valuation Committee. The Valuation Committee
oversees the implementation of the Trust’s Valuation Procedures. The Valuation Committee has designated the Advisor to make fair
valuation determinations relating to any and all portfolio investments for which market quotations are not readily available. All of the Independent Trustees serve on the Trust’s Valuation Committee. During the fiscal
year ended April 30, 2022, the Valuation Committee met four times.
Individual Trustee Qualifications
The Trust has concluded that each of the Trustees
should serve on the Board because of their ability to review and understand information about the Trust and the Funds provided to them
by management, to identify and request other information they may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the management and administration of the Funds, and to exercise their
business judgment in a manner that serves the best interests of each funds’ shareholders. The Trust has concluded that each of
the Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below. The Trust
has concluded that Ms. Aggarwal should serve as trustee of the Trust and as an audit committee financial expert because of the experience
she has gained as a professor of finance, deputy dean at Georgetown University’s McDonough School of Business and Director of the
Georgetown Center for Financial Markets and Policy, her service as trustee for another mutual fund family, the experience she has gained
serving as trustee of the Funds since 2008 and her general expertise with respect to financial matters and accounting principles.
The Trust has concluded that Mr. Holder
should serve as trustee of the Trust because of his experience in senior executive roles in the financial services industry, and in particular,
as co-founder and managing partner of Pine Street Alternative Asset Management LLC.
The Trust has concluded that Mr. Pignataro
should serve as trustee of the Trust and as an audit committee financial expert because of the experience he has gained as a businessman
and, in particular, his prior service in the financial services industry as a Director of Credit Suisse Asset Management and Chief Financial
Officer of the Credit Suisse Funds.
The Trust has concluded that Mr. Schaeffer
should serve as trustee of the Trust because of his experience in the financial services industry, including his experience as a director
of and service provider to investment companies.
The Trust has concluded that Ms. Shell
should serve as trustee of the Trust because of the experience she has gained as an academic and researcher in the fields of business
and operations and technology management and her extensive experience in the financial services industry as a consultant and executive.
The Trust has concluded that Mr. Lehneis
should serve as trustee of the Trust because of the experience he has gained as President of the MainStay Funds, Chief Operating Officer
of New York Life Investment Management LLC, and President of IndexIQ Advisors, his knowledge of and experience in the financial services
industry, and the experience he has gained serving as Chairman of the Board of New York Life Investment Management LLC since 2017.
Trustee Ownership of Shares
Listed below for each Trustee is a dollar
range of securities beneficially owned in the Trust together with the aggregate dollar range of equity securities in all registered investment
companies overseen by each Trustee that are in the same family of investment companies as the Trust, as of December 31, 2021. As
of the date of this SAI, the IQ MacKay Municipal Short Duration ETF has not yet commenced operations.
Name of Trustee | |
Dollar
Range of Equity
Securities in the Funds | |
Aggregate
Dollar Range of Equity Securities in All Registered
Investment Companies Overseen by Trustees in Family of Investment
Companies(1) |
Lofton Holder(2) | |
None | |
None |
Michael A. Pignataro | |
None | |
None |
Paul D. Schaeffer | |
None | |
$50,001-$100,000 |
Michelle A. Shell(2) | |
None | |
None |
Kirk
C. Lehneis(3) | |
None | |
Over $100,000 |
| (1) | The
fund complex includes all operational open-end funds (including all of their portfolios)
advised by the Advisor and any funds that have an investment advisor that is an affiliated
person of the Advisor. |
| (2) | Mr. Holder
and Ms. Shell became Trustees on June 22, 2022; therefore, they have not received any
compensation from the Trust and/or Fund Complex for the fiscal year ended April 30,
2022. |
| (3) | Mr. Lehneis
is an “interested person” of the Trust (as that term is defined in the 1940 Act)
because of his affiliations with the Advisor. |
Board Compensation
Effective January 1, 2022, each Independent
Trustee receives from the Fund Complex, either directly or indirectly, an annual retainer of $60,000. From October 1, 2020 to January 1,
2022, each Independent Trustee received from the Fund Complex, either directly or indirectly, an annual retainer of $52,000. In addition,
as the Chair of both the Audit Committee and Valuation Committee, Mr. Pignataro receives a total annual stipend of $20,000, which
represents $10,000 for each committee; and as Nominating Committee chair, Mr. Schaeffer receives an annual stipend of $10,000. In
addition, the Independent Trustees are reimbursed for all reasonable travel expenses relating to their attendance at the Board Meetings.
The following table sets forth certain information with respect to the compensation of each Trustee for the fiscal year ended April 30,
2022:
Name and Position | |
Pension or Retirement
Benefits Accrued As Part of Trust Expenses | |
Estimated Annual
Benefits Upon
Retirement | |
Total
Compensation
From Trust and Fund
Complex Paid to
Trustees(1) |
Lofton
Holder, Trustee(2) | |
N/A | |
N/A | |
None |
Michael A. Pignataro, Trustee | |
N/A | |
N/A | |
$68,000 |
Paul D. Schaeffer, Trustee | |
N/A | |
N/A | |
$64,667 |
Michelle
A. Shell, Trustee(2) | |
N/A | |
N/A | |
None |
Kirk
C. Lehneis, Trustee, President and Principal(3) | |
None | |
None | |
None |
(1) | The fund complex includes all operational open-end funds (including
all of their portfolios) advised by the Advisor. As of the date of this SAI, the fund complex
consists of the Trust’s funds and the funds of IndexIQ ETF Trust. |
(2) | Mr. Holder and Ms. Shell became Trustees on June 22, 2022; therefore, they have
not received any compensation from the Trust and/or Fund Complex for the fiscal year ended April 30, 2022. |
(3) | Mr. Lehneis is an “interested person” of the Trust (as that term is defined
in the 1940 Act) because of his affiliations with the Advisor. |
Code of Ethics
The Trust, its Advisor, Subadvisors and principal underwriter have
each adopted a code of ethics under Rule 17j-1 of the 1940 Act that permit personnel subject to their particular codes of ethics
to invest in securities, including securities that may be purchased or held by a Fund.
PROXY VOTING POLICIES
The Board believes that the voting of proxies
on securities held by the Funds is an important element of the overall investment process. As such, the Board has delegated responsibility
for decisions regarding proxy voting for securities held by each series of the Trust to the Advisor. Where a Fund has retained the services
of a Subadvisor to provide day-to-day portfolio management for a Fund, the Advisor may delegate proxy voting authority to the Subadvisor,
provided that, as specified in the Advisor’s Proxy Voting Policies and Procedures, the Subadvisor has demonstrated that its proxy
voting policies and procedures are consistent with the Advisor’s Proxy Voting Policies and Procedures or are otherwise implemented
in the best interests of the Advisor’s clients and appear to comply with governing regulations. A Fund may revoke all or part of
this delegation (to the Advisor and/or a Subadvisor as applicable) at any time by a vote of the Board. The Advisor has delegated proxy-voting
authority to each Fund’s Subadvisor. A summary of each Subadvisor’s proxy voting policies and procedures is included in Appendix
A to this Statement of Additional Information. The Board will periodically review each series’ proxy voting record.
The Trust is required to disclose annually the
Funds’ complete proxy voting record on Form N-PX covering the period July 1 through June 30 and file it with the
SEC no later than August 31 of each year. The Fund’s Form N-PX will be available at no charge upon request by calling
1-888-474-7725. It will also be available on the SEC’s website at www.sec.gov.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF
SECURITIES
Although the Trust does not have information
concerning the beneficial ownership of shares held in the names of Depository Trust Company (“DTC”) participants (“DTC
Participants”), as of July 29, 2022, the name and percentage ownership of each DTC Participant that owned of record 5% or
more of the outstanding shares of a Fund is set forth in the table below. As of the date of this SAI, the IQ MacKay Municipal Short Duration
ETF has not yet commenced operations and information is not presented for the Fund.
Fund Name |
DTC
Participants |
Percentage
of Ownership
(rounded to the nearest
whole percentage) |
IQ
MacKay Municipal Insured ETF |
Morgan
Stanley Smith Barney LLC
1300 Thames St. 6th Floor
Baltimore, MD 21231
|
20.98% |
|
UBS
Financial Services
1000 Harbour Blvd.
Weehawken, NJ 07086
|
12.41% |
|
Charles
Schwab & Co., Inc.
2423 E Lincoln Drive
Phoenix, AZ 85016-1215
|
12.06% |
|
Raymond
James & Associates, Inc.
880 Carilion Parkway
Saint Petersburg, FL 33716
|
9.37% |
|
Merrill
Lynch, Pierce, Fenner & Smith Inc.
4804 Deerlake Dr. E.
Jacksonville, FL 32246
|
8.48% |
|
TD
Ameritrade
4700 Alliance Gateway Freeway
Fort Worth, TX 76177
|
6.78% |
|
National
Financial Services LLC
499 Washington Blvd.
Jersey City, NJ 07310
|
6.67% |
IQ
MacKay Municipal Intermediate ETF |
National
Financial Services LLC
499 Washington Blvd.
Jersey City, NJ 07310
|
19.16% |
|
Merrill
Lynch, Pierce, Fenner & Smith Inc.
4804 Deerlake Dr. E.
Jacksonville, FL 32246
|
14.87% |
|
Morgan
Stanley Smith Barney LLC
1300 Thames St. 6th Floor
Baltimore, MD 21231
|
13.89% |
|
Charles
Schwab & Co., Inc.
2423 E Lincoln Drive
Phoenix, AZ 85016-1215
|
11.56% |
|
UBS
Financial Services
1000 Harbour Blvd.
Weehawken, NJ 07086
|
8.46% |
|
LPL
Financial Corporation
9785 Towne Centre Drive
San Diego, CA 92121-1968
|
8.36% |
|
TD
Ameritrade
4700 Alliance Gateway Freeway
Fort Worth, TX 76177
|
7.88% |
|
Raymond
James & Associates, Inc.
880 Carilion Parkway
Saint Petersburg, FL 33716
|
5.40% |
IQ
MacKay California Municipal Intermediate ETF |
The
Bank of New York Mellon
535 William Penn Place
Suite 153-0400
Pittsburgh, PA 15259
|
96.59% |
IQ
Ultra Short Duration ETF |
The
Bank of New York Mellon
535 William Penn Place
Suite 153-0400
Pittsburgh, PA 15259
|
50.96% |
|
JP
Morgan Chase Bank, Nat’l Association
14201 Dallas Parkway
Dallas, TX 75254
|
21.70% |
The Advisor is an affiliate and subsidiary
of New York Life Investment Management LLC (“NYLIM”) and of New York Life Insurance & Annuity Corporation (“NYLife”).
As of July 31, 2022, NYLIM and NYLife owned Shares of the Funds as set forth below. NYLIM and NYLife own Shares of the Funds on
their own behalf or on behalf of funds or accounts managed by NYLIM or NYLife.
New York Life Investment Management LLC |
|
Fund Name | |
Percentage of Ownership (rounded to the nearest whole percentage) | |
IQ MacKay California Municipal Intermediate ETF | |
| 3 | % |
New York Life Insurance & Annuity Corporation |
|
Fund Name | |
Percentage of Ownership (rounded to the nearest whole percentage) | |
IQ MacKay California Municipal Intermediate ETF | |
| 3 | % |
MANAGEMENT SERVICES
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled “Management.”
Investment Advisor
IndexIQ Advisors LLC, the Advisor, serves
as investment advisor to the Funds and has overall responsibility for the general management and administration of the Trust, pursuant
to the Investment Advisory Agreement between the Trust and the Advisor (the “Advisory Agreement”). Under the Advisory Agreement,
the Advisor, subject to the supervision of the Board provides an investment program for each Fund and is responsible for the retention
of subadvisors to manage the investment of each Fund’s assets in conformity with the stated investment objective and principal
investment strategies, and subject to the investment policies, of each Fund if the Advisor does not provide these services directly.
The Advisor is responsible for the supervision of the Subadvisor and its management of the investment portfolio of each of the Funds.
The Advisor also arranges for the provision of distribution, subadvisory, transfer agency, custody, administration and all other services
necessary for the Funds to operate.
Section 15(a) of the 1940 Act requires
that all contracts pursuant to which persons serve as investment advisors to investment companies be approved by shareholders. As interpreted,
this requirement also applies to the appointment of subadvisors to the Fund. The Advisor and the Funds have obtained an exemptive order
(the “Order”) from the SEC permitting the Advisor, on behalf of the Funds and subject to the approval of the Board, including
a majority of the Independent Trustees, to hire or terminate unaffiliated subadvisors and to modify any existing or future subadvisory
agreement with unaffiliated subadvisors without shareholder approval. This authority is subject to certain conditions. The Funds will
notify shareholders and provide them with certain information required by the Order within 90 days of hiring a new subadvisor. The Funds’
sole shareholder has approved the use of the Order.
The Advisory Agreement will remain in effect
with respect to the Funds from year to year provided such continuance is specifically approved at least annually by (i) the vote
of a majority of the Funds’ outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of
a majority of the Independent Trustees of the Trust, cast in person at a meeting called for the purpose of voting on such approval.
In addition to providing advisory services, under
the Advisory Agreement, the Advisor also: (i) supervises all non-advisory operations of the Funds; (ii) provides personnel
to perform such executive, administrative and clerical services as are reasonably necessary to provide effective administration of the
Funds; (iii) arranges for (a) the preparation of all required tax returns, (b) the preparation and submission of reports
to existing shareholders, (c) the periodic updating of prospectuses and statements of additional information and (d) the preparation
of reports to be filed with the SEC and other regulatory authorities; (iv) maintains the records of the Funds; and (v) provides
office space and all necessary office equipment and services.
The Advisory Agreement will terminate automatically
if assigned (as defined in the 1940 Act). The Advisory Agreement is also terminable with respect to the Funds at any time without penalty
by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of each Fund on 60 days’ written
notice to the Advisor or by the Advisor on 60 days’ written notice to the Trust.
Pursuant to the Advisory Agreement, the Advisor
is entitled to receive a fee, payable monthly, at the annual rate for the Fund based on a percentage of its average daily net assets,
as follows:
Fund Name | |
Management
Fee | |
IQ MacKay Municipal Insured
ETF | |
| 0.40 | % |
IQ MacKay Municipal Short Duration
ETF | |
| 0.30 | % |
IQ MacKay Municipal Intermediate ETF | |
| 0.40 | % |
IQ MacKay California Municipal Intermediate
ETF | |
| 0.45 | % |
IQ Ultra Short Duration ETF | |
| 0.24 | % |
For the last three fiscal years ended April 30,
the advisory fees paid to the Advisor were:
Fund Name |
|
Commencement
of Operations |
|
Fees
Paid to the Advisor for the Fiscal Year Ended 2020 |
|
|
Fees
Paid to the Advisor for the Fiscal Year Ended 2021 |
|
|
Fees
Paid to the Advisor for the Fiscal Year/Period Ended 2022 |
|
IQ MacKay Municipal Insured
ETF |
|
10/18/17 |
|
$ |
276,133 |
|
|
$ |
923,022 |
|
|
$ |
1,859,250 |
|
IQ MacKay Municipal Intermediate ETF |
|
10/18/17 |
|
$ |
187,414 |
|
|
$ |
286,264 |
|
|
$ |
887,980 |
|
IQ MacKay California Municipal Intermediate
ETF |
|
12/21/21 |
|
|
N/A |
|
|
|
N/A |
|
|
$ |
76,689 |
|
IQ Ultra Short Duration ETF |
|
7/31/19 |
|
$ |
99,245 |
|
|
$ |
516,913 |
|
|
$ |
465,461 |
|
As of the date of this SAI, the IQ MacKay Municipal
Short Duration ETF has not yet commenced operations and, therefore, has not yet incurred any advisory fees under the Advisory Agreement.
Expense Limitation Agreement
The Advisor has entered into an Expense Limitation
Agreement (“Expense Limitation Agreement”) with the Funds under which it has agreed to waive or reduce its fees and to assume
other expenses of the Funds in an amount that limits “Total Annual Fund Operating Expenses” (excluding interest, taxes, brokerage
commissions, dividend payments on short sales, acquired fund fees and expenses, other expenditures which are capitalized in accordance
with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of a Fund’s business,
and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to not more than the percentage
of the average daily net assets of the Funds as set forth below. The Expense Limitation Agreement will remain in effect unless terminated
by the Board of Trustees of the Funds.
Fund Name | |
Total
Annual Fund Operating Expense Fund Expenses After Waiver/Reimbursement | |
IQ MacKay Municipal Insured
ETF | |
| 0.30 | % |
IQ MacKay Municipal Short Duration
ETF | |
| 0.30 | % |
IQ MacKay Municipal Intermediate ETF | |
| 0.30 | % |
IQ MacKay California Municipal Intermediate
ETF | |
| 0.35 | % |
IQ Ultra Short Duration ETF | |
| 0.24 | % |
As described above, the Advisor has agreed, through
August 31, 2022, to waive fees and reimburse expenses of the Funds. For the last three fiscal years ended April 30, the Advisor
waived or reimbursed the following amounts:
| |
Commencement of | |
Fees
Waived and/or Expenses Reimbursed Fiscal Years/Period Ended | |
Fund Name | |
Operations | |
2020 | | |
2021 | | |
2022 | |
IQ MacKay Municipal Insured
ETF | |
10/18/17 | |
$ | 185,416 | | |
$ | 481,070 | | |
$ | 897,579 | |
IQ MacKay Municipal Intermediate ETF | |
10/18/17 | |
$ | 147,733 | | |
$ | 194,192 | | |
$ | 463,374 | |
IQ MacKay California Municipal Intermediate
ETF | |
12/21/21 | |
| N/A | | |
| N/A | | |
$ | 64,141 | |
IQ Ultra Short Duration ETF | |
7/31/19 | |
$ | 101,421 | | |
$ | 198,553 | | |
$ | 205,683 | |
As of the date of this SAI, the IQ MacKay Municipal Short Duration
ETF has not yet commenced operations.
Subadvisors
MacKay Shields LLC
MacKay Shields LLC, located at 1345
Avenue of the Americas, New York, New York 10105, serves as investment subadvisor to the IQ MacKay Municipal Insured ETF, IQ
MacKay Municipal Intermediate ETF, IQ MacKay Municipal Short Duration ETF and IQ MacKay California Municipal Intermediate ETF
(the “Municipal Funds”) pursuant to the Investment Subadvisory Agreement between the Advisor and MacKay Shields (the
“Subadvisory Agreement”). As of June 30, 2022, MacKay Shields managed approximately $132 billion in assets.
Pursuant to the Subadvisory Agreement, the Subadvisor
is entitled to receive a fee from the Advisor, payable monthly, at the annual rate based on a percentage of each Municipal Fund’s
average daily net assets as follows:
Fund Name | |
Subadvisory
Fee | |
IQ MacKay Municipal Insured
ETF | |
| 0.20 | % |
IQ MacKay Municipal Intermediate ETF | |
| 0.20 | % |
IQ MacKay Municipal Short Duration
ETF | |
| 0.15 | % |
IQ MacKay California Municipal Intermediate
ETF | |
| 0.225 | % |
NYL Investors LLC
NYL Investors LLC (“NYL Investors”),
located at 51 Madison Avenue, New York, New York 10010, serves as investment subadvisor to the IQ Ultra Short Duration ETF pursuant to
the Investment Subadvisory Agreement between the Advisor and the Subadvisor (the “Subadvisory Agreement”). NYL Investors
is responsible for placing purchase and sale orders and shall make investment decisions for the Fund, subject to the supervision by the
Advisor and the Board. For its services, NYL Investors is compensated by the Advisor. As of June 30, 2022, NYL Investors managed
approximately $291.30 billion in assets.
Pursuant to the NYL Investors Subadvisory
Agreement, NYL Investors is entitled to receive a fee from the Advisor, payable monthly, at the annual rate of 0.108% based on a percentage
of the Fund’s average daily net assets.
The Subadvisors are responsible for placing purchase
and sale orders and shall make investment decisions for the Funds, subject to the supervision by the Advisor and the Board of Trustees
of the Trust. For its services, the Subadvisors are compensated by the Advisor. Each Subadvisory Agreement will continue in effect with
respect to the Funds from year to year provided such continuance is specifically approved at least annually by (i) the vote of a
majority of a Fund’s outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority
of the Independent Trustees of the Trust, cast in person at a meeting called for the purpose of voting on such approval. The Subadvisory
Agreements provide that the Subadvisors shall not be liable to a Fund for any error of judgment by the Subadvisors or for any loss sustained
by a Fund except in the case of the Subadvisor’s willful misfeasance, bad faith, gross negligence or reckless disregard of duty.
To the extent that the Advisor has agreed to waive its Advisory Fee or reimburse expenses, each Subadvisor has voluntarily agreed to
waive or reimburse its fee proportionately.
A Subadvisory Agreement will terminate automatically
if assigned (as defined in the 1940 Act). Each Subadvisory Agreement is also terminable with respect to each Fund at any time without
penalty by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of a Fund on 60 days’
written notice to a Subadvisor or by a Subadvisor on 60 days’ written notice to the Advisor.
For the last three fiscal years ended April 30,
the amount of the Subadvisory fees paid by the Advisor from the management fee, and the amount of the Subadvisory fees waived and/or
expenses reimbursed were as follows:
| |
Subadvisory
Fee Paid Fiscal Years/Period Ended | | |
Subadvisory
Fee Waived and/or Expenses Reimbursed Fiscal Years/Period Ended | |
Fund Name | |
2020 | | |
2021 | | |
2022 | | |
2020 | | |
2021 | | |
2022 | |
IQ MacKay Municipal Insured
ETF | |
$ | 138,067 | | |
$ | 441,952 | | |
$ | 929,625 | | |
$ | (92,708 | ) | |
$ | (240,535 | ) | |
$ | (448,789 | ) |
IQ MacKay Municipal Intermediate ETF | |
$ | 93,707 | | |
$ | 92,072 | | |
$ | 443,990 | | |
$ | (73,867 | ) | |
$ | (97,096 | ) | |
$ | (231,687 | ) |
IQ
MacKay California Municipal Intermediate ETF(1) | |
| N/A | | |
| N/A | | |
$ | 38,344 | | |
| N/A | | |
| N/A | | |
$ | (32,070 | ) |
IQ Ultra Short Duration ETF | |
$ | 44,660 | | |
$ | 232,611 | | |
$ | 209,458 | | |
$ | (45,639 | ) | |
$ | (89,349 | ) | |
$ | (92,558 | ) |
| (1) | Commended operations on December 21,
2021. |
As of the date of this SAI, the IQ MacKay Municipal Short Duration
ETF has not yet commenced operations.
Portfolio Managers
Each Subadvisor acts as portfolio manager for
the Funds. Subject to the supervision of the Advisor and the Board, the Subadvisors supervise and manage the investment portfolios of
the Funds and direct the purchase and sale of each Fund’s investment securities. The Subadvisors utilize a team of investment professionals
acting together to manage the assets of the Funds. Each portfolio management team meets regularly to review portfolio holdings and to
discuss purchase and sale activity. The portfolio management teams adjust holdings in the applicable portfolio as they deem appropriate
in the pursuit of a Fund’s investment objective.
The portfolio managers primarily responsible
for the day-to-day management of the IQ MacKay Municipal Insured ETF, IQ MacKay Municipal Intermediate ETF, IQ MacKay Municipal
Short Duration ETF are Michael Petty, Frances Lewis, John Lawlor, Scott Sprauer, David Dowden, Michael Denlinger and Peter Bartlett.
The portfolio managers primarily responsible for the day-to-day management of the IQ MacKay California Municipal Intermediate ETF are
Michael Denlinger, John Lawlor, Michael Petty and Scott Sprauer. The portfolio managers primarily responsible for the day-to-day management
of the IQ Ultra Short Duration ETF are Kenneth Sommer and Matthew Downs.
Other Accounts Managed
The Funds’ portfolio managers also have
responsibility for the day-to-day management of accounts other than the Funds. Except as otherwise indicated, information regarding these
other accounts, as of April 30, 2022, is set forth below.
| |
NUMBER
OF OTHER ACCOUNTS
MANAGED
AND ASSETS BY ACCOUNT TYPE | |
NUMBER
OF ACCOUNTS AND ASSETS
FOR WHICH THE ADVISORY FEE
IS BASED ON PERFORMANCE |
Portfolio
Manager | |
Registered
Investment
Company
($mm) | |
Other
Polled
Investment
Vehicles
($mm) | |
Other
Accounts($mm) | |
Registered
Investment
Company
($mm) | |
Other
Pooled
Investment
Vehicles
($mm) | |
Other
Accounts($mm) |
David Dowden | |
17 / $29,811 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Michael Petty | |
16 / $27,113 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Scott Sprauer | |
15 / $26,002 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Frances Lewis | |
9 / $23,922 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
John Lawlor | |
11 / $7,765 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Michael Denlinger | |
12 / $17,887 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Peter Bartlett | |
3 / $4,526 | |
9 / $10,878 | |
80 / $24,722 | |
0 / $0 | |
2 / $756.30 | |
2 / $608.60 |
Kenneth Sommer | |
5 / $1,311 | |
10 / $1,464 | |
11 / $12,318 | |
0 / $0 | |
0 / $0 | |
0 / $0 |
Matthew Downs | |
0 / $0 | |
10 / $1,464 | |
11 / $12,318 | |
0 / $0 | |
0 / $0 | |
0 / $0 |
Material Conflicts of Interest
MacKay Shields does not favor the interest of
one client over another and it has adopted a Trade Allocation Policy designed so that all client accounts will be treated fairly and
no one client account will receive, over time, preferential treatment over another.
MacKay Shields maintains investment teams
with their own distinct investment process that operate independent of each other when making portfolio management decisions. Certain
investment teams consist of Portfolio Managers, Research Analysts, and Traders, while certain other investment teams share Research Analysts
and/or Traders. MacKay Shields’ investment teams may compete with each other for the same investment opportunities and/or take
contrary positions. At times, two or more of MacKay Shields’ investment teams may jointly manage the assets of a single client
portfolio (“Crossover Mandate”). In such instances, the asset allocation decisions will be discussed amongst the various
investment teams, but the day-to-day investment decision-making process will typically be made independently by each team for the portion
of the Crossover Mandate that team is responsible for managing. Orders within an investment team will typically be aggregated or bunched
to reduce the costs of the transactions. Orders are typically not aggregated across investment teams even though there may be orders
by separate investment teams to execute the same instrument on the same trading day; provided, however, that orders for the same instrument
are typically aggregated across investment teams that are supported by a shared trading desk.
MacKay Shields’ clients have held, and
it is expected that in the future they will at times hold, different segments of the capital structure of the same issuer that have different
priorities. These investments create conflicts of interest, particularly because MacKay Shields can take certain actions for clients
that can have an adverse effect on other clients. For example, certain MacKay Shields clients may hold instruments that are senior or
subordinated relative to instruments of the same issuer held by other clients, and any action that the portfolio managers were to take
on behalf of the issuer’s senior instrument, for instance, could have an adverse effect on the issuer’s junior instrument
held by other clients, and vice versa, particularly in distressed or default situations. To the extent MacKay Shields or any of its employees
were to serve on a formal or informal creditor or similar committee on behalf of a client, such conflicts of interest may be exacerbated.
MacKay Shields engages in transactions and
investment strategies for certain clients that differ from the transactions and strategies executed on behalf of other clients, including
clients that have retained the services of the same investment team. MacKay Shields may make investments for certain clients that they
conclude are inappropriate for other clients. For instance, clients within one investment strategy may take short positions in the debt
or equity instruments of certain issuers, while at the same time those instruments or other instruments of that issuer are acquired or
held long by clients in another investment strategy, or within the same strategy, and vice versa.
Additionally, MacKay Shields’ investment
strategies are available through a variety of investment products, including, without limitation, separately managed accounts, private
funds, mutual funds and ETFs. Given the different structures of these products, certain clients are subject to terms and conditions that
are materially different or more advantageous than available under different products. For example, mutual funds offer investors the
ability to redeem from the fund daily, while private funds offer less frequent liquidity. Similarly a client with a separately managed
account may have more transparency regarding the positions held in its account than would be available to an investor in a collective
investment vehicle. Further, separately managed account clients have the ability to terminate their investment management agreement with
little or no notice (subject to the terms of the investment advisory agreement or similar agreement).
As a result of these differing liquidity and
other terms, MacKay Shields may acquire and/or dispose of investments for a client either prior to or subsequent to the acquisition and/or
disposition of the same or similar securities held by another client. In certain circumstances, purchases or sales of securities by one
client could adversely affect the value of the same securities held in another client’s portfolio. In addition, MacKay Shields
has caused, and expects in the future to cause, certain clients to invest in opportunities with different levels of concentration or
on different terms than that to which other clients invest in the same securities. These differences in terms and concentration could
lead to different investment outcomes among clients investing in the same securities. MacKay Shields seeks to tailor its investment advisory
services to meet each client’s investment objective, constraints and investment guidelines and MacKay Shields’ judgments
with respect to a particular client will at times differ from its judgments for other clients, even when such clients pursue similar
investment strategies.
MacKay Shields permits its personnel, including
portfolio managers and other investment personnel, to engage in personal securities transactions, including buying or selling securities
that it has recommended to, or purchased or sold on behalf of, clients. These transactions raise potential conflicts of interest, including
when they involve securities owned or considered for purchase or sale by or on behalf of a client account. MacKay Shields has adopted
a Code of Ethics to assist and guide the portfolio managers and other investment personnel when faced with a conflict. MacKay Shields’
services to each client are not exclusive. The nature of managing accounts for multiple clients creates a conflict of interest with regard
to time available to serve clients. MacKay Shields and its portfolio managers will devote as much of their time to the activities of
each client as they deem necessary and appropriate. Although MacKay Shields strives to identify and mitigate all conflicts of interest,
and seeks to treat its clients in a fair and reasonable manner consistent with its fiduciary duties, there may be times when conflicts
of interest are not resolved in a manner favorable to a specific client.
Additional material conflicts of interest
are presented within Part 2A of MacKay Shields’ Form ADV.
Compensation for the Portfolio Managers
Salaries are set by reference to a range of
factors, taking into account each individual’s seniority and responsibilities and the market rate of pay for the relevant position.
Annual salaries are set at competitive levels to attract and maintain the best professional talent. Variable or incentive compensation,
both cash bonus and deferred awards, are a significant component of total compensation for portfolio managers at MacKay Shields. Incentive
compensation received by portfolio managers is generally based on both quantitative and qualitative factors. The quantitative factors
include, but are not limited to: (i) investment performance; (ii) assets under management; (iii) revenues and profitability;
and (iv) industry benchmarks. The qualitative factors may include, among others: leadership, adherence to the firm’s policies
and procedures, and contribution to the firm’s goals and objectives.
MacKay Shields maintains a mandatory phantom
equity plan for those employees who qualify whereby awards vest and pay out after several years, to attract, retain, motivate and reward
key personnel. Portfolio managers that participate in the phantom equity plan share in the results and success of the firm as the value
of award tracks the operating revenue and operating profit of Mackay Shields. This approach helps to instill a strong sense of commitment
towards the overall success of the firm.
MacKay Shields maintains an employee benefit
program, including health and non-health insurance and a 401(k) defined contribution plan for all of its employees regardless of
their job title, responsibilities or seniority.
Ownership of Securities
The following table provides the dollar range
of Shares of each Fund beneficially owned by the Portfolio Managers as of April 30, 2022.
Fund | |
Dowden | |
Petty | |
Sprauer | |
Lewis | |
Lawlor | |
Denlinger | |
Bartlett | |
Sommer | |
Downs |
IQ MacKay Municipal Insured ETF | |
B | |
A | |
A | |
A | |
C | |
A | |
A | |
- | |
- |
IQ MacKay Municipal Intermediate ETF | |
B | |
A | |
A | |
A | |
B | |
A | |
A | |
- | |
- |
IQ MacKay California Municipal Intermediate
ETF | |
A | |
A | |
D | |
A | |
A | |
A | |
A | |
- | |
- |
IQ Ultra Short Duration ETF | |
- | |
- | |
- | |
- | |
- | |
- | |
- | |
A | |
A |
Ownership Codes
A. None
B. $1 – $10,000
C. $10,001 – $50,000
D. $50,001– $100,000
E. $100,001 –
$500,000
F. $500,001 –
$1,000,000
E. Over
$1,000,000
As of the date of this SAI, the IQ MacKay Municipal Short Duration
ETF has not yet commenced operations.
OTHER SERVICE PROVIDERS
Fund Administrator, Custodian, Transfer Agent
and Securities Lending Agent
The Bank of New York Mellon (“BNY Mellon”)
serves as the Funds’ administrator, custodian, transfer agent and securities lending agent. BNY Mellon’s principal address
is 240 Greenwich Street, New York, New York 10286. Under the Fund Administration and Accounting Agreement, BNY Mellon provides necessary
administrative, legal, tax, accounting services, and financial reporting for the maintenance and operations of the Trust and each Fund.
In addition, BNY Mellon makes available the office space, equipment, personnel and facilities required to provide such services.
BNY Mellon supervises the overall administration
of the Trust and the Funds, including, among other responsibilities, assisting in the preparation and filing of documents required for
compliance by the Funds with applicable laws and regulations and arranging for the maintenance of books and records of the Funds. BNY
Mellon provides persons satisfactory to the Board to serve as officers of the Trust.
BNY Mellon is the principal operating subsidiary
of The Bank of New York Mellon Corporation.
BNY Mellon serves as custodian of the Funds’
assets (the “Custodian”). Under the Custody Agreement with the Trust, BNY Mellon maintains in separate accounts cash, securities
and other assets of the Trust and the Funds, keeps all necessary accounts and records, and provides other services. BNY Mellon is required,
upon order of the Trust, to deliver securities held by BNY Mellon and to make payments for securities purchased by the Trust for the
Funds. Under the Custody Agreement, BNY Mellon is also authorized to appoint certain foreign custodians or foreign custody managers for
Fund investments outside the U.S.
The Custodian has agreed to (1) make receipts
and disbursements of money on behalf of the Funds; (2) collect and receive all income and other payments and distributions on account
of each Fund’s portfolio investments; (3) respond to correspondence from Fund shareholders and others relating to its duties;
and (4) make periodic reports to each Fund concerning the Funds’ operations. The Custodian does not exercise any supervisory
function over the purchase and sale of securities.
BNY Mellon serves as transfer agent and dividend
paying agent for the Funds (the “Transfer Agent”). The Transfer Agent has agreed to (1) issue and redeem Shares of the
Funds; (2) make dividend and other distributions to shareholders of the Funds; (3) respond to correspondence by Fund shareholders
and others relating to its duties; (4) maintain shareholder accounts; and (5) make periodic reports to the Funds.
As compensation for the foregoing services, BNY
Mellon receives certain out of pocket costs, transaction fees and asset based fees, which are accrued daily and paid monthly by the Trust.
For the last three fiscal years ended April 30,
the fees paid by each Fund to BNY Mellon for the foregoing services were:
Fund Name | |
Commencement
of Operations | |
Administration,
Custody, Transfer Agency Fees for Fiscal Year Ended 2020 | | |
Administration,
Custody and Transfer Agency Fees for Fiscal Year Ended 2021 | | |
Administration,
Custody and Transfer Agency Fees for Fiscal Year/Period Ended 2022 | |
IQ MacKay Municipal Insured
ETF | |
10/18/17 | |
$ | 59,763 | | |
$ | 125,729 | | |
$ | 290,599 | |
IQ MacKay Municipal Intermediate ETF | |
10/18/17 | |
$ | 53,254 | | |
$ | 63,350 | | |
$ | 143,032 | |
IQ MacKay California Municipal Intermediate
ETF | |
12/21/21 | |
| N/A | | |
| N/A | | |
$ | 20,878 | |
IQ Ultra Short Duration ETF | |
7/31/19 | |
$ | 40,145 | | |
$ | 107,265 | | |
$ | 122,341 | |
As of the date of this SAI, the IQ MacKay Municipal
Short Duration ETF has not yet commenced operations and, therefore, have not yet paid any administration fees.
BNY Mellon also serves as the Trust’s
securities lending agent pursuant to a Securities Lending Authorization Agreement. As compensation for providing securities lending services,
BNY Mellon receives a portion of the income earned by each Fund on collateral investments in connection with the lending program. For
the fiscal year ended April 30, 2022, the Funds did not participate in the securities lending program.
Distributor
ALPS Distributors, Inc., the Distributor,
is located at 1290 Broadway, Suite 1000, Denver, Colorado 80203. The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934, as amended (the “Exchange Act”), and a member of the Financial Industry Regulatory Authority (“FINRA”).
NYLIFE Distributors LLC has entered into a Services Agreement with ALPS to market the Funds.
Shares will be continuously offered for sale
by the Trust through the Distributor only in whole Creation Units, as described in the section of this SAI entitled “Purchase and
Redemption of Creation Units.” The Distributor also acts as an agent for the Trust. The Distributor will deliver a prospectus to
authorized participants purchasing Shares in Creation Units and will maintain records of both orders placed with it and confirmations
of acceptance furnished by it. The Distributor has no role in determining the investment policies of the Funds or which securities are
to be purchased or sold by the Advisor.
As compensation for the foregoing services, the
Distributor receives certain out of pocket costs and per Fund flat fees, which are accrued daily and paid monthly by the Advisor.
The Board of Trustees has adopted a Distribution
and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Distribution and Service Plan, each Fund is authorized
to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale
of Creation Units of each Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Funds and there
are no plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the
respective Fund’s assets, and over time these fees will increase the cost of your investment and they may cost you more than certain
other types of sales charges.
Under the Service and Distribution Plan, and
as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan, if any, and the purpose for which such expenditures were made.
The Advisor and its affiliates may, out of their
own resources, pay amounts to third parties for distribution or marketing services on behalf of the Funds. The making of these payments
could create a conflict of interest for a financial intermediary receiving such payments.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, located at 300 Madison
Avenue, New York, NY 10017, serves as the independent registered public accounting firm to the Trust. PricewaterhouseCoopers LLP will
perform the annual audit of the Funds’ financial statements.
Ernst & Young LLP, located at 5 Times
Square, New York, New York 10036, serves as tax advisor to the Trust and will prepare the Funds' federal, state and excise tax returns,
and advise the Trust on matters of accounting and federal and state income taxation.
Legal Counsel
Chapman and Cutler, LLP, located at 1717 Rhode Island Avenue, N.W.,
Washington, D.C. 20036, serves as legal counsel to the Trust and the Funds.
PORTFOLIO TRANSACTIONS AND
BROKERAGE
Subject to the general supervision by the Board,
the Advisor, and the Subadvisors is responsible for decisions to buy and sell securities for the Funds, the selection of brokers and
dealers to effect the transactions, which may be affiliates of the Advisor or the Subadvisors, and the negotiation of brokerage commissions.
The Funds may execute brokerage or other agency transactions through registered broker-dealers who receive compensation for their services
in conformity with the 1940 Act, the Exchange Act, and the rules and regulations thereunder. Compensation may also be paid in connection
with riskless principal transactions (on Nasdaq or over-the-counter securities and securities listed on an exchange) and agency Nasdaq
or over-the-counter transactions executed with an electronic communications network or an alternative trading system.
The Funds will give primary consideration to
obtaining the most favorable prices and efficient executions of transactions in implementing trading policy. Consistent with this policy,
when securities transactions are traded on an exchange, the Funds’ policy will be to pay commissions which are considered fair
and reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Advisor believes
that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude the Funds
from obtaining a high quality of brokerage services. In seeking to determine the reasonableness of brokerage commissions paid in any
transaction, the Advisor will rely upon its experience and knowledge regarding commissions generally charged by various brokers and on
its judgment in evaluating the brokerage and research services received from the broker effecting the transaction. Such determinations
will be necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable.
