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TABLE
OF CONTENTS
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Angel
Oak UltraShort Income ETF Summary |
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| Portfolio
Holdings Information |
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| Additional
Payments to Dealers |
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| How
to Buy and Sell Shares |
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| Dividends,
Distribution, and Taxes |
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| Distribution |
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| Premium/Discount
Information |
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| Additional
Notices |
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Financial
Highlights |
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ANGEL
OAK
INCOME
ETF SUMMARY |
Investment Objective
The investment objective of
the Angel Oak Income ETF (the “Fund”) is
current income.
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
Annual Fund Operating
Expenses (expenses that you pay each year as a
percentage of the value of your
investment)
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Management
Fees |
0.99% |
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Other
Expenses1,
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0.00% |
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Total
Annual Fund Operating Expenses |
0.99% |
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Less
Fee Waiver/Expense Reimbursement3 |
-0.20% |
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Total
Annual Fund Operating Expenses After Fee Waiver/Expense
Reimbursement3 |
0.79% |
1 Estimated for the current
fiscal year.
2 Angel Oak
Capital Advisors, LLC (the “Adviser”) is responsible for substantially all the
expenses of the Fund (including expenses of the Trust relating to the Fund),
except for the advisory fees, payments under the Fund’s 12b-1 plan (if any),
interest expenses, dividend and interest expenses related to short sales, taxes,
acquired fund fees and expenses (other than fees for funds advised by the
Adviser), brokers’ commissions and any other transaction related expenses and
fees arising out of transactions effected on behalf of the Fund, litigation and
potential litigation and other extraordinary expenses not incurred in the
ordinary course of the Fund’s business.
3 The Adviser has
contractually agreed to waive its fees and/or reimburse certain expenses
(exclusive of interest expenses, dividend and interest expenses related to short
sales, taxes, acquired fund fees and expenses (other than fees for funds advised
by the Adviser which are waived), brokers’ commissions and any other transaction
related expenses and fees arising out of transactions effected on behalf of the
Fund, and litigation and potential litigation and other extraordinary expenses
not incurred in the ordinary course of the Fund’s business) to limit the Total
Annual Fund Operating Expenses After Fee Waiver/Expense Reimbursement to 0.79%
of the Fund’s average daily net assets (the “Expense Limit”) through
May 31,
2024. The contractual arrangement may only be changed or
eliminated by the Board of Trustees upon 60 days’ written notice to the Adviser.
The Adviser may recoup from the Fund any waived amount or reimbursed expenses
pursuant to this agreement if such recoupment does not cause the Fund’s Total
Annual Fund Operating Expenses after such recoupment to exceed the lesser of (i)
the Expense Limit in effect at the time of the waiver or reimbursement and (ii)
the Expense Limit in effect at the time of recoupment and the recoupment is made
within three years after the end of the month in which the Adviser incurred the
expense.
Expense Example
The following example
is intended to help you compare the cost of investing in the Fund with the cost
of investing in other funds. The example assumes that you invest $10,000 in the
Fund for the time periods indicated and then continue to hold or sell all of
your Shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The example does not take into account brokerage commissions
that you may pay on your purchases and sales of Shares. The fee waiver and
expense reimbursement discussed in the table above is reflected only for the
first year. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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Three
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| $81 |
$295 |
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Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
example above, affect the Fund’s performance. For the fiscal period November 7,
2022 (commencement of operations) through January 31, 2023, the portfolio
turnover rate for the Fund was 59% of the average value of its
portfolio.
Principal Investment Strategies
The Fund invests primarily in
agency and non-agency residential mortgage-backed securities (“RMBS”),
commercial mortgage-backed securities (“CMBS”), collateralized loan obligations
(“CLOs”), collateralized debt obligations (“CDOs”), collateralized mortgage
obligations (“CMOs”), collateralized bond obligations (“CBOs”), asset-backed
securities (“ABS”), including securities or
securitizations
backed by assets such as unsecured consumer loans, credit card receivables,
student loans, automobile loans, loans financing solar energy systems, and
residential and commercial real estate, and other debt securitizations
(collectively, “Structured Products”); mortgage loans, secured and unsecured
consumer loans, commercial loans and pools of such loans (collectively,
“Loans”); corporate debt, including bank-issued subordinated debt; equity
securities of banks, real estate investment trusts (“REITs”), or other issuers;
and U.S. Treasury and U.S. government agency securities.
The
Fund may invest up to 25% of its net assets in CLOs and CDOs, which are backed
by a pool of loans or a pool of debt, respectively. CLOs and CDOs are similar to
CMOs, but differ as to the type of underlying loan or debt.
The
Fund may invest in the securities of other investment companies, including
closed-end investment companies and open-end investment companies, which may
operate as traditional mutual funds, ETFs or business development companies
(“BDCs”). The other investment companies in which the Fund invests may be part
of the same group of investment companies as the Fund.
The
Fund will concentrate its investments in agency and non-agency RMBS and CMBS
(collectively, “MBS”). This means that, under normal circumstances, the Fund
will invest more than 25% of its total assets in MBS (measured at the time of
purchase). The Fund will not concentrate its investments in any other group of
industries. The Fund’s policy to concentrate its investments in MBS is
fundamental and may not be changed without shareholder approval.
The
fixed income instruments in which the Fund invests may include those of issuers
from the United States and other countries. The Fund’s investments in foreign
debt securities will typically be denominated in U.S. dollars.
The
Fund may invest up to 15% of its net assets in investments that are deemed to be
illiquid, which may include private placements, certain Rule 144A securities
(which are subject to resale restrictions), and securities of issuers that are
bankrupt or in default.
The
Fund may invest, without limitation, in securities of any maturity and duration.
Maturity refers to the length of time until a debt security’s principal is
repaid with interest. Duration is a measure used to determine the sensitivity of
a security’s price to changes in interest rates that incorporates a security’s
yield, coupon, final maturity and call and put features and prepayment exposure
into one measure with a higher duration indicating greater sensitivity to
interest rates. For example, if a portfolio has a duration of two years, and
interest rates increase (fall) by 1%, the portfolio would decline (increase) in
value by approximately 2%. However, duration may not accurately reflect the true
interest rate sensitivity of instruments held by the Fund and, therefore the
Fund’s exposure to changes in interest rates.
The
Fund may invest in high-yield securities and securities that are not rated by
any rating agencies. These “high-yield” securities (also known as “junk bonds”)
will be rated BB+ or lower by Standard & Poor’s Rating Group (“S&P”) or
will be of equivalent quality rating from another Nationally Recognized
Statistical Ratings Organization. If a bond is unrated, the Adviser may
determine whether it is of comparable quality and therefore eligible for the
Fund’s investment. Although the Fund will not acquire investments of issuers
that are in default at the time of investment, the Fund may hold such securities
if an investment subsequently defaults.
In
pursuing its investment objectives or for hedging purposes, the Fund may utilize
borrowing and various types of derivative instruments, including swaps, futures
contracts, and options, although not all such derivatives will be used at all
times. Such derivatives may trade over-the-counter or on an exchange and may
principally be used for one or more of the following purposes: speculation,
currency hedging, duration management, credit deterioration hedging, hedges
against broad market movements, or to pursue the Fund’s investment objective.
The Fund may borrow to the maximum extent permitted by applicable law, which
generally means that the Fund may borrow up to one-third of its total assets.
The Fund may also invest in repurchase agreements and borrow through reverse
repurchase agreements.
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940, as amended (the “1940 Act”), and, therefore, may invest a greater
percentage of its assets in fewer issuers than diversified funds.
The
Fund is an actively managed ETF, which is a fund that trades like other
publicly-traded securities. The Fund is not an index fund and does not seek to
replicate the performance of a specified index.
The
Fund’s allocation of its assets into various asset classes within its investment
strategy will depend on the views of the Adviser as to the best value relative
to what is currently presented in the marketplace. Investment decisions are made
based on fundamental research and analysis to identify issuers with the ability
to improve their credit profile over time with attractive valuations, resulting
in both income and potential capital appreciation. In selecting investments,
including Structured Products, the Adviser may consider maturity, yield and
ratings information and opportunities for price appreciation among other
criteria. The Adviser also analyzes a variety of factors when selecting
investments for the Fund, such as collateral quality, credit support, structure
and market conditions. The Adviser attempts to diversify risks that arise from
position sizes, geography, ratings, duration, deal structure and collateral
values. The Adviser will also seek to invest in securities that have relatively
low volatility. The Adviser seeks to limit risk of principal by targeting assets
that it considers undervalued. From time to time, the Fund may allocate its
assets so as to focus on particular types of securities.
As
part of its investment process, the Adviser also considers certain
environmental, social and governance (“ESG”) and sustainability factors that it
believes could have a material negative or positive impact on the risk profiles
of the issuers or
underlying collateral assets of certain
securities in which the Fund may invest. These determinations may not be
conclusive, and securities that may be negatively impacted by such factors may
be purchased and retained by the Fund while the Fund may divest or not invest in
securities that may be positively impacted by such factors. The Adviser may sell
investments, including Structured Products, if it determines that any of the
mentioned factors have changed materially from its initial analysis, that other
factors indicate that an investment is no longer earning a return commensurate
with its risk, or that a different security will better help the Fund achieve
its investment objective.
Principal Risks
The
principal risks of investing in the Fund are summarized below. You should
carefully consider the Fund’s investment risks before deciding whether to invest
in the Fund. There may be circumstances that could prevent the Fund
from achieving its investment objective and you may lose money by investing in
the Fund. An investment in the Fund is not a
deposit at a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
•Fixed-Income
Instruments Risks. The
Fund will invest in fixed-income instruments and securities. Such investments
may be secured, partially secured or unsecured and may be unrated, and whether
or not rated, may have speculative characteristics. The market price of the
Fund’s investments will change in response to changes in interest rates and
other factors. Generally, when interest rates rise, the values of fixed-income
instruments fall, and vice versa. In typical interest rate environments, the
prices of longer-term fixed-income instruments generally fluctuate more than the
prices of shorter-term fixed-income instruments as interest rates change. In
addition, a fund with a longer average portfolio duration will be more sensitive
to changes in interest rates than a fund with a shorter average portfolio
duration. A fund with a negative average portfolio duration may decline in value
as interest rates decrease. Most high yield investments pay a fixed rate of
interest and are therefore vulnerable to inflation risk (inflation rates are
currently elevated relative to normal conditions). The obligor of a fixed-income
instrument may not be able or willing to pay interest or to repay principal when
due in accordance with the terms of the associated agreement.
•General
Market Risk.
The capital markets may experience periods of disruption, instability and
volatility. Political, geopolitical, natural and other events, including war,
terrorism, trade disputes, government shutdowns, market closures, natural and
environmental disasters, epidemics, pandemics and other public health crises and
related events have led, and in the future may lead, to economic uncertainty,
decreased economic activity, increased market volatility and other disruptive
effects on U.S. and global economies and markets. Such conditions may materially
and adversely affect the markets globally and in the jurisdictions in which the
Fund invests, which may have a negative impact on the Fund’s performance. The
Fund’s NAV and investment return will fluctuate based upon changes in the value
of its portfolio securities.
•Credit
Risk.
Credit risk is the risk that the Fund could lose money if the issuer or
guarantor of a fixed income security, or the counterparty to a derivative
contract, is unable or unwilling to meet its financial obligations.
•Interest
Rate Risk.
The Fund is exposed to risks associated with changes in interest rates,
including the possibility that, in a period of rising interest rates, securities
may exhibit additional volatility and may lose value.
•Prepayment
Risk.
When interest rates decline, fixed income securities with stated interest rates
may have the principal paid earlier than expected, requiring the Fund to invest
the proceeds at generally lower interest rates.
•Structured
Products Risks.
The Fund may invest in Structured Products, including CLOs, CDOs, CMOs, CBOs,
and other asset-backed securities and debt securitizations. Some Structured
Products have credit ratings, but are typically issued in various classes with
various priorities. Normally, Structured Products are privately offered and sold
(that is, they are not registered under the securities laws), which means less
information about the security may be available as compared to publicly offered
securities and only certain institutions may buy and sell them. As a result,
investments in Structured Products may be characterized by the Fund as illiquid
securities. An active dealer market may exist for Structured Products that
qualify for Rule 144A transactions, but there can be no assurance that such a
market will exist or will be active enough for the Fund to sell such securities.
In addition to the typical risks associated with fixed-income securities and
asset-backed securities, CLOs and CDOs carry additional risks including, but not
limited to: (i) the possibility that distributions from collateral securities
will not be adequate to make interest or other payments; (ii) the risk that the
collateral may default, decline in value or quality or be downgraded by a rating
agency; (iii) the Fund may invest in tranches of Structured Products that are
subordinate to other tranches; (iv) the structure and complexity of the
transaction and the legal documents could lead to disputes among investors
regarding the characterization of proceeds; (v) risk of forced “fire sale”
liquidation due to technical defaults such as coverage test failures; and (vi)
the Structured Product’s manager may perform poorly. The senior and junior
tranches of Structured Products may have floating or variable interest rates
based on LIBOR and are subject to the risks associated with securities tied to
LIBOR, including the risks associated with the pending replacement of LIBOR with
an alternative reference rate. The Fund may also invest in the equity tranches
of a Structured Product, which typically represent the first loss position in
the Structured Product, are unrated and are subject to higher risks. Equity
tranches of Structured Products typically do not have a fixed coupon and
payments on equity tranches will be based on the income received from the
underlying collateral and the payments made to the senior tranches, both of
which may be based on floating rates based on LIBOR.
•Borrowing
Risks and Leverage Risks.
Borrowing for investment purposes creates leverage, which will exaggerate the
effect of any change in the value of securities in the Fund’s portfolio on the
Fund’s NAV and, therefore, may increase the volatility of the Fund.
•Extension
Risk.
An issuer could exercise its right to pay principal on an obligation held by the
Fund (such as a mortgage-backed security) later than expected. This may happen
when there is a rise in interest rates. Under these circumstances, the value of
the obligation will decrease, and the Fund will also suffer from the inability
to reinvest in higher yielding securities.
•Concentration
in Certain Mortgage-Backed Securities Risk.
The risks of concentrating in residential mortgage-backed securities (agency and
non-agency) and commercial mortgage-backed securities include susceptibility to
changes in lending standards, interest rates and lending rates, and the risks
associated with the market’s perception of issuers, the creditworthiness of the
parties involved and investing in real estate securities.
•U.S.
Government Securities Risks.
U.S. government securities are not guaranteed against price movement and may
decrease in value. Some U.S. government securities are supported by the full
faith and credit of the U.S. Treasury, while others may be supported only by the
discretionary authority of the U.S. government to purchase certain obligations
of a federal agency or U.S. government sponsored enterprise (“GSE”) or only by
the right of the issuer to borrow from the U.S. Treasury. While the U.S.
government provides financial support to such agencies and GSEs, no assurance
can be given that the U.S. government will always do so. Other obligations are
backed solely by the GSE’s own resources. Investments in securities issued by
GSEs that are not backed by the U.S. Treasury are subject to higher credit risk
than those that are backed by the U.S. Treasury.
