PRINCIPAL
EXCHANGE-TRADED FUNDS
Statement of
Additional Information
dated November 1, 2019, as amended
and restated June 15, 2020
This Statement of Additional
Information ("SAI") is not a prospectus. It contains information in addition to
the information in the Fund's prospectus. The prospectus, which we may amend
from time to time, contains the basic information you should know before
investing in the Fund. You should read this SAI together with the Fund’s
prospectuses dated November 1, 2019 and June 15, 2020.
Incorporation by
Reference: The audited
financial statements, schedules of investments and auditor’s report included in
the Fund’s Annual Report to
Shareholders, for
the fiscal year ended June 30, 2019 and the unaudited financial statements and
schedules of investments included in the Fund’s Semiannual Report to
Shareholders, for
the period ended December 31, 2019, are hereby incorporated by reference into
and are legally a part of this SAI.
For a free copy of the current
prospectus, semiannual or annual report, call 1-800-787-1621 or
write:
Principal Exchange-Traded
Funds
c/o ALPS Distributors,
Inc.
1290 Broadway, Suite
1000
Denver, CO 80203
The prospectus may be viewed at
www.principaletfs.com.
On or about
September 30, 2020, the Principal International Multi-Factor Core Index ETF will
change its name to the Principal International Multi-Factor ETF. On that date,
delete all references in this statement of additional information to Principal
International Multi-Factor Core Index ETF, and replace with Principal
International Multi-Factor ETF.
On or about
September 30, 2020, the Principal Price Setters Index ETF will change its name
to the Principal Quality ETF. On that date, delete all references in this
statement of additional information to Principal Price Setters Index ETF, and
replace with Principal Quality ETF.
On or about
September 30, 2020, the Principal Shareholder Yield Index ETF will change its
name to the Principal Value ETF. On that date, delete all references in this
statement of additional information to Principal Shareholder Yield Index ETF,
and replace with Principal Value ETF.
On or about
September 30, 2020, the Principal U.S. Large-Cap Multi-Factor Core Index ETF
will change its name to the Principal U.S. Large-Cap Multi-Factor ETF. On that
date, delete all references in this statement of additional information to
Principal U.S. Large-Cap Multi-Factor Core Index ETF, and replace with Principal
U.S. Large-Cap Multi-Factor ETF.
On or about
September 30, 2020, the Principal U.S. Mega-Cap Multi-Factor Index ETF will
change its name to the Principal U.S. Mega-Cap ETF. On that date, delete all
references in this statement of additional information to Principal U.S.
Mega-Cap Multi-Factor Index ETF, and replace with Principal U.S. Mega‑Cap
ETF.
On or about
September 30, 2020, the Principal U.S. Small-Cap Multi-Factor Index ETF will
change its name to the Principal U.S. Small-Cap Multi-Factor ETF. On that date,
delete all references in this statement of additional information to Principal
U.S. Small-Cap Multi-Factor Index ETF, and replace with Principal U.S. Small-Cap
Multi-Factor ETF.
On or about
September 30, 2020, the Principal U.S. Small-MidCap Multi-Factor Core Index ETF
will change its name to the Principal U.S. Small-MidCap Multi-Factor ETF. On
that date, delete all references in this statement of additional information to
Principal U.S. Small-MidCap Multi-Factor Core Index ETF, and replace with
Principal U.S. Small-MidCap Multi-Factor ETF.
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Fund |
Ticker
Symbol |
Principal
U.S. Listing Exchange |
Principal Active Global
Dividend Income ETF |
GDVD |
Cboe BZX Exchange,
Inc. |
Principal Active Income
ETF |
YLD |
NYSE Arca |
Principal Contrarian Value
Index ETF |
PVAL |
The Nasdaq Stock Market
LLC |
Principal Healthcare
Innovators Index ETF |
BTEC |
The Nasdaq Stock Market
LLC |
Principal International
Multi-Factor Core Index ETF |
PDEV |
The Nasdaq Stock Market
LLC |
Principal Investment Grade
Corporate Active ETF |
IG |
NYSE Arca |
Principal Millennials Index
ETF |
GENY |
The Nasdaq Stock Market
LLC |
Principal Price Setters Index
ETF |
PSET |
The Nasdaq Stock Market
LLC |
Principal Shareholder Yield
Index ETF |
PY |
The Nasdaq Stock Market
LLC |
Principal Spectrum Preferred
Securities Active ETF |
PREF |
Cboe BZX Exchange,
Inc. |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
PQDI |
NYSE Arca |
Principal Sustainable Momentum
Index ETF |
PMOM |
The Nasdaq Stock Market
LLC |
Principal Ultra-Short Active
Income ETF |
USI |
NYSE Arca |
Principal U.S. Large-Cap
Multi-Factor Core Index ETF |
PLC |
The Nasdaq Stock Market
LLC |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
USMC |
The Nasdaq Stock Market
LLC |
Principal U.S. Small-Cap
Multi-Factor Index ETF |
PSC |
The Nasdaq Stock Market
LLC |
Principal U.S. Small-MidCap
Multi-Factor Core Index ETF |
PSM |
The Nasdaq Stock Market
LLC |
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TABLE OF
CONTENTS |
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GENERAL DESCRIPTION OF TRUST
AND FUNDS |
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EXCHANGE LISTING AND
TRADING |
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DESCRIPTION OF THE FUNDS'
INVESTMENTS AND RISKS |
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LEADERSHIP STRUCTURE AND
BOARD |
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INVESTMENT ADVISORY AND OTHER
SERVICES |
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INTERMEDIARY
COMPENSATION |
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PURCHASE AND REDEMPTION OF
CREATION UNITS |
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CALCULATION OF
NAV |
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TAX
CONSIDERATIONS |
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PORTFOLIO HOLDINGS
DISCLOSURE |
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PROXY VOTING POLICIES AND
PROCEDURES |
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FINANCIAL
STATEMENTS |
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INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM |
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CONTROL PERSONS AND PRINCIPAL
HOLDERS OF SECURITIES |
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PORTFOLIO MANAGER
DISCLOSURE |
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APPENDIX A – DESCRIPTION OF
BOND RATINGS |
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APPENDIX B – FOREIGN MARKET
HOLIDAYS |
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APPENDIX C – PROXY VOTING
POLICIES |
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GENERAL
DESCRIPTION OF TRUST AND FUNDS
Principal Exchange-Traded Funds (the
"Trust") is a statutory trust organized under the laws of the State of Delaware
in 2013 and is authorized to have multiple series or portfolios (each, a
"Fund"). 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 17 Funds.
The shares of the Funds are referred
to herein as "Shares."
The Trust issues and redeems Shares
at net asset value ("NAV") only with Authorized Participants (“APs”) and only in
aggregations of Shares in the amounts described in the prospectus (each a
"Creation Unit" or a "Creation Unit Aggregation"), which is subject to change.
Each Fund issues and redeems Creation Units in exchange for portfolio securities
and/or cash, plus a fixed and/or variable transaction fee.
EXCHANGE LISTING
AND TRADING
Shares of each Fund are listed on a
national securities exchange (the "Exchange") as set forth below. Shares trade
on the Exchange at market prices that may be below, at, or above NAV.
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Fund |
Principal
U.S. Listing Exchange |
Principal Active Global
Dividend Income ETF |
Cboe BZX Exchange,
Inc. |
Principal Active Income
ETF |
NYSE Arca |
Principal Contrarian Value
Index ETF |
The Nasdaq Stock Market
LLC |
Principal Healthcare
Innovators Index ETF |
The Nasdaq Stock Market
LLC |
Principal International
Multi-Factor Core Index ETF |
The Nasdaq Stock Market
LLC |
Principal Investment Grade
Corporate Active ETF |
NYSE Arca |
Principal Millennials Index
ETF |
The Nasdaq Stock Market
LLC |
Principal Price Setters Index
ETF |
The Nasdaq Stock Market
LLC |
Principal Shareholder Yield
Index ETF |
The Nasdaq Stock Market
LLC |
Principal Spectrum Preferred
Securities Active ETF |
Cboe BZX Exchange,
Inc. |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
NYSE Arca |
Principal Sustainable Momentum
Index ETF |
The Nasdaq Stock Market
LLC |
Principal Ultra-Short Active
Income ETF |
NYSE Arca |
Principal U.S. Large-Cap
Multi-Factor Core Index ETF |
The Nasdaq Stock Market
LLC |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
The Nasdaq Stock Market
LLC |
Principal U.S. Small-Cap
Multi-Factor Index ETF |
The Nasdaq Stock Market
LLC |
Principal U.S. Small-MidCap
Multi-Factor Core Index ETF |
The Nasdaq Stock Market
LLC |
There can be no assurance that a
Fund will continue to meet the requirements of the Exchange necessary to
maintain the listing of its Shares. The Exchange may, but is not required to,
remove the Shares of a Fund from listing if: (i) following the initial 12-month
period beginning at the commencement of trading of the Fund, there are fewer
than 50 beneficial owners of the Shares of the Fund for 30 or more consecutive
trading days; or (ii) such other event shall occur or condition shall exist
that, in the opinion of the Exchange, makes further dealings on such Exchange
inadvisable. The Exchange will remove the Shares of a 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
negotiated commission rates at customary levels.
The Trust reserves the right to
adjust the price levels of the Shares in the future to help 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 a Fund.
DESCRIPTION OF
THE FUNDS' INVESTMENTS AND RISKS
Fund
Policies
The investment objective, principal
investment strategies and principal risks of each Fund are described in the
Fund's Prospectus. This Statement of Additional Information contains
supplemental information about those strategies and risks and the types of
securities that those managing the investments of each Fund can select.
Additional information is also provided about other strategies that each Fund
may use to try to achieve its objective.
The composition of each Fund and the
techniques and strategies that those managing the investments of the Fund may
use in selecting securities will vary over time. A Fund is not required to use
all of the investment techniques and strategies available to it in seeking its
goals.
Unless otherwise indicated, with the
exception of the percentage limitations on borrowing, the restrictions apply at
the time transactions are entered into. Accordingly, any later increase or
decrease beyond the specified limitation, resulting from market fluctuations or
in a rating by a rating service, does not require elimination of any security
from a Fund’s portfolio.
The investment objective of each
Fund and, except as described below as "Fundamental Restrictions," the
investment strategies described in this Statement of Additional Information and
the Prospectus are not fundamental and may be changed by the Board of Trustees
without shareholder approval.
With the exception of the
diversification test required by the Internal Revenue Code, the Funds will not
consider collateral held in connection with securities lending activities when
applying any of the following fundamental restrictions or any other investment
restriction set forth in each Fund's Prospectus or Statement of Additional
Information.
Fundamental
Restrictions
Except as specifically noted, each
Fund has adopted the following fundamental restrictions. Each fundamental
restriction is a matter of fundamental policy and may not be changed without a
vote of a majority of the outstanding voting securities of the affected Fund.
The Investment Company Act of 1940, as amended (the "1940 Act"), provides that
"a vote of a majority of the outstanding voting securities" of a Fund means the
affirmative vote of the lesser of 1) more than 50% of the outstanding shares or
2) 67% or more of the shares present at a meeting if more than 50% of the
outstanding Fund shares are represented at the meeting in person or by proxy.
Each share has one vote.
Each Fund:
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1) |
May not issue senior
securities, except as permitted under the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by regulatory authority
having jurisdiction, from time to time. |
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2) |
May not purchase or sell
commodities, except as permitted by applicable law, regulation or
regulatory authority having jurisdiction. |
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3) |
May not purchase or sell real
estate, which term does not include securities of companies which deal in
real estate or mortgages or investments secured by real estate or
interests therein, except that the Fund reserves freedom of action to hold
and to sell real estate acquired as a result of the Fund’s ownership of
securities. |
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4) |
May not borrow money, except
as permitted under the 1940 Act, as amended, and as interpreted, modified
or otherwise permitted by regulatory authority having jurisdiction, from
time to time. |
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5) |
May not make loans except as
permitted under the 1940 Act, as amended, and as interpreted, modified or
otherwise permitted by regulatory authority having jurisdiction, from time
to time. |
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6) |
Has elected to be treated as a
“diversified” investment company, as that term is used in the 1940 Act, as
amended, and as interpreted, modified or otherwise permitted by regulatory
authority having jurisdiction, from time to time.
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7) |
Has adopted a concentration
policy as follows: |
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a. |
The Principal Spectrum
Preferred Securities Active, Principal Spectrum Tax-Advantaged Dividend,
and Principal Ultra Short Active Income ETFs each concentrates its
investments in securities in the financial services (i.e., banking,
insurance and commercial finance) industry.
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b. |
Each index ETF will not
concentrate its investments in a particular industry except to the extent
its underlying index is so concentrated. Given the present composition of
its underlying index, the Principal Healthcare Innovators Index ETF
expects to have more than 25% of its assets invested in industries within
the healthcare sector. |
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c. |
The remaining Funds may not
concentrate, as that term is used in the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by regulatory authority
having jurisdiction, from time to time, its investments in a particular
industry or group of industries. |
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8) |
May not act as an underwriter
of securities, except to the extent that the Fund may be deemed to be an
underwriter in connection with the sale of securities held in its
portfolio. |
Non-Fundamental
Restrictions
Except as specifically noted, each
Fund has also adopted the following non-fundamental restrictions.
Non-fundamental restrictions are not fundamental policies and may be changed
without shareholder approval. It is contrary to each Fund's present policy
to:
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1) |
Invest more than 15% of its
net assets in illiquid securities and in repurchase agreements maturing in
more than seven days except to the extent permitted by applicable law or
regulatory authority having jurisdiction, from time to
time. |
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2) |
Pledge, mortgage, or
hypothecate its assets, except to secure permitted borrowings. The deposit
of underlying securities and other assets in escrow and other collateral
arrangements in connection with transactions that involve any future
payment obligation, as permitted under the 1940 Act, as amended, and as
interpreted, modified or otherwise permitted by any regulatory authority
having jurisdiction, from time to time, are not deemed to be pledges,
mortgages, hypothecations, or other
encumbrances. |
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3) |
Invest in companies for the
purpose of exercising control or
management. |
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4) |
Acquire securities of other
investment companies in reliance on Section 12(d)(1)(F) or (G) of the 1940
Act, invest more than 10% of its total assets in securities of other
investment companies, invest more than 5% of its total assets in the
securities of any one investment company, or acquire more than 3% of the
outstanding voting securities of any one investment company except in
connection with a merger, consolidation, or plan of reorganization and
except as permitted by the 1940 Act, SEC rules adopted under the 1940 Act
or exemptions granted by the Securities and Exchange Commission. The Fund
may purchase securities of closed-end investment companies in the open
market where no underwriter or dealer’s commission or profit, other than a
customary broker’s commission, is
involved. |
The Principal Spectrum Preferred
Securities Active ETF has also adopted the following non-fundamental
restriction. It is contrary to the Fund's present policy to:
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1) |
Invest more than 5% of its
total assets in real estate limited partnership
interests. |
Non-Fundamental
Restriction - Rule 35d-1
With the exception of the Principal
Active Income ETF, each Fund has also adopted the non-fundamental policy,
pursuant to SEC Rule 35d-1, which requires it, under normal circumstances, to
invest at least 80% of its net assets, plus any borrowings for investment
purposes, in the type of investments, industry or geographic region (as
described in the prospectus) as suggested by the name of the Fund.
This policy applies at the time of
purchase. The Fund will provide 60 days’ notice to shareholders prior to
implementing a change in this policy for the Fund. For purposes of this
non-fundamental restriction, the Fund tests market capitalization ranges
monthly.
For purposes of testing this
requirement with respect to:
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foreign currency investments,
each Fund will count forward foreign currency contracts and other
investments that have economic characteristics similar to foreign
currency; the value of such contracts and investments will include the
Fund’s investments in cash and/or cash equivalents to the extent such
instruments are used to cover the Fund’s exposure under its forward
foreign currency contracts and similar
investments. |
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derivatives instruments, each
Fund will typically count the mark-to-market value of such derivatives.
However, the Fund may use a derivative contract’s notional value when it
determines that notional value is an appropriate measure of the Fund’s
exposure to investments. For example, with respect to single name equity
swaps which are “fully paid” (equity swaps in which cash and/or cash
equivalents are specifically segregated on the Fund’s books for the
purpose of covering the full notional value of the swap), each Fund will
count the value of such cash and/or cash
equivalents. |
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investments in underlying
funds (including ETFs), each Fund will count all investments in an
underlying fund toward the requirement as long as 80% of the value of such
underlying fund's holdings focus on the particular type of investment
suggested by the Fund name. |
Investment
Strategies and Risks Related to Borrowing and Senior Securities,
Commodity-Related Investments, Industry Concentration and Loans
Borrowing and
Senior Securities
Under the 1940 Act, a fund that
borrows money is required to maintain continuous asset coverage (that is, total
assets including borrowings, less liabilities exclusive of borrowings) of 300%
of the amount borrowed, with an exception for borrowings not in excess of 5% of
the fund’s total assets made for temporary or emergency purposes. If a Fund
invests the proceeds of borrowing, borrowing will tend to exaggerate the effect
on net asset value of any increase or decrease in the market value of a fund’s
portfolio. If a Fund invests the proceeds of borrowing, money borrowed will be
subject to interest costs that may or may not be recovered by earnings on the
securities purchased. A fund also may be required to maintain minimum average
balances in connection with a borrowing or to pay a commitment or other fee to
maintain a line of credit; either of these requirements would increase the cost
of borrowing over the stated interest rate.
Pursuant to SEC staff
interpretations of the 1940 Act, a fund that purchases securities or makes other
investments that have a leveraging effect on the fund (for example, reverse
repurchase agreements) must segregate assets to render them not available
for sale or other disposition in an amount equal to the amount the fund owes
pursuant to the terms of the security or other investment.
Commodity-Related
Investments
Under the 1940 Act, a fund's
registration statement must recite the fund's policy with regard to
investing in commodities. Each fund may invest in commodities to the extent
permitted by applicable law and under its fundamental and non-fundamental
policies and restrictions. Pursuant to a claim for exclusion filed with the
Commodity Futures Trading Commission (“CFTC”) on behalf of each of the Funds,
the Trust and the Funds are not deemed to be a “commodity pool” or “commodity
pool operator” under the Commodity Exchange Act (“CEA”), and they
are therefore not subject to registration or regulation under the CEA. The
CFTC amended rule 4.5 “Exclusion for certain otherwise regulated persons from
the definition of the term “commodity pool operator.” Rule 4.5 provides that an
investment company does not meet the definition of “commodity pool operator” if
its use of futures contracts, options on futures contracts and swaps is
sufficiently limited that the fund can fall within one of two exclusions set out
in rule 4.5. Each Fund intends to limit its use of futures contracts, options on
futures contracts and swaps to the degree necessary to fall within one of the
two exclusions. If a Fund is unable to do so, it may incur expenses that are
necessary to comply with the CEA and rules the CFTC has adopted under
it.
Industry
Concentration
“Concentration” means a fund invests
more than 25% of its net assets in a particular industry or group of industries.
To monitor compliance with the policy regarding industry concentration, the
Funds may use the industry classifications provided by Bloomberg, L.P., the
MSCI/Standard & Poor's Global Industry Classification Standard (GICS), the
Directory of Companies Filing Annual Reports with the Securities and Exchange
Commission or any other reasonable industry classification system. With respect
to monitoring industry concentration, a Fund concentrating in the "financial
services industry" concentrates its investments in one or more industries
classified within the broader financial services sector.
Each Fund interprets its policy with
respect to concentration in a particular industry to apply only to direct
investments in the securities of issuers in a particular industry. For purposes
of this restriction, government securities such as treasury securities or
mortgage-backed securities that are issued or guaranteed by the U.S. government,
its agencies or instrumentalities are not subject to a Fund’s industry
concentration restrictions. Each Fund also views its investments in tax-exempt
municipal securities as not representing interests in any particular industry or
group of industries. For information about municipal securities, see the
Municipal Obligations section.
Loans
A Fund may not make loans to other
persons except as permitted by (i) the 1940 Act and the rules and regulations
thereunder, or other successor law governing the regulation of registered
investment companies, or interpretations or modifications thereof by the U.S.
Securities and Exchange Commission (“SEC”), SEC staff or other authority of
competent jurisdiction, or (ii) pursuant to exemptive or other relief or
permission from the SEC, SEC staff or other authority of competent jurisdiction.
Generally, this means the Funds are typically permitted to make loans, but must
take into account potential issues such as liquidity, valuation, and avoidance
of impermissible transactions. Examples of permissible loans include (a) the
lending of its portfolio securities, (b) the purchase of debt securities, loan
participations and/or engaging in direct corporate loans in accordance with its
investment objectives and policies, (c) the entry into a repurchase agreement
(to the extent such entry is deemed to be a loan), and (d) loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom that may be granted by the SEC.
Other Investment
Strategies and Risks
Convertible
Securities
A convertible security is a bond,
debenture, note, preferred stock, or other security that entitles the holder to
acquire common stock or other equity securities of the same or a different
issuer. A convertible security generally entitles the holder to receive interest
paid or accrued until the convertible security matures or is redeemed, converted
or exchanged. Before conversion, convertible securities have characteristics
similar to non-convertible debt or preferred securities, as applicable.
Convertible securities rank senior to common stock in a corporation’s capital
structure and, therefore, generally entail less risk than the corporation’s
common stock, although the extent to which such risk is reduced depends in large
measure upon the degree to which the convertible security sells above its value
as a fixed income security. Convertible securities are subordinate in rank to
any senior debt obligations of the issuer, and, therefore, an issuer’s
convertible securities entail more risk than its debt obligations. Convertible
securities generally offer lower interest or dividend yields than
non-convertible debt securities of similar credit quality because of the
potential for capital appreciation. In addition, convertible securities are
often lower-rated securities.
Because of the conversion feature,
the price of the convertible security will normally fluctuate in some proportion
to changes in the price of the underlying asset, and as such is subject to risks
relating to the activities of the issuer and/or general market and economic
conditions. The income component of a convertible security may tend to cushion
the security against declines in the price of the underlying asset. However, the
income component of convertible securities causes fluctuations based upon
changes in interest rates and the credit quality of the issuer.
If the conversion value of a
convertible security increases to a point that approximates or exceeds its
investment value, the value of the security will be principally influenced by
its conversion value. A convertible security will sell at a premium over its
conversion value to the extent investors place value on the right to acquire the
underlying common stock while holding an income-producing security.
A convertible security may be
subject to redemption at the option of the issuer at a predetermined price. If a
convertible security held by a fund is called for redemption, the fund would be
required to permit the issuer to redeem the security and convert it to
underlying common stock, or would sell the convertible security to a third
party, which may have an adverse effect on the fund’s ability to achieve its
investment objective.
Corporate
Reorganizations
Each Fund may invest in securities
for which a tender or exchange offer has been made or announced and in
securities of companies for which a merger, consolidation, liquidation or
reorganization proposal has been announced if, in the judgment of those managing
the Fund's investments, there is a reasonable prospect of capital appreciation
significantly greater than the brokerage and other transaction expenses
involved. The primary risk of such investments is that if the contemplated
transaction is abandoned, revised, delayed or becomes subject to unanticipated
uncertainties, the market price of the securities may decline below the purchase
price paid by a Fund.
In general, securities which are the
subject of such an offer or proposal sell at a premium to their historic market
price immediately prior to the announcement of the offer or proposal. However,
the increased market price of such securities may discount what the stated or
appraised value of the security would be if the contemplated transaction were
approved or consummated. Such investments may be advantageous when the discount
significantly overstates the risk of the contingencies involved; significantly
undervalues the securities, assets or cash to be received by shareholders of the
prospective company as a result of the contemplated transaction; or fails
adequately to recognize the possibility that the offer or proposal may be
replaced or superseded by an offer or proposal of greater value. The evaluation
of such contingencies requires unusually broad knowledge and experience on the
part of those managing the Fund's investments, which must appraise not only the
value of the issuer and its component businesses, but also the financial
resources and business motivation of the offer or proposal as well as the
dynamics of the business climate when the offer or proposal is in
process.
Cyber Security
Issues
Each Fund and its service providers
may be subject to cyber security risks. Those risks include, among others,
theft, misuse or corruption of data maintained online or digitally; denial of
service attacks on websites; the loss or unauthorized release of confidential
and proprietary information; operational disruption; or various other forms of
cyber security breaches. Cyber-attacks against or security breakdowns of a Fund
or its service providers may harm the Fund and its shareholders, potentially
resulting in, among other things, financial losses, the inability of Fund
shareholders to transact business, inability to calculate a fund’s NAV,
violations of applicable privacy and other laws, regulatory fines, penalties,
reputational damage, reimbursement or other compensation costs, and/or
additional compliance and remediation costs. Cyber security risks may also
affect issuers of securities in which a fund invests, potentially causing the
fund’s investment in such issuers to lose value. Despite risk management
processes, there can be no guarantee that a fund will avoid losses relating to
cyber security risks or other information security breaches.
Depositary
Receipts
Depositary Receipts are generally
subject to the same sort of risks as direct investments in a foreign country,
such as, currency risk, political and economic risk, and market risk, because
their values depend on the performance of a foreign security denominated in its
home currency.
Each Fund may invest in foreign
securities which means it may invest in:
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American Depositary Receipts
("ADRs") - receipts issued by an American bank or trust company evidencing
ownership of underlying securities issued by a foreign issuer. They are
designed for use in U.S. securities
markets. |
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European Depositary Receipts
("EDRs") and Global Depositary Receipts ("GDRs") - receipts typically
issued by a foreign financial institution to evidence an arrangement
similar to that of ADRs. |
Depositary Receipts may be issued by
sponsored or unsponsored programs. In sponsored programs, an issuer has made
arrangements to have its securities traded in the form of Depositary Receipts.
In unsponsored programs, the issuer may not be directly involved in the creation
of the program. Although regulatory requirements with respect to sponsored and
unsponsored programs are generally similar, in some cases it may be easier to
obtain financial information from an issuer that has participated in the
creation of a sponsored program. Accordingly, there may be less information
available regarding issuers of securities of underlying unsponsored programs,
and there may not be a correlation between the availability of such information
and the market value of the Depositary Receipts.
Derivatives
Options
on Securities and Securities Indices
Each Fund may write (sell) and
purchase call and put options on securities in which it invests and on
securities indices based on securities in which the Fund invests. Each Fund may
engage in these transactions to hedge against a decline in the value of
securities owned or an increase in the price of securities which the Fund plans
to purchase, or to generate additional revenue.
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Exchange-Traded Options. An
exchange-traded option may be closed out only on an exchange that
generally provides a liquid secondary market for an option of the same
series. If a liquid secondary market for an exchange-traded option does
not exist, it might not be possible to effect a closing transaction with
respect to a particular option, with the result that a Fund would have to
exercise the option in order to consummate the
transaction. |
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Over the Counter ("OTC")
Options. OTC options differ from exchange-traded options in that they are
two-party contracts, with price and other terms negotiated between buyer
and seller, and generally do not have as much market liquidity as
exchange-traded options. An OTC option (an option not traded on an
established exchange) may be closed out only by agreement with the other
party to the original option transaction. With OTC options, a Fund is at
risk that the other party to the transaction will default on its
obligations or will not permit the Fund to terminate the transaction
before its scheduled maturity. While a Fund will seek to enter into OTC
options only with dealers who agree to or are expected to be capable of
entering into closing transactions with a Fund, there can be no assurance
that a Fund will be able to liquidate an OTC option at a favorable price
at any time prior to its expiration. OTC options are not subject to the
protections afforded purchasers of listed options by the Options Clearing
Corporation or other clearing organizations. An exchange-traded option may
be closed out only on an exchange that generally provides a liquid
secondary market for an option of the same series. If a liquid secondary
market for an exchange-traded option does not exist, it might not be
possible to effect a closing transaction with respect to a particular
option, with the result that a fund would have to exercise the option in
order to consummate the transaction. |
Writing Call and
Put Options. When a
fund writes a call option, it gives the purchaser of the option the right to buy
a specific security at a specified price at any time before the option expires.
When a fund writes a put option, it gives the purchaser of the option the right
to sell to the fund a specific security at a specified price at any time before
the option expires. In both situations, the fund receives a premium from the
purchaser of the option.
The premium received by a fund
reflects, among other factors, the current market price of the underlying
security, the relationship of the exercise price to the market price, the time
period until the expiration of the option and interest rates. The premium
generates additional income for the fund if the option expires unexercised or is
closed out at a profit. By writing a call, a fund limits its opportunity to
profit from any increase in the market value of the underlying security above
the exercise price of the option, but it retains the risk of loss if the price
of the security should decline. By writing a put, a fund assumes the risk that
it may have to purchase the underlying security at a price that may be higher
than its market value at time of exercise.
A Fund usually owns the underlying
security covered by any outstanding call option. With respect to an outstanding
put option, a Fund deposits and maintains with its custodian or segregates on
the Fund's records, cash, or other liquid assets with a value at least equal to
the market value of the option that was written.
Once a fund has written an option,
it may terminate its obligation before the option is exercised. The fund
executes a closing transaction by purchasing an option of the same series as the
option previously written. The fund has a gain or loss depending on whether the
premium received when the option was written exceeds the closing purchase price
plus related transaction costs.
Purchasing Call
and Put Options. When
the fund purchases a call option, it receives, in return for the premium it
pays, the right to buy from the writer of the option the underlying security at
a specified price at any time before the option expires. A fund purchases call
options in anticipation of an increase in the market value of securities that it
intends ultimately to buy. During the life of the call option, the fund is able
to buy the underlying security at the exercise price regardless of any increase
in the market price of the underlying security. In order for a call option to
result in a gain, the market price of the underlying security must exceed the
sum of the exercise price, the premium paid, and transaction costs.
When a fund purchases a put option,
it receives, in return for the premium it pays, the right to sell to the writer
of the option the underlying security at a specified price at any time before
the option expires. A fund purchases put options in anticipation of a decline in
the market value of the underlying security. During the life of the put option,
the fund is able to sell the underlying security at the exercise price
regardless of any decline in the market price of the underlying security. In
order for a put option to result in a gain, the market price of the underlying
security must decline, during the option period, below the exercise price enough
to cover the premium and transaction costs.
Once a fund purchases an option, it
may close out its position by selling an option of the same series as the option
previously purchased. The fund has a gain or loss depending on whether the
closing sale price exceeds the initial purchase price plus related transaction
costs.
Options on
Securities Indices. Each Fund may purchase and sell put
and call options on any securities index based on securities in which the Fund
may invest. Securities index options are designed to reflect price fluctuations
in a group of securities or segment of the securities market rather than price
fluctuations in a single security. Options on securities indices are similar to
options on securities, except that the exercise of securities index options
requires cash payments and does not involve the actual purchase or sale of
securities. Each Fund engages in transactions in put and call options on
securities indices for the same purposes as they engage in transactions in
options on securities. When a Fund writes call options on securities indices, it
holds in its portfolio underlying securities which, in the judgment of those
managing the Fund's investments, correlate closely with the securities index and
which have a value at least equal to the aggregate amount of the securities
index options.
Risks Associated
with Option Transactions. An option position may be closed
out only on an exchange that provides a secondary market for an option of the
same series. A fund generally purchases or writes only those options for which
there appears to be an active secondary market. However, there is no assurance
that a liquid secondary market on an exchange exists for any particular option,
or at any particular time. If a fund is unable to effect closing sale
transactions in options it has purchased, it has to exercise its options in
order to realize any profit and may incur transaction costs upon the purchase or
sale of underlying securities. If the fund is unable to effect a closing
purchase transaction for a covered option that it has written, it is not able to
sell the underlying securities, or dispose of the assets held in a segregated
account, until the option expires or is exercised. The fund's ability to
terminate option positions established in the over-the-counter market may be
more limited than for exchange-traded options and may also involve the risk that
broker-dealers participating in such transactions might fail to meet their
obligations.
Futures
Contracts and Options on Futures Contracts
Each Fund may purchase and sell
futures contracts of many types, including for example, futures contracts
covering indexes, financial instruments, and foreign currencies. Each Fund may
purchase and sell financial futures contracts and options on those contracts.
Financial futures contracts are commodities contracts based on financial
instruments such as U.S. Treasury bonds or bills or on securities indices such
as the S&P 500 Index. The Commodity Futures Trading Commission regulates
futures contracts, options on futures contracts, and the commodity exchanges on
which they are traded. Through the purchase and sale of futures contracts and
related options, a fund may seek to hedge against a decline in the value of
securities owned by the fund or an increase in the price of securities that the
fund plans to purchase. Each Fund may also purchase and sell futures contracts
and related options to maintain cash reserves while simulating full investment
in securities and to keep substantially all of its assets exposed to the market.
Each Fund may enter into futures contracts and related options transactions both
for hedging and non-hedging purposes.
Futures
Contracts. Each Fund
may purchase or sell a futures contract to gain exposure to a particular market
asset without directly purchasing that asset. When a fund sells a futures
contract based on a financial instrument, the fund is obligated to deliver that
kind of instrument at a specified future time for a specified price. When a fund
purchases that kind of contract, it is obligated to take delivery of the
instrument at a specified time and to pay the specified price. In most
instances, these contracts are closed out by entering into an offsetting
transaction before the settlement date. The fund realizes a gain or loss
depending on whether the price of an offsetting purchase plus transaction costs
are less or more than the price of the initial sale or on whether the price of
an offsetting sale is more or less than the price of the initial purchase plus
transaction costs. Although the fund usually liquidates futures contracts on
financial instruments, by entering into an offsetting transaction before the
settlement date, they may make or take delivery of the underlying securities
when it appears economically advantageous to do so.
A futures contract based on a
securities index provides for the purchase or sale of a group of securities at a
specified future time for a specified price. These contracts do not require
actual delivery of securities but result in a cash settlement. The amount of the
settlement is based on the difference in value of the index between the time the
contract was entered into and the time it is liquidated (at its expiration or
earlier if it is closed out by entering into an offsetting
transaction).
When a fund purchases or sells a
futures contract, it pays a commission to the futures commission merchant
through which the fund executes the transaction. When entering into a futures
transaction, the fund does not pay the execution price, as it does when it
purchases a security, or a premium, as it does when it purchases an option.
Instead, the fund deposits an amount of cash or other liquid assets (generally
about 5% of the futures contract amount) with its futures commission merchant.
This amount is known as "initial margin." In contrast to the use of margin
account to purchase securities, the fund's deposit of initial margin does not
constitute the borrowing of money to finance the transaction in the futures
contract. The initial margin represents a good faith deposit that helps assure
the fund's performance of the transaction. The futures commission merchant
returns the initial margin to the fund upon termination of the futures contract
if the fund has satisfied all its contractual obligations.
Subsequent payments to and from the
futures commission merchant, known as "variation margin," are required to be
made on a daily basis as the price of the futures contract fluctuates, a process
known as "marking to market." The fluctuations make the long or short positions
in the futures contract more or less valuable. If the position is closed out by
taking an opposite position prior to the settlement date of the futures
contract, a final determination of variation margin is made. Any additional cash
is required to be paid to or released by the broker and the fund realizes a loss
or gain.
In using futures contracts, a fund
may seek to establish with more certainty than would otherwise be possible the
effective price of or rate of return on portfolio securities or securities that
the fund proposes to acquire. A fund, for example, sells futures contracts in
anticipation of a rise in interest rates that would cause a decline in the value
of its debt investments. When this kind of hedging is successful, the futures
contract increases in value when the fund's debt securities decline in value and
thereby keeps the fund's net asset value from declining as much as it otherwise
would. A fund may also sell futures contracts on securities indices in
anticipation of or during a stock market decline in an endeavor to offset a
decrease in the market value of its equity investments. When a fund is not fully
invested and anticipates an increase in the cost of securities it intends to
purchase, it may purchase financial futures contracts.