The Advisor and Subadvisors do not consider sales
of Shares by broker-dealers as a factor in the selection of broker-dealers to execute portfolio transactions.
On occasions when the Advisor deems the purchase
or sale of a security to be in the best interest of a Fund as well as its other customers (including any other fund or other investment
company or advisory account for which the Advisor acts as investment advisor or investment subadvisor), the Advisor, to the extent permitted
by applicable laws and regulations, may aggregate the securities to be sold or purchased for a Fund with those to be sold or purchased
for such other customers in order to obtain the best net price and most favorable execution under the circumstances. In such event, allocation
of the securities so purchased or sold, as well as the expenses incurred in the transaction, will be made by the Advisor in the manner
it considers to be equitable and consistent with its fiduciary obligations to the Funds and such other customers. In some instances,
this procedure may adversely affect the price and size of the position obtainable for the Funds.
During the fiscal year ended April 30,
2022, commissions for securities transactions to brokers which provided research and brokerage products and services to the Fund(s) were
as follows:
Fund Name | |
Value
of Securities
Transactions | | |
Brokerage
Commissions | |
IQ Ultra Short Duration
ETF | |
$ | 883,424,811 | | |
$ | 9,387 | |
During the fiscal year ended April 30,
2021, commissions for securities transactions to brokers which provided research and brokerage products and services to the Fund(s) were
as follows:
Fund Name | |
Value
of Securities
Transactions | | |
Brokerage
Commissions | |
IQ Ultra Short Duration
ETF | |
$ | 691,490,313 | | |
$ | 8,129 | |
During the fiscal year ended April 30,
2020, the IQ Ultra Short Duration ETF did not engage in any securities transactions with brokers that were affiliated with the Fund,
Advisor, Subadvisors or distributor or brokers provided research and brokerage products and services to the Fund:
During the fiscal years ended April 30,
2022, April 30, 2021 and April 30, 2020, the IQ MacKay Shields Municipal Insured ETF and IQ MacKay Shields Municipal Intermediate
ETF did not engage in any securities transactions with brokers that were affiliated with the Funds, Advisor, Subadvisors or distributor
or brokers provided research and brokerage products and services to the Funds.
During the fiscal period ended April 30,
2022, the IQ MacKay California Municipal Intermediate ETF did not engage in any securities transactions with brokers that were affiliated
with the Fund, Advisor, Subadvisors or distributor or brokers provided research and brokerage products and services to the Fund.
As of the date of this SAI, the IQ MacKay Municipal
Short Duration ETF has not commenced operations, and therefore, not entered into securities transactions.
The Funds are required to identify any securities
of the Funds’ regular broker-dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by the Funds as of
the end of most recent fiscal year. As of April 30, 2022, the following Funds held the following securities of their regular broker-dealers
or their parents:
Fund Name | |
Broker/Dealer | |
Market
Value | |
IQ Ultra Short Duration ETF | |
BOFA Securities, Inc. | |
$ | 1,412,857 | |
| |
CitiGroup Global Markets Inc. | |
$ | 1,778,197 | |
| |
Goldman Sachs & Co. LLC | |
$ | 999,838 | |
DISCLOSURE OF PORTFOLIO HOLDINGS
Portfolio Disclosure Policy
The Trust has adopted a Portfolio Holdings Policy
(the “Policy”) designed to govern the disclosure of Fund portfolio holdings and the use of material nonpublic information
about Fund holdings. The Policy applies to all officers, employees and agents of the Funds, including the Advisor and the Subadvisors.
The Policy is designed to ensure that the disclosure of information about each Fund’s portfolio holdings is consistent with applicable
legal requirements and otherwise in the best interest of each Fund.
As ETFs, information about each Fund’s
portfolio holdings is made available on a daily basis in accordance with the provisions of any Order of the SEC applicable to the Exchange
and other applicable SEC regulations, orders and no-action relief. Such information typically reflects all or a portion of a Fund’s
anticipated portfolio holdings as of the next Business Day (as defined in the section entitled “Purchase and Redemption of Creation
Units”). This information is used in connection with the Creation and Redemption process and is disseminated on a daily basis through
the facilities of the Exchange, the National Securities Clearing Corporation (the “NSCC”) and/or third party service providers.
Each Fund will disclose on the Funds’
website (newyorklifeinvestments.com/etf) at the start of each Business Day the identities and quantities of the securities and other
assets held by each Fund that will form the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings
so disclosed will be based on information as of the close of business on the prior Business Day and/or trades that have been completed
prior to the opening of business on that Business Day and that are expected to settle on the Business Day. Online disclosure of such
holdings is publicly available at no charge.
Daily access to each Fund’s portfolio holdings
is permitted to personnel of the Advisor, the Subadvisors and the Distributor and the Funds’ administrator, custodian and accountant
and other agents or service providers of the Trust who have need of such information in connection with the ordinary course of their
respective duties to the Funds. The Funds’ Chief Compliance Officer may authorize disclosure of portfolio holdings.
Each Fund will disclose its complete portfolio
holdings schedule in public filings with the SEC on a quarterly basis, based on the Fund’s fiscal year, within sixty (60) days
of the end of the quarter, and will provide that information to shareholders, as required by federal securities laws and regulations
thereunder.
No person is authorized to disclose a Fund’s
portfolio holdings or other investment positions except in accordance with the Policy. The Trust’s Board reviews the implementation
of the Policy on a periodic basis.
ADDITIONAL INFORMATION
CONCERNING SHARES
Organization and Description of Shares of
Beneficial Interest
The Trust is a Delaware statutory trust and registered
investment company. The Trust was organized on January 30, 2008, and has authorized capital of an unlimited number of shares of
beneficial interest of no par value which may be issued in more than one class or series.
Under Delaware law, the Trust is not required
to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings
of Trust shareholders. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting
of the Trust’s shareholders for the purpose of voting upon the question of removal of a Trustee and will assist in communications
with other Trust shareholders. Shareholders holding two-thirds of Shares outstanding may remove Trustees from office by votes cast at
a meeting of Trust shareholders or by written consent.
When issued, Shares are fully paid, non-assessable,
redeemable and freely transferable; provided, however, that Shares may not be redeemed individually, but only in Creation Units. The
Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange,
dividends, retirements, liquidation, redemption or any other feature. Shares have equal voting rights, except that, if the Trust creates
additional funds, only Shares of that fund may be entitled to vote on a matter affecting that particular fund. Trust shareholders are
entitled to require the Trust to redeem Creation Units if such shareholders are Authorized Participants. The Declaration of Trust confers
upon the Board the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the
Trust may be individually redeemable. The Trust reserves the right to adjust the stock prices of Shares to maintain convenient trading
ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect
on the net assets of the Funds.
The Trust’s Declaration of Trust disclaims
liability of the shareholders or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets
and property of the Trust. The Declaration of Trust provides for indemnification by the Trust for all loss and expense of the Funds’
shareholders held personally liable for the obligations of the Trust. The risk of a Trust’s shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which the Funds themselves would not be able to meet the Trust’s
obligations and this risk should be considered remote. If a Fund does not grow to a size to permit it to be economically viable, the
Fund may cease operations. In such an event, shareholders may be required to liquidate or transfer their Shares at an inopportune time
and shareholders may lose money on their investment.
Book Entry Only System
The Depository Trust Company (“DTC”)
will act as securities depository for the Shares. The Shares of the Funds are represented by global securities registered in the name
of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for Shares.
DTC has advised the Trust as follows, DTC, the
world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for
over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt and money market instruments (from over 100
countries). DTC was created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance
and settlement of securities transactions among the DTC Participants in such securities through electronic computerized book-entry transfers
and pledges in accounts of DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants
include both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organization.
DTC is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is a holding company
for DTC, the NSCC and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of
its regulated subsidiaries. More specifically, DTCC is owned by a number of its DTC Participants and by the New York Stock Exchange, Inc.,
the NYSE Alternext U.S. (formerly known as the American Stock Exchange LLC) and FINRA.
Access to DTC system is also available to others
such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or
maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect Participants”). DTC agrees
with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and bylaws and
requirements of law. Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests
through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests
are referred to herein as “Beneficial Owners”) will be shown on, and the transfer of ownership will be effected only through,
records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants
and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation
relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical
delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire benefits interests in
Shares.
Beneficial Owners of Shares will not be entitled
to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive
form and are not considered the registered holders of the Shares. Accordingly, each Beneficial Owner must rely on the procedures of DTC,
DTC Participants and any Indirect Participants through which such Beneficial Owner holds its interest in order to exercise any rights
of a holder of Shares. The Trust understands that under existing industry practice, in the event the Trust requests any action of holders
of Shares, or a Beneficial Owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take,
DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorized the Indirect Participants
and Beneficial Owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial
Owners owning through them. DTC, through its nominee Cede & Co., is the record owner of all outstanding Shares.
Conveyance of all notices, statements and other
communications to Beneficial Owners will be effected as follows. DTC will make available to the Trust upon request and for a fee to be
charged to the Trust a listing of the Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as
to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust will provide each
such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant,
directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participants a fair and reasonable
amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Beneficial Owners may wish to take certain steps to augment the transmission to them of notices of significant events with respect to
Shares by providing their names and addresses to the DTC registrar and request that copies of notices by provided directly to them.
Distributions of Shares shall be made to DTC
or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions,
shall immediately credit DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests
in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners
of Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with
securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility
of such DTC Participants. The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial
Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any
records relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants
or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its
service with respect to shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect
thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its
functions at a comparable cost, or if such replacement is unavailable, to issue and deliver printed certificates representing ownership
of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange.
DTC
rules applicable to DTC Participants are on file with the SEC. More information about DTC can be found at www.dtcc.com and
www.dtc.org.
PURCHASE AND REDEMPTION OF
CREATION UNITS
Creation
The Trust issues and sells Shares of the Fund
only in Creation Units on a continuous basis on any Business Day (as defined below) through the Distributor at the Shares’ NAV
next determined after receipt of an order in proper form. The Distributor processes purchase orders only on a day that the Exchange is
open for trading (a “Business Day”). The Exchange is open for trading Monday through Friday except for the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery of Cash
The consideration for purchase of a Creation
Unit of Shares of the Fund generally consists of cash only (including the appropriate Transaction Fee). However, the Fund also reserves
the right to permit or require the in-kind deposit of Deposit Securities constituting a representation of a Fund’s portfolio, along
with the Cash Component, computed as described below, and the appropriate Transaction Fee (collectively, the “Fund Deposit”)
as consideration for the purchase of a Creation Unit.
The Cash Component of a Fund Deposit serves to
compensate the Trust or the Authorized Participant, as applicable, for any differences between the NAV per Creation Unit and the Deposit
Amount (as defined below). The Cash Component of a Fund Deposit is an amount equal to the difference between the NAV of the Shares (per
Creation Unit) and the “Deposit Amount,” an amount equal to the market value of the Deposit Securities. If the Cash Component
of a Fund Deposit is a positive number (i.e., the NAV per Creation Unit exceeds the Deposit Amount), the Authorized Participant
will deliver the Cash Component. If the Cash Component of a Fund Deposit is a negative number (i.e., the NAV per Creation Unit
is less than the Deposit Amount), the Authorized Participant will receive the Cash Component.
The Custodian through the NSCC (see the section
of this SAI entitled “Purchase and Redemption of Creation Units—Creation—Procedures for Creation of Creation Units”),
makes available on each Business Day, prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time), the list
of the name and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information
at the end of the previous Business Day) for the Fund. This Fund Deposit is applicable, subject to any adjustments as described below,
to orders to effect creations of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities
is made available.
The identity and number of shares of the Deposit
Securities required for a Fund Deposit for a Fund changes from time to time In addition, the Trust reserves the right to permit or require
the substitution of an amount of cash (that is a “cash in lieu” amount) to be added to the Cash Component to replace any
Deposit Security that may not be available in sufficient quantity for delivery or that may not be eligible for transfer through the systems
of DTC or the Clearing Process (discussed below) or for other similar reasons. The Trust also reserves the right to permit or require
a “cash in lieu” amount where the delivery of Deposit Securities by the Authorized Participant (as described below) would
be restricted under the securities laws or where delivery of Deposit Securities to the Authorized Participant would result in the disposition
of Deposit Securities by the Authorized Participant becoming restricted under the securities laws, and in certain other situations.
In addition to the list of names and number of
securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each
Business Day the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit of
a Fund.
Procedures for Creation of Creation Units
All orders to create Creation Units must be placed
with the Distributor either (1) through Continuous Net Settlement System of the NSCC (the “Clearing Process”), a clearing
agency that is registered with the SEC, by a “Participating Party,” i.e., a broker-dealer or other participant in
the Clearing Process; or (2) outside the Clearing Process by a DTC Participant (see the section of this SAI entitled “Additional
Information Concerning Shares — Book Entry Only System”). In each case, the Participating Party or the DTC Participant must
have executed an agreement with the Distributor with respect to creations and redemptions of Creation Units (a “Participant Agreement”);
and accepted by the Transfer Agent; such parties are collectively referred to as “APs” or “Authorized Participants.”
Investors should contact the Distributor for the names of Authorized Participants. All Shares, whether created through or outside the
Clearing Process, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
Except as described below, and in all cases subject
to the terms of the applicable Participant Agreement, all orders to create Creation Units of a Fund generally must be received by the
Distributor by the time specified in the Participant Agreement and the applicable order form (“Order Time”) in each case
on the date such order is placed for creation of Creation Units to be effected based on the NAV of Shares of such Fund as next determined
after receipt of an order in proper form. Orders consisting of cash only or requesting substitution of a “cash-in-lieu” amount
(collectively, “Custom Orders”), must be received by the Transfer Agent no later than the time specified in the Participant
Agreement and the applicable order form. On days when the Exchange closes earlier than normal (such as the day before a holiday), a Fund
may require orders to create Creation Units, including Custom Orders, to be placed earlier in the day. The date on which an order to
create Creation Units (or an order to redeem Creation Units, as discussed below) is placed is referred to as the “Transmittal Date.”
Orders must be transmitted by an Authorized Participant by telephone, electronic order entry system or other transmission method acceptable
to the Transfer Agent pursuant to procedures set forth in the Participant Agreement. Economic or market disruptions or changes, or telephone,
electronic or communication failure may impede the ability to reach the Transfer Agent or an Authorized Participant.
All orders to create Creation Units from investors
who are not Authorized Participants shall be placed with an Authorized Participant in the form required by such Authorized Participant.
In addition, the Authorized Participant may request the investor to make certain representations or enter into agreements with respect
to the order, e.g., to provide for payments of cash, when required. Investors should be aware that their particular broker may
not have executed a Participant Agreement and, therefore, orders to create Creation Units of the Fund have to be placed by the investor’s
broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to
such investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement.
Those placing orders for Creation Units through
the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Order Time
on the Transmittal Date. Orders for Creation Units that are effected outside the Clearing Process are likely to require transmittal by
the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations
department of the broker or depository institution effectuating such transfer of the Fund Deposit.
For more information about Clearing Process and
DTC, see the sections of this SAI entitled “Purchase and Redemption of Creation Units—Creation— Placement of Creation
Orders Using the Clearing Process” and “Purchase and Redemption of Creation Units—Creation—Placement of Creation
Orders Outside the Clearing Process.”
Placement of Creation Orders Using the Clearing
Process
The Clearing Process is the process of creating
or redeeming Creation Units through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process
must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor
to transmit through the Custodian to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the
Participating Party’s creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the
Fund Deposit to the Trust, together with such additional information as may be required by the Distributor. An order to create Creation
Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (1) such order is received by
the Distributor not later than the Order Time on such Transmittal Date and (2) all other procedures set forth in the Participant
Agreement are properly followed.
Placement of Creation Orders Outside the Clearing
Process
Fund Deposits made outside the Clearing Process
must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant who wishes to place an order
creating Creation Units to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state
that the DTC Participant is not using the Clearing Process and that the creation of Creation Units will instead be effected through a
transfer of securities and cash directly through DTC.
The Fund Deposit transfer must be ordered by
the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities
through DTC to the account of the Fund by no later than 11:00 a.m. Eastern time on the next Business Day following the Transmittal
Date (the “DTC Cut-Off-Time”).
All questions as to the number of Deposit Securities
to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will
be determined by the Trust, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred
directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian
no later than 2:00 p.m. Eastern time on the next Business Day following the Transmittal Date. An order to create Creation Units
outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (1) such order is received by the
Distributor not later than the Order Time on such Transmittal Date and (2) all other procedures set forth in the Participant Agreement
are properly followed. However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 11:00
a.m. and 2:00 p.m., Eastern time respectively, on the next Business Day following the Transmittal Date, such order will be canceled.
Upon written notice to the Distributor, such canceled order may be resubmitted the following Business Day using a Fund Deposit as newly
constituted to reflect the then-current Deposit Securities and Cash Component. The delivery of Creation Units so created will occur no
later than the second Business Day following the day on which the purchase order is deemed received by the Distributor.
Additional transaction fees may be imposed with
respect to transactions effected through a DTC participant outside the Clearing Process and in the limited circumstances in which any
cash can be used in lieu of Deposit Securities to create Creation Units. See the section of this SAI entitled “Purchase and Sale
of Creation Units—Creation—Creation Transaction Fee.”
Creation Units may be created in advance of receipt
by the Trust of all or a portion of the applicable Deposit Securities. In these circumstances, the initial deposit will have a value
greater than the NAV of the Shares on the date the order is placed in proper form since, in addition to available Deposit Securities,
cash must be deposited in an amount equal to the sum of (1) the Cash Component plus (2) up to 115% of the then-current market
value of the undelivered Deposit Securities (the “Additional Cash Deposit”). The order shall be deemed to be received on
the Business Day on which the order is placed provided that the order is placed in proper form prior to Order Time and funds in the appropriate
amount are deposited with the Custodian by 11:00 a.m. Eastern time the following Business Day. If the order is not placed in proper
form by Order Time or funds in the appropriate amount are not received by 11:00 a.m. Eastern time on the next Business Day, then
the order may be deemed to be canceled and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom.
An additional amount of cash shall be required to be deposited with the Trust, pending receipt of the undelivered Deposit Securities
to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal up to 115% of the daily marked-to-market
value of the undelivered Deposit Securities. To the extent that undelivered Deposit Securities are not received by 1:00 p.m. Eastern
time on the second Business Day following the day on which the purchase order is deemed received by the Distributor, or in the event
a marked-to-market payment is not made within one Business Day following notification by the Distributor that such a payment is required,
the Trust may use the cash on deposit to purchase the undelivered Deposit Securities. Authorized Participants will be liable to the Trust
and the Fund for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount
by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase
order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust
will return any unused portion of the Additional Cash Deposit once all of the undelivered Deposit Securities have been properly received
by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee will be charged in all cases.
See the section of this SAI entitled “Purchase and Redemption of Creation Units—Creation—Creation Transaction Fee.”
The delivery of Creation Units so created will occur no later than the second Business Day following the day on which the purchase order
is deemed received by the Distributor.
Acceptance of Orders for Creation Units
The Trust reserves the right to reject a creation
order transmitted to it by the Distributor for any legally permissible reason if: (1) the order is not in proper form; (2) the
investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (3) the Deposit
Securities delivered are not as disseminated for that date by the Custodian, as described above; (4) acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; or (5) there exist circumstances outside the control of the Trust, the Custodian,
the Distributor and the Advisor that make it for all practical purposes impossible to process creation orders. Examples of such circumstances
include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting
in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer
or other information systems affecting the Trust, the Advisor, the Subadvisor, the Distributor, DTC, NSCC, the Custodian or sub-custodian
or any other participant in the creation process and similar extraordinary events. The Distributor shall notify the Authorized Participant
of its rejection of the order. The Trust, the Custodian, any subcustodian and the Distributor are under no duty, however, to give notification
of any defects or irregularities in the delivery of Fund Deposits nor shall any of them incur any liability for the failure to give any
such notification. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility
and acceptance for deposit of any securities to be delivered shall be determined by the Trust and the Trust’s determination shall
be final and binding.
Creation Units typically are issued on a “T+2
basis” (that is two Business Days after trade date). However, the Fund reserves the right to settle Creation Unit transactions
on a basis other than T+2 in order to accommodate foreign market holiday schedules, to account for different treatment among foreign
and U.S. markets of dividend record dates and ex-dividend dates (that is the last day the holder of a security can sell the security
and still receive dividends payable on the security), and in certain other circumstances.
To the extent contemplated by a Participant Agreement
with the Distributor, the Trust will issue Creation Units to such Authorized Participant notwithstanding the fact that the corresponding
Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver
the missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participant’s delivery
and maintenance of collateral having a value equal to 115%, which the Advisor may change from time to time, of the value of the missing
Deposit Securities in accordance with the Trust’s then-effective procedures. Such collateral must be delivered no later than 2:00
p.m., Eastern time, on the contractual settlement date. The only collateral that is acceptable to the Trust is cash in U.S. Dollars or
an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by the Authorized
Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to
that Authorized Participant. Information concerning the Trust’s current procedures for collateralization of missing Deposit Securities
is available from the Transfer Agent. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities
at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
securities and the cash collateral or the amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants will
create and redeem Creation Units on the same trade date. In these instances, the Trust reserves the right to settle these transactions
on a net basis. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility
and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall
be final and binding.
Creation Transaction Fee
Authorized Participants placing a creation order
will be required to pay to the Custodian a fixed transaction fee (the “Creation Transaction Fee”) to offset the transfer
and other transaction costs associated with the issuance of Creation Units. The standard creation transaction fee will be the same regardless
of the number of Creation Units purchased by an investor on the applicable Business Day. The Creation Transaction Fee for each creation
order is $250. The Creation Transaction Fee may be waived for the Fund when the Advisor believes that waiver of the Creation Transaction
Fee is in the best interest of the Fund. When determining whether to waive the Creation Transaction Fee, the Advisor considers a number
of factors including, but not limited to, whether waiving the Creation Transaction Fee will: facilitate the initial launch of a Fund;
reduce the cost of portfolio rebalancings; improve the quality of the secondary trading market for a Fund’s Shares and not result
in a Fund’s bearing additional costs or expenses as a result of the waiver.
An additional variable fee of up to 3.00% of
the NAV per Creation Unit may be imposed for (1) creations effected outside the Clearing Process and (2) cash creations (to
offset the Trust’s brokerage and other transaction costs associated with using cash to purchase the requisite Deposit Securities).
Actual transaction costs may vary depending on the time of day a purchase order is received or the nature of the securities to be purchased.
The Advisor or Subadvisor may adjust the variable fee to ensure that the Fund collects the extra expenses associated with brokerage commissions
and other expenses incurred by the Fund to acquire a Deposit Security not part of the Fund Deposit from the Authorized Participant. Authorized
Participants placing a creation order are responsible for the costs of transferring the securities constituting the Deposit Securities
to the account of the Trust.
Redemption
To redeem Shares directly from the Fund, an investor
must be an Authorized Participant or must redeem through an Authorized Participant. The Trust redeems Creation Units on a continuous
basis on any Business Day through the Distributor at the Shares’ NAV next determined after receipt of an order in proper form.
The Fund will not redeem Shares in amounts less than Creation Units. Authorized Participants must accumulate enough Shares in the secondary
market to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there
will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. With respect to the Fund,
the Custodian, through the NSCC, makes available prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time)
on each Business Day, the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption
requests received in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit
Securities that are applicable to creations of Creation Units. Unless cash redemptions are available or specified for the Fund, the redemption
proceeds for a Creation Unit generally consist of Fund Securities — as announced on the Business Day the request for redemption
is received in proper form — plus or minus cash in an amount equal to the difference between the NAV of the Shares being redeemed,
as next determined after a receipt of a redemption request in proper form, and the value of the Fund Securities (the “Cash Redemption
Amount”), less a redemption transaction fee (see the section of this SAI entitled “Purchase and Redemption of Creation Units—Redemption—Redemption
Transaction Fee”).
The right of redemption may be suspended or the
date of payment postponed (1) for any period during which the Exchange is closed (other than customary weekend and holiday closings);
(2) for any period during which trading on the Exchange is suspended or restricted; (3) for any period during which an emergency
exists as a result of which disposal of the Shares of the Fund or determination of the Fund’s NAV is not reasonably practicable;
or (4) in such other circumstances as is permitted by the SEC.
Deliveries of redemption proceeds by the Fund
generally will be made within two Business Days (that is “T+2”). However, the Fund reserves the right to settle redemption
transactions and deliver redemption proceeds on a basis other than T+2 to accommodate foreign market holiday schedules, to account for
different treatment among foreign and U.S. markets of dividend record dates and dividend ex-dates (that is the last date the holder of
a security can sell the security and still receive dividends payable on the security sold), and in certain other circumstances.
In the event that cash redemptions are permitted
or required by the Trust, proceeds will be paid to the Authorized Participant redeeming Shares on behalf of the redeeming investor as
soon as practicable after the date of redemption.
Placement of Redemption Orders Using the Clearing Process
Orders to redeem Creation Units through the Clearing
Process must be delivered through an Authorized Participant that has executed a Participant Agreement. Investors other than Authorized
Participants are responsible for making arrangements with an Authorized Participant for an order to redeem. An order to redeem Creation
Units is deemed received by the Trust on the Transmittal Date if: (1) such order is received by the Distributor not later than Order
Time on such Transmittal Date; and (2) all other procedures set forth in the Participant Agreement are properly followed. Such order
will be effected based on the NAV of the relevant Fund as next determined. An order to redeem Creation Units using the Clearing Process
made in proper form but received by the Distributor after the Order Time will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV determined on such next Business Day. The requisite Fund Securities and
the Cash Redemption Amount will be transferred by the second NSCC business day following the date on which such request for redemption
is deemed received.
Placement of Redemption Orders Outside the Clearing Process
Orders to redeem Creation Units outside the Clearing
Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place
an order for redemption of Creation Units to be effected outside the Clearing Process does not need to be a Participating Party, but
such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead
be effected through transfer of Shares directly through DTC. An order to redeem Creation Units outside the Clearing Process is deemed
received by the Transfer Agent on the Transmittal Date if (1) such order is received by the Transfer Agent not later than Order
Time on such Transmittal Date; (2) such order is accompanied or followed by the requisite number of Shares, which delivery must
be made through DTC to the Custodian no later than the DTC Cut-Off-Time, and the Cash Redemption Amount, if owed to the Fund, which delivery
must be made by 2:00 p.m. Eastern time; and (3) all other procedures set forth in the Participant Agreement are properly followed.
After the Transfer Agent receives an order for redemption outside the Clearing Process, the Transfer Agent will initiate procedures to
transfer the requisite Fund Securities which are expected to be delivered and the Cash Redemption Amount, if any, by the second Business
Day following the Transmittal Date.
The calculation of the value of the Fund Securities
and the Cash Redemption Amount to be delivered or received upon redemption (by the Authorized Participant or the Trust, as applicable)
will be made by the Custodian according to the procedures set forth the section of this SAI entitled “Determination of Net Asset
Value” computed on the Business Day on which a redemption order is deemed received by the Transfer Agent. Therefore, if a redemption
order in proper form is submitted to the Distributor by a DTC Participant not later than Order Time on the Transmittal Date, and the
requisite number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities
and the Cash Redemption Amount to be delivered or received (by the Authorized Participant or the Trust, as applicable) will be determined
by the Custodian on such Transmittal Date. If, however, either (1) the requisite number of Shares of the relevant Fund are not delivered
by the DTC Cut-Off-Time, as described above, or (2) the redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount
to be delivered or received will be computed on the Business Day following the Transmittal Date provided that the Shares of the relevant
Fund are delivered through DTC to the Custodian by 11:00 a.m. Eastern time the following Business Day pursuant to a properly submitted
redemption order.
If it is not possible to effect deliveries of
the Fund Securities, the Trust may in its discretion exercise its option to redeem Shares in cash, and the redeeming Authorized Participant
will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Trust
may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its Shares based on
the NAV of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a transaction fee
which will include an additional charge for cash redemptions to offset the Fund’s brokerage and other transaction costs associated
with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer
a portfolio of securities that differs from the exact composition of the Fund Securities, or cash in lieu of some securities added to
the Cash Redemption Amount, but in no event will the total value of the securities delivered and the cash transmitted differ from the
NAV. Redemptions of Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the
Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the
Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities
under such laws. An Authorized Participant or an investor for which it is acting that is subject to a legal restriction with respect
to a particular security included in the Fund Securities applicable to the redemption of a Creation Unit may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Shares to complete an order form or to enter into
agreements with respect to such matters as compensating cash payment, beneficial ownership of Shares or delivery instructions.
Redemption Transaction Fee
Authorized Participants placing a redemption
order will be required to pay to the Custodian a fixed transaction fee (the “Redemption Transaction Fee”) to offset the transfer
and other transaction costs associated with the redemption of Creation Units. The standard redemption transaction fee will be the same
regardless of the number of Creation Units redeemed by an investor on the applicable Business Day. The Redemption Transaction Fee for
each redemption order is $250. The Redemption Transaction Fee may be waived for the Fund when the Advisor or Subadvisor believes that
waiver of the Redemption Transaction Fee is in the best interest of the Fund. When determining whether to waive the Redemption Transaction
Fee, the Advisor considers a number of factors including, but not limited to, whether waiving the Redemption Transaction Fee will: reduce
the cost of portfolio rebalancings; improve the quality of the secondary trading market for a Fund’s Shares and not result in a
Fund’s bearing additional costs or expenses as a result of the waiver.
An additional variable fee, which together
with the Redemption Transaction Fee may equal up to 2.00% of the NAV per Creation Unit, may be imposed for (1) redemptions effected
outside the Clearing Process and (2) cash redemptions (to offset the Trust’s brokerage and other transaction costs associate
with the sale of Fund Securities). Actual transaction costs may vary depending on the time of day a purchase order is received or the
nature of the securities to be sold. The Advisor or Subadvisor may adjust the variable fee to ensure that the Fund collects the extra
expenses associated with brokerage commissions and other expenses incurred by the Fund to acquire a Deposit Security not part of the
Fund Deposit from the Authorized Participant. Authorized Participants placing a redemption order will also bear the costs of transferring
the Fund Securities from the Trust to their account or on their order.
In order to seek to replicate the in-kind redemption
order process for creation orders executed in whole or in part with cash, the Trust expects to sell, in the secondary market, the portfolio
securities or settle any financial instruments that may not be permitted to be re-registered in the name of the Participating Party as
a result of an in-kind redemption order pursuant to local law or market convention, or for other reasons (“Market Sales”).
In such cases where the Trust makes Market Sales, the Authorized Participant will reimburse the Trust for, among other things, any difference
between the market value at which the securities and/or financial instruments were sold or settled by the Trust and the cash-in-lieu
amount, applicable registration fees, brokerage commissions and certain taxes.
CONTINUOUS OFFERING
The method by which Creation Units are created
and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by the Trust on
an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may occur. Broker-dealers and
other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants
in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability
provisions of the Securities Act.
For example, a broker-dealer firm or its client
may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent
Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes
of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its
client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities
that could lead to a categorization as an underwriter.
Broker-dealers who are not “underwriters”
but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that
are part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, would be unable
to take advantage of the prospectus-delivery exemption provided by Section 4(3) of the Securities Act. This is because the
prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result
of Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers who are not underwriters but are
participating in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are
part of an over-allotment within the meaning of Section 4(3) (A) of the Securities Act would be unable to take advantage
of the prospectus delivery exemption provided by Section 4(3) of the Securities Act. Firms that incur a prospectus delivery
obligation with respect to Shares are reminded that, under Rule 153 of the Securities Act, a prospectus delivery obligation under
Section 5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Exchange is satisfied by
the fact that the prospectus is available at the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is
only available with respect to transactions on an exchange.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Determination of Net Asset Value (NAV).”
The NAV per Share for the Fund is computed by
dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number
of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the management fee, are accrued daily and taken into
account for purposes of determining NAV. The NAV of the Fund is determined as of the close of the regular trading session on the Exchange
(ordinarily 4:00 p.m., Eastern time) on each day that the Exchange is open.
Any assets or liabilities denominated in currencies
other than the U.S. dollar are converted into U.S. dollars at the current market rates on the date of valuation as quoted by one or more
sources. In computing the Fund’s NAV, the Fund’s portfolio securities are valued based on market quotations. When market
quotations are not readily available for a portfolio security the Fund must use such security’s fair value as determined in good
faith in accordance with the Fund’s Fair Value Pricing Procedures which are approved by the Board.
The Fund typically values fixed-income portfolio
securities using last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied
by the Fund’s approved independent third-party pricing services. Pricing services may use matrix pricing or valuation models that
utilize certain inputs and assumptions to derive values. Pricing services generally value fixed-income securities assuming orderly transactions
of an institutional round lot size, but the Fund may hold or transact in such securities in smaller odd lot sizes. Odd lots often trade
at different prices that may be above or below the price at which the pricing service has valued the security. An amortized cost method
of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines
in good faith that such method does not represent fair value.
The value of each Fund's portfolio securities
is based on such securities’ closing price on local markets, when available. If a portfolio security’s market price is not
readily available or does not otherwise accurately reflect the fair value of such security, the portfolio security will be valued by
another method that the Advisor believes will better reflect fair value in accordance with the Trust’s valuation policies and procedures
approved by the Board. Each Fund may use fair value pricing in a variety of circumstances, including but not limited to, situations when
the value of a Fund’s portfolio security has been materially affected by events occurring after the close of the market on which
such security is principally traded (such as a corporate action or other news that may materially affect the price of such security)
or trading in such security has been suspended or halted. Accordingly, a Fund’s NAV may reflect certain portfolio securities’
fair values rather than their market prices. Fair value pricing involves subjective judgments and it is possible that a fair value determination
for a portfolio security is materially different than the value that could be realized upon the sale of such security.
DIVIDENDS AND DISTRIBUTIONS
General Policies
The following information supplements and should be read in conjunction
with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
Dividends from net investment income are declared
and paid at least annually by each Fund. Distributions of net realized capital gains, if any, generally are declared and paid once a
year. The Trust may make distributions on a more frequent basis for each Fund to comply with the distribution requirements of the U.S.
Internal Revenue Code of 1986, as amended (the “Code”), in all events in a manner consistent with the provisions of the 1940
Act. In addition, the Trust may distribute at least annually amounts representing the full dividend yield on the underlying portfolio
securities of the Funds, net of expenses of the Funds, as if each Fund owned such underlying portfolio securities for the entire dividend
period in which case some portion of each distribution may result in a return of capital for tax purposes for certain shareholders.
Dividends and other distributions on Shares are
distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants
and Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust. The Trust may make additional distributions
to the extent necessary (i) to distribute the entire annual taxable income of the Trust, plus any net capital gains and (ii) to
avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or advisable to preserve the status of each Fund as a “regulated
investment company” under the Code or to avoid imposition of income or excise taxes on undistributed income.
Dividend Reinvestment Service
No reinvestment service is provided by the Trust.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Funds through
DTC Participants for reinvestment of their dividend distributions. If this service is used, dividend distributions of both income and
realized gains will be automatically reinvested in additional whole Shares of the Funds. Beneficial Owners should contact their broker
to determine the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners
to adhere to specific procedures and timetables.
U.S. FEDERAL INCOME TAXATION
Set forth below is a discussion of certain U.S.
federal income tax considerations affecting the Funds and the purchase, ownership and disposition of Shares. It is based upon the U.S.
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Department regulations promulgated thereunder, judicial
authorities, and administrative rulings and practices, all as in effect as of the date of this SAI and all of which are subject to change,
possibly with retroactive effect. The following information supplements and should be read in conjunction with the section in the Prospectus
entitled “Dividends, Distributions and Taxes.”
Except to the extent discussed below, this summary
assumes that a Fund’s shareholder holds Shares as capital assets within the meaning of the Code, and does not hold Shares in connection
with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an
investment in Shares, and does not address the tax consequences to Fund shareholders subject to special tax rules, including, but not
limited to, partnerships and the partners therein, those who hold Shares through an IRA, 401(k) plan or other tax-advantaged account,
and, except to the extent discussed below, tax-exempt shareholders. This discussion does not discuss any aspect of U.S. state, local,
estate, and gift, or non-U.S., tax law. This discussion is not intended or written to be legal or tax advice to any shareholder in a
Fund or other person and is not intended or written to be used or relied on, and cannot be used or relied on, by any such person for
the purpose of avoiding any U.S. federal tax penalties that may be imposed on such person. Prospective Fund shareholders are urged to
consult their own tax advisers with respect to the specific U.S. federal, state, and local, and non-U.S., tax consequences of investing
in Shares based on their particular circumstances.
The Funds have not requested and will not request
an advance ruling from the U.S. Internal Revenue Service (“IRS”) as to the U.S. federal income tax matters described below.
The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective investors should consult
their own tax advisors with regard to the U.S. federal tax consequences of the purchase, ownership and disposition of Shares, as well
as the tax consequences arising under the laws of any state, non-U.S. country or other taxing jurisdiction.
Tax Treatment of the Funds
In
General. Each Fund intends to qualify and elect to be treated as a separate regulated investment company under the Code. As
a RIC, a Fund generally will not be required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains
that it distributes to its shareholders.
To qualify and remain eligible for the special
tax treatment accorded to RICs, each Fund must meet certain income, asset and distribution requirements, described in more detail below.
Specifically, each Fund must (i) derive at least 90% of its gross income in each taxable year from dividends, interest, payments
with respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including,
but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock,
securities or currencies and net income derived from interests in qualified publicly traded partnerships (“QPTPs”) (i.e.,
partnerships that are traded on an established securities market or readily tradable on a secondary market, other than partnerships that
derive at least 90% of their income from interest, dividends, and other qualifying RIC income described above), and (ii) diversify
its holdings so that, at the end of each quarter of the Fund’s taxable year, (a) at least 50% of the value of the Fund’s
assets is represented by cash, securities of other RICs, U.S. government securities and other securities, with such other securities
limited, in respect of any one issuer, to an amount not greater in value than five percent of the Fund’s total assets and not greater
than 10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its assets is invested in
the securities (other than U.S. government securities or securities of other RICs) of any one issuer, any two or more issuers of which
20% or more of the voting stock of each such issuer is held by the Fund and that are determined to be engaged in the same or similar
trades or businesses or related trades or businesses or in the securities of one or more QPTPs. Furthermore, each Fund must distribute
annually at least 90% of the sum of (i) its “investment company taxable income” (which includes dividends, interest
and net short-term capital gains) and (ii) its net tax-exempt interest income, if any.
Failure
to Maintain RIC Status. If a Fund fails to qualify as a RIC for any year (subject to certain curative measures allowed by
the Code), the Fund will be subject to regular corporate-level U.S. federal income tax in that year on all of its taxable income, regardless
of whether the Fund makes any distributions to its shareholders. In addition, in such case, distributions will be taxable to a Fund’s
shareholders generally as ordinary dividends to the extent of the Fund’s current and accumulated earnings and profits, possibly
eligible for (i) in the case of an individual Fund shareholder, treatment as a qualified dividend (as discussed below) subject to
tax at preferential long-term capital gains rates or (ii) in the case of a corporate Fund shareholder, a dividends-received deduction.
The remainder of this discussion assumes that the Funds will qualify for the special tax treatment accorded to RICs.
Excise
Tax. A Fund will be subject to a four percent excise tax on certain undistributed income generally if the Fund does not distribute
to its shareholders in each calendar year at least 98% of its ordinary income for the calendar year, 98.2% of its capital gain net income
for the twelve months ended October 31 of such year, plus 100% of any undistributed amounts from prior years. For these purposes,
a Fund will be treated as having distributed any amount on which it has been subject to U.S. corporate income tax for the taxable year
ending within such calendar year. A Fund intends to make distributions necessary to avoid this four percent excise tax, although there
can be no assurance that it will be able to do so.