•Mortgage-Backed
and Asset-Backed Securities Risks. Mortgage-backed
and other
asset-backed
securities are subject to the risks of traditional fixed-income instruments.
However, they are also subject to prepayment risk and extension risk, meaning
that if interest rates fall, the underlying debt may be repaid ahead of
schedule, reducing the value of the Fund’s investments and if interest rates
rise, there may be fewer prepayments, which would cause the average bond
maturity to rise, increasing the potential for the Fund to lose money.
Mortgage-backed and other asset-backed securities are also susceptible to
changes in lending standards and lending rates. In addition, mortgage-backed
securities comprised of subprime mortgages and investments in other asset-backed
securities collateralized by subprime loans may be subject to a higher degree of
credit risk and valuation risk. Additionally, such securities may be subject to
a higher degree of liquidity risk, because the liquidity of such investments may
vary dramatically over time.
Certain
mortgage-backed securities may be secured by pools of mortgages on
single-family, multi-family properties, as well as commercial properties.
Similarly, asset-backed securities may be secured by pools of loans, such as
corporate loans, student loans, automobile loans and credit card receivables.
The credit risk on such securities is affected by homeowners or borrowers
defaulting on their loans. The values of assets underlying mortgage-backed and
asset-backed securities may decline and therefore may not be adequate to cover
underlying investors. Some mortgage-backed and asset-backed securities have
experienced extraordinary weakness and volatility in recent years. Possible
legislation in the area of residential mortgages, credit cards, corporate loans
and other loans that may collateralize the securities in which the Fund may
invest could negatively impact the value of the Fund’s investments. To the
extent the Fund focuses its investments in particular types of mortgage-backed
or asset-backed securities, the Fund may be more susceptible to risk factors
affecting such types of securities.
•Unrated
Securities Risks.
Unrated securities may be less liquid than comparable rated securities and
involve the risk that Angel Oak may not accurately evaluate the security’s
comparative credit rating.
•Residential
Loans and Mortgages Risk.
In addition to interest rate, default and other risks of fixed income
securities, investments in whole loans and debt instruments backed by
residential loans or mortgages, (or pools of loans or mortgages) carry
additional risks, including the possibility that the quality of the collateral
may decline in value and the potential for the liquidity of residential loans
and mortgages to vary over time. These risks are greater for subprime
residential and mortgage loans. Because they do not trade in a liquid market,
residential loans typically can only be sold to a limited universe of
institutional investors and may be difficult for the Fund to value. In addition,
in the event that a loan is foreclosed on, the Fund could become the owner (in
whole or in part) of any collateral, which may include, among other things, real
estate or other real or personal property, and the Fund would bear the costs and
liabilities of owning, holding or disposing of such property.
•REIT
Risk.
A REIT is a company that owns or finances income-producing real estate. Through
its investments in REITs, the Fund is subject to the risks of investing in the
real estate market, including decreases in property revenues, increases in
interest rates, increases in property taxes and operating expenses, legal and
regulatory changes, a lack of credit or capital, defaults by borrowers or
tenants, environmental problems and natural disasters. The value of a REIT may
also be affected by the management or development of underlying properties,
which may also be subject to mortgage loans, and the underlying mortgage loans
may be subject to the risk of default.
•ETF
Risks.
The Fund is an ETF and may invest in other ETFs, and, as a result of this
structure, is exposed directly or indirectly to the following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk.
The Fund has a limited number of financial institutions that may act as
Authorized Participants (“APs”). In addition, there may be a limited number of
market makers and/or liquidity providers in the marketplace. To the extent
either of the following events occur, Shares may trade at a material discount to
NAV, which may also lead to a widening of bid/ask spreads quoted for Shares, and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid/ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant. If a
shareholder purchases Shares at a time when the market price is at a premium to
the NAV or sells Shares at a time when the market price is at a discount to the
NAV, the shareholder may sustain losses.
◦Trading.
Although Shares are listed for trading on the NYSE Arca, Inc. (the “Exchange”)
and may be traded on U.S. exchanges other than the Exchange, there can be no
assurance that Shares will trade with any volume, or at all, on any stock
exchange. In stressed market conditions, the liquidity of Shares may begin to
mirror the liquidity of the Fund’s underlying portfolio holdings, which can be
significantly less liquid than Shares, and may lead to a widening of bid/ask
spreads quoted for Shares.
◦Cash
Transactions Risk.
Unlike certain ETFs, the Fund may effect creations and redemptions in cash or
partially in cash. Therefore, it may be required to sell portfolio securities
and subsequently recognize gains on such sales that the Fund might not have
recognized if it were to distribute portfolio securities in-kind. As such,
investments in Shares may be less tax-efficient than an investment in an ETF
that distributes portfolio securities entirely in-kind.
•Foreign
Securities Risks.
Investments in securities or other instruments of non-U.S. issuers involve
certain risks not involved in domestic investments and may experience more rapid
and extreme changes in value than investments in securities of U.S. companies.
Financial markets in foreign countries often are not as developed, efficient or
liquid as financial markets in the United States, and therefore, the prices of
non-U.S. securities and instruments can be more volatile. In addition, the Fund
will be subject to risks associated with adverse political and economic
developments in foreign countries, which may include the imposition of economic
sanctions or other similar measures. Generally, there is less readily available
and reliable information about non-U.S. issuers due to less rigorous disclosure
or accounting standards and regulatory practices.
•Bank
Subordinated Debt Risks. Banks
may issue subordinated debt securities, which have a lower priority to full
payment behind other more senior debt securities. In addition to the risks
generally associated with fixed income instruments (e.g., interest rate risk,
counterparty risk, credit risk, etc.), bank subordinated debt is also subject to
risks inherent to banks. Because banks are highly regulated and operate in a
highly competitive environment, it may be difficult for a bank to meet its debt
obligations. Banks also may be affected by changes in legislation and
regulations applicable to the financial markets. Bank subordinated debt is often
issued by smaller community banks that may be overly concentrated in a specific
geographic region, lack the capacity to comply with new regulatory requirements
or lack adequate capital.
Subordinated
debt, senior debt and preferred securities of banks and diversified financials
companies are subject to the risks generally associated with the financials
sector. See “Financials Sector Risk.”
•Financials
Sector Risk. The
Fund may invest in companies in the financials sector, and therefore the
performance of the Fund could be negatively impacted by events affecting this
sector. This sector can be significantly affected by changes in interest rates,
government regulation, the rate of defaults on corporate, consumer and
government debt, the availability and cost of capital, and fallout from the
housing and sub-prime mortgage crisis that began in 2007. This sector has
experienced significant losses in the past, and the impact of more stringent
capital requirements and of past or future regulation on any individual
financial company or on the sector as a whole cannot be predicted. In recent
years, cyber attacks and technology malfunctions and failures have become
increasingly frequent in this sector and have caused significant
losses.
•Management
Risk.
The Fund may not meet its investment objective based on the Adviser’s success or
failure to implement investment strategies for the Fund.
•Cybersecurity
Risk.
Cybersecurity incidents may allow an unauthorized party to gain access to Fund
assets or proprietary information, or cause the Fund, the Adviser, and/or other
service providers (including custodians and financial intermediaries) to suffer
data breaches or data corruption. Additionally, cybersecurity failures or
breaches of the electronic systems of the Fund, the Adviser, or the Fund’s other
service providers, market makers, Authorized Participants or the issuers of
securities in which the Fund invests have the ability to cause disruptions and
negatively impact the Fund's business operations, potentially resulting in
financial losses to the Fund and its shareholders. In an extreme case, a
shareholder’s ability to transact in Fund shares may be affected.
•New
Fund Risk. The
Fund is a recently organized investment company with limited operating history.
As a result, prospective investors have no track record or history on which to
base their investment decision.
•Non-Diversification
Risk.
The Fund is classified as “non-diversified”
under the 1940 Act. As a result, it can invest a greater portion of its assets
in obligations of a single issuer than a “diversified” fund. The Fund may
therefore be more susceptible than a diversified fund to being adversely
affected by a single corporate, economic, political or regulatory
occurrence.
•Sector
Risk.
To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors.
•Floating
or Variable Rate Securities Risk.
Floating or variable rate securities pay interest at rates that adjust in
response to changes in a specified interest rate or reset at predetermined dates
(such as the end of a calendar quarter). Securities with floating or variable
interest rates are generally less sensitive to interest rate changes than
securities with fixed interest rates, but may decline in value if their interest
rates do not rise as much, or as quickly, as comparable market interest rates.
Although floating or variable rate securities are generally less sensitive to
interest rate risk than fixed rate securities, they are subject to credit,
liquidity and default risk and may be subject to legal or contractual
restrictions on resale, which could impair their value.
•Liquidity
and Valuation Risks.
It may be difficult for the Fund to purchase and sell particular investments
within a reasonable time at a fair price, or the price at which it has been
valued for purposes of the Fund’s net asset value, causing the Fund to be less
liquid and unable to sell securities for what the Adviser believes is the
appropriate price of the investment. Valuation of portfolio investments may be
difficult, such as during periods of market turmoil or reduced liquidity and for
investments that trade infrequently or irregularly. In these and other
circumstances, an investment may be valued using fair value methodologies, which
are inherently subjective, reflect good faith judgments based on available
information and may not accurately estimate the price at which the Fund could
sell the investment at that time. Based on its investment strategies, a
significant portion of the Fund’s investments can be difficult to value and
potentially less liquid and therefore particularly prone to these
risks.
•Other
Investment Companies Risks.
The Fund will incur higher and duplicative expenses when it invests in mutual
funds, ETFs, and other investment companies, which may include those that are
part of the same group of investment companies as the Fund (“affiliated
underlying funds”). There is also the risk that the Fund may suffer losses due
to the investment practices of the underlying funds. When the Fund invests in
other investment companies, the Fund will be subject to substantially the same
risks as those associated with the direct ownership of securities held by such
investment companies. ETFs may be less liquid than other investments, and thus
their share values more volatile than the values of the investments they hold.
Investments in ETFs are also subject to the following risks: (i) the market
price of an ETF’s shares may trade above or below their net asset value; (ii) an
active trading market for an ETF’s shares may not develop or be maintained; and
(iii) trading of an ETF’s shares may be halted for a number of
reasons.
The
Adviser may be subject to potential conflicts of interest in allocating the
Fund’s assets to underlying funds, such as a potential conflict in selecting
affiliated underlying funds over unaffiliated underlying funds. In addition, the
Fund’s portfolio managers may be subject to potential conflicts of interest in
allocating the Fund’s assets among underlying funds, as certain of the Fund’s
portfolio managers may also manage an affiliated underlying fund in which the
Fund may invest. Both the Adviser and the Fund’s portfolio managers have a
fiduciary duty to the Fund to act in the Fund’s best interest when selecting
underlying funds. Under the oversight of the Board of Trustees, the Adviser will
carefully analyze any such potential conflicts of interest and will take steps
to minimize and, where possible, eliminate them.
•Rating
Agencies Risks.
Ratings are not an absolute standard of quality, but rather general indicators
that reflect only the view of the originating rating agencies from which an
explanation of the significance of such ratings may be obtained. There is no
assurance that a particular rating will continue for any given period of time or
that any such rating will not be revised downward or withdrawn entirely. Such
changes may negatively affect the liquidity or market price of the securities in
which the Fund invests. The ratings of Structured Products may not adequately
reflect the credit risk of those assets due to their structure.
•LIBOR
Risk.
Instruments in which the Fund invests may pay interest at floating rates based
on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund
and issuers of instruments in which the Fund invests may also obtain financing
at floating rates based on LIBOR. Derivative instruments utilized by the Fund
and/or issuers of instruments in which
the
Fund may invest may also reference LIBOR. The Fund also may utilize leverage or
borrowings primarily based on LIBOR. One-week and two-month U.S. Dollar LIBOR
settings were discontinued at the end of 2021, and the United Kingdom Financial
Conduct Authority (“FCA”), which regulates LIBOR, has announced that the
remaining U.S. Dollar LIBOR settings will continue to be provided on a
representative basis until mid-2023. As of January 1, 2022, as a result of
supervisory guidance from U.S. regulators, some U.S. regulated entities have
ceased entering into new LIBOR contracts with limited exceptions. While
publication of the one-, three- and six- month Sterling and Japanese yen LIBOR
settings continued for a limited time on the basis of a changed methodology
(known as “synthetic LIBOR”), these synthetic LIBOR settings were designated by
the FCA as unrepresentative of the underlying market they sought to measure and
were solely available for use in legacy transactions. The FCA has indicated that
they will require the publication of synthetic LIBOR for the one-, three- and
six-month for U.S. Dollar LIBOR settings after June 30, 2023, until at least the
end of September 2024, although usage of these synthetic LIBOR settings may be
prohibited or prevented by applicable law. Certain bank-sponsored committees in
other jurisdictions, including Europe, the United Kingdom, Japan and
Switzerland, have selected alternative reference rates denominated in other
currencies. Abandonment of or modifications to LIBOR may affect the value,
liquidity or return on certain Fund investments that reference LIBOR without
including fallback provisions and may result in costs incurred in connection
with closing out positions and entering into new trades. Any pricing adjustments
to the Fund’s investments resulting from a substitute reference rate may also
adversely affect the Fund’s performance and/or NAV. The effect of a phase out of
LIBOR on instruments in which the Fund may invest is currently unclear. While
some instruments may contemplate a scenario where LIBOR is no longer available
by providing for an alternative rate setting methodology, not all instruments
may have such provisions, and there is significant uncertainty regarding the
effectiveness of any such alternative methodologies. To the extent that any
replacement rate differs from that utilized for a Structured Product that holds
those securities, the Structured Product would experience an interest rate
mismatch between its assets and liabilities. Recently, some Structured Products
have included, or have been amended to include, language permitting the
Structured Product’s investment manager to implement a market replacement rate
upon the occurrence of certain material disruption events. However, not all
Structured Products may adopt such provisions, nor can there be any assurance
that Structured Products’ investment managers will undertake the suggested
amendments when able. In cases where LIBOR replacement language is absent or
insufficient, certain legislative transition mechanisms may apply, causing LIBOR
to be replaced with a rate selected by the Board of Governors of the Federal
Reserve System. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was
signed into law. This law provides a statutory fallback mechanism on a
nationwide basis to replace LIBOR with a benchmark rate that is selected by the
Board of Governors of the Federal Reserve System and based on the Secured
Overnight Financing Rate (“SOFR”) for certain contracts that reference LIBOR and
contain no, or insufficient, fallback provisions. Final implementing regulations
in respect of the law have been promulgated although the effect that they may
have on the transition from LIBOR is uncertain. The transition from LIBOR to
alternative interest rates could lead to significant short-term and long-term
uncertainty and market instability. It remains uncertain how such changes would
affect the Fund, issuers of instruments in which the Fund invests and financial
markets generally.
•Large
Shareholder Transactions Risk.
Shares of the Fund are offered to certain other investment companies, large
retirement plans and other large investors. In addition, a third party investor,
the Adviser or an affiliate of the Adviser, an AP, a market maker, or another
entity may invest in the Fund and hold its investment for a limited period of
time. As a result, the Fund is subject to the risk that shareholders may
purchase or redeem a large amount of shares of the Fund. To satisfy such large
shareholder redemptions, the Fund may have to sell portfolio securities at times
when it would not otherwise do so, which may negatively impact the Fund’s NAV
and liquidity. In addition, large purchases of Fund shares could adversely
affect the Fund’s performance to the extent that the Fund does not immediately
invest cash it receives and therefore holds more cash than it ordinarily would.