When increases in the prices of
equities are expected, a fund may purchase futures contracts on securities
indices in order to gain rapid market exposure that may partially or entirely
offset increases in the cost of the equity securities it intends to
purchase.
With respect to futures contracts
that settle in cash, a Fund will cover (and mark-to-market on a daily basis)
liquid assets that, when added to the amounts deposited with a futures
commission merchant as margin, are equal to the market value of the futures
contract. When entering into futures contracts that do not settle in cash
(physically-settled futures contracts), a Fund will maintain with its custodian
(and mark-to-market on a daily basis) liquid assets that, when added to the
amounts deposited with a futures commission merchant as margin, are equal to the
full notional value of the contract. Physically-settled futures contracts (and
written options on such contracts) will be treated like cash-settled futures
contracts when a Fund has entered into a contractual arrangement with a
third-party futures commission merchant or other counterparty to offset the
Fund’s exposure under the contract and, failing that, to assign its delivery
obligation under the contract to the counterparty.
Options on
Futures Contracts. Each
Fund may also purchase and write call and put options on futures contracts. A
call option on a futures contract gives the purchaser the right, in return for
the premium paid, to purchase a futures contract (assume a long position) at a
specified exercise price at any time before the option expires. A put option
gives the purchaser the right, in return for the premium paid, to sell a futures
contract (assume a short position), for a specified exercise price, at any time
before the option expires.
Upon the exercise of a call, the
writer of the option is obligated to sell the futures contract (to deliver a
long position to the option holder) at the option exercise price, which will
presumably be lower than the current market price of the contract in the futures
market. Upon exercise of a put, the writer of the option is obligated to
purchase the futures contract (deliver a short position to the option holder) at
the option exercise price, which will presumably be higher than the current
market price of the contract in the futures market. However, as with the trading
of futures, most options are closed out prior to their expiration by the
purchase or sale of an offsetting option at a market price that reflects an
increase or a decrease from the premium originally paid. Options on futures can
be used to hedge substantially the same risks addressed by the direct purchase
or sale of the underlying futures contracts. For example, if a fund anticipates
a rise in interest rates and a decline in the market value of the debt
securities in its portfolio, it might purchase put options or write call options
on futures contracts instead of selling futures contracts.
If a Fund purchases an option on a
futures contract, it may obtain benefits similar to those that would result if
it held the futures position itself. But in contrast to a futures transaction,
the purchase of an option involves the payment of a premium in addition to
transaction costs. In the event of an adverse market movement, however, the Fund
is not subject to a risk of loss on the option transaction beyond the price of
the premium it paid plus its transaction costs.
When a Fund writes an option on a
futures contract, the premium paid by the purchaser is deposited with the Fund's
custodian. The Fund must maintain with its futures commission merchant all or a
portion of the initial margin requirement on the underlying futures contract. It
assumes a risk of adverse movement in the price of the underlying futures
contract comparable to that involved in holding a futures position. Subsequent
payments to and from the futures commission merchant, similar to variation
margin payments, are made as the premium and the initial margin requirements are
marked to market daily. The premium may partially offset an unfavorable change
in the value of portfolio securities, if the option is not exercised, or it may
reduce the amount of any loss incurred by the Fund if the option is
exercised.
Risks Associated
with Futures Transactions. There are many risks associated
with transactions in futures contracts and related options. The value of the
assets that are the subject of the futures contract may not move in the
anticipated direction. A Fund's successful use of futures contracts is subject
to the ability of those managing the Fund's investments to predict correctly the
factors affecting the market values of the Fund's portfolio securities. For
example, if the Fund is hedged against the possibility of an increase in
interest rates which would adversely affect debt securities held by the Fund and
the prices of those debt securities instead increases, the Fund loses part or
all of the benefit of the increased value of its securities it hedged because it
has offsetting losses in its futures positions. Other risks include imperfect
correlation between price movements in the financial instrument or securities
index underlying the futures contract, on the one hand, and the price movements
of either the futures contract itself or the securities held by the Fund, on the
other hand. If the prices do not move in the same direction or to the same
extent, the transaction may result in trading losses.
Prior to exercise or expiration, a
position in futures may be terminated only by entering into a closing purchase
or sale transaction. This requires a secondary market on the relevant contract
market. A Fund enters into a futures contract or related option only if there
appears to be a liquid secondary market. There can be no assurance, however,
that such a liquid secondary market exists for any particular futures contract
or related option at any specific time. Thus, it may not be possible to close
out a futures position once it has been established. Under such circumstances,
the Fund continues to be required to make daily cash payments of variation
margin in the event of adverse price movements. In such situations, if the Fund
has insufficient cash, it may be required to sell portfolio securities to meet
daily variation margin requirements at a time when it may be disadvantageous to
do so. In addition, the Fund may be required to perform under the terms of the
futures contracts it holds. The inability to close out futures positions also
could have an adverse impact on the Fund's ability effectively to hedge its
portfolio.
Most United States futures exchanges
limit the amount of fluctuation permitted in futures contract prices during a
single trading day. This daily limit establishes the maximum amount that the
price of a futures contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily limit has been
reached in a particular type of contract, no more trades may be made on that day
at a price beyond that limit. The daily limit governs only price movements
during a particular trading day and therefore does not limit potential losses
because the limit may prevent the liquidation of unfavorable positions. Futures
contract prices have occasionally moved to the daily limit for several
consecutive trading days with little or no trading, thereby preventing prompt
liquidation of futures positions and subjecting some futures traders to
substantial losses.
Swap
Agreements and Options on Swap Agreements
Each Fund may engage in swap
transactions, including, but not limited to, swap agreements on interest rates,
security or commodity indexes, specific securities and commodities, and credit
and event-linked swaps, to the extent permitted by its investment restrictions.
To the extent a Fund may invest in foreign currency-denominated securities, it
may also invest in currency swap agreements and currency exchange rate swap
agreements. Each Fund may also enter into options on swap agreements (“swap
options”).
Each Fund may enter into swap
transactions for any legal purpose consistent with its investment objectives and
policies, such as for the purpose of attempting to obtain or preserve a
particular return or spread at a lower cost than obtaining a return or spread
through purchases and/or sales of instruments in other markets; to protect
against currency fluctuations; as a duration management technique; to protect
against any increase in the price of securities the Fund anticipates purchasing
at a later date; to gain exposure to one or more securities, currencies, or
interest rates; to take advantage of perceived mispricing in the securities
markets; or to gain exposure to certain markets in the most economical way
possible.
Swap agreements are two party
contracts entered into primarily by institutional investors for periods ranging
from a few weeks to more than one year. In a standard "swap" transaction, two
parties agree to exchange the returns (or differentials in rates of return)
earned or realized on particular predetermined investments or instruments, which
may be adjusted for an interest factor. The gross returns to be exchanged or
"swapped" between the parties are generally calculated with respect to a
"notional amount," i.e., the return on or increase in value of a particular
dollar amount invested at a particular interest rate, in a particular foreign
currency, or in a "basket" of securities or commodities representing a
particular index.
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Interest Rate Swaps. Interest
rate swaps involve the exchange by a Fund with another party of their
respective commitments to pay or receive interest (for example, an
exchange of floating rate payments for fixed rate payments with respect to
a notional amount of principal). Forms of swap agreements also
include interest rate caps, under which, in return for a premium, one
party agrees to make payments to the other to the extent that interest
rates exceed a specified rate, or "cap"; interest rate floors, under
which, in return for a premium, one party agrees to make payments to the
other to the extent that interest rates fall below a specified rate, or
"floor"; and interest rate collars, under which a party sells a cap and
purchases a floor or vice versa in an attempt to protect itself against
interest rate movements exceeding given minimum or maximum levels.
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Currency Swaps. A currency
swap is an agreement to exchange cash flows on a notional amount based on
changes in the relative values of the specified currencies.
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Index Swaps. An index swap is
an agreement to make or receive payments based on the different returns
that would be achieved if a notional amount were invested in a specified
basket of securities (such as the S&P 500 Index) or in some other
investment (such as U.S. Treasury Securities).
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Total Return Swaps. A total
return swap is an agreement to make payments of the total return from a
specified asset or instrument (or a basket of such instruments) during the
specified period, in return for payments equal to a fixed or floating rate
of interest or the total return from another specified asset or
instrument. Alternatively, a total return swap can be structured so that
one party will make payments to the other party if the value of the
relevant asset or instrument increases, but receive payments from the
other party if the value of that asset or instrument
decreases.
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Commodity Swap Agreements.
Consistent with a Fund's investment objectives and general investment
policies, certain of the Funds may invest in commodity swap agreements.
For example, an investment in a commodity swap agreement may involve the
exchange of floating-rate interest payments for the total return on a
commodity index. In a total return commodity swap, a Fund will receive the
price appreciation of a commodity index, a portion of the index, or a
single commodity in exchange for paying an agreed-upon fee. If the
commodity swap is for one period, the Fund may pay a fixed fee,
established at the outset of the swap. However, if the term of the
commodity swap is for more than one period, with interim swap payments,
the Fund may pay an adjustable or floating fee. With a "floating" rate,
the fee may be pegged to a base rate, such as the London Interbank Offered
Rate, and is adjusted each period. Therefore, if interest rates increase
over the term of the swap contract, the Fund may be required to pay a
higher fee at each swap reset date. |
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Credit Default Swap
Agreements. The "buyer" in a credit default contract is obligated to pay
the "seller" a periodic stream of payments over the term of the contract
provided that no event of default on an underlying reference obligation
has occurred. If an event of default occurs, the seller must pay the buyer
the full notional value, or "par value," of the reference obligation in
exchange for the reference obligation. A Fund may be either the buyer or
seller in a credit default swap transaction. If the Fund is a buyer and no
event of default occurs, the Fund will lose its investment and recover
nothing. However, if an event of default occurs, the Fund (if the buyer)
will receive the full notional value of the reference obligation that may
have little or no value. As a seller, the Fund receives a fixed rate of
income throughout the term of the contract, which typically is between six
months and five years, provided that there is no default event. If an
event of default occurs, the seller must pay the buyer the full notional
value of the reference obligation. In addition, collateral posting
requirements are individually negotiated and there is no regulatory
requirement that a counterparty post collateral to secure its obligations
or a specified amount of cash, depending upon the terms of the swap, under
a credit default swap. Furthermore, there is no requirement that a party
be informed in advance when a credit default swap agreement is sold.
Accordingly, the Fund may have difficulty identifying the party
responsible for payment of its claims. The notional value of credit
default swaps with respect to a particular investment is often larger than
the total par value of such investment outstanding and, in event of a
default, there may be difficulties in making the required deliveries of
the reference investments, possibly delaying
payments. |
Each Fund may invest in derivative
instruments that provide exposure to one or more credit default swaps. For
example, a Fund may invest in a derivative instrument known as the Loan-Only
Credit Default Swap Index (“LCDX”), a tradable index with 100 equally-weighted
underlying single-name loan-only credit default swaps (“LCDS”). Each underlying
LCDS references an issuer whose loans trade in the secondary leveraged loan
market. A Fund can either buy the index (take on credit exposure) or sell the
index (pass credit exposure to a counterparty). While investing in these types
of derivatives will increase the universe of debt securities to which the Fund
is exposed, such investments entail additional risks that are not typically
associated with investments in other debt securities. Credit default swaps and
other derivative instruments related to loans are subject to the risks
associated with loans generally, as well as the risks of derivative
transactions.
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Investment Pools. Each Fund
may invest in publicly or privately issued interests in investment pools
whose underlying assets are credit default, credit-linked, interest rate,
currency exchange, equity-linked or other types of swap contracts and
related underlying securities or securities loan agreements. The pools’
investment results may be designed to correspond generally to the
performance of a specified securities index or “basket” of securities, or
sometimes a single security. These types of pools are often used to gain
exposure to multiple securities with a smaller investment than would be
required to invest directly in the individual securities. They also may be
used to gain exposure to foreign securities markets without investing in
the foreign securities themselves and/or the relevant foreign market. To
the extent that a Fund invests in pools of swaps and related underlying
securities or securities loan agreements whose return corresponds to the
performance of a foreign securities index or one or more foreign
securities, investing in such pools will involve risks similar to the
risks of investing in foreign securities. In addition to the risks
associated with investing in swaps generally, a Fund bears the risks and
costs generally associated with investing in pooled investment vehicles,
such as paying the fees and expenses of the pool and the risk that the
pool or the operator of the pool may default on its obligations to the
holder of interests in the pool, such as a Fund. Interests in privately
offered investment pools of swaps may be considered
illiquid. |
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Contracts for Differences.
“Contracts for differences” are swap arrangements in which a Fund may
agree with a counterparty that its return (or loss) will be based on the
relative performance of two different groups or “baskets” of securities.
For example, as to one of the baskets, a Fund’s return is based on
theoretical long futures positions in the securities comprising that
basket, and as to the other basket, the Fund’s return is based on
theoretical short futures positions in the securities comprising that
other basket. The notional sizes of the baskets will not necessarily be
the same, which can give rise to investment leverage. Each Fund may also
use actual long and short futures positions to achieve the market
exposure(s) as contracts for differences. Each Fund may enter into swaps
and contracts for differences for investment return, hedging, risk
management and for investment leverage. |
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Swaptions. A swap option (also
known as “swaptions”) is a contract that gives a counterparty the right
(but not the obligation) in return for payment of a premium, to enter into
a new swap agreement or to shorten, extend, cancel, or otherwise modify an
existing swap agreement, at some designated future time on specified
terms. The buyer and seller of the swap option agree on the strike price,
length of the option period, the term of the swap, notional amount,
amortization and frequency of settlement. Each Fund may engage in swap
options for hedging purposes or in an attempt to manage and mitigate
credit and interest rate risk. Each Fund may write (sell) and purchase put
and call swap options. The use of swap options involves risks, including,
among others, imperfect correlation between movements of the price of the
swap options and the price of the securities, indices or other assets
serving as reference instruments for the swap option, reducing the
effectiveness of the instrument for hedging or investment
purposes. |
Obligations
under Swap Agreements. The swap agreements a Fund enters
into settle in cash and, therefore, provide for calculation of the obligations
of the parties to the agreement on a “net basis.” Consequently, a Fund's current
obligations (or rights) under such a swap agreement will generally be equal only
to the net amount to be paid or received under the agreement based on the
relative values of the positions held by each party to the agreement (the “net
amount”). A Fund's current obligations under such a swap agreement will be
accrued daily (offset against any amounts owed to the Fund) and any accrued but
unpaid net amounts owed to a swap counterparty will be covered by the
segregation of assets determined to be liquid by those managing the Fund's
investments in accordance with procedures established by the Board, to avoid any
potential leveraging of the Fund's portfolio. In cases where a Fund is a seller
of a credit default swap contract, the Fund will segregate liquid assets equal
to the notional amount of the contract. Obligations under swap agreements for
which a Fund segregates assets will not be construed to be “senior securities”
for purposes of a Fund's investment restriction concerning senior
securities.
Risks Associated
with Swap Agreements. Swaps can be highly volatile and may
have a considerable impact on a Fund’s performance, as the potential gain or
loss on any swap transaction is not subject to any fixed limit. Whether a Fund's use of swap
agreements or swap options will be successful in furthering its investment
objective of total return will depend on the ability of those managing the
Fund's investments to predict correctly whether certain types of investments are
likely to produce greater returns than other investments. Because they are two
party contracts and because they may have terms of greater than seven days, swap
agreements may be considered to be illiquid. Moreover, a Fund bears the risk of
loss of the amount expected to be received under a swap agreement in the event
of the default or bankruptcy of a swap agreement counterparty. The Funds will
enter into swap agreements only with counterparties that present minimal credit
risks, as determined by those managing the Fund's investments. Certain
restrictions imposed on each Fund by the Internal Revenue Code may limit a
Fund’s ability to use swap agreements.
Depending on the terms of the
particular option agreement, a Fund will generally incur a greater degree of
risk when it writes a swap option than it will incur when it purchases a swap
option. When a Fund purchases a swap option, it risks losing only the amount of
the premium it has paid should it decide to let the option expire unexercised.
However, when the Fund writes a swap option, upon exercise of the option the
Fund will become obligated according to the terms of the underlying
agreement.
Liquidity of
Swap Agreements. Some
swap markets have grown substantially in recent years with a large number of
banks and investment banking firms acting both as principals and as agents
utilizing standardized swap documentation. As a result, these swap markets have
become relatively liquid. The liquidity of swap agreements will be determined by
those managing the Fund's investments based on various factors,
including:
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the frequency of trades and
quotations, |
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the number of dealers and
prospective purchasers in the
marketplace, |
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dealer undertakings to make a
market, |
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the nature of the security
(including any demand or tender features),
and |
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the nature of the marketplace
for trades (including the ability to assign or offset a portfolio's rights
and obligations relating to the
investment). |
Such determination will govern
whether a swap will be deemed to be within a Fund's restriction on investments
in illiquid securities.
Valuing Swap
Agreements. For
purposes of applying a Fund’s investment policies and restrictions (as stated in
the Prospectuses and this Statement of Additional Information) swap agreements
are generally valued by the Fund at market value. In the case of a credit
default swap, however, in applying certain of the Fund’s investment policies and
restrictions the Fund will value the credit default swap at its notional value
or its full exposure value (i.e., the sum of the notional amount for the
contract plus the market value), but may value the credit default swap at market
value for purposes of applying certain of the Fund’s other investment policies
and restrictions. For example, a Fund may value credit default swaps at full
exposure value for purposes of the Fund’s credit quality guidelines because such
value reflects the Fund’s actual economic exposure during the term of the credit
default swap agreement. In this context, both the notional amount and the market
value may be positive or negative depending on whether the fund is selling or
buying protection through the credit default swap. The manner in which certain
securities or other instruments are valued by a Fund for purposes of applying
investment policies and restrictions may differ from the manner in which those
investments are valued by other types of investors.
Permissible
Uses of Futures and Options on Futures Contracts
Each Fund may enter into futures
contracts and related options transactions, for hedging purposes and for other
appropriate risk management purposes, and to modify the Fund's exposure to
various currency, commodity, equity, or fixed-income markets. Each Fund may
engage in futures trading in an effort to generate returns. When using futures
contracts and options on futures contracts for hedging or risk management
purposes, the Fund determines that the price fluctuations in the contracts and
options are substantially related to price fluctuations in securities held by
the Fund or which it expects to purchase. In pursuing traditional hedging
activities, the Fund may sell futures contracts or acquire puts to protect
against a decline in the price of securities that the Fund owns. Each Fund may
purchase futures contracts or calls on futures contracts to protect the Fund
against an increase in the price of securities the Fund intends to purchase
before it is in a position to do so. When a Fund purchases a futures contract,
or writes a call option on a futures contract, it segregates liquid assets that,
when added to the value of assets deposited with the futures commission merchant
as margin, are equal to the market value of the contract.
Limitations
on the Use of Futures, Options on Futures Contracts, and Swaps
A fund that utilizes futures
contracts, options on futures contracts or swaps has claimed an exclusion from
the definition of a “commodity pool operator” under the Commodity Exchange Act
and is not subject to registration or regulation as a commodity pool operator
under the Commodity Exchange Act. The Commodity Futures Trading Commission
amended rule 4.5 “Exclusion for certain otherwise regulated persons from the
definition of the term “commodity pool operator.” Rule 4.5 provides that an
investment company does not meet the definition of “commodity pool operator” if
its use of futures contracts, options on futures contracts and swaps is
sufficiently limited that the fund can fall within one of two exclusions set out
in rule 4.5. Each Fund intends to limit its use of futures contracts, options on
futures contracts and swaps to the degree necessary to fall within one of the
two exclusions. If a Fund is unable to do so, it may incur expenses that are
necessary to comply with the Commodity Exchange Act and rules the Commodity
Futures Trading Commission has adopted under it.
Risk of
Potential Government Regulation of Derivatives
It is possible that additional
government regulation of various types of derivative instruments, including
futures, options and swap agreements, may limit or prevent a fund from using
such instruments as a part of its investment strategy, and could ultimately
prevent a fund from being able to achieve its investment objective. It is
difficult to predict the effects future legislation and regulation in this area,
but the effects could be substantial and adverse. It is possible that
legislative and regulatory activity could limit or restrict the ability of a
fund to use certain instruments as a part of its investment strategy. For
instance, in December 2015, the SEC proposed new regulations applicable to a
mutual fund’s use of derivatives and related instruments.
If adopted as proposed, these
regulations could significantly limit or impact a fund's ability to invest in
derivatives and related instruments, limit a fund's ability to employ certain
strategies that use derivatives and/or adversely affect the fund's performance,
efficiency in implementing strategies, and ability to pursue their investment
objectives. Limits or restrictions applicable to the counterparties with which
the funds engage in derivative transactions could also prevent the funds from
using certain instruments.
Fixed-Income
Securities
Inflation-Indexed
Bonds
Some Funds may invest in
inflation-indexed bonds or inflation protected debt securities, which are fixed
income securities whose value is periodically adjusted according to the rate of
inflation. Two structures are common. The U.S. Treasury and some other issuers
utilize a structure that accrues inflation into the principal value of the bond.
Most other issuers pay out the Consumer Price Index accruals as part of a
semi-annual coupon. Inflation-indexed securities issued by the U.S. Treasury
(Treasury Inflation Protected Securities or TIPS) have maturities of
approximately five, ten or thirty years, although it is possible that securities
with other maturities will be issued in the future. The U.S. Treasury securities
pay interest on a semi-annual basis equal to a fixed percentage of the
inflation-adjusted principal amount. If the periodic adjustment rate measuring
inflation falls, the principal value of inflation-indexed bonds will be adjusted
downward, and consequently the interest payable on these securities (calculated
with respect to a smaller principal amount) will be reduced. The value of
inflation-indexed bonds is expected to change in response to changes in real
interest rates. Real interest rates in turn are tied to the relationship between
nominal interest rates and the rate of inflation. Therefore, if the rate of
inflation rises at a faster rate than nominal interest rates, real interest
rates might decline, leading to an increase in value of inflation-indexed bonds.
In contrast, if nominal interest rates increase at a faster rate than inflation,
real interest rates might rise, leading to a decrease in value of
inflation-indexed bonds. While these securities are expected to be protected
from long-term inflationary trends, short-term increases in inflation may lead
to a decline in value. If interest rates rise due to reasons other than
inflation (for example, due to changes in currency exchange rates), investors in
these securities may not be protected to the extent that the increase is not
reflected in the bond's inflation measure.
The periodic adjustment of U.S.
inflation-indexed bonds is tied to the Consumer Price Index for Urban Consumers
(CPI-U), which is calculated monthly by the U.S. Bureau of Labor Statistics. The
CPI-U is a measurement of changes in the cost of living, made up of components
such as housing, food, transportation and energy. Inflation-indexed bonds issued
by a foreign government are generally adjusted to reflect a comparable inflation
index calculated by that government. Any increase in the principal amount of an
inflation-indexed bond will be considered taxable ordinary income, even though
investors do not receive their principal until maturity.
Step-Coupon
Securities
Each Fund may invest in step-coupon
securities. Step-coupon securities trade at a discount from their face value and
pay coupon interest. The coupon rate is low for an initial period and then
increases to a higher coupon rate thereafter. Market values of these types of
securities generally fluctuate in response to changes in interest rates to a
greater degree than conventional interest-paying securities of comparable term
and quality. Under many market conditions, investments in such securities may be
illiquid, making it difficult for a Fund to dispose of them or determine their
current value.
“Stripped”
Securities
Each Fund may invest in stripped
securities, which are usually structured with two or more classes that receive
different proportions of the interest and principal distribution on a pool of
U.S. government or foreign government securities or mortgage assets. In some
cases, one class will receive all of the interest (the interest-only or “IO”
class), while the other class will receive all of the principal (the
principal-only or “PO” class). Stripped securities commonly have greater market
volatility than other types of fixed-income securities. In the case of stripped
mortgage securities, if the underlying mortgage assets experience greater than
anticipated payments of principal, a Fund may fail to recoup fully its
investments in IOs. Stripped securities may be illiquid. Stripped securities may
be considered derivative securities.
Zero-Coupon
Securities
Each Fund may invest in zero-coupon
securities. Zero-coupon securities have no stated interest rate and pay only the
principal portion at a stated date in the future. They usually trade at a
substantial discount from their face (par) value. Zero-coupon securities are
subject to greater market value fluctuations in response to changing interest
rates than debt obligations of comparable maturities that make distributions of
interest in cash.
Foreign Currency
Transactions
Options
on Foreign Currencies
In addition, each Fund may buy and
write options on foreign currencies in a manner similar to that in which futures
or forward contracts on foreign currencies will be utilized. Each Fund may use
options on foreign currencies to hedge against adverse changes in foreign
currency conversion rates. For example, a decline in the U.S. dollar value of a
foreign currency in which portfolio securities are denominated will reduce the
U.S. dollar value of such securities, even if their value in the foreign
currency remains constant. In order to protect against such diminutions in the
value of the portfolio securities, a Fund may buy put options on the foreign
currency. If the value of the currency declines, the Fund will have the right to
sell such currency for a fixed amount in U.S. dollars, thereby offsetting, in
whole or in part, the adverse effect on its portfolio. Conversely, when a rise
in the U.S. dollar value of a currency in which securities to be acquired are
denominated is projected, thereby increasing the cost of such securities, the
Fund may buy call options on the foreign currency. The purchase of such options
could offset, at least partially, the effects of the adverse movements in
exchange rates. As in the case of other types of options, however, the benefit
to the Fund from purchases of foreign currency options will be reduced by the
amount of the premium and related transaction costs. In addition, if currency
exchange rates do not move in the direction or to the extent desired, the Fund
could sustain losses or lesser gains on transactions in foreign currency options
that would require the Fund to forgo a portion or all of the benefits of
advantageous changes in those rates.
Each Fund also may write options on
foreign currencies. For example, to hedge against a potential decline in the
U.S. dollar due to adverse fluctuations in exchange rates, a Fund could, instead
of purchasing a put option, write a call option on the relevant currency. If the
decline expected by the Fund occurs, the option will most likely not be
exercised and the diminution in value of portfolio securities will be offset at
least in part by the amount of the premium received. Similarly, instead of
purchasing a call option to hedge against a potential increase in the U.S.
dollar cost of securities to be acquired, a Fund could write a put option on the
relevant currency which, if rates move in the manner projected by the Fund, will
expire unexercised and allow the Fund to hedge the increased cost up to the
amount of the premium. If exchange rates do not move in the expected direction,
the option may be exercised and the Fund would be required to buy or sell the
underlying currency at a loss, which may not be fully offset by the amount of
the premium. Through the writing of options on foreign currencies, a Fund also
may lose all or a portion of the benefits that might otherwise have been
obtained from favorable movements in exchange rates.
Futures
on Currency
A foreign currency future provides
for the future sale by one party and purchase by another party of a specified
quantity of foreign currency at a specified price and time. A public market
exists in futures contracts covering a number of foreign currencies. Currency
futures contracts are exchange-traded and change in value to reflect movements
of a currency or a basket of currencies. Settlement must be made in a designated
currency.
Forward
Foreign Currency Exchange Contracts
Each Fund may, but is not obligated
to, enter into forward foreign currency exchange contracts. Currency
transactions include forward currency contracts and exchange listed or
over-the-counter options on currencies. A forward currency contract involves a
privately negotiated obligation to purchase or sell a specific currency at a
specified future date at a price set at the time of the contract.
The typical use of a forward
contract is to "lock in" the price of a security in U.S. dollars or some other
foreign currency which a Fund is holding in its portfolio. By entering into a
forward contract for the purchase or sale, for a fixed amount of dollars or
other currency, of the amount of foreign currency involved in the underlying
security transactions, the Fund may be able to protect itself against a possible
loss resulting from an adverse change in the relationship between the U.S.
dollar or other currency which is being used for the security purchase and the
foreign currency in which the security is denominated in or exposed to during
the period between the date on which the security is purchased or sold and the
date on which payment is made or received.
Those managing the Fund's
investments also may from time to time utilize forward contracts for other
purposes. For example, they may be used to hedge a foreign security held in the
portfolio or a security which pays out principal tied to an exchange rate
between the U.S. dollar and a foreign currency, against a decline in value of
the applicable foreign currency. They also may be used to lock in the current
exchange rate of the currency in which those securities anticipated to be
purchased are denominated in or exposed to. At times, each Fund may enter into
"cross-currency" hedging transactions involving currencies other than those in
which securities are held or proposed to be purchased are
denominated.
Each Fund segregates liquid assets
in an amount equal to (1) at least its daily marked-to-market (net) obligation
(i.e., its daily net liability, if any) with respect to forward currency
contracts that are cash settled and (2) the net notional value with respect to
forward currency contracts that are not cash settled. It should be noted that
the use of forward foreign currency exchange contracts does not eliminate
fluctuations in the underlying prices of the securities. It simply establishes a
rate of exchange between the currencies that can be achieved at some future
point in time. Additionally, although such contracts tend to minimize the risk
of loss due to a decline in the value of the hedged currency, they also tend to
limit any potential gain that might result if the value of the currency
increases.
Foreign
Securities
Investing in foreign securities
carries political and economic risks distinct from those associated with
investing in the United States. Investments in foreign securities also involve
the risk of possible adverse changes in investment or exchange control
regulations, expropriation or confiscatory taxation, limitation on or delays in
the removal of funds or other assets of a fund, political or financial
instability or diplomatic and other developments that could affect such
investments. Foreign investments may be affected by actions of foreign
governments adverse to the interests of U.S. investors, including the
possibility of expropriation or nationalization of assets, confiscatory
taxation, restrictions on U.S. investment or on the ability to repatriate assets
or to convert currency into U.S. Dollars. There may be a greater possibility of
default by foreign governments or foreign-government sponsored enterprises.
Investments in foreign countries also involve a risk of local political,
economic or social instability, military action or unrest or adverse diplomatic
developments.
Asia-Pacific
Countries
In addition to the risks of foreign
investing and the risks of investing in emerging markets, the developing market
Asia-Pacific countries in which a Fund may invest are subject to certain
additional or specific risks. In the Asia-Pacific markets, there is a high
concentration of market capitalization and trading volume in a small number of
issuers representing a limited number of industries, as well as a high
concentration of investors and financial intermediaries. Many of these markets
also may be affected by developments with respect to more established markets in
the region, such as Japan and Hong Kong. Brokers in developing market
Asia-Pacific countries typically are fewer in number and less well capitalized
than brokers in the United States.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political
and social instability than is the case in the United States and Western
European countries. Such instability may result from, among other things: (i)
authoritarian governments or military involvement in political and economic
decision- making, including changes in government through extra-constitutional
means; (ii) popular unrest associated with demands for improved political,
economic and social conditions; (iii) internal insurgencies; (iv) hostile
relations with neighboring countries; and/or (v) ethnic, religious and racial
disaffection. In addition, the governments of many of such countries, such as
Indonesia, have a heavy role in regulating and supervising the
economy.
An additional risk common to most
such countries is that the economy is heavily export-oriented and, accordingly,
is dependent upon international trade. The existence of overburdened
infrastructure and obsolete financial systems also present risks in certain
countries, as do environmental problems. Certain economies also depend to a
significant degree upon exports of primary commodities and, therefore, are
vulnerable to changes in commodity prices that, in turn, may be affected by a
variety of factors. The legal systems in certain developing market Asia-Pacific
countries also may have an adverse impact on a Fund. The rights of investors in
developing market Asia-Pacific companies may be more limited than those of
shareholders of U.S. corporations. It may be difficult or impossible to obtain
and/or enforce a judgment in a developing market Asia-Pacific
country.
China
Investing in China involves special
considerations, including: the risk of nationalization or expropriation of
assets or confiscatory taxation; greater governmental involvement in and control
over the economy, interest rates and currency exchange rates; controls on
foreign investment and limitations on repatriation of invested capital; greater
social, economic and political uncertainty; dependency on exports and the
corresponding importance of international trade; and currency exchange rate
fluctuations. The government of China maintains strict currency controls in
support of economic, trade and political objectives and regularly intervenes in
the currency market. The government's actions in this respect may not be
transparent or predictable. Furthermore, it is difficult for foreign investors
to directly access money market securities in China because of investment and
trading restrictions. These and other factors may decrease the value and
liquidity of a fund's investments.