Exempt-Interest
Dividends: Each of the Funds expects that, at the end of each quarter of its taxable year, (i) it will be a “qualified
fund of funds” (i.e., a RIC at least 50% of the total assets of which is represented by interests in other RICs) or (ii) 50%
or more of its assets, by value, will consist of certain obligations exempt from U.S. federal income tax under Section 103(a) of
the Code (relating generally to obligations of a state or local governmental unit) (“Tax-Exempt Obligations”). As a result,
each of the Funds expects to qualify to designate a portion of its dividends as “exempt-interest dividends.” “Exempt-interest
dividends” generally means dividends designated by a Fund as attributable to its net interest income from Tax-Exempt Obligations.
The tax consequences applicable to shareholders with respect to exempt- interest dividends are discussed below (see—Tax Treatment
of Fund Shareholders).
Phantom
Income. With respect to some or all of its investments, a Fund may be required to recognize taxable income in advance of receiving
the related cash payment. For example, under the “wash sale” rules, a Fund may not be able to deduct currently a loss on
a disposition of a portfolio security. As a result, a Fund may be required to make an annual income distribution greater than the total
cash actually received during the year. Such distribution may be made from the existing cash assets of the Fund or cash generated from
selling portfolio securities. The Fund may realize gains or losses from such sales, in which event the Fund’s shareholders may
receive a larger capital gain distribution than they would in the absence of such transactions. (See also —“Certain Debt
Instruments” below.)
Certain
Debt Instruments. Some of the debt securities (with a fixed maturity date of more than one year from the date of issuance)
that may be acquired by a Fund (such as zero coupon debt instruments or debt instruments with payment in-kind interest) may be treated
as debt securities that are issued originally at a discount. Generally, the amount of original issue discount is treated as interest
income and is included in income over the term of the debt security, even though payment of that amount is not received until a later
time, usually when the debt security matures.
If a Fund acquires debt securities (with a fixed
maturity date of more than one year from the date of issuance) in the secondary market, such debt securities may be treated as having
market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having
market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the “accrued market
discount” on such debt security. Market discount generally accrues in equal daily installments. A Fund may make one or more of
the elections applicable to debt securities having market discount, which could affect the character and timing of recognition of income.
Some debt securities (with a fixed maturity
date of one year or less from the date of issuance) that may be acquired by the Funds may be treated as having acquisition discount,
or original issue discount in the case of certain types of debt securities. Generally, the Fund will be required to include the acquisition
discount, or original issue discount, in income over the term of the debt security, even though payment of that amount is not received
until a later time, usually when the debt security matures. A Fund may make one or more of the elections applicable to debt securities
having acquisition discount, or original issue discount, which could affect the character and timing of recognition of income.
The Funds may invest a portion of their net assets
in below investment grade instruments. Investments in these types of instruments may present special tax issues for the Funds. U.S. federal
income tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, OID or market discount,
when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default
should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable.
Special
or Uncertain Tax Consequences. A Fund’s investment or other activities could be subject to special and complex tax rules that
may produce differing tax consequences, such as disallowing or limiting the use of losses or deductions, causing the recognition of income
or gain without a corresponding receipt of cash, affecting the time as to when a purchase or sale of stock or securities is deemed to
occur or altering the characterization of certain complex financial transactions.
Tax Treatment of Fund Shareholders
Taxation of U.S. Shareholders
The following is a summary of certain U.S. federal
income tax consequences of the purchase, ownership and disposition of Shares applicable to “U.S. shareholders.” For purposes
of this discussion, a “U.S. shareholder” is a beneficial owner of Shares who, for U.S. federal income tax purposes, is (i) an
individual who is a citizen or resident of the U.S.; (ii) a corporation (or an entity treated as a corporation for U.S. federal
income tax purposes) created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia;
(iii) an estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source;
or (iv) a trust, if (a) a U.S. court is able to exercise primary supervision over the administration of such trust and one
or more U.S. persons have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election
in place to be treated as a U.S. person.
Fund
Distributions. The Funds expect to qualify to designate a portion of their dividends paid as exempt-interest dividends (as
defined above). To qualify to designate a portion of its dividends as “exempt-interest dividends,” a Fund must, at the close
of each quarter of its taxable year (i) be a qualified fund of funds (as defined above), or (ii) have 50% or more of its assets,
by value, consist of Tax-Exempt Obligations (as defined above). In purchasing municipal securities, the Funds intend to rely on opinions
of its bond counsel for each issue as to the excludability of interest on such obligations from gross income for U.S. federal income
tax purposes. The Funds will not undertake independent investigations concerning the tax-exempt status of such obligations, nor do the
Funds guarantee or represent that bond counsels’ opinions are correct. Tax laws enacted principally during the 1980’s not
only had the effect of limiting the purposes for which Tax-Exempt Obligations could be issued and reducing the supply of such obligations,
but also increased the number and complexity of requirements that must be satisfied on a continuing basis in order for obligations to
be and remain tax-exempt. If the issuer of a bond or a user of a bond-financed facility fails to comply with such requirements at any
time, interest on the bond could become taxable, retroactive to the date the obligation was issued. In that event, a portion of a Fund’s
distributions attributable to interest such Fund received on such bond for the current year and for prior years could be characterized
or recharacterized as taxable income.
Exempt-interest dividends generally will be excludable
from a shareholder’s gross income for U.S. federal income tax purposes. However, a shareholder is advised to consult his, her or
its tax advisor with respect to whether exempt-interest dividends retain the exclusion under Section 103(a) of the Code if
such shareholder would be treated as a "substantial user" or “related person” thereof under Section 147(a) of
the Code with respect to any of the Tax-Exempt Obligations held by a Fund.
Although exempt-interest dividends paid by
a Fund generally may be excluded by such Fund’s shareholders from their gross income for U.S. federal income tax purposes, exempt-interest
dividends will be included in determining the portion, if any, of a shareholder’s social security and railroad retirement benefit
payments subject to U.S. federal income tax. Furthermore, exempt-interest dividends paid by a Fund could subject certain individual shareholders
in a Fund to the U.S. federal alternative minimum tax. For tax years beginning after December 31, 2022, tax exempt interest dividends
may affect the corporate alternative minimum tax for certain corporations. In addition, if the Fund invests in “private activity
bonds,” a portion of the exempt-interest dividends paid by the Fund may be treated as an item of “tax preference” and,
therefore, could subject certain shareholders of such Fund to the U.S. federal alternative minimum tax.
Interest on indebtedness incurred to purchase
or carry Shares of a Fund that pays exempt-interest dividends will not be deductible by the shareholders for U.S. federal income tax
purposes to the extent attributable to exempt-interest dividends.
Fund distributions other than exempt-interest
dividends will be taxable to shareholders who are subject to U.S. federal income tax. In general, Fund distributions are subject to U.S.
federal income tax when paid, regardless of whether they consist of cash or property and regardless of whether they are reinvested in
Shares. However, any Fund distribution declared in October, November or December of any calendar year and payable to shareholders
of record on a specified date during such month will be deemed to have been received by each Fund shareholder on December 31 of
such calendar year, provided such dividend is actually paid during January of the following calendar year.
Distributions of a Fund’s net investment
income and a Fund’s net short-term capital gains in excess of net long-term capital losses (collectively referred to as “ordinary
income dividends”) are taxable as ordinary income to the extent of the Fund’s current and accumulated earnings and profits
(subject to an exception for “qualified dividend income”, as discussed below). Corporate shareholders of a Fund may be eligible
to take a dividends-received deduction with respect to some of such distributions, provided the distributions are attributable to dividends
received by the Fund on stock of U.S. corporations with respect to which the Fund meets certain holding period and other requirements.
To the extent designated as “capital gain dividends” by a Fund, distributions of a Fund’s net long- term capital gains
in excess of net short-term capital losses (“net capital gain”) are taxable at long-term capital gain tax rates to the extent
of the Fund’s current and accumulated earnings and profits, regardless of a Fund shareholder’s holding period in the Fund’s
Shares. Such dividends will not be eligible for a dividends-received deduction by corporate shareholders.
An election may be available to you to defer
recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You
should talk to your tax advisor about the availability of this deferral election and its requirements.
A Fund’s net capital gain is computed by
taking into account the Fund’s capital loss carryforwards, if any. Under the Regulated Investment Company Modernization Act of
2010, capital losses incurred in tax years beginning after December 22, 2010 can be carried forward indefinitely and retain the
character of the original loss. To the extent that these carryforwards are available to offset future capital gains, it is probable that
the amount offset will not be distributed to shareholders. In the event that a Fund were to experience an ownership change as defined
under the Code, the Fund’s loss carryforwards, if any, may be subject to limitation.
Distributions of “qualified dividend
income” (defined below) are taxed to certain non-corporate shareholders at the reduced rates applicable to long-term capital gain
to the extent of the Fund’s current and accumulated earnings and profits, provided that the Fund shareholder meets certain holding
period and other requirements with respect to the distributing Fund’s Shares and the distributing Fund meets certain holding period
and other requirements with respect to the dividend-paying stocks. Dividends subject to these special rules, however, are not actually
treated as capital gains and, thus, are not included in the computation of a non-corporate shareholder’s net capital gain and generally
cannot be used to offset capital losses. The portion of distributions that a Fund may report as qualified dividend income generally is
limited to the amount of qualified dividend income received by the Fund, but if for any Fund taxable year 95% or more of the Fund’s
gross income (exclusive of net capital gain from sales of stock and securities) consist of qualified dividend income, all distributions
of such income for that taxable year may be reported as qualified dividend income. For this purpose, “qualified dividend income”
generally means income from dividends received by a Fund from a real estate investment trust (“REIT”) or another RIC and
generally is qualified dividend income only to the extent that the dividend distributions are made out of qualified dividend income received
by such REIT or other RIC. Given their investment strategies, the Funds do not anticipate that a significant portion of their distributions
will be eligible for qualifying dividend treatment.
To the extent that a Fund makes a distribution
of income received by such Fund in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction,
such income will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends-received
deduction for corporate shareholders.
Distributions in excess of a Fund’s current
and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholder’s
tax basis in its Shares of the Fund, and as a capital gain thereafter (assuming the shareholder holds its Shares of the Fund as capital
assets).
Each Fund intends to distribute its net capital
gain at least annually. However, by providing written notice to its shareholders no later than 60 days after its year end, a Fund may
elect to retain some or all of its net capital gain and designate the retained amount as a “deemed distribution.” In that
event, the Fund pays U.S. federal income tax on the retained net capital gain, and each Fund shareholder recognizes a proportionate share
of the Fund’s undistributed net capital gain. In addition, each Fund shareholder can claim a tax credit or refund for the shareholder’s
proportionate share of the Fund’s U.S. federal income taxes paid on the undistributed net capital gain and increase the shareholder’s
tax basis in the Shares by an amount equal to the shareholder’s proportionate share of the Fund’s undistributed net capital
gain, reduced by the amount of the shareholder’s tax credit or refund. Organizations or persons not subject to U.S. federal income
tax on such net capital gain may be entitled to a refund of their pro rata share of such taxes paid by the Fund upon timely filing appropriate
returns or claims for refund with the IRS.
With respect to non-corporate Fund shareholders
(i.e., individuals, trusts and estates), ordinary income and short-term capital gain are taxed at a current maximum rate of 37% and long-term
capital gain is taxed at a current maximum rate of 20%. Corporate shareholders are taxed at a current maximum rate of 21% on their income
and gain.
In addition, high-income individuals (and certain
trusts and estates) generally will be subject to a 3.8% Medicare tax on “net investment income,” in addition to otherwise
applicable U.S. federal income tax. “Net investment income” generally will include dividends (including capital gain dividends)
received from a Fund and net gains from the redemption or other disposition of Shares. Please consult your tax advisor regarding this
tax.
If a Fund is a qualified fund of funds (as defined
above) or more than 50% of the Fund’s total assets at the end of a taxable year consist of non-U.S. stock or securities, the Fund
may elect to “pass through” to its shareholders certain non-U.S. income taxes paid by the Fund. This means that each shareholder
will be required to (i) include in gross income, even though not actually received, the shareholder’s pro rata share of the
Fund’s non-U.S. income taxes, and (ii) either take a corresponding deduction (in calculating U.S. federal taxable income)
or credit (in calculating U.S. federal income tax), subject to certain limitations.
Investors considering buying Shares just prior
to a distribution should be aware that, although the price of the Shares purchased at such time may reflect the forthcoming distribution,
such distribution nevertheless may be taxable (as opposed to a non-taxable return of capital).
Sales
of Shares. Any capital gain or loss realized upon a sale or exchange of Shares generally is treated as a long-term gain or
loss if the Shares have been held for more than one year. Any capital gain or loss realized upon a sale or exchange of Shares held for
one year or less generally is treated as a short-term gain or loss, except that any capital loss on the sale of Shares held for six months
or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect
to such Shares. Furthermore, a loss realized by a shareholder on the sale or exchange of Shares of a Fund with respect to which exempt-interest
dividends have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held by the shareholder
for six months or less at the time of their disposition. All or a portion of any loss realized upon a sale or exchange of Shares also
will be disallowed under the “wash sale” rules if substantially identical shares are purchased (through reinvestment
of dividends or otherwise) within a 61-day period beginning 30 days before and ending 30 days after the disposition of the Shares. In
such a case, the basis of the newly purchased shares will be adjusted to reflect the disallowed loss.
An election may be available to you to defer
recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about
the availability of this deferral election and its requirements.
Legislation passed by Congress requires reporting
to the IRS and to taxpayers of adjusted cost basis information for “covered securities,” which generally include shares of
a RIC acquired on or after January 1, 2012. Shareholders should contact their brokers to obtain information with respect to the
available cost basis reporting methods and available elections for their accounts.
Creation
Unit Issues and Redemptions. On an issue of Shares as part of a Creation Unit, made by means of an in-kind deposit, an Authorized
Participant recognizes capital gain or loss (assuming the Authorized Participant does not hold the securities as inventory) equal to
the difference between (i) the fair market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant
as part of the issue) and (ii) the Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid
by the Authorized Participant as part of the issue). On a redemption of Shares as part of a Creation Unit where the redemption is conducted
in-kind by a payment of Fund Securities, an Authorized Participant recognizes capital gain or loss (assuming the Authorized Participant
does not hold the securities as inventory) equal to the difference between (i) the fair market value (at redemption) of the securities
received (plus any cash received by the Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s
basis in the redeemed Shares (plus any cash paid by the Authorized Participant as part of the redemption). However, the IRS may assert,
under the “wash sale” rules or on the basis that there has been no significant change in the Authorized Participant’s
economic position, that any loss on an issue or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss recognized
upon the issue or redemption of Shares (as components of a Creation Unit) is treated either as long-term capital gain or loss, if the
deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than one year, or
otherwise as short-term capital gain or loss. However, any capital loss on a redemption of Shares held for six months or less is treated
as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect to such Shares. Furthermore,
a loss realized on the redemption of Shares of a Fund with respect to which exempt-interest dividends have been paid may, to the extent
of such exempt-interest dividends, be disallowed if such Shares have been held for six months or less at the time of their disposition.
Reportable
Transactions. If a Fund shareholder recognizes a loss with respect to Shares of $2 million or more (for an individual Fund
shareholder) or $10 million or more (for a corporate shareholder) in any single taxable year (or a greater loss over a combination of
years), the Fund shareholder may be required file a disclosure statement with the IRS. Significant penalties may be imposed upon the
failure to comply with these reporting rules. Shareholders should consult their tax advisors to determine the applicability of these
rules in light of their individual circumstances.
Taxation
of Non-U.S. Shareholders
The following is a summary of certain U.S. federal
income tax consequences of the purchase, ownership and disposition of Shares applicable to “non-U.S. shareholders.” For purposes
of this discussion, a “non-U.S. shareholder” is a beneficial owner of Shares that is not a U.S. shareholder (as defined above)
and is not an entity or arrangement treated as a partnership for U.S. federal income tax purposes. The following discussion is based
on current law, and is for general information only. It addresses only selected, and not all, aspects of U.S. federal income taxation.
Dividends. As indicated above, a majority of
each Fund’s dividend distributions to its shareholders, including its non-U.S. shareholders, is expected to be exempt from U.S.
federal income tax as exempt-interest dividends. However, with respect to non-U.S. shareholders of a Fund, the Fund’s ordinary
income dividends generally will be subject to U.S. federal withholding tax at a rate of 30% (or at a lower rate established under an
applicable tax treaty). However, ordinary income dividends that are “interest-related dividends” or “short-term capital
gain dividends” (each as defined below) and capital gain dividends generally will not be subject to U.S. federal withholding (or
income) tax, provided that the non-U.S. shareholder furnishes the Fund with a completed IRS Form W-8BEN or W-8BEN-E, as applicable,
(or acceptable substitute documentation) establishing the non-U.S. shareholder’s non-U.S. status and the Fund does not have actual
knowledge or reason to know that the non-U.S. shareholder would be subject to such withholding tax if the non-U.S. shareholder were to
receive the related amounts directly rather than as dividends from the Fund. “Interest-related dividends” generally means
dividends designated by a Fund as attributable to such Fund’s U.S.-source interest income, other than certain contingent interest
and interest from obligations of a corporation or partnership in which such Fund is at least a 10% shareholder, reduced by expenses that
are allocable to such income. “Short-term capital gain dividends” generally means dividends designated by a Fund as attributable
to the excess of such Fund’s net short-term capital gain over its net long-term capital loss. Depending on its circumstances, a
Fund may treat such dividends, in whole or in part, as ineligible for these exemptions from withholding.
Notwithstanding the foregoing, special rules apply
in certain cases, including as described below. For example, in cases where dividend income from a non-U.S. shareholder’s investment
in a Fund is effectively connected with a trade or business of the non-U.S. shareholder conducted in the U.S., the non-U.S. shareholder
generally will be exempt from withholding tax, but will be subject to U.S. federal income tax at the graduated rates applicable to U.S.
shareholders. Such income generally must be reported on a U.S. federal income tax return. Furthermore, such income also may be subject
to the 30% branch profits tax in the case of a non-U.S. shareholder that is a corporation. In addition, if a non-U.S. shareholder is
an individual who is present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., any
gain incurred by such shareholder with respect to his or her capital gain dividends and short-term capital gain dividends would be subject
to a 30% U.S. federal income tax (which, in the case of short-term capital gain dividends, may, in certain instances, be withheld at
source by a Fund).
For years after December 31, 2022, amounts
paid to or recognized by a non-U.S. affiliate that are excluded from tax under the portfolio interest, capital gains dividends, short-term
capital gains or tax-exempt interest dividend exceptions or applicable treaties, may be taken into consideration in determining whether
a corporation is an “applicable corporation” subject to a 15% minimum tax on adjusted financial statement income.
Sales
of Fund Shares. Under current law, gain on a sale or exchange of Shares generally will be exempt from U.S. federal income
tax (including withholding at the source) unless (i) the non-U.S. shareholder is an individual who was physically present in the
U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., in which case the non-U.S. shareholder
would incur a 30% U.S. federal income tax on his capital gain, (ii) the gain is effectively connected with a U.S. trade or business
conducted by the non-U.S. shareholder (in which case the non-U.S. shareholder generally would be taxable on such gain at the same graduated
rates applicable to U.S. shareholders, would be required to file a U.S. federal income tax return and, in the case of a corporate non-U.S.
shareholder, may also be subject to the 30% branch profits tax.
Credits
or Refunds. To claim a credit or refund for any Fund-level taxes on any undistributed long-term capital gains (as discussed
above) or any taxes collected through withholding, a non-U.S. Fund shareholder must obtain a U.S. taxpayer identification number and
file a U.S. federal income tax return even if the non-U.S. Fund shareholder would not otherwise be required to do so.
Non-U.S. shareholders that engage in certain
“wash sale” and/or substitute dividend payment transactions the effect of which is to avoid the receipt of distributions
from the Fund that would be treated as gain effectively connected with a U.S. trade or business will be treated as having received such
distributions.
All shareholders of the Fund should consult their
tax advisers regarding the application of the rules described above.
Back-Up
Withholding
A Fund (or a financial intermediary such as a
broker through which a shareholder holds Shares in a Fund) may be required to report certain information on a Fund shareholder to the
IRS and withhold U.S. federal income tax (“backup withholding”) at a 24% rate from taxable distributions and redemption or
sale proceeds payable to the Fund shareholder if (i) the Fund shareholder fails to provide the Fund with a correct taxpayer identification
number or make required certifications, or if the IRS notifies the Fund that the Fund shareholder is otherwise subject to backup withholding,
and (ii) the Fund shareholder is not otherwise exempt from backup withholding. Non-U.S. shareholders can qualify for exemption from
backup withholding by submitting a properly completed IRS Form W-8BEN or W-8BEN-E. Backup withholding is not an additional tax and
any amount withheld may be credited against a Fund shareholder’s U.S. federal income tax liability.
Foreign
Account Tax Compliance Act
The U.S. Foreign Account Tax Compliance Act (“FATCA”)
generally imposes a 30% withholding tax on “withholdable payments” (defined below) made to (i) a “foreign financial
institution” ("FFI"), unless the FFI enters into an agreement with the IRS to provide information regarding certain of
its direct and indirect U.S. account holders and satisfy certain due diligence and other specified requirements, and (ii) a “non-financial
foreign entity” (“NFFE”) unless such NFFE provides certain information to the withholding agent about certain of its
direct and indirect “substantial U.S. owners” or certifies that it has no such U.S. owners. The beneficial owner of a “withholdable
payment” may be eligible for a refund or credit of the withheld tax. The U.S. government also has entered into several intergovernmental
agreements with other jurisdictions to provide an alternative, and generally easier, approach for FFIs to comply with FATCA.
“Withholdable payments” generally
include, among other items, (i) U.S.-source interest and dividends, and (ii) gross proceeds from the sale or disposition, occurring
on or after January 1, 2019, of property of a type that can produce U.S.-source interest or dividends. Proposed regulations may
eliminate the requirement to withhold on gross proceeds.
A Fund may be required to impose a 30% withholding
tax on withholdable payments to a shareholder if the shareholder fails to provide the Fund with the information, certifications or documentation
required under FATCA, including information, certification or documentation necessary for the Fund to determine if the shareholder is
a non-U.S. shareholder or a U.S. shareholder and, if it is a non-U.S. shareholder, if the non-U.S. shareholder has “substantial
U.S. owners” and/or is in compliance with (or meets an exception from) FATCA requirements. The Fund will not pay any additional
amounts to shareholders in respect of any amounts withheld. The Fund may disclose any shareholder information, certifications or documentation
to the IRS or other parties as necessary to comply with FATCA.
The requirements of, and exceptions from, FATCA
are complex. All prospective shareholders are urged to consult their own tax advisors regarding the potential application of FATCA with
respect to their own situation.
Section 351
The Trust, on behalf of each Fund, has the right
to reject an order for a purchase of shares of the Fund if the purchaser (or any group of purchasers) would, upon obtaining the shares
so ordered, own 80% or more of the outstanding shares of a given Fund and if, pursuant to Section 351 of the Code, that Fund would
have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has
the right to require information necessary to determine beneficial share ownership for purposes of the 80% determination.
California
Tax Status (The following applies to the IQ MacKay California Municipal Intermediate ETF only)
The assets of the Fund will consist primarily
of one or more of the following: (i) interest bearing obligations issued by or on behalf of the State of California or a local government
in California (the “California Bonds”), (ii) interest bearing obligations issued by the government of Puerto Rico, Guam
or the Virgin Islands (the “Possession Bonds,” and, collectively with the California Bonds, the “Bonds”) and
(iii) shares (the “RIC Shares”) in funds qualifying as regulated investment companies (“RICs”) that are
treated as interests in regulated investment companies for federal income tax purposes. The discussion in this section is based on the
assumption that: (i) the Bonds were validly issued by the State of California or a local government in California, or by the government
of Puerto Rico, Guam or the Virgin Islands, as the case may be, (ii) the interest on the Bonds is excludable from gross income for
federal income tax purposes, and (iii) with respect to the Possession Bonds, the Possession Bonds and the interest thereon are exempt
from all state and local taxation. This disclosure does not address the taxation of persons other than full-time residents of the State
of California.
If you are an individual, you may exclude
from taxable income for purposes of the California Personal Income Tax dividends received from the Fund that are properly reported by
the Fund as exempt-interest dividends for California Personal Income Tax purposes in written statements furnished to you. The portion
of the Fund’s dividends reported as California exempt-interest dividends may not exceed the amount of interest the Fund receives
during its taxable year on obligations the interest on which, if held by an individual, is exempt from taxation by the State of California,
which may include interest received from Possession Bonds, and the amount of California exempt-interest dividends the Fund receives from
the RIC Shares, reduced by certain nondeductible expenses. The Fund may designate California exempt-interest dividends only if the Fund
qualifies as a regulated investment company under the Internal Revenue Code of 1986, and, if at the close of each quarter of its taxable
year, (i) at least 50% of the value of the total assets of the Fund consists of obligations the interest on which when held by an
individual, is exempt from taxation by the State of California or (ii) at least 50% of the value of the total assets of the Fund
consists of interests in other entities qualifying as regulated investment companies for federal income tax purposes.
Distributions from the Fund, other than those
properly reported by the Fund as exempt-interest dividends for California Personal Income Tax purposes, will generally be subject to
the California Personal Income Tax.
Please note that all distributions from the
Fund, including California exempt-interest dividends, received by taxpayers subject to the California Corporation Tax Law may be subject
to the California franchise tax and the California income tax.
You generally will be subject to tax for purposes
of the California Personal Income Tax, and the California franchise and income taxes imposed on taxpayers subject to the California Corporation
Tax Law on gain recognized on the sale or redemption of shares of the Fund. Interest on indebtedness incurred or continued to purchase
or carry shares of the Fund, if the Fund distributes California exempt-interest dividends during a year, is generally not deductible
for purposes of the California Personal Income Tax.
Neither the Sponsor nor its counsel have independently
examined the RIC Shares, the Bonds or the opinions of bond counsel rendered in connection with the issuance of the Bonds. Ownership of
shares in the Fund may result in other California tax consequences to certain taxpayers, and prospective investors should consult their
tax advisors.
You should consult your tax advisor regarding
potential foreign, state or local taxation with respect to your Shares.
OTHER INFORMATION
The Funds are not sponsored, endorsed, sold or
promoted by the Exchange. The Exchange makes no representation or warranty, express or implied, to the owners of Shares or any member
of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the Funds
to achieve their objective. The Exchange has no obligation or liability in connection with the administration, marketing or trading of
the Funds.
For purposes of the 1940 Act, the Funds are
registered investment companies, and the acquisition of Shares by other registered investment companies and companies relying on exemption
from registration as investment companies under Sections 3(c)(1) or 3(c)(7) of the 1940 Act are subject to the restrictions
of Section 12(d)(1) of the 1940 Act and the related rules and interpretations.
Shareholder inquiries may be made by writing
to the Trust, c/o IndexIQ Advisors LLC, 51 Madison Avenue, New York, New York 10010.
FINANCIAL STATEMENTS
The audited financial statements and notes
thereto for the Funds (except the IQ MacKay Municipal Short Duration ETF) contained in the Funds’ Annual Report to Shareholders for their fiscal year ended April 30, 2022 (“Annual Report”) are incorporated by reference into this SAI. No other parts
of the Annual Report are incorporated by reference herein.
The financial statements included in the Annual
Report have been audited by PricewaterhouseCoopers LLP, the Funds’ independent registered public accounting firm, whose report
thereon also appears in the Annual Report and is incorporated by reference into this SAI. Such financial statements have been incorporated
by reference herein in reliance upon such report given upon their authority as experts in accounting and auditing.
As of the date of this SAI, the IQ MacKay Municipal
Short Duration ETF has not yet commenced operations.
A copy of the Annual Report for the fiscal
period ended April 30, 2022, may be obtained upon request and without charge by calling the Advisor, writing the Trust or visiting
the Funds’ website as follows:
By telephone: |
1-888-474-7725 |
|
|
By mail: |
IndexIQ Active ETF Trust |
|
c/o IndexIQ Advisors LLC |
|
51 Madison Avenue |
|
New York, NY 10010 |
|
|
On the Internet: |
newyorklifeinvestments.com/etf |
ME14k-08/22
APPENDIX A
SUMMARY OF PROXY VOTING POLICY AND PROCEDURES
The Advisor has delegated proxy-voting authority to the Fund’s
Subadvisors. A summary of the Subadvisors' proxy voting policies and procedures are provided below.
MacKay
Shields LLC
The Advisor has delegated proxy-voting authority
to the Fund(s)’ subadvisor, MacKay Shields. MacKay Shields has adopted Proxy-Voting Policies and Procedures designed to make sure
that where clients have delegated proxy-voting authority to MacKay Shields, proxies are voted in the best interest of such clients without
regard to the interests of MacKay Shields or related parties. MacKay Shields currently uses Institutional Shareholder Services, Inc.
(“ISS”) to assist in voting client securities. For purposes of the Policy, the "best interests of clients" means,
unless otherwise specified by the client, the clients' best economic interests over the long term – that is, the common interest
that all clients share in seeing the value of a common investment increase over time. MacKay Shields has adopted standard proxy voting
guidelines, which follow ISS voting recommendations and standard guidelines will vary based on client type and/or investment strategy
(e.g., union or non-union voting guidelines, or sustainability voting guidelines).
For those clients who have given us voting
authority, we instruct the client’s custodian to send all ballots to ISS and we instruct ISS which guidelines to follow. MacKay
Shields votes proxies in accordance with the applicable standard voting guidelines unless MacKay Shields agrees with the client to apply
custom guidelines. ISS researches each proxy issue and provides a recommendation to MacKay Shields on how to vote based on such research
and its application of the research to the applicable voting guidelines. ISS casts votes in accordance with its recommendation unless
a portfolio manager believes that it is in the best interests of the client(s) to vote otherwise. To override a proxy recommendation,
a portfolio manager must submit a written override request to the Legal and/or Compliance Department. MacKay Shields has procedures in
place to review each such override request for potential material conflicts of interest between clients and MacKay Shields. MacKay Shields
will memorialize the basis for any decision to override a recommendation or to abstain from voting, including the resolution of any conflicts
of interest.
NYL Investors LLC
NYL Investors has adopted Proxy Voting Policy
and Procedures (the “Policy”) to provide guidance to its employees in discharging its proxy voting duty, and to ensure that,
where proxy-voting authority has been granted to NYL Investors, proxies are voted in the “best interests” of its clients
without regard to the interests of NYL Investors or related parties. For purposes of the Policy, the “best interests of clients”
means, unless otherwise specified by the client, the clients’ best economic interests over the long term – that is, the common
interest that all clients share in seeing the value of a common investment increase over time.
To assist in researching and voting proxies,
NYL Investors utilizes the research and implementation services of a third-party proxy service provider, ISS. NYL Investors uses
ISS’s voting guidelines with respect to voting certain frequently recurring proxy issues. NYL Investors Proxy Voting Committee
is responsible for general oversight of NYL Investors Proxy Policy and Procedures and voting activity. ISS will research each proxy proposal
and provide a recommendation based on the application of its research to the applicable proxy voting guidelines. All proxy voting guidelines
are reviewed annually by the Proxy Voting Committee.
NYL Investors reviews all recommendations and
permits ISS to cast votes in accordance with its recommendations, unless otherwise instructed by the NYL Investors portfolio manager.
The portfolio manager may override the ISS recommendation only if it is in the best interest of the client to do so and after completing
and executing a “Proxy Vote Override Form.” The form requires the portfolio manager to set forth the reason for such override
and identify any potential material conflict of interest. The form is then submitted to Compliance for a determination as to whether
a material conflict of interest exists between NYL Investors or any of its affiliates and the client and on whose behalf the proxy is
to be voted. If Compliance determines that there is no potential material conflict, the portfolio manager may override the recommendation
and vote the proxy issue as he/she determines is in the best interest of clients. If Compliance determines that there exists or may exist
a material conflict, it will refer the issue to the Proxy Voting Committee for consideration. The Proxy Voting Committee determines whether
to permit or deny the override of the recommendation, or whether to take other action, such as delegating the proxy vote to an independent
third party or obtaining voting instructions from clients. NYL Investors will not abstain from voting any proxy for purposes of avoiding
a conflict.
APPENDIX B
SPECIAL RISKS RELATED TO INVESTMENTS IN
MUNICIPAL SECURITIES OF CALIFORNIA
This appendix provides a summary of the factors
that may affect the financial condition of the State of California (“State” or “California”). The information
provided below is intended only to summarize certain of these factors and does not purport to describe in detail each of the potential
factors that may impact the financial condition of the State. The information provided below is derived from public sources that are
current as of the preparation of this SAI. These sources are typically prepared or disseminated by departments, agencies, or bureaus
of the State or federal government, though they may also include other publicly available sources such as news articles, press releases
and other reports. The IQ MacKay California Municipal Intermediate ETF (the “Fund”) has not independently verified the information
included herein and does not make any representation as to the accuracy of such information.
The information included herein is subject
to change rapidly, substantially and without notice. Any changes in this information may adversely impact the financial condition of
the State or its municipal issuers, which could adversely impact the Fund’s investments. In addition, as a result of the severe
market volatility and economic downturn following the outbreak of COVID-19, the economic circumstances in the State may change negatively
and more rapidly than usual, and the State may be less able to maintain up-to-date information for the public. The Fund does not maintain
any obligation to update this information throughout the year. As such, investors and their financial advisers are encouraged to independently
research the financial condition of the State, its municipalities, and their political subdivisions, instrumentalities or authorities.
Investors should also review information about
the Fund’s strategies, risks and investments before investing in the Fund.
Municipal issuers in California rely on State
appropriations and local taxes to fund their operations. As a result, economic, political, natural disasters or weather events, public
health emergencies or financial conditions that reduce State appropriations or impact local tax revenues may increase fiscal pressure
on the State’s municipalities. If a municipal issuer is unable to obtain sufficient revenues to satisfy its outstanding obligations,
that issuer may be subject to a downgrade of its credit rating or other similar credit event. In addition, increased fiscal pressure
may cause a municipal issuer to become insolvent, which may require the issuer to file for bankruptcy. If a California municipal issuer
suffers a credit rating downgrade, becomes insolvent, or files for bankruptcy, the value or liquidity of securities issued by other municipal
issuers in California, including securities issued by the State, could be adversely affected.
Additionally, external factors, such as conditions
in the national economy and demand for goods and services produced in California, could have an adverse impact on the financial condition
of the State and its municipalities. At this time, it is difficult to accurately predict the extent to which these factors may impact
the financial condition of the State and it municipalities.
Overview
Although California’s fiscal health
has improved since the economic downturn beginning in 2008, the State's General Fund budget has been materially adversely impacted by
the health-related and economic impact of the COVID-19 pandemic. Efforts to respond to and mitigate the spread of COVID-19 have had a
severe negative impact on the California and national economies and triggered a historic drop and ongoing volatility in the stock market.
These efforts are expected to result in significant declines in state revenues from recent levels, as well as increased expenditures
required to address the impact of COVID-19. To help address the public health and economic impact of COVID-19, the federal government
passed the Coronavirus Aid, Relief, and Economic Security Act (CARES Act), which provided for approximately $2.2 trillion in disaster
relief, of which California has received approximately $16.1 billion, as well as the American Rescue Plan, which provides an additional
$350 billion in emergency funding for state, local, territorial, and Tribal governments. In addition, the Governor signed into law in
February 2021 an economic relief package totaling $7.6 billion, which was funded primarily by the state’s General Fund. The
rate at which the United States and California have taken on new debt could have a negative impact on their fiscal health, which could
lead to prolonged economic challenges for the respective economies. It is not presently possible to predict the extent of the short-
and long-term harm that COVID-19 could cause to the United States and California economies. A meaningful decline in revenues, which may
result from high levels of unemployment and the closure of businesses, could negatively impact California’s ability to meet its
debt obligations, including with respect to investments held by the Fund.
The State’s revenues can be volatile
and correlate to overall economic conditions. There can be no assurances that the State will not face fiscal stress and cash pressures
again, or that other changes in the State or national economies will not materially adversely affect the financial condition of the State.
Any deterioration in the State’s financial condition may have a negative effect on the marketability, liquidity or value of the
securities issued by the State and its municipalities and may increase the risk of investing in these securities, which could adversely
impact the performance of the Fund.
Economic Conditions
With a population of more than 39 million,
California is by far the most populous state in the nation. In addition, California’s economy is the largest among the 50 states
and among the largest and most diverse in the world, with major components in the high-technology, trade, entertainment, manufacturing,
government, tourism, construction and service sectors. In addition, governmental agencies at the state, local and federal levels employ
a significant number of the State’s residents.
California personal income growth is expected
to increase by 4.0% in 2021 and slow to 0.3% in 2022 but may be negatively impacted by the effects of COVID-19 in the future. According
to the U.S. Department of Commerce, residents of California received approximately $2.8 trillion in estimated personal income in 2020.
As a result, residents of California had a per capita personal income of $71,480, which compared favorably to the national average of
$59,729 over the same period.
California’s unemployment rate averaged
4.1% in 2020, reaching its peak in May 2020 at 16.4% following the outbreak of COVID-19. By April 2021, the State’s unemployment
rate had fallen to 8.0%. In addition to unemployment, a significant number of Californians have also been negatively impacted by COVID-19
through furloughs, pay cuts, reduction in hours worked, and loss of non-wage income, such as from independent contracting.
The value of the State’s exports in
2020 totaled approximately $153.1 billion, which represents a 10.3 percent decrease from 2019. COVID-19 may continue to materially reduce
the value of California’s exports in the future.
Recent Results
Historically, the General Fund derives the
majority of its revenue from personal income taxes, sales and use taxes, and corporation taxes. During fiscal year 2021, these revenue
sources are projected to contribute approximately 70 percent, 16 percent and 10 percent, respectively, of total General Fund revenues
and transfers.
The State’s personal income tax is structured
in a highly progressive manner. The passage of Proposition 30 (and later, Proposition 55), which imposed additional taxes on high-income
taxpayers, has made the personal income tax even more progressive. Depending on market conditions, a large share of personal income tax
receipts may be derived from capital gains realizations and stock option income, revenue sources that can be particularly volatile and
susceptible to economic fluctuations. However, revenues from personal income tax may decline as a result of the impacts of COVID-19.
Sales and use taxes and corporation taxes
are subject to economic fluctuations and were negatively impacted during the U.S. recession in 2007- 2008 and may decline as a result
of COVID-19. Additionally, California is limited in its ability to generate revenues from local property taxes, which are a relatively
stable revenue source. The State is also required to maintain a Special Fund for Economic Uncertainties (“SFEU”), which is
funded from General Fund resources to meet cash needs of the General Fund. For purposes of financial reporting, year-end balances in
the SFEU are included in the General Fund balance. The 2022 Proposed Budget (as defined below) projected that the SFEU would have a balance
of approximately $2.8 billion at the end of fiscal year 2022.
Proposition 2, a budget reserve and debt payment
measure that was approved by voters in November 2014, annually captures an amount equal to 1.5 percent of General Fund revenues
plus capital gains taxes that exceed a long-term historical average. Under the 2022 Proposed Budget’s revenue estimates, Proposition
2 captures a total of $3.0 billion, which will be used to pay down existing State debts. Due to COVID-19, it is expected that conditions
would allow for funds in the Budget Stabilization Account (“BSA”) to be returned to the General Fund for appropriation, as
well as to suspend or reduce required transfers to the BSA.