Large shareholder activity could also generate increased transaction costs and
cause adverse tax consequences. In addition, transactions by large shareholders
may account for a large percentage of the trading volume on the Exchange and
may, therefore, have a material effect on the market price of the
Shares.
•Illiquid
Investments Risks.
The Fund may, at times, hold illiquid investments, by virtue of the absence of a
readily available market for certain of its investments, or because of legal or
contractual restrictions on sales. The Fund could lose money if it is unable to
dispose of an investment at a time or price that is most beneficial to the Fund.
•Regulatory
and Legal Risks.
U.S. and non-U.S. government agencies and other regulators regularly adopt new
regulations and legislatures enact new statutes that affect the investments held
by the Fund, the strategies used by the Fund or the level of regulation or
taxation that applies to the Fund. These statutes and regulations may impact the
investment strategies, performance, costs and operations of the Fund or the
taxation of its shareholders.
•Community
Bank Risks.
The Fund’s investments in community banks may make the Fund more economically
vulnerable in the event of a downturn in the banking industry, including
economic downturns impacting a particular region. Community banks may also be
subject to greater lending risks than larger banks, including the risks
associated with mortgage loans, and may have fewer resources to devote towards
employing and retaining strong management employees and implementing a thorough
compliance program. Additionally, community banks are subject to substantial
regulations that could adversely affect their ability to operate and the value
of the Fund investments, including from future banking regulations.
•High-Yield
Securities Risks. High-yield
securities (also known as junk bonds) carry a greater degree of risk and are
more volatile than investment grade securities and are considered speculative.
High-yield securities may be issued by companies that are restructuring, are
smaller and less creditworthy, or are more highly indebted than other companies.
This means that they may have more difficulty making scheduled payments of
principal and interest. Changes in the value of high-yield securities are
influenced more by changes in the financial and business position of the issuing
company than by changes in interest rates when compared to investment grade
securities. The Fund’s investments in high-yield securities expose it to a
substantial degree of credit risk.
•Reverse
Repurchase Agreement Risks. A
reverse repurchase agreement is the sale by the Fund of a debt obligation to a
party for a specified price, with the simultaneous agreement by the Fund to
repurchase that debt obligation from that party on a future date at a higher
price. Similar to borrowing, reverse repurchase agreements provide the Fund with
cash for investment purposes, which creates leverage and subjects the Fund to
the risks of leverage. Reverse repurchase agreements also involve the risk that
the other party may fail to return the securities in a timely manner or at all.
The Fund could lose money if it is unable to recover the securities and/or if
the value of collateral held by the Fund, including the value of the investments
made with cash collateral, is less than the value of securities.
•Derivatives
Risks.
The Fund’s derivatives and other similar instruments (collectively referred to
in this section as “derivatives” or “derivative instruments”) have risks,
including the imperfect correlation between the value of such instruments and
the underlying assets, rate or index; the loss of principal, including the
potential loss of amounts greater than the initial amount invested in the
derivative instrument; the possible default of the other party to the
transaction; and illiquidity of the derivative investments. Changes in the value
of a derivative may also create margin delivery or settlement payment
obligations for the Fund. If a counterparty becomes bankrupt or otherwise fails
to perform its obligations under a derivative contract due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery under the derivative contract in a bankruptcy or other reorganization
proceeding. Certain derivatives may give rise to a form of leverage. Leverage
magnifies the potential for gain and the risk of loss. The use of derivatives is
also subject to operational risk which refers to risk related to potential
operational issues, including documentation issues, settlement issues, system
failures, inadequate controls, and human error, as well as legal risk which
refers to the risk of loss resulting from insufficient documentation,
insufficient capacity or authority of counterparty, or legality or
enforceability of a contract. Derivatives are also subject to market risk which
refers to the risk that markets could experience a change in volatility that
adversely impacts fund returns and the fund’s obligations and exposures. Certain
of the Fund’s transactions in derivatives could also affect the amount, timing
and character of distributions to shareholders, which may result in the Fund
realizing more short-term capital gain and ordinary income subject to tax at
ordinary income tax rates than it would if it did not engage in such
transactions, which may adversely impact the Fund’s after-tax returns.
The
derivative instruments and techniques that the Fund may principally use include:
◦Futures.
A
futures contract is a standardized agreement to buy or sell a specific quantity
of an underlying instrument at a specific price at a specific future time. A
decision as to whether, when and how to use futures involves the exercise of
skill and judgment and even a well-conceived futures transaction may be
unsuccessful because of market behavior or unexpected events. In addition to the
derivatives risks discussed above, the prices of futures can be highly volatile,
using futures can lower total return, and the potential loss from futures can
exceed the Fund’s initial investment in such contracts.
◦Options.
If the Fund buys an option, it buys a legal contract giving it the right to buy
or sell a specific amount of the underlying instrument or futures contract on
the underlying instrument at an agreed-upon price typically in exchange for a
premium paid by the Fund. If the Fund sells an option, it sells to another
person the right to buy from or sell to the Fund a specific amount of the
underlying instrument or futures contract on the underlying instrument at an
agreed-upon price typically in exchange for a premium received by the Fund. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment and even a well-conceived option transaction may be
unsuccessful because of market behavior or unexpected events. The prices of
options can be highly volatile and the use of options can lower total
returns.
◦Swaps.
A
swap contract is an agreement between two parties pursuant to which the parties
exchange payments at specified dates on the basis of a specified notional
amount, with the payments calculated by reference to specified securities,
indexes, reference rates, currencies or other instruments. Swap agreements are
particularly subject to counterparty credit, liquidity, valuation, correlation,
leverage, operational and legal risk. Swaps could result in losses if interest
rate or foreign currency exchange rates or credit quality changes are not
correctly anticipated by the Fund or if the reference index, security or
investments do not perform as expected. The use of credit default swaps can
result in losses if the Fund’s assumptions regarding the creditworthiness of the
underlying obligation prove to be incorrect.
•Risks
Relating to Fund’s RIC Status. To
qualify and remain eligible for the special tax treatment accorded to a
regulated investment company (“RIC”) and its shareholders under the Internal
Revenue Code of 1986, as amended, the Fund must meet certain source-of-income,
asset diversification and annual distribution requirements. If the Fund fails to
qualify as a RIC for
any
reason and becomes subject to corporate tax, the resulting corporate taxes could
substantially reduce its net assets, the amount of income available for
distribution and the amount of its distributions.
•Uncertain
Tax Treatment.
Below investment grade instruments may present special tax issues for the Fund.
U.S. federal income tax rules are not entirely clear about issues such as when
the Fund may cease accruing interest, original issue discount (“OID”) or market
discount, when and to what extent deductions may be taken for bad debts or
worthless instruments, how payments received on obligations in default should be
allocated between principal and income and whether exchanges of debt obligations
in a bankruptcy or workout context are taxable, which may make it difficult for
the Fund to satisfy the annual distribution requirements applicable to RICs.
•Equity
Market Risk. Equity
securities are susceptible to general stock market fluctuations and to volatile
increases and decreases in value. The equity market may experience declines, and
companies whose equity securities are in the Fund’s portfolio may not increase
their earnings at the rate anticipated. The Fund’s net asset value and
investment return will fluctuate based upon changes in the value of its
portfolio securities.
•Repurchase
Agreement Risks.
Repurchase agreements typically involve the acquisition by the Fund of
fixed-income securities from a selling financial institution such as a bank or
broker-dealer. The Fund may incur a loss if the other party to a repurchase
agreement is unwilling or unable to fulfill its contractual obligations to
repurchase the underlying security.
Performance
Performance information for the Fund is not
included because the Fund did not have a full calendar year of performance prior
to the date of this Prospectus. Performance information will be
available once the Fund has at least one calendar year of performance. Updated
performance information is available online at www.angeloakcapital.com.
Portfolio
Management
Investment
Adviser.
Angel Oak Capital Advisors, LLC.
Portfolio
Managers.
Sam
Dunlap, Chief Investment Officer, Public Strategies of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Clayton
Triick, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Colin
McBurnette, Senior Portfolio Manager of the Adviser, has been a portfolio
manager of the Fund since its inception in October 2022.
Berkin
Kologlu, Senior Portfolio Manager of the Adviser, has been a portfolio manager
of the Fund since its inception in October 2022.
Kin
Lee, Senior Portfolio Manager of the Adviser, has been a portfolio manager of
the Fund since its inception in October 2022.
Matthew
R. Kennedy, CFA®,
Head of Corporate Credit and Senior Portfolio Manager of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Nichole
Hammond, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Johannes
Palsson, Senior Portfolio Manager of the Adviser, has been a portfolio manager
of the Fund since its inception in October 2022.
Cheryl
Pate, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Ward
Bortz, Managing Director and Portfolio Manager of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Purchase
and Sale of Fund Shares
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only Authorized Participants (“APs”) (typically, broker-dealers)
may purchase or redeem. The Fund generally issues and redeems Creation Units in
exchange for a portfolio of securities and/or a designated amount of U.S.
cash.
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through a broker or dealer at market prices, rather than
NAV. Because Shares trade at market prices rather than NAV, Shares may trade at
a price greater than NAV (premium) or less than NAV (discount).
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares (the “bid” price) and the
lowest price a seller is willing to accept for Shares (the “ask” price) when
buying or selling Shares in the secondary market. The difference in the bid and
ask prices is referred to as the “bid-ask spread.”
Recent
information regarding the Fund’s NAV, market price, how often Shares traded on
the Exchange at a premium or discount, and bid-ask spreads can be found on the
Fund’s website at www.angeloakcapital.com.
Tax
Information
The
Fund’s distributions are generally taxable as ordinary income, qualified
dividend income, or capital gains (or a combination), unless your investment is
in an individual retirement account (“IRA”) or other tax-advantaged account.
Distributions on investments made through tax-deferred arrangements may be taxed
later upon withdrawal of assets from those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange-traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
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ANGEL
OAK
ULTRASHORT
INCOME
ETF
SUMMARY |
Investment Objective
The Angel Oak UltraShort Income ETF (the
“Fund”) seeks to provide current income while seeking to minimize price
volatility and maintain liquidity.
Fees and Expenses of the Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
Annual Fund Operating
Expenses (expenses that you pay each year as a
percentage of the value of your
investment)
|
|
|
|
|
| |
|
Management
Fees |
0.55% |
|
Other
Expenses1,
2 |
0.00% |
|
Total
Annual Fund Operating Expenses |
0.55% |
|
Less
Fee Waiver/Expense Reimbursement3 |
-0.26% |
|
Total
Annual Fund Operating Expenses After Fee Waiver/Expense
Reimbursement3 |
0.29% |
1 Estimated for the current
fiscal year.
2 Angel Oak
Capital Advisors, LLC (the “Adviser”) is responsible for substantially all the
expenses of the Fund (including expenses of the Trust relating to the Fund),
except for the advisory fees, payments under the Fund’s 12b-1 plan (if any),
interest expenses, dividend and interest expenses related to short sales, taxes,
acquired fund fees and expenses (other than fees for funds advised by the
Adviser), brokers’ commissions and any other transaction related expenses and
fees arising out of transactions effected on behalf of the Fund, and litigation
and potential litigation and other extraordinary expenses not incurred in the
ordinary course of the Fund’s business.
3 The Adviser has
contractually agreed to waive its fees and/or reimburse certain expenses
(exclusive of interest expenses, dividend and interest expenses related to short
sales, taxes, acquired fund fees and expenses (other than fees for funds advised
by the Adviser which are waived), brokers’ commissions and any other transaction
related expenses and fees arising out of transactions effected on behalf of the
Fund, and litigation and potential litigation and other extraordinary expenses
not incurred in the ordinary course of the Fund’s business) to limit the Total
Annual Fund Operating Expenses After Fee Waiver/Expense Reimbursement to 0.29%
of the Fund’s average daily net assets (the “Expense Limit”) through
May 31,
2024. The contractual arrangement may only be changed or
eliminated by the Board of Trustees upon 60 days’ written notice to the Adviser.
The Adviser may recoup from the Fund any waived amount or reimbursed expenses
pursuant to this agreement if such recoupment does not cause the Fund’s Total
Annual Fund Operating Expenses after such recoupment to exceed the lesser of (i)
the Expense Limit in effect at the time of the waiver or reimbursement and (ii)
the Expense Limit in effect at the time of recoupment and the recoupment is made
within three years after the end of the month in which the Adviser incurred the
expense.
Expense Example
The following example
is intended to help you compare the cost of investing in the Fund with the cost
of investing in other funds. The example assumes that you invest $10,000 in the
Fund for the time periods indicated and then continue to hold or sell all of
your Shares at the end of those periods. The example also assumes that your
investment has a 5% return each year and that the Fund’s operating expenses
remain the same. The example does not take into account brokerage commissions
that you may pay on your purchases and sales of Shares. The fee waiver and
expense reimbursement discussed in the table above is reflected only for the
first year. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
|
|
|
|
|
|
|
| |
| One
Year |
Three
Years |
| |
| $30 |
$150 |
| |
Portfolio Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
example above, affect the Fund’s performance. For the fiscal period October 24,
2022 (commencement of operations) through January 31, 2023, the portfolio
turnover rate for the Fund was 23% of the average value of its
portfolio.
Principal Investment Strategies
In pursuing its investment
objective, the Fund will, under normal circumstances, invest in securities which
cause the Fund to have a dollar-weighted average maturity of less than two years
and a dollar-weighted average duration of less than one
year.
Angel
Oak UltraShort Income ETF 12
The
Fund invests primarily in agency and non-agency residential mortgage-backed
securities (“RMBS”), asset-backed securities (“ABS”), including securities or
securitizations backed by assets such as credit card receivables, student loans,
automobile loans, and residential and commercial real estate, collateralized
loan obligations (“CLOs”), collateralized debt obligations (“CDOs”),
collateralized mortgage obligations (“CMOs”), and other debt securitizations
(collectively, “Structured Products”); corporate debt and other debt securities;
and U.S. Treasury and U.S. government agency securities.
The
Fund may invest up to 25% of its net assets in CLOs.
The
Fund may invest in other investment companies, including closed-end investment
companies and open-end investment companies, which may operate as traditional
mutual funds, exchange-traded funds (“ETFs”) or business development companies
(“BDCs”). The other investment companies in which the Fund invests may be part
of the same group of investment companies as the Fund.
The
Fund will concentrate its investments in agency and non-agency RMBS and
commercial mortgage-backed securities (“CMBS”) (collectively, “MBS”). This means
that, under normal circumstances, the Fund will invest more than 25% of its
total assets in MBS (measured at the time of purchase). The Fund will not
concentrate its investments in any other group of industries. The Fund’s policy
to concentrate its investments in MBS is fundamental and may not be changed
without shareholder approval.
The
fixed income instruments in which the Fund invests may include those of issuers
from the United States and other countries. The Fund’s investments in foreign
debt securities will typically be denominated in U.S. dollars.