Investments
in Stock Connect and Bond Connect
Funds may invest in China A shares,
which are shares of certain Chinese companies listed and traded
through the Shanghai-Hong Kong Stock Connect and Shenzhen-Hong Kong Stock
Connect programs (“Stock Connect”). Stock Connect is a securities trading and
clearing program established by Hong Kong Exchanges and Clearing Limited, the
Shanghai Stock Exchange ("SSE"), the Shenzhen Stock Exchange ("SZSE") and China
Securities Depository and Clearing Corporation Limited, which seeks to provide
mutual stock market access between Mainland China and Hong Kong. Trading
through Stock Connect is subject to numerous restrictions and risks
that could impair the Fund’s ability to invest in or sell China A
shares and adversely affect the Fund’s performance, such as the following:
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China A shares generally may
not be sold, purchased or otherwise transferred other than through Stock
Connect in accordance with applicable rules, regulations, and
restrictions. Such securities may lose their eligibility, in which case
they presumably could be sold but could no longer be purchased through
Stock Connect. Market volatility and settlement difficulties in the
China A share markets may result in significant fluctuations in
the prices and liquidity of the securities traded on such markets. Further
regulations or restrictions, such as limitations on redemptions or
suspension of trading, may adversely impact the
Fund. |
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Stock Connect is
generally only available on business days when both the China and
Hong Kong markets are open and when banking services are available in both
markets on the corresponding settlement days. As a result, a Fund may not
be able trade when it would be otherwise attractive to do so, and the Fund
may not be able to dispose of its China A shares in a timely
manner. |
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Investing in China A
shares is subject to Stock Connect’s clearance and settlement procedures,
which could pose risks to the Fund. Certain requirements must be completed
before the market opening, or a Fund cannot sell the shares on that
trading day. Stock Connect also imposes quotas that limit aggregate
net purchases on an exchange on a particular day, and an investor cannot
purchase and sell the same security through Stock Connect on the same
trading day. Once the daily quota is reached, orders to purchase
additional China A shares through Stock Connect will
be rejected. Such restrictions could limit a Fund’s ability to sell
its China A shares in a timely manner, or to sell them at
all. |
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If a Fund holds 5% or more of
a China A share issuer’s total shares through Stock Connect investments,
the Fund must return any profits obtained from the purchase and sale of
those shares if both transactions occur within
a six-month period. All accounts managed by the Funds’ Advisor
and/or its affiliates will be aggregated for purposes of this 5%
limitation, which makes it more likely that a Fund’s profits may be
subject to these limitations. |
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Stock Connect uses an omnibus
clearing structure, and the Fund’s shares will be registered in its
custodian’s name on the Central Clearing and Settlement System. This may
limit the ability of the Fund’s advisor to effectively manage a Fund, and
may expose the Fund to the credit risk of its custodian or to greater risk
of expropriation. Investment in China A shares
through Stock Connect may be available only through a single
broker that is an affiliate of the Fund’s custodian, which may affect the
quality of execution provided by such
broker. |
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China A shares purchased
through Stock Connect will be held via a book entry omnibus account in the
name of Hong Kong Securities Clearing Company Limited (“HKSCC”), Hong
Kong’s clearing entity, and not the Fund’s name as the beneficial
owner. Therefore, a Fund’s ability to exercise its rights as a
shareholder and to pursue claims against the issuer of China A
shares may be limited. While Chinese regulations and the
Hong Kong Stock Exchange have issued clarifications and guidance
supporting the concept of beneficial ownership through Stock Connect,
the interpretation of beneficial ownership in China by regulators and
courts may continue to evolve. |
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The Fund’s investments
in China A shares through Stock Connect are generally subject
to Chinese securities regulations and listing rules, among other
restrictions. The Fund will not benefit from access to Hong Kong investor
compensation funds, which are set up to protect against defaults of
trades, when investing through Stock Connect. Investments in China A
shares may not be covered by the securities investor protection
programs of the exchanges and, without the protection of such programs,
will be subject to the risk of default by the broker. If the depository of
the SSE and the SZSE defaulted, a Fund may not be able to recover fully
its losses from the depository or may be delayed in receiving proceeds as
part of any recovery process. |
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Fees, costs and taxes imposed
on foreign investors (such as the Fund) may be higher than comparable
fees, costs and taxes imposed on owners of other securities that provide
similar investment exposure. Trades using Stock Connect may also
be subject to various fees, taxes and market charges imposed by Chinese
market participants and regulatory authorities. Uncertainties in China’s
tax rules related to the taxation of income and gains from investments in
China A shares could result in unexpected tax liabilities for the Fund,
and the withholding tax treatment of dividends and capital gains payable
to overseas investors currently is
unsettled. |
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Because trades of eligible
China A shares on Stock Connect must be settled in Renminbi (RMB),
the Chinese currency, Funds investing through Stock Connect will
be exposed to RMB currency risks. The ability to hedge RMB currency risks
may be limited. The RMB is subject to exchange control restrictions, and
the Fund could be adversely affected by delays in converting currencies
into RMB and vice versa. |
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Because Stock Connect is in
its early stages, the effect on the market for trading China A
shares with the introduction of numerous foreign investors is
currently unknown. Stock Connect is relatively new and may be subject to
further interpretation and guidance. There can be no assurance as to Stock
Connect’s continued existence or whether future developments regarding the
program may restrict or adversely affect the Fund’s investments or
returns. |
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The risks associated with
investing through Stock Connect could lead to greater market execution
risk, valuation risks, liquidity risks and costs for a Fund, as well as
for Authorized Participants that create and redeem Creation Units. This
could cause a Fund to trade in the market at greater bid-ask spreads or
greater premiums or discounts to the Fund’s NAV. Because the China A share
market is considered volatile and unstable (with the risk of widespread
trading suspensions or government intervention), the creation and
redemption of Creation Units may also be
disrupted. |
Funds may also invest in China
Interbank bonds traded on the China Interbank Bond Market (“CIBM”) through the
China - Hong Kong Bond Connect program (“Bond Connect”). In China, the Hong Kong
Monetary Authority Central Money Markets Unit holds Bond Connect securities on
behalf of investors (such as the Fund) in accounts maintained with maintained
with a China-based custodian (either the China Central Depository & Clearing
Co. or the Shanghai Clearing House). Investments using Bond Connect are subject
to risks similar to those described above with respect to Stock
Connect.
Europe
The economies and markets of
European countries are often closely connected and interdependent, and events in
one European country can have an adverse impact on other European countries.
Certain funds may invest in securities of issuers that are domiciled in, or have
significant operations in, member countries of the Economic and Monetary Union
of the European Union (the “EU”), which requires member countries to comply with
restrictions on inflation rates, deficits, interest rates, debt levels and
fiscal and monetary controls. Decreasing imports or exports, changes in
governmental or EU regulations on trade, changes in the exchange rate of the
euro (the common currency of certain EU countries), the default or threat of
default by an EU member country on its sovereign debt, and/or an economic
recession in an EU member country may have a significant adverse effect on the
economies of EU member countries and their trading partners, including some or
all of the emerging markets countries. Although certain European countries do
not use the euro, many of these countries are obliged to meet the criteria for
joining the euro zone. Consequently, these countries must comply with many of
the restrictions noted above. The European financial markets have experienced
volatility and adverse trends in recent years due to concerns about economic
downturns, rising government debt levels and the possible default of government
debt in several European countries. Further defaults or restructurings by
governments and other entities of their debt could have additional adverse
effects on economies, financial markets and asset valuations around the world.
In addition, one or more countries may abandon the euro and/or withdraw from the
EU, including, with respect to the latter, the United Kingdom (the "UK"), which
is a significant market in the global economy. The impact of these actions,
especially if they occur in a disorderly fashion, is not clear but could be
significant and far-reaching and could adversely impact the value of investments
in the region.
The UK’s referendum vote to leave
the EU (referred to as "Brexit") could cause business disruptions and
uncertainty and thus adversely impact the financial results and operations of
various European companies and economies.
Although the precise time frame for
Brexit is uncertain, it is currently expected that the UK will seek to withdraw
from the EU with an anticipated completion date within two years after notifying
the European Council of the UK’s intention to withdraw. The effects of Brexit
will largely depend on any agreements the UK makes to retain access to EU
markets either during a transitional period or more permanently. Brexit could
lead to legal and tax uncertainty and potentially divergent national laws and
regulations as the UK determines which EU laws to replace or replicate.
Additionally, Brexit could lead to global economic uncertainty and result in
significant volatility in the global stock markets and currency exchange rate
fluctuations.
Japan
Japanese investments may be
significantly affected by events influencing Japan’s economy and the exchange
rate between the Japanese yen and the U.S. Dollar. Japan’s economy fell into a
long recession in the 1990s. After a few years of mild recovery in the
mid-2000s, Japan’s economy fell into another recession as a result of the recent
global economic crisis. Japan is heavily dependent on exports and foreign oil.
Japan is located in a seismically active area, and in 2011 experienced an
earthquake of a sizable magnitude and a tsunami that significantly affected
important elements of its infrastructure and resulted in a nuclear crisis. Since
these events, Japan’s financial markets have fluctuated dramatically. The full
extent of the impact of these events on Japan’s economy and on foreign
investment in Japan is difficult to estimate. Japan’s economic prospects may be
affected by the political and military situations of its near neighbors, notably
North and South Korea, China, and Russia.
Latin
America
Most Latin American countries have
experienced, at one time or another, severe and persistent levels of inflation,
including, in some cases, hyperinflation. This has, in turn, led to high
interest rates, extreme measures by governments to keep inflation in check, and
a generally debilitating effect on economic growth. Although inflation in many
countries has lessened, there is no guarantee it will remain at lower levels. In
addition, the political history of certain Latin American countries has been
characterized by political uncertainty, intervention by the military in civilian
and economic spheres, and political corruption. Such developments, if they were
to reoccur, could reverse favorable trends toward market and economic reform,
privatization, and removal of trade barriers, and result in significant
disruption in securities markets. Certain Latin American countries may also have
managed currencies which are maintained at artificial levels to the U.S. Dollar
rather than at levels determined by the market. This type of system can lead to
sudden and large adjustments in the currency which, in turn, can have a
disruptive and negative effect on foreign investors. There is no significant
foreign exchange market for many currencies and it would, as a result, be
difficult for the Fund to engage in foreign currency transactions designed to
protect the value of the Fund’s interests in securities denominated in such
currencies. Finally, a number of Latin American countries are among the largest
debtors of developing countries. There have been moratoria on, and reschedulings
of, repayment with respect to these debts. Such events can restrict the
flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
High Yield
Securities
Each Fund may invest a portion of
its assets in bonds that are rated below investment grade (sometimes called
“high yield bonds” or "junk bonds") which are rated at the time of purchase Ba1
or lower by Moody's and BB+ or lower by S&P Global (if the bond has been
rated by only one of those agencies, that rating will determine whether the bond
is below investment grade; if the bond has not been rated by either of those
agencies, those managing the Fund's investments will determine whether the bond
is of a quality comparable to those rated below investment grade). Lower rated
bonds involve a higher degree of credit risk, which is the risk that the issuer
will not make interest or principal payments when due. In the event of an
unanticipated default, a Fund would experience a reduction in its income and
could expect a decline in the market value of the bonds so affected. Issuers of
high yield securities may be involved in restructurings or bankruptcy
proceedings that may not be successful. If an issuer defaults, it may not be
able to pay all or a portion of interest and principal owed to the fund, it may
exchange the high yield securities owned by the fund for other securities,
including equities, and/or the fund may incur additional expenses while seeking
recovery of its investment. Some funds may also invest in unrated bonds of
foreign and domestic issuers. Unrated bonds, while not necessarily of lower
quality than rated bonds, may not have as broad a market. Because of the size
and perceived demand of the issue, among other factors, certain municipalities
may not incur the expense of obtaining a rating. Those managing the Fund's
investments will analyze the creditworthiness of the issuer, as well as any
financial institution or other party responsible for payments on the bond, in
determining whether to purchase unrated bonds. Unrated bonds will be included in
the limitation a Fund has with regard to high yield bonds unless those managing
the Fund's investments deem such securities to be the equivalent of investment
grade bonds. Some of the high yield securities consist of Rule 144A securities.
High yield securities may contain any type of interest rate payment or reset
terms, including fixed rate, adjustable rate, zero coupon, contingent, deferred,
payment-in-kind and those with auction rate features.
Initial Public
Offerings ("IPOs")
An IPO is a company's first offering
of stock to the public. IPO risk is that the market value of IPO shares will
fluctuate considerably due to factors such as the absence of a prior public
market, unseasoned trading, the small number of shares available for trading,
and limited information about the issuer. The purchase of IPO shares may involve
high transaction costs. IPO shares are subject to market risk and liquidity
risk. In addition, the market for IPO shares can be speculative and/or inactive
for extended periods. The limited number of shares available for trading in some
IPOs may make it more difficult for a fund to buy or sell significant amounts of
shares without an unfavorable impact on prevailing prices. Investors in IPO
shares can be affected by substantial dilution in the value of their shares by
sales of additional shares and by concentration of control in existing
management and principal shareholders. When a fund's asset base is small, a
significant portion of the fund's performance could be attributable to
investments in IPOs because such investments would have a magnified impact on
the fund. As the fund's assets grow, the effect of the fund's investments in
IPOs on the fund's performance probably will decline, which could reduce the
fund's performance. Because of the price volatility of IPO shares, a fund may
choose to hold IPO shares for a very short period. This may increase the
turnover of the fund's portfolio and lead to increased expenses to the fund,
such as commissions and transaction costs. By selling IPO shares, the fund may
realize taxable gains it will subsequently distribute to
shareholders.
Inverse Floating
Rate and Other Variable and Floating Rate Instruments
Each Fund may purchase variable and
floating rate instruments. These instruments may include variable amount master
demand notes that permit the indebtedness thereunder to vary in addition to
providing for periodic adjustments in the interest rate. These instruments may
also include leveraged inverse floating rate debt instruments, or “inverse
floaters”. The interest rate of an inverse floater resets in the opposite
direction from the market rate of interest on a security or interest to which it
is related. An inverse floater may be considered to be leveraged to the extent
that its interest rate varies by a magnitude that exceeds the magnitude of the
change in the index rate of interest, and is subject to many of the same risks
as derivatives. The higher degree of leverage inherent in inverse floaters is
associated with greater volatility in their market values. Certain of these
investments may be illiquid. The absence of an active secondary market with
respect to these investments could make it difficult for a Fund to dispose of a
variable or floating rate note if the issuer defaulted on its payment obligation
or during periods that the Fund is not entitled to exercise its demand rights,
and the Fund could, for these or other reasons, suffer a loss with respect to
such instruments.
Master Limited
Partnerships (“MLPs”)
An MLP is an entity that is
generally taxed as a partnership for federal income tax purposes and that
derives each year at least 90% of its gross income from "Qualifying Income".
Qualifying Income includes interest, dividends, real estate rents, gain from the
sale or disposition of real property, income and gain from commodities or
commodity futures, and income and gain from mineral or natural resources
activities that generate Qualifying Income. MLP interests (known as units) are
traded on securities exchanges or over-the-counter. An MLP's organization as a
partnership and compliance with the Qualifying Income rules generally eliminates
federal tax at the entity level.
An MLP has one or more general
partners (who may be individuals, corporations, or other partnerships) which
manage the partnership, and limited partners, which provide capital to the
partnership but have no role in its management. Typically, the general partner
is owned by company management or another publicly traded sponsoring
corporation. When an investor buys units in an MLP, the investor becomes a
limited partner. Holders of MLP units have limited control and voting rights on
matters affecting the partnership and are exposed to a remote possibility of
liability for all of the obligations of that MLP in the event that a court
determines that the rights of the holders of MLP units to vote to remove or
replace the general partner of that MLP, to approve amendments to that MLP’s
partnership agreement, or to take other action under the partnership agreement
of that MLP would constitute “control” of the business of that MLP, or a court
or governmental agency determines that the MLP is conducting business in a state
without complying with the partnership statute of that state. Holders of MLP
units are also exposed to the risk that they will be required to repay amounts
to the MLP that are wrongfully distributed to them.
The business of certain MLPs is
affected by supply and demand for energy commodities because such MLPs derive
revenue and income based upon the volume of the underlying commodity produced,
transported, processed, distributed, and/ or marketed. Pipeline MLPs have
indirect commodity exposure to oil and gas price volatility because, although
they do not own the underlying energy commodity, the general level of commodity
prices may affect the volume of the commodity the MLP delivers to its customers
and the cost of providing services such as distributing natural gas liquids. The
costs of natural gas pipeline MLPs to perform services may exceed the negotiated
rates under “negotiated rate” contracts. Processing MLPs may be directly
affected by energy commodity prices. Propane MLPs own the underlying energy
commodity, and therefore have direct exposure to energy commodity prices. The
MLP industry in general could be hurt by market perception that MLP's
performance and valuation are directly tied to commodity prices.
Pipeline MLPs are common carrier
transporters of natural gas, natural gas liquids (primarily propane, ethane,
butane and natural gasoline), crude oil or refined petroleum products (gasoline,
diesel fuel and jet fuel). Pipeline MLPs also may operate ancillary businesses
such as storage and marketing of such products. Pipeline MLPs derive revenue
from capacity and transportation fees. Historically, pipeline output has been
less exposed to cyclical economic forces due to its low cost structure and
government-regulated nature. In addition, most pipeline MLPs have limited direct
commodity price exposure because they do not own the product being
shipped.
Processing MLPs are gatherers and
processors of natural gas as well as providers of transportation, fractionation
and storage of natural gas liquids ("NGLs"). Processing MLPs derive revenue from
providing services to natural gas producers, which require treatment or
processing before their natural gas commodity can be marketed to utilities and
other end user markets. Revenue for the processor is fee based, although it is
not uncommon to have some participation in the prices of the natural gas and NGL
commodities for a portion of revenue.
Propane MLPs are distributors of
propane to homeowners for space and water heating. Propane MLPs derive revenue
from the resale of the commodity on a margin over wholesale cost. The ability to
maintain margin is a key to profitability. Propane serves approximately 3% of
the household energy needs in the United States, largely for homes beyond the
geographic reach of natural gas distribution pipelines. Approximately 70% of
annual cash flow is earned during the winter heating season (October through
March). Accordingly, volumes are weather dependent, but have utility type
functions similar to electricity and natural gas.
MLPs operating interstate pipelines
and storage facilities are subject to substantial regulation by the Federal
Energy Regulatory Commission ("FERC"), which regulates interstate transportation
rates, services and other matters regarding natural gas pipelines including: the
establishment of rates for service; regulation of pipeline storage and liquified
natural gas facility construction; issuing certificates of need for companies
intending to provide energy services or constructing and operating interstate
pipeline and storage facilities; and certain other matters. FERC also regulates
the interstate transportation of crude oil, including: regulation of rates and
practices of oil pipeline companies; establishing equal service conditions to
provide shippers with equal access to pipeline transportation; and establishment
of reasonable rates for transporting petroleum and petroleum products by
pipeline.
MLPs are subject to various federal,
state and local environmental laws and health and safety laws as well as laws
and regulations specific to their particular activities. These laws and
regulations address: health and safety standards for the operation of
facilities, transportation systems and the handling of materials; air and water
pollution requirements and standards; solid waste disposal requirements; land
reclamation requirements; and requirements relating to the handling and
disposition of hazardous materials. MLPs are subject to the costs of compliance
with such laws applicable to them, and changes in such laws and regulations may
adversely affect their results of operations.
MLPs may be subject to liability
relating to the release of substances into the environment, including liability
under federal “Superfund” and similar state laws for investigation and
remediation of releases and threatened releases of hazardous materials, as well
as liability for injury and property damage for accidental events, such as
explosions or discharges of materials causing personal injury and damage to
property. Such potential liabilities could have a material adverse effect upon
the financial condition and results of operations of MLPs.
MLPs are subject to numerous
business related risks, including: deterioration of business fundamentals
reducing profitability due to development of alternative energy sources,
consumer sentiment with respect to global warming, changing demographics in the
markets served, unexpectedly prolonged and precipitous changes in commodity
prices and increased competition that reduces the MLP’s market share; the lack
of growth of markets requiring growth through acquisitions; disruptions in
transportation systems; the dependence of certain MLPs upon the energy
exploration and development activities of unrelated third parties; availability
of capital for expansion and construction of needed facilities; a significant
decrease in natural gas production due to depressed commodity prices or
otherwise; the inability of MLPs to successfully integrate recent or future
acquisitions; and the general level of the economy.
Municipal
Obligations and AMT-Subject Bonds
Municipal Obligations are
obligations issued by or on behalf of states, territories, and possessions of
the United States and the District of Columbia and their political subdivisions,
agencies and instrumentalities, including municipal utilities, or multi-state
agencies or authorities. The interest on Municipal Obligations is exempt from
federal income tax in the opinion of bond counsel to the issuer. Three major
classifications of Municipal Obligations are: Municipal Bonds, that generally
have a maturity at the time of issue of one year or more; Municipal Notes, that
generally have a maturity at the time of issue of six months to three years; and
Municipal Commercial Paper, that generally has a maturity at the time of issue
of 30 to 270 days.
The term "Municipal Obligations"
includes debt obligations issued to obtain funds for various public purposes,
including the construction of a wide range of public facilities such as
airports, bridges, highways, housing, hospitals, mass transportation, schools,
streets, water and sewer works, and electric utilities. Other public purposes
for which Municipal Obligations are issued include refunding outstanding
obligations, obtaining funds for general operating expenses, and lending such
funds to other public institutions and facilities. To the extent that a fund
invests a significant portion of its assets in municipal obligations issued in
connection with a single project, the fund likely will be affected by the
economic, business or political environment of the project.
AMT-Subject Bonds are industrial
development bonds issued by or on behalf of public authorities to obtain funds
to provide for the construction, equipment, repair or improvement of privately
operated housing facilities, sports facilities, convention or trade show
facilities, airport, mass transit, industrial, port or parking facilities, air
or water pollution control facilities, and certain local facilities for water
supply, gas, electricity, or sewage or solid waste disposal. They are considered
to be Municipal Obligations if the interest paid thereon qualifies as exempt
from federal income tax in the opinion of bond counsel to the issuer, even
though the interest may be subject to the federal alternative minimum tax for
individual income tax purposes.
Municipal
Bonds
Municipal Bonds may be either
"general obligation" or "revenue" issues. General obligation bonds are secured
by the issuer's pledge of its faith, credit, and taxing power for the payment of
principal and interest. Revenue bonds are payable from the revenues derived from
a particular facility or class of facilities or, in some cases, from the
proceeds of a special excise tax or other specific revenue source (e.g., the
user of the facilities being financed), but not from the general taxing power.
Industrial development bonds and pollution control bonds in most cases are
revenue bonds and generally do not carry the pledge of the credit of the issuing
municipality. The payment of the principal and interest on industrial revenue
bonds depends solely on the ability of the user of the facilities financed by
the bonds to meet its financial obligations and the pledge, if any, of real and
personal property so financed as security for such payment. Funds may also
invest in "moral obligation" bonds that are normally issued by special purpose
public authorities. If an issuer of moral obligation bonds is unable to meet its
obligations, the repayment of the bonds becomes a moral commitment but not a
legal obligation of the state or municipality in question.
Municipal
Commercial Paper
Municipal Commercial Paper refers to
short-term obligations of municipalities that may be issued at a discount and
may be referred to as Short-Term Discount Notes. Municipal Commercial Paper is
likely to be used to meet seasonal working capital needs of a municipality or
interim construction financing. Generally, they are repaid from general revenues
of the municipality or refinanced with long-term debt. In most cases Municipal
Commercial Paper is backed by letters of credit, lending agreements, note
repurchase agreements or other credit facility agreements offered by banks or
other institutions.
Municipal
Notes
Municipal Notes usually are general
obligations of the issuer and are sold in anticipation of a bond sale,
collection of taxes, or receipt of other revenues. Payment of these notes is
primarily dependent upon the issuer's receipt of the anticipated revenues. Other
notes include "Construction Loan Notes" issued to provide construction financing
for specific projects, and "Bank Notes" issued by local governmental bodies and
agencies to commercial banks as evidence of borrowings. Some notes ("Project
Notes") are issued by local agencies under a program administered by the U.S.
Department of Housing and Urban Development. Project Notes are secured by the
full faith and credit of the United States.
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Bank Notes are notes issued by
local governmental bodies and agencies such as those described above to
commercial banks as evidence of borrowings. The purposes for which the
notes are issued are varied but they are frequently issued to meet
short-term working-capital or capital-project needs. These notes may have
risks similar to the risks associated with TANs and
RANs. |
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Bond Anticipation Notes
("BANs") are usually general obligations of state and local governmental
issuers which are sold to obtain interim financing for projects that will
eventually be funded through the sale of long-term debt obligations or
bonds. The ability of an issuer to meet its obligations on its BANs is
primarily dependent on the issuer's access to the long-term municipal bond
market and the likelihood that the proceeds of such bond sales will be
used to pay the principal and interest on the
BANs. |
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Construction Loan Notes are
issued to provide construction financing for specific projects. Permanent
financing, the proceeds of which are applied to the payment of
construction loan notes, is sometimes provided by a commitment by the
Government National Mortgage Association ("GNMA") to purchase the loan,
accompanied by a commitment by the Federal Housing Administration to
insure mortgage advances thereunder. In other instances, permanent
financing is provided by commitments of banks to purchase the
loan. |
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Revenue Anticipation Notes
("RANs") are issued by governments or governmental bodies with the
expectation that future revenues from a designated source will be used to
repay the notes. In general, they also constitute general obligations of
the issuer. A decline in the receipt of projected revenues, such as
anticipated revenues from another level of government, could adversely
affect an issuer's ability to meet its obligations on outstanding RANs. In
addition, the possibility that the revenues would, when received, be used
to meet other obligations could affect the ability of the issuer to pay
the principal and interest on RANs. |
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Tax Anticipation Notes
("TANs") are issued by state and local governments to finance the current
operations of such governments. Repayment is generally to be derived from
specific future tax revenues. TANs are usually general obligations of the
issuer. A weakness in an issuer's capacity to raise taxes due to, among
other things, a decline in its tax base or a rise in delinquencies, could
adversely affect the issuer's ability to meet its obligations on
outstanding TANs. |
Other
Municipal Obligations
Other kinds of Municipal Obligations
are occasionally available in the marketplace, and the fund may invest in such
other kinds of obligations to the extent consistent with its investment
objective and limitations. Such obligations may be issued for different purposes
and with different security than those mentioned.
Stand-By
Commitments
Each Fund may acquire stand-by
commitments with respect to municipal obligations held in its portfolios. Under
a stand-by commitment, a broker-dealer, dealer, or bank would agree to purchase,
at the Fund’s option, a specified municipal security at a specified price. Thus,
a stand-by commitment may be viewed as the equivalent of a put option acquired
by a fund with respect to a particular municipal security held in the Fund's
portfolio.
The amount payable to a Fund upon
its exercise of a stand-by commitment normally would be 1) the acquisition cost
of the municipal security (excluding any accrued interest that the fund paid on
the acquisition), less any amortized market premium or plus any amortized market
or original issue discount during the period the fund owned the security, plus,
2) all interest accrued on the security since the last interest payment date
during the period the security was owned by the fund. Absent unusual
circumstances, the fund would value the underlying municipal security at
amortized cost. As a result, the amount payable by the broker-dealer, dealer or
bank during the time a stand-by commitment is exercisable would be substantially
the same as the value of the underlying municipal obligation.
A Fund’s right to exercise a
stand-by commitment would be unconditional and unqualified. Although the Fund
could not transfer a stand-by commitment, it could sell the underlying municipal
security to a third party at any time. It is expected that stand-by commitments
generally will be available to the Fund without the payment of any direct or
indirect consideration. The Fund may, however, pay for stand-by commitments if
such action is deemed necessary. In any event, the total amount paid for
outstanding stand-by commitments held in the Fund's portfolio would not exceed
0.50% of the value of the Fund’s total assets calculated immediately after each
stand-by commitment is acquired.
Each Fund intends to enter into
stand-by commitments only with broker-dealers, dealers, or banks that those
managing the Fund's investments believe present minimum credit risks. A Fund’s
ability to exercise a stand-by commitment will depend upon the ability of the
issuing institution to pay for the underlying securities at the time the
stand-by commitment is exercised. The credit of each institution issuing a
stand-by commitment to a fund will be evaluated on an ongoing basis by those
managing the Fund's investments.
Each Fund intends to acquire
stand-by commitments solely to facilitate portfolio liquidity and does not
intend to exercise its right thereunder for trading purposes. The acquisition of
a stand-by commitment would not affect the valuation of the underlying municipal
security. Each stand-by commitment will be valued at zero in determining net
asset value. Should a Fund pay directly or indirectly for a stand-by commitment,
its costs will be reflected in realized gain or loss when the commitment is
exercised or expires. The maturity of a municipal security purchased by a Fund
will not be considered shortened by any stand-by commitment to which the
obligation is subject. Thus, stand-by commitments will not affect the
dollar-weighted average maturity of a Fund's portfolio.
Variable
and Floating Rate Obligations
Certain Municipal Obligations,
obligations issued or guaranteed by the U.S. Government or its agencies or
instrumentalities, and debt instruments issued by domestic banks or corporations
may carry variable or floating rates of interest. Such instruments bear interest
at rates which are not fixed, but which vary with changes in specified market
rates or indices, such as a bank prime rate or tax-exempt money market index.
Variable rate notes are adjusted to current interest rate levels at certain
specified times, such as every 30 days. A floating rate note adjusts
automatically whenever there is a change in its base interest rate adjustor,
e.g., a change in the prime lending rate or specified interest rate indices.
Typically, such instruments carry demand features permitting the fund to redeem
at par.
The fund's right to obtain payment
at par on a demand instrument upon demand could be affected by events occurring
between the date the fund elects to redeem the instrument and the date
redemption proceeds are due which affects the ability of the issuer to pay the
instrument at par value. Those managing the Fund's investments monitor on an
ongoing basis the pricing, quality, and liquidity of such instruments and
similarly monitor the ability of an issuer of a demand instrument, including
those supported by bank letters of credit or guarantees, to pay principal and
interest on demand. Although the ultimate maturity of such variable rate
obligations may exceed one year, the fund treats the maturity of each variable
rate demand obligation as the longer of a) the notice period required before the
fund is entitled to payment of the principal amount through demand or b) the
period remaining until the next interest rate adjustment. Floating rate
instruments with demand features are deemed to have a maturity equal to the
period remaining until the principal amount can be recovered through
demand.
Each Fund may purchase participation
interests in variable rate Municipal Obligations (such as industrial development
bonds). A participation interest gives the purchaser an undivided interest in
the Municipal Obligation in the proportion that its participation interest bears
to the total principal amount of the Municipal Obligation. Each Fund has the
right to demand payment on seven days' notice, for all or any part of the Fund's
participation interest in the Municipal Obligation, plus accrued interest. Each
participation interest is backed by an irrevocable letter of credit or guarantee
of a bank. Banks will retain a service and letter of credit fee and a fee for
issuing repurchase commitments in an amount equal to the excess of the interest
paid on the Municipal Obligations over the negotiated yield at which the
instruments were purchased by the Fund.
Risks of
Municipal Obligations
The yields on Municipal Obligations
are dependent on a variety of factors, including general economic and monetary
conditions, money market factors, conditions in the Municipal Obligations
market, size of a particular offering, maturity of the obligation, and rating of
the issue. Each Fund's ability to achieve its investment objective also depends
on the continuing ability of the issuers of the Municipal Obligations in which
it invests to meet its obligation for the payment of interest and principal when
due.
Municipal Obligations are subject to
the provisions of bankruptcy, insolvency, and other laws affecting the rights
and remedies of creditors, such as the Federal Bankruptcy Act. They are also
subject to federal or state laws, if any, which extend the time for payment of
principal or interest, or both, or impose other constraints upon enforcement of
such obligations or upon municipalities to levy taxes. The power or ability of
issuers to pay, when due, principal of and interest on Municipal Obligations may
also be materially affected by the results of litigation or other
conditions.
From time to time, proposals have
been introduced before Congress for the purpose of restricting or eliminating
the federal income tax exemption for interest on Municipal Obligations. It may
be expected that similar proposals will be introduced in the future. If such a
proposal was enacted, the ability of a Fund to pay "exempt interest" dividends
may be adversely affected. The Fund would reevaluate its investment objective
and policies and consider changes in its structure.
Pay-in-Kind
Securities
Each Fund may invest in pay-in-kind
securities. Pay-in-kind securities pay dividends or interest in the form of
additional securities of the issuer, rather than in cash. These securities are
usually issued and traded at a discount from their face amounts. The amount of
the discount varies depending on various factors, such as the time remaining
until maturity of the securities, prevailing interest rates, the liquidity of
the security and the perceived credit quality of the issuer. The market prices
of pay-in-kind securities generally are more volatile than the market prices of
securities that pay interest periodically and are likely to respond to changes
in interest rates to a greater degree than are other types of securities having
similar maturities and credit quality.
Portfolio
Turnover (Active Trading)
Portfolio turnover is a measure of
how frequently a portfolio's securities are bought and sold. The portfolio
turnover rate is generally calculated as the dollar value of the lesser of a
portfolio's purchases or sales of shares of securities during a given year,
divided by the monthly average value of the portfolio securities during that
year (excluding securities whose maturity or expiration at the time of
acquisition were less than one year). For example, a portfolio reporting a 100%
portfolio turnover rate would have purchased and sold securities worth as much
as the monthly average value of its portfolio securities during the
year.
It is not possible to predict future
turnover rates with accuracy. Many variable factors are outside the control of a
portfolio manager. The investment outlook for the securities in which a
portfolio may invest may change as a result of unexpected developments in
securities markets, economic or monetary policies, or political relationships.
High market volatility may result in a portfolio manager using a more active
trading strategy than might otherwise be employed. Each portfolio manager
considers the economic effects of portfolio turnover but generally does not
treat the portfolio turnover rate as a limiting factor in making investment
decisions.
Sale of shares by investors may
require the liquidation of portfolio securities to meet cash flow needs. In
addition, changes in a particular portfolio's holdings may be made whenever the
portfolio manager considers that a security is no longer appropriate for the
portfolio or that another security represents a relatively greater opportunity.
Such changes may be made without regard to the length of time that a security
has been held.
Higher portfolio turnover rates
generally increase transaction costs that are expenses of the Account. Active
trading may generate short-term gains (losses) for taxable
shareholders.
No Fund had a significant variation
in portfolio turnover rates over the two most recently completed fiscal
years.
Preferred
Securities
Preferred securities can include:
traditional preferred securities, hybrid-preferred securities, $25 par hybrid
preferred securities, baby bonds, U.S. dividend received deduction (“DRD”)
preferred stock, fixed rate and floating rate adjustable preferred securities,
step-up preferred securities, public and 144A $1000 par capital securities
including U.S. agency subordinated debt issues, trust originated preferred
securities, monthly income preferred securities, quarterly income bond
securities, quarterly income debt securities, quarterly income preferred
securities, corporate trust securities, public income notes, and other trust
preferred securities.
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Traditional Preferred
Securities. Traditional preferred securities may be issued by an entity
taxable as a corporation and pay fixed or floating rate dividends.
However, these claims are subordinated to more senior creditors, including
senior debt holders. “Preference” means that a company must pay dividends
on its preferred securities before paying any dividends on its common
stock, and the claims of preferred securities holders are ahead of common
stockholders’ claims on assets in a corporate liquidation. Holders of
preferred securities usually have no right to vote for corporate directors
or on other matters. Preferred securities share many investment
characteristics with both common stock and
bonds. |
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Hybrid or Trust Preferred
Securities. Hybrid-preferred securities are debt instruments that have
characteristics similar to those of traditional preferred securities
(characteristics of both subordinated debt and preferred stock). Hybrid
preferred securities may be issued by corporations, generally in the form
of interest-bearing instruments with preferred securities characteristics,
or by an affiliated trust or partnership of the corporation, generally in
the form of preferred interests in subordinated business trusts or
similarly structured securities. The hybrid-preferred securities market
consists of both fixed and adjustable coupon rate securities that are
either perpetual in nature or have stated maturity dates. Hybrid preferred
holders generally have claims to assets in a corporate liquidation that
are senior to those of traditional preferred securities but subordinate to
those of senior debt holders. Certain subordinated debt and senior debt
issues that have preferred characteristics are also considered to be part
of the broader preferred securities
market. |
Preferred securities may be issued
by trusts (likely one that is wholly-owned by a financial institution or other
corporate entity, typically a bank holding company) or other special purpose
entities established by operating companies, and are therefore not direct
obligations of operating companies. The financial institution creates the trust
and owns the trust’s common securities. The trust uses the sale proceeds of its
preferred securities to purchase, for example, subordinated debt issued by the
financial institution. The financial institution uses the proceeds from the
subordinated debt sale to increase its capital while the trust receives periodic
interest payments from the financial institution for holding the subordinated
debt. The trust uses the funds received to make dividend payments to the holders
of the trust preferred securities. The primary advantage of this structure may
be that the trust preferred securities are treated by the financial institution
as debt securities for tax purposes and as equity for the calculation of capital
requirements.
Trust preferred securities typically
bear a market rate coupon comparable to interest rates available on debt of a
similarly rated issuer. Typical characteristics include long-term maturities,
early redemption by the issuer, periodic fixed or variable interest payments,
and maturities at face value. Holders of trust preferred securities have limited
voting rights to control the activities of the trust and no voting rights with
respect to the financial institution. The market value of trust preferred
securities may be more volatile than those of conventional debt securities.
Trust preferred securities may be issued in reliance on Rule 144A under the 1933
Act and subject to restrictions on resale. There can be no assurance as to the
liquidity of trust preferred securities and the ability of holders, such as the
Funds, to sell its holdings. The condition of the financial institution can be
looked to identify the risks of trust preferred securities as the trust
typically has no business operations other than to issue the trust preferred
securities. If the financial institution defaults on interest payments to the
trust, the trust will not be able to make dividend payments to holders of its
securities, such as the Funds.
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Floating rate preferred
securities provide for a periodic adjustment in the interest rate paid on
the securities. The terms of such securities provide that interest rates
are adjusted periodically based upon an interest rate adjustment index.