State Budget
2021-2022 Budget. On January 8, 2021,
the Governor presented his proposed budget for fiscal year 2022 (“2022 Proposed Budget”). The 2022 Proposed Budget assumes
that the General Fund will receive total revenues of approximately $158.4 billion during the fiscal year, which is a decrease of approximately
2.7 percent from fiscal year 2021. Against these revenues, the Governor proposes appropriations of approximately $164.5 billion from
the General Fund, which would be an increase of 5.5 percent from the previous fiscal year.
The 2022 Proposed Budget assumes increases
in total tax receipts during the fiscal year. The Governor projects that personal income tax receipts, which would account for 67 percent
of total General Fund revenues under the proposal, will increase by 5.0 percent over fiscal year 2021 budgeted estimates. The 2022 Proposed
Budget assumes that sales and use tax receipts and corporation tax receipts will be approximately 2.2 percent and 1.8 percent, respectively,
lower their fiscal year 2021 budgeted estimates.
The Governor’s proposal focuses on,
among other things, helping the State manage the COVID-19 crisis. The 2022 Proposed Budget includes approximately $2.4 billion for direct
stimulus payments to low-income individuals and approximately $575 million for grants to small businesses and non-profit cultural institutions.
The 2022 Proposed Budget also proposes approximately $2 billion for the safe reopening of schools. Under the Governor’s proposal,
these amounts would be allocated immediately in advance of the remained of the 2022 budget.
On January 10, 2021, the LAO released
its analysis of the 2022 Proposed Budget. The report on the 2022 Proposed Budget stated that although the Governor’s immediate
action proposals contemplate challenging timelines, the immediate action items would generally benefit the State. The LAO cautioned that
the 2022 Proposed Budget should complement, rather than duplicate, federal efforts contemplated in the Consolidated Appropriations Act
of 2021, which contains approximately $900 billion in federal stimulus. The report also encouraged the legislature should take steps
towards restoring budget reserves that were used in fiscal year 2021 to help address COVID-19.
In May 2021, the Governor revised the
projections contained in the 2021-22 Governor’s Budget (“May Revision”). The May Revision contemplates $22.4
billion in budget reserves, including $15.9 billion in the Proposition 2 Budget Stabilization Account. In addition, under the May Revision,
California will continue to pay down long-term debt obligations. Projections in the May Revision provide for approximately $175
billion in General Fund revenue against $196 billion in expenditures, including from amounts allocated from federal relief aid. The May Revision
projects that the General Fund will end fiscal year 2022 with a balance of approximately $6.6 billion. The LAO Report on the May Revision
states that notwithstanding recent stimulus efforts, state revenue growth is not certain. The LAO cautioned that inflationary pressures
could lead to changes in federal policy that could slow economic growth. The LAO encouraged the Legislature to weigh the risks of future
revenue shortfalls in setting expenditures for the upcoming fiscal year.
Obligations of the State
The State has historically paid the principal
and interest on its outstanding obligations when due. The obligations of the State typically include its general obligations bonds, commercial
paper notes, lease-revenue obligations and short-term obligations, including revenue anticipation notes and warrants. The State’s
Constitution prohibits the creation of general obligation indebtedness of the State unless a bond issuance is approved by a majority
of the electorate voting at either a general election or a direct primary.
As of January 1, 2021, the State’s
outstanding aggregate principal amount of long-term general obligation bonds was approximately $71.9 billion. Of this amount, approximately
$71.2 billion were payable primarily from the State’s General Fund and approximately $672.8 million were “selfliquidating”
bonds payable first from other special revenue funds. Further, as of January 1, 2021, the State’s outstanding aggregate amount
of lease revenue obligations was $8.2 billion.
In the November 2018 general election,
voters passed Proposition 1, authorizing the State to issue $4 billion in general obligation bonds to fund veterans and affordable housing
services ($3 billion for various housing programs and $1 billion for home loan assistance to veterans). The bonds are anticipated to
increase the General Fund’s debt service expenditures by approximately $170 million annually for 35 years. Additional bond measures
may be included on future election ballots, but any proposed bond measure must first be approved by the Legislature or placed on the
ballot through the initiative process.
As of January 1, 2021, there were unused
voter authorizations for the future issuance of approximately $35.5 billion of long-term general obligation bonds, some of which may
first be issued as commercial paper notes.
Certain State agencies and authorities may
issue obligations secured or payable from specific revenue streams. Most of these revenue bonds are not payable from the State’s
General Fund. State agencies and authorities had approximately $70.4 billion aggregate principal amount of revenue bonds and notes that
are non-recourse to the General Fund outstanding as of December 30, 2020. These borrowings are used to finance a large array of
enterprises and projects, including various housing, health facilities, pollution control facilities, transportation projects, public
work projects and public and private educational facilities.
Obligations of Other California Issuers
The State has a large number of agencies,
instrumentalities and political subdivisions that issue municipal obligations. These revenue bonds are supported by state revenue-producing
enterprises and projects, as well as conduit obligations payable from revenues paid by private users or local governments of facilities
financed by the revenue bonds. Such revenue bonds are not payable from the State’s General Fund. The State’s agencies, instrumentalities
and political subdivisions are subject to various economic risks and uncertainties, and the credit quality of securities they issue may
differ significantly from the credit quality of securities backed by the State’s full faith and credit.
Pension and Post Retirement Liabilities
The financial condition of the State and its
localities is subject to risks associated with pension and post retirement liabilities. The pension funds managed by the State’s
retirement systems (e.g., the California Public Employees’ Retirement System (“CaIPERS”) and the California State Teachers’
Retirement System (“CaISTRS”)) suffered large investment losses during the most recent recession and currently have significant
unfunded liabilities. These unfunded liabilities may require the General Fund to make increased contributions in the future, which could
reduce resources available for other State priorities.
As of July 1, 2020, CaIPERS reported
an unfunded accrued liability allocable to state employees, excluding judges and elected officials, of $61.4 billion on a market value
of assets (“MVA”) basis. As of June 30, 2020, CaISTRS reported an unfunded accrued liability of its Defined Benefit
Plan of $102.6 billion on an actuarial value of assets basis. The 2022 Proposed Budget contemplates General Fund contributions to CaIPERS
and CaISTRS are estimated to be approximately $5.5 billion and $3.9 billion, respectively.
In addition to pension benefits, the State
also provides certain other post-employment benefits (“OPEB”), such as health care and dental benefits, for eligible retired
employees of the State. Because the State currently funds its OPEB costs on a “pay-as-you-go” basis, the State has amassed
large unfunded actuarial liabilities with respect to its OPEB obligations. As of June 30, 2019, the State’s accrued actuarial
OPEB liability was estimated at $91.93 billion, of which $91.51 billion was unfunded.
It is possible that the State will be forced
to significantly increase its pension fund and post-retirement benefit contributions, which would reduce discretionary General Fund resources
available for other State programs. Failure to manage these unfunded liabilities may have an adverse impact on the State’s credit
rating.
A significant number of local governments,
including various current CaIPERS members, face similar, and sometimes, relatively more severe, fiscal issues with respect to unfunded
pension and post-retirement benefit liabilities, which fiscal stress may be increased as a result of the impacts of COVID-19. These local
governments’ credit ratings and solvency may be threatened if their liabilities are not addressed by way of wage concessions, restructuring
of benefits, or other more creative methods, which could cause these issuers to default on their outstanding obligations or file for
bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code. In the past, as a result of financial and economic difficulties, several
of the State’s municipalities filed for bankruptcy protection under Chapter 9. Additional municipalities could file for bankruptcy
protection in the future. Any such action could negatively impact the value of the Fund’s investments in the securities of those
issuers or other issuers in the State.
Local Governments
California has 58 counties, which make up
the primary units of local government. Counties are responsible for providing many basic services such as welfare, jails, health care
for the indigent and public safety in unincorporated areas. The State is also made up of nearly 500 incorporated cities and thousands
of special districts formed for education, utilities and other services. The fiscal condition of the various local governments changed
when State voters approved Proposition 13 in 1978. Among other things, Proposition 13 set limits on the future growth of property taxes
and limited local governments’ ability to impose “special taxes” (i.e., taxes devoted to specific purposes) unless
the local government had two-thirds voter approval. In addition, Proposition 218, enacted by initiative in 1996, further limited the
ability of local governments to raise taxes, fees and other exactions.
To help counterbalance the loss of property
tax revenue for local governments, the State provided aid to many local governments from the General Fund. Significantly, the State assumed
a larger responsibility for funding K-12 education and community colleges. During the recession of the early 1990s, the State Legislature
was forced to reduce some of the post-Proposition 13 aid to local government entities other than K-12 education and community colleges.
However, the State Legislature also provided additional funding sources, such as sales taxes, and reduced certain mandates for the provision
of local services by cities and counties.
In 2000, the “internet bubble”
caused another economic shock in the State, which caused the State to divert local revenue sources, including certain sales taxes and
vehicle license fees, into State coffers. Following these actions, voters approved Proposition 1A in 2004. Proposition 1A amended the
State Constitution to reduce the State Legislature’s authority over local government revenue sources and placed restrictions on
the State’s access to local governments’ property, sales and vehicle license fee revenues. Proposition 22, adopted in late
2010, superseded portions of Proposition 1A and completely prohibits the State from borrowing local government funds. Proposition 22
also generally prohibits the State Legislature from making certain changes to local government funding sources.
The enacted budget for fiscal year 2011-2012
included a plan to shift certain State program costs to counties and provide comparable amounts of funds to support these new local obligations.
This realignment plan was designed to provide State funds for certain programs such as corrections and local public safety programs,
as well as programs related to mental health, substance abuse, foster care, child welfare services and adult protective services. However,
local governments, in particular counties, were made responsible for covering an increased part of the financial burden of providing
such local services. Such responsibility brings with it the risk of possible cost overruns, revenue declines and insufficient revenue
growth.
Enacted in 1988, Proposition 98 directs a
minimum portion of the General Fund revenues to support K-12 schools and community colleges. The State may face financial pressure due
to its obligation to fund public schools under Proposition 98. Such obligations may limit the State’s ability to respond to economic
conditions and could reduce the level of assistance the State provides to local governments. Such a reduction in State aid could exacerbate
the serious fiscal issues many local governments already face, particularly with respect to education funding.
Limits placed on the ability of local governments
to raise taxes and fees may prevent these localities from effectively responding to economic and other conditions. The major local government
revenue sources, property and sales tax, and fees from real estate development, are highly susceptible to economic fluctuations and were
all adversely affected by the 2007-2008 U.S. recession. In addition, many California municipalities have been adversely affected by reduced
income resulting from COVID-19. If economic conditions significantly deteriorate, local governments may be forced to cut local services
to address their budget constraints, or, in some cases, file for bankruptcy.
Pending Litigation
The State, its officials and employees are
named as defendants in numerous legal proceedings that occur in the normal course of governmental operations. Some of these proceedings
involve claims for substantial amounts, which, if decided against the State, might require the State to make significant future expenditures
or substantially impair future revenue sources. Because of the prospective nature of these proceedings, it is difficult to accurately
predict the ultimate outcome of such proceedings, estimate the potential impact on the ability of the State to pay debt service costs
on its obligations, or determine what impact, if any, such proceedings may have on the Fund’s investments.
Natural Disasters Risk
Substantially all of California is within
an active geologic region subject to major seismic activity, which could result in increased frequency and severity of natural disasters,
most notably, earthquakes, wildfires and droughts. Such events have, in the past, resulted in significant disruptions of the State economy
and required substantial expenditures from the State government. The risks of natural disasters of varying degrees of severity continue
to persist, and the full extent of the impact of recurring natural disasters on the State’s economy and fiscal stability is difficult
to accurately predict. Any obligation in the Fund could be affected by an interruption of revenues because of damaged facilities, or,
consequently, income tax deductions for casualty losses or property tax assessment reductions. Compensatory financial assistance could
be constrained by the inability of: (i) an issuer to have obtained earthquake insurance coverage rates; (ii) an insurer to
perform on its contracts of insurance in the event of widespread losses; or (iii) the federal or State government to appropriate
sufficient funds within their respective budget limitations.
In 2020, California experienced a number of
catastrophic wildfires that consumed over four million acres, far more than any previous year in the State’s history, and has since
spent billions of dollars in recovery efforts and debris removal. The 2022 Proposed Budget contemplates approximately $143 million in
General Fund appropriations to support new fire crews and equipment. The California Legislature enacted AB 1054 to address public utility
liability for wildfires by, among other measures, establishing a wildfire fund to pay eligible claims arising from wildfires. The wildfires,
particularly in the last year, have significantly impacted the State’s economy and there can be no guarantee that future wildfires
would not have an equally detrimental effect on the State’s economy or environment.
Bond Ratings
As of June 30, 2021, the following ratings
for the State’s general obligation bonds have been received from Moody’s Investors Service, Inc. (“Moody’s”),
Standard & Poor’s Ratings Service (“S&P”) and Fitch Ratings (“Fitch”):
Moody’s | |
S&P | |
Fitch |
Aa2 | |
AA- | |
AA |
These ratings reflect only the views of the
respective rating agency, an explanation of which may be obtained from each such rating agency. There is no assurance that these ratings
will continue for any given period of time or that they will not be revised or withdrawn entirely by the rating agency if, in the judgment
of such rating agency, circumstances so warrant. A downward revision or withdrawal of any such rating may have an adverse effect on the
market prices of the securities issued by the State, its municipalities, and their political subdivisions, instrumentalities, and authorities.
Any explanation of the significance of such ratings may be obtained only from the rating agency furnishing such ratings.
STATEMENT OF ADDITIONAL INFORMATION
INDEXIQ ACTIVE ETF TRUST
51 MADISON AVENUE
NEW YORK, NEW YORK 10010
PHONE: (888) 474-7725
August 31, 2022
This Statement of Additional Information (this
“SAI”) is not a prospectus. It should be read in conjunction with and is incorporated by reference into the prospectus dated
August 31, 2022, as it may be revised from time to time (the “Prospectus”) for the IQ MacKay ESG Core Plus Bond ETF
(ESGB) (the “Fund”), a series of IndexIQ Active ETF Trust (the “Trust).
The Fund’s Prospectus and the Fund’s
Annual Report or Semi-Annual Report may be obtained without charge by writing to the Trust, c/o ALPS Distributors, Inc., 1290 Broadway,
Suite 1000, Denver, Colorado 80203, by calling (888) 474-7725, or by visiting the Trust’s website at newyorklifeinvestments.com/etf.
Shares of the Fund are principally listed on a national securities exchange, the NYSE Arca, Inc. (“NYSE Arca” or the
“Exchange”).
Capitalized terms used but not defined herein
have the same meaning as in the Prospectus, unless otherwise noted.
TABLE OF CONTENTS
No person has been authorized to give any information or to make any
representations other than those contained in this SAI and the Prospectus and, if given or made, such information or representations may
not be relied upon as having been authorized by the Trust.
The SAI does not constitute an offer to sell securities.
GENERAL
DESCRIPTION OF THE TRUST AND THE FUND
The Trust was organized as a Delaware statutory
trust on January 30, 2008 and is authorized to have multiple segregated series or portfolios. The Trust is an open-end management
investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”). The Trust currently
consists of a number of separate investment portfolios, of which 8 are in operation.
The Fund is deemed to be diversified for the
purposes of the 1940 Act. Other portfolios may be added to the Trust in the future. The shares of the Fund are referred to herein as
“Shares.” The offering of Shares is registered under the Securities Act of 1933, as amended (the “Securities Act”).
The Fund is managed by IndexIQ Advisors LLC
(the “Advisor”). The Advisor has been registered as an investment adviser with the Securities and Exchange Commission (the
“SEC”) since August 2007 and is a wholly-owned indirect subsidiary of New York Life Investment Management Holdings LLC.
The Fund is subadvised by MacKay Shields LLC
(“MacKay Shields” or the “Subadvisor”). The Subadvisor was incorporated in 1969 and has been registered as an
investment adviser with the SEC since 1969. Today, the Subadvisor is an indirect wholly-owned subsidiary of New York Life. The Subadvisor’s
principal office is located at 1345 Avenue of the Americas, New York, New York, 1015. As of June 30, 2022, the Subadvisor had approximately
$132 billion in assets under management.
The Fund offers and issues Shares at net asset
value (the “NAV”) only in aggregations of a specified number of Shares (each, a “Creation Unit” or a “Creation
Unit Aggregation”). The consideration for purchase of a Creation Unit of Shares generally consists of cash only, although the Fund
also reserves the right to permit or require the in-kind deposit of a designated portfolio of securities (the “Deposit Securities”)
along with a specified cash payment (the “Cash Component”). Shares are redeemable only in Creation Unit Aggregations and,
generally, in exchange for a basket of Deposit Securities together with a Cash Component. In the event of the liquidation of the Fund,
the Trust may lower the number of Shares in a Creation Unit.
The Trust’s Amended and Restated Declaration
of Trust (the “Declaration”) provides that by virtue of becoming a shareholder of the Trust, each shareholder is bound by
the provisions of the Declaration. The Declaration provides a detailed process for the bringing of derivative actions by shareholders.
Prior to bringing a derivative action, a written demand by the complaining shareholder must first be made on the Trustees. The Declaration
details conditions that must be met with respect to the demand, including the requirement that 10% of the outstanding Shares of the Fund
who are eligible to bring such derivative action under the Delaware Statutory Trust Act join in the demand for the Trustees to commence
such derivative action. There may be questions regarding the enforceability of this provision based on certain interpretations of the
Securities Act of 1933 Act, as amended (the “1933 Act”), the Securities Exchange Act of 1934, as amended (the “1934
Act”) and the 1940 Act.
Additionally, the Declaration provides that
the Court of Chancery of the State of Delaware, to the extent there is subject matter jurisdiction in such court for the claims asserted
or, if not, then in the Superior Court of the State of Delaware shall be the exclusive forum in which certain types of litigation may
be brought, which may require shareholders to have to bring an action in an inconvenient or less favorable forum. There may be questions
regarding the enforceability of this provision because the 1933 Act, the 1934 Act and the 1940 Act allow claims to be brought in state
and federal courts. The Declaration provides that shareholders waive any and all right to trial by jury in any claim, suit, action or
proceeding.
EXCHANGE
LISTING AND TRADING
There can be no assurance that the Fund will
be able to maintain the listing of its Shares on the Exchange. The Exchange will consider the suspension of trading and delisting of
the Shares of the Fund from listing if, (i) the Fund does not comply with the Exchange’s continuous listing standards; or
(ii) such other event shall occur or condition exist that, in the opinion of the Exchange, makes further trading on the Exchange
inadvisable. The Exchange will remove the Shares of the Fund from listing and trading upon termination of the Fund.
As in the case of other stocks traded on the Exchange,
brokers’ commissions on transactions will be based on commission rates negotiated by an investor and his or her broker.
The Trust reserves the right to adjust the price
levels of the Shares in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished through
stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
INVESTMENT
OBJECTIVES AND POLICIES
Investment Objectives
The Fund has a distinct investment objective and
policies that are distinct from the other series of the Trust. There can be no assurance that the Fund’s objective will be achieved.
All investment objectives and investment policies
not specifically designated as fundamental may be changed without shareholder approval. Additional information about the Fund, its policies,
and the investment instruments it may hold, is provided below.
The Fund’s share prices will fluctuate with
market and economic conditions. The Fund should not be relied upon as a complete investment program.
Investment Restrictions
The investment restrictions set forth below have
been adopted by the Board of Trustees of the Trust (the “Board”) as fundamental policies that cannot be changed with respect
to the Fund without the affirmative vote of the holders of a majority (as defined in the 1940 Act) of the outstanding voting securities
of the Fund. The investment objective of the Fund and all other investment policies or practices of the Fund are considered by the Trust
not to be fundamental and accordingly may be changed without shareholder approval. For purposes of the 1940 Act, a “majority of
the outstanding voting securities” means the lesser of the vote of (i) 67% or more of the Shares of the Fund present at a meeting,
if the holders of more than 50% of the outstanding Shares of the Fund are present or represented by proxy, or (ii) more than 50%
of the Shares of the Fund.
As a matter of fundamental policy, the Fund:
A. May not invest 25% or more
of its total assets in the securities of one or more issuers conducting their principal business activities in the same industry or group
of industries. The Fund will not invest 25% or more of its total assets in any investment company that so concentrates. This limitation
does not apply to investments in securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities, or shares
of investment companies. Also, for purposes of industry concentration, tax-exempt securities issued by states, municipalities and their
political subdivisions are not considered to be part of any industry.
B. May borrow money, to the extent
permitted by the 1940 Act, as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time.
C. May make loans as permitted
under the 1940 Act, as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time.
D. May act as an underwriter of
securities within the meaning of the Securities Act of 1933 (“1933 Act”), to the extent permitted under the 1933 Act, as such
may be interpreted or modified by regulatory authorities having jurisdiction, from time to time.
E. May purchase or sell real estate
or any interest therein to the extent permitted under the 1940 Act, as such may be interpreted or modified by regulatory authorities having
jurisdiction, from time to time.
F. May not purchase physical commodities
or contracts regarding physical commodities, except as permitted under the 1940 Act and other applicable laws, rules and regulations,
as such may be interpreted or modified by regulatory authorities having jurisdiction, from time to time.
G. May issue senior securities,
to the extent permitted by the 1940 Act, as such may be interpreted or modified by regulatory authorities having jurisdiction, from time
to time.
Unless otherwise indicated, all of the percentage
limitations above and in the investment restrictions recited in the Prospectus apply only at the time of an acquisition or encumbrance
of securities or assets of the Fund, except that any borrowings by the Fund that exceeds applicable limitations must be reduced to meet
such limitations within the period required by the 1940 Act. Therefore, a change in the percentage that results from a relative change
in values or from a change in the Fund’s assets will not be considered a violation of the Fund’s policies or restrictions.
“Value” for the purposes of all investment restrictions shall mean the value used in determining the Fund’s net asset
value (“NAV”).
Additional Information Regarding Investment
Restrictions
Below is additional information regarding the
Fund’s investment restrictions. This information is in addition to, rather than part of, the fundamental investment restrictions
themselves.
For purposes of the Fund’s industry concentration
policy, the Advisor or a Subadvisor may analyze the characteristics of a particular issuer and instrument and may assign an industry classification
consistent with those characteristics. The Advisor or a Subadvisor may, but need not, consider industry classifications provided by third
parties.
INVESTMENT
STRATEGIES AND RISKS
A discussion of the risks associated with
an investment in the Fund is contained in the Fund’s Prospectus under the headings “Principal Risks,” “Description
of the Principal Risks of the Fund” and “Additional Risks.” The discussion below supplements, and should be read in
conjunction with, such sections of the Fund’s Prospectus.
General
Investment in the Fund should be made with an
understanding that the value of the portfolio of securities held by the Fund may fluctuate in accordance with changes in the financial
condition of the issuers of the portfolio securities, the value of common stocks generally and other factors.
Bonds
The Fund
invests a substantial portion of its assets in corporate bonds. A bond is an interest-bearing security issued by a U.S. or non-U.S.
company. The issuer of a bond has a contractual obligation to pay interest at a stated rate on specific dates and to repay principal
(the bond’s face value) periodically or on a specified maturity date. Bonds generally are used by corporations and governments
to borrow money from investors. The investment return of corporate bonds reflects interest earned on the security and changes in the
market value of the security. The market value of a corporate bond may be affected by changes in the market rate of interest, the
credit rating of the corporation, the corporation’s performance and perceptions of the corporation in the market place. There
is a risk that the issuers of the securities may not be able to meet their obligations on interest or principal payments at the time
called for by an instrument.
An issuer may
have the right to redeem or “call” a bond before maturity, in which case the Fund may have to reinvest the proceeds at lower
market rates. Similarly, the Fund may have to reinvest interest income or payments received when bonds mature, sometimes at lower market
rates. Most bonds bear interest income at a “coupon” rate that is fixed for the life of the bond. The value of a fixed-rate
bond usually rises when market interest rates fall, and falls when market interest rates rise. Accordingly, a fixed-rate bond’s
yield (income as a percent of the bond’s current value) may differ from its coupon rate as its value rises or falls. When an investor
purchases a fixed-rate bond at a price that is greater than its face value, the investor is purchasing the bond at a premium. Conversely,
when an investor purchases a fixed-rate bond at a price that is less than its face value, the investor is purchasing the bond at a discount.
Fixed-rate bonds that are purchased at a discount pay less current income than securities with comparable yields that are purchased at
face value, with the result that prices for such fixed-rate securities can be more volatile than prices for such securities that are purchased
at face value. Other types of bonds bear interest at an interest rate that is adjusted periodically.
Interest rates
on “floating rate” or “variable rate” bonds may be higher or lower than current market rates for fixed-rate bonds
of comparable quality with similar final maturities. Because of their adjustable interest rates, the value of “floating rate”
or “variable rate” bonds fluctuates much less in response to market interest rate movements than the value of fixed-rate bonds,
but their value may decline if their interest rates do not rise as much, or as quickly, as interest rates in general. The Fund may treat
some of these bonds as having a shorter maturity for purposes of calculating the weighted average maturity of its investment portfolio.
Generally, prices of higher quality issues tend to fluctuate less with changes in market interest rates than prices of lower quality issues
and prices of longer maturity issues tend to fluctuate more than prices of shorter maturity issues. Bonds may be senior or subordinated
obligations. Senior obligations generally have the first claim on a corporation’s earnings and assets and, in the event of liquidation,
are paid before subordinated obligations. Bonds may be unsecured (backed only by the issuer’s general creditworthiness) or secured
(backed by specified collateral).
The value of
the debt securities generally will fluctuate depending on a number of factors, including, among others, changes in the perceived creditworthiness
of the issuers of those securities, movements in interest rates, and the maturity of the debt security. Generally, a rise in interest
rates will reduce the value of fixed-income securities, and a decline in interest rates will increase the value of fixed-income securities.
Longer term debt securities generally pay higher interest rates than do shorter term debt securities but also may experience greater price
volatility as interest rates change.
High Yield Securities
Typically, high
yield debt securities (sometimes called “junk bonds”) are rated below investment grade by one or more of the rating agencies
and are generally considered to be speculative. Investment in lower rated corporate debt securities provides greater income and increased
opportunity for capital appreciation than investments in higher quality securities, but they also typically entail greater price volatility
and principal and income risk. These high yield securities are regarded as predominantly speculative with respect to the issuer's continuing
ability to meet principal and interest payments.
Investors
should be willing to accept the risk associated with investment in high yield/high risk securities. Investment in high yield/high
risk bonds involves special risks in addition to the risks associated with investments in higher rated debt securities. High
yield/high risk bonds may be more susceptible to real or perceived adverse economic and competitive industry conditions than higher
grade bonds. The prices of high yield/high risk bonds have been found to be less sensitive to interest-rate changes than more highly
rated investments, but more sensitive to adverse economic downturns or individual corporate developments. The Secondary Market on
which high yield/high risk bonds are traded may be less liquid than the market for higher grade bonds. Less liquidity in the
secondary trading market could adversely affect the price at which the Fund could sell a high yield/high risk bond. A projection of
an economic downturn or of a period of rising interest rates, for example, could cause a decline in high yield/high risk bond prices
because the advent of a recession could lessen the ability of a highly leveraged company to make principal and interest payments on
its debt securities. If such securities are determined to be illiquid, then the Fund will limit its investment in these securities
subject to its limitation on investments in illiquid securities.
Adverse publicity
and investor perceptions, whether or not based on fundamental analysis, may decrease the values and liquidity of high yield/high risk
bonds, especially in a thinly traded market.
Some high yield
securities are issued by smaller, less-seasoned companies, while others are issued as part of a corporate restructuring, such as an acquisition,
merger, or leveraged buyout. Companies that issue high yield securities are often highly leveraged and may not have available to them
more traditional methods of financing.
Therefore, the
risk associated with acquiring the securities of such issuers generally is greater than is the case with investment-grade securities.
Some high yield securities were once rated as investment-grade but have been downgraded to junk bond status because of financial difficulties
experienced by their issuers.
If the issuer
of high yield/high risk bonds defaults, the Fund may incur additional expenses to seek recovery. In the case of high yield/high risk bonds
structured as zero coupon or payment-in-kind securities, the market prices of such securities are affected to a greater extent by interest
rate changes, and therefore tend to be more volatile than securities that pay interest periodically and in cash.
Analysis of the
creditworthiness of issuers of high yield/high risk bonds may be more complex than for issuers of higher quality debt securities. When
Secondary Markets for high yield securities are less liquid than the market for higher grade securities, it may be more difficult to value
the securities because such valuation may require more research, and elements of judgment may play a greater role in the valuation because
there is less reliable, objective data available. The use of credit ratings as the sole method for evaluating high yield/high risk bonds
also involves certain risks. For example, credit ratings evaluate the safety of principal and interest payments, not the market value
risk of high yield/high risk bonds. Also, credit rating agencies may fail to change credit ratings on a timely basis to reflect subsequent
events.
Floating and Variable Rate Securities
Floating and
variable rate securities provide for a periodic adjustment in the interest rate paid on the obligations. The terms of such obligations
must provide that interest rates are adjusted periodically based upon an interest rate adjustment index as provided in the respective
obligations. The adjustment intervals may be regular and range from daily up to annually, or may be based on an event, such as a change
in the prime rate.
Some variable
or floating rate securities are structured with liquidity features such as (1) put options or tender options that permit holders
(sometimes subject to conditions) to demand payment of the unpaid principal balance plus accrued interest from the issuers or certain
financial intermediaries or (2) auction rate features, remarketing provisions, or other maturity-shortening devices designed to enable
the issuer to refinance or redeem outstanding debt securities (market-dependent liquidity features). Variable or floating rate securities
that include market- dependent liquidity features may have greater liquidity risk than other securities, due to (for example) the failure
of a market-dependent liquidity feature to operate as intended (as a result of the issuer's declining creditworthiness, adverse market
conditions, or other factors) or the inability or unwillingness of a participating broker/dealer to make a Secondary Market for such securities.
As a result, variable or floating rate securities that include market-dependent liquidity features may lose value and the holders of such
securities may be required to retain them until the later of the repurchase date, the resale date, or maturity.
The interest
rate on a floating rate debt instrument (“floater”) is a variable rate that is tied to another interest rate, such as a money-market
index or Treasury bill rate.
The interest
rate on a floater may reset periodically, typically every three to six months, or whenever a specified interest rate changes. While, because
of the interest rate reset feature, floaters provide the Fund with a certain degree of protection against rises in interest rates; the
Fund will participate in any declines in interest rates as well.
Money Market Instruments
The Fund may
invest a portion of its assets in high-quality money market instruments on an ongoing basis rather than in the securities comprising its
principal investment strategy, when it would be more efficient or less expensive for the Fund to do so, or as collateral for Financial
Instruments, for liquidity purposes, or to earn interest. The instruments in which the Fund may invest include: (1) short-term obligations
issued by the U.S. government; negotiable certificates of deposit (“CDs”), fixed time deposits and bankers’ acceptances
of U.S. and foreign banks and similar institutions; commercial paper; (4) repurchase agreements; and (5) money market mutual
funds. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained in banking
institutions for specified periods of time at stated interest rates. Banker’s acceptances are time drafts drawn on commercial banks
by borrowers, usually in connection with international transactions.
Credit Default Swaps
The Fund may
invest in credit default swaps, including credit default swap index products (sometimes referred to as CDX index).
Credit default
swaps are contracts whereby one party, the protection “buyer,” makes periodic payments to a counterparty, the protection “seller,”
in exchange for the right to receive from the seller a payment equal to the par (or other agreed-upon value (the “value”)
of a particular debt obligation (the “referenced debt obligation”) in the event of a default by the issuer of that debt obligation.
A credit default swap may use one or more securities that are not currently held by the Fund as referenced debt obligations. The Fund
may be either the buyer or the seller in the transaction. The use of credit default swaps may be limited by the Fund’s limitations
on illiquid investments. When the Fund is the buyer of a credit default swap contract, the Fund would be entitled to receive the value
of a referenced debt obligation from the seller in the event of a default by a third-party, such as a U.S. or non-U.S. issuer, on the
debt obligation. In return, the Fund would pay to the seller a periodic stream of payments over the term of the contract provided that
no event of default has occurred. If no default occurs, the Fund would have spent the stream of payments and received no benefit from
the contract. Credit default swaps involve the risk that, in the event that the Fund's Advisor or Subadvisor incorrectly evaluates the
creditworthiness of the issuer on which the swap is based, the investment may expire worthless and would generate income only in the event
of an actual default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial instability).
They also involve credit risk - that the seller may fail to satisfy its payment obligations to the Fund in the event of a default.
As the seller,
the Fund would effectively add leverage to its portfolio because, in addition to its total assets, the Fund would be subject to investment
exposure on the notional amount of the swap. In connection with credit default swaps in which the Fund is the seller, the Fund will maintain
appropriate liquid assets, or enter into offsetting positions.
In addition to
the risks applicable to derivatives generally, credit default swaps involve special risks because they are difficult to value, are highly
susceptible to liquidity and credit risk, and generally pay a return to the party that has paid the premium only in the event of an actual
default by the issuer of the underlying obligation (as opposed to a credit downgrade or other indication of financial difficulty).
The Fund may
also invest in a CDX index, which is an equally-weighted credit default swap index that is designed to track a representative segment
of the credit default swap market (e.g., investment grade, high volatility, below investment grade or emerging markets) and provides an
investor with exposure to specific “baskets” of issuers of certain debt instruments. CDX index products potentially allow
an investor to obtain the same investment exposure as an investor who invests in an individual credit default swap, with an increased
level of diversification. Generally, the value of the CDX index will fluctuate in response to changes in the perceived creditworthiness
or default experience of the basket of issuers of debt instruments to which the CDX index provides exposure. An investor’s investment
in a tranche of a CDX index provides customized exposure to certain segments of the CDX index’s potential loss distribution. The
lowest or riskiest tranche, known as the equity tranche, has exposure to the first losses experienced by the basket. The mezzanine and
senior tranches are higher in the capital structure but may also be exposed to losses in value. Investment in a CDX index is susceptible
to liquidity risk, along with credit risk, counterparty risk and others risks associated with an investment in a credit default swaps,
as discussed above.
Total Return Swaps
Total return
swaps give the Fund the right to receive the appreciation in the value of a specified security, index or other instrument in return for
a fee paid to the counterparty, which will typically be an agreed upon interest rate. Total return swaps can also be used to replicate
an exposure to a short position in an asset class where the Fund has the right to receive the depreciation in value of a specified security,
index or other instrument (“inverse swaps”). If the underlying asset in a total return swap declines in value (or increases
in value, if an inverse swap) over the term of the swap, the Fund may also be required to pay the dollar value of that decline (or increase,
if an inverse swap) to the counterparty.
The Fund may
use total return swaps to replicate the performance of a particular security. These total return swaps would reference the performance
of a security, or an ETF, ETN or ETV (each an “exchange-traded issuer”), an index on which such an exchange-traded issuer
is based, or one or more of the portfolio constituents of such exchange-traded issuer.
The Fund will
segregate liquid assets, which may include securities, cash or cash equivalents, to cover the Fund’s daily marked-to-market net
obligations under outstanding swap agreements. This segregation of assets may limit the Fund’s investment flexibility, as well as
its ability to meet redemption requests or other current obligations.
All counterparties
are subject to pre-approval by the Board. The Board’s pre-approval is based on the creditworthiness of each potential swap counterparty.
In addition, the Advisor will monitor and manage the counterparty risk posed by the counterparties and take actions as necessary to decrease
counterparty risk to the Fund by, among other things, reducing swap exposures to certain counterparties and/or seeking alternate or additional
counterparties.
The number of
counterparties may vary over time. During periods of credit market turmoil or when the aggregate swap notional amount needed by the Fund
is relatively small given the level of the Fund’s net assets, the Fund may have only one or a few counterparties. In such circumstances,
the Fund will be exposed to greater counterparty risk. Moreover, the Fund may be unable to enter into any total return swap on terms that
make economic sense (e.g., they may be too costly).
To the extent
that the Fund is unable to enter into any total return swaps, it may not be able to meet its investment objective. If the Fund is unable
to enter into total return swaps, it may engage in other types of derivative transactions, although the added costs, higher asset segregation
requirements and lower correlation to the reference asset, performance of these other derivatives may adversely affect the Fund’s
ability to meet its investment objective.
Ratings
The Fund may invest in bonds that do not have
an investment-grade rating. Bonds rated lower than Baa3 or BBB- by a national recognized statistical rating organization are considered
below investment-grade quality and are obligations of issuers that are considered predominantly speculative with respect to the issuer’s
capacity to pay interest and repay principal according to the terms of the obligation and, therefore, carry greater investment risk,
including the possibility of issuer default and bankruptcy and increased market price volatility. Such securities (“lower- rated
securities”) are commonly referred to as “junk bonds” and are subject to a substantial degree of credit risk. Lower-rated
securities are often issued by smaller, less creditworthy companies or by highly leveraged (indebted) firms, which are generally less
able than more financially stable firms to make scheduled payments of interest and principal. The risks posed by securities issued under
such circumstances are substantial. Bonds rated below investment-grade tend to be less marketable than higher-quality bonds because the
market for them is less broad. The ratings of fixed-income securities by a credit rating agency are a generally accepted barometer of
credit risk. They are, however, subject to certain limitations from an investor's standpoint. The rating of an issuer is heavily weighted
by past developments and does not necessarily reflect future conditions. There is frequently a lag between the time a rating is assigned
and the time it is updated. In addition, there may be varying degrees of difference in credit risk of securities in each rating category.
Please see Appendix B of this SAI for a general description of rating categories from various nationally recognized statistical rating
organizations (“NRSROs”).
Futures Contracts
The Fund may enter into futures contracts. Futures
contracts provide for the future sale by one party and purchase by another party of a specified amount of a specific instrument or index
at a specified future time and at a specified price. Assets committed to futures contracts will be segregated by the custodian to the
extent required by law.
Futures contracts may be used by the Fund to replicate
the performance of a particular reference asset. These futures contracts would reference the performance of a security or an index, or
would be used in combination to produce similar returns to those of a security or index. The Fund will not use futures contracts for speculative
purposes.
All counterparties are subject to pre-approval
by the Board. The Board’s pre-approval is based on the creditworthiness of each potential futures contract counterparty. In addition,
the Advisor will monitor and manage the counterparty risk posed by the counterparties and take actions as necessary to decrease counterparty
risk to the Fund by, among other things, reducing futures contract exposures to certain counterparties and/or seeking alternate or additional
counterparties.
The number of counterparties may vary over time.
During periods of credit market turmoil or when the aggregate futures contract notional amount needed by the Fund is relatively small
given the level of the Fund’s net assets, the Fund may have only one or a few counterparties. In such circumstances, the Fund will
be exposed to greater counterparty risk. Moreover, the Fund may be unable to enter into any futures contract on terms that make economic
sense (e.g., they may be too costly). To the extent that the Fund is unable to enter into any futures contracts, it may not be able to
meet its investment objective. If the Fund is unable to enter into futures contracts, it may engage in other types of derivative transactions,
although the added costs, higher asset segregation requirements and lower correlation to the performance of the reference asset of these
other derivatives may adversely affect the Fund’s ability to meet its investment objective.
Lending of Portfolio Securities
The Fund may lend portfolio securities constituting
up to 33 1/3% of its total assets (as permitted by the 1940 Act). Under present regulatory policies, such loans may be made to institutions,
such as brokers or dealers, pursuant to agreements requiring the loans to be continuously secured by collateral in cash, securities issued
or guaranteed by the U.S. Government or one of its agencies or instrumentalities, irrevocable bank letters of credit (upon consent of
the Board) or any combination thereof, marked to market daily, at least equal to the market value of the securities loaned. Cash received
as collateral for securities lending transactions may be invested in liquid, short-term investments approved by the Advisor.