The
Fund may invest up to 15% of its net assets in investments that are deemed to be
illiquid, which may include private placements, certain Rule 144A securities
(which are subject to resale restrictions), and securities of issuers that are
bankrupt or in default.
The
Fund is not a money market fund and does not seek to maintain a stable net asset
value (“NAV”).
The
Fund may engage in active and frequent trading of its portfolio securities.
The
Fund may invest, without limitation, in securities of any maturity and duration,
but, under normal circumstances, the Fund will have a dollar-weighted average
maturity of less than two years and a dollar-weighted average duration of less
than one year. Maturity refers to the length of time until a debt security’s
principal is repaid with interest. Duration is a measure used to determine the
sensitivity of a security’s price to changes in interest rates. Duration
incorporates a security’s yield, coupon, final maturity, call and put features
and prepayment exposure into one measure, with a higher duration indicating
greater sensitivity to interest rates. For example, if a portfolio has a
duration of two years, and interest rates increase (fall) by 1%, the portfolio
would decline (increase) in value by approximately 2%. However, duration may not
accurately reflect the true interest rate sensitivity of instruments held by the
Fund and, therefore the Fund’s exposure to changes in interest rates.
The
Fund may invest in high-yield securities and securities that are not rated by
any rating agencies. These “high-yield” securities (also known as “junk bonds”)
will be rated BB+ or lower by Standard & Poor’s Rating Group (“S&P”) or
will be of equivalent quality rating from another Nationally Recognized
Statistical Ratings Organization. If a bond is unrated, the Adviser may
determine whether it is of comparable quality and therefore eligible for the
Fund’s investment. Although the Fund will not acquire investments of issuers
that are in default at the time of investment, the Fund may hold such securities
if an investment subsequently defaults.
In
pursuing its investment objective or for hedging purposes, the Fund may utilize
borrowing, and various types of derivative instruments, including structured
products, swaps, futures contracts, and options, although the Adviser expects
that not all such derivatives will be used at all times. Such derivatives may
trade over-the-counter or on an exchange and may principally be used for one or
more of the following purposes: speculation, currency hedging, duration
management, credit deterioration hedging, hedges against broad market movements,
or to pursue the Fund’s investment objective. The Fund may borrow to the maximum
extent permitted by applicable law, which generally means that the Fund may
borrow up to one-third of its total assets. The Fund may also invest in reverse
repurchase agreements.
The
Fund’s allocation of its assets into various asset classes within its investment
strategy will depend on the views of the Adviser as to the best value relative
to what is currently available in the marketplace. Investment decisions are made
based on fundamental research and analysis to identify issuers with the ability
to improve their credit profile over time with attractive valuations, resulting
in both income and potential capital appreciation. In selecting investments,
including Structured Products, the Adviser may consider maturity, yield, and
ratings information and opportunities for price appreciation among other
criteria. The Adviser also analyzes a variety of factors when selecting
investments for the Fund, such as collateral quality, credit support, structure
and market conditions. The Adviser attempts to diversify risks that arise from
position sizes, geography, ratings, duration, deal structure and collateral
values. The Adviser will also seek to invest in securities that have relatively
low volatility. The Adviser seeks to limit risk of principal by targeting assets
that it considers undervalued. From time to time, the Fund may allocate its
assets so as to focus on particular types of securities.
As
part of its investment process, the Adviser also considers certain
environmental, social and governance (“ESG”) and sustainability factors that it
believes could have a material negative or positive impact on the risk profiles
of the issuers or underlying collateral assets of certain securities in which
the Fund may invest. These determinations may not be conclusive, and
Angel
Oak UltraShort Income ETF 13
securities
that may be negatively impacted by such factors may be purchased and retained by
the Fund while the Fund may divest or not invest in securities that may be
positively impacted by such factors. The Adviser may sell investments, including
Structured Products, if it determines that any of the mentioned factors have
changed materially from its initial analysis or that other factors indicate that
an investment is no longer earning a return commensurate with its risk or that a
different security will better help the Fund achieve its investment
objective.
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940, as amended (the “1940 Act”), and, therefore, may invest a greater
percentage of its assets in fewer issuers than diversified funds.
The
Fund is an actively managed ETF, which is a fund that trades like other
publicly-traded securities. The Fund is not an index fund and does not seek to
replicate the performance of a specified index.
Principal Risks
The
principal risks of investing in the Fund are summarized below. You should
carefully consider the Fund’s investment risks before deciding whether to invest
in the Fund. There may be circumstances that could prevent the Fund
from achieving its investment objective and you may lose money by investing in
the Fund. An investment in the Fund is not a
deposit at a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency.
•Fixed-Income
Instruments Risks. The
Fund will invest in fixed-income instruments and securities. Such investments
may be secured, partially secured or unsecured and may be unrated, and whether
or not rated, may have speculative characteristics. The market price of the
Fund’s investments will change in response to changes in interest rates and
other factors. Generally, when interest rates rise, the values of fixed-income
instruments fall, and vice versa. In typical interest rate environments, the
prices of longer-term fixed-income instruments generally fluctuate more than the
prices of shorter-term fixed-income instruments as interest rates change. In
addition, a fund with a longer average portfolio duration will be more sensitive
to changes in interest rates than a fund with a shorter average portfolio
duration. A fund with a negative average portfolio duration may decline in value
as interest rates decrease. Most high yield investments pay a fixed rate of
interest and are therefore vulnerable to inflation risk (inflation rates are
currently elevated relative to normal conditions). The obligor of a fixed-income
instrument may not be able or willing to pay interest or to repay principal when
due in accordance with the terms of the associated agreement.
•General
Market Risk.
The capital markets may experience periods of disruption, instability and
volatility. Political, geopolitical, natural and other events, including war,
terrorism, trade disputes, government shutdowns, market closures, natural and
environmental disasters, epidemics, pandemics and other public health crises and
related events have led, and in the future may lead, to economic uncertainty,
decreased economic activity, increased market volatility and other disruptive
effects on U.S. and global economies and markets. Such conditions may materially
and adversely affect the markets globally and in the jurisdictions in which the
Fund invests, which may have a negative impact on the Fund’s performance. The
Fund’s NAV and investment return will fluctuate based upon changes in the value
of its portfolio securities.
•Credit
Risk.
Credit risk is the risk that the Fund could lose money if the issuer or
guarantor of a fixed income security, or the counterparty to a derivative
contract, is unable or unwilling to meet its financial obligations.
•Interest
Rate Risk.
The Fund is exposed to risks associated with changes in interest rates,
including the possibility that, in a period of rising interest rates, securities
may exhibit additional volatility and may lose value.
•Prepayment
Risk.
When interest rates decline, fixed income securities with stated interest rates
may have the principal paid earlier than expected, requiring the Fund to invest
the proceeds at generally lower interest rates.
•Structured
Products Risks.
The Fund may invest in Structured Products, including CLOs, CDOs, CMOs, and
other asset-backed securities and debt securitizations. Some Structured Products
have credit ratings, but are typically issued in various classes with various
priorities. Normally, Structured Products are privately offered and sold (that
is, they are not registered under the securities laws), which means less
information about the security may be available as compared to publicly offered
securities and only certain institutions may buy and sell them. As a result,
investments in Structured Products may be characterized by the Fund as illiquid
securities. An active dealer market may exist for Structured Products that
qualify for Rule 144A transactions, but there can be no assurance that such a
market will exist or will be active enough for the Fund to sell such securities.
In addition to the typical risks associated with fixed-income securities and
asset-backed securities, CLOs and CDOs carry additional risks including, but not
limited to: (i) the possibility that distributions from collateral securities
will not be adequate to make interest or other payments; (ii) the risk that the
collateral may default, decline in value or quality or be downgraded by a rating
agency; (iii) the Fund may invest in tranches of Structured Products that are
subordinate to other tranches; (iv) the structure and complexity of the
transaction and the legal documents could lead to disputes among investors
regarding the characterization of proceeds; (v) risk of forced “fire sale”
liquidation due to technical defaults such as coverage test failures; and (vi)
the Structured Product’s manager may perform poorly. The senior and junior
tranches of Structured Products may have floating or variable interest rates
based on LIBOR and are subject to the risks associated with securities tied to
LIBOR, including the risks associated with the pending replacement of LIBOR with
an alternative reference rate. The
Angel
Oak UltraShort Income ETF 14
Fund
may also invest in the equity tranches of a Structured Product, which typically
represent the first loss position in the Structured Product, are unrated and are
subject to higher risks. Equity tranches of Structured Products typically do not
have a fixed coupon and payments on equity tranches will be based on the income
received from the underlying collateral and the payments made to the senior
tranches, both of which may be based on floating rates based on
LIBOR.
•Borrowing
Risks and Leverage Risks.
Borrowing for investment purposes creates leverage, which will exaggerate the
effect of any change in the value of securities in the Fund’s portfolio on the
Fund’s NAV and, therefore, may increase the volatility of the Fund.
•Extension
Risk.
An issuer could exercise its right to pay principal on an obligation held by the
Fund (such as a mortgage-backed security) later than expected. This may happen
when there is a rise in interest rates. Under these circumstances, the value of
the obligation will decrease, and the Fund will also suffer from the inability
to reinvest in higher yielding securities.
•Concentration
in Certain Mortgage-Backed Securities Risk.
The risks of concentrating in residential mortgage-backed securities (agency and
non-agency) and commercial mortgage-backed securities include susceptibility to
changes in lending standards, interest rates and lending rates, and the risks
associated with the market’s perception of issuers, the creditworthiness of the
parties involved and investing in real estate securities.
•U.S.
Government Securities Risks.
U.S. government securities are not guaranteed against price movement and may
decrease in value. Some U.S. government securities are supported by the full
faith and credit of the U.S. Treasury, while others may be supported only by the
discretionary authority of the U.S. government to purchase certain obligations
of a federal agency or U.S. government sponsored enterprise (“GSE”) or only by
the right of the issuer to borrow from the U.S. Treasury. While the U.S.
government provides financial support to such agencies and GSEs, no assurance
can be given that the U.S. government will always do so. Other obligations are
backed solely by the GSE’s own resources. Investments in securities issued by
GSEs that are not backed by the U.S. Treasury are subject to higher credit risk
than those that are backed by the U.S. Treasury.
•Unrated
Securities Risks.
Unrated securities may be less liquid than comparable rated securities and
involve the risk that Angel Oak may not accurately evaluate the security’s
comparative credit rating.
•Mortgage-Backed
and Asset-Backed Securities Risks. Mortgage-backed
and other
asset-backed
securities are subject to the risks of traditional fixed-income instruments.
However, they are also subject to prepayment risk and extension risk, meaning
that if interest rates fall, the underlying debt may be repaid ahead of
schedule, reducing the value of the Fund’s investments and if interest rates
rise, there may be fewer prepayments, which would cause the average bond
maturity to rise, increasing the potential for the Fund to lose money.
Mortgage-backed and other asset-backed securities are also susceptible to
changes in lending standards and lending rates. In addition, mortgage-backed
securities comprised of subprime mortgages and investments in other asset-backed
securities collateralized by subprime loans may be subject to a higher degree of
credit risk and valuation risk. Additionally, such securities may be subject to
a higher degree of liquidity risk, because the liquidity of such investments may
vary dramatically over time.
Certain
mortgage-backed securities may be secured by pools of mortgages on
single-family, multi-family properties, as well as commercial properties.
Similarly, asset-backed securities may be secured by pools of loans, such as
corporate loans, student loans, automobile loans and credit card receivables.
The credit risk on such securities is affected by homeowners or borrowers
defaulting on their loans. The values of assets underlying mortgage-backed and
asset-backed securities may decline and therefore may not be adequate to cover
underlying investors. Some mortgage-backed and asset-backed securities have
experienced extraordinary weakness and volatility in recent years. Possible
legislation in the area of residential mortgages, credit cards, corporate loans
and other loans that may collateralize the securities in which the Fund may
invest could negatively impact the value of the Fund’s investments. To the
extent the Fund focuses its investments in particular types of mortgage-backed
or asset-backed securities, the Fund may be more susceptible to risk factors
affecting such types of securities.
•ETF
Risks.
The Fund is an ETF and may invest in other ETFs, and, as a result of this
structure, is exposed directly or indirectly to the following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk.
The Fund has a limited number of financial institutions that may act as
Authorized Participants (“APs”). In addition, there may be a limited number of
market makers and/or liquidity providers in the marketplace. To the extent
either of the following events occur, Shares may trade at a material discount to
NAV, which may also lead to a widening of bid/ask spreads quoted for Shares, and
possibly face delisting: (i) APs exit the business or otherwise become
unable to process creation and/or redemption orders and no other APs step
forward to perform these services, or (ii) market makers and/or liquidity
providers exit the business or significantly reduce their business activities
and no other entities step forward to perform their functions.
◦Costs
of Buying or Selling Shares.
Due to the costs of buying or selling Shares, including brokerage commissions
imposed by brokers and bid/ask spreads, frequent trading of Shares may
significantly reduce investment results and an investment in Shares may not be
advisable for investors who anticipate regularly making small investments.
Angel
Oak UltraShort Income ETF 15
◦Shares
May Trade at Prices Other Than NAV. As
with all ETFs, Shares may be bought and sold in the secondary market at market
prices. Although it is expected that the market price of Shares will approximate
the Fund’s NAV, there may be times when the market price of Shares is more than
the NAV intra-day (premium) or less than the NAV intra-day (discount) due to
supply and demand of Shares or during periods of market volatility. This risk is
heightened in times of market volatility, periods of steep market declines, and
periods when there is limited trading activity for Shares in the secondary
market, in which case such premiums or discounts may be significant. Because
securities held by the Fund may trade on foreign exchanges that are closed when
the Fund’s primary listing exchange is open, the Fund is likely to experience
premiums or discounts greater than those of domestic ETFs. If a shareholder
purchases Shares at a time when the market price is at a premium to the NAV or
sells Shares at a time when the market price is at a discount to the NAV, the
shareholder may sustain losses.
◦Trading.
Although Shares are listed for trading on the NYSE Arca, Inc. (the “Exchange”)
and may be traded on U.S. exchanges other than the Exchange, there can be no
assurance that Shares will trade with any volume, or at all, on any stock
exchange. In stressed market conditions, the liquidity of Shares may begin to
mirror the liquidity of the Fund’s underlying portfolio holdings, which can be
significantly less liquid than Shares, and may lead to a widening of bid/ask
spreads quoted for Shares.
◦Cash
Transactions Risk.
Unlike certain ETFs, the Fund may effect creations and redemptions in cash or
partially in cash. Therefore, it may be required to sell portfolio securities
and subsequently recognize gains on such sales that the Fund might not have
recognized if it were to distribute portfolio securities in-kind. As such,
investments in Shares may be less tax-efficient than an investment in an ETF
that distributes portfolio securities entirely in-kind.
•Foreign
Securities Risks.
Investments in securities or other instruments of non-U.S. issuers involve
certain risks not involved in domestic investments and may experience more rapid
and extreme changes in value than investments in securities of U.S. companies.