The adjustment intervals may be regular, and range from daily up to
annually, or may be event-based, such as a change in the short-term
interest rate. Because of the interest rate reset feature, floating rate
securities provide a Fund with a certain degree of protection against
rising interest rates, although the interest rates of floating rate
securities will participate in any declines in interest rates as
well. |
If a portion of a Fund’s income
consists of dividends paid by U.S. corporations, a portion of the dividends paid
by the fund may be eligible for the corporate dividends-received deduction for
corporate shareholders. In addition, distributions reported by a Fund as derived
from qualified dividend income (“QDI”) will be taxed in the hands of individuals
at the reduced rates applicable to net capital gains, provided certain holding
period and other requirements are met by both the shareholder and the fund.
Dividend income that a Fund receives from REITs, if any, will generally not be
treated as QDI and will not qualify for the corporate dividends-received
deduction. It is unclear the extent to which distributions a Fund receives from
investments in certain preferred securities will be eligible for treatment as
QDI or for the corporate dividends-received deduction. The Funds cannot predict
at this time what portion, if any, of their dividends will qualify for the
corporate dividends-received deduction or be eligible for the reduced rates of
taxation applicable to QDI.
Real Estate
Investment Trusts (“REITs”)
REITs are pooled investment vehicles
that invest in income producing real estate, real estate related loans, or other
types of real estate interests. U.S. REITs are allowed to eliminate corporate
level federal tax so long as they meet certain requirements of the Internal
Revenue Code. Foreign REITs ("REIT-like") entities may have similar tax
treatment in their respective countries. Equity real estate investment trusts
own real estate properties, while mortgage real estate investment trusts make
and/or invests in construction, development, and long-term mortgage loans. Their
value may be affected by changes in the underlying property of the trusts, the
creditworthiness of the issuer, property taxes, interest rates, and tax and
regulatory requirements, such as those relating to the environment. Both types
of trusts are not diversified, are dependent upon management skill, are subject
to heavy cash flow dependency, defaults by borrowers, self-liquidation, and the
possibility of failing to qualify for tax-free status of income under the
Internal Revenue Code and failing to maintain exemption from the 1940 Act. In
addition, foreign REIT-like entities will be subject to foreign securities
risks. (See "Foreign Securities").
Repurchase and
Reverse Repurchase Agreements, Mortgage Dollar Rolls and
Sale-Buybacks
Each Fund may invest in repurchase
and reverse repurchase agreements. Repurchase agreements typically involve the
purchase of debt securities from a financial institution such as a bank, savings
and loan association, or broker-dealer. A repurchase agreement provides that the
fund sells back to the seller and that the seller repurchases the underlying
securities at a specified price on a specific date. Repurchase agreements may be
viewed as loans by a fund collateralized by the underlying securities. This
arrangement results in a fixed rate of return that is not subject to market
fluctuation while the fund holds the security. In the event of a default or
bankruptcy by a selling financial institution, the affected fund bears a risk of
loss. To minimize such risks, the fund enters into repurchase agreements only
with parties those managing the fund's investments deem creditworthy (those that
are large, well-capitalized, and well-established financial institutions). In
addition, the value of the securities collateralizing the repurchase agreement
is, and during the entire term of the repurchase agreement remains, at least
equal to the acquisition price the Funds pay to the seller of the securities.
In a repurchase agreement, the Fund
purchases a security and simultaneously commits to resell that security to the
seller at an agreed upon price on an agreed upon date within a number of days
(usually not more than seven) from the date of purchase. The resale price
consists of the purchase price plus an amount that is unrelated to the coupon
rate or maturity of the purchased security. A repurchase agreement involves the
obligation of the seller to pay the agreed upon price, which obligation is in
effect secured by the value (at least equal to the amount of the agreed upon
resale price and marked-to-market daily) of the underlying security or
"collateral." A risk associated with repurchase agreements is the failure of the
seller to repurchase the securities as agreed, which may cause the Fund to
suffer a loss if the market value of such securities declines before they can be
liquidated on the open market. In the event of bankruptcy or insolvency of the
seller, the Fund may encounter delays and incur costs in liquidating the
underlying security. Repurchase agreements that mature in more than seven days
are subject to the Fund's limit on illiquid investments. While it is not
possible to eliminate all risks from these transactions, it is the policy of the
Fund to limit repurchase agreements to those parties whose creditworthiness has
been reviewed and found satisfactory by those managing the Fund's
investments.
Each Fund may use reverse repurchase
agreements, mortgage dollar rolls, and economically similar transactions to
obtain cash to satisfy unusually heavy redemption requests or for other
temporary or emergency purposes without the necessity of selling portfolio
securities, or to earn additional income on portfolio securities, such as
Treasury bills or notes. In a reverse repurchase agreement, the Fund sells a
portfolio security to another party, such as a bank or broker-dealer, in return
for cash and agrees to repurchase the instrument at a particular price and time.
While a reverse repurchase agreement is outstanding, the Fund will maintain cash
or appropriate liquid assets to cover its obligation under the agreement. A Fund
will enter into reverse repurchase agreements only with parties that those
managing the Fund's investments deem creditworthy. Using reverse repurchase
agreements to earn additional income involves the risk that the interest earned
on the invested proceeds is less than the expense of the reverse repurchase
agreement transaction. This technique may also have a leveraging effect on a
Fund, although the Fund's intent to segregate assets in the amount of the
reverse repurchase obligation minimizes this effect.
A “mortgage dollar roll” is similar
to a reverse repurchase agreement in certain respects. In a “dollar roll”
transaction a Fund sells a mortgage-related security, such as a security issued
by the Government National Mortgage Association, to a dealer and simultaneously
agrees to repurchase a similar security (but not the same security) in the
future at a pre-determined price. A dollar roll can be viewed, like a reverse
repurchase agreement, as a collateralized borrowing in which the Fund pledges a
mortgage-related security to a dealer to obtain cash. Unlike in the case of
reverse repurchase agreements, the dealer with which the Fund enters into a
dollar roll transaction is not obligated to return the same securities as those
originally sold by the Fund, but only securities which are “substantially
identical.” To be considered “substantially identical,” the securities returned
to the Fund generally must: 1) be collateralized by the same types of underlying
mortgages; 2) be issued by the same agency and be part of the same program; 3)
have a similar original stated maturity; 4) have identical net coupon rates; 5)
have similar market yields (and therefore price); and 6) satisfy “good delivery”
requirements, meaning that the aggregate principal amounts of the securities
delivered and received back must be within 0.01% of the initial amount
delivered.
A Fund's obligations under a dollar
roll agreement must be covered by segregated liquid assets equal in value to the
securities subject to repurchase by the Fund.
Each Fund also may effect
simultaneous purchase and sale transactions that are known as “sale-buybacks.” A
sale-buyback is similar to a reverse repurchase agreement, except that in a
sale-buyback, the counterparty who purchases the security is entitled to receive
any principal or interest payments made on the underlying security pending
settlement of the Fund's repurchase of the underlying security. A Fund's
obligations under a sale-buyback typically would be segregated by liquid assets
equal in value to the amount of the Fund's forward commitment to repurchase the
subject security.
Restricted and
Illiquid Securities
A fund may experience difficulty in
valuing and selling illiquid securities and, in some cases, may be unable to
value or sell certain illiquid securities for an indefinite period of time.
Illiquid securities may include a wide variety of investments, such as (1)
repurchase agreements maturing in more than seven days (unless the agreements
have demand/redemption features), (2) OTC options contracts and certain other
derivatives (including certain swap agreements), (3) fixed time deposits that
are not subject to prepayment or do not provide for withdrawal penalties upon
prepayment (other than overnight deposits), (4) loan interests and other direct
debt instruments, (5) certain municipal lease obligations, (6) commercial paper
issued pursuant to Section 4(2) of the 1933 Act, (7) thinly-traded securities,
and (8) securities whose resale is restricted under the federal securities laws
or contractual provisions (including restricted, privately placed securities
that, under the federal securities laws, generally may be resold only to
qualified institutional buyers). Generally, restricted securities may be sold
only in a public offering for which a registration statement has been filed and
declared effective or in a transaction that is exempt from the registration
requirements of the Securities Act of 1933. When registration is required, a
fund that owns restricted securities may be obligated to pay all or part of the
registration expenses and a considerable period may elapse between the time of
the decision to sell and the time the Fund may be permitted to sell a restricted
security. If adverse market conditions were to develop during such a period, the
fund might obtain a less favorable price than existed when it decided to
sell.
Illiquid and restricted securities
are priced at fair value as determined in good faith by or under the direction
of the Trustees. Each Fund has adopted investment restrictions that limit its
investments in illiquid securities to no more than 15% of its net assets. The
Trustees have adopted procedures to determine the liquidity of Rule 4(2)
short-term paper and of restricted securities that may be resold under Rule
144A. Securities determined to be liquid under these procedures are excluded
from the preceding investment restriction.
Securitized
Products (Mortgage- and Asset-Backed Securities)
The yield characteristics of the
mortgage- and asset-backed securities in which a Fund may invest differ from
those of traditional debt securities. Among the major differences are that the
interest and principal payments are made more frequently on mortgage- and
asset-backed securities (usually monthly) and that principal may be prepaid at
any time because the underlying mortgage loans or other assets generally may be
prepaid at any time. As a result, if a Fund purchases those securities at a
premium, a prepayment rate that is faster than expected will reduce their yield,
while a prepayment rate that is slower than expected will have the opposite
effect of increasing yield. If a Fund purchases these securities at a discount,
faster than expected prepayments will increase their yield, while slower than
expected prepayments will reduce their yield. Amounts available for reinvestment
by a Fund are likely to be greater during a period of declining interest rates
and, as a result, are likely to be reinvested at lower interest rates than
during a period of rising interest rates.
In general, the prepayment rate for
mortgage-backed securities decreases as interest rates rise and increases as
interest rates fall. However, rising interest rates will tend to decrease the
value of these securities. In addition, an increase in interest rates may affect
the volatility of these securities by effectively changing a security that was
considered a short-term security at the time of purchase into a long-term
security. Long-term securities generally fluctuate more widely in response to
changes in interest rates than short- or medium-term securities.
The market for privately issued
mortgage- and asset-backed securities is smaller and less liquid than the market
for U.S. government mortgage-backed securities. A collateralized mortgage
obligation (“CMO”) may be structured in a manner that provides a wide variety of
investment characteristics (yield, effective maturity, and interest rate
sensitivity). As market conditions change, and especially during periods of
rapid market interest rate changes, the ability of a CMO to provide the
anticipated investment characteristics may be greatly diminished. Increased
market volatility and/or reduced liquidity may result.
Each Fund may invest in each of
collateralized bond obligations (“CBOs”), collateralized loan obligations
(“CLOs”), other collateralized debt obligations (“CDOs”) and other similarly
structured securities. CBOs, CLOs and other CDOs are types of asset-backed
securities. A CBO is a trust which is often backed by a diversified pool of high
risk, below investment grade fixed income securities. The collateral can be from
many different types of fixed income securities such as high yield debt,
residential privately issued mortgage-related securities, commercial privately
issued mortgage-related securities, trust preferred securities and emerging
market debt. A CLO is a trust typically collateralized by a pool of loans, which
may include, among others, domestic and foreign senior secured loans, senior
unsecured loans, and subordinate corporate loans, including loans that may be
rated below investment grade or equivalent unrated loans. Other CDOs are trusts
backed by other types of assets representing obligations of various parties.
CBOs, CLOs and other CDOs may charge management fees and administrative
expenses.
Short
Sales
A short sale involves the sale by a
fund of a security that it does not own with the expectation of covering
settlement by purchasing the same security at a later date at a lower price. A
fund may also enter into a short position by using a derivative instrument, such
as a future, forward, or swap agreement. If the price of the security or
derivative increases prior to the time the fund is required to replace the
borrowed security, then the fund will incur a loss equal to the increase in
price from the time that the short sale was entered into plus any premiums and
interest paid to the broker. Therefore, short sales involve the risk that losses
may be exaggerated, potentially losing more money than the value of the
investment.
A “short sale against the box” is a
technique that involves selling either a security owned by a fund, or a security
equivalent in kind and amount to the security sold short that the fund has the
right to obtain, at no additional cost, for delivery at a specified date in the
future. Each Fund may enter into a short sale against the box to hedge against
anticipated declines in the market price of portfolio securities. If the value
of the securities sold short against the box increases prior to the scheduled
delivery date, a fund will lose money.
Supranational
Entities
Each Fund may invest in obligations
of supranational entities. A supranational entity is an entity designated or
supported by national governments to promote economic reconstruction,
development or trade amongst nations. Examples of supranational entities include
the International Bank for Reconstruction and Development (also known as the
World Bank) and the European Investment Bank. Obligations of supranational
entities are subject to the risk that the governments on whose support the
entity depends for its financial backing or repayment may be unable or unwilling
to provide that support. Obligations of a supranational entity that are
denominated in foreign currencies will also be subject to the risks associated
with investments in foreign currencies.
Temporary
Defensive Measures/Money Market Instruments
Each Fund may make money market
investments (cash equivalents), without limit, pending other investment or
settlement, for liquidity, or in adverse market conditions. Following are
descriptions of the types of money market instruments that each Fund may
purchase:
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U.S. Government Securities -
Securities issued or guaranteed by the U.S. government, including treasury
bills, notes, and bonds. |
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• |
U.S. Government Agency
Securities - Obligations issued or guaranteed by agencies or
instrumentalities of the U.S. government. |
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U.S. agency obligations
include, but are not limited to, the Bank for Cooperatives, Federal Home
Loan Banks, and Federal Intermediate Credit
Banks. |
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U.S. instrumentality
obligations include, but are not limited to, the Export-Import Bank,
Federal Home Loan Mortgage Corporation, and Federal National Mortgage
Association. |
Some obligations issued or
guaranteed by U.S. government agencies and instrumentalities are supported by
the full faith and credit of the U.S. Treasury. Others, such as those issued by
the Federal National Mortgage Association, are supported by discretionary
authority of the U.S. government to purchase certain obligations of the agency
or instrumentality. Still others, such as those issued by the Student Loan
Marketing Association, are supported only by the credit of the agency or
instrumentality.
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• |
Bank Obligations -
Certificates of deposit, time deposits and bankers' acceptances of U.S.
commercial banks having total assets of at least one billion dollars and
overseas branches of U.S. commercial banks and foreign banks, which in the
opinion of those managing the Fund's investments, are of comparable
quality. A Fund may acquire obligations of U.S. banks that are not members
of the Federal Reserve System or of the Federal Deposit Insurance
Corporation. |
Certificates of deposit are
negotiable certificates issued against funds deposited in a commercial bank for
a definite period of time and earning a specified return. Bankers’ acceptances
are negotiable drafts or bills of exchange, normally drawn by an importer or
exporter to pay for specific merchandise, which are “accepted” by a bank,
meaning, in effect, that the bank unconditionally agrees to pay the face value
of the instrument on maturity. Fixed time deposits are bank obligations payable
at a stated maturity date and bearing interest at a fixed rate. Fixed time
deposits may be withdrawn on demand by the investor, but may be subject to early
withdrawal penalties which vary depending upon market conditions and the
remaining maturity of the obligation. There are no contractual restrictions on
the right to transfer a beneficial interest in a fixed time deposit to a third
party, although there is no market for such deposits.
Obligations of foreign banks and
obligations of overseas branches of U.S. banks are subject to somewhat different
regulations and risks than those of U.S. domestic banks. For example, an issuing
bank may be able to maintain that the liability for an investment is solely that
of the overseas branch which could expose a Fund to a greater risk of loss. In
addition, obligations of foreign banks or of overseas branches of U.S. banks may
be affected by governmental action in the country of domicile of the branch or
parent bank. Examples of adverse foreign governmental actions include the
imposition of currency controls, the imposition of withholding taxes on interest
income payable on such obligations, interest limitations, seizure or
nationalization of assets, or the declaration of a moratorium. Deposits in
foreign banks or foreign branches of U.S. banks are not covered by the Federal
Deposit Insurance Corporation and that the selection of those obligations may be
more difficult because there may be less publicly available information
concerning foreign banks or the accounting, auditing and financial reporting
standards, practices and requirements applicable to foreign banks may differ
from those applicable to United States banks. Foreign banks are not generally
subject to examination by any United States Government agency or
instrumentality. The Funds only buy short-term instruments where the risks of
adverse governmental action are believed by those managing the Fund's
investments to be minimal. The Funds consider these factors, along with other
appropriate factors, in making an investment decision to acquire such
obligations. A Fund only acquires those which, in the opinion of management, are
of an investment quality comparable to other debt securities bought by the
Fund.
A certificate of deposit is issued
against funds deposited in a bank or savings and loan association for a definite
period of time, at a specified rate of return. Normally they are negotiable.
However, a Fund occasionally may invest in certificates of deposit which are not
negotiable. Such certificates may provide for interest penalties in the event of
withdrawal prior to their maturity. A bankers' acceptance is a short-term credit
instrument issued by corporations to finance the import, export, transfer, or
storage of goods. They are termed "accepted" when a bank guarantees their
payment at maturity and reflect the obligation of both the bank and drawer to
pay the face amount of the instrument at maturity.
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• |
Commercial Paper - Short-term
promissory notes issued by U.S. or foreign
corporations. |
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• |
Short-term Corporate Debt -
Corporate notes, bonds, and debentures that at the time of purchase have
397 days or less remaining to maturity, with certain exceptions permitted
by applicable regulations. |
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• |
Repurchase Agreements -
Instruments under which securities are purchased from a bank or securities
dealer with an agreement by the seller to repurchase the securities at the
same price plus interest at a specified
rate. |
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• |
Taxable Municipal Obligations
- Short-term obligations issued or guaranteed by state and municipal
issuers which generate taxable income. |
LEADERSHIP
STRUCTURE AND BOARD
PETF's Board has overall
responsibility for directing PETF's operations in accordance with the provisions
of the 1940 Act, other applicable laws and PETF’s charter. Each Board Member
serves on the Boards of the following investment companies sponsored by
Principal Life Insurance Company: Principal Funds, Inc. ("PFI"), Principal
Variable Contracts Funds, Inc. (“PVC”), Principal Exchange-Traded Funds
("PETF"), and Principal Diversified Select Real Asset Fund ("PDSRA"), which are
collectively referred to in this SAI as the "Fund Complex." The Board elects
officers to supervise the day-to-day operations of the Fund Complex. Officers
serve at the pleasure of the Board, and each officer has the same position with
each investment company in the Fund Complex.
Board Members that are affiliated
persons of PGI, the principal distributor, or the principal underwriter of the
Fund Complex are considered “interested persons” of the Fund (as defined in the
1940 Act) and are referred to in this SAI as "Interested Board Members." Board
Members who are not Interested Board Members are referred to as "Independent
Board Members."
The Board meets in regularly
scheduled meetings eight times throughout the year. Board meetings may occur
in-person or by telephone. In addition, the Board holds special in-person or
telephonic meetings or informal conference calls to discuss specific matters
that may arise or require action between regular meetings. Independent Board
Members also meet annually to consider renewal of advisory
contracts.
The Chairman of the Board is an
interested person of the Fund Complex. The Independent Board Members have
appointed a lead Independent Board Member whose role is to review and approve,
with the Chairman, each Board meeting's agenda and to facilitate communication
between and among the Independent Board Members, management, and the full Board.
The Board's leadership structure is appropriate for the Fund Complex given its
characteristics and circumstances, including the number of portfolios, variety
of asset classes, net assets, and distribution arrangements. The appropriateness
of this structure is enhanced by the establishment and allocation of
responsibilities among the following Committees, which report their activities
to the Board on a regular basis.
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Committee
and Independent Board Members |
Primary
Purpose and Responsibilities |
Meetings
Held During the Last Fiscal Year |
15(c)
Committee
Craig Damos
Mark Grimmett
Fritz Hirsch
Tao Huang |
The Committee’s primary purpose
is to assist the Board in performing the annual review of the Fund’s
advisory and sub-advisory agreements pursuant to Section 15(c) of the 1940
Act. The Committee is responsible for requesting and reviewing related
materials. |
6 |
Audit
Committee
Leroy Barnes
Mark Grimmett
Elizabeth
Nickels |
The Committee's primary purpose
is to assist the Board by serving as an independent and objective party to
monitor the Fund Complex's accounting policies, financial reporting and
internal control system, as well as the work of the independent registered
public accountants. The Audit Committee assists Board oversight of 1) the
integrity of the Fund Complex's financial statements; 2) the Fund
Complex's compliance with certain legal and regulatory requirements; 3)
the independent registered public accountants' qualifications and
independence; and 4) the performance of the Fund Complex's independent
registered public accountants. The Audit Committee also provides an open
avenue of communication among the independent registered public
accountants, PGI's internal auditors, Fund Complex management, and the
Board. |
7 |
Executive
Committee
Craig Damos
Timothy M. Dunbar
Mark Grimmett |
The Committee's primary purpose
is to exercise certain powers of the Board when the Board is not in
session. When the Board is not in session, the Committee may exercise all
powers of the Board in the management of the Fund Complex's business
except the power to 1) issue stock, except as permitted by law; 2)
recommend to the stockholders any action which requires stockholder
approval; 3) amend the bylaws; or 4) approve any merger or share exchange
which does not require stockholder approval. |
none |
Nominating
and Governance
Committee
Elizabeth
Ballantine
Leroy Barnes
Craig Damos
Fritz Hirsch |
The Committee's primary purpose
is to oversee the structure and efficiency of the Board and the
committees. The Committee is responsible for evaluating Board
membership and functions, committee membership and functions, insurance
coverage, and legal matters. The Committee's nominating functions include
selecting and nominating Independent Board Member candidates for election
to the Board. Generally, the Committee requests nominee suggestions
from Committee members and management. In addition, the Committee
considers candidates recommended by shareholders of the Fund Complex.
Recommendations should be submitted in writing to Principal Funds, Inc.,
711 High Street, Des Moines, IA 50392. When evaluating a potential
nominee for Independent Board Member, the Committee generally considers,
among other factors: age; education; relevant business experience;
geographical factors; whether the person is "independent" and otherwise
qualified under applicable laws and regulations to serve as an Independent
Board Member; and whether the person is willing to serve, and willing and
able to commit the time necessary to attend meetings and perform the
duties of an Independent Board Member. The Committee meets personally
with nominees and conducts a reference check. The final decision is based
on a combination of factors, including the strengths and the experience an
individual may bring to the Board. The Committee believes the Board
generally benefits from diversity of background, experience and views
among its members, and considers these factors in evaluating the Board's
composition. The Board does not regularly use the services of
professional search firms to identify or evaluate potential candidates or
nominees. |
4 |
Operations
Committee
Fritz Hirsch
Tao Huang
Karrie McMillan
Meg VanDeWeghe |
The Committee's primary purpose
is to review and oversee the provision of administrative and distribution
services to the Fund Complex, communications with the Fund Complex's
shareholders, and the Fund Complex's operations. |
4 |
Risk oversight forms part of the
Board's general oversight of the Fund Complex. The Board has appointed a Chief
Compliance Officer who oversees the implementation and testing of the Fund's
compliance program and reports to the Board regarding compliance matters for the
Fund and its principal service providers. As part of its regular risk oversight
functions, the Board, directly or through a Committee, interacts with and
reviews reports from, among others: Fund Complex management, sub-advisors, the
Chief Compliance Officer, independent registered public accounting firm, and
internal auditors for PGI or its affiliates, as appropriate. The Board, with the
assistance of Fund management and PGI, reviews investment policies and risks in
connection with its review of Fund Complex performance. In addition, as part of
the Board's periodic review of advisory, sub-advisory and other service provider
agreements, the Board may consider risk management aspects of their operations
and the functions for which they are responsible. With respect to valuation, the
Board oversees a PGI valuation committee and has approved and periodically
reviews valuation policies applicable to valuing Fund shares.
Each Board Member has significant
prior senior management and/or board experience. Board Members are selected and
retained based upon their skills, experience, judgment, analytical ability,
diligence and ability to work effectively with other Board members, a commitment
to the interests of shareholders and, for each Independent Board Member, a
demonstrated willingness to take an independent and questioning view of
management. In addition to these general qualifications, the Board seeks members
who build upon the Board's diversity. Below is a brief discussion of the
specific education, experience, qualifications, or skills that led to the
conclusion that each person identified below should serve as a Board Member. As
required by rules adopted under the 1940 Act, the Independent Board Members
select and nominate all candidates for Independent Board Member
positions.
Independent
Board Members
Elizabeth
Ballantine. Ms.
Ballantine has served as an Independent Board Member of the Fund Complex since
2004. Through her professional training, experience as an attorney, and
experience as a board member and investment consultant, Ms. Ballantine is
experienced in financial, investment and regulatory matters.
Leroy T. Barnes,
Jr. Mr. Barnes has
served as an Independent Board Member of the Fund Complex since 2012. From
2001-2005, Mr. Barnes served as Vice President and Treasurer of PG&E
Corporation. From 1997-2001, Mr. Barnes served as Vice President and Treasurer
of Gap, Inc. Through his education, employment experience, and experience as a
board member, Mr. Barnes is experienced with financial, accounting, regulatory
and investment matters.
Craig
Damos. Mr. Damos has
served as an Independent Board Member of the Fund Complex since 2008. Since
2011, Mr. Damos has served as the President of The Damos Company (consulting
services). Mr. Damos served as President and Chief Executive Officer of Weitz
Company from 2006-2010; Vertical Growth Officer of Weitz Company from 2004-2006;
and Chief Financial Officer of Weitz Company from 2000-2004. From 2005-2008, Mr.
Damos served as a director of West Bank. Through his education, employment
experience, and experience as a board member, Mr. Damos is experienced with
financial, accounting, regulatory and investment matters.
Mark A.
Grimmett. Mr. Grimmett
has served as an Independent Board Member of the Fund Complex since 2004. He is
a Certified Public Accountant. From 1996-2015, Mr. Grimmett served as the Chief
Financial Officer for Merle Norman Cosmetics, Inc. Through his education,
employment experience, and experience as a board member, Mr. Grimmett is
experienced with financial, accounting, regulatory and investment
matters.
Fritz S.
Hirsch. Mr. Hirsch has
served as an Independent Board Member of the Fund Complex since 2005. From
2011-2015, Mr. Hirsch served as CEO of MAM USA. He served as President and Chief
Executive Officer of Sassy, Inc. from 1986-2009, and Chief Financial Officer of
Sassy, Inc. from 1983-1985. Through his education, employment experience, and
experience as a board member, Mr. Hirsch is experienced with financial,
accounting, regulatory and investment matters.
Tao
Huang. Mr. Huang has
served as an Independent Board Member of the Fund Complex since 2012. Mr. Huang
served as Chief Operating Officer of Morningstar from 2000-2011; as President of
the International Division of Morningstar from 1998-2000; and as Chief
Technology Officer of Morningstar, Inc. from 1996-2000. Through his education,
employment experience, and experience as a board member, Mr. Huang is
experienced with technology, financial, regulatory and investment matters.
Karen
(“Karrie”) McMillan. Ms. McMillan has
served as an Independent Board Member of the Fund Complex since 2014. From
2007-2014, Ms. McMillan served as general counsel to the Investment Company
Institute. Prior to that (from 1999-2007), she worked as an attorney in private
practice, specializing in the mutual fund industry. From 1991-1999, she served
in various roles as counsel at the Securities and Exchange Commission, Division
of Investment Management, including as Assistant Chief Counsel. Through her
professional education, experience as an attorney, and experience as a board
member, Ms. McMillan is experienced in financial, investment and regulatory
matters.
Elizabeth A.
Nickels. Ms. Nickels
has served as an Independent Board Member of the Fund Complex since 2015. Ms.
Nickels currently serves as a director of SpartanNash. From 2008 to 2017, she
served as a director of the not-for-profit Spectrum Health System; from 2014 to
2016, she served as a director of Charlotte Russe; from 2014 to 2015, she served
as a director of Follet Corporation; and from 2013 to 2015, she served as a
director of PetSmart. Ms. Nickels was formerly employed by Herman Miller, Inc.
in several capacities: from 2012 to 2014, as the Executive Director of the
Herman Miller Foundation; from 2007 to 2012, as President of Herman Miller
Healthcare; and from 2000 to 2007, as Chief Financial Officer. Through her
education, employment experience, and experience as a board member, Ms. Nickels
is experienced with financial, accounting and regulatory matters.
Mary
M. (“Meg”) VanDeWeghe. Ms. VanDeWeghe has served as an
Independent Board Member of the Fund Complex since 2018. She is CEO and
President of Forte Consulting, Inc., a management and financial consulting firm,
and was previously employed as a Finance Professor at Georgetown University from
2009-2016, Senior Vice President - Finance at Lockheed Martin Corporation from
2006-2009, a Finance Professor at the University of Maryland from 1996-2006, and
in various positions at J.P. Morgan from 1983-1996. Ms. VanDeWeghe served as a
director of Brown Advisory from 2003-2018, B/E Aerospace from 2014-2017, WP
Carey from 2014-2017, and Nalco (and its successor Ecolab) from 2009-2014.
Through her education, employment experience, and experience as a board member,
Ms. VanDeWeghe is experienced with financial, investment and regulatory
matters.
Interested
Board Members
Timothy M.
Dunbar. Mr. Dunbar has
served as Chair and Board Member of the Fund Complex since 2019. Mr. Dunbar
serves as President of Global Asset Management for Principal®, overseeing all of Principal’s
asset management capabilities, including with respect to PGI, PLIC, and PFSI,
among others. He also serves on numerous boards of directors of
Principal® subsidiaries, including PGI and
Post. He has served in various other positions since joining
Principal® in 1986. Through his education and
employment experience, Mr. Dunbar is experienced with financial, accounting,
regulatory and investment matters.
Patrick G.
Halter. Mr. Halter has
served as a Board Member of the Fund Complex since 2017. Mr. Halter also serves
as Chief Operating Officer and director of PGI, and Chief Executive Officer and
Chair of Principal Real Estate Investors ("Principal - REI"). He has served in
various other positions since joining Principal® in 1984. Through his education
and employment experience, Mr. Halter is experienced with financial, accounting,
regulatory and investment matters.
Additional
Information Regarding Board Members and Officers
The following tables present
additional information regarding the Board Members and Fund Complex officers,
including their principal occupations which, unless specific dates are shown,
are of more than five years duration. For each Board Member, the tables also
include information concerning other directorships held in reporting companies
under the Securities Exchange Act of 1934 or registered investment companies
under the 1940 Act.
|
|
|
|
|
|
INDEPENDENT
BOARD MEMBERS |
Name,
Address,
and Year of
Birth |
Board
Positions Held with Fund Complex |
Principal
Occupation(s)
During Past
5 Years |
Number of
Portfolios Overseen in Fund Complex |
Other
Directorships
Held During
Past 5 Years |
|
|
|
|
|
Elizabeth
Ballantine
711 High Street
Des Moines, IA
50392
1948 |
Director, PFI and PVC (since
2004) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
Principal, EBA
Associates
(consulting and
investments) |
128 |
Durango Herald,
Inc.;
McClatchy Newspapers,
Inc. |
|
|
|
|
|
Leroy T. Barnes,
Jr.
711 High Street
Des Moines, IA
50392
1951 |
Director, PFI and PVC (since
2012) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
Retired
|
128 |
McClatchy Newspapers, Inc.;
Frontier Communications, Inc.; formerly, Herbalife Ltd. |
|
|
|
|
|
Craig Damos
711 High Street
Des Moines, IA
50392
1954 |
Lead Independent Board
Member
(since 2020)
Director, PFI and PVC (since
2008) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
President, C.P. Damos
Consulting LLC |
128 |
None |
|
|
|
|
|
Mark A. Grimmett
711 High Street
Des Moines, IA
50392
1960 |
Director, PFI and PVC (since
2004) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
Formerly, Executive Vice
President and CFO, Merle Norman Cosmetics, Inc. (cosmetics
manufacturing) |
128 |
None |
|
|
|
|
|
Fritz S. Hirsch
711 High Street
Des Moines, IA
50392
1951 |
Director, PFI and PVC (since
2005) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019)
|
Formerly, CEO, MAM USA
(manufacturer of infant and juvenile products) |
128 |
MAM USA |
|
|
|
|
|
Tao Huang
711 High Street
Des Moines, IA
50392
1962 |
Director, PFI and PVC (since
2012) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
Retired |
128 |
Armstrong World Industries,
Inc. (manufacturing) and Equity Lifestyle Properties,
Inc. |
|
|
|
|
|
Karen (“Karrie”)
McMillan
711 High Street
Des Moines, IA
50392
1961 |
Director, PFI and PVC (since
2014) Trustee, PETF (since 2014)
Trustee, PDSRA (since
2019) |
Managing Director, Patomak
Global Partners, LLC (financial services consulting) |
128 |
None |
|
|
|
|
|
Elizabeth A.