Investing the collateral subjects the Fund to
risks, and the Fund will be responsible for any loss that may result from its investment of the borrowed collateral. The Fund will have
the right to terminate a loan at any time and recall the loaned securities within the normal and customary settlement time for securities
transactions.
For the duration of a loan, the Fund will continue
to receive the equivalent of the interest or dividends paid by the issuer on the securities loaned and will also receive compensation
from investment of the collateral. These events could also trigger adverse tax consequences for the Fund.
The Fund will generally not have the right to
vote securities during the existence of the loan, but the Advisor may call the loan to exercise the Fund’s voting or consent rights
on material matters affecting the Fund’s investment in such loaned securities. As with other extensions of credit there are risks
of delay in recovering, or even loss of rights in, the collateral and loaned securities should the borrower of the securities fail financially.
Loans will be made only to firms deemed creditworthy,
and when the consideration which can be earned from securities loans is deemed to justify the attendant risk. The creditworthiness of
a borrower will be considered in determining whether to lend portfolio securities and will be monitored during the period of the loan.
It is intended that the value of securities loaned by the Fund will not exceed one-third of the value of the Fund’s total assets
(including the loan collateral). Loan collateral (including any investment of the collateral) is not subject to the percentage limitations
stated elsewhere in this SAI or the Prospectus regarding investing in fixed-income securities and cash equivalents.
Money Market Instruments
The Fund may invest a portion of its assets
in high-quality money market instruments on an ongoing basis, when it would be more efficient or less expensive for the Fund to do so,
or as collateral for financial instruments, for liquidity purposes, or to earn interest. The instruments in which the Fund may invest
include: (1) short-term obligations issued by the U.S. government; (2) negotiable certificates of deposit (“CDs”),
fixed time deposits and bankers’ acceptances of U.S. and foreign banks and similar institutions; (3) commercial paper rated
at the date of purchase “Prime-1” by Moody’s Investors Service, Inc. (“Moody’s”), “A-1+”
or “A-1” by Standard & Poor’s Ratings Group, Inc. (“S&P”), a division of The McGraw-Hill
Companies, Inc., “K1” or better by Kroll Bond Rating Agency (“Kroll”), “R-1 (low)” or better
by DBRS Morningstar or, if unrated, of comparable quality as determined by the Advisor; (4) repurchase agreements; and (5) money
market mutual funds. CDs are short-term negotiable obligations of commercial banks. Time deposits are non-negotiable deposits maintained
in banking institutions for specified periods of time at stated interest rates. Banker’s acceptances are time drafts drawn on commercial
banks by borrowers, usually in connection with international transactions.
Tax Risks
As with any investment, you should consider how
your investment in Shares of the Fund will be taxed. The tax information in the Prospectus and this SAI is provided as general information.
You should consult your own tax professional about the tax consequences of an investment in Shares of the Fund.
Cyber Security
With the increasing use of the Internet and
technology in connection with the Fund’s operations, the Fund may be more susceptible to greater operational and information security
risks resulting from breaches in cyber security. Cyber incidents can result from unintentional events (such as an inadvertent release
of confidential information) or deliberate attacks by insiders or third-parties, including cyber criminals, competitors, nation-states
and “hacktivists,” and can be perpetrated by a variety of complex means, including the use of stolen access credentials,
malware or other computer viruses, ransomware, phishing, structured query language injection attacks, and distributed denial of service
attacks, among other means. Cyber incidents may result in actual or potential adverse consequences for critical information and communications
technology, or systems and networks that are vital to the Fund’s or its service providers’ operations, or otherwise impair
Fund or service provider operations. For example, a cyber incident may cause operational disruptions and failures impacting information
systems or information that a system processes, stores, or transmits, such as by theft, damage or destruction, or corruption or modification
of or denial of access to data maintained online or digitally, denial of service on websites rendering the websites unavailable to intended
users or not accessible for such users in a timely manner, and the unauthorized release or other exploitation of confidential information
(i.e., identity theft or other privacy breaches). In addition, a cyber security breach may cause disruptions and impact the Fund’s
business operations, which could potentially result in financial losses, inability to determine the Fund’s NAV including over an
extended period, impediments to trading, the inability of shareholders to transact business, violation of applicable law, regulatory
penalties and/or fines, compliance and other costs. The Fund and its shareholders could be negatively impacted as a result. Further,
substantial costs may be incurred in order to prevent future cyber incidents.
In addition, because the Fund works closely
with third-party service providers (e.g., custodians), cyber security breaches at such third-party service providers or trading counterparties
may subject the Fund’s shareholders to the same risks associated with direct cyber security breaches. Further, cyber security breaches
at an issuer of securities in which the Fund invests may similarly negatively impact the Fund’s shareholders because of a decrease
in the value of these securities. These incidents could result in adverse consequences for such issuers, and may cause the Fund’s
investment in such securities to lose value. For example, a cyber incident involving an issuer may include the theft, destruction or
misappropriation of financial assets, intellectual property or other sensitive information belonging to the issuer or their customers
(i.e., identity theft or other privacy breaches). As a result, the issuer may experience the types of adverse consequences summarized
above, among others (such as loss of revenue), despite having implemented preventative and other measures reasonably designed to protect
from and/or defend against the risks or adverse effects associated with cyber incidents.
While the Fund has established risk management
systems and business continuity policies designed to reduce the risks associated with cyber security breaches and other operational disruptions,
there can be no assurances that such measures will be successful particularly since the Fund does not control the cyber security and
operational systems of issuers or third-party service providers, and certain security breaches may not be detected. The Fund and its
service providers, as well as exchanges and market participants through or with which the Fund trades and other infrastructures on which
the Fund or its service providers rely, are also subject to the risks associated with technological and operational disruptions or failures
arising from, for example, processing errors and human errors, inadequate or failed internal or external processes, failures in systems
and technology, errors in algorithms used with respect to the Fund, changes in personnel, and errors caused by third-parties or trading
counterparties. In addition, there are inherent limitations to these plans and systems and certain risks may not yet be identified and
new risks may emerge in the future. The Fund and its respective shareholders could be negatively impacted as a result of any security
breaches or operational disruptions and may bear certain costs tied to such events.
Liquidation of Fund
The Board may determine to close and liquidate
the Fund at any time, which may have adverse consequences for shareholders. In the event of the liquidation of the Fund, shareholders
will receive a liquidating distribution in cash or in-kind equal to their proportionate interest in the Fund. A liquidating distribution
may be a taxable event to shareholders, resulting in a gain or loss for tax purposes, depending upon a shareholder's basis in his or her
shares of the Fund. A shareholder of a liquidating Fund will not be entitled to any refund or reimbursement of expenses borne, directly
or indirectly, by the shareholder (such as sales loads, account fees, or fund expenses), and a shareholder may receive an amount in liquidation
less than the shareholder’s original investment.
Market Disruption Risk and Recent Market
Events
Geopolitical and other events, including war,
terrorism, economic uncertainty, trade disputes, public health crises and related geopolitical events have led, and in the future may
lead, to disruptions in the US and world economies and markets, which may increase financial market volatility and have significant adverse
direct or indirect effects on the Fund and its investments. Market disruptions could cause the Fund to lose money, experience significant
redemptions, and encounter operational difficulties. Although multiple asset classes may be affected by a market disruption, the duration
and effects may not be the same for all types of assets. Recent market disruption events include the pandemic spread of the novel coronavirus
known as COVID-19, and the significant restrictions, market volatility, decreased economic and other activity and increased government
activity that it has caused. Specifically, COVID-19 has led to significant death and morbidity, and concerns about its further spread
have resulted in the closing of schools and non-essential businesses, cancellations, shelter-in-place orders, lower consumer spending
in certain sectors, social distancing, bans on large social gatherings and travel, quarantines, government economic stimulus measures,
reduced productivity, rapid increases in unemployment, increased demand for and strain on government and medical resources, border closings
and global trade and supply chain interruptions, among others. The full effects, duration and costs of the COVID-19 pandemic are impossible
to predict, and the circumstances surrounding the COVID-19 pandemic will continue to evolve. The pandemic may affect certain countries,
industries, economic sectors, companies and investment products more than others, may exacerbate existing economic, political, or social
tensions and may increase the probability of an economic recession or depression. The Fund and its investments may be adversely affected
by the effects of the COVID-19 pandemic, and a prolonged pandemic may result in the Fund and its service providers experiencing operational
difficulties in coordinating a remote workforce and implementing their business continuity plans, among others.
Additional Market Disruption Risk
In late February 2022, the Russian military
invaded the Ukraine, which amplified existing geopolitical tensions among Russia, Ukraine, Europe, and many other countries including
the U.S. and other members of the North Atlantic Treaty Organization (“NATO”). In response, various countries, including
the U.S., the United Kingdom, and members of the European Union issued broad-ranging economic sanctions against Russia, Russian companies
and financial institutions, Russian individuals and others. Additional sanctions may be imposed in the future. Such sanctions (and any
future sanctions) and other actions against Russia in light of Russia’s invasion of Ukraine will adversely impact the economies
of Russia and Ukraine. Certain sectors of each country’s economy may be particularly affected, including but not limited to, financials,
energy, metals and mining, engineering and defense and defense-related materials sectors.
Further, a number of large corporations and
U.S. and foreign governmental entities have announced plans to divest interests or otherwise curtail business dealings in Russia or with
certain Russian businesses. These events have resulted in (and may continue to result in) a loss of liquidity and value of Russian and
Ukrainian securities and, in some cases, a complete inability to trade or settle trades in certain Russian securities. Further actions
are likely to be taken by the international community, including governments and private corporations, that will adversely impact the
Russian economy in particular. Such actions may include boycotts, tariffs, and purchasing and financing restrictions on Russia’s
government, companies and certain individuals, or other unforeseeable actions.
The ramifications of the hostilities and sanctions
also may negatively impact other regional and global economic markets (including Europe and the U.S.), companies in other countries (particularly
those that have done business with Russia) and various sectors, industries and markets for securities and commodities globally, such
as oil and natural gas and precious metals. Accordingly, the actions discussed above and the potential for a wider conflict could increase
financial market volatility and have severe negative consequences for regional and global markets, industries and companies in which
the Fund invests. Moreover, the extent and duration of the Ukrainian invasion or future escalation of such hostilities, the extent and
impact of existing and future sanctions, market disruptions and volatility, and the result of any diplomatic negotiations cannot be predicted.
These and any related events could have a significant impact on the Fund’s performance and the value of an investment in the Fund.
MANAGEMENT
Board Responsibilities. The business
of the Trust is managed under the direction of the Trust’s Board of Trustees (the “Board”). The Board has
considered and approved contracts, as described herein, under which certain companies provide essential management and
administrative services to the Trust. The day-to-day business of the Trust, including the day-to-day management of risk, is
performed by the service providers of the Trust, such as the Advisor, Subadvisor, Distributor and Administrator. The Board is
responsible for overseeing the Trust’s service providers and, thus, has oversight responsibility with respect to the risk
management performed by those service providers. Risk management seeks to identify and eliminate or mitigate the potential effects
of risks such as events or circumstances that could have material adverse effects on the business, operations, shareholder services,
investment performance or reputation of the Trust or the Fund. The Board’s role in risk management oversight begins before the
inception of an investment portfolio, at which time the Advisor and Subadvisor present the Board with information concerning the
investment objectives, strategies and risks of the investment portfolio. Additionally, the Advisor and Subadvisor provide the Board
with an overview of, among other things, the respective firm’s investment philosophy, brokerage practices and compliance
infrastructure. Thereafter, the Board oversees the risk management of the investment portfolio’s operations, in part, by
requesting periodic reports from and otherwise communicating with various personnel of the service providers, including the
Trust’s Chief Compliance Officer and the independent registered public accounting firm of the Trust. The Board and, with
respect to identified risks that relate to its scope of expertise, the Audit Committee of the Board, oversee efforts by management
and service providers to manage risks to which the Fund may be exposed.
Under the overall supervision of the Board and
the Audit Committee (discussed in more detail below), the service providers to the Trust employ a variety of processes, procedures and
controls to identify risks relevant to the operations of the Trust and the Fund to lessen the probability of their occurrence and/or to
mitigate the effects of such events or circumstances if they do occur. Each service provider is responsible for one or more discrete aspects
of the Trust’s business and, consequently, for managing the risks associated with that activity.
The Board is responsible for overseeing the nature,
extent and quality of the services provided to the Fund by the Advisor and Subadvisor and receives information about those services at
its regular meetings. In addition, on at least an annual basis, in connection with its consideration of whether to renew the Advisory
Agreement with the Advisor and the Subadvisory Agreement with the Subadvisor, the Board receives detailed information from the Advisor
and the Subadvisor. Among other things, the Board regularly considers each of the Advisor’s and Subadvisor’s adherence to
the Fund’s investment restrictions and compliance with various policies and procedures of the Trust and with applicable securities
regulations. The Board also reviews information about the Fund’s performance and investments.
The Trust’s Chief Compliance Officer meets
regularly with the Board to review and discuss compliance and other issues. At least annually, the Trust’s Chief Compliance Officer
provides the Board with a report reviewing the adequacy and effectiveness of the Trust’s policies and procedures and those of its
service providers, including the Advisor and Subadvisor. The report addresses the operation of the policies and procedures of the Trust
and each service provider since the date of the last report; material changes to the policies and procedures since the date of the last
report; any recommendations for material changes to the policies and procedures; and material compliance matters since the date of the
last report.
The Board receives reports from the Trust’s
service providers regarding operational risks, portfolio valuation and other matters. Annually, the independent registered public accounting
firm reviews with the Audit Committee its audit of the financial statements of the Fund, focusing on major areas of risk encountered by
the Trust and noting any significant deficiencies or material weaknesses in the Trust’s internal controls.
The Board recognizes that not all risks that may
affect the Fund can be identified, that it may not be practical or cost-effective to eliminate or mitigate certain risks, that it may
be necessary to bear certain risks (such as investment-related risks) to achieve the Fund’s goals, and that the processes, procedures
and controls employed to address certain risks may be limited in their effectiveness. Moreover, despite the periodic reports the Board
receives and the Board’s discussions with the service providers to the Trust, it may not be made aware of all of the relevant information
of a particular risk. Most of the Trust’s investment management and business affairs are carried out by or through the Advisor and
other service providers each of which has an independent interest in risk management but whose policies and the methods by which one or
more risk management functions are carried out may differ from the Trust’s and each other’s in the setting of priorities,
the resources available or the effectiveness of relevant controls. As a result of the foregoing and other factors, the Board’s risk
management oversight is subject to substantial limitations.
Additionally, as required by Rule 22e-4
under the 1940 Act, the Trust has implemented a written liquidity risk management program and related procedures (“Liquidity
Program”) that is reasonably designed to assess and manage the Fund’s “liquidity risk” (defined by the SEC
as the risk that the Fund could not meet requests to redeem shares issued by the Fund without significant dilution of remaining
investors’ interests in the Fund). The Liquidity Program, which is reasonably designed to assess and manage the Funds'
liquidity risk. The Board, including a majority of the Independent Trustees, approved the designation of IndexIQ Advisors as the
Liquidity Program’s Administrator. The Board will review, no less frequently than annually, a written report prepared by the
Liquidity Program's Administrator that addresses the operation of the Liquidity Program and assesses its adequacy and effectiveness
of implementation.
The Board also benefits from other risk management
resources and functions within New York Life, such as its risk management personnel and internal auditor department. The Board recognizes
that it is not possible to identify all of the risks that may affect the Fund or to develop processes and controls to mitigate or eliminate
all risks and their possible effects, and that it may be necessary to bear certain risks (such as investment risks) to achieve the Fund’s
investment objectives. The Board may, at any time and in its discretion, change the manner in which it conducts risk oversight.
Members of the Board and Officers of the Trust.
Set forth below are the names, years of birth, position with the Trust, term of office, portfolios supervised and the principal occupations
and other directorships for a minimum of the last five years of each of the persons currently serving as members of the Board and as Executive
Officers of the Trust. Also included below is the term of office for each of the Executive Officers of the Trust. The members of the Board
serve as Trustees for the life of the Trust or until retirement, removal, or their office is terminated pursuant to the Trust’s
Declaration of Trust.
Kirk C. Lehneis, an Interested Trustee
(as defined below) and President of the Trust, is Chair of the Board. Mr. Lehneis (the “Interested Trustee”) is an
interested person of the Trust as that term is defined under Section 2(a)(19) of the 1940 Act because of his affiliation with
the Advisor. Four of the Trustees, Lofton Holder, Michael Pignataro, Paul Schaeffer and Michelle A. Shell, and their immediate
family members have no affiliation or business connection with the Advisor or the Funds’ principal underwriter or any of their
affiliated persons and do not own any stock or other securities issued by the Advisor or the Funds’ principal underwriter.
These Trustees are not “interested persons” of the Trust and are referred to herein as “Independent Trustees.”
There is an Audit Committee and Nominating Committee
of the Board, each of which is chaired by an Independent Trustee and comprised solely of Independent Trustees. The Committee chair for
each is responsible for running the Committee meeting, formulating agendas for those meetings, and coordinating with management to serve
as a liaison between the Independent Trustees and management on matters within the scope of the responsibilities of such Committee as
set forth in its Board-approved charter. There is a Valuation Committee, which is comprised of the Independent Trustees and representatives
of the Advisor to take action in connection with the valuation of portfolio securities held by the Fund in accordance with the Board-approved
Valuation Procedures. The Board has determined that this leadership structure is appropriate given the specific characteristics and circumstances
of the Fund. The Board made this determination in consideration of, among other things, the fact that the Independent Trustees constitute
a majority of the Board, the assets under management of the Fund, the number of portfolios overseen by the Board and the total number
of trustees on the Board.
Independent
Trustees |
Name
and Year of
Birth(1) |
Position(s) Held
with
Trust |
Term
of Office and
Length of Time
Served(2) |
Principal
Occupation(s) During Past
5 Years |
Number
of
Portfolios in Fund
Complex Overseen
by Trustee(3) |
Other
Directorships
Held by Trustee
During Past 5 Years |
Lofton
Holder, 1964 |
Trustee |
Since
June 2022 |
Retired;
formerly, Managing Partner and Co-Founder, Pine Street Alternative Asset Management (2011 – 2019). |
31 |
Board
Member, Golub Capital BDC, Inc., Golub Capital BDC 3, Inc., and Golub Capital Direct Lending Corporation (each, a business
development company) (2021 – present); Board Member, Manning & Napier (investment manager) (2021 – present). |
Michael
A. Pignataro, 1959 |
Trustee |
Since
April 2015 |
Retired;
formerly, Director, Credit Suisse Asset Management (2001 to 2012); and Chief Financial Officer, Credit Suisse Funds (1996 to 2013). |
31 |
The
New Ireland Fund, Inc. (closed-end fund) (2015 to present). |
Paul
D. Schaeffer, 1951 |
Trustee |
Since
April 2015 |
President,
ASP (dba Aspiring Solution Partners) (financial services consulting) (2013 to present); Consultant and Executive Advisor, Aquiline
Capital Partners LLC (private equity investment) (2014 to present). |
31 |
Management
Board Member, RIA in a Box LLC (financial services consulting) (2018 to 2021); Context Capital Funds (mutual fund trust) (2 Portfolios)
(2014 to 2018); Management Board Member, Altegris Investments, LLC (registered broker-dealer) (2016 to 2018); Management Board Member,
AssetMark Inc. (financial services consulting) (2016 to 2017); PopTech! (conference operator) (2012 to 2016); Board Member, Pathways
Core Training (nonprofit) (2019 to present); Board Member, Center for Collaborative Investigative Journalism (non-profit) (2020-present). |
Michelle
A. Shell, 1975 |
Trustee |
Since
June 2022 |
Visiting
Scholar, Harvard Business School (2020 to present); Visiting Assistant Professor of Operations Management, Boston University Questrom
School of Business (2020 to present); Business researcher and consultant, self-employed (2013 – 2020). |
31 |
U.S.
Charitable Gift Trust (public charity offering donor-advised funds and trust products) (2017 –present). |
Interested
Trustee |
|
|
|
|
|
Kirk
C. Lehneis, 1974(4) |
President
Chairman of the Board
|
Since January 2018
Since December 2021
|
Chief
Operating Officer and Senior Managing Director, New York Life Investment Management LLC (since 2016); Chief Executive Officer, IndexIQ
Advisors LLC (since 2018); Chairman of the Board, NYLIM Service Company LLC (since September 2017); President, MainStay DefinedTerm
Municipal Opportunities Fund, MainStay Funds, MainStay Funds Trust, and MainStay VP Funds Trust (since September 2017); President,
MainStay CBRE Global Infrastructure Megatrends Fund (since 2021). |
31 |
None. |
Officers |
|
|
|
Name
and Year of Birth(1) |
Position(s) Held
with Trust |
Term
of Office and Length of Time Served(2) |
Principal
Occupation(s) During Past 5 Years |
Jomil
M. Guerrero, 1976 |
Vice
President |
Since
March 2022 |
Chief
Operating Officer and Managing Director, IndexIQ Advisors LLC (2021 to present); Managing Director, Global Marketing operations,
New York Life Investment Management LLC (2016 to 2021); and Director of Finance (2011 to 2016) New York Life Investment Management
LLC. |
Adefolahan
Oyefeso, 1974 |
Treasurer,
Principal Financial Officer and Principal Accounting Officer |
Since
April 2018 |
Vice
President of Operations & Finance, IndexIQ Advisors (2015 to present); Director of the Fund Administration Client
Service Department at The Bank of New York Mellon (2007 to 2015). |
Matthew
V. Curtin, 1982 |
Secretary
and Chief Legal Officer |
Since
June 2015 |
Secretary
and Chief Legal Officer, IndexIQ Advisors LLC (since 2015), Chief Compliance Officer, IndexIQ Trust, IndexIQ ETF Trust
and IndexIQ Active ETF Trust (June 2015 to January 2017); Associate General Counsel, New York Life Insurance Company (since
2015); Associate, Dechert LLP (2007 to 2015). |
Kevin M. Gleason,
1966
|
Chief
Compliance Officer |
Since
June 2022 |
Chief
Compliance Officer, IndexIQ ETF Trust and IndexIQ Active ETF Trust, The MainStay Funds, MainStay Funds Trust, MainStay MacKay
DefinedTerm Municipal Opportunities Fund, MainStay CBRE Global Infrastructure Megatrends Fund and MainStay VP Funds Trust (since
2022); Senior Vice President, Voya Investment Management, LLC and Chief Compliance Officer, Voya Family of Funds (2012 to 2022). |
| (1) | The address of each Trustee or officer
is c/o IndexIQ Advisors, 51 Madison Avenue, New York, New York 10010. |
| (2) | Trustees and Officers serve until their
successors are duly elected and qualified. |
| (3) | The Fund is part of a “fund complex”
as defined in the 1940 Act. The fund complex includes all operational open-end funds (including
all of their portfolios) advised by the Advisor and any funds that have an investment advisor
that is an affiliated person of the Advisor. |
| (4) | Mr. Lehneis is an “interested
person” of the Trust (as that term is defined in the 1940 Act) because of his affiliations
with the Advisor. |
The Board met six times during the fiscal year ended April 30,
2022.
Description of Standing Board Committees
Audit Committee. The principal responsibilities
of the Audit Committee are the appointment, compensation and oversight of the Trust’s independent auditors, including the resolution
of disagreements regarding financial reporting between Trust management and such independent auditors. The Audit Committee’s responsibilities
include, without limitation, to (i) oversee the accounting and financial reporting processes of the Trust and its internal control
over financial reporting and, as the Committee deems appropriate, to inquire into the internal control over financial reporting of certain
third-party service providers; (ii) oversee the quality and integrity of the Funds’ financial statements and the independent
audits thereof; (iii) oversee, or, as appropriate, assist Board oversight of, the Trust’s compliance with legal and regulatory
requirements that relate to the Trust’s accounting and financial reporting, internal control over financial reporting and independent
audits; (iv) approve prior to appointment the engagement of the Trust’s independent auditors and, in connection therewith,
to review and evaluate the qualifications, independence and performance of the Trust’s independent auditors; and (v) act as
a liaison between the Trust’s independent auditors and the full Board. The Board has adopted a written charter for the Audit Committee.
All of the Independent Trustees serve on the Trust’s Audit Committee. During the fiscal year ended April 30, 2022, the Audit
Committee met three times.
Nominating Committee. The Nominating Committee
has been established to: (i) assist the Board of Trustees in matters involving mutual fund governance and industry practices; (ii) select
and nominate candidates for appointment or election to serve as Trustees who are not “interested persons” of the Trust or
its Advisor or distributor (as defined by the 1940 Act); and (iii) advise the Board of Trustees on ways to improve its effectiveness.
All of the Independent Trustees serve on the Nominating Committee. As stated above, each Trustee holds office for an indefinite term
until the occurrence of certain events. In filling Board vacancies, the Nominating Committee will consider nominees recommended by shareholders.
Nominee recommendations should be submitted to the Trust at its mailing address stated in the Fund’s Prospectus and should be directed
to the attention of the IndexIQ Active ETF Trust Nominating Committee. During the fiscal year ended April 30, 2022, the Nominating
Committee met one time.
Valuation Committee. The Valuation Committee
oversees the implementation of the Trust’s Valuation Procedures. The Valuation Committee has designated the Advisor to make fair
valuation determinations relating to any and all portfolio investments for which market quotations are not readily available. All of the Independent Trustees serve on the Trust’s Valuation Committee. During the fiscal
year ended April 30, 2022, the Valuation Committee met four times.
Individual Trustee Qualifications
The Trust has concluded that each of the Trustees
should serve on the Board because of their ability to review and understand information about the Trust and the Fund provided to them
by management, to identify and request other information they may deem relevant to the performance of their duties, to question management
and other service providers regarding material factors bearing on the management and administration of the Fund, and to exercise their
business judgment in a manner that serves the best interests of the Fund’s shareholders. The Trust has concluded that each of the
Trustees should serve as a Trustee based on their own experience, qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Holder
should serve as trustee of the Trust because of his experience in senior executive roles in the financial services industry, and in particular,
as co-founder and managing partner of Pine Street Alternative Asset Management LLC.
The Trust has concluded that Mr. Pignataro
should serve as trustee of the Trust and as an audit committee financial expert because of the experience he has gained as a businessman
and, in particular, his prior service in the financial services industry as a Director of Credit Suisse Asset Management and Chief Financial
Officer of the Credit Suisse Funds.
The Trust has concluded that Mr. Schaeffer
should serve as trustee of the Trust because of his experience in the financial services industry, including his experience as a director
of and service provider to investment companies.
The Trust has concluded that Ms. Shell
should serve as trustee of the Trust because of the experience she has gained as an academic and researcher in the fields of business
and operations and technology management and her extensive experience in the financial services industry as a consultant and executive.
The Trust has concluded that Mr. Lehneis
should serve as trustee of the Trust because of the experience he has gained as President of the MainStay Funds, Chief Operating Officer
of New York Life Investment Management LLC, and President of IndexIQ Advisors, his knowledge of and experience in the financial services
industry, and the experience he has gained serving as Chairman of the Board of New York Life Investment Management LLC since 2017.
Trustee Ownership of Shares
Listed below for each Trustee is a dollar
range of securities beneficially owned in the Trust together with the aggregate dollar range of equity securities in all registered investment
companies overseen by each Trustee that are in the same family of investment companies as the Trust, as of December 31, 2021.
Name of Trustee | |
Dollar
Range of Equity
Securities in the Funds | |
Aggregate
Dollar Range of Equity Securities in All Registered
Investment Companies Overseen by Trustees in Family of
Investment Companies(1) |
Lofton Holder(2) | |
None | |
None |
Michael A. Pignataro | |
None | |
None |
Paul D. Schaeffer | |
None | |
$50,001-$100,000 |
Michelle A. Shell(2) | |
None | |
None |
Kirk
C. Lehneis(3) | |
None | |
Over $100,000 |
| (1) | The fund complex includes all operational open-end funds (including
all of their portfolios) advised by the Advisor and any funds that have an investment advisor
that is an affiliated person of the Advisor. |
| (2) | Mr. Holder and Ms. Shell became Trustees on June 22,
2022; therefore, they have not received any compensation from the Trust and/or Fund Complex for
the fiscal year ended April 30, 2022. |
| (3) | Mr. Lehneis is an “interested person” of the Trust
(as that term is defined in the 1940 Act) because of his affiliations with the Advisor. |
Board Compensation
Effective January 1, 2022, each Independent
Trustee receives from the Fund Complex, either directly or indirectly, an annual retainer of $60,000. From October 1, 2020 to January 1,
2022, each Independent Trustee received from the Fund Complex, either directly or indirectly, an annual retainer of $52,000. In addition,
as the Chair of both the Audit Committee and Valuation Committee, Mr. Pignataro receives a total annual stipend of $20,000, which
represents $10,000 for each committee; and as Nominating Committee chair, Mr. Schaeffer receives an annual stipend of $10,000. In
addition, the Independent Trustees are reimbursed for all reasonable travel expenses relating to their attendance at the Board Meetings.
The following table sets forth certain information with respect to the compensation of each Trustee for the fiscal year ended April 30,
2022:
Name and Position | |
Pension or Retirement
Benefits Accrued As Part of Trust Expenses | |
Estimated Annual
Benefits Upon
Retirement | |
Total
Compensation
From Trust and
Fund Complex Paid
to Trustees(1) | |
Lofton
Holder, Trustee(2) | |
N/A | |
N/A | |
| None | |
Michael A. Pignataro, Trustee | |
N/A | |
N/A | |
| $68,000 | |
Paul D. Schaeffer, Trustee | |
N/A | |
N/A | |
| $64,667 | |
Michelle
A. Shell, Trustee(2) | |
N/A | |
N/A | |
| None | |
Kirk
C. Lehneis, Trustee, President and Principal(3) | |
None | |
None | |
| None | |
| (1) | The fund complex includes all operational open-end
funds (including all of their portfolios) advised by the Advisor. As of the date of this
SAI, the fund complex consists of the Trust’s funds and the funds of IndexIQ ETF Trust. |
| (2) | Mr. Holder and Ms. Shell became Trustees
on June 22, 2022; therefore, they have not received any compensation from the Trust and/or
Fund Complex for the fiscal year ended April 30, 2022. |
| (3) | Mr. Lehneis is an “interested person”
of the Trust (as that term is defined in the 1940 Act) because of his affiliations with the
Advisor. |
Code of Ethics
The Trust, its Advisor, Subadvisor and principal
underwriter have each adopted a code of ethics under Rule 17j-1 of the 1940 Act that permit personnel subject to their particular
codes of ethics to invest in securities, including securities that may be purchased or held by the Fund.
PROXY
VOTING POLICIES
The Board believes that the voting of proxies
on securities held by the Fund is an important element of the overall investment process. As such, the Board has delegated responsibility
for decisions regarding proxy voting for securities held by each series of the Trust to the Advisor. Where the Fund has retained the
services of a Subadvisor to provide day-to-day portfolio management for the Fund, the Advisor may delegate proxy voting authority to
the Subadvisor, provided that, as specified in the Advisor’s Proxy Voting Policies and Procedures, the Subadvisor has demonstrated
that its proxy voting policies and procedures are consistent with the Advisor’s Proxy Voting Policies and Procedures or are otherwise
implemented in the best interests of the Advisor’s clients and appear to comply with governing regulations. The Fund may revoke
all or part of this delegation (to the Advisor and/or Subadvisor as applicable) at any time by a vote of the Board. The Advisor has delegated
proxy-voting authority to the Fund’s Subadvisor. A summary of the Subadvisor’s proxy voting policies and procedures is included
in Appendix A to this Statement of Additional Information. The Board will periodically review each series’ proxy voting record.
The Trust is required to disclose annually the
Fund’s complete proxy voting record on Form N-PX covering the period July 1 through June 30 and file it with the
SEC no later than August 31 of each year. The Fund’s Form N-PX will be available at no charge upon request by calling
1-888-474-7725. It will also be available on the SEC’s website at www.sec.gov.
CONTROL
PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Although the Trust does not have information
concerning the beneficial ownership of shares held in the names of Depository Trust Company (“DTC”) participants (“DTC
Participants”), as of July 29, 2022, the name and percentage ownership of each DTC Participant that owned of record 5% or
more of the outstanding shares of the Fund is set forth in the table below.
Fund Name | |
DTC Participants | |
Percentage of Ownership
(rounded to the nearest whole percentage) | |
IQ MacKay ESG Core Plus Bond ETF | |
JP Morgan Chase Bank, Nat’l Association
14201 Dallas Parkway
Dallas, TX 75254 | |
| 99.00 | % |
The Advisor is an affiliate and subsidiary
of New York Life Investment Management LLC (“NYLIM”) and of New York Life Insurance & Annuity Corporation (“NYLife”).
As of July 31, 2022, NYLIM and NYLife owned Shares of the Funds as set forth below. NYLIM and NYLife own Shares of the Funds on
their own behalf or on behalf of funds or accounts managed by NYLIM or NYLife.
New York Life Investment Management LLC |
|
Fund
Name | |
| Percentage
of Ownership (rounded to the
nearest whole percentage) | |
IQ MacKay ESG Core
Plus Bond ETF | |
| 19 | % |
MANAGEMENT
SERVICES
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Management.”
Investment Advisor
IndexIQ Advisors LLC, the Advisor, serves
as investment advisor to the Fund and has overall responsibility for the general management and administration of the Trust, pursuant
to the Investment Advisory Agreement between the Trust and the Advisor (the “Advisory Agreement”). Under the Advisory Agreement,
the Advisor, subject to the supervision of the Board provides an investment program for the Fund and is responsible for the retention
of subadvisors to manage the investment of the Fund’s assets in conformity with the stated investment objective and principal investment
strategies, and subject to the investment policies, of the Fund if the Advisor does not provide these services directly. The Advisor
is responsible for the supervision of the Subadvisor and its management of the investment portfolio of the Fund. The Advisor also arranges
for the provision of distribution, subadvisory, transfer agency, custody, administration and all other services necessary for the Fund
to operate.
Section 15(a) of the 1940 Act requires
that all contracts pursuant to which persons serve as investment advisors to investment companies be approved by shareholders. As interpreted,
this requirement also applies to the appointment of subadvisors to the Fund. The Advisor and the Fund have obtained an exemptive order
(the “Order”) from the SEC permitting the Advisor, on behalf of the Fund and subject to the approval of the Board, including
a majority of the Independent Trustees, to hire or terminate unaffiliated subadvisors and to modify any existing or future subadvisory
agreement with unaffiliated subadvisors without shareholder approval. This authority is subject to certain conditions. The Fund will
notify shareholders and provide them with certain information required by the Order within 90 days of hiring a new subadvisor. The Fund’s
sole shareholder has approved the use of the Order.
The Advisory Agreement will remain in effect with
respect to the Fund from year to year provided such continuance is specifically approved at least annually by (i) the vote of a majority
of the Fund’s outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority of
the Independent Trustees of the Trust, cast in person at a meeting called for the purpose of voting on such approval.
In addition to providing advisory services, under
the Advisory Agreement, the Advisor also: (i) supervises all non-advisory operations of the Fund; (ii) provides personnel to
perform such executive, administrative and clerical services as are reasonably necessary to provide effective administration of the Fund;
(iii) arranges for (a) the preparation of all required tax returns, (b) the preparation and submission of reports to existing
shareholders, (c) the periodic updating of prospectuses and statements of additional information and (d) the preparation of
reports to be filed with the SEC and other regulatory authorities; (iv) maintains the records of the Fund; and (v) provides
office space and all necessary office equipment and services.
The Advisory
Agreement will terminate automatically if assigned (as defined in the 1940 Act). The Advisory Agreement is also terminable with respect
to the Fund at any time without penalty by the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities
of the Fund on 60 days’ written notice to the Advisor or by the Advisor on 60 days’ written notice to the Trust.
Pursuant to the Advisory Agreement, the Advisor
is entitled to receive a fee, payable monthly in arrears, at the annual rate for the Fund of 0.39% based on a percentage of its average
daily net assets.
For the last three fiscal years ended April 30,
advisory fees paid to the Advisor were as follows:
Fund Name | |
Commencement
of Operations | | |
Fees Paid to the
Advisor for the
Fiscal Period
Ended 2020 | |
Fees Paid to the
Advisor for the
Fiscal Period
Ended 2021 | |
Fees
Paid to the
Advisor for the
Fiscal Period
Ended 2022 | |
IQ MacKay ESG Core
Plus Bond ETF | |
| 6/29/21 | | |
N/A | |
N/A | |
$ | 120,984 | |
Expense Limitation Agreement
The Advisor has entered into an Expense Limitation
Agreement (“Expense Limitation Agreement”) with the Fund under which it has agreed to waive or reduce its fees and to assume
other expenses of the Fund in an amount that limits “Total Annual Fund Operating Expenses” (excluding interest, taxes, brokerage
commissions, dividend payments on short sales, acquired fund fees and expenses, other expenditures which are capitalized in accordance
with generally accepted accounting principles, other extraordinary expenses not incurred in the ordinary course of a Fund’s business,
and amounts, if any, payable pursuant to a plan adopted in accordance with Rule 12b-1 under the 1940 Act) to not more than 0.39%
of the average daily net assets of the Fund. The Expense Limitation Agreement will remain in effect unless terminated by the Board of
Trustees of the Fund.
For the last three fiscal years/periods ended
April 30, the Advisor waived or reimbursed the following amounts:
Fund Name | |
Commencement
of Operations | | |
Fees
Waived/ Expenses Reimbursed 2020 | |
Fees
Waived/ Expenses Reimbursed 2021 | |
Fees
Waived/ Expenses Reimbursed 2022 | |
IQ
MacKay ESG Core Plus Bond ETF | |
| 6/29/21 | | |
N/A | |
N/A | |
$ | 77,233 | |
Subadvisor
MacKay Shields LLC, located at 1345 Avenue
of the Americas, New York, New York 10105, serves as investment subadvisor to the Fund pursuant to the Investment Subadvisory Agreement
between the Advisor and the Subadvisor (the “Subadvisory Agreement”). The Subadvisor is responsible for placing purchase
and sale orders and shall make investment decisions for the Fund, subject to the supervision by the Advisor and the Board. For its services,
the Subadvisor is compensated by the Advisor. As of June 30, 2022, the Subadvisor managed approximately $132 billion in assets.
The Subadvisory Agreement will continue in effect
with respect to the Fund from year to year provided such continuance is specifically approved at least annually by (i) the vote of
a majority of the Fund’s outstanding voting securities or a majority of the Trustees of the Trust, and (ii) the vote of a majority
of the Independent Trustees of the Trust, cast in person at a meeting called for the purpose of voting on such approval. To the extent
that the Advisor has agreed to waive its Advisory Fee or reimburse expenses, the Subadvisor has voluntarily agreed to waive or reimburse
its fee proportionately.
The Subadvisory Agreement will terminate automatically
if assigned (as defined in the 1940 Act). The Subadvisory Agreement is also terminable with respect to the Fund at any time without penalty
by the Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days’ written notice
to the Subadvisor or by the Subadvisor on 60 days’ written notice to the Advisor.