Financial markets in foreign countries often are not as developed, efficient or
liquid as financial markets in the United States, and therefore, the prices of
non-U.S. securities and instruments can be more volatile. In addition, the Fund
will be subject to risks associated with adverse political and economic
developments in foreign countries, which may include the imposition of economic
sanctions or other similar measures. Generally, there is less readily available
and reliable information about non-U.S. issuers due to less rigorous disclosure
or accounting standards and regulatory practices.
•Management
Risk.
The Fund may not meet its investment objective based on the Adviser’s success or
failure to implement investment strategies for the Fund.
•Cybersecurity
Risk.
Cybersecurity incidents may allow an unauthorized party to gain access to Fund
assets or proprietary information, or cause the Fund, the Adviser, and/or other
service providers (including custodians and financial intermediaries) to suffer
data breaches or data corruption. Additionally, cybersecurity failures or
breaches of the electronic systems of the Fund, the Adviser, or the Fund’s other
service providers, market makers, Authorized Participants or the issuers of
securities in which the Fund invests have the ability to cause disruptions and
negatively impact the Fund's business operations, potentially resulting in
financial losses to the Fund and its shareholders. In an extreme case, a
shareholder’s ability to transact in Fund shares may be affected.
•New
Fund Risk. The
Fund is a recently organized investment company with limited operating history.
As a result, prospective investors have no track record or history on which to
base their investment decision.
•Non-Diversification
Risk.
The Fund is classified as “non-diversified”
under the 1940 Act. As a result, it can invest a greater portion of its assets
in obligations of a single issuer than a “diversified” fund. The Fund may
therefore be more susceptible than a diversified fund to being adversely
affected by a single corporate, economic, political or regulatory
occurrence.
•Sector
Risk.
To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors.
•Floating
or Variable Rate Securities Risk.
Floating or variable rate securities pay interest at rates that adjust in
response to changes in a specified interest rate or reset at predetermined dates
(such as the end of a calendar quarter). Securities with floating or variable
interest rates are generally less sensitive to interest rate changes than
securities with fixed interest rates, but may decline in value if their interest
rates do not rise as much, or as quickly, as comparable market interest rates.
Although floating or variable rate securities are generally less sensitive to
interest rate risk than fixed rate securities, they are subject to credit,
liquidity and default risk and may be subject to legal or contractual
restrictions on resale, which could impair their value.
•Liquidity
and Valuation Risks.
It may be difficult for the Fund to purchase and sell particular investments
within a reasonable time at a fair price, or the price at which it has been
valued for purposes of the Fund’s net asset value, causing the Fund to be less
liquid and unable to sell securities for what the Adviser believes is the
appropriate price of the investment. Valuation of portfolio investments may be
difficult, such as during periods of market turmoil or reduced liquidity and for
investments that trade infrequently or irregularly. In these and other
circumstances, an investment may be valued using fair value methodologies, which
are inherently subjective, reflect good faith judgments based on available
information and may not
Angel
Oak UltraShort Income ETF 16
accurately
estimate the price at which the Fund could sell the investment at that time.
Based on its investment strategies, a significant portion of the Fund’s
investments can be difficult to value and potentially less liquid and therefore
particularly prone to these risks.
•Portfolio
Turnover Risk.
Frequent trading increases the Fund’s portfolio turnover rate and may increase
transaction costs, such as brokerage commissions, dealer mark-ups and may result
in higher taxes when Fund shares are held in a taxable account. Increased
transaction costs could detract from the Fund’s performance.
•Other
Investment Companies Risks.
The Fund will incur higher and duplicative expenses when it invests in mutual
funds, ETFs, and other investment companies, which may include those that are
part of the same group of investment companies as the Fund (“affiliated
underlying funds”). There is also the risk that the Fund may suffer losses due
to the investment practices of the underlying funds. When the Fund invests in
other investment companies, the Fund will be subject to substantially the same
risks as those associated with the direct ownership of securities held by such
investment companies. ETFs may be less liquid than other investments, and thus
their share values more volatile than the values of the investments they hold.
Investments in ETFs are also subject to the following risks: (i) the market
price of an ETF’s shares may trade above or below their net asset value; (ii) an
active trading market for an ETF’s shares may not develop or be maintained; and
(iii) trading of an ETF’s shares may be halted for a number of
reasons.
The
Adviser may be subject to potential conflicts of interest in allocating the
Fund’s assets to underlying funds, such as a potential conflict in selecting
affiliated underlying funds over unaffiliated underlying funds. In addition, the
Fund’s portfolio managers may be subject to potential conflicts of interest in
allocating the Fund’s assets among underlying funds, as certain of the Fund’s
portfolio managers may also manage an affiliated underlying fund in which the
Fund may invest. Both the Adviser and the Fund’s portfolio managers have a
fiduciary duty to the Fund to act in the Fund’s best interest when selecting
underlying funds. Under the oversight of the Board of Trustees, the Adviser will
carefully analyze any such potential conflicts of interest and will take steps
to minimize and, where possible, eliminate them.
•Rating
Agencies Risks.
Ratings are not an absolute standard of quality, but rather general indicators
that reflect only the view of the originating rating agencies from which an
explanation of the significance of such ratings may be obtained. There is no
assurance that a particular rating will continue for any given period of time or
that any such rating will not be revised downward or withdrawn entirely. Such
changes may negatively affect the liquidity or market price of the securities in
which the Fund invests. The ratings of Structured Products may not adequately
reflect the credit risk of those assets due to their structure.
•LIBOR
Risk.
Instruments in which the Fund invests may pay interest at floating rates based
on LIBOR or may be subject to interest caps or floors based on LIBOR. The Fund
and issuers of instruments in which the Fund invests may also obtain financing
at floating rates based on LIBOR. Derivative instruments utilized by the Fund
and/or issuers of instruments in which the Fund may invest may also reference
LIBOR. The Fund also may utilize leverage or borrowings primarily based on
LIBOR. One-week and two-month U.S. Dollar LIBOR settings were discontinued at
the end of 2021, and the United Kingdom Financial Conduct Authority (“FCA”),
which regulates LIBOR, has announced that the remaining U.S. Dollar LIBOR
settings will continue to be provided on a representative basis until mid-2023.
As of January 1, 2022, as a result of supervisory guidance from U.S. regulators,
some U.S. regulated entities have ceased entering into new LIBOR contracts with
limited exceptions. While publication of the one-, three- and six- month
Sterling and Japanese yen LIBOR settings continued for a limited time on the
basis of a changed methodology (known as “synthetic LIBOR”), these synthetic
LIBOR settings were designated by the FCA as unrepresentative of the underlying
market they sought to measure and were solely available for use in legacy
transactions. The FCA has indicated that they will require the publication of
synthetic LIBOR for the one-, three- and six-month for U.S. Dollar LIBOR
settings after June 30, 2023, until at least the end of September 2024, although
usage of these synthetic LIBOR settings may be prohibited or prevented by
applicable law. Certain bank-sponsored committees in other jurisdictions,
including Europe, the United Kingdom, Japan and Switzerland, have selected
alternative reference rates denominated in other currencies. Abandonment of or
modifications to LIBOR may affect the value, liquidity or return on certain Fund
investments that reference LIBOR without including fallback provisions and may
result in costs incurred in connection with closing out positions and entering
into new trades. Any pricing adjustments to the Fund’s investments resulting
from a substitute reference rate may also adversely affect the Fund’s
performance and/or NAV. The effect of a phase out of LIBOR on instruments in
which the Fund may invest is currently unclear. While some instruments may
contemplate a scenario where LIBOR is no longer available by providing for an
alternative rate setting methodology, not all instruments may have such
provisions, and there is significant uncertainty regarding the effectiveness of
any such alternative methodologies. To the extent that any replacement rate
differs from that utilized for a Structured Product that holds those securities,
the Structured Product would experience an interest rate mismatch between its
assets and liabilities. Recently, some Structured Products have included, or
have been amended to include, language permitting the Structured Product’s
investment manager to implement a market replacement rate upon the occurrence of
certain material disruption events. However, not all Structured Products may
adopt such provisions, nor can there be any assurance that Structured Products’
investment managers will undertake the suggested amendments when able. In cases
where LIBOR replacement language is absent or insufficient, certain legislative
transition mechanisms may apply, causing LIBOR to be replaced with a rate
selected by the Board of
Angel
Oak UltraShort Income ETF 17
Governors
of the Federal Reserve System. On March 15, 2022, the Adjustable Interest Rate
(LIBOR) Act was signed into law. This law provides a statutory fallback
mechanism on a nationwide basis to replace LIBOR with a benchmark rate that is
selected by the Board of Governors of the Federal Reserve System and based on
the Secured Overnight Financing Rate (“SOFR”) for certain contracts that
reference LIBOR and contain no, or insufficient, fallback provisions. Final
implementing regulations in respect of the law have been promulgated although
the effect that they may have on the transition from LIBOR is uncertain. The
transition from LIBOR to alternative interest rates could lead to significant
short-term and long-term uncertainty and market instability. It remains
uncertain how such changes would affect the Fund, issuers of instruments in
which the Fund invests and financial markets generally.
•Large
Shareholder Transactions Risk.
Shares of the Fund are offered to certain other investment companies, large
retirement plans and other large investors. In addition, a third party investor,
the Adviser or an affiliate of the Adviser, an AP, a market maker, or another
entity may invest in the Fund and hold its investment for a limited period of
time. As a result, the Fund is subject to the risk that shareholders may
purchase or redeem a large amount of shares of the Fund. To satisfy such large
shareholder redemptions, the Fund may have to sell portfolio securities at times
when it would not otherwise do so, which may negatively impact the Fund’s NAV
and liquidity. In addition, large purchases of Fund shares could adversely
affect the Fund’s performance to the extent that the Fund does not immediately
invest cash it receives and therefore holds more cash than it ordinarily would.
Large shareholder activity could also generate increased transaction costs and
cause adverse tax consequences. In addition, transactions by large shareholders
may account for a large percentage of the trading volume on the Exchange and
may, therefore, have a material effect on the market price of the Shares.
•Illiquid
Investments Risks.
The Fund may, at times, hold illiquid investments, by virtue of the absence of a
readily available market for certain of its investments, or because of legal or
contractual restrictions on sales. The Fund could lose money if it is unable to
dispose of an investment at a time or price that is most beneficial to the Fund.
•NAV
Risk.
The Fund is not a money market fund, does not attempt to maintain a stable NAV,
and is not subject to the rules that govern the quality, maturity, liquidity and
other features of securities that money market funds may purchase. Under normal
conditions, the Fund’s investment may be more susceptible than a money market
fund to interest rate risk, valuation risk, credit risk, and other risks
relevant to the Fund’s investments. The Fund’s NAV per share will
fluctuate.
•Regulatory
and Legal Risks.
U.S. and non-U.S. government agencies and other regulators regularly adopt new
regulations and legislatures enact new statutes that affect the investments held
by the Fund, the strategies used by the Fund or the level of regulation or
taxation that applies to the Fund. These statutes and regulations may impact the
investment strategies, performance, costs and operations of the Fund or the
taxation of its shareholders.
•High-Yield
Securities Risks. High-yield
securities (also known as junk bonds) carry a greater degree of risk and are
more volatile than investment grade securities and are considered speculative.
High-yield securities may be issued by companies that are restructuring, are
smaller and less creditworthy, or are more highly indebted than other companies.
This means that they may have more difficulty making scheduled payments of
principal and interest. Changes in the value of high-yield securities are
influenced more by changes in the financial and business position of the issuing
company than by changes in interest rates when compared to investment grade
securities. The Fund’s investments in high-yield securities expose it to a
substantial degree of credit risk.
•Reverse
Repurchase Agreement Risks. A
reverse repurchase agreement is the sale by the Fund of a debt obligation to a
party for a specified price, with the simultaneous agreement by the Fund to
repurchase that debt obligation from that party on a future date at a higher
price. Similar to borrowing, reverse repurchase agreements provide the Fund with
cash for investment purposes, which creates leverage and subjects the Fund to
the risks of leverage. Reverse repurchase agreements also involve the risk that
the other party may fail to return the securities in a timely manner or at all.
The Fund could lose money if it is unable to recover the securities and/or if
the value of collateral held by the Fund, including the value of the investments
made with cash collateral, is less than the value of securities.
•Derivatives
Risks.
The Fund’s derivatives and other similar instruments (collectively referred to
in this section as “derivatives” or “derivative instruments”) have risks,
including the imperfect correlation between the value of such instruments and
the underlying assets, rate or index; the loss of principal, including the
potential loss of amounts greater than the initial amount invested in the
derivative instrument; the possible default of the other party to the
transaction; and illiquidity of the derivative investments. Changes in the value
of a derivative may also create margin delivery or settlement payment
obligations for the Fund. If a counterparty becomes bankrupt or otherwise fails
to perform its obligations under a derivative contract due to financial
difficulties, the Fund may experience significant delays in obtaining any
recovery under the derivative contract in a bankruptcy or other reorganization
proceeding. Certain derivatives may give rise to a form of leverage. Leverage
magnifies the potential for gain and the risk of loss. The use of derivatives is
also subject to operational risk which refers to risk related to potential
operational issues, including documentation issues, settlement issues, system
failures, inadequate controls, and human error, as well as legal risk which
refers to the risk of loss resulting from insufficient documentation,
insufficient capacity or authority of counterparty, or legality or
enforceability of a contract. Derivatives are also subject to market risk which
refers to the risk that markets could experience a change in volatility that
adversely impacts
Angel
Oak UltraShort Income ETF 18
fund
returns and the fund’s obligations and exposures. Certain of the Fund’s
transactions in derivatives could also affect the amount, timing and character
of distributions to shareholders, which may result in the Fund realizing more
short-term capital gain and ordinary income subject to tax at ordinary income
tax rates than it would if it did not engage in such transactions, which may
adversely impact the Fund’s after-tax returns.
The
derivative instruments and techniques that the Fund may principally use include:
◦Futures.
A
futures contract is a standardized agreement to buy or sell a specific quantity
of an underlying instrument at a specific price at a specific future time. A
decision as to whether, when and how to use futures involves the exercise of
skill and judgment and even a well-conceived futures transaction may be
unsuccessful because of market behavior or unexpected events. In addition to the
derivatives risks discussed above, the prices of futures can be highly volatile,
using futures can lower total return, and the potential loss from futures can
exceed the Fund’s initial investment in such contracts.
◦Options.
If the Fund buys an option, it buys a legal contract giving it the right to buy
or sell a specific amount of the underlying instrument or futures contract on
the underlying instrument at an agreed-upon price typically in exchange for a
premium paid by the Fund. If the Fund sells an option, it sells to another
person the right to buy from or sell to the Fund a specific amount of the
underlying instrument or futures contract on the underlying instrument at an
agreed-upon price typically in exchange for a premium received by the Fund. A
decision as to whether, when and how to use options involves the exercise of
skill and judgment and even a well-conceived option transaction may be
unsuccessful because of market behavior or unexpected events. The prices of
options can be highly volatile and the use of options can lower total
returns.
◦Swaps.