Nickels
711 High Street
Des Moines, IA
50392
1962 |
Director, PFI and PVC (since
2015) Trustee, PETF (since 2015)
Trustee, PDSRA (since
2019) |
Retired |
128 |
SpartanNash; Formerly:
Charlotte Russe; Follet Corporation; PetSmart; Spectrum Health
System |
|
|
|
|
|
Mary M. (“Meg”) VanDeWeghe
711 High Street
Des Moines, IA
50392
1959 |
Director, PFI and PVC (since
2018) Trustee, PETF (since 2018)
Trustee, PDSRA (since
2019) |
CEO and President, Forte
Consulting, Inc. (financial and management consulting) |
128 |
Denbury Resources Inc. and
Helmerich & Payne;
Formerly: Brown Advisory;
B/E Aerospace; WP Carey; Nalco
(and its successor Ecolab) |
|
|
|
|
|
|
INTERESTED
BOARD MEMBERS |
Name,
Address,
and Year of
Birth |
Board
Positions Held with Fund Complex |
Positions
with PGI and its affiliates;
Principal
Occupation(s)
During Past
5 Years**
(unless
noted otherwise) |
Number
of
Portfolios
Overseen
in
Fund
Complex |
Other
Directorships
Held During
Past 5 Years |
Timothy M. Dunbar
711 High Street
Des Moines, IA
50392
1957 |
Chair (since 2019)
Director, PFI and PVC (since
2019) Trustee, PETF (since 2019) Trustee, PDSRA (since
2019) |
Director, PGI (since
2018)
President-PGAM, PGI, PLIC,
PFSI, and PFG
(since 2018)
Chair/Executive Vice President,
RobustWealth,
Inc. (since 2018)
Director, Post (since
2018)
Executive Vice President/Chief
Investment
Officer, PLIC, PFSI, and PFG
(2014-2018) |
128 |
None |
|
|
|
|
|
Patrick G. Halter
711 High Street Des Moines,
IA 50392 1959 |
Director, PFI and PVC (since
2017) Trustee, PETF (since 2017) Trustee, PDSRA (since
2019) |
Chief Executive Officer and
President, PGI (since 2018)
Chief Operating Officer, PGI
(2017-2018)
Chair, PGI (since
2018)
Director, PGI (2003-2018)
Director, Finisterre (since
2018)
Director, Origin (since
2018)
Chair, Post (since 2017)
Chief Executive Officer,
Principal - REI
(since 2005)
Chair, Principal - REI (since
2004)
Chair, Spectrum (since
2017)
Director, CCIP (since
2017) |
128 |
None |
|
|
|
|
FUND COMPLEX
OFFICERS |
Name,
Address
and Year of
Birth |
Position(s)
Held
with Fund
Complex |
Positions
with PGI and its Affiliates;
Principal
Occupations During Past 5 Years** |
Randy L. Bergstrom
711 High Street
Des Moines, IA 50392
1955 |
Assistant Tax
Counsel
(since 2005) |
Counsel, PGI
Counsel,
PLIC |
|
|
|
Kamal Bhatia
711 High Street
Des Moines, IA
50392
1972 |
President and Chief Executive
Officer
(since 2019) |
President - Principal Funds,
PFG, PFSI, PLIC (since 2019)
Principal Executive Officer, OC
Private Capital (2017-2019)
Senior Vice President,
Oppenheimer Funds (2011-2019) |
|
|
|
Tracy W. Bollin
711 High Street
Des Moines, IA
50392
1970 |
Chief Financial Officer (since
2014)
|
Managing Director, PGI (since
2016)
Senior Vice President, PFD
(since 2015)
Chief Financial Officer, PFD
(2010-2016)
Chief Operating Officer and
Senior Vice President, PMC (2015-2017)
Director, PMC (2014-2017)
President, PSS (since 2015)
|
|
|
|
Gina L. Graham
711 High Street
Des Moines, IA
50392
1965 |
Treasurer (since
2016) |
Vice President/Treasurer, PGI
(since 2016)
Vice President/Treasurer, PFA
(since 2016)
Vice President/Treasurer, PFD
(since 2016)
Vice President/Treasurer, PLIC
(since 2016)
Vice President/Treasurer, PMC
(2016-2017)
Vice President/Treasurer,
Principal - REI (since 2016)
Vice President/Treasurer, PSI
(since 2016)
Vice President/Treasurer, PSS
(since 2016) |
|
|
|
Laura B. Latham
711 High Street
Des Moines, IA 50392
1986 |
Assistant Counsel and Assistant
Secretary (since 2018) |
Counsel, PGI (since 2018)
Prior thereto, Attorney in
Private Practice |
|
|
|
Diane K. Nelson
711 High Street
Des Moines, IA
50392
1965 |
AML Officer (since
2016) |
Chief Compliance Officer/AML
Officer, PSS (since 2015) |
|
|
|
Sara L. Reece
711 High Street
Des Moines, IA
50392
1975 |
Vice President and Controller
(since 2016) |
Director - Accounting, PLIC
(since 2015) |
|
|
|
|
|
|
|
FUND COMPLEX
OFFICERS |
Name,
Address
and Year of
Birth |
Position(s)
Held
with Fund
Complex |
Positions
with PGI and its Affiliates;
Principal
Occupations During Past 5 Years** |
Teri R. Root
711 High Street
Des Moines, IA
50392
1979 |
Chief Compliance Officer (since
2018)
Interim Chief Compliance
Officer (2018)
Deputy Chief Compliance Officer
(2015-2018) |
Chief Compliance Officer -
Funds, PGI (since 2018)
Deputy Chief Compliance
Officer, PGI (since 2017)
Vice President and Chief
Compliance Officer, PMC (2015-2017)
Vice President, PSS (since
2015) |
|
|
|
Britney L.
Schnathorst
711 High Street
Des Moines, IA
50392
1981 |
Assistant Secretary (since
2017)
Assistant Counsel (since
2014) |
Counsel, PLIC (since
2013) |
|
|
|
Adam U. Shaikh
711 High Street
Des Moines, IA 50392
1972 |
Assistant Counsel (since
2006) |
Assistant General Counsel, PGI
(since 2018)
Counsel, PGI
(2017-2018)
Counsel, PLIC (since
2006)
Counsel, PMC
(2007-2017) |
|
|
|
John L. Sullivan
711 High Street
Des Moines, IA
50392
1970 |
Assistant Counsel and Assistant
Secretary
(since 2019) |
Counsel, PGI (since
2019)
Prior thereto, Attorney in
Private Practice |
|
|
|
Dan L. Westholm
711 High Street
Des Moines, IA 50392
1966 |
Assistant Treasurer (since
2006) |
Assistant Vice
President/Treasurer, PGI (since 2017)
Assistant Vice
President/Treasury, PFA (since 2013)
Assistant Vice
President/Treasury, PFD (since 2013)
Assistant Vice
President/Treasury, PLIC (since 2014)
Assistant Vice
President/Treasury, PMC (2013-2017)
Assistant Vice
President/Treasury, PSI (since 2013)
Assistant Vice
President/Treasury, PSS (since 2013) |
|
|
|
Beth C. Wilson
711 High Street
Des Moines, IA 50392
1956 |
Vice President and Secretary
(since 2007) |
Director and Secretary-Funds,
PLIC |
|
|
|
Clint L. Woods
711 High Street
Des Moines, IA
50392
1961 |
Counsel, Vice President, and
Assistant Secretary (since 2018)
Of Counsel
(2017-2018)
Vice President
(2016-2017)
Counsel
(2015-2017) |
Vice President (since
2015)
Associate General Counsel,
Governance Officer, and Assistant Corporate Secretary, PLIC (since
2013) |
|
|
|
Jared A. Yepsen
711 High Street
Des Moines, IA
50392
1981 |
Assistant Tax Counsel (since
2017) |
Counsel, PGI (since
2017)
Counsel, PLIC (since
2015) |
|
|
|
Abbreviations
used: |
|
|
|
CCIP, LLC
(CCIP) |
Principal Global Investors, LLC
(PGI) |
Finisterre Capital LLP
(Finisterre) |
Principal Life Insurance
Company (PLIC) |
Origin Asset Management LLP
(Origin) |
Principal Management
Corporation (PMC), now PGI |
Post Advisory Group, LLC
(Post) |
Principal Real Estate
Investors, LLC (Principal - REI) |
Principal Financial Advisors,
Inc. (PFA) |
Principal Securities, Inc.
(PSI) |
Principal Financial Services,
Inc. (PFSI) |
Principal Shareholder Services,
Inc. (PSS) |
Principal Funds Distributor,
Inc. (PFD) |
Spectrum Asset Management, Inc.
(Spectrum) |
Principal Global Asset
Management (PGAM) |
|
Board Member
Ownership of Securities
The following tables set forth the
dollar range of the equity securities of Funds included in this SAI, and
aggregate dollar range of the equity securities of the funds in the Fund
Complex, that were beneficially owned by the Board Members as of December 31,
2018. As of that date, Board Members did not own shares of the Funds included in
this SAI that are not listed.
For the purpose of these tables,
beneficial ownership means a direct or indirect pecuniary interest. Only
Interested Board Members are eligible to participate in an employee benefit
program which invests in the Fund Complex. Board Members who beneficially owned
shares of the series of PVC did so through variable life insurance and variable
annuity contracts. Please note that exact dollar amounts of securities held are
not listed. Rather, ownership is listed based on the following dollar
ranges:
A $0
B $1 up to and
including $10,000
C $10,001 up
to and including $50,000
D $50,001 up
to and including $100,000
E $100,001 or
more
|
|
|
|
|
|
|
|
|
|
|
|
Independent
Board Members |
ETFs in this
SAI |
Ballantine |
Barnes |
Damos |
Grimmett |
Hirsch |
Huang |
McMillan |
Nickels |
VanDeWeghe |
Principal Active
Income |
A |
A |
A |
C |
A |
A |
A |
A |
A |
Principal Millennials
Index |
A |
A |
A |
A |
A |
A |
D |
A |
A |
Principal
Sustainable Momentum Index |
A |
A |
A |
A |
A |
A |
A |
A |
C |
Principal U.S.
Mega-Cap
Multi-Factor
Index |
A |
A |
A |
A |
A |
A |
A |
A |
D |
Total Fund
Complex |
E |
E |
E |
E |
E |
E |
E |
E |
E |
|
|
|
|
|
Interested
Board Members |
|
Dunbar |
Halter |
ETFs in this
SAI |
A |
A |
Total Fund
Complex |
E |
E |
Board Member and
Officer Compensation
The Fund Complex does not pay any
remuneration to its Board Members or officers who are employed by PGI or its
affiliates. The Board annually considers a proposal to reimburse PGI for certain
expenses, including a portion of the Chief Compliance Officer's compensation. If
the proposal is adopted, these amounts are allocated across all Funds based on
relative net assets of each portfolio.
Each Independent Board Member
received compensation for service as a member of the Boards of all investment
companies in the Fund Complex based on a schedule that takes into account an
annual retainer amount, the number of meetings attended, and expenses incurred.
Board Member compensation and related expenses are allocated to each of the
Funds based on the net assets of each relative to combined net assets of the
Fund Complex.
The following table provides
information regarding the compensation received by the Independent Board Members
from the Funds included in this SAI and from the Fund Complex during the period
ended June 30, 2019. On that date, there were 4 investment companies in the Fund
Complex. With respect to the Funds in this SAI, Board Member compensation is
paid from the unitary fee that such Funds pay to PGI. The Funds do not provide
retirement benefits or pensions to any of the Board Members.
|
|
|
|
Trustee |
Funds in
this SAI* |
Fund
Complex |
Elizabeth
Ballantine |
$5,017 |
$281,750 |
Leroy T. Barnes,
Jr. |
$5,360 |
$301,000 |
Craig Damos |
$5,644 |
$317,000 |
Mark A.
Grimmett |
$5,477 |
$307,500 |
Fritz S. Hirsch |
$5,546 |
$311,500 |
Tao Huang |
$5,252 |
$295,000 |
Karen ("Karrie")
McMillan |
$5,101 |
$286,500 |
Elizabeth A.
Nickels |
$5,101 |
$286,500 |
Mary M. ("Meg")
VanDeWeghe |
$5,101 |
$286,500 |
* The Principal International
Multi-Factor Core Index, Principal Spectrum Tax-Advantaged Dividend Active ETF.
Principal U.S. Large-Cap Multi-Factor Core Index, and Principal U.S.
Small-MidCap Multi-Factor Core Index ETFs were not in operation during the
period ended June 30, 2019.
INVESTMENT
ADVISORY AND OTHER SERVICES
Investment
Advisors
Principal Global Investors, LLC
(“PGI”), an indirect subsidiary of Principal Financial Group, Inc.
("Principal®"), serves as the manager and as a
discretionary advisor for each Fund.
PGI has executed an agreement with a
Sub-Advisor. Under the Sub-Advisory agreement, the Sub-Advisor agrees to assume
the obligations of PGI to provide investment advisory services for a specific
Fund. For these services, PGI pays the Sub-Advisor a fee.
|
|
Sub-Advisor: |
Spectrum
Asset Management, Inc. ("Spectrum") is an indirect subsidiary of
Principal Financial Group, Inc. |
|
|
Funds: |
Principal Spectrum Preferred
Securities Active and Principal Spectrum Tax-Advantaged Dividend
Active |
Affiliated
Persons of the Trust Who are Affiliated Persons of the Advisor
For information about affiliated
persons of the Trust who are also affiliated persons of PGI or affiliated
advisors, see the Interested Trustee and Officer tables in the “Leadership
Structure and Board” section.
Codes of
Ethics
The Trust, PGI, and
the Sub-Advisor have adopted Codes of Ethics (“Codes”) under Rule 17j-1 of the
1940 Act. PGI and the Sub-Advisor have each also adopted such a Code under Rule
204A-1 of the Investment Advisers Act of 1940. These Codes are designed to
prevent, among other things, persons with access to information regarding the
portfolio trading activity of the Funds from using that information for their
personal benefit. Except in limited circumstances, the Code for PGI and the Fund
prohibits portfolio managers from personally trading securities that are held or
traded in the actively managed portfolios for which they are responsible. The
Sub-Advisor's Code does not permit personnel subject to the Code to invest in
securities that may be purchased or held by the Fund. The Trust's Board reviews
reports at least annually regarding the operation of the Code of Ethics of the
Trust, PGI, and each Sub-Advisor. The Codes are on file with, and available
from, the SEC. A copy of the Trust's Code will also be provided upon request,
which may be made by contacting the Trust.
Management
Agreement
For providing the investment
advisory services, and specified other services, PGI, under the terms of the
Management Agreement for the Trust, is entitled to receive a fee computed and
accrued daily and payable monthly, at the following annual rates. The management
fee schedule for each Fund is as follows (expressed as a percentage of average
net assets):
|
|
|
|
|
|
Fund |
First
$500
Million |
Next
$500
Million |
Next
$500
Million |
Over
$1.5
Billion |
Principal Healthcare Innovators
Index ETF |
0.42% |
0.40% |
0.38% |
0.37% |
Principal Millennials Index
ETF |
0.45% |
0.43% |
0.41% |
0.40% |
Principal Price Setters Index
ETF |
0.29% |
0.27% |
0.25% |
0.24% |
Principal Shareholder Yield
Index ETF |
0.29% |
0.27% |
0.25% |
0.24% |
Effective July
1, 2020, delete Principal Price Setters Index ETF and Principal Shareholder
Yield Index ETF from the fee schedule table above, and add the following to the
fee schedule table below:
|
|
|
Fund |
All
Assets |
Principal Price Setters Index
ETF |
0.15% |
Principal Shareholder Yield
Index ETF |
0.15% |
|
|
|
Fund |
All
Assets |
Principal Active Global
Dividend Income ETF |
0.58% |
Principal Active Income
ETF |
0.49% |
Principal Contrarian Value
Index ETF |
0.29% |
Principal International
Multi-Factor Core Index ETF |
0.25% |
Principal Investment Grade
Corporate Active ETF |
0.26% |
Principal Spectrum Preferred
Securities Active ETF |
0.55% |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
0.60% |
Principal Sustainable Momentum
Index ETF |
0.29% |
Principal Ultra-Short Active
Income ETF |
0.18% |
Principal U.S. Large-Cap
Multi-Factor Core Index ETF |
0.15% |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
0.15% |
Principal U.S. Small-Cap
Multi-Factor Index ETF |
0.38% |
Principal U.S. Small-MidCap
Multi-Factor Core Index ETF |
0.20% |
Fund
Operating Expenses
The Management Agreement between
each Fund and PGI provides that PGI will pay all operating expenses of the Fund,
except for the Management Fee, payments made under each Series 12b-1 plan,
brokerage commissions and other expenses connected to the execution of portfolio
transactions, interest expense, taxes, acquired fund fees and expenses,
litigation expenses and other extraordinary expenses.
Contractual
Limits on Total Annual Fund Operating Expenses
PGI has contractually agreed to
limit certain Funds' expenses (excluding interest expense, expenses related to
fund investments, acquired fund fees and expenses, and other extraordinary
expenses). The reductions and management fee waivers/expense reimbursements are
in amounts that maintain total operating expenses at or below certain limits.
The limits are expressed as a percentage of average daily net assets on an
annualized basis. The expenses borne by PGI are subject to reimbursement by the
Funds through the fiscal year end, provided no reimbursement will be made if it
would result in the Funds' exceeding the total operating expense limit. The
operating expense limits and the agreement terms are as follows:
|
|
|
|
Contractual
Limit on Total Annual Fund Operating Expenses |
Fund |
Limit |
Expiration |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
0.12% |
10/31/2020 |
Management
Fees Paid
Fees paid for investment management
services during the periods indicated were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management
Fees for Periods Ended June 30*
(amounts in
thousands) |
|
2019 |
|
2018 |
|
2017 |
|
Principal Active Global
Dividend Income ETF |
$ |
3,991 |
|
|
$ |
3,414 |
|
|
$ |
300 |
|
(1) |
Principal Active Income
ETF |
1,767 |
|
|
1,955 |
|
|
2,088 |
|
|
Principal Contrarian Value
Index ETF |
12 |
|
|
9 |
|
(2) |
N/A |
|
|
Principal Healthcare Innovators
Index ETF |
223 |
|
|
154 |
|
|
23 |
|
(3) |
Principal Investment Grade
Corporate Active ETF |
563 |
|
|
80 |
|
(4) |
N/A |
|
|
Principal Millennials Index
ETF |
85 |
|
|
58 |
|
|
26 |
|
(3) |
Principal Price Setters Index
ETF |
74 |
|
|
61 |
|
|
27 |
|
|
Principal Shareholder Yield
Index ETF |
56 |
|
|
42 |
|
|
27 |
|
|
Principal Spectrum Preferred
Securities Active ETF |
296 |
|
|
198 |
|
(5) |
N/A |
|
|
Principal Sustainable Momentum
Index ETF |
16 |
|
|
9 |
|
(2) |
N/A |
|
|
Principal Ultra-Short Active
Income ETF |
4 |
|
(6) |
N/A |
|
|
N/A |
|
|
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
2,399 |
|
|
1,235 |
|
(7) |
N/A |
|
|
Principal U.S. Small-Cap
Multi-Factor Index ETF |
1,332 |
|
|
1,215 |
|
|
681 |
|
(8) |
|
|
|
|
|
|
|
(1) Period from May 9, 2017,
date operations commenced, through June 30, 2017 |
(2) Period from October 18,
2017, date operations commenced, through June 30, 2018 |
(3) Period from August 19,
2016, date operations commenced, through June 30, 2017 |
(4) Period from April 18,
2018, date operations commenced, through June 30, 2018 |
(5) Period from July 7, 2017,
date operations commenced, through June 30, 2018 |
(6) Period from April 24,
2019, date operations commenced, through June 30, 2019 |
(7) Period from October 11,
2017, date operations commenced, through June 30, 2018 |
(8) Period from September 21,
2016, date operations commenced, through June 30,
2017 |
* The Principal International
Multi-Factor Core Index, Principal Spectrum Tax-Advantaged Dividend Active ETF,
Principal U.S. Large-Cap Multi-Factor Core Index, and Principal U.S.
Small-MidCap Multi-Factor Core Index ETFs were not in operation as of June 30,
2019.
Sub-Advisory
Agreements
PGI (and not the Fund) pays the
sub-advisor fees determined pursuant to a sub-advisory Agreement with the
sub-advisor, including any sub-advisors that are at least 95% owned, directly or
indirectly, by PGI or its affiliates. Fees paid to sub-advisors are individually
negotiated between PGI and each sub-advisor and may vary.
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”).
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 with
respect to the continuous distribution of Creation Units of the Funds. The
Distributor will deliver a prospectus to APs 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 Funds.
The Board has adopted a Distribution
and Service Plan pursuant to Rule 12b-1 under the 1940 Act. No Rule 12b-1 fees
are currently paid by any of the Funds, and there are no plans to impose these
fees. However, 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
compensate the Distributor for providing certain services to the Fund, including
activities primarily intended to result in the sale of Creation Units of the
Fund or the provision of investor services. Under the plan, the Funds would have
no legal obligation to pay any amount that exceeds the compensation limit. The
Distributor would be entitled to retain any such fees without regard to the
expenses which it incurs. 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.
Fund
Sub-Administrator, Custodian, and Transfer Agent
State Street Bank and Trust Company
(the “Transfer Agent,” “Custodian,” or "State Street") serves as the Funds'
sub-administrator, custodian and transfer agent. State Street is located at One
Lincoln Street, Boston, MA 02111.
Under an Administration Agreement
and an Accounting Services Agreement with PGI (on behalf of the Trust), State
Street provides necessary administrative, treasury, and tax services, including
financial reporting for the maintenance and operations of the Funds. In
addition, State Street makes available the office space, equipment, personnel
and facilities required to provide such services. State Street also provides
fund accounting services and is responsible for maintaining the books and
records and calculating the daily net asset value of the Funds. PGI is
ultimately responsible for such services pursuant to a Management Agreement with
the Trust.
Under the Custody Agreement with the
Trust, State Street maintains in separate accounts cash, securities and other
assets of the Trust and each Fund, keeps all necessary accounts and records, and
provides other services. State Street is required, upon order of the Trust, to
deliver securities held by State Street and to make payments for securities
purchased by the Trust for each Fund. Under the Custody Agreement, State Street
is also authorized to appoint certain foreign custodians or foreign custody
managers for Fund investments outside the United States.
Pursuant to a Transfer Agency
Services Agreement with the Trust, State Street acts as transfer agent to the
Funds, dividend disbursing agent and shareholder servicing agent to the
Funds.
For the fiscal year ended June 30,
2019, the Trust paid State Street a total of $2,428,006.74 for these
services.
Securities
Lending Agent
State Street serves as the
securities lending agent for the Funds. The Funds did not loan their securities
or
employ State Street as securities
lending agent during the fiscal year ended June 30, 2019. The Principal Spectrum
Tax-Advantaged Dividend Active ETF does not expect to participate in the
securities lending program.
Brokerage on
Purchases and Sales of Securities
All orders for the purchase or sale
of portfolio securities are placed on behalf of a Fund by PGI, or by the Fund's
Sub-Advisor pursuant to the terms of the applicable sub-advisory agreement. In
distributing brokerage business arising out of the placement of orders for the
purchase and sale of securities for any Fund, the objective of PGI and of each
Fund's Sub-Advisor is to obtain the best overall terms. In pursuing this
objective, PGI or the Sub-Advisor considers all matters it deems relevant,
including the breadth of the market in the security, the price of the security,
the financial condition and executing capability of the broker or dealer,
confidentiality, including trade anonymity, and the reasonableness of the
commission, if any (for the specific transaction and on a continuing basis).
This may mean in some instances that PGI or the Sub-Advisor will pay broker
commissions that are in excess of the amount of commissions another broker might
have charged for executing the same transaction when PGI or the Sub-Advisor
believes that such commissions are reasonable in light of a) the size and
difficulty of the transaction, b) the quality of the execution provided, and c)
the level of commissions paid relative to commissions paid by other
institutional investors. Such factors are viewed both in terms of that
particular transaction and in terms of all transactions that broker executes for
accounts over which PGI or the Sub-Advisor exercises investment discretion. The
Board has also adopted a policy and procedure designed to prevent each of the
Funds from compensating a broker/dealer for promoting or selling Fund shares by
directing brokerage transactions to that broker/dealer for the purpose of
compensating the broker/dealer for promoting or selling Fund shares. Therefore,
PGI or the Sub-Advisor may not compensate a broker/dealer for promoting or
selling Fund shares by directing brokerage transactions to that broker/dealer
for the purpose of compensating the broker/dealer for promoting or selling Fund
shares. PGI or the Sub-Advisor may purchase securities in the over-the-counter
market, utilizing the services of principal market makers unless better terms
can be obtained by purchases through brokers or dealers, and may purchase
securities listed on the NYSE from non-Exchange members in transactions off the
Exchange.
PGI or the Sub-Advisor may give
consideration in the allocation of business to services performed by a broker
(e.g., the furnishing of statistical data and research generally consisting of,
but not limited to, information of the following types: analyses and reports
concerning issuers, industries, economic factors and trends, portfolio strategy,
performance of client accounts, and access to research analysts, corporate
management personnel, and industry experts). If any such allocation is made, the
primary criteria used will be to obtain the best overall terms for such
transactions or terms that are reasonable in relation to the research or
brokerage services provided by the broker or dealer when viewed in terms of
either a particular transaction or the Sub-Advisor’s overall responsibilities to
the accounts under its management. PGI or the Sub-Advisor generally pays
additional commission amounts for such research services. Statistical data and
research information received from brokers or dealers as described above may be
useful in varying degrees and PGI or a Sub-Advisor may use it in servicing some
or all of the accounts it manages.
Subject to the rules promulgated by
the SEC, as well as other regulatory requirements, the Board has approved
procedures whereby the Funds may purchase securities that are offered in
underwritings in which an affiliate of a
Sub-Advisor, or PGI, participates.
These procedures prohibit the Funds from directly or indirectly benefiting a
Sub-Advisor or PGI affiliate in connection with such underwritings. In addition,
for underwritings where a Sub-Advisor affiliate or PGI participates as a
principal underwriter, certain restrictions may apply that could, among other
things, limit the amount of securities that the Funds could purchase in the
underwritings. The Sub-Advisor shall determine the amounts and proportions of
orders allocated to the Sub-Advisor or affiliate. The Trustees will receive
quarterly reports on these transactions.
The Board has approved procedures
that permit the Funds to effect a purchase or sale transaction between the Fund
and an affiliated investment company or between a Fund and affiliated persons of
the Fund under limited circumstances prescribed by SEC rules. Any such
transaction must be effected without any payment other than a cash payment for
the securities, for which a market quotation is readily available, at the
current market price; no brokerage commission or fee (except for customary
transfer fees), or other remuneration may be paid in connection with the
transaction. The Board receives quarterly reports of all such
transactions.
The Board has also approved
procedures that permit a Fund's Sub-Advisor(s) to place portfolio trades with an
affiliated broker under circumstances prescribed by SEC Rules 17e-1 and 17a-10.
The procedures require that total commissions, fees, or other remuneration
received or to be received by an affiliated broker must be reasonable and fair
compared to the commissions, fees or other remuneration received by other
brokers in connection with comparable transactions involving similar securities
being purchased or sold on a securities exchange during a comparable time
period. The Board receives quarterly reports of all transactions completed
pursuant to each Fund's procedures.
Purchases and sales of debt
securities and money market instruments usually are principal transactions;
portfolio securities are normally purchased directly from the issuer or from an
underwriter or marketmakers for the securities. Such transactions are usually
conducted on a net basis with a Fund paying no brokerage commissions. Purchases
from underwriters include a commission or concession paid by the issuer to the
underwriter, and the purchases from dealers serving as marketmakers include the
spread between the bid and asked prices.
Commission rates that PGI or a
Sub-Advisor pays to brokers may vary and reflect such factors as the trading
volume placed with a broker, the type of security, the market in which a
security is traded and the trading volume of that security, the types of
services provided by the broker (i.e. execution services only or additional
research services) and the quality of a broker's execution.
The following table shows the
brokerage commissions paid during the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Brokerage Commissions Paid for Periods Ended June 30 |
Fund |
2019 |
|
2018 |
|
2017 |
|
|
|
|
|
|
|
|
Principal Active Global
Dividend Income ETF |
$ |
342,577 |
|
|
$ |
206,167 |
|
|
N/A |
|
|
Principal Active Income
ETF |
31,067 |
|
|
13,067 |
|
|
33,187 |
|
|
Principal Contrarian Value
Index ETF |
923 |
|
|
930 |
|
(1) |
N/A |
|
|
Principal Healthcare Innovators
Index ETF |
9,418 |
|
|
7,255 |
|
|
1,169 |
|
(2) |
Principal Millennials Index
ETF |
3,847 |
|
|
3,859 |
|
|
2,011 |
|
(2) |
Principal Price Setters Index
ETF |
3,427 |
|
|
4,911 |
|
|
600 |
|
|
Principal Shareholder Yield
Index ETF |
3,045 |
|
|
3,047 |
|
|
945 |
|
|
Principal Sustainable Momentum
Index ETF |
4,347 |
|
|
2,367 |
|
(1) |
N/A |
|
|
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
222,178 |
|
|
138,564 |
|
(3) |
N/A |
|
|
Principal U.S. Small-Cap
Multi-Factor Index ETF |
124,112 |
|
|
170,353 |
|
|
30,673 |
|
(4) |
|
|
|
(1) |
Period from October 18, 2017,
date operations commenced, through June 30, 2018 |
(2) |
Period from August 19, 2016,
date operations commenced, through June 30, 2017 |
(3) |
Period from October 11, 2017,
date operations commenced, through June 30, 2018 |
(4) |
Period from September 21, 2016,
date operations commenced, through June 30,
2017 |
In 2018, in response to the adoption
of the Markets in Financial Instruments Directive (“MiFID II”), PGI modified its
approach regarding how trading costs are paid and how research costs are
allocated, which resulted in certain Funds paying higher, and certain Funds
paying lower, commission amounts compared to prior years. Other primary reasons
for changes in several Funds’ brokerage commissions for the three years were
changes in Fund size; changes in market conditions; changes in money managers of
certain Funds; and implementation of investment strategies. In some cases, such
events required substantial portfolio restructurings, resulting in increased
securities transactions and brokerage commissions.
Brokerage commissions from the
portfolio transactions effected for the Funds were paid to brokers affiliated
with PGI or the Sub-Advisors for the fiscal years ended June 30 as
follows:
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund
Complex |
Affiliated
Broker |
2019
Fund's
Total
Commissions
Paid |
% of Fund's
Total
Commissions |
% of Dollar
Amount of Fund's Commissionable Transactions |
Principal
Active Global Dividend Income ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
6,423 |
|
1.87 |
% |
2.83 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
28,239 |
|
8.24 |
|
5.87 |
|
|
Delaware Investments Fund
Advisers |
Macquarie Securities
Limited |
5,127 |
|
1.50 |
|
1.84 |
|
|
Eagle Asset Management,
Inc. |
Raymond James and
Associates |
1,098 |
|
0.32 |
|
0.17 |
|
|
Mellon Investments
Corporation |
Pershing Securities
Limited |
1,473 |
|
0.43 |
|
0.78 |
|
|
Robert W. Baird & Co.
Incorporated |
Robert W. Baird
Co. |
737 |
|
0.22 |
|
0.11 |
|
Total |
$ |
43,097 |
|
12.58 |
% |
11.60 |
% |
Principal
Active Income ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
472 |
|
1.52 |
% |
3.12 |
% |
|
Mellon Investments
Corporation |
Pershing Securities
Limited |
158 |
|
0.51 |
|
0.36 |
|
Total |
$ |
630 |
|
2.03 |
% |
3.48 |
% |
Principal
Contrarian Value Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
13 |
|
1.43 |
% |
1.61 |
% |
Total |
$ |
13 |
|
1.43 |
% |
1.61 |
% |
Principal
Millennials Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
68 |
|
1.77 |
% |
2.53 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
118 |
|
3.06 |
|
0.88 |
|
Total |
$ |
186 |
|
4.83 |
% |
3.41 |
% |
Principal
Price Setters Index ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
18 |
|
0.52 |
% |
0.09 |
% |
Total |
$ |
18 |
|
0.52 |
% |
0.09 |
% |
Principal
Shareholder Yield index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ 0 |
|
0.00% |
|
0.01 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
29 |
|
0.95 |
|
0.17 |
|
Total |
$ |
29 |
|
0.95 |
% |
0.18 |
% |
Principal
Sustainable Momentum Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
15 |
|
0.34 |
% |
0.65 |
% |
Total |
$ |
15 |
|
0.34 |
% |
0.65 |
% |
Principal
U.S. Mega-Cap Multi-Factor Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
817 |
|
0.37 |
% |
0.08 |
% |
|
Mellon Investments
Corporation |
Pershing Securities
Limited |
1,734 |
|
0.78 |
|
0.58 |
|
Total |
$ |
2,551 |
|
1.15 |
% |
0.66 |
% |
Principal
U.S. Small-Cap Multi-Factor Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
283 |
|
0.23 |
% |
0.21 |
% |
Total |
$ |
283 |
|
0.23 |
% |
0.21 |
% |
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund
Complex |
Affiliated
Broker |
2018
Fund's
Total
Commissions
Paid |
% of Fund's
Total
Commissions |
% of Dollar
Amount of Fund's Commissionable Transactions |
Principal
Active Global Dividend Income ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
855 |
|
0.41 |
% |
1.05 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
3,568 |
|
1.73 |
|
2.33 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
9,824 |
|
4.77 |
|
3.39 |
|
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
11,117 |
|
5.39 |
|
5.87 |
|
Total |
$ |
25,364 |
|
12.30 |
% |
12.64 |
% |
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund
Complex |
Affiliated
Broker |
2018
Fund's
Total
Commissions
Paid |
% of Fund's
Total
Commissions |
% of Dollar
Amount of Fund's Commissionable Transactions |
Principal
Active Income ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
107 |
|
0.82 |
% |
0.78 |
% |
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
196 |
|
1.50 |
|
0.66 |
|
Total |
$ |
303 |
|
2.32 |
% |
1.44 |
% |
Principal
Contrarian Value Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
2 |
|
0.20 |
% |
0.25 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
3 |
|
0.36 |
|
0.15 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
54 |
|
5.76 |
|
7.30 |
|
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
12 |
|
1.32 |
|
1.67 |
|
Total |
$ |
71 |
|
7.64 |
% |
9.37 |
% |
Principal
Healthcare Innovators Index ETF |
|
|
|
|
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
64 |
|
0.88 |
% |
0.64 |
% |
Total |
$ |
64 |
|
0.88 |
% |
0.64 |
% |
Principal
Millennials Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
20 |
|
0.51 |
% |
0.91 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
33 |
|
0.87 |
|
1.77 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
2 |
|
0.06 |
|
0.05 |
|
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
— |
|
0.01 |
|
0.01 |
|
Total |
$ |
55 |
|
1.45 |
% |
2.74 |
% |
Principal
Price Setters Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
27 |
|
0.55 |
% |
1.06 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
10 |
|
0.20 |
|
0.09 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
14 |
|
0.28 |
|
0.34 |
|
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
4 |
|
0.07 |
|
0.06 |
|
Total |
$ |
55 |
|
1.10 |
% |
1.55 |
% |
Principal
Shareholder Yield index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
— |
|
— |
% |
0.01 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
7 |
|
0.23 |
|
0.10 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
37 |
|
1.21 |
|
1.53 |
|
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
16 |
|
0.53 |
|
0.25 |
|
Total |
$ |
60 |
|
1.97 |
% |
1.89 |
% |
Principal
Sustainable Momentum Index ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
— |
|
— |
% |
0.01 |
% |
|
Macquarie Capital Investment
Management LLC |
Macquarie Securities
Limited |
149 |
|
6.31 |
|
7.41 |
|
Total |
$ |
149 |
|
6.31 |
% |
7.42 |
% |
Principal
U.S. Mega-Cap Multi-Factor Index ETF |
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
$ |
460 |
|
0.33 |
% |
0.30 |
% |
Total |
$ |
460 |
|
0.33 |
% |
0.30 |
% |
Principal
U.S. Small-Cap Multi-Factor Index ETF |
|
AllianceBernstein
L.P. |
Sanford C Bernstein Co.,
LLC |
$ |
1,132 |
|
0.66 |
% |
0.52 |
% |
|
Mellon Capital Management
Corporation |
Pershing Securities
Limited |
375 |
|
0.22 |
|
0.05 |
|
Total |
$ |
1,507 |
|
0.88 |
% |
0.57 |
% |
|
|
|
|
|
|
|
|
|
|
|
Fund |
Sub-Advisor
Employed by
the Fund
Complex |
Affiliated
Broker |
2017
Fund's
Total
Commissions
Paid |
% of Fund's
Total
Commissions |
% of Dollar
Amount of Fund's Commissionable Transactions |
Principal
Active Income ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
2,931 |
|
8.83 |
% |
9.52 |
% |
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
129 |
|
0.39 |
|
1.31 |
|
|
Mellon Capital Management
Corporation |
Pershing LLC |
547 |
|
1.65 |
|
1.37 |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
861 |
|
2.59 |
|
2.70 |
|
|
Analytic Investors,
LLC |
Wells Fargo Securities,
LLC |
5,589 |
|
16.84 |
|
13.58 |
|
Total |
$ |
10,057 |
|
30.30 |
% |
28.48 |
% |
Principal
Healthcare Innovators Index ETF |
|
|
|
|
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
2 |
|
0.15 |
% |
0.32 |
% |
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
100 |
|
8.60 |
|
10.27 |
|
|
Mellon Capital Management
Corporation |
Pershing LLC |
1 |
|
0.08 |
|
0.03 |
|
Total |
$ |
103 |
|
8.83 |
% |
10.62 |
% |
Principal
Millennials Index ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities
(Europe), LLC |
$ |
361 |
|
17.97 |
% |
16.33 |
% |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
2 |
|
0.09 |
|
0.05 |
|
|
American Century Investment
Management, Inc. |
Instinet U.K.