For the last three fiscal years ended April 30,
the amount of Subadvisory fee paid by the Advisor from the management fee, and the amount of the Subadvisory fee waived and/or expense
reimbursed were as follows:
| |
| |
Subadvisory
Fee Paid | |
Subadvisory
Fee Waived and/or Expense Reimbursed | |
Fund | |
Commencement
of Operations | |
Fiscal
Period
Ended
2020 | |
| Fiscal
Period
Ended
2021 | | |
| Fiscal
Period
Ended
2022 | | |
Fiscal
Period
Ended
2020 | |
| Fiscal
Period
Ended
2021 | | |
| Fiscal
Period
Ended
2022 | |
IQ
MacKay ESG Core Plus Bond ETF | |
6/29/21 | |
N/A | |
| N/A | | |
$ | 54,443 | | |
N/A | |
| N/A | | |
$ | (34,755 | ) |
Portfolio Managers
The Subadvisor acts as portfolio manager for the
Fund. Subject to the supervision of the Advisor and the Board, the Subadvisor will supervise and manage the investment portfolios of the
Fund and will direct the purchase and sale of its investment securities. The Subadvisor utilizes a team of investment professionals acting
together to manage the assets of the Fund. The team meets regularly to review portfolio holdings and to discuss purchase and sale activity.
The team adjusts holdings in the portfolio as they deem appropriate in the pursuit of the Fund’s investment objective.
The following portfolio managers are primarily
responsible for the day-to-day management of the Fund: Stephen Cianci, CFA, Neil Moriarty, III and Lesya Paisley, CFA.
Other Accounts Managed
The following table provides additional information
about other portfolios or accounts managed by the Fund’s portfolio managers as of April 30, 2022.
Total number of other accounts managed by the
portfolio managers within each category below and the total assets in the accounts managed within each category below.
| |
NUMBER
OF OTHER ACCOUNTS
MANAGED AND ASSETS BY ACCOUNT
TYPE | |
NUMBER
OF ACCOUNTS AND ASSETS
FOR WHICH THE ADVISORY FEE IS
BASED ON PERFORMANCE |
Portfolio
Manager | |
Registered
Investment
Company
($mm) | |
Other
Pooled Investment Vehicles ($mm) | |
Other
Accounts ($mm) | |
Registered
Investment Company
($mm) | |
Other
Pooled Investment
Vehicles ($mm) | |
Other
Accounts ($mm) |
Stephen Cianci,
CFA | |
6 / $3,035 | |
12 / $1,809 | |
82 / $14,437 | |
0 / $0 | |
0 / $0 | |
2 / $1,786 |
Neil Moriarty, III | |
6 / $3,035 | |
12 / $1,809 | |
82 / $14,437 | |
0 / $0 | |
0 / $0 | |
2 / $1,786 |
Lesya Paisley,
CFA | |
3 / $1,939 | |
12 / $1,809 | |
82 / $14,437 | |
0 / $0 | |
0 / $0 | |
2 / $1,786 |
Material Conflicts of Interest
MacKay Shields does not favor the interest
of one client over another and it has adopted a Trade Allocation Policy designed so that all client accounts will be treated fairly and
no one client account will receive, over time, preferential treatment over another.
MacKay Shields maintains investment teams
with their own distinct investment process that operate independent of each other when making portfolio management decisions. Certain
investment teams consist of Portfolio Managers, Research Analysts, and Traders, while certain other investment teams share Research Analysts
and/or Traders. MacKay Shields’ investment teams may compete with each other for the same investment opportunities and/or take
contrary positions. At times, two or more of MacKay Shields’ investment teams may jointly manage the assets of a single client
portfolio (“Crossover Mandate”). In such instances, the asset allocation decisions will be discussed amongst the various
investment teams, but the day-to-day investment decision-making process will typically be made independently by each team for the portion
of the Crossover Mandate that team is responsible for managing. Orders within an investment team will typically be aggregated or bunched
to reduce the costs of the transactions. Orders are typically not aggregated across investment teams even though there may be orders
by separate investment teams to execute the same instrument on the same trading day; provided, however, that orders for the same instrument
are typically aggregated across investment teams that are supported by a shared trading desk.
MacKay Shields’ clients have held, and
it is expected that in the future they will at times hold, different segments of the capital structure of the same issuer that have different
priorities. These investments create conflicts of interest, particularly because MacKay Shields can take certain actions for clients
that can have an adverse effect on other clients. For example, certain MacKay Shields clients may hold instruments that are senior or
subordinated relative to instruments of the same issuer held by other clients, and any action that the portfolio managers were to take
on behalf of the issuer’s senior instrument, for instance, could have an adverse effect on the issuer’s junior instrument
held by other clients, and vice versa, particularly in distressed or default situations. To the extent MacKay Shields or any of its employees
were to serve on a formal or informal creditor or similar committee on behalf of a client, such conflicts of interest may be exacerbated.
MacKay Shields engages in transactions and
investment strategies for certain clients that differ from the transactions and strategies executed on behalf of other clients, including
clients that have retained the services of the same investment team. MacKay Shields may make investments for certain clients that they
conclude are inappropriate for other clients. For instance, clients within one investment strategy may take short positions in the debt
or equity instruments of certain issuers, while at the same time those instruments or other instruments of that issuer are acquired or
held long by clients in another investment strategy, or within the same strategy, and vice versa.
Additionally, MacKay Shields’ investment
strategies are available through a variety of investment products, including, without limitation, separately managed accounts, private
funds, mutual funds and ETFs. Given the different structures of these products, certain clients are subject to terms and conditions that
are materially different or more advantageous than available under different products. For example, mutual funds offer investors the
ability to redeem from the fund daily, while private funds offer less frequent liquidity. Similarly a client with a separately managed
account may have more transparency regarding the positions held in its account than would be available to an investor in a collective
investment vehicle. Further, separately managed account clients have the ability to terminate their investment management agreement with
little or no notice (subject to the terms of the investment advisory agreement or similar agreement).
As a result of these differing liquidity and
other terms, MacKay Shields may acquire and/or dispose of investments for a client either prior to or subsequent to the acquisition and/or
disposition of the same or similar securities held by another client. In certain circumstances, purchases or sales of securities by one
client could adversely affect the value of the same securities held in another client’s portfolio. In addition, MacKay Shields
has caused, and expects in the future to cause, certain clients to invest in opportunities with different levels of concentration or
on different terms than that to which other clients invest in the same securities. These differences in terms and concentration could
lead to different investment outcomes among clients investing in the same securities. MacKay Shields seeks to tailor its investment advisory
services to meet each client’s investment objective, constraints and investment guidelines and MacKay Shields’ judgments
with respect to a particular client will at times differ from its judgments for other clients, even when such clients pursue similar
investment strategies.
MacKay Shields permits its personnel, including
portfolio managers and other investment personnel, to engage in personal securities transactions, including buying or selling securities
that it has recommended to, or purchased or sold on behalf of, clients. These transactions raise potential conflicts of interest, including
when they involve securities owned or considered for purchase or sale by or on behalf of a client account. MacKay Shields has adopted
a Code of Ethics to assist and guide the portfolio managers and other investment personnel when faced with a conflict. MacKay Shields’
services to each client are not exclusive. The nature of managing accounts for multiple clients creates a conflict of interest with regard
to time available to serve clients. MacKay Shields and its portfolio managers will devote as much of their time to the activities of
each client as they deem necessary and appropriate. Although MacKay Shields strives to identify and mitigate all conflicts of interest,
and seeks to treat its clients in a fair and reasonable manner consistent with its fiduciary duties, there may be times when conflicts
of interest are not resolved in a manner favorable to a specific client.
Additional material conflicts of interest
are presented within Part 2A of MacKay Shields’ Form ADV.
Compensation for the Portfolio Managers
Salaries are set by reference to a range of
factors, taking into account each individual’s seniority and responsibilities and the market rate of pay for the relevant position.
Annual salaries are set at competitive levels to attract and maintain the best professional talent. Variable or incentive compensation,
both cash bonus and deferred awards, are a significant component of total compensation for portfolio managers at MacKay Shields. Incentive
compensation received by portfolio managers is generally based on both quantitative and qualitative factors. The quantitative factors
include, but are not limited to: (i) investment performance; (ii) assets under management; (iii) revenues and profitability;
and (iv) industry benchmarks. The qualitative factors may include, among others: leadership, adherence to the firm’s policies
and procedures, and contribution to the firm’s goals and objectives.
MacKay Shields maintains a mandatory phantom
equity plan for those employees who qualify whereby awards vest and pay out after several years, to attract, retain, motivate and reward
key personnel. Portfolio managers that participate in the phantom equity plan share in the results and success of the firm as the value
of award tracks the operating revenue and operating profit of Mackay Shields. This approach helps to instill a strong sense of commitment
towards the overall success of the firm.
MacKay Shields maintains an employee benefit
program, including health and non-health insurance and a 401(k) defined contribution plan for all of its employees regardless of
their job title, responsibilities or seniority.
Ownership of Securities
As of April 30, 2022, the portfolio managers
did not own Shares of the Fund.
OTHER
SERVICE PROVIDERS
Fund Administrator, Custodian, Transfer Agent
and Securities Lending Agent
The Bank of New York Mellon (“BNY
Mellon”) serves as the Fund’s administrator, custodian, transfer agent and securities lending agent. BNY Mellon’s
principal address is 240 Greenwich Street, New York, New York 10286. Under the Fund Administration and Accounting Agreement, BNY
Mellon provides necessary administrative, legal, tax, accounting services, and financial reporting for the maintenance and
operations of the Trust and the Fund. In addition, BNY Mellon makes available the office space, equipment, personnel and facilities
required to provide such services.
BNY Mellon supervises the overall administration
of the Trust and the Fund, including, among other responsibilities, assisting in the preparation and filing of documents required for
compliance by the Fund with applicable laws and regulations and arranging for the maintenance of books and records of the Fund. BNY Mellon
provides persons satisfactory to the Board to serve as officers of the Trust.
BNY Mellon is the principal operating subsidiary
of The Bank of New York Mellon Corporation.
BNY Mellon serves as custodian of Fund’s
assets (the “Custodian”). Under the Custody Agreement with the Trust, BNY Mellon maintains in separate accounts cash, securities
and other assets of the Trust and the Fund, keeps all necessary accounts and records, and provides other services. BNY Mellon is required,
upon order of the Trust, to deliver securities held by BNY Mellon and to make payments for securities purchased by the Trust for the Fund.
Under the Custody Agreement, BNY Mellon is also authorized to appoint certain foreign custodians or foreign custody managers for Fund
investments outside the U.S.
The Custodian has agreed to (1) make receipts
and disbursements of money on behalf of the Fund; (2) collect and receive all income and other payments and distributions on account
of the Fund’s portfolio investments; (3) respond to correspondence from Fund shareholders and others relating to its duties;
and (4) make periodic reports to the Fund concerning the Fund’s operations. The Custodian does not exercise any supervisory
function over the purchase and sale of securities.
BNY Mellon serves as transfer agent and dividend
paying agent for the Fund (the “Transfer Agent”). The Transfer Agent has agreed to (1) issue and redeem Shares of the
Fund; (2) make dividend and other distributions to shareholders of the Fund’s; (3) respond to correspondence by Fund shareholders
and others relating to its duties; (4) maintain shareholder accounts; and (5) make periodic reports to the Fund. The Advisor
pays the Transfer Agent out of the Advisor’s unified management fee.
As compensation for the foregoing services, BNY
Mellon receives certain out of pocket costs, transaction fees and asset based fees, which are accrued daily and paid monthly by the Trust.
The Advisor paid BNY Mellon the following amounts for the last
three fiscal years ended April 30 for the foregoing services:
Fund Name | |
Commencement
of Operations | | |
Administration,
Custody and
Transfer
Agency Fees
for Fiscal
Period Ended 2020 | |
Administration,
Custody and
Transfer
Agency Fees for
Fiscal Period
Ended 2021 | |
Administration,
Custody and
Transfer
Agency Fees for
Fiscal Period
Ended 2022 | |
IQ MacKay ESG Core Plus
Bond ETF | |
| 6/29/21 | | |
N/A | |
N/A | |
$ | 37,243 | |
BNY Mellon also serves as the Trust’s securities
lending agent pursuant to a Securities Lending Authorization Agreement. As compensation for providing securities lending services, BNY
Mellon receives a portion of the income earned by the Fund on collateral investments in connection with the lending program.
Securities Lending
BNY Mellon also serves as the Trust’s
securities lending agent pursuant to a Securities Lending Authorization Agreement. As compensation for providing securities lending services,
BNY Mellon receives a portion of the income earned by the Fund on collateral investments in connection with the lending program.
The dollar amounts of income and fees and
compensation paid to all service providers related to those Funds that participated in securities lending activities for the fiscal year
ended April 30, 2022 were as follows:
Fund | |
IQ
MacKay ESG Core Plus Bond ETF | |
Gross
Income1 | |
$ | 1,417 | |
Revenue
Split2 | |
$ | 979 | |
Cash Collateral Management Fees | |
| - | |
Administrative Fees | |
| - | |
Indemnification Fees | |
| - | |
Net Rebate (Paid)/Received | |
$ | 1,848 | |
Other Fees | |
| - | |
Aggregate Fees for Securities Lending
Activities | |
$ | 869 | |
Net Income from Securities Lending
Activities | |
$ | 2,286 | |
| 1 | Gross income includes
income from cash collateral reinvestment. |
| 2 | Revenue split represents
the share of revenue generated by the securities lending program and paid to BNYM. |
Distributor
ALPS Distributors, Inc. (“ALPS”
or the “Distributor”), is located at 1290 Broadway, Suite 1000, Denver, Colorado 80203. The Distributor is a broker-dealer
registered under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and a member of the Financial Industry
Regulatory Authority (“FINRA”). NYLIFE Distributors LLC has entered into a Services Agreement with ALPS to market the Fund.
Shares will be continuously offered for sale by
the Trust through the Distributor only in whole Creation Units, as described in the section of this SAI entitled “Purchase and Redemption
of Creation Units.” The Distributor also acts as an agent for the Trust. The Distributor will deliver a prospectus to authorized
participants purchasing Shares in Creation Units and will maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor has no role in determining the investment policies of the Fund or which securities are to be purchased
or sold by the Advisor.
As compensation for the foregoing services, the
Distributor receives certain out of pocket costs and per Fund flat fees, which are accrued daily and paid monthly by the Advisor.
The Board of Trustees has adopted a
Distribution and Service Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Distribution and Service Plan,
the Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year to finance activities primarily
intended to result in the sale of Creation Units of the Fund or the provision of investor services. No Rule 12b-1 fees are
currently paid by the Fund and there are no plans to impose these fees. However, in the event Rule 12b-1 fees are charged in
the future, they will be paid out of the respective Fund’s assets, and over time these fees will increase the cost of your
investment and they may cost you more than certain other types of sales charges.
Under the Service and Distribution Plan, and as
required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided by
the Distributor of the amounts expended under the Plan, if any, and the purpose for which such expenditures were made.
The Advisor and its affiliates may, out of their
own resources, pay amounts to third parties for distribution or marketing services on behalf of the Fund. The making of these payments
could create a conflict of interest for a financial intermediary receiving such payments.
Independent Registered Public Accounting Firm
PricewaterhouseCoopers LLP, located at 300 Madison
Avenue, New York, NY 10017, serves as the independent registered public accounting firm to the Trust. PricewaterhouseCoopers LLP will
perform the annual audit of the Fund’s financial statements.
Ernst & Young LLP, located at 5 Times
Square, New York, New York 10036, serves as tax advisor to the Trust and will prepare the Fund’s federal, state and excise tax returns,
and advise the Trust on matters of accounting and federal and state income taxation.
Legal Counsel
Chapman and Cutler LLP, located at 1717 Rhode
Island Avenue, N.W., Washington, D.C. 20036, serves as legal counsel to the Trust and the Fund.
PORTFOLIO
TRANSACTIONS AND BROKERAGE
Subject to the general supervision by the Board
and the Advisor, the Subadvisor is responsible for decisions to buy and sell securities for the Fund, the selection of brokers and dealers
to effect the transactions, which may be affiliates of the Advisor or the Subadvisor, and the negotiation of brokerage commissions. The
Fund may execute brokerage or other agency transactions through registered broker-dealers who receive compensation for their services
in conformity with the 1940 Act, the Exchange Act of 1934, and the rules and regulations thereunder. Compensation may also be paid
in connection with riskless principal transactions (in Nasdaq or over-the-counter securities and securities listed on an exchange) and
agency Nasdaq or over-the-counter transactions executed with an electronic communications network or an alternative trading system.
The Fund will give primary consideration to
obtaining the most favorable prices and efficient executions of transactions in implementing trading policy. Consistent with this policy,
when securities transactions are traded on an exchange, the Fund’s policy will be to pay commissions that are considered fair and
reasonable without necessarily determining that the lowest possible commissions are paid in all circumstances. The Advisor and Subadvisor
believe that a requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude
the Fund from obtaining a high quality of brokerage services. In seeking to determine the reasonableness of brokerage commissions paid
in any transaction, the Advisor or Subadvisor will rely upon its experience and knowledge regarding commissions generally charged by
various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction.
Such determinations will be necessarily subjective and imprecise, as in most cases an exact dollar value for those services is not ascertainable.
The Advisor and Subadvisor do not consider
sales of Shares by broker-dealers as a factor in the selection of broker-dealers to execute portfolio transactions.
The Advisor or Subadvisor may receive research
products and services from broker-dealers that effect securities transactions for the Fund and such research products and services may
be used by the Advisor or Subadvisor in servicing all of its accounts. Accordingly, not all of these products or services may be used
by the Advisor or Subadvisor in connection with the Fund. Some of these products and services are also available to the Advisor or Subadvisor
for cash, and some do not have an explicit cost or determinable value. The research received does not reduce the advisory fees paid to
the Advisor or Subadvisor for services provided to the Fund. The Advisor’s or Subadvisor’s expenses would likely increase
if the Advisor or Subadvisor had to generate these research products and services through its own efforts, or if it paid for these products
or services itself.
During the fiscal year ended April 30,
2022, commissions for securities transactions to brokers which provided research and brokerage products and services to the Fund were
as follows:
Fund
Name | |
Value
of Securities
Transactions | | |
Brokerage
Commissions | |
IQ MacKay ESG Core
Plus Bond ETF | |
$ | 40,751,851 | | |
$ | 628 | |
During the fiscal period April 30, 2021,
the Fund did not engage in any securities transactions with brokers that were affiliated with the Fund, Advisor, Subadvisor or distributor
or brokers which provided research and brokerage products and services to the Fund.
The Fund is required to identify any securities
of the Fund’s regular broker-dealers (as defined in Rule 10b-1 under the 1940 Act) or their parents held by the Fund as of
the end of most recent fiscal year. As of April 30, 2022, the Fund held the following securities of their regular broker-dealers
or their parents:
Fund Name | |
Broker/Dealer | |
Market
Value | |
IQ MacKay ESG Core Plus Bond ETF | |
Barclays Capital, Inc. | |
$ | 1,036,616 | |
| |
BOFA Securities, Inc. | |
$ | 1,951,342 | |
| |
CitiGroup Global Markets Inc. | |
$ | 1,269,812 | |
| |
Goldman Sachs & Co. LLC | |
$ | 1,305,302 | |
| |
J.P. Morgan Securities LLC | |
$ | 1,218,995 | |
| |
Morgan Stanley & Co. LLC | |
$ | 1,219,602 | |
DISCLOSURE
OF PORTFOLIO HOLDINGS
Portfolio Disclosure Policy
The Trust has adopted a Portfolio Holdings Policy
(the “Policy”) designed to govern the disclosure of Fund portfolio holdings and the use of material non-public information
about Fund holdings. The Policy applies to all officers, employees and agents of the Fund, including the Advisor and Subadvisor. The Policy
is designed to ensure that the disclosure of information about the Fund’s portfolio holdings is consistent with applicable legal
requirements and otherwise in the best interest of the Fund.
As an ETF, information about the Fund’s
portfolio holdings is made available on a daily basis in accordance with the provisions of any Order of the SEC applicable to the Fund,
regulations of the Fund’s listing Exchange and other applicable SEC regulations, orders and no-action relief. Such information
typically reflects all or a portion of the Fund’s anticipated portfolio holdings as of the next Business Day (as defined in the
section entitled “Purchase of Creation Units”). This information is used in connection with the creation and redemption process
and is disseminated on a daily basis through the facilities of the Exchange, the National Securities Clearing Corporation (the “NSCC”)
and/or third party service providers.
The Fund will disclose on the Fund’s
website (newyorklifeinvestments.com/etf) at the start of each Business Day the identities and quantities of the securities and other
assets held by the Fund that will form the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings
so disclosed will be based on information as of the close of business on the prior Business Day and/or trades that have been completed
prior to the opening of business on that Business Day and that are expected to settle on the Business Day. Online disclosure of such
holdings is publicly available at no charge.
Daily access to the Fund’s portfolio holdings
is permitted to personnel of the Advisor, Subadvisor and Distributor and the Fund’s administrator, custodian and accountant and
other agents or service providers of the Trust who have need of such information in connection with the ordinary course of their respective
duties to the Fund. The Fund’s Chief Compliance Officer may authorize disclosure of portfolio holdings.
The Fund will disclose its complete portfolio
holdings schedule in public filings with the SEC on a quarterly basis, based on the Fund’s fiscal year, within sixty (60) days of
the end of the quarter, and will provide that information to shareholders, as required by federal securities laws and regulations thereunder.
No person is authorized to disclose the Fund’s
portfolio holdings or other investment positions except in accordance with the Policy. The Trust’s Board reviews the implementation
of the Policy on a periodic basis.
ADDITIONAL
INFORMATION CONCERNING SHARES
Organization and Description of Shares of Beneficial
Interest
The Trust is a Delaware statutory trust and registered
investment company. The Trust was organized on January 30, 2008, and has authorized capital of an unlimited number of shares of beneficial
interest of no par value which may be issued in more than one class or series.
Under Delaware law, the Trust is not required
to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of
Trust shareholders. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting
of the Trust’s shareholders for the purpose of voting upon the question of removal of a Trustee and will assist in communications
with other Trust shareholders. Shareholders holding two-thirds of Shares outstanding may remove Trustees from office by votes cast at
a meeting of Trust shareholders or by written consent.
When issued, Shares are fully paid,
non-assessable, redeemable and freely transferable; provided, however, that Shares may not be redeemed individually, but only in
Creation Units. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to
conversion, exchange, dividends, retirements, liquidation, redemption or any other feature. Shares have equal voting rights, except
that, if the Trust creates additional funds, only Shares of that fund may be entitled to vote on a matter affecting that particular
fund. Trust shareholders are entitled to require the Trust to redeem Creation Units if such shareholders are Authorized
Participants. The Declaration of Trust confers upon the Board the power, by resolution, to alter the number of Shares constituting a
Creation Unit or to specify that Shares of the Trust may be individually redeemable. The Trust reserves the right to adjust the
stock prices of Shares to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock
splits or reverse stock splits which would have no effect on the net assets of the Fund.
The Trust’s Declaration of Trust disclaims
liability of the shareholders or the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and
property of the Trust. The Declaration of Trust provides for indemnification by the Trust for all loss and expense of the Fund’s
shareholders held personally liable for the obligations of the Trust. The risk of a Trust’s shareholder incurring financial loss
on account of shareholder liability is limited to circumstances in which the Fund itself would not be able to meet the Trust’s obligations
and this risk should be considered remote. If the Fund does not grow to a size to permit it to be economically viable, the Fund may cease
operations. In such an event, shareholders may be required to liquidate or transfer their Shares at an inopportune time and shareholders
may lose money on their investment.
Book Entry Only System
The Depository Trust Company (“DTC”)
will act as securities depository for the Shares. The Shares of the Fund is represented by global securities registered in the name of
DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates will not be issued for Shares.
DTC has advised the Trust as follows, DTC, the
world's largest securities depository, is a limited-purpose trust company organized under the New York Banking Law, a member of the Federal
Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC holds and provides asset servicing for
over 3.5 million issues of U.S. and non-U.S. equity issues, corporate and municipal debt and money market instruments (from over 100 countries).
DTC was created to hold securities of its participants (the “DTC Participants”) and to facilitate the clearance and settlement
of securities transactions among the DTC Participants in such securities through electronic computerized book-entry transfers and pledges
in accounts of DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include
both U.S. and non-U.S. securities brokers and dealers, banks, trust companies, clearing corporations and certain other organization. DTC
is a wholly-owned subsidiary of The Depository Trust & Clearing Corporation (“DTCC”). DTCC is a holding company for
DTC, the NSCC and Fixed Income Clearing Corporation, all of which are registered clearing agencies. DTCC is owned by the users of its
regulated subsidiaries. More specifically, DTCC is owned by a number of its DTC Participants and by the New York Stock Exchange, Inc.,
the NYSE Alternext U.S. (formerly known as the American Stock Exchange LLC) and FINRA.
Access to DTC system is also available to others
such as both U.S. and non-U.S. securities brokers and dealers, banks, trust companies and clearing corporations that clear through or
maintain a custodial relationship with a DTC Participant, either directly or indirectly (“Indirect Participants”). DTC agrees
with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and bylaws and
requirements of law. Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests
through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are
referred to herein as “Beneficial Owners”) will be shown on, and the transfer of ownership will be effected only through,
records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants
and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation
relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery
of such securities in definitive form. Such laws may impair the ability of certain investors to acquire benefits interests in Shares.
Beneficial Owners of Shares will not be
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in
definitive form and are not considered the registered holders of the Shares. Accordingly, each Beneficial Owner must rely on the
procedures of DTC, DTC Participants and any Indirect Participants through which such Beneficial Owner holds its interest in order to
exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event the Trust
requests any action of holders of Shares, or a Beneficial Owner desires to take any action that DTC, as the record owner of all
outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants
would authorized the Indirect Participants and Beneficial Owners acting through such DTC Participants to take such action and would
otherwise act upon the instructions of Beneficial Owners owning through them. DTC, through its nominee Cede & Co., is the
record owner of all outstanding Shares.
Conveyance of all notices, statements and other
communications to Beneficial Owners will be effected as follows. DTC will make available to the Trust upon request and for a fee to be
charged to the Trust a listing of the Shares holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as
to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust will provide each such
DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant
may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or
indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participants a fair and reasonable amount as
reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements. Beneficial
Owners may wish to take certain steps to augment the transmission to them of notices of significant events with respect to Shares by providing
their names and addresses to the DTC registrar and request that copies of notices by provided directly to them.
Distributions of Shares shall be made to DTC or
its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions,
shall immediately credit DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests
in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial Owners of
Shares held through such DTC Participants will be governed by standing instructions and customary practices, as is now the case with securities
held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such
DTC Participants. The Trust has no responsibility or liability for any aspect of the records relating to or notices to Beneficial Owners,
or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests, or for any other aspect of the relationship between DTC and the DTC Participants or the
relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its
service with respect to shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect
thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its
functions at a comparable cost, or if such replacement is unavailable, to issue and deliver printed certificates representing ownership
of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange.
DTC rules applicable to DTC Participants
are on file with the SEC. More information about DTC can be found at www.dtcc.com and www.dtc.org.
PURCHASE
AND REDEMPTION OF CREATION UNITS
Creation
The Trust issues and sells Shares of the Fund
only in Creation Units on a continuous basis on any Business Day (as defined below) through the Distributor at the Shares’ NAV
next determined after receipt of an order in proper form. The Distributor processes purchase orders only on a day that the Exchange is
open for trading (a “Business Day”). The Exchange is open for trading Monday through Friday except for the following holidays:
New Year’s Day, Martin Luther King, Jr. Day, Presidents’ Day, Good Friday, Memorial Day, Juneteenth, Independence
Day, Labor Day, Thanksgiving Day and Christmas Day.
Deposit of Securities and Deposit or Delivery
of Cash
The consideration for purchase of a Creation Unit
of shares of the Fund generally consists of cash only (including the appropriate Transaction Fee). However, the Fund also reserves the
right to permit or require the in-kind deposit of Deposit Securities constituting a representation of its portfolio, along with the Cash
Component, computed as described below, and the appropriate Transaction Fee (collectively, the “Fund Deposit”) as consideration
for the purchase of a Creation Unit.
The Cash Component of the Fund Deposit serves
to compensate the Trust or the Authorized Participant, as applicable, for any differences between the NAV per Creation Unit and the Deposit
Amount (as defined below). The Cash Component of the Fund Deposit is an amount equal to the difference between the NAV of the Shares (per
Creation Unit) and the “Deposit Amount,” an amount equal to the market value of the Deposit Securities. If the Cash Component
of the Fund Deposit is a positive number (i.e., the NAV per Creation Unit exceeds the Deposit Amount), the Authorized Participant
will deliver the Cash Component. If the Cash Component of the Fund Deposit is a negative number (i.e., the NAV per Creation Unit
is less than the Deposit Amount), the Authorized Participant will receive the Cash Component.
The Custodian through the NSCC (see the section
of this SAI entitled “Purchase and Redemption of Creation Units—Creation—Procedures for Creation of Creation Units”),
makes available on each Business Day, prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time), the list
of the name and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information
at the end of the previous Business Day) for the Fund. This Fund Deposit is applicable, subject to any adjustments as described below,
to orders to effect creations of Creation Units of the Fund until such time as the next-announced composition of the Deposit Securities
is made available.
The identity and number of shares of the Deposit
Securities required for the Fund Deposit for the Fund changes as rebalancing adjustments and corporate action events are reflected within
the Fund from time to time by the Advisor, with a view to the investment objective of the Fund. The composition of the Deposit Securities
may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index.
In addition, the Trust reserves the right to permit or require the substitution of an amount of cash (that is a “cash in lieu”
amount) to be added to the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery
or that may not be eligible for transfer through the systems of DTC or the Clearing Process (discussed below) or for other similar reasons.
The Trust also reserves the right to permit or require a “cash in lieu” amount where the delivery of Deposit Securities by
the Authorized Participant (as described below) would be restricted under the securities laws or where delivery of Deposit Securities
to the Authorized Participant would result in the disposition of Deposit Securities by the Authorized Participant becoming restricted
under the securities laws, and in certain other situations.
In addition to the list of names and number of
securities constituting the current Deposit Securities of the Fund Deposit, the Custodian, through the NSCC, also makes available on each
Business Day the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation Unit of
the Fund.
Procedures for Creation of Creation Units
All orders to create Creation Units must be placed
with the Distributor either (1) through Continuous Net Settlement System of the NSCC (the “Clearing Process”), a clearing
agency that is registered with the SEC, by a “Participating Party,” i.e., a broker-dealer or other participant in the
Clearing Process; or (2) outside the Clearing Process by a DTC Participant (see the section of this SAI entitled “Additional
Information Concerning Shares — Book Entry Only System”). In each case, the Participating Party or the DTC Participant must
have executed an agreement with the Distributor with respect to creations and redemptions of Creation Units (a “Participant Agreement”);
and accepted by the Transfer Agent; such parties are collectively referred to as “APs” or “Authorized Participants.”
Investors should contact the Distributor for the names of Authorized Participants. All Shares, whether created through or outside the
Clearing Process, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
Except as described below, and in all cases
subject to the terms of the applicable Participant Agreement, all orders to create Creation Units of the Fund generally must be
received by the Distributor no later than one hour prior to the closing time of the regular trading session of the Listing Exchange
(ordinarily 3:00 p.m., Eastern time) (“Order Time”) in each case on the date such order is placed for creation of
Creation Units to be effected based on the NAV of shares of the Fund as next determined after receipt of an order in proper form.
Orders consisting of cash only or requesting substitution of a “cash-in-lieu” amount (collectively, “Custom
Orders”), must be received by the Transfer Agent no later than 2:00 p.m., Eastern time. On days when the Listing Exchange
closes earlier than normal (such as the day before a holiday), the Fund requires standard orders to create Creation Units to be
placed by one hour prior to the earlier closing time and Custom Orders to create Creation Units to be placed no later than two hours
prior to the earlier closing time. Notwithstanding the foregoing, the Trust may, but is not required to, permit Custom Orders until
3:00 p.m., Eastern time, or until one hour prior to the market close (in the event the Listing Exchange closes early). The date on
which an order to create Creation Units (or an order to redeem Creation Units, as discussed below) is placed is referred to as the
“Transmittal Date.” Orders must be transmitted by an Authorized Participant by telephone, electronic order entry system
or other transmission method acceptable to the Transfer Agent pursuant to procedures set forth in the Participant Agreement.
Economic or market disruptions or changes, or telephone, electronic or communication failure may impede the ability to reach the
Transfer Agent or an Authorized Participant.
All orders to create Creation Units from investors
who are not Authorized Participants shall be placed with an Authorized Participant in the form required by such Authorized Participant.
In addition, the Authorized Participant may request the investor to make certain representations or enter into agreements with respect
to the order, e.g., to provide for payments of cash, when required. Investors should be aware that their particular broker may
not have executed a Participant Agreement and, therefore, orders to create Creation Units of the Fund have to be placed by the investor’s
broker through an Authorized Participant that has executed a Participant Agreement. In such cases there may be additional charges to such
investor. At any given time, there may be only a limited number of broker-dealers that have executed a Participant Agreement.
Those placing orders for Creation Units through
the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Order Time
on the Transmittal Date. Orders for Creation Units that are effected outside the Clearing Process are likely to require transmittal by
the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside
the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations
department of the broker or depository institution effectuating such transfer of the Fund Deposit. For more information about Clearing
Process and DTC, see the sections of this SAI entitled “Purchase and Redemption of Creation Units—Creation—Placement
of Creation Orders Using the Clearing Process” and “Purchase and Redemption of Creation Units—Creation—Placement
of Creation Orders Outside the Clearing Process.”
Placement of Creation Orders Using the Clearing
Process
The Clearing Process is the process of creating
or redeeming Creation Units through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process
must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor
to transmit through the Custodian to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the
Participating Party’s creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the
Fund Deposit to the Trust, together with such additional information as may be required by the Distributor. An order to create Creation
Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (1) such order is received by
the Distributor not later than the Order Time on such Transmittal Date and (2) all other procedures set forth in the Participant
Agreement are properly followed.
Placement of Creation Orders Outside the Clearing
Process
Fund Deposits made outside the Clearing Process
must be delivered through a DTC Participant that has executed a Participant Agreement. A DTC Participant who wishes to place an order
creating Creation Units to be effected outside the Clearing Process does not need to be a Participating Party, but such orders must state
that the DTC Participant is not using the Clearing Process and that the creation of Creation Units will instead be effected through a
transfer of securities and cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal
Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of the
Fund by no later than 11:00 a.m. Eastern time on the next Business Day following the Transmittal Date (the “DTC Cut-Off-Time”).
All questions as to the number of Deposit Securities
to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be
determined by the Trust, whose determination shall be final and binding. The amount of cash equal to the Cash Component must be transferred
directly to the Custodian through the Federal Reserve Bank wire transfer system in a timely manner so as to be received by the Custodian
no later than 2:00 p.m. Eastern time on the next Business Day following the Transmittal Date. An order to create Creation Units outside
the Clearing Process is deemed received by the Distributor on the Transmittal Date if (1) such order is received by the Distributor
not later than the Order Time on such Transmittal Date and (2) all other procedures set forth in the Participant Agreement are properly
followed. However, if the Custodian does not receive both the required Deposit Securities and the Cash Component by 11:00 a.m. and
2:00 p.m. Eastern time respectively, on the next Business Day following the Transmittal Date, such order will be canceled. Upon written
notice to the Distributor, such canceled order may be resubmitted the following Business Day using the Fund Deposit as newly constituted
to reflect the then-current Deposit Securities and Cash Component. The delivery of Creation Units so created will occur no later than
the second Business Day following the day on which the purchase order is deemed received by the Distributor.
Additional transaction fees may be imposed with
respect to transactions effected through a DTC participant outside the Clearing Process and in the limited circumstances in which any
cash can be used in lieu of Deposit Securities to create Creation Units. See the section of this SAI entitled “Purchase and Sale
of Creation Units—Creation—Creation Transaction Fee.”
Creation Units may be created in advance of receipt
by the Trust of all or a portion of the applicable Deposit Securities. In these circumstances, the initial deposit will have a value greater
than the NAV of the Shares on the date the order is placed in proper form since, in addition to available Deposit Securities, cash must
be deposited in an amount equal to the sum of (1) the Cash Component plus (2) up to 115% of the then-current market value of
the undelivered Deposit Securities (the “Additional Cash Deposit”). The order shall be deemed to be received on the Business
Day on which the order is placed provided that the order is placed in proper form prior to Order Time and funds in the appropriate amount
are deposited with the Custodian by 11:00 a.m. Eastern time the following Business Day. If the order is not placed in proper form
by Order Time or funds in the appropriate amount are not received by 11:00 a.m. Eastern time on the next Business Day, then the order
may be deemed to be canceled and the Authorized Participant shall be liable to the Fund for losses, if any, resulting therefrom. An additional
amount of cash shall be required to be deposited with the Trust, pending receipt of the undelivered Deposit Securities to the extent necessary
to maintain the Additional Cash Deposit with the Trust in an amount at least equal up to 115% of the daily marked-to-market value of the
undelivered Deposit Securities. To the extent that undelivered Deposit Securities are not received by 1:00 p.m. Eastern time on the
second Business Day following the day on which the purchase order is deemed received by the Distributor, or in the event a marked-to-market
payment is not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use
the cash on deposit to purchase the undelivered Deposit Securities. Authorized Participants will be liable to the Trust and the Fund for
the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual
purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed
received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any
unused portion of the Additional Cash Deposit once all of the undelivered Deposit Securities have been properly received by the Custodian
or purchased by the Trust and deposited into the Trust. In addition, a transaction fee will be charged in all cases. See the section of
this SAI entitled “Purchase and Redemption of Creation Units—Creation—Creation Transaction Fee.” The delivery
of Creation Units so created will occur no later than the second Business Day following the day on which the purchase order is deemed
received by the Distributor.
Acceptance of Orders for Creation Units
The Trust reserves the right to reject a creation
order transmitted to it by the Distributor for any legally permissible reason if: (1) the order is not in proper form; (2) the
investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (3) the Deposit
Securities delivered are not as disseminated for that date by the Custodian, as described above; (4) acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; or (5) there exist circumstances outside the control of the Trust, the Custodian,
the Distributor and the Advisor that make it for all practical purposes impossible to process creation orders. Examples of such circumstances
include acts of God; public service or utility problems such as fires, floods, extreme weather conditions and power outages resulting
in telephone, telecopy and computer failures; market conditions or activities causing trading halts; systems failures involving computer
or other information systems affecting the Trust, the Advisor, the Subadvisor, the Distributor, DTC, NSCC, the Custodian or sub-custodian
or any other participant in the creation process and similar extraordinary events. The Distributor shall notify the Authorized Participant
of its rejection of the order. The Trust, the Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification
of any defects or irregularities in the delivery of Fund Deposits nor shall any of them incur any liability for the failure to give any
such notification. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility
and acceptance for deposit of any securities to be delivered shall be determined by the Trust and the Trust’s determination shall
be final and binding.
Creation Units typically are issued on a “T+2
basis” (that is two Business Days after trade date). However, the Fund reserves the right to settle Creation Unit transactions on
a basis other than T+2 in order to accommodate foreign market holiday schedules, to account for different treatment among foreign and
U.S. markets of dividend record dates and ex-dividend dates (that is the last day the holder of a security can sell the security and still
receive dividends payable on the security), and in certain other circumstances.