A
swap contract is an agreement between two parties pursuant to which the parties
exchange payments at specified dates on the basis of a specified notional
amount, with the payments calculated by reference to specified securities,
indexes, reference rates, currencies or other instruments. Swap agreements are
particularly subject to counterparty credit, liquidity, valuation, correlation,
leverage, operational and legal risk. Swaps could result in losses if interest
rate or foreign currency exchange rates or credit quality changes are not
correctly anticipated by the Fund or if the reference index, security or
investments do not perform as expected. The use of credit default swaps can
result in losses if the Fund’s assumptions regarding the creditworthiness of the
underlying obligation prove to be incorrect.
•Risks
Relating to Fund’s RIC Status. To
qualify and remain eligible for the special tax treatment accorded to a
regulated investment company (“RIC”) and its shareholders under the Internal
Revenue Code of 1986, as amended, the Fund must meet certain source-of-income,
asset diversification and annual distribution requirements. If the Fund fails to
qualify as a RIC for any reason and becomes subject to corporate tax, the
resulting corporate taxes could substantially reduce its net assets, the amount
of income available for distribution and the amount of its distributions.
•Uncertain
Tax Treatment.
Below investment grade instruments may present special tax issues for the Fund.
U.S. federal income tax rules are not entirely clear about issues such as when
the Fund may cease accruing interest, original issue discount (“OID”) or market
discount, when and to what extent deductions may be taken for bad debts or
worthless instruments, how payments received on obligations in default should be
allocated between principal and income and whether exchanges of debt obligations
in a bankruptcy or workout context are taxable, which may make it difficult for
the Fund to satisfy the annual distribution requirements applicable to RICs.
•Repurchase
Agreement Risks. Repurchase agreements typically involve
the acquisition by the Fund of fixed-income securities from a selling financial
institution such as a bank or broker-dealer. The Fund may incur a loss if the
other party to a repurchase agreement is unwilling or unable to fulfill its
contractual obligations to repurchase the underlying security.
Performance
Performance information for the Fund is not
included because the Fund did not have a full calendar year of performance prior
to the date of this Prospectus. Performance information will be
available once the Fund has at least one calendar year of performance. Updated
performance information is available online at www.angeloakcapital.com.
Portfolio
Management
Investment
Adviser.
Angel Oak Capital Advisors, LLC.
Portfolio
Managers.
Sam
Dunlap, Chief Investment Officer, Public Strategies of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Clayton
Triick, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Angel
Oak UltraShort Income ETF 19
Colin
McBurnette, Senior Portfolio Manager of the Adviser, has been a portfolio
manager of the Fund since its inception in October 2022.
Berkin
Kologlu, Senior Portfolio Manager of the Adviser, has been a portfolio manager
of the Fund since its inception in October 2022.
Kin
Lee, Senior Portfolio Manager of the Adviser, has been a portfolio manager of
the Fund since its inception in October 2022.
Matthew
R. Kennedy, CFA®,
Head of Corporate Credit and Senior Portfolio Manager of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Nichole
Hammond, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Johannes
Palsson, Senior Portfolio Manager of the Adviser, has been a portfolio manager
of the Fund since its inception in October 2022.
Cheryl
Pate, CFA®,
Senior Portfolio Manager of the Adviser, has been a portfolio manager of the
Fund since its inception in October 2022.
Ward
Bortz, Managing Director and Portfolio Manager of the Adviser, has been a
portfolio manager of the Fund since its inception in October 2022.
Purchase
and Sale of Fund Shares
The
Fund issues and redeems Shares at NAV only in large blocks known as “Creation
Units,” which only APs (typically, broker-dealers) may purchase or redeem. The
Fund generally issues and redeems Creation Units in exchange for a portfolio of
securities and/or a designated amount of U.S. cash.
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through a broker or dealer at market prices, rather than
NAV. Because Shares trade at market prices rather than NAV, Shares may trade at
a price greater than NAV (premium) or less than NAV (discount).
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares (the “bid” price) and the
lowest price a seller is willing to accept for Shares (the “ask” price) when
buying or selling Shares in the secondary market. The difference in the bid and
ask prices is referred to as the “bid-ask spread.”
Recent
information regarding the Fund’s NAV, market price, how often Shares traded on
the Exchange at a premium or discount, and bid-ask spreads can be found on the
Fund’s website at www.angeloakcapital.com.
Tax
Information
The
Fund’s distributions are generally taxable as ordinary income, qualified
dividend income, or capital gains (or a combination), unless your investment is
in an individual retirement account (“IRA”) or other tax-advantaged account.
Distributions on investments made through tax-deferred arrangements may be taxed
later upon withdrawal of assets from those accounts.
Financial
Intermediary Compensation
If
you purchase Shares through a broker-dealer or other financial intermediary
(such as a bank) (an “Intermediary”), the Adviser or its affiliates may pay
Intermediaries for certain activities related to the Fund, including
participation in activities that are designed to make Intermediaries more
knowledgeable about exchange-traded products, including the Fund, or for other
activities, such as marketing, educational training or other initiatives related
to the sale or promotion of Shares. These payments may create a conflict of
interest by influencing the Intermediary and your salesperson to recommend the
Fund over another investment. Any such arrangements do not result in increased
Fund expenses. Ask your salesperson or visit the Intermediary’s website for more
information.
Angel
Oak UltraShort Income ETF 20
ADDITIONAL
INFORMATION
ABOUT
THE
FUNDS’
OBJECTIVES,
PRINCIPAL
INVESTMENT
STRATEGIES,
AND
PRINCIPAL
INVESTMENT
RISKS
The
following information is in addition to, and should be read along with, the
description of the Angel Oak Income ETF’s (the “Income ETF”) and the Angel Oak
UltraShort Income ETF’s (the “UltraShort Income ETF”) (each a “Fund” and
together, the “Funds”) investment objectives, principal investment strategies
and principal investment risks in the summary sections above.
Each
Fund is an ETF, which is a fund that trades like other publicly-traded
securities. The Fund is not an index fund. The Fund is actively managed and does
not seek to replicate the performance of a specified index.
The
name, investment objective and policies of the Funds are similar to other funds
advised by the Adviser. However, the investment results of a Fund may be higher
or lower than, and there is no guarantee that the investment results of the Fund
will be comparable to, any other of these funds.
Investment
Objective
Each
Fund’s investment objective is not fundamental and may be changed without
shareholder approval. Each Fund will provide 60 days’ advance notice of any
change in its investment objective.
Principal
Investment Strategies of the Income ETF
The
Fund invests primarily in agency and non-agency residential mortgage-backed
securities (“RMBS”), commercial mortgage-backed securities (“CMBS”),
collateralized loan obligations (“CLOs”), collateralized debt obligations
(“CDOs”), collateralized mortgage obligations (“CMOs”), collateralized bond
obligations (“CBOs”), asset-backed securities (“ABS”), including securities or
securitizations backed by assets such as unsecured consumer loans, credit card
receivables, student loans, automobile loans, loans financing solar energy
systems, and residential and commercial real estate, and other debt
securitizations (collectively, “Structured Products”); mortgage loans, secured
and unsecured consumer loans, commercial loans and pools of such loans
(collectively, “Loans”); corporate debt, including bank-issued subordinated
debt; equity securities of banks, real estate investment trusts, or other
issuers; and U.S. Treasury and U.S. government agency securities.
The
Fund will concentrate its investment in agency and non-agency residential
mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities
(“CMBS”) (collectively, “MBS”). This means that, under normal circumstances, the
Fund will invest more than 25% of its total assets in MBS (measured at the time
of purchase). The Fund will not concentrate its investments in any other group
of industries. The Fund’s policy to concentrate its investments in MBS is
fundamental and may not be changed without shareholder approval.
The
Fund may make direct investments in mortgage loans.
The
Fund may invest in other investment companies, including closed-end investment
companies and open-end investment companies, which may operate as traditional
mutual funds, exchange-traded funds (“ETFs”), or business development companies
(“BDCs”). The other investment companies in which the Fund invests may be part
of the same group of investment companies as the Fund.
Except
as otherwise discussed herein, the Fund may invest, without constraint, in a
variety of instruments that are not limited with respect to their issuer,
quality, maturity, currency, structure, yield, duration, or any other
characteristic.
The
Fund’s portfolio may include significant investments in high-yield securities
and fixed-income securities that are not rated by any rating agencies. Such
bonds, if rated, will be in the lower rating categories of the major rating
agencies (BB+ or lower by Standard & Poor’s Ratings Group (“S&P”) or an
equivalent rating from another National Recognized Statistical Ratings
Organization) or will be determined by the Adviser to be of similar quality.
The
fixed income instruments in which the Fund invests may include those of issuers
from the United States and other countries. The Fund’s investments in foreign
debt securities will typically be denominated in U.S. dollars.
The
Fund may invest up to 15% of its net assets in investments that are deemed to be
illiquid, which may include private placements, certain Rule 144A securities
(which are subject to resale restrictions), and securities of issuers that are
bankrupt or in default.
The
Fund’s use of borrowing, derivatives and reverse repurchase agreements may be
deemed to create leverage, which can increase the Fund’s volatility and the
effect, positive or negative, of the Fund’s investments on its NAV. The 1940 Act
generally limits the extent to which the Fund may utilize borrowings to
one-third of the Fund’s total assets at the time utilized. The Fund’s use of
derivatives and other similar instruments is subject to a value-at-risk leverage
limit, certain derivatives risk management program, and reporting requirements
under Rule 18f-4. In the future, the Fund could qualify as a “limited
derivatives user” as defined in Rule 18f-4 (or its use of derivatives and other
similar instruments could satisfy the conditions of certain exemptions from the
rule), in which case the Fund would not be required to comply with such
requirements.
Derivatives,
which are instruments that have a value based on another instrument, exchange
rate or index, may be used as substitutes for securities in which the Fund can
invest. The Fund uses derivatives to gain or adjust exposure to markets,
sectors, securities and currencies and to manage exposure to risks relating to
creditworthiness, interest rate spreads, volatility and changes in yield curves.
In certain market environments, the Fund may use interest rate swaps and futures
contracts to help protect its portfolio from interest rate risk. The Fund’s
hedging strategies may include the use of derivatives with underlying
instruments that are not specified in the Fund’s principal investment strategies
(for example, the Fund may invest in total return swaps on the S&P 500 Index
to hedge against broad market exposure).
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940, as amended (the “1940 Act”), and, therefore, may invest a greater
percentage of its assets in fewer issuers than diversified funds.
The
Fund is an actively managed ETF, which is a fund that trades like other
publicly-traded securities. The Fund is not an index fund and does not seek to
replicate the performance of a specified index.
The
Fund’s portfolio of fixed-income instruments will depend on the views of the
Adviser as to the best value relative to what is currently presented in the
marketplace. The Fund’s portfolio managers lead a team of sector specialists
responsible for researching opportunities within their sector and making
recommendations to the Fund’s portfolio managers.
Investment
decisions are made based on fundamental research and analysis to identify
issuers with the ability to improve their credit profile over time with
attractive valuations, resulting in both income and potential capital
appreciation. In selecting investments, including Structured Products, the
Adviser may consider maturity, yield and ratings information and opportunities
for price appreciation among other criteria. The Adviser also analyzes a variety
of factors when selecting investments for the Fund, such as collateral quality,
credit support, structure and market conditions. The Adviser attempts to
diversify risks that arise from position sizes, geography, ratings, duration,
deal structure and collateral values. The Adviser will also seek to invest in
securities that have relatively low volatility. The Adviser seeks to limit risk
of principal by targeting assets that it considers undervalued. From time to
time, the Fund may allocate its assets so as to focus on particular types of
securities.
As
part of its investment process, the Adviser also considers certain
environmental, social and governance (“ESG”) and sustainability factors that it
believes could have a material negative or positive impact on the risk profiles
of the issuers or underlying collateral assets of certain securities in which
the Fund may invest. These determinations may not be conclusive, and securities
that may be negatively impacted by such factors may be purchased and retained by
the Fund while the Fund may divest or not invest in securities that may be
positively impacted by such factors. The Adviser may sell investments, including
Structured Products, if it determines that any of the mentioned factors have
changed materially from its initial analysis or that other factors indicate that
an investment is no longer earning a return commensurate with its risk or that a
different security will better help the Fund achieve its investment objective.
In
evaluating a security’s ESG and sustainability factors, the Adviser will use its
own proprietary assessments of such factors and may also reference standards as
set forth by recognized global organizations, including the United Nations’
Sustainable Development Goals (“UN SDGs”), the United Nations’ Principles for
Responsible Investing (“UN PRI”), the Task Force on Climate-Related Financial
Disclosures (“TCFD”), the Carbon Disclosure Project (“CDP”), the International
Sustainability Standards Board (“ISSB”) and the Global Reporting Initiative
(“GRI”). Examples of the types of factors the Adviser may consider as part of
its proprietary assessment, include, without limitation: environmental issues,
such as carbon emissions and energy efficiency; social issues, such as
affordable housing and community investment; and corporate governance issues,
such as board independence and diversity. The Fund may also invest in other
investment companies that focus on ESG and sustainability factors, including the
Angel Oak Financials Income Impact Fund.
Additionally,
the Adviser may engage proactively with issuers or trustees to encourage them to
improve their ESG and sustainability factors. In this regard, the Adviser may
engage in direct dialogue with company management, including through in-person
meetings, phone calls, electronic communications, and letters. These engagement
activities are designed to facilitate the Adviser’s efforts to identify
opportunities for issuers and trustees to improve their ESG and sustainability
practices and to work collaboratively with managers and trustees to establish
concrete objectives and to develop a plan for meeting those objectives. The Fund
may invest in securities issued by companies or securitization platforms whose
ESG and sustainability practices, at the time of the investment, do not fully
meet the Adviser’s proprietary standards, with the expectation that the
Adviser’s engagement efforts and/or the company’s own initiatives will lead to
improvements in ESG and sustainability practices over time. It may also exclude
those issuers or securitization platforms that are not receptive to the
Adviser’s engagement efforts, as determined in the Adviser’s sole discretion.
ESG and sustainability factors will not be considered with respect to
investments in U.S. Treasury and U.S. government agency securities, money market
instruments, and derivatives.
Principal
Investment Strategies of the UltraShort Income ETF
In
pursuing its objective, the Fund will, under normal circumstances, invest in
securities which cause the Fund to have a dollar-weighted average maturity of
less than two years and a dollar-weighted average duration of less than one
year.
The
Fund invests primarily in agency and non-agency residential mortgage-backed
securities (“RMBS”), asset-backed securities (“ABS”), including securities or
securitizations backed by assets such as unsecured consumer loans, credit card
receivables, student
loans,
automobile loans, loans financing solar energy systems, and residential and
commercial real estate, collateralized loan obligations (“CLOs”), collateralized
debt obligations (“CDOs”), collateralized mortgage obligations (“CMOs”), and
other debt securitizations (collectively, “Structured Products”); corporate debt
and other debt securities; and U.S. Treasury and U.S. government agency
securities.
The
Fund will concentrate its investments in agency and non-agency residential
mortgage-backed securities (“RMBS”) and commercial mortgage-backed securities
(“CMBS”) (collectively, “MBS”). This means that, under normal circumstances, the
Fund will invest more than 25% of its total assets in MBS (measured at the time
of purchase). The Fund will not concentrate its investments in any other group
of industries. The Fund’s policy to concentrate its investments in MBS is
fundamental and may not be changed without shareholder approval.