LTD |
20 |
|
1.01 |
|
0.28 |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
576 |
|
28.63 |
|
45.40 |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities
Australia LTD |
1 |
|
0.03 |
|
0.01 |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities
PLC |
1 |
|
0.04 |
|
0.02 |
|
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Securities (Asia
Pacific) LTD |
7 |
|
0.37 |
|
0.14 |
|
|
Macquarie Capital Investment
Management LLC |
Macquarie Bank
Limited |
18 |
|
0.90 |
|
0.49 |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
36 |
|
1.80 |
|
1.28 |
|
Total |
$ |
1,022 |
|
50.84 |
% |
64.00 |
% |
Principal
Price Setters Index ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
8 |
|
1.39 |
% |
0.65 |
% |
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
18 |
|
3.03 |
|
3.70 |
|
|
Mellon Capital Management
Corporation |
Pershing LLC |
7 |
|
1.24 |
|
0.48 |
|
Total |
$ |
33 |
|
5.66 |
% |
4.83 |
% |
Principal
Shareholder Yield index ETF |
|
Credit Suisse Asset Management,
LLC |
Credit Suisse Securities (USA),
LLC |
$ |
22 |
|
2.29 |
% |
1.22 |
% |
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
25 |
|
2.60 |
|
4.11 |
|
|
Mellon Capital Management
Corporation |
Pershing LLC |
9 |
|
0.93 |
|
0.28 |
|
Total |
$ |
56 |
|
5.82 |
% |
5.61 |
% |
Principal
U.S. Small-Cap Multi-Factor Index ETF |
|
J.P. Morgan Investment
Management, Inc. |
J.P. Morgan Clearing
Corp |
$ |
604 |
|
1.97 |
% |
2.54 |
% |
|
Macquarie Capital Investment
Management LLC |
Macquarie Capital (USA)
Inc. |
678 |
|
2.21 |
|
1.96 |
|
|
AllianceBernstein
L.P. |
Sanford C. Bernstein & Co.,
LLC |
371 |
|
1.21 |
|
1.96 |
|
Total |
$ |
1,653 |
|
5.39 |
% |
6.46 |
% |
Material differences, if any,
between the percentage of an ETF’s brokerage commissions paid to a broker and
the percentage of transactions effected through that broker reflect the
commission rates the Advisor or Sub-Advisor has negotiated with the broker.
Commission rates an Advisor or Sub-Advisor pays to brokers may vary and reflect
such factors as the trading volume placed with a broker, the type of security,
the market in which a security is traded and the trading volume of that
security, the types of services provided by the broker (i.e. execution services
only or additional research services) and the quality of a broker's
execution.
The following table indicates the
value of each Fund's aggregate holdings, in thousands, of the securities of its
regular brokers or dealers for the fiscal year ended June 30, 2019.
|
|
|
|
|
Holdings of
Securities of Principal Exchange-Traded Funds Regular Brokers and
Dealers |
Principal Active Global
Dividend Income ETF |
JP Morgan Chase &
Co. |
$21,621 |
Principal Active Income
ETF |
Goldman Sachs Group,
Inc. |
1,060 |
|
|
JP Morgan Chase &
Co. |
4,879 |
|
|
Morgan Stanley |
1,243 |
|
|
Wells Fargo |
1,024 |
|
Principal Contrarian Value
Index ETF |
Wells Fargo |
6 |
|
Principal Investment Grade
Corporate Active ETF |
CITIGroup |
815 |
|
|
Goldman Sachs Group,
Inc. |
4,107 |
|
|
JP Morgan Chase &
Co. |
1,766 |
|
|
Morgan Stanley |
2,382 |
|
|
UBS Group |
278 |
|
|
Wells Fargo |
1,396 |
|
Principal Price Setter Index
ETF |
JP Morgan Chase &
Co. |
211 |
|
Principal Shareholder Yield
Index ETF |
CITIGroup |
149 |
|
|
Wells Fargo |
129 |
|
Principal Spectrum Preferred
Securities Active ETF |
CITIGroup |
1,412 |
|
|
Goldman Sachs Group,
Inc. |
2,154 |
|
|
JP Morgan Chase &
Co. |
2,012 |
|
|
Morgan Stanley |
1,415 |
|
|
Wells Fargo |
1,522 |
|
Principal Ultra-Short Active
Income ETF |
CITIGroup |
251 |
|
|
Credit Suisse |
201 |
|
|
Goldman Sachs Group,
Inc. |
252 |
|
|
JP Morgan Chase &
Co. |
200 |
|
|
Morgan Stanley |
200 |
|
|
Wells Fargo |
251 |
|
Principal U.S. Mega Cap-Multi
Factor Index ETF |
CITIGroup |
35,509 |
|
|
JP Morgan Chase &
Co. |
34,842 |
|
|
Wells Fargo |
30,897 |
|
Conflicts of
Interest and Allocation of Trades
By the Manager
(PGI). PGI has its own
trading platform and personnel that perform trade-related functions. Where
applicable, PGI trades on behalf of its own clients. Such transactions are
executed in accordance with PGI's trading policies and procedures, including,
but not limited to trade allocations and order aggregation, purchase of new
issues, and directed brokerage. PGI acts as discretionary investment adviser for
a variety of individual accounts, ERISA accounts, mutual funds, insurance
company separate accounts, and public employee retirement plans and places
orders to trade portfolio securities for each of these accounts. Managing
multiple accounts may give rise to potential conflicts of interest including,
for example, conflicts among investment strategies and conflicts in the
allocation of investment opportunities. PGI has adopted and implemented policies
and procedures that it believes address the potential conflicts associated with
managing accounts for multiple clients and are designed to ensure that all
clients are treated fairly and equitably. These procedures include allocation
policies and procedures and internal review processes.
If, in carrying out the investment
objectives of its respective clients, occasions arise in which PGI deems it
advisable to purchase or sell the same equity securities for two or more client
accounts at the same or approximately the same time, PGI may submit the orders
to purchase or sell to a broker/dealer for execution on an aggregate or
"bunched" basis. PGI will not aggregate orders unless it believes that
aggregation is consistent with (1) its duty to seek best execution and (2) the
terms of its investment advisory agreements. In distributing the securities
purchased or the proceeds of sale to the client accounts participating in a
bunched trade, no advisory account will be favored over any other account and
each account that participates in an aggregated order will participate at the
average share price for all transactions of PGI relating to that aggregated
order on a given business day, with all transaction costs relating to that
aggregated order shared on a pro rata basis.
Because of PGI's role as investment
advisor to each of the Funds and discretionary advisor to funds of funds and
some underlying funds, conflicts may arise in connection with the services PGI
provides to funds of funds with respect to asset class and target weights for
each asset class and investments made in underlying funds. Conflicts may arise
in connection with the services PGI provides to the funds of funds that it
manages, in connection with the services PGI provides to other funds of funds,
because PGI serves as the investment adviser to the underlying mutual funds in
which the funds of funds invest, sometimes as the discretionary advisor, and an
affiliated investment adviser may serve as sub-adviser to the mutual funds in
which a fund of funds may invest. This raises a potential conflict because PGI's
or an affiliated company's profit margin may vary depending upon the underlying
fund in which the funds of funds invest.
PGI implements the following in an
effort to limit the appearance of conflicts of interest and the opportunity for
events that could trigger an actual conflict of interest:
|
|
• |
PGI uses a process to select
investment advisors that emphasizes the selection of PGI or
Principal-affiliated subadvisors that are determined to be qualified under
the Manager’s due diligence process. However, PGI will select an
unaffiliated subadvisor to manage all or a portion of a Fund’s portfolio
when deemed necessary or appropriate based upon a consideration of the
Fund’s objective and investment strategies and available expertise and
resources within the Principal
organization. |
|
|
• |
PGI provides ongoing oversight
of the Funds' investments to monitor adherence to their investment
program. |
Additionally, each Fund's portfolio
managers manage a number of accounts other than the applicable Fund's portfolio,
including in some instances proprietary or personal accounts. Managing multiple
accounts may give rise to potential conflicts of interest including, for
example, conflicts among investment strategies, allocating time and attention to
account management, allocation of investment opportunities, knowledge of and
timing of fund trades, selection of brokers and dealers, and compensation for
the account. PGI has adopted and implemented policies and procedures that it
believes address the potential conflicts associated with managing accounts for
multiple clients and personal accounts and are designed to ensure that all
clients and client accounts are treated fairly and equitably. These procedures
include allocation policies and procedures, personal trading policies and
procedures, internal review processes and, in some cases, review by independent
third parties.
Investments that PGI and its
portfolio managers deem appropriate for a Fund's portfolio may also be deemed
appropriate by it for other accounts. Therefore, the same security may be
purchased or sold at or about the same time for both a Fund's portfolio and
other accounts. In such circumstances, PGI may determine that orders for the
purchase or sale of the same security for a Fund's portfolio and one or more
other accounts should be combined. In this event the transactions will be priced
and allocated in a manner deemed by PGI to be equitable and in the best
interests of a Fund’s portfolio and such other accounts. While in some instances
combined orders could adversely affect the price or volume of a security, the
Trust believes that its participation in such transactions on balance will
produce better overall results for the Funds.
By the
Sub-Advisor(s). The
portfolio managers of the Sub-Advisor(s) manage a number of accounts other than
the Fund's portfolios, including in some instances proprietary or personal
accounts. Managing multiple accounts may give rise to potential conflicts of
interest including, for example, conflicts among investment strategies,
allocating time and attention to account management, allocation of investment
opportunities, knowledge of and timing of fund trades, selection of brokers and
dealers, and compensation for the account. Each has adopted and implemented
policies and procedures that it believes address the potential conflicts
associated with managing accounts for multiple clients and personal accounts and
are designed to ensure that all clients and client accounts are treated fairly
and equitably. These procedures include allocation policies and procedures,
personal trading policies and procedures, internal review processes and, in some
cases, review by independent third parties.
Investments the Sub-Advisor(s) deem
appropriate for the Fund's portfolio may also be deemed appropriate by it for
other accounts. Therefore, the same security may be purchased or sold at or
about the same time for both the Fund's portfolio and other accounts. In such
circumstances, the Sub-Advisor(s) may determine that orders for the purchase or
sale of the same security for the Fund's portfolio and one or more other
accounts should be combined. In this event the transactions will be priced and
allocated in a manner deemed by the Sub-Advisor(s) to be equitable and in the
best interests of the Fund’s portfolio and such other accounts. While in some
instances combined orders could adversely affect the price or volume of a
security, the Fund believes that its participation in such transactions on
balance will produce better overall results for the Fund.
INTERMEDIARY
COMPENSATION
Shares of the Funds are sold
primarily through intermediaries, such as brokers, dealers, investment advisors,
banks, trust companies, pension plan consultants, retirement plan administrators
and insurance companies.
As mentioned in the Prospectus, in
the event 12b-1 fees are paid by the Funds to the Distributor in the future, the
Distributor may pay some or all of those fees to intermediaries.
Additional
Payments to Intermediaries
In addition, PGI and its affiliates
may, out of their own resources, pay amounts to intermediaries that support the
distribution or marketing of shares of the Funds or provide services to Fund
shareholders. The making of these payments could create a conflict of interest
for a financial intermediary receiving such payments. These payments may be made
from profits received by PGI from the management fees paid to PGI by the Funds.
Numerous factors may be considered
in determining the amount of such additional payments, including, but not
limited to, the intermediary’s Fund sales and assets, and the willingness and
ability of the intermediary to give the Distributor access to its Financial
Professionals for educational and marketing purposes. Some such arrangements may
include an agreed upon minimum or maximum payment.
As of June 30, 2019, PGI anticipates
that the firms that will receive additional payments as described above include,
but are not necessarily limited to, the following:
|
|
• |
Kestra Investment
Services |
The preceding list is subject to
change at any time without notice. Any additions, modifications, or deletions to
the
financial intermediaries identified
in this list that have occurred since June 30, 2019 are not
reflected.
Ask your Financial Professional or
visit your intermediary’s website for more information about the amounts paid to
them by PGI and its affiliates, and by sponsors of other investment companies
your Financial Professional may recommend to you.
PURCHASE AND
REDEMPTION OF CREATION UNITS
Book-Entry Only
System
The Depository Trust Company (DTC)
acts as securities depository for the shares. Shares of the Funds are
represented by securities registered in the name of DTC or its nominee and
deposited with, or on behalf of, DTC. Certificates will not be issued for
shares.
DTC, a limited-purpose trust
company, was created to hold securities of its participants and to facilitate
the clearance and settlement of securities transactions among DTC participants
in such securities through electronic book-entry changes in accounts of the DTC
participants, thereby eliminating the need for physical movement of securities
certificates. DTC participants include securities brokers and dealers, banks,
trust companies, clearing corporations, and certain other organizations, some of
whom (and/or their representatives) own DTC. Access to the DTC system is also
available to others such as banks, brokers, dealers, and trust companies that
clear through or maintain a custodial relationship with a DTC participant,
either directly or indirectly.
Beneficial ownership of shares is
limited to DTC participants and persons holding interests through DTC
participants. Ownership of beneficial interests in shares (owners of beneficial
interests are referred to herein as Beneficial Owners) is shown on, and the
transfer of ownership is effected only through, records maintained by DTC (with
respect to DTC participants) and on the records of DTC participants (with
respect to indirect DTC participants and Beneficial Owners that are not DTC
participants). Beneficial Owners will receive from or through a DTC participant
a written confirmation relating to their purchase of shares.
Conveyance of all notices,
statements and other communications to Beneficial Owners is effected as follows.
Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required
to make available to the Trust upon request and for a fee to be charged to the
trust a listing of the shares of the fund held by each DTC participant. The
Trust shall inquire of each such DTC participant as to the number of Beneficial
Owners holding fund shares, directly or indirectly, through such DTC
participant. The Trust shall provide each such DTC participant with copies of
such notice, statement or other communication, in such form, number and at such
place as such DTC participant may reasonably request, so that such notice,
statement or communication may be transmitted by such DTC participant, directly
or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to
each such DTC participant a fair and reasonable amount as reimbursement for the
expenses attendant to such transmittal, all subject to applicable statutory and
regulatory requirements.
Share distributions shall be made to
DTC or its nominee, Cede & Co., as the registered holder of all shares. DTC
or its nominee, upon receipt of any such distributions, shall credit immediately
DTC participants' accounts with payments in amounts proportionate to their
respective beneficial interests in shares of the fund as shown on the records of
DTC or its nominee. Payments by DTC participants to indirect DTC 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 DTC participants and Beneficial Owners owning
through such DTC participants.
DTC may decide 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 a 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.
Creation
Units
The Funds sell, issue and redeem
through the Distributor, Shares in Creation Units on a continuous basis, without
a sales load, at the NAV next determined after receipt of an order in proper
form on any Business Day. As of the date of this SAI, the NYSE observes the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’
Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day
and Christmas Day. The Funds will not issue fractional Creation Units. Shares of
the Funds will only be issued against full payment, as further described in the
prospectus and this SAI.
A Creation Unit is an aggregation of
Shares in the amount described in the prospectus. The Board may declare a split
or a consolidation in the number of Shares outstanding of the Funds or Trust,
and make a corresponding change in the number of Shares in a Creation
Unit.
To purchase or redeem any Creation
Units from a Fund, you must be, or transact through, an authorized participant
(“AP”). To be an AP, you must be either a broker-dealer or other participant
(“Participating Party”) in the Continuous Net Settlement System (“Clearing
Process”) of the National Securities Clearing Corporation (“NSCC”) or a
participant in DTC with access to the DTC system (“DTC Participant”), and you
must execute an agreement (“Participant Agreement”) with the Distributor, which
must be accepted by the Transfer Agent, that governs transactions in the Fund’s
Creation Units.
Transactions by an AP that is a
Participating Party using the NSCC system are referred to as transactions
“through the Clearing Process.” Transactions by an AP that is a DTC Participant
using the DTC system are referred to as transactions “outside the Clearing
Process.”
Investors who are not APs but want
to transact in Creation Units may contact the Distributor for the names of APs.
An AP may require investors to enter into a separate agreement to transact
through it for Creation Units and may require orders for purchases of shares
placed with it to be in a particular form. Investors should be aware that their
broker may not be an AP and, therefore, may need to place any order to purchase
or redeem Creation Units through another broker or person that is an AP, which
may result in additional charges. There are expected to be a limited number of
APs at any one time.
Orders must be transmitted by an AP
by electronic order entry system, telephone, electronic mail, or other
transmission method acceptable to the Distributor pursuant to procedures set
forth in the Participant Agreement. Market disruptions and telephone or other
communication failures may impede the transmission of orders.
Purchasing
Creation Units
Fund
Deposit
The consideration for a Creation
Unit of a Fund is the Fund Deposit. The Fund Deposit will consist of the In-Kind
Creation Basket and Cash Component, or an all cash payment (“Cash Value”), as
determined by PGI to be permitted or required by a Fund. Short portions in a
Fund’s portfolio and any other financial instruments that cannot be transferred in-kind, will
be represented by cash in the Cash Component and not in the In-Kind Creation
Basket.
The Cash Component will typically
include a “Balancing Amount” reflecting the difference, if any, between the NAV
of a Creation Unit and the market value of the securities in the In-Kind
Creation Basket. If the NAV per Creation Unit exceeds the market value of the
securities in the In-Kind Creation Basket, the purchaser pays the Balancing
Amount to the Fund. By contrast, if the NAV per Creation Unit is less than the
market value of the securities in the In-Kind Creation Basket, the Fund pays the
Balancing Amount to the purchaser. The Balancing Amount ensures that the
consideration paid by an investor for a Creation Unit is exactly equal to the
value of the Creation Unit.
PGI, in a portfolio composition file
sent via the NSCC, generally makes available on each Business Day, immediately
prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern
Time), a list of the names and the required number of shares of each security in
the In-Kind Creation Basket to be included in the current Fund Deposit for the
Fund (based on information about the Fund’s portfolio at the end of the previous
Business Day subject to correction). If applicable, PGI, through the NSCC, also
makes available on each Business Day, the estimated Cash Component or Cash
Value, effective through and including the previous Business Day, per Creation
Unit.
The announced Fund Deposit is
applicable, subject to any adjustments as described below, for purchases of
Creation Units of a Fund until the next-announced Fund Deposit is made
available. From day to day, the composition of the In-Kind Creation Basket may
change as, among other things, corporate actions and investment decisions by the
Advisor are implemented for the Fund’s portfolio. All questions as to the
composition of the In-Kind Creation Basket and the validity, form, eligibility,
and acceptance for deposit of any securities shall be determined by the Fund,
and the Fund’s determination shall be final and binding. Each Fund reserves the
right to accept a nonconforming (i.e., custom) Fund Deposit. Payment of any
stamp duty or the like shall be the sole responsibility of the AP purchasing a
Creation Unit. The AP must ensure that all Deposit Securities properly denote
change in beneficial ownership.
Cash in
lieu
Each Fund may, in its sole
discretion, permit or require the substitution of an amount of cash (“cash in
lieu”) to be added to the Cash Component to replace any security in the In-Kind
Creation Basket. Circumstances in which the Funds may permit or require cash in
lieu include, without limitation:
|
|
• |
when the Fund announces before
the open of trading that all purchases, all redemptions or all purchases
and redemptions on that day will be made entirely in
cash; |
|
|
• |
when the securities in the
In-Kind Creation Basket may not be available in sufficient quantity for
delivery or may not be eligible for transfer through the systems of DTC or
the Clearing Process; and |
|
|
• |
when the AP or its underlying
investor is restricted under U.S. or local securities laws or policies
from transacting in one or more securities in the In-Kind Creation
Basket. |
Each Fund will comply with the
federal securities laws in accepting securities in the In-Kind Creation Basket,
including the securities in the In-Kind Creation Basket that are sold in
transactions that would be exempt from registration under the 1933 Act.
Each Fund expects to purchase the
securities represented by the cash in lieu amount in the secondary market
(“Market Purchases”). PGI may charge a higher transaction fee on the cash amount
contributed in lieu of securities, which is intended in part to cover all or a
portion of any difference between the market value at which the securities were
purchased by the Fund and the cash in lieu amount.
Order
Cut-Off Time
For an order involving a Creation
Unit to be effectuated at a Fund’s NAV on a particular day, it must be received
by the Distributor by or before the deadline for such order (“Order Cut-Off
Time”) in accordance with the procedures set forth in the Participant Agreement.
The Order Cut-Off Time for creation and redemption orders for a Fund is
generally expected to be 4:00 p.m. Eastern Time for In-Kind Creation and
Redemption Baskets, and 2:00 p.m. Eastern Time for Cash Value transactions.
Accordingly, In-Kind Creation and Redemption Baskets are expected to be accepted
until the close of regular trading on the Exchange on each Business Day, which
is usually 4:00 p.m. Eastern Time. On days when the Exchange or bond markets
close earlier than normal (such as the day before a holiday), the Order Cut-Off
Time is expected to track the Exchange or bond markets closing and be similarly
earlier than normal.
For select International Funds, next
day (also known as T-1 or T minus one) international market orders are to be
placed after the listing exchange closing time and before the Fund’s established
T-1 order window cut-off time, the latest being 5:30 PM Eastern Standard Time on
any Business Day. Such orders, if accepted, will receive the next Business Day’s
NAV per Creation Unit.
Custom orders typically clear
outside the Clearing Process and, therefore, like other orders outside the
Clearing Process, may need to be transmitted early on the relevant Business Day
to be effectuated at that day’s NAV. A custom order may be placed when, for
example, an AP cannot transact in a security in the In-Kind Creation or
Redemption Basket and additional cash is included in the Fund Deposit or Fund
Redemption in lieu of such security. Custom orders may be required to be
received by the Distributor by 3:00 p.m. Eastern Time to be effectuated based on
the Fund’s NAV on that Business Day.
In all cases, cash and securities
should be transferred to the Fund by the “Settlement Date,” which is generally
the Business Day immediately following the Business Day the order is placed
(“Transmittal Date”) for cash and the second Business Day following the
Transmittal Date for securities. Persons placing custom orders or orders
involving Cash Value should be aware of time deadlines imposed by
intermediaries, such as DTC and/or the Federal Reserve Bank wire system, which
may delay the delivery of cash and securities by the Settlement
Date.
Placement
of Creation Orders
All purchase orders must be placed
by or through an AP. To order a Creation Unit, an AP must submit an irrevocable
purchase order to the Distributor in accordance with the procedures set forth in
the Participant Agreement. In-kind (portions of) purchase orders will be
processed through the Clearing Process when it is available. The Clearing
Process is an enhanced clearing process that is available only for certain
securities and only to DTC Participants that are also participants in the
Clearing Process of the NSCC. In-kind (portions of) purchase orders not subject
to the Clearing Process will go through a manual clearing process run by DTC.
Fund Deposits that include government securities must be delivered through the
Federal Reserve Bank wire transfer system (“Federal Reserve System”). Fund
Deposits that include cash may be delivered through the Clearing Process or the
Federal Reserve System. Certain orders for a Fund may be made outside the
Clearing Process. In-kind deposits of securities for such orders must be
delivered through the Federal Reserve System (for government securities) or
through DTC (for corporate securities).
Orders
Using Clearing Process
In connection with creation orders
made through the Clearing Process, the Distributor transmits, on behalf of the
AP, such trade instructions as are necessary to effect the creation order.
Pursuant to such trade instructions, the AP agrees to deliver the requisite Fund
Deposit to the Trust, together with such additional information as may be
required by the Distributor and the Transfer Agent. An order to create Creation
Units through the Clearing Process is deemed received by the Distributor and the
Transfer Agent on the Transmittal Date if (i) such order is received by the
Distributor by the order Cut-Off Time on such Transmittal Date and (ii) all
other procedures set forth in the Participant Agreement are properly followed.
Cash Components will be delivered using either the Clearing Process or the
Federal Reserve System, as described below.
Orders
Outside Clearing Process
Fund Deposits made outside the
Clearing Process 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. With respect to such
orders, 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 securities in the In- Kind Creation Basket (whether standard
or custom) through DTC to the relevant Trust account by 11:00 a.m., Eastern
Time, (the “DTC Cut-Off Time”) on the Business Day immediately following the
Transmittal Date. The amount of cash equal to the Cash Component, along with any
cash in lieu and Transaction Fee, 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 12:00 p.m., Eastern Time, on the
Business Day immediately following the Transmittal Date. The delivery of
corporate securities through DTC must occur by 3:00 p.m., Eastern Time, on the
Business Day immediately following the Transmittal Date. The delivery of
government securities through the Federal Reserve System must occur by 3:00
p.m., Eastern Time, on the Business Day immediately 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 (i) such order is received by the Distributor by the Order
Cut-Off Time on such Transmittal Date and (ii) all other procedures set forth in
the Participant Agreement are properly followed. If the Custodian does not
receive both the required In-Kind Creation Basket by the DTC Cut-Off Time and
the Cash Component by the appointed time, such order may be canceled. Upon
written notice to the Distributor and the Transfer Agent, a canceled order may
be resubmitted the following Business Day using a Fund Deposit as newly
constituted to reflect the then-current In-Kind Creation Basket and Cash
Component. Except as provided in the Participant Agreement and subject to
Foreign Market Holidays (See Appendix B for a list of Foreign Market Holidays),
the delivery of Creation Units so created will occur no later than the second
Business Day following the day on which the order is deemed received by the
Distributor. APs that submit a canceled order will be liable to the Funds for
any losses resulting therefrom.
Orders involving foreign securities
are expected to be settled outside the Clearing Process. Thus, upon receipt of
an irrevocable purchase order, the Distributor will notify PGI and the Custodian
of such order. The Custodian, who will have caused the appropriate local
sub-custodian(s) of the Fund to maintain an account into which an AP may deliver
the Fund Deposit (or cash in lieu), with adjustments determined by the Fund,
will then provide information of the order to such local sub-custodian(s). The
AP must also make available on or before the Settlement, by means satisfactory
to the Fund, immediately available or same day funds in U.S. dollars estimated
by the Fund to be sufficient to pay the Cash Component and Transaction
Fee.
While, as stated above, Creation
Units are generally delivered no later than the second Business Day following
the day on which the order is deemed received by the Distributor, each Fund may
settle Creation Unit transactions on a basis other than the one described above
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.
Acceptance of
Orders for Creation Units
The Trust reserves the absolute
right to reject a creation order transmitted to it by the Distributor in respect
of the Funds if: (i) the order is not in proper form; (ii) the investor(s), upon
obtaining the Shares, would own 80% or more of the currently outstanding Shares
of the Fund; (iii) the securities delivered do not conform to the In-Kind
Creation Basket for the relevant date; (iv) acceptance of the Fund Deposit would
have adverse tax consequences to the Fund; (v) acceptance of the Fund Deposit
would, in the opinion of counsel, be unlawful; (vi) acceptance of the Fund
Deposit would otherwise, in the discretion of the Trust, the Fund, or PGI, will
have an adverse effect on the Trust, the Fund or the rights of beneficial
owners; or (vii) in the event that circumstances that are outside the control of
the Trust make it practically impossible to process creation orders. Examples of
such circumstances include acts of God; public service or utility problems
resulting in telephone, telecopy and computer failures; fires, floods or extreme
weather conditions; market conditions or activities causing trading halts;
systems failures involving computer or other information systems affecting the
Trust, PGI, a Sub-Advisor, the Transfer Agent, 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 an AP of its
rejection of the order. The Funds, the Custodian, any sub-custodian, the
Transfer Agent and the Distributor are under no duty, however, to give
notification of any defects or irregularities in the delivery of Fund Deposits,
and they shall not incur any liability for the failure to give any such
notification.
Issuance of a
Creation Unit
Once a Fund has accepted a creation
order, upon next determination of the Fund’s NAV, the Fund will confirm the
issuance of a Creation Unit, against receipt of payment, at such NAV. The
Distributor will transmit a confirmation of acceptance to the AP that placed the
order.
Except as provided below, a Creation
Unit will not be issued until the Fund obtains good title to the In-Kind
Creation Basket securities and the Cash Component, along with any cash in lieu
and Transaction Fee. Except as provided in Appendix B, the delivery of Creation
Units will generally occur no later than the second Business Day following the
Transmittal Date for securities.
In certain cases, APs 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.
With respect to orders involving
foreign securities, when the applicable local sub-custodian(s) has confirmed to
the Custodian that the In-Kind Creation Basket (or cash in lieu) has been
delivered to the Fund’s account at the applicable sub-custodian(s), the
Distributor and PGI shall be notified of such delivery, and the Fund will issue
and cause the delivery of the Creation Unit.
Creation Units may be created in
advance of receipt by the Trust of all or a portion of the applicable In-Kind
Creation Basket, provided the purchaser tenders an initial deposit consisting of
any available securities in the In-Kind Creation Basket and cash equal to the
sum of the Cash Component and at least 115% of the market value, as adjusted
from time to time by, of the In-Kind Creation Basket securities not delivered
(“Additional Cash Deposit”). Such initial deposit will have a value greater than
the NAV of the Creation Unit on the date the order is placed. The order shall be
deemed to be received on the Transmittal Date provided that it is placed in
proper form prior to 4:00 p.m., Eastern Time, on such date, and federal funds in
the appropriate amount are deposited with the Custodian by the DTC Cut-Off Time
the following Business Day. If the order is not placed in proper form by 4:00
p.m., Eastern Time, or federal funds in the appropriate amount are not received
by the DTC Cut-Off Time the next Business Day, then the order will be canceled
or deemed unreceived and the AP effectuating such transaction will be liable to
the Fund for any losses resulting therefrom.
To the extent securities in the
In-Kind Creation Basket remain undelivered, pending delivery of such securities
additional cash will be required to be deposited with the Trust as necessary to
maintain an Additional Cash Deposit equal to at least 115% (as adjusted by PGI)
of the daily marked-to-market value of the missing securities. To the extent
that either such securities are still 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 a marked-to- market payment is not made
within one Business Day following notification to the purchaser and/or AP that
such a payment is required, the Trust may use the cash on deposit to purchase
the missing securities, and the AP effectuating such transaction will be liable
to the Fund for any costs incurred therein or losses resulting therefrom,
including any Transaction Fee, any amount by which the actual purchase price of
the missing securities exceeds the Additional Cash Deposit or the market value
of such securities on the day the purchase order was deemed received by the
Distributor, as well as brokerage and related transaction costs. The Trust will
return any unused portion of the Additional Cash Deposit once all of the missing
securities have been received by the Trust. 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.
Transaction
Fees
To compensate for costs incurred in
connection with creation and redemption transactions, investors will be required
to pay a Transaction Fee as follows:
|
|
|
|
|
|
ETF |
Standard
Creation
Transaction
Fee
* |
Maximum
Variable Charge for Cash Creation ** |
Standard
Redemption
Transaction
Fee * |
Maximum
Variable Charge for Cash Redemptions ** |
Principal Active Global
Dividend Income |
$500 |
3.00% |
$500 |
2.00% |
Principal Active Income
|
$500 |
3.00% |
$500 |
2.00% |
Principal Contrarian Value
Index |
$750 |
3.00% |
$750 |
2.00% |
Principal Healthcare Innovators
Index |
$600 |
3.00% |
$600 |
2.00% |
Principal International
Multi-Factor Core Index |
$4,000 |
3.00% |
$4,000 |
2.00% |
Principal Investment Grade
Corporate Active |
$750 |
3.00% |
$750 |
2.00% |
Principal Millennials Index
|
$1,000 |
3.00% |
$1,000 |
2.00% |
Principal Price Setters Index
|
$500 |
3.00% |
$500 |
2.00% |
Principal Shareholder Yield
Index |
$500 |
3.00% |
$500 |
2.00% |
Principal Spectrum Preferred
Securities Active |
$250 |
3.00% |
$250 |
2.00% |
Principal Spectrum
Tax-Advantaged Dividend Active |
$400 |
3.00% |
$400 |
2.00% |
Principal Sustainable Momentum
Index |
$400 |
3.00% |
$400 |
2.00% |
Principal Ultra-Short Active
Income |
$250 |
3.00% |
$250 |
2.00% |
Principal U.S. Large-Cap
Multi-Factor Core Index |
$350 |
3.00% |
$350 |
2.00% |
Principal U.S. Mega-Cap
Multi-Factor Index |
$200 |
3.00% |
$200 |
2.00% |
Principal U.S. Small-Cap
Multi-Factor Index |
$1,500 |
3.00% |
$1,500 |
2.00% |
Principal U.S. Small-MidCap
Multi-Factor Core Index |
$1,200 |
3.00% |
$1,200 |
2.00% |
* Applicable
to in-kind purchases only.
** As a
percentage of the cash amount invested.
The Standard Transaction Fee applies
to in-kind purchases of the Funds effected through the Clearing Process on any
Business Day, regardless of the number of Creation Units purchased or redeemed
that day (assuming, in the case of multiple orders on the same day, that the
orders are received at or near the same time). As shown in the table above,
certain Fund Deposits consisting of a Cash Value will be subject to a variable
charge of up to 3% in addition to the standard Transaction Fee. With cash
received from the variable charge, PGI will purchase the necessary securities
for a Fund’s portfolio and return any unused portion thereof to the
investor.
PGI may adjust the Transaction Fee
from time to time. The Standard Creation/Redemption Transaction Fee is based, in
part, on the number of holdings in a Fund’s portfolio and may be adjusted on a
quarterly basis if the number of holdings increases. Investors will also be
responsible for the costs associated with transferring the securities in the
In-Kind Creation (and Redemption) Baskets to (and from) the account of the
Trust. Further, investors who, directly or indirectly, use the services of a
broker or other intermediary to compose a Creation Unit in addition to an AP to
effect a transaction in Creation Units may be charged an additional fee for such
services.
Cash
Purchase Method
When cash purchases of Creation
Units are available or specified for a Fund, they will be effected in
essentially the same manner as in-kind purchases. In the case of a cash
purchase, the investor must pay the cash equivalent of the Fund Deposit. In
addition, cash purchases may be subject to Transaction Fees.
Redeeming
Creation Units
Fund Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption
request in proper form by the Distributor and only on a Business Day. The
redemption proceeds for a Creation Unit will consist of the In-Kind Redemption
Basket and a Cash Redemption Amount, or an all cash payment (“Cash Value”), in
all instances equal to the value of a Creation Unit. Short positions and other
instruments that cannot be transferred in kind will be represented by cash in
the Cash Redemption Amount and not in the In-Kind Redemption Basket.
The Cash Redemption Amount will
typically include a Balancing Amount, reflecting the difference, if any, between
the NAV of a Creation Unit and the market value of the securities in the In-Kind
Redemption Basket. If the NAV per Creation Unit exceeds the market value of the
securities in the In-Kind Redemption Basket, the Fund pays the
Balancing Amount to the redeeming
investor. By contrast, if the NAV per Creation Unit is less than the market
value of the securities in the In-Kind Redemption Basket, the redeeming investor
pays the Balancing Amount to the Fund.
PGI, in a portfolio composition file
sent via the NSCC, generally makes available on each Business Day, immediately
prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern
Time), a list of the names and the required number of shares of each security in
the In-Kind Redemption Basket to be included in the current redemption proceeds
for the Fund (based on information about the Fund’s portfolio at the end of the
previous Business Day) (subject to correction). If applicable, PGI, through the
NSCC, also makes available on each Business Day, the estimated Cash Component or
Cash Value, effective through and including the previous Business Day, per
Creation Unit. Each Fund reserves the right to accept a nonconforming (i.e.,
custom) Fund Redemption.