To the extent contemplated by a Participant Agreement
with the Distributor, the Trust will issue Creation Units to such Authorized Participant notwithstanding the fact that the corresponding
Portfolio Deposits have not been received in part or in whole, in reliance on the undertaking of the Authorized Participant to deliver
the missing Deposit Securities as soon as possible, which undertaking shall be secured by such Authorized Participant’s delivery
and maintenance of collateral having a value equal to 115%, which the Advisor may change from time to time, of the value of the missing
Deposit Securities in accordance with the Trust’s then-effective procedures. Such collateral must be delivered no later than 2:00
p.m., Eastern time, on the contractual settlement date. The only collateral that is acceptable to the Trust is cash in U.S. Dollars or
an irrevocable letter of credit in form, and drawn on a bank, that is satisfactory to the Trust. The cash collateral posted by the Authorized
Participant may be invested at the risk of the Authorized Participant, and income, if any, on invested cash collateral will be paid to
that Authorized Participant. Information concerning the Trust’s current procedures for collateralization of missing Deposit Securities
is available from the Transfer Agent. The Authorized Participant Agreement will permit the Trust to buy the missing Deposit Securities
at any time and will subject the Authorized Participant to liability for any shortfall between the cost to the Trust of purchasing such
securities and the cash collateral or the amount that may be drawn under any letter of credit.
In certain cases, Authorized Participants will
create and redeem Creation Units on the same trade date. In these instances, the Trust reserves the right to settle these transactions
on a net basis. All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility
and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall
be final and binding.
Creation Transaction Fee
Authorized Participants placing a creation order
will be required to pay to the Custodian a fixed transaction fee (the “Creation Transaction Fee”) to offset the transfer and
other transaction costs associated with the issuance of Creation Units. The standard creation transaction fee will be the same regardless
of the number of Creation Units purchased by an investor on the applicable Business Day. The Creation Transaction Fee for each creation
order is $250. The Creation Transaction Fee may be waived for the Fund when the Advisor believes that waiver of the Creation Transaction
Fee is in the best interest of the Fund. When determining whether to waive the Creation Transaction Fee, the Advisor considers a number
of factors including, but not limited to, whether waiving the Creation Transaction Fee will: facilitate the initial launch of the Fund;
reduce the cost of portfolio rebalancings; improve the quality of the secondary trading market for the Fund's shares and not result in
the Fund’s bearing additional costs or expenses as a result of the waiver.
An additional variable fee of up to 3.00% of
the net asset value per Creation Unit may be imposed for (1) creations effected outside the Clearing Process and (2) cash
creations (to offset the Trust’s brokerage and other transaction costs associated with using cash to purchase the requisite
Deposit Securities). Actual transaction costs may vary depending on the time of day a purchase order is received or the nature of
the securities to be purchased. The Advisor or Subadvisor may adjust the variable fee to ensure that the Fund collects the extra
expenses associated with brokerage commissions and other expenses incurred by the Fund to acquire a Deposit Security not part of the
Fund Deposit from the Authorized Participant. Authorized Participants placing a creation order are responsible for the costs of
transferring the securities constituting the Deposit Securities to the account of the Trust.
Redemption
To redeem Shares directly from the Fund, an investor
must be an Authorized Participant or must redeem through an Authorized Participant. The Trust redeems Creation Units on a continuous basis
on any Business Day through the Distributor at the Shares’ NAV next determined after receipt of an order in proper form. The Fund
will not redeem Shares in amounts less than Creation Units. Authorized Participants must accumulate enough Shares in the secondary market
to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will
be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit.
With respect to the Fund, the Custodian, through
the NSCC, makes available prior to the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each Business Day,
the identity of the Fund Securities that will be applicable (subject to possible amendment or correction) to redemption requests received
in proper form (as described below) on that day. Fund Securities received on redemption may not be identical to Deposit Securities that
are applicable to creations of Creation Units. Unless cash redemptions are available or specified for the Fund, the redemption proceeds
for a Creation Unit generally consist of Fund Securities — as announced on the Business Day the request for redemption is received
in proper form — plus or minus cash in an amount equal to the difference between the NAV of the Shares being redeemed, as next determined
after a receipt of a redemption request in proper form, and the value of the Fund Securities (the “Cash Redemption Amount”),
less a redemption transaction fee (see the section of this SAI entitled “Purchase and Redemption of Creation Units—Redemption—Redemption
Transaction Fee”).
The right of redemption may be suspended or the
date of payment postponed (1) for any period during which the Exchange is closed (other than customary weekend and holiday closings);
(2) for any period during which trading on the Exchange is suspended or restricted; (3) for any period during which an emergency
exists as a result of which disposal of the Shares of the Fund or determination of the Fund’s NAV is not reasonably practicable;
or (4) in such other circumstances as is permitted by the SEC.
Deliveries of redemption proceeds by the Fund
generally will be made within two Business Days (that is “T+2”). However, the Fund reserves the right to settle redemption
transactions and deliver redemption proceeds on a basis other than T+2 to accommodate foreign market holiday schedules, to account for
different treatment among foreign and U.S. markets of dividend record dates and dividend ex-dates (that is the last date the holder of
a security can sell the security and still receive dividends payable on the security sold), and in certain other circumstances.
In the event that cash redemptions are permitted
or required by the Trust, proceeds will be paid to the Authorized Participant redeeming shares on behalf of the redeeming investor as
soon as practicable after the date of redemption.
Placement of Redemption Orders Using the Clearing
Process
Orders to redeem Creation Units through the Clearing
Process must be delivered through an Authorized Participant that has executed a Participant Agreement. Investors other than Authorized
Participants are responsible for making arrangements with an Authorized Participant for an order to redeem. An order to redeem Creation
Units is deemed received by the Trust on the Transmittal Date if: (1) such order is received by the Distributor not later than Order
Time on such Transmittal Date; and (2) all other procedures set forth in the Participant Agreement are properly followed. Such order
will be effected based on the NAV of the relevant Fund as next determined. An order to redeem Creation Units using the Clearing Process
made in proper form but received by the Distributor after the Order Time will be deemed received on the next Business Day immediately
following the Transmittal Date and will be effected at the NAV determined on such next Business Day. The requisite Fund Securities and
the Cash Redemption Amount will be transferred by the second NSCC business day following the date on which such request for redemption
is deemed received.
Placement of Redemption Orders Outside the
Clearing Process
Orders to redeem Creation Units outside the Clearing
Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place
an order for redemption of Creation Units to be effected outside the Clearing Process does not need to be a Participating Party, but such
orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead be effected
through transfer of Shares directly through DTC. An order to redeem Creation Units outside the Clearing Process is deemed received by
the Transfer Agent on the Transmittal Date if (1) such order is received by the Transfer Agent not later than Order Time on such
Transmittal Date; (2) such order is accompanied or followed by the requisite number of Shares, which delivery must be made through
DTC to the Custodian no later than the DTC Cut-Off-Time, and the Cash Redemption Amount, if owed to the Fund, which delivery must be made
by 2:00 p.m. Eastern time; and (3) all other procedures set forth in the Participant Agreement are properly followed. After
the Transfer Agent receives an order for redemption outside the Clearing Process, the Transfer Agent will initiate procedures to transfer
the requisite Fund Securities which are expected to be delivered and the Cash Redemption Amount, if any, by the second Business Day following
the Transmittal Date.
The calculation of the value of the Fund Securities
and the Cash Redemption Amount to be delivered or received upon redemption (by the Authorized Participant or the Trust, as applicable)
will be made by the Custodian according to the procedures set forth the section of this SAI entitled “Determination of Net Asset
Value” computed on the Business Day on which a redemption order is deemed received by the Transfer Agent. Therefore, if a redemption
order in proper form is submitted to the Distributor by a DTC Participant not later than Order Time on the Transmittal Date, and the requisite
number of Shares of the Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the
Cash Redemption Amount to be delivered or received (by the Authorized Participant or the Trust, as applicable) will be determined by the
Custodian on such Transmittal Date. If, however, either (1) the requisite number of Shares of the relevant Fund are not delivered
by the DTC Cut-Off-Time, as described above, or (2) the redemption order is not submitted in proper form, then the redemption order
will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount
to be delivered or received will be computed on the Business Day following the Transmittal Date provided that the Shares of the relevant
Fund are delivered through DTC to the Custodian by 11:00 a.m. Eastern time the following Business Day pursuant to a properly submitted
redemption order.
If it is not possible to effect deliveries of
the Fund Securities, the Trust may in its discretion exercise its option to redeem Shares in cash, and the redeeming Authorized Participant
will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash that the Trust
may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the NAV of its Shares based on
the NAV of Shares of the relevant Fund next determined after the redemption request is received in proper form (minus a transaction fee
which will include an additional charge for cash redemptions to offset the Fund’s brokerage and other transaction costs associated
with the disposition of Fund Securities). The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer
a portfolio of securities that differs from the exact composition of the Fund Securities, or cash in lieu of some securities added to
the Cash Redemption Amount, but in no event will the total value of the securities delivered and the cash transmitted differ from the
NAV. Redemptions of Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and the
Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the
Trust could not lawfully deliver specific Fund Securities upon redemptions or could not do so without first registering the Fund Securities
under such laws. An Authorized Participant or an investor for which it is acting that is subject to a legal restriction with respect to
a particular security included in the Fund Securities applicable to the redemption of a Creation Unit may be paid an equivalent amount
of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Shares to complete an order form or to enter into
agreements with respect to such matters as compensating cash payment, beneficial ownership of shares or delivery instructions.
Redemption Transaction Fee
Authorized Participants placing a redemption order
will be required to pay to the Custodian a fixed transaction fee (the “Redemption Transaction Fee”) to offset the transfer
and other transaction costs associated with the redemption of Creation Units. The standard redemption transaction fee will be the same
regardless of the number of Creation Units redeemed by an investor on the applicable Business Day. The Redemption Transaction Fee for
each redemption order is $250. The Redemption Transaction Fee may be waived for the Fund when the Advisor or Subadvisor believes that
waiver of the Redemption Transaction Fee is in the best interest of the Fund. When determining whether to waive the Redemption Transaction
Fee, the Advisor considers a number of factors including, but not limited to, whether waiving the Redemption Transaction Fee will: reduce
the cost of portfolio rebalancings; improve the quality of the secondary trading market for the Fund's shares and not result in the Fund’s
bearing additional costs or expenses as a result of the waiver.
An additional variable fee, which together
with the Redemption Transaction Fee may equal up to 2.00% of the NAV per Creation Unit, may be imposed for (1) redemptions effected outside
the Clearing Process and (2) cash redemptions (to offset the Trust’s brokerage and other transaction costs associate with the sale
of Fund Securities). Actual transaction costs may vary depending on the time of day a purchase order is received or the nature of the
securities to be sold. The Advisor or Subadvisor may adjust the variable fee to ensure that the Fund collects the extra expenses associated
with brokerage commissions and other expenses incurred by the Fund to acquire a Deposit Security not part of the Fund Deposit from the
Authorized Participant. Authorized Participants placing a redemption order will also bear the costs of transferring the Fund Securities
from the Trust to their account or on their order.
In order to seek to replicate the in-kind redemption
order process for creation orders executed in whole or in part with cash, the Trust expects to sell, in the secondary market, the portfolio
securities or settle any financial instruments that may not be permitted to be re-registered in the name of the Participating Party as
a result of an in-kind redemption order pursuant to local law or market convention, or for other reasons (“Market Sales”).
In such cases where the Trust makes Market Sales, the Authorized Participant will reimburse the Trust for, among other things, any difference
between the market value at which the securities and/or financial instruments were sold or settled by the Trust and the cash-in-lieu amount,
applicable registration fees, brokerage commissions and certain taxes.
CONTINUOUS
OFFERING
The method by which Creation Units are created
and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by the Trust on an
ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may occur. Broker-dealers and other
persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants
in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery and liability
provisions of the Securities Act.
For example, a broker-dealer firm or its client
may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down into constituent
Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether one is an underwriter for purposes
of the Securities Act must take into account all the facts and circumstances pertaining to the activities of the broker-dealer or its
client in the particular case, and the examples mentioned above should not be considered a complete description of all the activities
that could lead to a categorization as an underwriter.
Broker-dealers who are not “underwriters”
but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares that
are part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, would be unable to
take advantage of the prospectus-delivery exemption provided by Section 4(3) of the Securities Act. This is because the prospectus
delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of
the 1940 Act. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating in a distribution
(as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of an over-allotment within
the meaning of Section 4(3)(A) of the Securities Act would be unable to take advantage of the prospectus delivery exemption
provided by Section 4(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect to Shares are
reminded that, under Rule 153 of the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the Securities
Act owed to an exchange member in connection with a sale on the Exchange is satisfied by the fact that the prospectus is available at
the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions
on an exchange.
DETERMINATION
OF NET ASSET VALUE
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Determination of Net Asset Value (NAV).”
The NAV per Share for the Fund is computed by
dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number
of Shares outstanding, rounded to the nearest cent. Expenses and fees, including the management fee, are accrued daily and taken into
account for purposes of determining NAV. The NAV of the Fund is determined as of the close of the regular trading session on the Exchange
(ordinarily 4:00 p.m., Eastern time) on each day that the Exchange is open. Any assets or liabilities denominated in currencies other
than the U.S. dollar are converted into U.S. dollars at the current market rates on the date of valuation as quoted by one or more sources.
In computing the Fund’s NAV, the Fund’s
portfolio securities are valued based on market quotations. When market quotations are not readily available for a portfolio security
the Fund must use such security’s fair value as determined in good faith in accordance with the Fund’s Fair Value Pricing
Procedures which are approved by the Board of Trustees.
The Fund typically values fixed-income portfolio
securities using last available bid prices or current market quotations provided by dealers or prices (including evaluated prices) supplied
by the Fund’s approved independent third-party pricing services. Pricing services may use matrix pricing or valuation models that
utilize certain inputs and assumptions to derive values. Pricing services generally value fixed-income securities assuming orderly transactions
of an institutional round lot size, but the Fund may hold or transact in such securities in smaller odd lot sizes. Odd lots often trade
at different prices that may be above or below the price at which the pricing service has valued the security. An amortized cost method
of valuation may be used with respect to debt obligations with sixty days or less remaining to maturity unless the Advisor determines
in good faith that such method does not represent fair value.
The value of the Fund's portfolio securities is
based on such securities’ closing price on local markets, when available. If a portfolio security’s market price is not readily
available or does not otherwise accurately reflect the fair value of such security, the portfolio security will be valued by another method
that the Advisor believes will better reflect fair value in accordance with the Trust’s valuation policies and procedures approved
by the Board of Trustees. The Fund may use fair value pricing in a variety of circumstances, including but not limited to, situations
when the value of the Fund’s portfolio security has been materially affected by events occurring after the close of the market on
which such security is principally traded (such as a corporate action or other news that may materially affect the price of such security)
or trading in such security has been suspended or halted. Accordingly, the Fund’s NAV may reflect certain portfolio securities’
fair values rather than their market prices. Fair value pricing involves subjective judgments and it is possible that a fair value determination
for a portfolio security is materially different than the value that could be realized upon the sale of such security.
DIVIDENDS
AND DISTRIBUTIONS
General Policies
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Dividends, Distributions and Taxes.”
Dividends from net investment income are declared
and paid at least annually by the Fund. Distributions of net realized capital gains, if any, generally are declared and paid once a year.
The Trust may make distributions on a more frequent basis for the Fund to comply with the distribution requirements of the U.S. Internal
Revenue Code of 1986, as amended (the “Code”), in all events in a manner consistent with the provisions of the 1940 Act. In
addition, the Trust may distribute at least annually amounts representing the full dividend yield on the underlying portfolio securities
of the Fund, net of expenses of the Fund, as if the Fund owned such underlying portfolio securities for the entire dividend period in
which case some portion of each distribution may result in a return of capital for tax purposes for certain shareholders.
Dividends and other distributions on Shares are
distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants
and Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust. The Trust may make additional distributions
to the extent necessary (i) to distribute the entire annual taxable income of the Trust, plus any net capital gains and (ii) to
avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to declare special
dividends if, in its reasonable discretion, such action is necessary or advisable to preserve the status of the Fund as a “regulated
investment company” under the Code or to avoid imposition of income or excise taxes on undistributed income.
Dividend Reinvestment Service
No reinvestment service is provided by the Trust.
Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service for use by Beneficial Owners of the Fund through DTC
Participants for reinvestment of their dividend distributions. If this service is used, dividend distributions of both income and realized
gains will be automatically reinvested in additional whole Shares of the Fund. Beneficial Owners should contact their broker to determine
the availability and costs of the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to
specific procedures and timetables.
U.S. FEDERAL INCOME TAXATION
Set forth below is a discussion of certain U.S.
federal income tax considerations affecting the Fund and the purchase, ownership and disposition of Shares. It is based upon the U.S.
Internal Revenue Code of 1986, as amended (the “Code”), U.S. Treasury Department regulations promulgated thereunder, judicial
authorities, and administrative rulings and practices, all as in effect as of the date of this SAI and all of which are subject to change,
possibly with retroactive effect. The following information supplements and should be read in conjunction with the section in the Prospectus
entitled “Dividends, Distributions and Taxes.”
Except to the extent discussed below, this summary
assumes that the Fund’s shareholder holds Shares as capital assets within the meaning of the Code, and does not hold Shares in connection
with a trade or business. This summary does not address all potential U.S. federal income tax considerations possibly applicable to an
investment in Shares, and does not address the tax consequences to Fund shareholders subject to special tax rules, including, but not
limited to, partnerships and the partners therein, those who hold Shares through an IRA, 401(k) plan or other tax-advantaged account,
and, except to the extent discussed below, tax-exempt shareholders. This discussion does not discuss any aspect of U.S. state, local,
estate, and gift, or non-U.S., tax law. This discussion is not intended or written to be legal or tax advice to any shareholder in the
Fund or other person and is not intended or written to be used or relied on, and cannot be used or relied on, by any such person for the
purpose of avoiding any U.S. federal tax penalties that may be imposed on such person. Prospective Fund shareholders are urged to consult
their own tax advisers with respect to the specific U.S. federal, state, and local, and non-U.S., tax consequences of investing in Shares
based on their particular circumstances.
The Fund has not requested and will not
request an advance ruling from the U.S. Internal Revenue Service (“IRS”) as to the U.S. federal income tax matters
described below. The IRS could adopt positions contrary to those discussed below and such positions could be sustained. Prospective
investors should consult their own tax advisors with regard to the U.S. federal tax consequences of the purchase, ownership and
disposition of Shares, as well as the tax consequences arising under the laws of any state, non-U.S. country or other taxing
jurisdiction.
Tax Treatment of the Fund
In General. The Fund intends to qualify
and elect to be treated as a separate regulated investment company (“RIC”) under the Code. As a RIC, the Fund generally will
not be required to pay corporate-level U.S. federal income taxes on any ordinary income or capital gains that it distributes to its shareholders.
To qualify and remain eligible for the special
tax treatment accorded to RICs, the Fund must meet certain income, asset and distribution requirements, described in more detail below.
Specifically, the Fund must (i) derive at least 90% of its gross income in each taxable year from dividends, interest, payments with
respect to securities loans, gains from the sale or other disposition of stock, securities or foreign currencies, other income (including,
but not limited to, gains from options, futures or forward contracts) derived with respect to its business of investing in such stock,
securities or currencies and net income derived from interests in qualified publicly traded partnerships (“QPTPs”) (i.e.,
partnerships that are traded on an established securities market or readily tradable on a secondary market, other than partnerships that
derive at least 90% of their income from interest, dividends, and other qualifying RIC income described above), and (ii) diversify
its holdings so that, at the end of each quarter of the Fund’s taxable year, (a) at least 50% of the value of the Fund’s
assets is represented by cash, securities of other RICs, U.S. government securities and other securities, with such other securities limited,
in respect of any one issuer, to an amount not greater in value than five percent of the Fund’s total assets and not greater than
10% of the outstanding voting securities of such issuer, and (b) not more than 25% of the value of its assets is invested in the
securities (other than U.S. government securities or securities of other RICs) of any one issuer, any two or more issuers of which 20%
or more of the voting stock of each such issuer is held by the Fund and that are determined to be engaged in the same or similar trades
or businesses or related trades or businesses or in the securities of one or more QPTPs. Furthermore, the Fund must distribute annually
at least 90% of the sum of (i) its “investment company taxable income” (which includes dividends, interest and net short-term
capital gains) and (ii) its net tax-exempt interest income, if any.
Failure to Maintain RIC Status. If the
Fund fails to qualify as a RIC for any year (subject to certain curative measures allowed by the Code), the Fund will be subject to regular
corporate-level U.S. federal income tax in that year on all of its taxable income, regardless of whether the Fund makes any distributions
to its shareholders. In addition, in such case, distributions will be taxable to the Fund’s shareholders generally as ordinary dividends
to the extent of the Fund’s current and accumulated earnings and profits, possibly eligible for (i) in the case of an individual
Fund shareholder, treatment as a qualified dividend (as discussed below) subject to tax at preferential long-term capital gains rates
or (ii) in the case of a corporate Fund shareholder, a dividends-received deduction. The remainder of this discussion assumes that
the Fund will qualify for the special tax treatment accorded to RICs.
Excise Tax. The Fund will be subject to
a four percent excise tax on certain undistributed income generally if the Fund does not distribute to its shareholders in each calendar
year at least 98% of its ordinary income for the calendar year, 98.2% of its capital gain net income for the twelve months ended October 31
of such year, plus 100% of any undistributed amounts from prior years. For these purposes, the Fund will be treated as having distributed
any amount on which it has been subject to U.S. corporate income tax for the taxable year ending within such calendar year. The Fund intends
to make distributions necessary to avoid this four percent excise tax, although there can be no assurance that it will be able to do so.
Exempt-Interest Dividends: The Fund expects
that, at the end of each quarter of its taxable year, (i) it will be a “qualified fund of funds” (i.e., a RIC
at least 50% of the total assets of which is represented by interests in other RICs) or (ii) 50% or more of its assets, by value,
will consist of certain obligations exempt from U.S. federal income tax under Section 103(a) of the Code (relating generally
to obligations of a state or local governmental unit) (“Tax-Exempt Obligations”). As a result, each of the Fund expects to
qualify to designate a portion of its dividends as “exempt-interest dividends.” “Exempt-interest dividends” generally
means dividends designated by the Fund as attributable to its net interest income from Tax-Exempt Obligations. The tax consequences applicable
to shareholders with respect to exempt-interest dividends are discussed below (see—Tax Treatment of Fund Shareholders).
Phantom Income. With respect to some or
all of its investments, the Fund may be required to recognize taxable income in advance of receiving the related cash payment. For example,
under the “wash sale” rules, the Fund may not be able to deduct currently a loss on a disposition of a portfolio security.
As a result, the Fund may be required to make an annual income distribution greater than the total cash actually received during the year.
Such distribution may be made from the existing cash assets of the Fund or cash generated from selling portfolio securities. The Fund
may realize gains or losses from such sales, in which event the Fund’s shareholders may receive a larger capital gain distribution
than they would in the absence of such transactions. (See also —“Certain Debt Instruments” below.)
Certain Debt Instruments. Some of the debt
securities (with a fixed maturity date of more than one year from the date of issuance) that may be acquired by the Fund (such as zero
coupon debt instruments or debt instruments with payment in-kind interest) may be treated as debt securities that are issued originally
at a discount. Generally, the amount of original issue discount is treated as interest income and is included in income over the term
of the debt security, even though payment of that amount is not received until a later time, usually when the debt security matures.
If the Fund acquires debt securities (with a fixed
maturity date of more than one year from the date of issuance) in the secondary market, such debt securities may be treated as having
market discount. Generally, any gain recognized on the disposition of, and any partial payment of principal on, a debt security having
market discount is treated as ordinary income to the extent the gain, or principal payment, does not exceed the “accrued market
discount” on such debt security. Market discount generally accrues in equal daily installments. The Fund may make one or more of
the elections applicable to debt securities having market discount, which could affect the character and timing of recognition of income.
Some debt securities (with a fixed maturity date
of one year or less from the date of issuance) that may be acquired by the Fund may be treated as having acquisition discount, or original
issue discount in the case of certain types of debt securities. Generally, the Fund will be required to include the acquisition discount,
or original issue discount, in income over the term of the debt security, even though payment of that amount is not received until a later
time, usually when the debt security matures. The Fund may make one or more of the elections applicable to debt securities having acquisition
discount, or original issue discount, which could affect the character and timing of recognition of income.
The Fund may invest a portion of their net assets
in below investment grade instruments. Investments in these types of instruments may present special tax issues for the Fund. U.S. federal
income tax rules are not entirely clear about issues such as when the Fund may cease to accrue interest, OID or market discount,
when and to what extent deductions may be taken for bad debts or worthless instruments, how payments received on obligations in default
should be allocated between principal and income and whether exchanges of debt obligations in a bankruptcy or workout context are taxable.
Special or Uncertain Tax Consequences.
The Fund’s investment or other activities could be subject to special and complex tax rules that may produce differing tax
consequences, such as disallowing or limiting the use of losses or deductions, causing the recognition of income or gain without a corresponding
receipt of cash, affecting the time as to when a purchase or sale of stock or securities is deemed to occur or altering the characterization
of certain complex financial transactions.
Tax Treatment of Fund Shareholders
Taxation of U.S. Shareholders
The following is a summary of certain U.S. federal
income tax consequences of the purchase, ownership and disposition of Shares applicable to “U.S. shareholders.” For purposes
of this discussion, a “U.S. shareholder” is a beneficial owner of Shares who, for U.S. federal income tax purposes, is (i) an
individual who is a citizen or resident of the U.S.; (ii) a corporation (or an entity treated as a corporation for U.S. federal income
tax purposes) created or organized in the U.S. or under the laws of the U.S., or of any state thereof, or the District of Columbia; (iii) an
estate, the income of which is includable in gross income for U.S. federal income tax purposes regardless of its source; or (iv) a
trust, if (a) a U.S. court is able to exercise primary supervision over the administration of such trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust, or (b) the trust has a valid election in place to be treated
as a U.S. person.
Fund Distributions. The Fund expects to
qualify to designate a portion of their dividends paid as exempt-interest dividends (as defined above). To qualify to designate a portion
of its dividends as “exempt-interest dividends,” the Fund must, at the close of each quarter of its taxable year (i) be
a qualified fund of funds (as defined above), or (ii) have 50% or more of its assets, by value, consist of Tax-Exempt Obligations
(as defined above). In purchasing municipal securities, the Fund intends to rely on opinions of its bond counsel for each issue as to
the excludability of interest on such obligations from gross income for U.S. federal income tax purposes. The Funds will not undertake
independent investigations concerning the tax-exempt status of such obligations, nor does the Fund guarantee or represent that bond counsels’
opinions are correct. Tax laws enacted principally during the 1980’s not only had the effect of limiting the purposes for which
Tax-Exempt Obligations could be issued and reducing the supply of such obligations, but also increased the number and complexity of requirements
that must be satisfied on a continuing basis in order for obligations to be and remain tax-exempt. If the issuer of a bond or a user of
a bond-financed facility fails to comply with such requirements at any time, interest on the bond could become taxable, retroactive to
the date the obligation was issued. In that event, a portion of the Fund’s distributions attributable to interest the Fund received
on such bond for the current year and for prior years could be characterized or recharacterized as taxable income.
Exempt-interest dividends generally will be excludable
from a shareholder’s gross income for U.S. federal income tax purposes. However, a shareholder is advised to consult his, her or
its tax advisor with respect to whether exempt-interest dividends retain the exclusion under Section 103(a) of the Code if such
shareholder would be treated as a "substantial user" or “related person” thereof under Section 147(a) of
the Code with respect to any of the Tax-Exempt Obligations held by the Fund.
Although exempt-interest dividends paid by
the Fund generally may be excluded by the Fund’s shareholders from their gross income for U.S. federal income tax purposes, exempt-interest
dividends will be included in determining the portion, if any, of a shareholder’s social security and railroad retirement benefit
payments subject to U.S. federal income tax. Furthermore, exempt-interest dividends paid by the Fund could subject certain individual
shareholders in the Fund to the U.S. federal alternative minimum tax. For tax years beginning after December 31, 2022, tax exempt
interest dividends may affect the corporate alternative minimum tax for certain corporations In addition, if the Fund invests in “private
activity bonds,” a portion of the exempt-interest dividends paid by the Fund may be treated as an item of “tax preference”
and, therefore, could subject certain shareholders of the Fund to the U.S. federal alternative minimum tax.
Interest on indebtedness incurred to purchase
or carry Shares of the Fund that pays exempt-interest dividends will not be deductible by the shareholders for U.S. federal income tax
purposes to the extent attributable to exempt-interest dividends.
Fund distributions other than exempt-interest
dividends will be taxable to shareholders who are subject to U.S. federal income tax. In general, Fund distributions are subject to U.S.
federal income tax when paid, regardless of whether they consist of cash or property and regardless of whether they are re-invested in
Shares. However, any Fund distribution declared in October, November or December of any calendar year and payable to shareholders
of record on a specified date during such month will be deemed to have been received by the Fund shareholder on December 31 of such
calendar year, provided such dividend is actually paid during January of the following calendar year.
Distributions of the Fund’s net investment
income and the Fund’s net short-term capital gains in excess of net long-term capital losses (collectively referred to as “ordinary
income dividends”) are taxable as ordinary income to the extent of the Fund’s current and accumulated earnings and profits
(subject to an exception for “qualified dividend income”, as discussed below). Corporate shareholders of the Fund may be
eligible to take a dividends-received deduction with respect to some of such distributions, provided the distributions are attributable
to dividends received by the Fund on stock of U.S. corporations with respect to which the Fund meets certain holding period and other
requirements. To the extent designated as “capital gain dividends” by the Fund, distributions of the Fund’s net long-term
capital gains in excess of net short-term capital losses (“net capital gain”) are taxable at long-term capital gain tax rates
to the extent of the Fund’s current and accumulated earnings and profits, regardless of the Fund shareholder’s holding period
in the Fund’s Shares. Such dividends will not be eligible for a dividends-received deduction by corporate shareholders.
An election may be available to you to defer
recognition of the gain attributable to a capital gain dividend if you make certain qualifying investments within a limited time. You
should talk to your tax advisor about the availability of this deferral election and its requirements.
The Fund’s net capital gain is computed
by taking into account the Fund’s capital loss carryforwards, if any. Under the Regulated Investment Company Modernization Act of
2010, capital losses incurred in tax years beginning after December 22, 2010 can be carried forward indefinitely and retain the character
of the original loss. To the extent that these carryforwards are available to offset future capital gains, it is probable that the amount
offset will not be distributed to shareholders. In the event that the Fund were to experience an ownership change as defined under the
Code, the Fund’s loss carryforwards, if any, may be subject to limitation.
Distributions of “qualified dividend
income” (defined below) are taxed to certain non-corporate shareholders at the reduced rates applicable to long-term capital gain
to the extent of the Fund’s current and accumulated earnings and profits, provided that the Fund shareholder meets certain holding
period and other requirements with respect to the distributing Fund’s Shares and the distributing Fund meets certain holding period
and other requirements with respect to the dividend-paying stocks. Dividends subject to these special rules, however, are not actually
treated as capital gains and, thus, are not included in the computation of a non-corporate shareholder’s net capital gain and generally
cannot be used to offset capital losses. The portion of distributions that the Fund may report as qualified dividend income generally
is limited to the amount of qualified dividend income received by the Fund, but if for any Fund taxable year 95% or more of the Fund’s
gross income (exclusive of net capital gain from sales of stock and securities) consist of qualified dividend income, all distributions
of such income for that taxable year may be reported as qualified dividend income. For this purpose, “qualified dividend income”
generally means income from dividends received by the Fund from U.S. corporations and qualified non-U.S. corporations. Income from dividends
received by the Fund from a real estate investment trust (“REIT”) or another RIC and generally is qualified dividend income
only to the extent that the dividend distributions are made out of qualified dividend income received by such REIT or other RIC. Given
its investment strategy, the Fund does not anticipate that a significant portion of their distributions will be eligible for qualifying
dividend treatment.
To the extent that the Fund makes a distribution
of income received by the Fund in lieu of dividends with respect to securities on loan pursuant to a securities lending transaction, such
income will not constitute qualified dividend income to individual shareholders and will not be eligible for the dividends-received deduction
for corporate shareholders.
Distributions in excess of the Fund’s current
and accumulated earnings and profits will, as to each shareholder, be treated as a tax-free return of capital to the extent of the shareholder’s
tax basis in its Shares of the Fund, and as a capital gain thereafter (assuming the shareholder holds its Shares of the Fund as capital
assets).
The Fund intends to distribute its net capital
gain at least annually. However, by providing written notice to its shareholders no later than 60 days after its year-end, the Fund may
elect to retain some or all of its net capital gain and designate the retained amount as a “deemed distribution.” In that
event, the Fund pays U.S. federal income tax on the retained net capital gain, and the Fund shareholder recognizes a proportionate share
of the Fund’s undistributed net capital gain. In addition, the Fund shareholder can claim a tax credit or refund for the shareholder’s
proportionate share of the Fund’s U.S. federal income taxes paid on the undistributed net capital gain and increase the shareholder’s
tax basis in the Shares by an amount equal to the shareholder’s proportionate share of the Fund’s undistributed net capital
gain, reduced by the amount of the shareholder’s tax credit or refund. Organizations or persons not subject to U.S. federal income
tax on such net capital gain may be entitled to a refund of their pro rata share of such taxes paid by the Fund upon timely filing appropriate
returns or claims for refund with the IRS.
With respect to non-corporate Fund shareholders
(i.e., individuals, trusts and estates), ordinary income and short-term capital gain are taxed at a current maximum rate of 37% and long-term
capital gain is taxed at a current maximum rate of 20%. Corporate shareholders are taxed at a current maximum rate of 21% on their income
and gain.
In addition, high-income individuals (and
certain trusts and estates) generally will be subject to a 3.8% Medicare tax on “net investment income,” in addition to
otherwise applicable U.S. federal income tax. “Net investment income” generally will include dividends (including
capital gain dividends) received from the Fund and net gains from the redemption or other disposition of Shares. Please consult your
tax advisor regarding this tax.
If the Fund is a qualified fund of funds (as defined
above) or more than 50% of the Fund’s total assets at the end of a taxable year consist of non-U.S. stock or securities, the Fund
may elect to “pass through” to its shareholders certain non-U.S. income taxes paid by the Fund. This means that each shareholder
will be required to (i) include in gross income, even though not actually received, the shareholder’s pro rata share of the
Fund’s non-U.S. income taxes, and (ii) either take a corresponding deduction (in calculating U.S. federal taxable income) or
credit (in calculating U.S. federal income tax), subject to certain limitations.
Investors considering buying Shares just prior
to a distribution should be aware that, although the price of the Shares purchased at such time may reflect the forthcoming distribution,
such distribution nevertheless may be taxable (as opposed to a non-taxable return of capital).
Sales of Shares. Any capital gain or loss
realized upon a sale or exchange of Shares generally is treated as a long-term gain or loss if the Shares have been held for more than
one year. Any capital gain or loss realized upon a sale or exchange of Shares held for one year or less generally is treated as a short-term
gain or loss, except that any capital loss on the sale of Shares held for six months or less is treated as long-term capital loss to the
extent that capital gain dividends were paid (or deemed to be paid) with respect to such Shares. Furthermore, a loss realized by a shareholder
on the sale or exchange of Shares of the Fund with respect to which exempt-interest dividends have been paid may, to the extent of such
exempt-interest dividends, be disallowed if such Shares have been held by the shareholder for six months or less at the time of their
disposition. All or a portion of any loss realized upon a sale or exchange of Shares also will be disallowed under the “wash sale”
rules if substantially identical shares are purchased (through reinvestment of dividends or otherwise) within a 61-day period beginning
30 days before and ending 30 days after the disposition of the Shares. In such a case, the basis of the newly purchased shares will be
adjusted to reflect the disallowed loss.
An election may be available to you to defer
recognition of capital gain if you make certain qualifying investments within a limited time. You should talk to your tax advisor about
the availability of this deferral election and its requirements.
Legislation passed by Congress requires reporting
to the IRS and to taxpayers of adjusted cost basis information for “covered securities,” which generally include shares of
a RIC acquired on or after January 1, 2012. Shareholders should contact their brokers to obtain information with respect to the available
cost basis reporting methods and available elections for their accounts.
Creation Unit Issues and Redemptions. On
an issue of Shares as part of a Creation Unit, made by means of an in-kind deposit, an Authorized Participant recognizes capital gain
or loss (assuming the Authorized Participant does not hold the securities as inventory) equal to the difference between (i) the fair
market value (at issue) of the issued Shares (plus any cash received by the Authorized Participant as part of the issue) and (ii) the
Authorized Participant’s aggregate basis in the exchanged securities (plus any cash paid by the Authorized Participant as part of
the issue). On a redemption of Shares as part of a Creation Unit where the redemption is conducted in-kind by a payment of Fund Securities,
an Authorized Participant recognizes capital gain or loss (assuming the Authorized Participant does not hold the securities as inventory)
equal to the difference between (i) the fair market value (at redemption) of the securities received (plus any cash received by the
Authorized Participant as part of the redemption) and (ii) the Authorized Participant’s basis in the redeemed Shares (plus
any cash paid by the Authorized Participant as part of the redemption). However, the IRS may assert, under the “wash sale”
rules or on the basis that there has been no significant change in the Authorized Participant’s economic position, that any
loss on an issue or redemption of Creation Units cannot be deducted currently.
In general, any capital gain or loss
recognized upon the issue or redemption of Shares (as components of a Creation Unit) is treated either as long-term capital gain or
loss, if the deposited securities (in the case of an issue) or the Shares (in the case of a redemption) have been held for more than
one year, or otherwise as short-term capital gain or loss. However, any capital loss on a redemption of Shares held for six months
or less is treated as long-term capital loss to the extent that capital gain dividends were paid (or deemed to be paid) with respect
to the Shares. Furthermore, a loss realized on the redemption of Shares of the Fund with respect to which exempt-interest dividends
have been paid may, to the extent of such exempt-interest dividends, be disallowed if such Shares have been held for six months or
less at the time of their disposition.
Reportable Transactions. If the Fund shareholder
recognizes a loss with respect to Shares of $2 million or more (for an individual Fund shareholder) or $10 million or more (for a corporate
shareholder) in any single taxable year (or a greater loss over a combination of years), the Fund shareholder may be required file a disclosure
statement with the IRS. Significant penalties may be imposed upon the failure to comply with these reporting rules. Shareholders should
consult their tax advisors to determine the applicability of these rules in light of their individual circumstances.
Taxation of Non-U.S. Shareholders
The following is a summary of certain U.S. federal
income tax consequences of the purchase, ownership and disposition of Shares applicable to “non-U.S. shareholders.” For purposes
of this discussion, a “non-U.S. shareholder” is a beneficial owner of Shares that is not a U.S. shareholder (as defined above)
and is not an entity or arrangement treated as a partnership for U.S. federal income tax purposes. The following discussion is based on
current law, and is for general information only. It addresses only selected, and not all, aspects of U.S. federal income taxation.
Dividends. As indicated above, a majority of the
Fund’s dividend distributions to its shareholders, including its non-U.S. shareholders, is expected to be exempt from U.S. federal
income tax as exempt-interest dividends. However, with respect to non-U.S. shareholders of the Fund, the Fund’s ordinary income
dividends generally will be subject to U.S. federal withholding tax at a rate of 30% (or at a lower rate established under an applicable
tax treaty). However, ordinary income dividends that are “interest-related dividends” or “short-term capital gain dividends”
(each as defined below) and capital gain dividends generally will not be subject to U.S. federal withholding (or income) tax, provided
that the non-U.S. shareholder furnishes the Fund with a completed IRS Form W-8BEN or W-8BEN-E, as applicable, (or acceptable substitute
documentation) establishing the non-U.S. shareholder’s non-U.S. status and the Fund does not have actual knowledge or reason to
know that the non-U.S. shareholder would be subject to such withholding tax if the non-U.S. shareholder were to receive the related amounts
directly rather than as dividends from the Fund. “Interest-related dividends” generally means dividends designated by the
Fund as attributable to the Fund’s U.S.-source interest income, other than certain contingent interest and interest from obligations
of a corporation or partnership in which the Fund is at least a 10% shareholder, reduced by expenses that are allocable to such income.