The
Fund may make direct investments in mortgage loans.
The
Fund may invest in other investment companies, including closed-end investment
companies and open-end investment companies, which may operate as traditional
mutual funds, exchange-traded funds (“ETFs”) or business development companies
(“BDCs”). The other investment companies in which the Fund invests may be part
of the same group of investment companies as the Fund.
Except
as otherwise discussed herein, the Fund may invest, without constraint, in a
variety of instruments that are not limited with respect to their issuer,
quality, currency, structure, yield, or any other characteristic.
The
fixed income instruments in which the Fund invests may include those of issuers
from the United States and other countries. The Fund’s investments in foreign
debt securities will typically be denominated in U.S. dollars.
The
Fund may invest up to 15% of its net assets in investments that are deemed to be
illiquid, which may include private placements, certain Rule 144A securities
(which are subject to resale restrictions), and securities of issuers that are
bankrupt or in default.
The
Fund may engage in active and frequent trading of its portfolio securities which
may result in higher portfolio turnover. Higher portfolio turnover may result in
the Fund paying higher levels of transaction costs and generating greater tax
liabilities for shareholders.
The
Fund’s use of borrowing, derivatives, and reverse repurchase agreements may be
deemed to create leverage, which can increase the Fund’s volatility and the
effect, positive or negative, of the Fund’s investments on its NAV. The 1940 Act
generally limits the extent to which the Fund may utilize borrowings to
one-third of the Fund’s total assets at the time utilized. The Fund’s use of
derivatives and other similar instruments is subject to a value-at-risk leverage
limit, certain derivatives risk management program, and reporting requirements
under Rule 18f-4. In the future, the Fund could qualify as a “limited
derivatives user” as defined in Rule 18f-4 (or its use of derivatives and other
similar instruments could satisfy the conditions of certain exemptions from the
rule), in which case the Fund would not be required to comply with such
requirements.
Derivatives,
which are instruments that have a value based on another instrument, exchange
rate or index, may be used as substitutes for securities in which the Fund can
invest. The Fund uses derivatives to gain or adjust exposure to markets,
sectors, securities, and currencies and to manage exposure to risks relating to
creditworthiness, interest rate spreads, volatility, and changes in yield
curves. In certain market environments, the Fund may use interest rate swaps and
futures contracts to help protect its portfolio from interest rate risk. The
Fund’s hedging strategies may include the use of derivatives with underlying
instruments that are not specified in the Fund’s principal investment strategies
(for example, the Fund may invest in total return swaps on the S&P 500 Index
to hedge against broad market exposure).
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940, as amended (the “1940 Act”), and, therefore, may invest a greater
percentage of its assets in fewer issuers than diversified funds.
The
Fund is an actively managed ETF, which is a fund that trades like other
publicly-traded securities. The Fund is not an index fund and does not seek to
replicate the performance of a specified index.
The
Fund’s portfolio of fixed-income instruments will depend on the views of the
Adviser as to the best value relative to what is currently presented in the
marketplace. The Fund’s portfolio managers lead a team of sector specialists
responsible for researching opportunities within their sector and making
recommendations to the Fund’s portfolio managers.
Investment
decisions are made based on fundamental research and analysis to identify
issuers with the ability to improve their credit profile over time with
attractive valuations, resulting in both income and potential capital
appreciation. In selecting investments, including Structured Products, the
Adviser may consider maturity, yield and ratings information and opportunities
for price appreciation among other criteria. The Adviser also analyzes a variety
of factors when selecting investments for the Fund, such as collateral quality,
credit support, structure and market conditions. The Adviser attempts to
diversify risks that arise from position sizes, geography, ratings, duration,
deal structure and collateral values. The Adviser will also seek to invest in
securities that have relatively low volatility. The Adviser seeks to limit risk
of principal by targeting assets that it considers undervalued. From time to
time, the Fund may allocate its assets so as to focus on particular types of
securities.
As
part of its investment process, the Adviser also considers certain
environmental, social and governance (“ESG”) and sustainability factors that it
believes could have a material negative or positive impact on the risk profiles
of the issuers or underlying collateral assets of certain securities in which
the Fund may invest. These determinations may not be conclusive, and securities
that may be negatively impacted by such factors may be purchased and retained by
the Fund while the Fund may divest or not invest in securities that may be
positively impacted by such factors. The Adviser may sell investments, including
Structured Products, if it determines that any of the mentioned factors have
changed materially from its initial analysis or that other factors indicate that
an investment is no longer earning a return commensurate with its risk or that a
different security will better help the Fund achieve its investment objective.
In
evaluating a security’s ESG and sustainability factors, the Adviser will use its
own proprietary assessments of such factors and may also reference standards as
set forth by recognized global organizations, including the United Nations’
Principles for Responsible Investing, the United Nations’ Sustainable
Development Goals (“UN SDGs”), the United Nations’ Principles for Responsible
Investing (“UN PRI”), the Task Force on Climate-Related Financial Disclosures
(“TCFD”), the Carbon Disclosure Project (“CDP”), the International
Sustainability Standards Board (“ISSB”) and the Global Reporting Initiative
(“GRI”). Examples of the types of factors the Adviser may consider as part of
its proprietary assessment, include, without limitation: environmental issues,
such as carbon emissions and energy efficiency; social issues, such as
affordable housing and community investment; and corporate governance issues,
such as board independence and diversity. The Fund may also invest in other
investment companies that focus on ESG and sustainability factors, including the
Angel Oak Financials Income Impact Fund.
Additionally,
the Adviser may engage proactively with issuers or trustees to encourage them to
improve their ESG and sustainability factors. In this regard, the Adviser may
engage in direct dialogue with company management, including through in-person
meetings, phone calls, electronic communications, and letters. These engagement
activities are designed to facilitate the Adviser’s efforts to identify
opportunities for issuers and trustees to improve their ESG and sustainability
practices and to work collaboratively with managers and trustees to establish
concrete objectives and to develop a plan for meeting those objectives. The Fund
may invest in securities issued by companies or securitization platforms whose
ESG and sustainability practices, at the time of the investment, do not fully
meet the Adviser’s proprietary standards, with the expectation that the
Adviser’s engagement efforts and or the company’s own initiatives will lead to
improvements in ESG and sustainability practices over time. It may also exclude
those issuers or securitization platforms that are not receptive to the
Adviser’s engagement efforts, as determined in the Adviser’s sole discretion.
ESG and sustainability factors will not be considered with respect to
investments in U.S. Treasury and U.S. government agency securities, money market
instruments, and derivatives.
Temporary
Defensive Positions
From
time to time, each Fund may take temporary defensive positions that are
inconsistent with its principal investment strategies, in attempting to respond
to adverse market, economic, political or other conditions. In such instances, a
Fund may hold up to 100% of its assets in cash; short-term U.S. government
securities and government agency securities; investment grade money market
instruments; investment grade fixed-income securities; repurchase agreements;
commercial paper and cash equivalents. Each Fund may invest in the securities
described above at any time to maintain liquidity, pending selection of
investments by the Adviser, or if the Adviser believes that sufficient
investment opportunities that meet the Fund’s investment criteria are not
available. By keeping cash on hand, a Fund may be able to meet shareholder
redemptions without selling securities and realizing gains and losses. As a
result of engaging in these temporary measures, the applicable Fund may not
achieve its investment objective.
Principal
Risks of Investing in the Funds
The
principal risks of investing in the Funds are summarized below. You should
carefully consider the Fund’s investment risks before deciding whether to invest
in the Fund. There may be circumstances that could prevent the Fund from
achieving its investment objective and you may lose money by investing in the
Fund. An investment in the Fund is not a deposit at a bank and is not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
•Bank
Subordinated Debt Risk (Income
ETF only).
Banks
may issue subordinated debt securities, which have a lower priority to full
payment behind other more senior debt securities. This means, for example, that
if the issuing bank were to become insolvent, subordinated debt holders may not
receive a full return of their principal because the bank would have to satisfy
the claims of senior debt holders first. In addition to the risks generally
associated with fixed income instruments (e.g., interest rate risk, credit risk,
etc.), bank subordinated debt is also subject to risks inherent to banks.
Because banks are highly regulated and operate in a highly competitive
environment, it may be difficult for a bank to meet its debt obligations. Banks
also may be affected by changes in legislation and regulations applicable to the
financial markets. This is especially true in light of the large amount of
regulatory developments in recent years. Bank subordinated debt is often issued
by smaller community banks that may be overly concentrated in a specific
geographic region, lack the capacity to comply with new regulatory requirements
or lack adequate capital. Smaller banks may also have a lower capacity to
withstand negative developments in the market in general. If any of these or
other factors were to negatively affect a bank’s operations, the bank could fail
to make payments on its debt obligations, which would hurt a Fund’s bank
subordinated debt investments. Subordinated debt, senior debt and
preferred
securities of banks and diversified financials companies are subject to the
risks generally associated with the financials sector. See “Financials Sector
Risk.”
•Borrowing
Risks and Leverage Risks.
Borrowing for investment purposes creates leverage, which will exaggerate the
effect of any change in the value of securities in the Fund’s portfolio on the
Fund’s net asset value (“NAV”) and, therefore, may increase the volatility of
the Fund. Money borrowed will be subject to interest and other costs (including
commitment fees and/or the cost of maintaining minimum average balances). Unless
the income and capital appreciation, if any, on securities acquired with
borrowed funds exceed the cost of borrowing, the use of leverage will diminish
the investment performance of the Fund. In addition, pursuant to an exemptive
order from the U.S. Securities and Exchange Commission (“SEC”), a Fund may
borrow from another Fund for temporary purposes, to the extent such
participation is consistent with the Fund’s and the lending Fund’s investment
objective and investment policies.
•Community
Bank Risks (Income
ETF only).
A Fund’s investments in community banks may make the Fund more economically
vulnerable in the event of a downturn in the banking industry. Community banks
may face heightened risks of failure during times of economic downturns,
including those impacting a particular region, than larger banks. Community
banks may also be subject to greater lending risks than larger banks, including
the risks associated with mortgage loans. The ability of management of financial
institutions to identify, measure, monitor and control the risks of an
institution’s activities and to ensure a financial institution’s safe, sound and
efficient operation in compliance with applicable laws and regulations are
critical. Community banks may have fewer resources to devote towards employing
and retaining strong management employees and implementing a thorough compliance
program. Additionally, banking institutions are subject to substantial
regulations that could adversely affect their ability to operate and the value
of a Fund’s investments, including from future banking regulations. Ownership of
the stock of certain types of regulated banking institutions may subject the
Fund to additional regulations. Investments in banking institutions and
transactions related to Fund investments may require approval from one or more
regulatory authorities. If a Fund were deemed to be a bank holding company or
thrift holding company, bank holding companies or thrift holding companies that
invest in the Fund would be subject to certain restrictions and regulations.
•Concentration
in Certain Mortgage-Backed Securities Risk.
Concentration risk results from maintaining exposure to the performance of the
residential and commercial mortgages held in the mortgage-backed securities in
which a Fund will invest. The risk of concentrating in these types of
investments is that a Fund will be susceptible to the risks associated with
mortgage-backed securities as discussed below, changes in lending standards,
interest rates and lending rates, and the risks associated with the market’s
perception of issuers, the creditworthiness of the parties involved and
investing in real estate securities.
•Covenant
Lite Loan Risk (Income
ETF only).
The Fund may obtain exposure to “covenant lite” loans. Covenants contained in
loan documentation are intended to protect lenders by imposing certain
restrictions and other limitations on a borrower’s operations or assets and by
providing certain information and consent rights to lenders. Covenant lite loans
may lack financial maintenance covenants that in certain situations can allow
lenders to claim a default on the loan to seek to protect the interests of the
lenders. The absence of financial maintenance covenants in a covenant lite loan
might result in a lower recovery in the event of a default by the borrower.
Covenant lite loans have become much more prevalent in recent
years.
•Credit
Risk.
A Fund could lose money if the issuer or guarantor of a fixed income security,
or the counterparty to a derivatives contract or repurchase agreement, is unable
or unwilling, or is perceived (whether by market participants, rating agencies,
pricing services or otherwise) as unable or unwilling, to make timely principal
and/or interest payments, or to otherwise honor its obligations. The downgrade
of the credit of a security held by a Fund may decrease its value. Securities
are subject to varying degrees of credit risk, which are often reflected in
credit ratings. Measures such as average credit quality may not accurately
reflect the true credit risk of a Fund. This is especially the case if a Fund
consists of securities with widely varying credit ratings. Therefore, if a Fund
has an average credit rating that suggests a certain credit quality, the Fund
may in fact be subject to greater credit risk than the average would suggest.
This risk is greater to the extent a Fund uses leverage or derivatives in
connection with the management of the Fund. In addition, under current
conditions, there is an increasing amount of issuers that are unprofitable, have
little cash on hand and/or are unable to pay the interest owed on their debt
obligations and the number of such issuers may increase if demand for their
goods and services falls, borrowing costs rise due to governmental action or
inaction or other reasons. Also, the issuer, guarantor or counterparty may
suffer adverse changes in its financial condition or reduced demand for its
goods and services or be adversely affected by economic, political, public
health or social conditions that could lower the credit quality (or the market’s
perception of the credit quality) of the issuer or instrument, leading to
greater volatility in the price of the instrument and in shares of a Fund.
If
an issuer, guarantor or counterparty declares bankruptcy or is declared
bankrupt, a Fund would likely be adversely affected in its ability to receive
principal or interest owed or otherwise to enforce the financial obligations of
the other party. A Fund may be subject to increased costs associated with the
bankruptcy process and experience losses as a result of the deterioration of the
financial condition of the issuer, guarantor or counterparty. The risks to a
Fund related to such bankruptcies are elevated given the currently distressed
economic, market, labor and public health conditions.
•Cybersecurity
Risk.
With the increased use of technologies such as the Internet and the dependence
on computer systems to perform business and operational functions, funds (such
as a Fund) and their service providers may be prone to operational and
information
security risks resulting from cyberattacks and/or technological malfunctions. In
general, cyberattacks are deliberate, but unintentional events may have similar
effects. Cyberattacks include, among others, stealing or corrupting data
maintained online or digitally, preventing legitimate users from accessing
information or services on a website, releasing confidential information without
authorization, and causing operational disruption. Cybersecurity incidents may
allow an unauthorized party to gain access to Fund assets or proprietary
information, or cause a Fund, the Adviser, and/or other service providers
(including custodians and financial intermediaries) to suffer data breaches or
data corruption. Additionally, cybersecurity failures or breaches of the
electronic systems of a Fund, the Adviser, or such Fund’s other service
providers, market makers, Authorized Participants or the issuers of securities
in which the Fund invests have the ability to cause disruptions and negatively
impact the Fund’s business operations, potentially resulting in financial losses
to the Fund and its respective shareholders. For instance, cyberattacks or
technical malfunctions may interfere with the processing of shareholder or other
transactions, affect a Fund’s ability to calculate its NAV, cause the release of
private shareholder information or confidential Fund information, impede
trading, cause reputational damage, and subject such Fund to regulatory fines,
penalties or financial losses, reimbursement or other compensation costs, and
additional compliance costs. Cyberattacks or technical malfunctions may render
records of Fund assets and transactions, shareholder ownership of Fund Shares,
and other data integral to the functioning of the Fund inaccessible or
inaccurate or incomplete. A Fund may also incur substantial costs for
cybersecurity risk management in order to prevent cyber incidents in the future.