In lieu of an In-Kind Redemption
Basket and Cash Redemption Amount, Creation Units may be redeemed consisting
solely of cash in an amount equal to the NAV of a Creation Unit, which amount is
referred to as the Cash Value. Such redemptions for a Fund may be subject to a
variable charge, as explained above. If applicable, information about the Cash
Value will be made available by PGI.
From day to day, the composition of
the In-Kind Redemption Basket may change as, among other things, corporate
actions are implemented for a Fund’s portfolio. All questions as to the
composition of the In-Kind Redemption Basket and the validity, form,
eligibility, and acceptance for deposit of any securities shall be determined by
the Fund, and the Fund’s determination shall be final and binding.
The right of redemption may be
suspended or the date of payment postponed: (i) for any period during which the
NYSE is closed (other than customary weekend and holiday closings); (ii) for any
period during which trading on the NYSE is suspended or restricted; (iii) for
any period during which an emergency exists as a result of which disposal of the
Shares or determination of the Fund’s NAV is not reasonably practicable; or (iv)
in such other circumstances as permitted by the SEC, including as described
below.
Cash in
lieu
Each Fund may, in its sole
discretion, permit or require the substitution of an amount of cash (“cash in
lieu”) to be added to the Cash Redemption Amount to replace any security in the
In-Kind Redemption Basket. A Fund may permit or require cash in lieu when, for
example, the securities in the In-Kind Redemption Basket may not be available in
sufficient quantity for delivery or may not be eligible for transfer through the
systems of DTC or the Clearing Process. Similarly, a Fund may permit or require
cash in lieu when, for example, the AP or its underlying investor is restricted
under U.S. or local securities law or policies from transacting in one or more
securities in the In-Kind Redemption Basket or an underlying investor would be
subject to unfavorable tax treatment if the investor received redemption
proceeds consisting of certain non-U.S. securities. Each Fund will comply with
the federal securities laws in satisfying redemptions with the applicable
In-Kind Redemption Basket, including the securities in the In-Kind Redemption
Basket that are sold in transactions that would be exempt from registration
under the 1933 Act. All redemption orders involving cash in lieu are considered
to be “custom redemptions.” PGI may charge a higher transaction fee on the cash
amount contributed in lieu of securities, which is intended in part to cover all
or a portion of any difference between the market value of the securities and
the cash in lieu amount.
Placement
of Redemption Orders
Redemptions must be placed to the
Distributor. In addition, redemption orders must be processed either through the
DTC process or the Clearing Process. To redeem a Creation Unit, an AP must
submit an irrevocable redemption order to the Distributor in accordance with the
procedures set forth in the Participant Agreement.
An AP submitting a redemption order
is deemed to represent to the Fund that it is in compliance with all applicable
representations set forth in the Participant Agreement. Each Fund reserves the
absolute right, in its sole discretion, to verify these representations, but
will typically require verification in connection with higher levels of
redemption activity and/or short interest in the Fund. If the AP, upon receipt
of a verification report, does not provide sufficient verification of the
requested representations, the redemption order will not be considered to be in
proper form and may be rejected by the Fund.
In certain cases, APs 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.
For select International Funds, next
day (also known as T-1 or T minus one) international market orders are to be
placed after the listing exchange closing time and before the Fund’s established
T-1 order window cut-off time, the latest being 5:30 PM Eastern Standard Time on
any Business Day. Such orders, if accepted, will receive the next Business Day’s
NAV per Creation Unit.
Placement
of Redemption Orders Using Clearing Process
Orders to redeem Creation Units
through the Clearing Process are deemed received by the Trust on the Transmittal
Date if (i) such order is received by the Distributor not later than the Order
Cut-Off Time on such Transmittal Date, and (ii) all other procedures set forth
in the Participant Agreement are properly followed. Orders deemed received will
be effectuated based on the NAV of the Fund as next determined. An order to
redeem Creation Units using the Clearing Process made in proper form but
received by the Trust after the Order Cut-Off Time will be deemed received on
the next Business Day and will be effected at the NAV next determined on such
next Business Day. In connection with such orders, the Transfer Agent transmits
on behalf of the AP such trade instructions as are necessary to effect the
redemption. Pursuant to such trade instructions, the AP agrees to deliver the
requisite Creation Unit(s) to the Fund, together with such additional
information as may be required by the Transfer Agent. Cash Redemption Amounts
will be delivered using either the Clearing Process or the Federal Reserve
System. The applicable In-Kind Redemption Basket and the Cash Redemption Amount
will be transferred to the investor by the second NSCC business day following
the date on which such request for redemption is deemed received.
Placement
of Redemption Orders Outside Clearing Process
Orders to redeem Creation Units
outside the Clearing Process 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. Such orders are deemed
received by the Trust on the Transmittal Date if: (i) such order is received by
the Transfer Agent not later than the Order Cut-Off Time on the Transmittal
Date; (ii) such order is accompanied or followed by the delivery of both (a) the
Creation Unit(s), which delivery must be made through DTC to the Custodian no
later than the DTC Cut-Off Time on the Business Day immediately following the
Transmittal Date and (b) the Cash Redemption Amount by 12:00 p.m., Eastern Time,
on the Business Day immediately following the Transmittal Date; and (iii) all
other procedures set forth in the Participant Agreement are properly followed.
After the Trust has deemed such an order received, the Trust will initiate
procedures to transfer, and expect to deliver, the requisite In-Kind Redemption
Basket and/or any Cash Redemption Amount owed to the redeeming party by the
second Business Day following the Transmittal Date on which such redemption
order is deemed received by the Trust.
Orders involving foreign securities
are expected to be settled outside the Clearing Process. Thus, upon receipt of
an irrevocable redemption order, the Transfer Agent will notify PGI and the
Custodian. The Custodian will then provide information of the redemption to the
Fund’s local sub-custodian(s). The redeeming AP, or the investor on whose behalf
it is acting, will have established appropriate arrangements with a
broker-dealer, bank or other custody provider in each jurisdiction in which the
securities are customarily traded and to which such securities (and any cash in
lieu) can be delivered from the Fund’s accounts at the applicable local
sub-custodian(s).
The calculation of the value of the
In-Kind Redemption Basket and the Cash Redemption Amount to be
delivered/received upon redemption will be made by the Custodian computed on the
Business Day on which a redemption order is deemed received by the Trust.
Therefore, if a redemption order in proper form is submitted to the Distributor
by an AP with the ability to transact through the Federal Reserve System, as
applicable, not later than Order Cut-Off Time on the Transmittal Date, and the
requisite number of Shares of the relevant Fund are delivered to the Custodian
prior to the DTC Cut-Off-Time, then the value of the In-Kind Redemption Basket
and the Cash Redemption Amount to be delivered/received will be determined by
the Custodian on such Transmittal Date. If, however, either: (i) the requisite
number of Shares of the relevant Fund are not delivered by the DTC Cut-
Off-Time, as described above, or (ii) 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 In-Kind Redemption Basket and
the Cash Redemption Amount to be delivered/received will be computed on the
Business Day following the Transmittal Date provided that the Fund 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 securities in the In-Kind Redemption Basket, the Trust may in
its discretion exercise its option to redeem Shares in cash, and the redeeming
beneficial owner will be required to receive its redemption proceeds in cash. In
addition, an investor may request a redemption in cash that each Fund 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 Fund
next determined after the redemption request is received in proper form (minus a
Transaction Fee, including a variable charge, if applicable, as described
above).
Redemptions of Fund Shares for the
In-Kind Redemption Basket will be subject to compliance with applicable federal
and state securities laws and each 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 securities in the
In-Kind Redemption Basket upon redemptions or could not do so without first
registering the securities in the In-Kind Redemption Basket under such laws. An
AP or an investor for which it is acting subject to a legal restriction with
respect to a particular security included in the In-Kind Redemption Basket
applicable to the redemption of a Creation Unit may be paid an equivalent amount
of cash. The AP 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.
Delivery of
Redemption Basket
Once a Fund has accepted a
redemption order, upon next determination of the Fund’s NAV, the Fund will
confirm the issuance of an In-Kind Redemption Basket, against receipt of the
Creation Unit(s) at such NAV, any cash in lieu and Transaction Fee. A Creation
Unit tendered for redemption and the payment of the Cash Redemption Amount, any
cash in lieu and Transaction Fee will be effected through DTC. The AP, or the
investor on whose behalf it is acting, will be recorded on the book-entry system
of DTC.
In certain cases, APs 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.
Cash
Redemption Method
When cash redemptions of Creation
Units are available or specified for a Fund, they will be effected in
essentially the same manner as in-kind redemptions. In the case of a cash
redemption, the investor will receive the cash equivalent of the In-Kind
Redemption Basket minus any Transaction Fees.
Settlement
of Foreign Securities and Regular Foreign Holidays
Each Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of the
Transmittal Date (“T”) plus two Business Days (i.e., days on which the national
securities exchange is open) ("T+2"). A Fund may effect deliveries of Creation
Units and portfolio securities on a basis other than T+2 to accommodate local
holiday schedules, to account for different treatment among foreign and U.S.
markets of dividend record dates and ex- dividend dates or under certain other
circumstances. Given that foreign securities settle in accordance with the
normal rules of settlement of such securities in the applicable foreign market,
coupled with foreign market holiday schedules, the Settlement Date may be up to
14 calendar days after the Transmittal Date in certain
circumstances.
The ability of the Trust to effect
in-kind creations and redemptions within two Business Days of receipt of an
order in good form is subject, among other things, to the condition that, within
the time period from the date of the order to the date of delivery of the
securities, there are no days that are holidays in the applicable foreign
market. In such cases, the local market settlement procedures will not commence
until the end of the local holiday periods. For every occurrence of one or more
intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be
extended by the number of such intervening holidays. In addition to holidays,
other unforeseeable closings in a foreign market due to emergencies may also
prevent the Trust from delivering securities within normal settlement periods.
The proclamation of new holidays, the treatment by market participants of
certain days as “informal holidays” (e.g., days on which no or limited
securities transactions occur, as a result of substantially shortened trading
hours), the elimination of existing holidays or changes in local securities
delivery practices could affect the information set forth herein at some time in
the future.
Because a Fund’s portfolio
securities may trade on days that the Fund’s Exchange is closed or on days that
are not Business Days for the Fund, APs may not be able to redeem their Shares,
or to purchase and sell Shares on the Exchange, on days when the NAV of the Fund
could be significantly affected by events in the relevant non-U.S.
markets.
The Trust offers, issues and sells
Shares of the Funds to investors only in Creation Units through the Distributor
on a continuous basis at the NAV next determined after an order in proper form
is received. The NAV of each Fund is expected to be determined as of 4:00 p.m.
ET on each “Business Day,” which is defined to include any day that the Trust is
open for business as required by Section 22(e) of the 1940 Act. The Trust will
sell and redeem Creation Units of the Funds only on a Business Day.
The price of Shares trading on the
Exchange will be based on a current bid-offer market. No secondary sales will be
made to Brokers at a concession by the Distributor or by the Funds. Purchases
and sales of Shares on the Exchange, which will not involve the Funds, will be
subject to customary brokerage commissions and charges.
CALCULATION OF
NAV
Each Fund’s NAV is calculated each
day the New York Stock Exchange (“NYSE”) is open, as of the close of business of
the Exchange (normally 4:00 p.m. Eastern Time). The NAV of Fund shares is not
determined in days the NYSE is closed (generally, New Year’s Day; Martin Luther
King, Jr. Day; Washington’s Birthday/Presidents’ Day; Good Friday; Memorial Day;
Independence Day’ Labor Day; Thanksgiving Day; and Christmas). The Funds will
not treat an intraday unscheduled disruption in NYSE trading as a closure of the
NYSE and will price its shares as of 4:00 p.m. Eastern Time, if the particular
disruption directly affects only the NYSE. When an order to buy or sell shares
is received, the share price used to fill the order is the next price calculated
after the order is received in proper form.
A Fund’s NAV will be the value of a
single Share. The NAV of Shares of a Fund will be computed by adding the value
of the Fund’s investments, cash, and other assets, subtracting its liabilities,
and dividing the result by the number of Shares outstanding.
The Board has delegated day-to-day
valuation oversight responsibilities to PGI. PGI has established a Valuation
Committee (“Valuation Committee”) to fulfill these oversight
responsibilities.
Generally, each Fund will value its
portfolio securities and assets as follows:
In computing the Fund’s NAV, the
Fund’s fixed income securities (including defaulted debt and restricted
securities (collectively, “OTC-Traded Securities”) will be valued based on price
quotations obtained from a third-party pricing service or from a broker-dealer
who makes markets in such securities. Any such third-party pricing service may
use a variety of methodologies to value some or all such securities to determine
the market price. For example, the prices of securities with characteristics
similar to those held by the Fund may be used to assist with the pricing
process. In addition, the pricing service may use proprietary pricing models.
The Fund’s OTC-Traded Securities will generally be valued at bid prices.
Debt securities with remaining
maturities of sixty days or less for which market quotations and information
furnished by a third-party pricing service are not readily available will be
valued at amortized cost, which approximates current value.
Exchange traded equity securities,
including ETFs, Depositary Receipts (including unsponsored ADRs),
exchange-traded REITs, exchange-traded preferred stock, exchange-traded
convertible bonds, and cleared swaps will be valued at market value, which will
generally be determined using the last reported official closing or last trading
price on the exchange or market on which the security is primarily traded at the
time of valuation or, if no sale has occurred, at the last quoted bid price on
the primary market or exchange on which they are traded.
Investment company securities (other
than ETFs), including money market funds, closed end investment companies, unit
investment trusts and open-end investment companies will be valued at
NAV.
Exchange-traded futures contracts
will be valued at the settlement or closing price determined by the applicable
exchange.
Exchange-traded option contracts,
including options on futures and swaps, will be valued at their most recent sale
price. If no such sales are reported, these contracts will be valued at their
most recent bid price.
OTC-traded derivative instruments,
including options, swaps, will normally be valued on the basis of quotes
obtained from a third party broker-dealer who makes markets in such securities
or on the basis of quotes obtained from an independent third-party pricing
service. The Fund’s OTC-traded derivative instruments will generally be valued
at bid prices. Certain OTC-traded derivative instruments, such as interest rate
swaps and credit default swaps, will be valued at the mean price.
Prices described above will be
obtained from pricing services that have been approved by the Board. A number of
independent third party pricing services are available and the Funds may use
more than one of these services. The Funds may also discontinue the use of any
pricing service at any time. PGI will engage in oversight activities with
respect to each Fund’s pricing services, which includes, among other things,
testing the prices provided by pricing services prior to calculation of the
Fund’s NAV, conducting periodic due diligence meetings, and periodically
reviewing the methodologies and inputs used by these services.
Foreign securities and instruments
will be valued in their local currency following the methodologies described
above. Typically, foreign securities, instruments and currencies will be
translated to U.S. dollars, based on foreign currency exchange rate quotations
supplied by a pricing service as of the close of the New York Stock Exchange
(“NYSE”), which will use a proprietary model to determine the exchange
rate.
Forward foreign currency exchange
contracts will be valued at an interpolated rate based on days to maturity
between the closest preceding and subsequent settlement period. Such
interpolated rates are derived from foreign currency exchange rate quotations
reported by an independent third-party pricing service.
Other portfolio securities and
assets for which market quotations, official closing prices, or information
furnished by a pricing service are not readily available or, in the opinion of
the Valuation Committee, are deemed unreliable will be fair valued in good faith
by the Valuation Committee in accordance with applicable fair value pricing
policies. For example, if, in the opinion of the Valuation Committee, a
security’s value has been materially affected by events occurring before the
Fund’s pricing time but after the close of the exchange or market on which the
security is principally traded, that security will be fair valued in good faith
by the Valuation Committee in accordance with applicable fair value pricing
policies.
In fair valuing a security, the
Valuation Committee may consider factors including price movements in futures
contracts and ADRs, market and trading trends, the bid/ask quotes of brokers,
and off-exchange institutional trading.
TAX
CONSIDERATIONS
Taxation
of the Funds
It is a policy of each Fund to make
distributions of substantially all of its respective investment income and any
net realized capital gains. Each Fund intends to qualify as a regulated
investment company by satisfying certain requirements prescribed by Subchapter M
of the Internal Revenue Code. If a Fund fails to qualify as a regulated
investment company, it will be liable for taxes, significantly reducing its
distributions to shareholders and eliminating shareholders' ability to treat
distributions (as long or short-term capital gains or qualifying dividends) of
the Fund in the manner they were received by the Fund.
Each Fund may purchase securities of
certain foreign corporations considered to be passive foreign investment
companies by the Internal Revenue Service. To avoid taxes and interest that must
be paid by the Fund if these instruments appreciate in value, the Fund may make
various elections permitted by the tax laws. However, these elections could
require that the Fund recognizes additional taxable income, which in turn must
be distributed.
Each Fund is required in certain
cases to withhold and remit to the U.S. Treasury 24% of ordinary income
dividends and capital gain dividends, and the proceeds of redemption of shares,
paid to any shareholder 1) who has provided either an incorrect tax
identification number or no number at all, 2) who is subject to backup
withholding by the Internal Revenue Service for failure to report the receipt of
interest or dividend income properly, or 3) who has failed to certify to the
Fund that it is not subject to backup withholding or that it is a corporation or
other "exempt recipient."
Taxation
of Shareholders
A shareholder recognizes gain or
loss on the sale or redemption of shares of a Fund in an amount equal to the
difference between the proceeds of the sales or redemption and the shareholder's
adjusted tax basis in the shares. All or a portion of any loss so recognized may
be disallowed if the shareholder purchases other shares of the Fund within 30
days before or after the sale or redemption. In general, any gain or loss
arising from (or treated as arising from) the sale or redemption of shares of
the Fund is considered capital gain or loss (long-term capital gain or loss if
the shares were held for longer than one year). However, any capital loss
arising from the sales or redemption of shares held for six months or less is
disallowed to the extent of the amount of exempt-interest dividends received on
such shares and (to the extent not disallowed) is treated as a long-term capital
loss to the extent of the amount of capital gain dividends received on such
shares. Capital losses in any year are deductible only to the extent of capital
gains plus, in the case of a noncorporate taxpayer, $3,000 of ordinary income
under current rules.
If a shareholder a) incurs a sales
charge in acquiring shares of a Fund, b) disposes of such shares less than 91
days after they are acquired, and c) subsequently acquires shares of a Fund or
another fund at a reduced sales charge pursuant to a right to reinvest at such
reduced sales charge acquired in connection with the acquisition of the shares
disposed of, then the sales charge on the shares disposed of (to the extent of
the reduction in the sales charge on the shares subsequently acquired) shall not
be taken into account in determining gain or loss on the shares disposed of but
shall be treated as incurred on the acquisition of the shares subsequently
acquired.
Shareholders should consult their
own tax advisors as to the federal, state and local tax consequences of
ownership of shares of the Funds in its particular circumstances.
Qualification
as a Regulated Investment Company
Each Fund intends to qualify
annually to be treated as a regulated investment company (RIC) under the
Internal Revenue Code of 1986, as amended, (the IRC). To qualify as a RIC, a
Fund must invest in assets which produce types of income specified in the IRC
(Qualifying Income). Whether the income from derivatives, swaps,
commodity-linked derivatives and other commodity/natural resource-related
securities is Qualifying Income is unclear under current law. Accordingly, a
Fund’s ability to invest in certain derivatives, swaps, commodity-linked
derivatives and other commodity/natural resource-related securities may be
restricted. Further, if a Fund does invest in these types of securities and the
income is not determined to be Qualifying Income, it may cause the Fund to fail
to qualify as a RIC under the IRC.
International
Funds
Some foreign securities purchased by
the Funds may be subject to foreign taxes that could reduce the yield on such
securities. The amount of such foreign taxes is expected to be insignificant. A
Fund may from year to year make an election to pass through such taxes to
shareholders. If such election is not made, any foreign taxes paid or accrued
will represent an expense to the Fund that will reduce its investment company
taxable income.
Under the Foreign Account Tax
Compliance Act (FATCA), a Fund may be required to withhold a 30% tax on (a)
dividends paid by the Fund and (b) certain capital gain distributions and/or the
proceeds arising from the sale of Fund shares paid by the Fund after December
31, 2018, to certain foreign entities, referred to as foreign financial
institutions or non-financial foreign entities, that fail to comply (or be
deemed compliant) with extensive new reporting and withholding requirements
designed to inform the U.S. Department of the Treasury of U.S.-owned foreign
investment accounts. The IRS recently issued proposed regulations indicating its
intent to eliminate the 30% withholding tax on gross proceeds. A Fund may
disclose the information that it receives from its shareholders to the IRS,
non-U.S. taxing authorities or other parties as necessary to comply with FATCA.
Withholding also may be required if a foreign entity that is a shareholder of a
Fund fails to provide the Fund with appropriate certifications or other
documentation concerning its status under FATCA.
Futures
Contracts and Options
As previously discussed, some of the
Funds invest in futures contracts or options thereon, index options, or options
traded on qualified exchanges. For federal income tax purposes, capital gains
and losses on futures contracts or options thereon, index options or options
traded on qualified exchanges are generally treated as 60% long-term and 40%
short-term. In addition, a Fund must recognize any unrealized gains and losses
on such positions held at the end of the fiscal year. A Fund may elect out of
such tax treatment, however, for a futures or options position that is part of
an "identified mixed straddle" such as a put option purchased with respect to a
portfolio security. Gains and losses on futures and options included in an
identified mixed straddle are considered 100% short-term and unrealized gains or
losses on such positions are not realized at year-end. The straddle provisions
of the Code may require the deferral of realized losses to the extent that a
Fund has unrealized gains in certain offsetting positions at the end of the
fiscal year. The Code may also require recharacterization of all or a part of
losses on certain offsetting positions from short-term to long-term, as well as
adjustment of the holding periods of straddle positions.
PORTFOLIO
HOLDINGS DISCLOSURE
The portfolio holdings of each Fund
are publicly disseminated each day the Fund is open for business through
financial reporting and news services, including publicly accessible Internet
web-sites. In addition, for in-kind creations, a basket composition file, which
includes the security names and share quantities to deliver in exchange for
Shares, together with estimates and actual cash components, will be publicly
disseminated daily prior to the opening of the Exchange via the National
Securities Clearing Corporation ("NSCC"). The basket represents one Creation
Unit of the Funds.
Certain Entities may receive
information regarding the creation unit portfolio not available to other current
or prospective Fund shareholders in connection with the dissemination of
information necessary for transactions in Creation Units. For this
purpose, “Entities” are generally limited to NSCC members, subscribers to
various fee-based subscription services, large institutional investors (known as
“Authorized Participants”) that have been authorized by the Distributor to
purchase and redeem large blocks of shares pursuant to legal requirements,
market makers, and other institutional market participants and entities that
provide information or transactional services.
Access to information concerning the
Funds' portfolio holdings may be permitted at other times to personnel of third
party service providers, including the Funds' custodian, transfer agent,
auditors and counsel, as may be necessary to conduct business in the ordinary
course in a manner consistent with such service providers’ agreements with the
Trust on behalf of the Funds.
In addition to the permitted
disclosures described above, shareholders can also obtain each Fund's Statement
of Additional Information (“SAI”), Shareholder Reports, and its Form N-CSR and
Form N-SAR, filed twice a year. Each Fund’s SAI and Shareholder Reports are
available free upon request from the Fund, and those documents and the Form
N-CSR and Form N-SAR may be viewed on-screen or downloaded from the SEC web site
at www.sec.gov.
PROXY VOTING
POLICIES AND PROCEDURES
The Board has delegated
responsibility for decisions regarding proxy voting for securities held by each
Fund to PGI or the Fund's Sub-Advisor, if applicable. PGI and the Sub-Advisor
will vote such proxies in accordance with its proxy policies and procedures,
which have been reviewed by the Board, and which are found in Appendix C. Any
material changes to the proxy policies and procedures will be submitted to the
Board for approval.
Information regarding how the Funds
voted proxies relating to portfolio securities during the most recent 12 month
period ended June 30, 2019, will be available, without charge, upon request, by
calling 1-800-787-1621 or on the SEC website at www.sec.gov.
For Funds that participate in a
securities lending program, the voting rights for securities that are loaned
are
transferred to the borrower.
Therefore, the lender (i.e., a Fund) is not entitled to vote the loaned
securities,
unless it recalls those securities.
Those managing the Fund’s investments may recall securities for
voting
purposes when they reasonably
believe the ability to vote such securities outweighs the additional
revenue
received if such securities were not
recalled.
FINANCIAL
STATEMENTS
The financial statements of the Fund
at June 30, 2019, are incorporated herein by reference to the Fund's most recent
Annual Report to
Shareholders filed
with the SEC on Form N-CSR. The unaudited financial statements of the Fund at
December 31, 2019 are also incorporated herein by reference from the Fund's most
recent Semi-Annual Report to
Shareholders filed
with the SEC on Form N-CSR.
INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
Ernst & Young LLP (220 South
Sixth Street, Suite 1400, Minneapolis, MN 55402), is the independent registered
public accounting firm for the Trust.
CONTROL PERSONS
AND PRINCIPAL HOLDERS OF SECURITIES
Control
Persons
Although the Fund does not have
information concerning its beneficial ownership held in the names of DTC
participants, as of May 31, 2020, the names, addresses and percentage ownership
of each DTC participant that owned of record 5% or more of the outstanding
Shares of the Fund were as follows:
|
|
|
|
|
ETF |
Percent
of
Ownership |
Name of
Owner |
Address of
Owner |
Principal Active Global
Dividend Income |
98.70% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
Principal Active
Income |
86.25% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
Principal Contrarian Value
Index |
70.84% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal Contrarian Value
Index |
9.82% |
Goldman Sachs & Co.
LLC |
200 West St, 29th
Floor |
|
|
|
New York, NY
10282 |
|
|
|
|
Principal Contrarian Value
Index |
6.01% |
Citibank, N.A. |
701 E 60th Street
North |
|
|
|
Sioux Falls, SD
57104 |
|
|
|
|
|
|
|
|
|
ETF |
Percent
of
Ownership |
Name of
Owner |
Address of
Owner |
Principal Contrarian Value
Index |
5.23% |
Citadel Securities
LLC |
131 South Dearborn
Street |
|
|
|
Chicago, IL
60603 |
|
|
|
|
Principal Healthcare Innovators
Index |
64.34% |
State Street Bank and Trust
Company |
John Hancock
Tower |
|
|
|
200 Clarendon
St |
|
|
|
Boston, MA
02116 |
|
|
|
|
Principal Healthcare Innovators
Index |
21.91% |
Pershing LLC |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal International
Multi-Factor Core Index |
84.04% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal International
Multi-Factor Core Index |
12.05% |
J.P. Morgan Securities
LLC/JPMC |
383 Madison
Avenue |
|
|
|
New York, NY
10179 |
|
|
|
|
Principal Investment Grade
Corporate Active |
95.18% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
Principal Millennials
Index |
46.60% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal Millennials
Index |
17.51% |
J.P. Morgan Securities
LLC/JPMC |
383 Madison
Avenue |
|
|
|
New York, NY
10179 |
|
|
|
|
Principal Millennials
Index |
6.92% |
Charles Schwab |
211 Main
Street |
|
|
|
San Francisco, CA
94105 |
|
|
|
|
Principal Millennials
Index |
6.49% |
TD Ameritrade |
200 S 108th
Ave |
|
|
|
Omaha, NE
68154 |
|
|
|
|
Principal Price Setters
Index |
64.12% |
Pershing LLC |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal Price Setters
Index |
9.42% |
TD Ameritrade |
200 S 108th
Ave |
|
|
|
Omaha, NE
68154 |
|
|
|
|
Principal Price Setters
Index |
7.19% |
Bank of America |
100 North Tryon
Street |
|
|
|
Charlotte, NC
28255 |
|
|
|
|
Principal Shareholder Yield
Index |
68.39% |
Pershing LLC |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal Shareholder Yield
Index |
10.97% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
|
ETF |
Percent
of
Ownership |
Name of
Owner |
Address of
Owner |
Principal Shareholder Yield
Index |
9.88% |
Charles Schwab |
211 Main
Street |
|
|
|
San Francisco, CA
94105 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
18.76% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
15.90% |
Merrill Lynch, Pierce, Fenner
& Smith |
One Bryant
Park |
|
|
Incorporated |
New York, NY
10036 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
8.88% |
Raymond James & Associates,
Inc. |
880 Carillon
Parkway |
|
|
|
St. Petersburg, FL
33716 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
7.99% |
TD Ameritrade |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
6.33% |
Pershing LLC |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal Spectrum Preferred
Securities Index |
5.38% |
Wells Fargo Clearing Services,
LLC |
One North Jefferson
Ave |
|
|
|
St. Louis, MO
63103 |
|
|
|
|
Principal Sustainable Momentum
Index |
71.40% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal Sustainable Momentum
Index |
12.47% |
Goldman Sachs & Co.
LLC |
200 West St, 29th
Floor |
|
|
|
New York, NY
10282 |
|
|
|
|
Principal Sustainable Momentum
Index |
8.16% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
Principal Ultra-Short Active
Income |
82.89% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal Ultra-Short Active
Income |
7.79% |
J.P. Morgan Securities
LLC/JPMC |
383 Madison
Avenue |
|
|
|
New York, NY
10179 |
|
|
|
|
Principal U.S. Large-Cap
Multi-Factor Core Index |
80.17% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
|
|
|
|
Principal U.S. Large-Cap
Multi-Factor Core Index |
18.01% |
Bank of America |
100 North Tryon
Street |
|
|
|
Charlotte, NC
28255 |
|
|
|
|
Principal U.S. Mega-Cap
Multi-Factor Index |
88.06% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
|
ETF |
Percent
of
Ownership |
Name of
Owner |
Address of
Owner |
Principal U.S. Mega-Cap
Multi-Factor Index |
5.56% |
Pershing LLC |
One Pershing
Plaza |
|
|
|
Jersey City, NJ
07399 |
|
|
|
|
Principal U.S. Small-Cap
Multi-Factor Index |
96.67% |
Bank of New York
Mellon |
225 Liberty
Street |
|
|
|
New York, NY
10286 |
|
|
|
|
Principal U.S. Small-MidCap
Multi-Factor Core Index |
98.08% |
National Financial Services,
LLC |
200 Liberty
St. |
|
|
|
One World Financial
Center |
|
|
|
New York, NY
10281-1003 |
The By-laws of the Trust sets the
quorum requirement (a quorum must be present at a meeting of shareholders for
business to be transacted). The By-laws of the Trust state that a quorum is the
presence in person or by proxy of the holders of one-third of the shares of the
capital stock of the Trust, or when the meeting relates to a certain series of
the Trust, that series, issued and outstanding and entitled to vote on the
record date.
Certain proposals presented to
shareholders for approval require the vote of a "majority of the outstanding
voting securities," which is a term defined in the 1940 Act to mean, with
respect to the Fund, the affirmative vote of the lesser of 1) 67% or more of the
voting securities of the Fund present at the meeting of that Fund, if the
holders of more than 50% of the outstanding voting securities of the Fund are
present in person or by proxy, or 2) more than 50% of the outstanding voting
securities of the Fund (a "Majority of the Outstanding Voting
Securities").
Management
Ownership
As of May 31, 2020, the Officers and
Trustees of the Trust as a group owned less than 1% of the outstanding shares of
any of the Funds.
PORTFOLIO MANAGER
DISCLOSURE
This section contains information
about portfolio managers and the other accounts they manage, their compensation,
and their ownership of securities. The “Ownership of Securities” tables reflect
the portfolio managers’ beneficial ownership, which means a direct or indirect
pecuniary interest. For information about potential material conflicts of
interest, see Investment Advisory & Other Services - Brokerage on Purchases
and Sales of Securities - Conflicts of Interest and Allocation of
Trades.
This section lists information about
PGI’s portfolio managers first. Next, the section includes information about the
sub-advisor's portfolio managers, which is provided by the
sub-advisor.
Information in this section is as of
June 30, 2019, unless otherwise noted.
Advisor:
Principal Global Investors, LLC
|
|
|
|
|
|
|
Other
Accounts Managed |
Portfolio
Manager and ETFs |
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of the
Accounts
that base
the
Advisory
Fee
on
Performance |
John R.
Friedl: Principal Investment
Grade Corporate Active and Principal Ultra-Short Active Income
ETFs |
|
|
|
|
Registered investment
companies |
25 |
$10.2 billion |
0 |
$0 |
Other pooled investment
vehicles |
4 |
$1.0 billion |
0 |
$0 |
Other accounts |
4 |
$70.0 million |
0 |
$0 |
|
|
|
|
|
Scott J.
Peterson: Principal Ultra-Short Active
Income ETF |
|
|
|
|
Registered investment
companies |
25 |
$10.2 billion |
0 |
$0 |
Other pooled investment
vehicles |
4 |
$1.0 billion |
0 |
$0 |
Other accounts |
4 |
$70.0 million |
0 |
$0 |
|
|
|
|
|
Jeffrey A.
Schwarte:
Principal Contrarian Value Index, Principal Healthcare Innovators Index,
Principal International Multi-Factor Core Index, Principal Millennials
Index, Principal Price Setters Index, Principal Shareholder Yield Index,
Principal Sustainable Momentum Index, Principal U.S. Large-Cap
Multi-Factor Core Index, Principal U.S. Mega-Cap Multi-Factor Index,
Principal U.S. Small-Cap Multi-Factor Index, and Principal U.S.
Small-MidCap Multi-Factor Core Index ETFs |
|
|
|
|
Registered investment
companies |
26 |
$15.2 billion |
0 |
$0 |
Other pooled investment
vehicles |
10 |
$38.6 billion |
0 |
$0 |
Other accounts |
6 |
$106.0 million |
0 |
$0 |
|
|
|
|
|
Aaron J.
Siebel (1): Principal Contrarian Value
Index, Principal Healthcare Innovators Index, Principal International
Multi-Factor Core Index, Principal Millennials Index, Principal Price
Setters Index, Principal Shareholder Yield Index, Principal Sustainable
Momentum Index, Principal U.S. Large-Cap Multi-Factor Core Index,
Principal U.S. Mega-Cap Multi-Factor Index, Principal U.S. Small-Cap
Multi-Factor Index, and Principal U.S. Small-MidCap Multi-Factor Core
Index ETFs |
|
|
|
|
Registered investment
companies |
18 |
$16.2 billion |
0 |
$0 |
Other pooled investment
vehicles |
4 |
$39.1 billion |
0 |
$0 |
Other accounts |
2 |
$7.8 million |
0 |
$0 |
|
|
|
|
|
Timothy R.
Warrick: Principal Investment
Grade Corporate Active ETF |
|
|
|
|
Registered investment
companies |
25 |
$2.3 billion |
3 |
$546.0
million |
Other pooled investment
vehicles |
30 |
$3.7 billion |
0 |
$0 |
Other accounts |
62 |
$7.2 billion |
8 |
$697.2
million |
|
|
|
|
|
(1) Information as of
December 31, 2019 |
|
|
|
|
Compensation
PGI offers a competitive
compensation structure that is evaluated annually relative to other global asset
management firms to ensure its continued competitiveness and alignment with
industry best practices. The objective of the structure is to offer market
competitive compensation that aligns individual and team contributions with firm
and client performance objectives in a manner that is consistent with industry
standards and business results.
Compensation for the Exchange-Traded
Fund investment team is comprised of base salary and variable incentive
components. As team members advance in their careers, the variable component
increases in its proportion commensurate with responsibility levels. The
incentive component is aligned with pre-tax investment performance (1, 3 and 5
year), such performance as compared to relevant benchmarks, and other specific
goals of Principal Global Investors and Principal Financial Group
(“PFG”). Team results and individual contributions focused on regulatory
compliance, operational excellence, client retention, and client satisfaction
are among the other factors contributing to the quantum of incentive
compensation.