“Short-term capital gain dividends” generally means dividends designated by the Fund as attributable to the excess of the
Fund’s net short-term capital gain over its net long-term capital loss. Depending on its circumstances, the Fund may treat such
dividends, in whole or in part, as ineligible for these exemptions from withholding.
Notwithstanding the foregoing, special rules apply
in certain cases, including as described below. For example, in cases where dividend income from a non-U.S. shareholder’s investment
in the Fund is effectively connected with a trade or business of the non-U.S. shareholder conducted in the U.S., the non-U.S. shareholder
generally will be exempt from withholding tax, but will be subject to U.S. federal income tax at the graduated rates applicable to U.S.
shareholders. Such income generally must be reported on a U.S. federal income tax return. Furthermore, such income also may be subject
to the 30% branch profits tax in the case of a non-U.S. shareholder that is a corporation. In addition, if a non-U.S. shareholder is an
individual who is present in the U.S. for 183 days or more during the taxable year and has a “tax home” in the U.S., any gain
incurred by such shareholder with respect to his or her capital gain dividends and short-term capital gain dividends would be subject
to a 30% U.S. federal income tax (which, in the case of short-term capital gain dividends, may, in certain instances, be withheld at source
by the Fund).
For years after December 31, 2022, amounts
paid to or recognized by a non-U.S. affiliate that are excluded from tax under the portfolio interest, capital gains dividends, short-term
capital gains or tax-exempt interest dividend exceptions or applicable treaties, may be taken into consideration in determining whether
a corporation is an “applicable corporation” subject to a 15% minimum tax on adjusted financial statement income.
Sales of Fund Shares. Under current
law, gain on a sale or exchange of Shares generally will be exempt from U.S. federal income tax (including withholding at the
source) unless (i) the non-U.S. shareholder is an individual who was physically present in the U.S. for 183 days or more during
the taxable year and has a “tax home” in the U.S., in which case the non-U.S. shareholder would incur a 30% U.S. federal
income tax on his capital gain, (ii) the gain is effectively connected with a U.S. trade or business conducted by the non-U.S.
shareholder (in which case the non-U.S. shareholder generally would be taxable on such gain at the same graduated rates applicable
to U.S. shareholders, would be required to file a U.S. federal income tax return and, in the case of a corporate non-U.S.
shareholder, may also be subject to the 30% branch profits tax.
Credits or Refunds. To claim a credit or
refund for any Fund-level taxes on any undistributed long-term capital gains (as discussed above) or any taxes collected through withholding,
a non-U.S. Fund shareholder must obtain a U.S. taxpayer identification number and file a U.S. federal income tax return even if the non-U.S.
Fund shareholder would not otherwise be required to do so.
Non-U.S. shareholders that engage in certain “wash
sale” and/or substitute dividend payment transactions the effect of which is to avoid the receipt of distributions from the Fund
that would be treated as gain effectively connected with a U.S. trade or business will be treated as having received such distributions.
All shareholders of the Fund should consult their
tax advisers regarding the application of the rules described above.
Back-Up Withholding
The Fund (or a financial intermediary such as
a broker through which a shareholder holds Shares in the Fund) may be required to report certain information on the Fund shareholder to
the IRS and withhold U.S. federal income tax (“backup withholding”) at a 24% rate from taxable distributions and redemption
or sale proceeds payable to the Fund shareholder if (i) the Fund shareholder fails to provide the Fund with a correct taxpayer identification
number or make required certifications, or if the IRS notifies the Fund that the Fund shareholder is otherwise subject to backup withholding,
and (ii) the Fund shareholder is not otherwise exempt from backup withholding. Non-U.S. shareholders can qualify for exemption from
backup withholding by submitting a properly completed IRS Form W-8BEN or W-8BEN-E. Backup withholding is not an additional tax and
any amount withheld may be credited against the Fund shareholder’s U.S. federal income tax liability.
Foreign Account Tax Compliance Act
The U.S. Foreign Account Tax Compliance Act (“FATCA”)
generally imposes a 30% withholding tax on “withholdable payments” (defined below) made to (i) a “foreign financial
institution” ("FFI"), unless the FFI enters into an agreement with the IRS to provide information regarding certain of
its direct and indirect U.S. account holders and satisfy certain due diligence and other specified requirements, and (ii) a “non-financial
foreign entity” (“NFFE”) unless such NFFE provides certain information to the withholding agent about certain of its
direct and indirect “substantial U.S. owners” or certifies that it has no such U.S. owners. The beneficial owner of a “withholdable
payment” may be eligible for a refund or credit of the withheld tax. The U.S. government also has entered into several intergovernmental
agreements with other jurisdictions to provide an alternative, and generally easier, approach for FFIs to comply with FATCA.
“Withholdable payments” generally
include, among other items, (i) U.S.-source interest and dividends, and (ii) gross proceeds from the sale or disposition, occurring
on or after January 1, 2019, of property of a type that can produce U.S.-source interest or dividends. Proposed regulations may eliminate
the requirement to withhold on gross proceeds.
The Fund may be required to impose a 30%
withholding tax on withholdable payments to a shareholder if the shareholder fails to provide the Fund with the information,
certifications or documentation required under FATCA, including information, certification or documentation necessary for the Fund
to determine if the shareholder is a non-U.S. shareholder or a U.S. shareholder and, if it is a non-U.S. shareholder, if the
non-U.S. shareholder has “substantial U.S. owners” and/or is in compliance with (or meets an exception from) FATCA
requirements. The Fund will not pay any additional amounts to shareholders in respect of any amounts withheld. The Fund may disclose
any shareholder information, certifications or documentation to the IRS or other parties as necessary to comply with FATCA.
The requirements of, and exceptions from, FATCA
are complex. All prospective shareholders are urged to consult their own tax advisors regarding the potential application of FATCA with
respect to their own situation.
Section 351
The Trust, on behalf of the Fund, has the right
to reject an order for a purchase of shares of the Fund if the purchaser (or any group of purchasers) would, upon obtaining the shares
so ordered, own 80% or more of the outstanding shares of a given Fund and if, pursuant to Section 351 of the Code, that Fund would
have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has the
right to require information necessary to determine beneficial share ownership for purposes of the 80% determination.
You should consult your tax advisor regarding
potential foreign, state or local taxation with respect to your Shares.
OTHER
INFORMATION
The Fund is not sponsored, endorsed, sold
or promoted by the Exchange. The Exchange makes no representation or warranty, express or implied, to the owners of Shares or any member
of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Fund
to achieve its objective. The Exchange has no obligation or liability in connection with the administration, marketing or trading of
the Fund.
For purposes of the 1940 Act, the Fund is
a registered investment company, and the acquisition of Shares by other registered investment companies and companies relying on exemption
from registration as investment companies under Sections 3(c)(1) or 3(c)(7) of the 1940 Act are subject to the restrictions
of Section 12(d)(1) of the 1940 Act and the related rules and interpretations.
Shareholder inquiries may be made by writing to
the Trust, c/o IndexIQ Advisors LLC, 51 Madison Avenue, New York, New York 10010.
FINANCIAL STATEMENTS
The audited financial statements and notes
thereto in the Fund’s Annual Report to Shareholders for the fiscal year ended April 30, 2022 (the “Annual Report”)
are incorporated by reference into this SAI. No other parts of the Annual Report are incorporated by reference herein.
The financial statements included in the Annual
Report have been audited by PricewaterhouseCoopers LLP, the Fund's independent registered public accounting firm, whose report thereon
also appears in the Annual Report and is incorporated by reference into this SAI. Such financial statements have been incorporated by
reference herein in reliance upon such report given upon their authority as experts in accounting and auditing.
A copy of the Annual Report for the fiscal
year ended April 30, 2022, may be obtained upon request and without charge by calling the Advisor, writing the Trust or visiting
the Fund’s website as follows:
By
telephone: |
1-888-474-7725 |
|
|
By mail: |
IndexIQ Active ETF Trust |
|
|
|
c/o IndexIQ Advisors LLC |
|
51 Madison Avenue |
|
New York, NY 10010 |
On the Internet: newyorklifeinvestments.com/etf
MEESGB14-08/22
APPENDIX A
SUMMARY OF PROXY VOTING POLICY AND PROCEDURES
The Advisor has delegated proxy-voting authority
to the Fund(s)’ subadvisor, MacKay Shields. MacKay Shields has adopted Proxy-Voting Policies and Procedures designed to make sure
that where clients have delegated proxy-voting authority to MacKay Shields, proxies are voted in the best interest of such clients without
regard to the interests of MacKay Shields or related parties. MacKay Shields currently uses Institutional Shareholder Services, Inc.
(“ISS”) to assist in voting client securities. For purposes of the Policy, the "best interests of clients" means,
unless otherwise specified by the client, the clients' best economic interests over the long term – that is, the common interest
that all clients share in seeing the value of a common investment increase over time. MacKay Shields has adopted standard proxy voting
guidelines, which follow ISS voting recommendations and standard guidelines will vary based on client type and/or investment strategy
(e.g., union or non-union voting guidelines, or sustainability voting guidelines).
For those clients who have given us voting
authority, we instruct the client’s custodian to send all ballots to ISS and we instruct ISS which guidelines to follow. MacKay
Shields votes proxies in accordance with the applicable standard voting guidelines unless MacKay Shields agrees with the client to apply
custom guidelines. ISS researches each proxy issue and provides a recommendation to MacKay Shields on how to vote based on such research
and its application of the research to the applicable voting guidelines. ISS casts votes in accordance with its recommendation unless
a portfolio manager believes that it is in the best interests of the client(s) to vote otherwise. To override a proxy recommendation,
a portfolio manager must submit a written override request to the Legal and/or Compliance Department. MacKay Shields has procedures in
place to review each such override request for potential material conflicts of interest between clients and MacKay Shields. MacKay Shields
will memorialize the basis for any decision to override a recommendation or to abstain from voting, including the resolution of any conflicts
of interest.
APPENDIX B
DESCRIPTION OF FIXED-INCOME RATINGS
A rating is generally
assigned to a fixed-income security at the time of issuance by a credit rating agency designated as a nationally recognized statistical
rating organization (“NRSRO”) by the SEC. While NRSROs may from time to time revise such ratings, they undertake no obligation
to do so, and the ratings given to securities at issuance do not necessarily represent ratings which would be given to these securities
on a particular subsequent date.
Fixed-income
securities which are unrated expose the investor to risks with respect to capacity to pay interest or repay principal which are similar
to the risks of lower-rated speculative bonds. Evaluation of these securities is dependent on the investment adviser’s judgment,
analysis and experience in the evaluation of such securities.
Investors should
note that the assignment of a rating to a security by an NRSRO may not reflect the effect of recent developments on the issuer’s
ability to make interest and principal payments or on the likelihood of default.
Securities deemed
to be high yield are rated below Baa3 by Moody’s and below BBB- by Standard & Poor’s Rating Services and Fitch. The
descriptions below relate to general long-term and short-term obligations of an issuer.
Moody’s Ratings
Long-Term Obligations
Ada: Obligations
rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa: Obligations
rated Aa are judged to be of high quality and are subject to very low credit risk.
A: Obligations
rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa: Obligations
rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba: Obligations
rated Ba are judged to be speculative and are subject to substantial credit risk.
B: Obligations
rated B are considered speculative and are subject to high credit risk.
Caa: Obligations
rated Caa are judged to be speculative, of poor standing and are subject to very high credit risk.
Ca: Obligations
rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C: Obligations
rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest.
Note:
Moody's appends numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through Caa. The modifier 1 indicates that
the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier
3 indicates a ranking in the lower end of that generic rating category.
Absence of
Rating: Where no rating has been assigned or where a rating has been withdrawn, it may be for reasons unrelated to the creditworthiness
of the issue.
Should no rating
be assigned, the reason may be one of the following:
| 1. | An application was not received or accepted. |
| 2. | The issue or issuer belongs to a group of securities or entities that are not rated as a matter of policy. |
| 3. | There is a lack of essential data pertaining to the issue or issuer. |
| 4. | The issue was privately placed, in which case the rating is not published in Moody’s publications. |
Withdrawal may
occur if new and material circumstances arise, the effects of which preclude satisfactory analysis; if there is no longer available reasonable
up-to-date data to permit a judgment to be formed; if a bond is called for redemption; or for other reasons.
Short-Term Obligations
Moody’s
short-term debt ratings are opinions of the ability of issuers to honor short-term financial obligations, generally with an original maturity
not exceeding thirteen months.
Moody's employs
the following designations to indicate the relative repayment ability of rated issuers:
P-1: Issuers
(or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2: Issuers
(or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3: Issuers
(or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations. NP: Issuers (or supporting
institutions) rated Not Prime do not fall within any of the Prime rating categories.
US Municipal Short-Term Debt Obligations
There are three
rating categories for short-term municipal obligations that are considered investment-grade and are designated as Municipal Investment
Grade (MIG). In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings
expire at the maturity of the obligation.
MIG 1:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity
support, or demonstrated broad-based access to the market for refinancing.
MIG 2:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing
is likely to be less well-established.
SG: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Standard & Poor's Ratings
Services Long-Term Obligations
AAA: An
obligation rated AAA has the highest rating assigned by Standard & Poor's Rating Services. The obligor’s capacity to meet
its financial commitment on the obligation is extremely strong.
AA: An
obligation rated AA differs from the highest-rated obligations only to a small degree. The obligor’s capacity to meet its financial
commitment is very strong.
A: An
obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations
in higher-rated categories. However, the obligor’s capacity to meet its financial commitment on the obligation is still strong.
BBB: An
obligation rated BBB exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BB; B;
CCC; CC; and C: Obligations rated BB, B, CCC, CC, and C are regarded as having significant speculative characteristics.
BB indicates the least degree of speculation and C the highest. While such obligations will likely have some quality and protective characteristics,
these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB: An
obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure
to adverse business, financial, or economic conditions which could lead to the obligor’s inadequate capacity to meet its financial
commitment on the obligation.
B: An
obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its
financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor’s capacity
or willingness to meet its financial commitment on the obligation.
CCC: An
obligation rated CCC is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions,
the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An
obligation rated CC is currently highly vulnerable to nonpayment. The CC rating is used when a default has not yet occurred, but Standard &
Poor's Rating Services expects default to be a virtual certainty, regardless of the anticipated time to default.
C: An
obligation rated C is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower
ultimate recovery compared to obligations that are rated higher.
D: An
obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used
when payments on an obligation are not made on the date due, unless Standard & Poor's Rating Services believes that such payments
will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30
calendar days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of similar action and where default
on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to D if it is
subject to a distressed exchange offer.
NR: NR
indicates no rating has been requested, or that there is insufficient information on which to base a rating, or that Standard &
Poor's Rating Services does not rate a particular obligation as a matter of policy.
Note:
The ratings from AA to CCC may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major
rating categories.
Short-Term Obligations
A-1: A
short-term obligation rated A-1 is rated in the highest category by Standard & Poor's Rating Services. The obligor's capacity
to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus sign
(+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2: A
short-term obligation rated A-2 is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions
than obligations in higher rating categories. However, the obligor's capacity to meet its financial commitment on the obligation is satisfactory.
A-3: A
short-term obligation rated A-3 exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances
are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
B: A short-term
obligation rated B is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to
meet its financial commitments; however, it faces major ongoing uncertainties which could lead to the obligor's inadequate capacity to
meet its financial commitments.
C: A short-term
obligation rated C is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions
for the obligor to meet its financial commitment on the obligation.
D: A short-term
obligation rated D is in default or in breach of an imputed promise. For non-hybrid capital instruments, the D rating category is used
when payments on an obligation are not made on the date due, unless Standard & Poor's Rating Services believes that such payments
will be made within any stated grace period. However, any stated grace period longer than five business days will be treated as five business
days. The D rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and where default on an
obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to D if it is subject
to a distressed exchange offer.
Municipal Short-Term Obligations
An S&P U.S.
municipal note rating reflects Standard & Poor's opinion about the liquidity factors and market access risks unique to the notes.
Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than three years will most
likely receive a long-term debt rating.
SP-1:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus
(+) designation.
SP-2:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of
the notes.
SP-3:
Speculative capacity to pay principal and interest.
Fitch Ratings
Long-Term Obligations
AAA: Highest
credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in cases of exceptionally strong capacity
for payment of financial commitments. This capacity is highly unlikely to be adversely affected by foreseeable events.
AA: Very
high credit quality. AA ratings denote expectations of very low credit risk. They indicate very strong capacity for payment of financial
commitments. This capacity is not significantly vulnerable to foreseeable events.
A: High
credit quality. A ratings denote expectations of low credit risk. The capacity for payment of financial commitments is considered strong.
This capacity may, nevertheless, be more vulnerable to adverse business or economic conditions than is the case for higher ratings.
BBB: Good
credit quality. BBB ratings indicate that expectations of credit risk are currently low. The capacity for payment of financial commitments
is considered adequate but adverse business or economic conditions are more likely to impair this capacity.
BB: Speculative.
BB ratings indicate an elevated vulnerability to credit risk, particularly in the event of adverse changes in business or economic conditions
over time; however, business or financial alternatives may be available to allow financial commitments to be met.
B: Highly
speculative. B ratings indicate that material credit risk is present.
CCC: Substantial
credit risk. CCC ratings indicate that substantial credit risk is present.
CC: Very
high levels of credit risk. CC ratings indicate very high levels of credit risk.
C: Exceptionally
high levels of credit risk. C indicates exceptionally high levels of credit risk.
Defaulted obligations
typically are not assigned RD or D ratings, but are instead rated in the B to C rating categories, depending upon their recovery prospects
and other relevant characteristics. This approach better aligns obligations that have comparable overall expected loss but varying vulnerability
to default and loss.
Note: The
modifiers “+” or “-” may be appended to a rating to denote relative status within major rating categories. Such
suffixes are not added to the AAA obligation rating category, or to corporate finance obligation ratings in the categories below CCC.
The subscript
'emir' is appended to a rating to denote embedded market risk which is beyond the scope of the rating. The designation is intended to
make clear that the rating solely addresses the counterparty risk of the issuing bank. It is not meant to indicate any limitation in the
analysis of the counterparty risk, which in all other respects follows published Fitch criteria for analyzing the issuing financial institution.
Fitch does not rate these instruments where the principal is to any degree subject to market risk.
Short-Term Obligations (Corporate
and Public Finance)
A short-term
issuer or obligation rating is based in all cases on the short-term vulnerability to default of the rated entity or security stream and
relates to the capacity to meet financial obligations in accordance with the documentation governing the relevant obligation. Short-Term
Ratings are assigned to obligations whose initial maturity is viewed as “short-term” based on market convention. Typically,
this means up to 13 months for corporate, sovereign, and structured obligations, and up to 36 months for obligations in U.S. public finance
markets.
F1: Highest
short-term credit quality. Indicates the strongest intrinsic capacity for timely payment of financial commitments; may have an added “+”
to denote any exceptionally strong credit feature.
F2: Good
short-term credit quality. Good intrinsic capacity for timely payment of financial commitments.
F3: Fair
short-term credit quality. The intrinsic capacity for timely payment of financial commitments is adequate.
B: Speculative
short-term credit quality. Minimal capacity for timely payment of financial commitments, plus heightened vulnerability to near term adverse
changes in financial and economic conditions.
C: High
short-term default risk. Default is a real possibility.
RD: Restricted
default. Indicates an entity that has defaulted on one or more of its financial commitments, although it continues to meet other financial
obligations. Typically applicable to entity ratings only.
D: Default.
Indicates a broad-based default event for an entity, or the default of a short-term obligation.
Kroll
Ratings
Long-Term
Credit Ratings
AAA: Determined
to have almost no risk of loss due to credit-related events. Assigned only to the very highest quality obligors and obligations able
to survive extremely challenging economic events.
AA: Determined
to have minimal risk of loss due to credit-related events. Such obligors and obligations are deemed very high quality.
A: Determined
to be of high quality with a small risk of loss due to credit-related events. Issuers and obligations in this category are expected to
weather difficult times with low credit losses.
BBB: Determined
to be of medium quality with some risk of loss due to credit-related events. Such issuers and obligations may experience credit losses
during stressed environments.
BB: Determined
to be of low quality with moderate risk of loss due to credit-related events. Such issuers and obligations have fundamental weaknesses
that create moderate credit risk.
B: Determined
to be of very low quality with high risk of loss due to credit-related events. These issuers and obligations contain many fundamental
shortcomings that create significant credit risk.
CCC: Determined
to be at substantial risk of loss due to credit-related events, near default, or in default with high recovery expectations.
CC: Determined
to be near default or in default with average recovery expectations.
C: Determined
to be near default or in default with low recovery expectations.
D: Kroll
defines default as occurring if:
There
is a missed interest payment, principal payment, or preferred dividend payment, as applicable, on a rated obligation which is unlikely
to be recovered. The rated entity files for protection from creditors, is placed into receivership, or is closed by regulators such that
a missed payment is likely to result. The rated entity seeks and completes a distressed exchange, where existing rated obligations are
replaced by new obligations with a diminished economic value.
Kroll
may append - or + modifiers to ratings in categories AA through CCC to indicate, respectively, upper and lower risk levels within the
broader category.
Short-Term
Credit Ratings
K1+: Exceptional
ability to meet short-term obligations.
K1: Very
strong ability to meet short-term obligations.
K2: Strong
ability to meet short-term obligations.
K3: Adequate
ability to meet short-term obligations.
B: Questionable
ability to meet short-term obligations.
C: Little
ability to meet short-term obligations.
D: Kroll
defines default as occurring if:
There
is a missed interest payment, principal payment, or preferred dividend payment, as applicable, on a rated obligation which is unlikely
to be recovered. The rated entity files for protection from creditors, is placed into receivership, or is closed by regulators such that
a missed payment is likely to result. The rated entity seeks and completes a distressed exchange, where existing rated obligations are
replaced by new obligations with a diminished economic value.
DBRS
Morningstar Ratings
Long
Term Obligations Scale
All
rating categories other than AAA and D also contain subcategories (high) and (low). The absence of
either a (high) or (low) designation indicates the rating is in the middle of the category.
AAA: Highest
credit quality. The capacity for the payment of financial obligations is exceptionally high and unlikely to be adversely affected by
future events.
AA: Superior
credit quality. The capacity for the payment of financial obligations is considered high. Credit quality differs from AAA only to a small
degree. Unlikely to be significantly vulnerable to future events.
A: Good
credit quality. The capacity for the payment of financial obligations is substantial, but of lesser credit quality than AA. May be
vulnerable to future events, but qualifying negative factors are considered manageable.
BBB: Adequate
credit quality. The capacity for the payment of financial obligations is considered acceptable. May be vulnerable to future events.
BB: Speculative,
non-investment grade credit quality. The capacity for the payment of financial obligations is uncertain. Vulnerable to future events.
B: Highly
speculative credit quality. There is a high level of uncertainty as to the capacity to meet financial obligations.
CCC
/ CC / C: Very highly speculative credit quality. In danger of defaulting on financial obligations. There is little difference
between these three categories, although CC and C ratings are normally applied to obligations that are seen as highly likely to default,
or subordinated to obligations rated in the CCC to B range. Obligations in respect of which default has not technically taken place but
is considered inevitable may be rated in the C category.
D: When
the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation
after the exhaustion of grace periods, a downgrade to D may occur. DBRS Morningstar may also use SD (Selective Default) in cases where
only some securities are impacted, such as the case of a distressed exchange. See Default Definition for more information.
Commercial
Paper and Short-Term Debt Rating Scale
R-1
(high): Highest credit quality. The capacity for the payment of short-term financial obligations as they fall due is exceptionally
high. Unlikely to be adversely affected by future events.
R-1
(middle): Superior credit quality. The capacity for the payment of short-term financial obligations as they fall due is very
high. Differs from R-1 (high) by a relatively modest degree. Unlikely to be significantly vulnerable to future events.
R-1
(low): Good credit quality. The capacity for the payment of short-term financial obligations as they fall due is substantial.
Overall strength is not as favorable as higher rating categories. May be vulnerable to future events, but qualifying negative factors
are considered manageable.
R-2
(high): Upper end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall
due is acceptable. May be vulnerable to future events.
R-2
(middle): Adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due is acceptable.
May be vulnerable to future events or may be exposed to other factors that could reduce credit quality.
R-2
(low): Lower end of adequate credit quality. The capacity for the payment of short-term financial obligations as they fall due
is acceptable. May be vulnerable to future events. A number of challenges are present that could affect the issuer's ability to
meet such obligations.
R-3: Lowest
end of adequate credit quality. There is a capacity for the payment of short-term financial obligations as they fall due. May be
vulnerable to future events and the certainty of meeting such obligations could be impacted by a variety of developments.
R-4: Speculative
credit quality. The capacity for the payment of short-term financial obligations as they fall due is uncertain.
R-5: Highly
speculative credit quality. There is a high level of uncertainty as to the capacity to meet short-term financial obligations as they
fall due.
D: When
the issuer has filed under any applicable bankruptcy, insolvency or winding up statute or there is a failure to satisfy an obligation
after the exhaustion of grace periods, a downgrade to D may occur. DBRS Morningstar may also use SD (Selective Default) in cases where
only some securities are impacted, such as the case of a distressed exchange. See Default Definition for more information.
IndexIQ
Active ETF Trust
Part C
– Other Information
| (d) | Investment Advisory Agreements |
| (e) | Underwriting Agreements |
| (h) | Other Material Agreements |
(1) |
Previously filed as part of the Registration Statement, filed August 22, 2012. |
(2) |
Previously filed as part of Pre-Effective Amendment No. 3 to the Registration Statement, filed November 21, 2013. |
(3) |
Previously filed as part of Post-Effective Amendment No. 3 to the Registration Statement filed on August 26, 2016. |
(4) |
Previously filed as part of Post-Effective Amendment No. 5 to the Registration Statement filed on February 24, 2017. |
(5) |
Previously filed as part of Post-Effective Amendment No. 18 to the Registration Statement filed on August 29, 2018. |
(6) |
Previously filed as part of Post-Effective Amendment No. 21 to the Registration Statement filed on July 19, 2019. |
(7) |
Previously filed as part of Post-Effective Amendment No. 35 to the Registration Statement filed on August 27, 2020. |
(8) |
Previously filed as part of Post-Effective Amendment No. 70 to the Registration Statement filed on June 17, 2021. |
(9) |
Previously filed as part of Post-Effective Amendment No. 76 to the Registration Statement filed on August 30, 2021. |
(10) |
Previously filed as part of Post-Effective Amendment No. 81 to the Registration Statement filed on December 13, 2021. |
(11) |
Previously filed as part of Post-Effective Amendment No. 87 to the Registration Statement filed on May 3, 2022. |
(12) |
Previously filed as part of Post-Effective Amendment No. 89 to the Registration Statement filed on June 29, 2022. |
(13) |
Filed herewith. |
| Item 29. | Persons
Controlled By or Under Common Control with Registrant |
Not Applicable.
Reference is made to Article
Eight of the Registrant’s Declaration of Trust, which is incorporated by reference herein. The general effect of the indemnification
available to an officer or trustee may be to reduce the circumstances under which the officer or trustee is required to bear the economic
burden of liabilities and expenses related to actions taken by the individual in his or her capacity as an officer or trustee.
The Registrant (sometimes
referred to as the “Trust”) is organized as a Delaware statutory trust and is operated pursuant to a Declaration of Trust
that permits the Registrant to indemnify every person who is, or has been, a trustee, officer, employee or agent of the Trust, including
persons who serve at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the
Trust has an interest as a shareholder, creditor or otherwise (each, a “Covered Person”). Each Covered Person is indemnified
by the Trust to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her
in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his
or her being or having been such a director, trustee, officer, employee or agent and against amounts paid or incurred by him in settlement
thereof. This indemnification is subject to the following conditions:
No indemnification is provided
to a Covered Person:
(a) For a liability
to the Trust or its shareholders arising out of a final adjudication by the court or other body before which the proceeding was brought
that the Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of his or her office;
(b) With respect to
any matter as to which the Covered Person has been finally adjudicated not to have acted in good faith in the reasonable belief that his
or her action was in the best interests of the Trust; or
(c) In the event of
a settlement or other disposition not involving a final adjudication (as provided in paragraph (a) or (b) above) and resulting in a payment
by a Covered Person, unless there has been either a determination that such Covered Person did not engage in willful misfeasance, bad
faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office or position by the court or other
body approving the settlement or other disposition, or a reasonable determination, based on a review of readily available facts (as opposed
to a full trial-type inquiry), that he or she did not engage in such conduct, such determination being made by: (i) a vote of a majority
of the Disinterested Trustees (as such term is defined in Section 8.5.5 of the Declaration of Trust) acting on the matter (provided that
a majority of Disinterested Trustees then in office act on the matter); or (ii) a written opinion of independent legal counsel.
The rights of indemnification
under the Declaration of Trust may be insured against by policies maintained by the Trust are severable; will not affect any other rights
to which any Covered Person is entitled; will continue as to a person who has ceased to be a Covered Person; and will inure to the benefit
of the heirs, executors and administrators of such a person. Nothing contained in the Declaration of Trust will affect any rights to indemnification
to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.
Expenses of preparation and
presentation of a defense to any claim, action, suit or proceeding subject to a claim for indemnification under Section 8.5 of the Declaration
of Trust will be advanced by the Trust prior to final disposition thereof upon receipt of an undertaking by or on behalf of the recipient
to repay such amount if it is ultimately determined that he or she is not entitled to indemnification under Section 8.5 of the Declaration
of Trust, provided that either:
(a) Such undertaking
is secured by a surety bond or some other appropriate security or the Trust is insured against losses arising out of any such advances;
or
(b) A majority of
the Disinterested Trustees acting on the matter (provided that a majority of the Disinterested Trustees then in office act on the matter)
or independent legal counsel in a written opinion determines, based upon a review of the readily available facts (as opposed to the facts
available upon a full trial), that there is reason to believe that the recipient ultimately will be found entitled to indemnification.
Insofar as indemnification
for liabilities arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant
by the Registrant pursuant to the Declaration of Trust or otherwise, the Registrant is aware that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed in the Act, and therefore, is unenforceable. In the event
that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by trustees,
officers or controlling persons of the Registrant in connection with the successful defense of any act, suit or proceeding) is asserted
by such trustees, officers or controlling persons in connection with the shares being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issues.
| Item 31. | Business and Other Connections
of the Investment Adviser |
The description of the Investment
Advisor is found under the caption “Service Providers—Investment Advisor” in the Prospectus and under the caption “Management
Services—Investment Advisor” in the Statement of Additional Information constituting Parts A and B, respectively, of this
Registration Statement, which are incorporated by reference herein. The Investment Advisor provides investment advisory services to other
persons or entities other than the Registrant.
| Item 32. | Principal Underwriter |
(a) ALPS
Distributors, Inc. acts as the distributor for the Registrant and the following investment companies: 1WS Credit Income Fund, 1290 Funds,
Aberdeen Standard Investments ETFs, Alpha Alternative Assets Fund, ALPS Series Trust, Alternative Credit Income Fund, Apollo Diversified
Credit Fund (fka Griffin Institutional Access Credit Fund), Apollo Diversified Real Estate Fund (fka Griffin Institutional Access
Real Estate Fund), The Arbitrage Funds, AQR Funds, Axonic Alternative Income Fund, Axonic Funds, , BBH Trust, Bluerock High Income Institutional
Credit Fund, Bluerock Total Income+ Real Estate Fund, Brandes Investment Trust, Bridge Builder Trust, Broadstone Real Estate Access
Fund, Brown Advisory Funds, Brown Capital Management Mutual Funds, Cambria ETF Trust, Centre Funds, CIM Real Assets & Credit Fund,
CION Ares Diversified Credit Fund, Columbia ETF Trust, Columbia ETF Trust I, Columbia ETF Trust II, CRM Mutual Fund Trust, Cullen Funds
Trust, DBX ETF Trust, ETF Series Solutions, Flat Rock Core Income Fund, Flat Rock Opportunity Fund, Financial Investors Trust,
Firsthand Funds, FS Credit Income Fund, FS Energy Total Return Fund, FS Series Trust, FS Multi-Alternative Income Fund, Goehring &
Rozencwajg Investment Funds, Goldman Sachs ETF Trust, Graniteshares ETF Trust, Hartford Funds Exchange-Traded Trust, Hartford Funds NextShares
Trust, Heartland Group, Inc., IndexIQ Active ETF Trust, IndexIQ ETF Trust, James Advantage Funds, Janus Detroit Street Trust, Lattice
Strategies Trust, Litman Gregory Funds Trust, Longleaf Partners Funds Trust, MassMutual Premier Funds, MassMutual Advantage Funds, Meridian
Fund, Inc., MVP Private Markets Fund, Natixis ETF Trust, Natixis ETF Trust II, PRIMECAP Odyssey Funds, Principal Exchange-Traded Funds,
Reality Shares ETF Trust, Reaves Utility Income Fund, RiverNorth Funds, RiverNorth Opportunities Fund, Inc., RiverNorth/DoubleLine Strategic
Opportunity Fund, Inc., SPDR Dow Jones Industrial Average ETF Trust, SPDR S&P 500 ETF Trust, SPDR S&P MidCap 400 ETF Trust, Sprott
Funds Trust, Stone Harbor Investment Funds, Stone Ridge Trust, Stone Ridge Trust II, Stone Ridge Trust III, Stone Ridge Trust IV, Stone
Ridge Trust V, Stone Ridge Trust VI, Stone Ridge Residential Real Estate Income Fund I, Inc., USCF ETF Trust, Valkyrie ETF Trust II,
Wasatch Funds, WesMark Funds, Wilmington Funds, XAI Octagon Credit Trust, X-Square Balanced Fund and YieldStreet Prism Fund.
(b) The directors and executive officers
of ALPS Distributors, Inc., are as follows:
Name* | |
Position with Underwriter | |
Positions with Fund |
Stephen J. Kyllo | |
President, Chief Operating Officer, Director, Chief Compliance Officer | |
None |
Patrick J. Pedonti** | |
Vice President, Treasurer and Assistant Secretary | |
None |
Eric Parsons | |
Vice President, Controller and Assistant Treasurer | |
None |
Jason White*** | |
Secretary | |
None |
Richard C. Noyes | |
Senior Vice President, General Counsel, Assistant Secretary | |
None |
Liza Orr | |
Vice President, Senior Counsel | |
None |
Jed Stahl | |
Vice President, Senior Counsel | |
None |
Terence Digan | |
Vice President | |
None |
James Stegall | |
Vice President | |
None |
Gary Ross | |
Senior Vice President | |
None |
Hilary Quinn | |
Vice President | |
None |
| * | Except as otherwise noted, the principal business address for each of the above directors and executive
officers is 1290 Broadway, Suite 1000, Denver, Colorado 80203. |
| ** | The principal business address for Mr. Pedonti is 333 W. 11th Street, 5th Floor, Kansas City, Missouri
64105. |
| *** | The principal business address for Mr. White is 4 Times Square, New York, NY 10036. |
| * | This list does not serve as an admission that the Trust considers all of these persons listed to be
officers of investment companies having the same Investment Advisor or Distributor or having an Investment Advisor or Distributor that
directly or indirectly controls, is controlled by or is under common control with the Investment Advisor or Distributor. |
(c) Not Applicable.
| Item 33. | Location of Accounts and
Records |
All accounts, books and other
documents required by Section 31(a) of the Investment Company Act of 1940, as amended, and the rules thereunder are maintained at:
IndexIQ Advisors LLC
51 Madison Avenue
New York, NY 10010
The Bank of New York Mellon
240 Greenwich Street
New York, NY 10286
ALPS Distributors, Inc.
1625 Broadway, Suite 1000
Denver, CO 80202
| Item 34. | Management Services |
Not Applicable.
Not Applicable.
Signatures
Pursuant to the requirements
of the Securities Act of 1933, as amended (the “Securities Act”) and the Investment Company Act of 1940, as amended,
the Registrant certifies that is meets all of the requirements for effectiveness of this Registration Statement under Rule 485(b) under
the Securities Act has duly caused this Registration Statement to be signed on its behalf by the undersigned, duly authorized, in the
City of New York, and State of New York, on August 29, 2022.
|
IndexIQ Active ETF Trust |
|
|
|
By: |
/s/ Kirk C. Lehneis |
|
|
Kirk C. Lehneis |
|
|
President |
Pursuant to the requirements
of the Securities Act, this Registration Statement has been signed below by the following persons in the capacities and on the date indicated:
Name |
|
Title |
|
Date |
|
|
|
|
|
Lofton Holder* |
|
Trustee |
|
August 29, 2022 |
Lofton Holder |
|
|
|
|
|
|
|
|
|
Michael A. Pignataro* |
|
Trustee |
|
August 29, 2022 |
Michael A. Pignataro |
|
|
|
|
|
|
|
|
|
Paul D. Schaeffer* |
|
Trustee |
|
August 29, 2022 |
Paul D. Schaeffer |
|
|
|
|
|
|
|
|
|
Michelle A. Shell* |
|
Trustee |
|
August 29, 2022 |
Michelle A. Shell |
|
|
|
|
|
|
|
|
|
/s/ Kirk C. Lehneis |
|
Trustee, President and Principal |
|
August 29, 2022 |
Kirk C. Lehneis |
|
Executive Officer |
|
|
|
|
|
|
|
/s/ Adefolahan Oyefeso |
|
Treasurer, Principal Financial |
|
August 29, 2022 |
Adefolahan Oyefeso |
|
Officer, and Principal Accounting Officer |
|
|
|
|
|
|
|
/s/ Matthew V. Curtin |
|
|
|
August 29, 2022 |
Matthew V. Curtin,
Attorney-in-fact* |
|
|
|
|
* PURSUANT
TO POWERS OF ATTORNEY PREVIOUSLY FILED
Index to Exhibits
(d)(1)(a) | Amendment to Investment Advisory Agreement dated June 29, 2022, between the Registrant and IndexIQ Advisors
LLC |
(d)(2)(c) | Amendment to Subadvisory Agreement dated June 29, 2022 between IndexIQ Advisors LLC and MacKay Shields
LLC for IQ MacKay Multi-Sector Income ETF |
(d)(4) | Subadvisory Agreement dated May 4, 2022, between IndexIQ Advisors LLC and Winslow Capital Management,
LLC for IQ Winslow Large Cap Growth ETF and IQ Winslow Focused Large Cap Growth ETF |
(e)(1)(a) | Amendment 5 to Distribution Agreement dated June 30, 2022, between the Registrant and ALPS Distributors,
Inc. |
(g)(1)(a) | Amendment to Custody Agreement dated June 29, 2022, between the Registrant and The Bank of New York Mellon |
(h)(1)(a) | Amendment to Fund Administration and Accounting Agreement dated June 29, 2022, between Registrant and
The Bank of New York Mellon |
(h)(1)(b) | Amendment to Investment Company Reporting Modernization Services Amendment to Fund Administration and
Accounting Agreement dated June 29, 2022, between Registrant and The Bank of New York Mellon |
(h)(2)(a) | Amendment to Transfer Agency and Service Agreement dated June 29, 2022, between Registrant and The Bank
of New York Mellon |
(h)(4) | Expense Limitation Agreement dated June 29, 2022, between the Registrant and IndexIQ Advisors LLC |
(i) | Opinion and Consent of Chapman & Cutler LLP |
(j) | Consent of Independent Registered Public Accounting firm |
(p)(3) | Code of Ethics of IndexIQ Advisors LLC, MacKay Shields LLC and NYL Investors LLC |