Payments under the variable
incentive plan are delivered in the form of cash or a combination of cash and
deferred compensation. Deferred incentive compensation is delivered in PFG
restricted stock units and/or co-investment. Deferred compensation payment
vehicles are subject to a three year vesting schedule. The overall
measurement framework and the deferred component are well aligned with our
desired focus on clients’ objectives, alignment with PFG stakeholders and talent
retention.
In addition to deferred compensation
obtained through their compensation programming, team members have investments
acquired through their participation in the PFG’s employee stock purchase plan,
retirement plans and direct personal investments. It should be noted that the
PFG’s retirement plans generally utilize its non-registered group separate
accounts or commingled vehicles rather than the traditional mutual funds.
However, in each instance these vehicles are managed in lockstep alignment with
the mutual funds (i.e. “clones”).
Ownership of
Securities
|
|
|
|
Portfolio
Manager |
Trust Funds
Managed by Portfolio Manager
(list each
fund on its own line) |
Dollar Range
of Securities Owned by the Portfolio Manager |
John R. Friedl |
Principal Investment Grade
Corporate Active ETF |
None |
John R. Friedl |
Principal Ultra-Short Active
Income ETF |
None |
Jeffrey A.
Schwarte |
Principal Contrarian Value
Index ETF |
$1 - $10,000 |
Jeffrey A.
Schwarte |
Principal Healthcare Innovators
Index ETF |
$50,001 -
$100,000 |
Jeffrey A.
Schwarte |
Principal International
Multi-Factor Core Index ETF |
None |
Jeffrey A.
Schwarte |
Principal Millennials Index
ETF |
$100,001 -
$500,000 |
Jeffrey A.
Schwarte |
Principal Price Setters Index
ETF |
$100,001 -
$500,000 |
Jeffrey A.
Schwarte |
Principal Shareholder Yield
Index ETF |
$100,001 -
$500,000 |
Jeffrey A.
Schwarte |
Principal Sustainable Momentum
Index ETF |
$10,001 -
$50,000 |
Jeffrey A.
Schwarte |
Principal U.S. Large-Cap
Multi-Factor Core Index ETF |
None |
Jeffrey A.
Schwarte |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
$100,001 -
$500,000 |
Jeffrey A.
Schwarte |
Principal U.S. Small-Cap
Multi-Factor Index ETF |
$100,001 -
$500,000 |
Jeffrey A.
Schwarte |
Principal U.S. Small-MidCap
Multi-Factor Core Index ETF |
None |
Aaron J. Siebel (1) |
Principal Contrarian Value
Index ETF |
None |
Aaron J. Siebel (1) |
Principal Healthcare Innovators
Index ETF |
None |
Aaron J. Siebel (1) |
Principal International
Multi-Factor Core Index ETF |
None |
Aaron J. Siebel (1) |
Principal Millennials Index
ETF |
None |
Aaron J. Siebel (1) |
Principal Price Setters Index
ETF |
None |
Aaron J. Siebel (1) |
Principal Shareholder Yield
Index ETF |
None |
Aaron J. Siebel (1) |
Principal Sustainable Momentum
Index ETF |
None |
Aaron J. Siebel (1) |
Principal U.S. Large-Cap
Multi-Factor Core Index ETF |
None |
Aaron J. Siebel (1) |
Principal U.S. Mega-Cap
Multi-Factor Index ETF |
None |
Aaron J. Siebel (1) |
Principal U.S. Small-Cap
Multi-Factor Index ETF |
None |
Aaron J. Siebel (1) |
Principal U.S. Small-MidCap
Multi-Factor Core Index ETF |
None |
Scott J.
Peterson |
Principal Ultra-Short Active
Income ETF |
None |
Timothy R.
Warrick |
Principal Investment Grade
Corporate Active ETF |
None |
|
|
|
(1) Information as of
December 31, 2019 |
|
Advisor:
Principal Global Investors, LLC (Edge Asset Management Portfolio
Managers)
|
|
|
|
|
|
|
Other
Accounts Managed |
|
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of the
Accounts
that base
the
Advisory
Fee
on
Performance |
Daniel R.
Coleman: Principal
Active Global Dividend Income ETF |
|
|
|
|
Registered investment
companies |
8 |
$13.1 billion |
0 |
$0 |
Other pooled investment
vehicles |
1 |
$77.6
million |
0 |
$0 |
Other accounts |
47 |
$3.4
billion |
0 |
$0 |
|
|
|
|
|
Cliff
Remily: Principal
Active Global Dividend Income ETF |
|
|
|
|
Registered investment
companies |
0 |
$0 |
0 |
$0 |
Other pooled investment
vehicles |
0 |
$0 |
0 |
$0 |
Other accounts |
1 |
$22.6
million |
0 |
$0 |
Compensation
PGI offers a competitive
compensation structure that is evaluated annually relative to other global asset
management firms to ensure its continued competitiveness and alignment with
industry best practices. The objective of the structure is to offer market
competitive compensation that aligns individual and team contributions with firm
and client performance objectives in a manner that is consistent with industry
standards and business results.
Compensation for all team members is
comprised of base salary and variable incentive components. As team members
advance in their careers, the variable component increases in its proportion
commensurate with responsibility levels. The variable component for investment
professionals is designed to reinforce investment performance, firm performance,
team collaboration, regulatory compliance, operational excellence, client
retention and client satisfaction. Fund performance is measured on a pre-tax
basis against relative client benchmarks and peer groups over one year,
three-year and five-year periods, calculated quarterly, reinforcing a longer
term orientation.
Payments under the variable
incentive plan are delivered in the form of cash or a combination of cash and
deferred compensation. The amount of incentive delivered in the form of deferred
compensation depends on the size of an individual’s incentive award as it
relates to a tiered deferral scale. Deferred compensation is required to be
invested into funds managed by the team, via a co-investment program; thus,
aligning the interests of investment professionals with client objectives.
Co-investment is subject to a three year cliff vesting schedule which meets our
objective of increased employee retention.
In addition to base salary and
variable incentive, portfolio managers and senior professionals participate in
the Principal Financial Group Long-term Incentive Plan (“Plan”). Awards from
this Plan are based on individual performance and are delivered in the form of
three-year cliff vest Principal Financial Group (“PFG”) RSUs or a combination of
three-year cliff vest PFG RSUs and three-year ratable vest PFG stock options;
therefore, aligning the interests of team members with PFG
stakeholders.
Ownership of
Securities
|
|
|
|
Portfolio
Manager |
Trust Funds
Managed by Portfolio Manager
(list each
fund on its own line) |
Dollar Range
of Securities Owned
by the Portfolio Manager |
Daniel R.
Coleman |
Principal Active Global
Dividend Income ETF |
$10,001 -
$50,000 |
Cliff Remily |
Principal Active Global
Dividend Income ETF |
$10,001 -
$50,000 |
Advisor:
Principal Global Investors, LLC (Principal® Global Asset
Allocation Portfolio Managers)
|
|
|
|
|
|
|
Other
Accounts Managed |
|
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of the
Accounts
that base
the
Advisory
Fee
on
Performance |
Todd A.
Jablonski:
Principal Active Income ETF |
|
|
|
|
Registered investment
companies |
9 |
$15.3 billion |
0 |
$0 |
Other pooled investment
vehicles |
2 |
$245.5 million |
0 |
$0 |
Other accounts |
1 |
$346.0 million |
0 |
$0 |
|
|
|
|
|
Gregory L.
Tornga: Principal Active Income
ETF |
|
|
|
|
Registered investment
companies |
9 |
$15.3 billion |
0 |
$0 |
Other pooled investment
vehicles |
2 |
$245.5 million |
0 |
$0 |
Other accounts |
1 |
$346.0 million |
0 |
$0 |
Compensation
PGI offers a competitive
compensation structure that is evaluated annually relative to other global asset
management firms to ensure its continued competitiveness and alignment with
industry best practices. The objective of the structure is to offer market
competitive compensation that aligns individual and team contributions with firm
and client performance objectives in a manner that is consistent with industry
standards and business results.
Compensation for all team members is
comprised of base salary and variable incentive components. As team members
advance in their careers, the variable component increases in its proportion
commensurate with responsibility levels. The variable component for investment
professionals is designed to reinforce investment performance, firm performance,
team collaboration, regulatory compliance, operational excellence, client
retention and client satisfaction. Fund performance is measured on a pre-tax
basis against relative client benchmarks and peer groups over one year,
three-year and five-year periods, calculated quarterly, reinforcing a longer
term orientation.
Payments under the variable
incentive plan are delivered in the form of cash or a combination of cash and
deferred compensation. The amount of incentive delivered in the form of deferred
compensation depends on the size of an individual’s incentive award as it
relates to a tiered deferral scale. Deferred incentive compensation is delivered
in PFG restricted stock units and co-investment, subject to a three year vesting
schedule. The overall measurement framework and the deferred component are
well aligned with our desired focus on clients’ objectives, alignment with PFG
stakeholders and talent retention.
In addition to deferred compensation
obtained through their compensation programming, team members have investments
acquired through their participation in the PFG’s employee stock purchase plan,
retirement plans and direct personal investments. It should be noted that the
PFG’s retirement plans generally utilize its non-registered group separate
accounts or commingled vehicles rather than the traditional mutual funds.
However, in each instance these vehicles are managed in lockstep alignment with
the mutual funds (i.e. “clones”).
Ownership of
Securities
|
|
|
|
Portfolio
Manager |
Trust Funds
Managed by Portfolio Manager
(list each
fund on its own line) |
Dollar Range
of Securities Owned
by the Portfolio Manager |
Todd A.
Jablonski |
Principal Active Income
ETF |
$1 - $10,000 |
Gregory L. Tornga
|
Principal Active Income
ETF |
$10,001 -
$50,000 |
Sub-Advisor:
Spectrum Asset Management, Inc. (Information as of April 30, 2020)
|
|
|
|
|
|
|
Other
Accounts Managed |
|
Total
Number
of
Accounts |
Total
Assets
in
the
Accounts |
Number
of
Accounts
that
base
the
Advisory
Fee
on
Performance |
Total
Assets
of the
Accounts
that base
the
Advisory
Fee
on
Performance |
Fernando
Diaz: Principal Spectrum
Tax-Advantaged Dividend Active ETF |
|
Registered investment
companies |
7 |
$10.5 billion |
0 |
$0 |
Other pooled investment
vehicles |
9 |
$4.4 billion |
1 |
$10.2
million |
Other accounts |
50 |
$6.8 billion |
0 |
$0 |
|
|
|
|
|
Roberto Giangregorio: Principal
Spectrum Preferred Securities Active ETF and Principal Spectrum
Tax-Advantaged Dividend Active ETF |
|
|
|
|
Registered investment
companies |
7 |
$10.5 billion |
0 |
$0 |
Other pooled investment
vehicles |
9 |
$4.4 billion |
1 |
$10.2
million |
Other accounts |
50 |
$6.8 billion |
0 |
$0 |
|
|
|
|
|
L. Phillip Jacoby, IV:
Principal Spectrum Preferred Securities Active ETF and Principal Spectrum
Tax-Advantaged Dividend Active ETF |
|
|
|
|
Registered investment
companies |
7 |
$10.5 billion |
0 |
$0 |
Other pooled investment
vehicles |
9 |
$4.4 billion |
1 |
$10.2
million |
Other accounts |
50 |
$6.8 billion |
0 |
$0 |
|
|
|
|
|
Manu Krishnan: Principal
Spectrum Preferred Securities Active ETF and Principal Spectrum
Tax-Advantaged Dividend Active ETF |
|
|
|
|
Registered investment
companies |
7 |
$10.5 billion |
0 |
$0 |
Other pooled investment
vehicles |
9 |
$4.4 billion |
1 |
$10.2
million |
Other accounts |
50 |
$6.8 billion |
0 |
$0 |
|
|
|
|
|
Mark A. Lieb: Principal
Spectrum Preferred Securities Active ETF and Principal Spectrum
Tax-Advantaged Dividend Active ETF |
|
|
|
|
Registered investment
companies |
7 |
$10.5 billion |
0 |
$0 |
Other pooled investment
vehicles |
9 |
$4.4 billion |
1 |
$10.2
million |
Other accounts |
50 |
$6.8 billion |
0 |
$0 |
|
|
|
|
|
Kevin Nugent: Principal
Spectrum Tax-Advantaged Dividend Active ETF |
|
|
|
|
Registered investment
companies |
2 |
$6.2 billion |
0 |
$0 |
Other pooled investment
vehicles |
4 |
$264.0 million |
1 |
$10.2
million |
Other accounts |
2 |
$37.9 million |
0 |
$0 |
Compensation
Spectrum Asset Management offers
investment professionals a competitive compensation structure that is evaluated
relative to other asset management firms to ensure its continued competitiveness
and alignment with industry best practices. The objective of the structure is to
align individual and team contributions with client performance objectives in a
manner that is consistent with industry standards and business
results.
Compensation for investment
professionals at all levels is comprised of base salary and variable incentive
components. As team members advance in their careers, the variable component
increases in its proportion commensurate with responsibility levels. The
incentive component is aligned with performance and goals of the firm. Salaries
are established based on a benchmark of salary levels of relevant asset
management firms, taking into account each portfolio manager’s position and
responsibilities, experience, contribution to client servicing, compliance with
firm and/or regulatory policies and procedures, work ethic, seniority and length
of service, and contribution to the overall functioning of the
organization. Spectrum attempts to
award all compensation in a manner that promotes sound risk management
principles. Base
salaries are fixed, but are subject to periodic adjustments, usually on an
annual basis.
The variable incentive is in the
form of a discretionary bonus and may represent a significant proportion of an
individual’s total annual compensation. Discretionary bonuses are determined
quarterly and are based on a methodology used by senior management that takes
into consideration several factors, including but not necessarily limited to
those listed below:
|
|
• |
Changes in overall firm assets
under management, including those assets in the Fund. (Portfolio managers
are not directly incentivized to increase assets (“AUM”), although they
are indirectly compensated as a result of an increase in
AUM) |
•Portfolio performance (on a pre-tax
basis) relative to benchmarks measured annually.
•Contribution to client
servicing
•Compliance with firm and/or
regulatory policies and procedures
•Work ethic
•Seniority and length of
service
•Contribution to overall functioning
of organization
Ownership of
Securities
|
|
|
|
Portfolio
Manager |
Trust Funds
Managed by Portfolio Manager |
Dollar Range
of Securities Owned by the Portfolio Manager |
Fernando Diaz |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
Roberto
Giangregorio |
Principal Spectrum Preferred
Securities Active ETF |
None |
Roberto
Giangregorio |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
L. Phillip Jacoby,
IV |
Principal Spectrum Preferred
Securities Active ETF |
None |
L. Phillip Jacoby,
IV |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
Manu Krishnan |
Principal Spectrum Preferred
Securities Active ETF |
None |
Manu Krishnan |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
Mark A. Lieb |
Principal Spectrum Preferred
Securities Active ETF |
$100,001-
$500,000 |
Mark A. Lieb |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
Kevin Nugent |
Principal Spectrum
Tax-Advantaged Dividend Active ETF |
None |
APPENDIX A –
DESCRIPTION OF BOND RATINGS
Moody's
Investors Service, Inc. Rating Definitions:
Long-Term Obligation
Ratings
Ratings assigned on Moody's global
long-term obligation rating scales are forward-looking opinions of the relative
credit risk of financial obligations issued by non-financial corporates,
financial institutions, structured finance vehicles, project finance vehicles,
and public sector entities. Long-term ratings are assigned to issuers or
obligations with an original maturity of one year or more and reflect both on
the likelihood of a default or impairment on contractually promised payments and
the expected financial loss suffered in the event of default or
impairment.1
1
For certain
structured finance, preferred stock and hybrid securities in which payment
default events are either not defined or do not match investor’s expectations
for timely payment, the ratings
reflect the likelihood of impairment and the expected financial loss in the
event of impairment.
|
|
Aaa: |
Obligations rated Aaa are
judged to be of the highest quality, subject to the lowest level of credit
risk. |
|
|
Aa: |
Obligations rated Aa are
judged to be of high quality and are subject to very low credit
risk. |
|
|
A: |
Obligations rated A are
considered upper-medium grade and are subject to low credit
risk. |
|
|
Baa: |
Obligations rated Baa are
subject to moderate credit risk. They are considered medium-grade 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 class of bonds and are typically in default, with little
prospect for recovery of principal or
interest. |
NOTE: Moody's appends numerical
modifiers, 1, 2, and 3 to each generic rating classification from Aa through
Caa. The modifier 1 indicates that the obligation ranks in the higher end of its
generic rating category, the modifier 2 indicates a mid-range ranking, and the
modifier 3 indicates a ranking in the lower end of that generic rating category.
Additionally, a “(hyb)” indicator is appended to all ratings of hybrid
securities issued by banks, issuers, financial companies, and securities
firms.*
* By their
terms, hybrid securities allow for the omission of scheduled dividends,
interest, or principal payments, which can potentially result in impairment if
such an omission occurs. Hybrid securities may also be subject to contractually
allowable write-downs of principal that could result in impairment. Together the
hybrid indicator, the long-term obligation rating assigned to a hybrid security
is an expression of the relative credit risk associated with that
security.
SHORT-TERM NOTES: Short-term ratings
are assigned to obligations with an original maturity of thirteen months or less
and reflect both on the likelihood of a default on contractually promised
payments and the expected financial loss suffered in the event of default.
Moody's employs the following three designations, all judged to be investment
grade, to indicate the relative repayment ability of rated issuers:
Issuers rated Prime-1 (or related
supporting institutions) have a superior ability to repay short-term debt
obligations.
Issuers rated Prime-2 (or related
supporting institutions) have a strong ability to repay short-term debt
obligations.
Issuers rated Prime-3 (or related
supporting institutions) have an acceptable ability to repay short-term
obligations.
Issuers rated Not Prime do not fall
within any of the Prime rating categories.
US MUNICIPAL SHORT-TERM DEBT: The
Municipal Investment Grade (MIG) scale is used to rate US municipal bonds of up
to five years maturity. MIG ratings are divided into three levels - MIG 1
through MIG 3 - while speculative grade short-term obligations are designated
SG.
MIG 1 denotes superior credit
quality, afforded excellent protection from highly reliable liquidity support,
or demonstrated broad-based access to the market for refinancing.
MIG 2 denotes strong credit quality
with ample margins of protection, although not as large as in the preceding
group.
MIG 3 notes are of acceptable credit
quality. Liquidity and cash-flow protection may be narrow and market access for
refinancing is likely to be less well-established.
SG denotes speculative-grade credit
quality and may lack sufficient margins of protection.
Description
of S&P Global Ratings' Credit Rating Definitions:
S&P Global's credit rating, both
long-term and short-term, is a forward-looking opinion of the creditworthiness
of an obligor with respect to a specific obligation. This assessment takes into
consideration the creditworthiness of guarantors, insurers, or other forms of
credit enhancement on the obligation.
The credit rating is not a
recommendation to purchase, sell or hold a security, inasmuch as it does not
comment as to market price or suitability for a particular
investor.
The ratings are statements of
opinion as of the date they are expressed furnished by the issuer or obtained by
S&P Global Ratings from other sources S&P Global Ratings considers
reliable. S&P Global Ratings does not perform an audit in connection with
any rating and may, on occasion, rely on unaudited financial information. The
ratings may be changed, suspended, or withdrawn as a result of changes in, or
unavailability of, such information, or for other circumstances.
The ratings are based, in varying
degrees, on the following considerations:
|
|
• |
Likelihood of payment -
capacity and willingness of the obligor to meet its financial commitment
on an obligation in accordance with the terms of the
obligation; |
|
|
• |
Nature of and provisions of
the financial obligation; |
|
|
• |
Protection afforded by, and
relative position of, the financial obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and
other laws affecting creditor's rights. |
LONG-TERM CREDIT
RATINGS:
|
|
AAA: |
Obligations rated ‘AAA’ have
the highest rating assigned by S&P Global Ratings. The obligor’s
capacity to meet its financial commitment on the obligation is extremely
strong. |
|
|
AA: |
Obligations rated ‘AA’ differ
from the highest-rated issues only in small degree. The obligor’s capacity
to meet its financial commitment on the obligation is very
strong. |
|
|
A: |
Obligations rated ‘A’ have a
strong capacity to meet financial commitment on the obligation although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions than obligations in higher-rated
categories. |
|
|
BBB: |
Obligations rated ‘BBB’
exhibit adequate protection parameters; however, adverse economic
conditions or changing circumstances are more likely to lead to a weakened
capacity to meet financial commitment on the
obligation. |
|
|
BB, B, CCC, |
Obligations rated ‘BB’, ‘B’,
‘CCC’, ‘CC’, and ‘C’ are regarded, on balance, as having
significant |
|
|
CC, and C: |
speculative characteristics.
‘BB’ indicates the lowest degree of speculation and ‘C’ the highest degree
of speculation. While such obligations will likely have some quality and
protective characteristics, these may be outweighed by large uncertainties
or major risk exposures to adverse
conditions. |
|
|
BB: |
Obligations rated ‘BB’ are
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: |
Obligations rated ‘B’ are more
vulnerable to nonpayment than ‘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 this
capacity. |
|
|
CCC: |
Obligations rated ‘CCC’ are
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. If adverse business,
financial, or economic conditions occur, the obligor is not likely to have the
capacity to meet its financial commitment on the obligation.
|
|
CC: |
Obligations rated ‘CC’ are
currently highly vulnerable to nonpayment. The ‘CC’ rating is used when a
default has not yet occurred but S&P Global Ratings expects default to
be a virtual certainty, regardless of anticipated time to
default. |
|
|
C: |
The rating ‘C’ is highly
vulnerable to nonpayment, the obligation is expected to have lower
relative seniority or lower ultimate recovery compared to higher rated
obligations. |
|
|
D: |
Obligations rated ‘D’ are 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 S&P Global Ratings
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 rating will also be used upon filing for
bankruptcy petition or the taking of similar action and where default is a
virtual certainty. If an obligation is subject to a distressed exchange
offer the rating is lowered to ‘D’. |
Plus (+) or Minus (-): 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.
|
|
NR: |
Indicates that no rating has
been requested, that there is insufficient information on which to base a
rating or that S&P Global Ratings does not rate a particular type of
obligation as a matter of policy. |
SHORT-TERM CREDIT RATINGS: Ratings
are graded into four categories, ranging from ‘A-1’ for the highest quality
obligations to ‘D’ for the lowest.
|
|
A-1: |
This is the highest category.
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: |
Issues carrying this
designation are somewhat more susceptible to the adverse effects of the
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: |
Issues carrying this
designation exhibit adequate capacity to meet their financial obligations.
However, adverse economic conditions or changing circumstances are more
likely to lead to a weakened capacity of the obligor to meet it financial
commitment on the obligation. |
|
|
B: |
Issues rated ‘B’ are regarded
as vulnerable and have significant speculative characteristics. The
obligor has capacity to meet financial commitments; however, it faces
major ongoing uncertainties which could lead to obligor’s inadequate
capacity to meet its financial
obligations. |
|
|
C: |
This rating is assigned to
short-term debt obligations that are currently vulnerable to nonpayment
and is dependent upon favorable business, financial, and economic
conditions to meet its financial commitment on the
obligation. |
|
|
D: |
This rating indicates that the
issue is either 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 S&P
Global Ratings 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 rating will
also be used upon filing for bankruptcy petition or the taking of similar
action and where default is a virtual certainty. If an obligation is
subject to a distressed exchange offer the rating is lowered to
‘D’. |
MUNICIPAL SHORT-TERM NOTE RATINGS:
S&P Global Ratings rates U.S. municipal notes with a maturity of less than
three years as follows:
|
|
SP-1: |
A strong capacity to pay
principal and interest. Issues that possess a very strong capacity to pay
debt service is given a "+" designation. |
|
|
SP-2: |
A satisfactory capacity to pay
principal and interest, with some vulnerability to adverse financial and
economic changes over the terms of the
notes. |
|
|
SP-3: |
A speculative capacity to pay
principal and interest. |
APPENDIX B –
FOREIGN MARKET HOLIDAYS
The foreign market holidays
applicable to the Funds:
|
|
|
|
|
2020 |
AUSTRALIA |
|
|
|
January 1 |
April 13 |
December 24 |
December 28 |
January 27 |
June 8 |
December 25 |
December 31 |
April 10 |
|
|
|
|
|
|
|
AUSTRIA |
|
|
|
January 1 |
May 1 |
October 26 |
December 25 |
April 10 |
June 1 |
December 24 |
December 31 |
April 13 |
|
|
|
|
|
|
|
BELGIUM |
|
|
|
January 1 |
April 13 |
December 24 |
December 31 |
April 10 |
May 1 |
December 25 |
|
|
|
|
|
BRAZIL |
|
|
|
January 1 |
April 21 |
September 7 |
December 24 |
February 24 |
May 1 |
October 12 |
December 25 |
February 25 |
June 11 |
November 2 |
December 31 |
April 10 |
July 9 |
November 20 |
|
|
|
|
|
CANADA |
|
|
|
January 1 |
May 18 |
September 7 |
December 25 |
February 17 |
July 1 |
October 12 |
December 28 |
April 10 |
August 3 |
December 24 |
|
|
|
|
|
CHILE |
|
|
|
January 1 |
May 21 |
September 18 |
December 25 |
April 10 |
June 29 |
October 12 |
December 31 |
May 1 |
July 16 |
December 8 |
|
|
|
|
|
CHINA |
|
|
|
January 1 |
January 30 |
June 25 |
October 5 |
January 24 |
April 6 |
June 26 |
October 6 |
January 27 |
May 1 |
October 1 |
October 7 |
January 28 |
May 4 |
October 2 |
October 8 |
January 29 |
May 5 |
|
|
|
|
|
|
DENMARK |
|
|
|
January 1 |
May 8 |
June 1 |
December 25 |
April 9 |
May 21 |
June 5 |
December 31 |
April 13 |
May 22 |
December 24 |
|
|
|
|
|
FINLAND |
|
|
|
January 1 |
April 13 |
June 19 |
December 25 |
January 6 |
May 1 |
December 24 |
December 31 |
April 10 |
May 21 |
|
|
|
|
|
|
|
FRANCE |
|
|
|
January 1 |
April 13 |
May 25 |
December 25 |
April 10 |
May 8 |
August 31 |
December 28 |
|
|
|
|
GERMANY |
|
|
|
January 1 |
April 13 |
June 1 |
December 25 |
April 10 |
May 1 |
December 24 |
December 31 |
|
|
|
|
GREECE |
|
|
|
January 1 |
April 10 |
April 20 |
October 28 |
January 6 |
April 13 |
May 1 |
December 24 |
March 2 |
April 17 |
June 8 |
December 25 |
March 25 |
|
|
|
|
|
|
|
HONG
KONG |
|
|
|
January 1 |
April 13 |
June 25 |
October 2 |
January 27 |
April 30 |
July 1 |
October 26 |
January 28 |
May 1 |
October 1 |
December 25 |
April 10 |
|
|
|
|
|
|
|
HUNGARY |
|
|
|
January 1 |
May 1 |
October 23 |
December 25 |
March 15 |
June 1 |
November 1 |
December 26 |
April 10 |
August 20 |
December 24 |
December 31 |
April 13 |
August 21 |
|
|
|
|
|
|
IRELAND |
|
|
|
January 1 |
April 13 |
May 1 |
December 25 |
April 10 |
|
|
|
|
|
|
|
ISRAEL |
|
|
|
March 20 |
April 14 |
May 29 |
October 4 |
April 8 |
April 15 |
July 30 |
October 5 |
April 9 |
April 28 |
September 20 |
October 6 |
April 12 |
April 29 |
September 27 |
October 7 |
April 13 |
May 28 |
September 28 |
|
|
|
|
|
ITALY |
|
|
|
January 1 |
April 13 |
December 24 |
December 31 |
April 10 |
May 1 |
December 25 |
|
|
|
|
|
JAPAN |
|
|
|
January 1 |
February 24 |
May 6 |
September 22 |
January 2 |
March 20 |
July 23 |
November 3 |
January 3 |
April 29 |
July 24 |
November 23 |
January 13 |
May 4 |
August 10 |
December 31 |
February 11 |
May 5 |
September 21 |
|
|
|
|
|
LUXEMBOURG |
|
|
|
January 1 |
April 13 |
May 1 |
December 25 |
April 10 |
|
|
|
|
|
|
|
|
|
|
|
|
MALAYSIA |
|
|
|
January 1 |
May 11 |
July 31 |
September 16 |
January 27 |
May 25 |
August 20 |
October 29 |
May 1 |
May 26 |
August 31 |
December 25 |
May 7 |
|
|
|
|
|
|
|
NETHERLANDS |
|
|
|
January 1 |
April 13 |
December 24 |
December 31 |
April 10 |
May 1 |
December 25 |
|
|
|
|
|
NEW
ZEALAND |
|
|
|
January 1 |
April 10 |
June 1 |
December 25 |
January 2 |
April 13 |
October 26 |
December 28 |
February 6 |
April 27 |
|
|
|
|
|
|
NORWAY |
|
|
|
January 1 |
April 10 |
May 21 |
December 25 |
April 8 |
April 13 |
June 1 |
December 31 |
April 9 |
May 1 |
December 24 |
|
|
|
|
|
POLAND |
|
|
|
January 1 |
April 13 |
November 11 |
December 25 |
January 6 |
May 1 |
December 24 |
December 31 |
April 10 |
June 11 |
|
|
|
|
|
|
PORTUGAL |
|
|
|
January 1 |
April 13 |
December 24 |
December 31 |
April 10 |
May 1 |
December 25 |
|
|
|
|
|
SINGAPORE |
|
|
|
January 1 |
May 1 |
July 31 |
November 14 |
January 27 |
May 7 |
August 10 |
December 25 |
April 10 |
May 25 |
|
|
|
|
|
|
SOUTH
AFRICA |
|
|
|
January 1 |
April 13 |
June 16 |
December 16 |
March 21 |
April 27 |
August 9 |
December 25 |
April 10 |
May 1 |
September 24 |
December 26 |
|
|
|
|
SPAIN |
|
|
|
January 1 |
April 13 |
May 1 |
December 25 |
April 10 |
|
|
|
|
|
|
|
SWEDEN |
|
|
|
January 1 |
April 13 |
May 21 |
December 24 |
January 6 |
April 30 |
June 19 |
December 25 |
April 9 |
May 1 |
October 30 |
December 31 |
April 10 |
May 20 |
|
|
|
|
|
|
SWITZERLAND |
|
|
|
January 1 |
April 20 |
July 22 |
December 24 |
January 2 |
May 1 |
August 31 |
December 25 |
April 10 |
May 21 |
September 7 |
December 31 |
April 13 |
June 1 |
|
|
|
|
|
|
|
TURKEY |
|
|
January 1 |
May 19 |
July 15 |
August 3 |
April 23 |
May 25 |
July 31 |
October 29 |
May 1 |
May 26 |
|
|
|
|
|
|
UNITED ARAB
EMIRATES |
|
|
January 1 |
May 23 |
May 25 |
August 1 |
March 22 |
May 24 |
July 31 |
December 2 |
April 24 |
|
|
|
|
|
|
|
UNITED
KINGDOM |
|
|
January 1 |
May 8 |
December 24 |
December 28 |
April 10 |
May 25 |
December 25 |
December 31 |
April 13 |
August 31 |
|
|
|
|
|
|
|
SETTLEMENT
PERIODS GREATER THAN SEVEN DAYS FOR PERIOD
JANUARY 1,
2020 THROUGH JANUARY 2, 2021 |
|
Beginning of
Settlement Period |
End of
Settlement
Period
|
Number of
Days in Settlement Period |
Australia |
4/6/2020 |
4/14/2020 |
8 |
|
4/7/2020 |
4/15/2020 |
8 |
|
4/8/2020 |
4/16/2020 |
8 |
|
4/9/2020 |
4/17/2020 |
8 |
|
12/21/2020 |
12/29/2020 |
8 |
|
12/22/2020 |
12/30/2020 |
8 |
|
12/23/2020 |
12/31/2020 |
8 |
|
12/24/2020 |
1/2/2021 |
11 |
|
|
|
|
China |
1/22/2020 |
2/3/2020 |
12 |
|
1/23/2020 |
2/3/2020 |
12 |
|
1/24/2020 |
2/5/2020 |
12 |
|
1/27/2020 |
2/5/2020 |
9 |
|
1/28/2020 |
2/5/2020 |
8 |
|
9/28/2020 |
10/8/2020 |
10 |
|
9/29/2020 |
10/9/2020 |
10 |
|
9/30/2020 |
10/12/2020 |
12 |
|
|
|
|
Japan |
1/10/2020 |
1/20/2020 |
9 |
|
4/28/2020 |
5/7/2020 |
8 |
|
4/29/2020 |
5/8/2020 |
8 |
|
4/30/2020 |
5/11/2020 |
10 |
|
5/1/2020 |
5/12/2020 |
11 |
|
|
|
|
Spain |
1/2/2020 |
1/14/2020 |
13 |
|
1/3/2020 |
1/15/2020 |
12 |
|
1/3/2020 |
1/16/2020 |
12 |
|
4/22/2020 |
58/4/20 |
11 |
|
4/23/2020 |
5/5/2020 |
11 |
|
4/24/2020 |
5/6/2020 |
11 |
|
4/27/2020 |
5/7/2020 |
9 |
|
4/28/2020 |
5/8/2020 |
9 |
|
4/29/2020 |
5/11/2020 |
11 |
|
4/30/2020 |
5/12/2020 |
11 |
|
10/1/2020 |
10/13/2020 |
11 |
|
10/2/2020 |
10/14/2020 |
11 |
|
10/5/2020 |
10/15/2020 |
9 |
|
10/6/2020 |
10/16/2020 |
9 |
|
10/7/2020 |
10/19/2020 |
11 |
|
10/8/2020 |
10/20/2020 |
11 |
|
10/9/2020 |
10/21/2020 |
11 |
|
11/27/2020 |
12/9/2020 |
11 |
|
11/30/2020 |
12/10/2020 |
9 |
|
12/1/2020 |
12/11/2020 |
9 |
|
12/2/2020 |
12/14/2020 |
9 |
|
12/3/2020 |
12/15/2020 |
9 |
|
12/4/2020 |
12/16/2020 |
9 |
|
12/7/2020 |
12/17/2020 |
9 |
|
12/16/2020 |
12/28/2020 |
11 |
|
12/17/2020 |
12/29/2020 |
11 |
|
|
|
|
|
SETTLEMENT
PERIODS GREATER THAN SEVEN DAYS FOR PERIOD
JANUARY 1,
2020 THROUGH JANUARY 2, 2021 |
|
Beginning of
Settlement Period |
End of
Settlement
Period
|
Number of
Days in Settlement Period |
|
12/18/2020 |
12/30/2020 |
11 |
|
12/21/2020 |
12/31/2020 |
10 |
|
12/22/2020 |
1/4/2021 |
12 |
|
12/23/2020 |
1/5/2021 |
12 |
|
12/24/2020 |
1/6/2021 |
12 |
APPENDIX C –
PROXY VOTING POLICIES
The proxy voting policies applicable
to each Fund appear in the following order:
The Fund's proxy voting policy is
first, followed by PGI’s proxy voting policy, and followed by the
Sub-Advisor's.