A Fund and its shareholders could be negatively impacted as a result.
•Derivatives
Risks.
A Fund’s derivatives and other similar investments (referred to collectively in
this section as “derivatives” or “derivative investments”) have risks similar to
their underlying instruments and may have additional risks, including the
imperfect correlation between the value of such instruments and the underlying
instrument, rate or index, which creates the possibility that the loss on such
instruments may be greater than the gain in the value of the underlying
instrument, rate or index; the loss of principal; the possible default of the
other party to the transaction; illiquidity of the derivative investments; risks
arising from margin requirements and settlement payment obligations; and risks
arising from mispricing or valuation complexity. The use of derivatives is also
subject to operational risk which refers to risk related to potential
operational issues, including documentation issues, settlement issues, system
failures, inadequate controls, and human error, as well as legal risk which
refers to the risk of loss resulting from insufficient documentation,
insufficient capacity or authority of counterparty, or legality or
enforceability of a contract. Derivatives are also subject to market risk which
refers to the risk that markets could experience a change in volatility that
adversely impacts fund returns and the fund’s obligations and exposures. If a
counterparty becomes bankrupt or otherwise fails to perform its obligations
under a derivative contract due to financial difficulties, a Fund may experience
significant delays in obtaining any recovery under the derivative contract in a
bankruptcy or other reorganization proceeding, or may not recover at all. In
addition, in the event of the insolvency of a counterparty to a derivative
transaction, the derivative contract would typically be terminated at its fair
market value. If a Fund is owed this fair market value in the termination of the
derivative contract and its claim is unsecured, the Fund will be treated as a
general creditor of such counterparty, and will not have any claim with respect
to the underlying instrument. Certain of the derivative investments in which a
Fund may invest may, in certain circumstances, give rise to a form of financial
leverage, which may magnify the risk of owning such instruments. The ability to
successfully use derivative investments depends on the ability of the Adviser to
predict pertinent market movements, which cannot be assured. In addition,
amounts paid by a Fund as premiums and cash or other assets held in margin
accounts with respect to the Fund’s derivative investments would not be
available to the Fund for other investment purposes, which may result in lost
opportunities for gain.
Regulation
of the derivatives market presents additional risks to a Fund and may limit the
ability of a Fund to use, and the availability or performance of, such
instruments.
The
derivative instruments and techniques that a Fund may principally use include:
◦Futures.
A
futures contract is a standardized agreement to buy or sell a specific quantity
of an underlying instrument at a specific price at a specific future time. The
value of a futures contract tends to increase and decrease in tandem with the
value of the underlying instrument. Depending on the terms of the particular
contract, futures contracts are settled through either physical delivery of the
underlying instrument on the settlement date or by payment of a cash settlement
amount on the settlement date. A decision as to whether, when and how to use
futures involves the exercise of skill and judgment and even a well-conceived
futures transaction may be unsuccessful because of market behavior or unexpected
events. In addition to the derivatives risks discussed above, the prices of
futures can be highly volatile, using futures can lower total return, and the
potential loss from futures can exceed a Fund’s initial investment in such
contracts.
◦Options.
If a Fund buys an option, it buys a legal contract giving it the right to buy or
sell a specific amount of the underlying instrument or futures contract on the
underlying instrument at an agreed-upon price typically in exchange for a
premium paid by the Fund. If a Fund sells an option, it sells to another person
the right to buy from or sell to the Fund a specific amount of the underlying
instrument or futures contract on the underlying instrument at an agreed-upon
price typically in exchange for a premium received by the Fund. A decision as to
whether, when and how to use options involves the exercise of skill and judgment
and even a well-conceived option transaction may be unsuccessful because
of
market behavior or unexpected events. The prices of options can be highly
volatile and the use of options can lower total returns.
◦Swaps.
A
swap contract is an agreement between two parties pursuant to which the parties
exchange payments at specified dates on the basis of a specified notional
amount, with the payments calculated by reference to specified securities,
indexes, reference rates, currencies or other instruments. Most swap agreements
provide that when the period payment dates for both parties are the same, the
payments are made on a net basis (i.e., the two payment streams are netted
out, with only the net amount paid by one party to the other). A Fund’s
obligations or rights under a swap contract entered into on a net basis will
generally be equal only to the net amount to be paid or received under the
agreement, based on the relative values of the positions held by each
counterparty. Swap agreements are particularly subject to counterparty credit,
liquidity, valuation, correlation, leverage, operational and legal risk. Certain
standardized swaps are now subject to mandatory central clearing requirements
and are required to be exchange-traded. While central clearing and
exchange-trading are intended to reduce counterparty and liquidity risk, they do
not make swap transactions risk-free. Swaps could result in losses if interest
rate or foreign currency exchange rates or credit quality changes are not
correctly anticipated by a Fund or if the reference index, security or
investments do not perform as expected. A Fund’s use of swaps may include those
based on the credit of an underlying investment, commonly referred to as “credit
default swaps.” Where a Fund is the buyer of a credit default swap contract, it
would be entitled to receive the par (or other agreed-upon) value of a
referenced debt obligation from the counterparty to the contract only in the
event of a default or similar event by a third party on the debt obligation. If
no default occurs, a Fund would have paid to the counterparty a periodic stream
of payments over the term of the contract and received no benefit from the
contract. When a Fund is the seller of a credit default swap contract, it
receives the stream of payments but is obligated to pay an amount equal to the
par (or other agreed-upon) value of a referenced debt obligation upon the
default or similar event of that obligation. The use of credit default swaps can
result in losses if a Fund’s assumptions regarding the creditworthiness of the
underlying obligation prove to be incorrect. Periodically, the CFTC and
exchanges change the position limits to which futures, options on futures and
some swaps are subject. To the extent these contracts are traded, the Fund may
be constrained by how many contracts it may trade. The Commodity Futures Trading
Commission in October 2020 adopted amendments to its position limits rules that
establish certain new and amended position limits for 25 specified physical
commodity futures and related options contracts traded on exchanges, other
futures contracts and related options directly or indirectly linked to such 25
specified contracts, and any over the counter transactions that are economically
equivalent to the 25 specified contracts. The Adviser will need to consider
whether the exposure created under these contracts might exceed the new and
amended limits in anticipation of the applicable compliance dates, and the
limits may constrain the ability of a Fund to use such contracts.
•Equity
Market Risk
(Income
ETF only).
A Fund’s investments in equity securities may subject the Fund to volatility and
the following risks: (i) prices of stock may fall over short or extended periods
of time; (ii) cyclical movements of the equity market may cause the value of the
Fund’s securities to fluctuate drastically from day to day; and (iii) individual
companies may report poor results or be negatively affected by industry and or
economic trends and developments.
•ETF
Risks.
Each Fund is an ETF and they may invest in other ETFs, and, as a result of the
structure, is exposed directly or indirectly to the following risks:
◦Authorized
Participants, Market Makers, and Liquidity Providers Concentration
Risk.
The Fund has a limited number of financial institutions that may act as APs. In
addition, there may be a limited number of market makers and/or liquidity
providers in the marketplace. To the extent either of the following events
occur, Shares may trade at a material discount to NAV, which may also lead to a
widening of bid/ask spreads quoted for Shares, and possibly face delisting: (i)
APs exit the business or otherwise become unable to process creation and/or
redemption orders and no other APs step forward to perform these services, or
(ii) market makers and/or liquidity providers exit the business or significantly
reduce their business activities and no other entities step forward to perform
their functions.
◦Costs
of Buying or Selling Shares.
Investors buying or selling Shares in the secondary market will pay brokerage
commissions or other charges imposed by brokers, as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant
proportional cost for investors seeking to buy or sell relatively small amounts
of Shares. In addition, secondary market investors will also incur the cost of
the difference between the price at which an investor is willing to buy Shares
(the “bid” price) and the price at which an investor is willing to sell Shares
(the “ask” price). This difference in bid and ask prices is often referred to as
the “spread” or “bid/ask spread.” The bid/ask spread varies over time for Shares
based on trading volume and market liquidity, and is generally lower if Shares
have more trading volume and market liquidity and higher if Shares have little
trading volume and market liquidity. Further, a relatively small investor base
in the Fund, asset swings in the Fund and/or increased market volatility may
cause increased bid/ask spreads. Due to the costs of buying or selling Shares,
including bid/ask spreads, frequent trading of Shares may significantly reduce
investment results and an investment in Shares may not be advisable for
investors who anticipate regularly making small investments.
◦Shares
May Trade at Prices Other Than NAV.
As with all ETFs, Shares may be bought and sold in the secondary market at
market prices. Although it is expected that the market price of Shares will
approximate the Fund’s NAV, there may be times when the market price of Shares
is more than the NAV intra-day (premium) or less than the NAV intra-day
(discount) due to supply and demand of Shares or during periods of market
volatility. This risk is heightened in times of market volatility or periods of
steep market declines and periods when there is limited trading activity for
Shares in the secondary market, in which case such premiums or discounts may be
significant. The market price of Shares during the trading day, like the price
of any exchange-traded security, includes a “bid/ask” spread charged by the
exchange specialist, market makers or other participants that trade Shares. In
times of severe market disruption, the bid/ask spread can increase
significantly. At those times, Shares are most likely to be traded at a discount
to NAV, and the discount is likely to be greatest when the price of Shares is
falling fastest, which may be the time that you most want to sell your Shares.
The Adviser believes that, under normal market conditions, large market price
discounts or premiums to NAV will not be sustained because of arbitrage
opportunities.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make trading in Shares inadvisable.
In addition, trading in Shares on the Exchange is subject to trading halts
caused by extraordinary market volatility pursuant to Exchange “circuit breaker”
rules, which temporarily halt trading on the Exchange when a decline in the
S&P 500 Index during a single day reaches certain thresholds (e.g., 7%, 13%,
and 20%). Additional rules applicable to the Exchange may halt trading in Shares
when extraordinary volatility causes sudden, significant swings in the market
price of Shares. There can be no assurance that Shares will trade with any
volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio holdings, which can be significantly less liquid than Shares, and may
lead to a widening of bid/ask spreads quoted for Shares. There can be no
assurance that the requirements of the Exchange necessary to maintain the
listing of the Fund’s Shares will continue to be met or will remain unchanged.
◦Cash
Transactions.
Unlike certain ETFs, a Fund may effect its creations and redemptions in cash or
partially in cash. As a result, an investment in a Fund may be less
tax-efficient than an investment in such ETFs. Other ETFs generally are able to
make in-kind redemptions and avoid realizing gains in connection with
transactions designed to raise cash to meet redemption requests. If a Fund
effects a portion of redemptions for cash, it may be required to sell portfolio
securities in order to obtain the cash needed to distribute redemption proceeds,
which may involve transaction costs. If a Fund recognizes gain on these sales,
this generally will cause a Fund to recognize gain it might not otherwise have
recognized if it were to distribute portfolio securities in-kind, or to
recognize such gain sooner than would otherwise be required. A Fund generally
intends to distribute these gains to shareholders to avoid being taxed on this
gain at the Fund level and otherwise comply with applicable tax rules. This
strategy may cause shareholders to be subject to tax on gains they would not
otherwise be subject to, or at an earlier date than, if they had made an
investment in a different ETF.
•Extension
Risk.
An issuer could exercise its right to pay principal on an obligation held by a
Fund (such as a mortgage-backed security) later than expected. This may happen
when there is a rise in interest rates. Under these circumstances, the value of
the obligation will decrease, and a Fund will also suffer from the inability to
reinvest in higher yielding securities.
•Financials
Sector Risk
(Income
ETF only).
Companies
in the group of industries related to banks and diversified financials are often
subject to extensive governmental regulation and intervention, which may
adversely affect the scope of their activities, the prices they can charge and
the amount of capital they must maintain. Governmental regulation may change
frequently and may have significant adverse consequences for companies in the
group of industries related to banks and diversified financials, including
effects not intended by such regulation. The impact of past or future regulation
in various countries on any individual financial company or on the industries as
a whole cannot be predicted. The Fund’s emphasis on community banks may make a
Fund more economically vulnerable in the event of a downturn in the banking
industry. Community banks may face heightened risks of failure during times of
economic downturns than larger banks. Community banks may also be subject to
greater lending risks than larger banks.
Certain
risks may impact the value of investments in the group of industries related to
banks and diversified financials more severely than those of investments outside
these industries, including the risks associated with companies that operate
with substantial financial leverage. Companies in the group of industries
related to banks and diversified financials may also be adversely affected by
increases in interest rates and loan losses, decreases in the availability of
money or asset valuations, credit rating downgrades and adverse conditions in
other related markets.
Insurance
companies are subject to extensive government regulation in some countries and
can be significantly affected by changes in interest rates, general economic
conditions, price and marketing competition, the imposition of premium rate caps
or other changes in government regulation or tax law. Different segments of the
insurance industry can be significantly affected by mortality and morbidity
rates, environmental clean-up costs and catastrophic events such as earthquakes,
hurricanes and terrorist acts.
During
the financial crisis that began in 2007, the deterioration of the credit markets
impacted a broad range of mortgage, asset-backed, auction rate, sovereign debt
and other markets, including U.S. and non-U.S. credit and interbank money
markets, thereby affecting a wide range of financial institutions and markets. A
number of large financial institutions failed during that time, merged with
stronger institutions or had significant government infusions of capital.
Instability in the financial markets caused certain financial companies to incur
large losses. Some financial companies experienced declines in the valuations of
their assets, took actions to raise capital (such as the issuance of debt or
equity securities), or even ceased operations. Some financial companies borrowed
significant amounts of capital from government sources and may face future
government-imposed restrictions on their businesses or increased government
intervention. Those actions caused the securities of many financial companies to
decline in value.
The
group of industries related to banks and diversified financials is also a target
for cyber attacks and may experience technology malfunctions and disruptions. In
recent years, cyber attacks and technology failures have become increasingly
frequent and have caused significant losses.
Risks
specific to the bank and diversified financial group of industries also may
include:
◦Asset
Quality and Credit Risk.
When financial institutions loan money, commit to loan money or enter into a
letter of credit or other contract with a counterparty, they incur credit risk,
or the risk of losses if their borrowers do not repay their loans or their
counterparties fail to perform according to the terms of their contract. The
companies in which a Fund will invest offer a number of products which expose
them to credit risk, including loans, leases and lending commitments,
derivatives, trading account assets and assets held-for-sale. Financial
institutions allow for and create loss reserves against credit risks based on an
assessment of credit losses inherent in their credit exposure (including
unfunded credit commitments). This process, which is critical to their financial
results and condition, requires difficult, subjective and complex judgments,
including forecasts of economic conditions and how these economic predictions
might impair the ability of their borrowers to repay their loans. As is the case
with any such assessments, there is always the chance that the financial
institutions in which a Fund invests will fail to identify the proper factors or
that they will fail to accurately estimate the impacts of factors that they
identify. Failure to identify credit risk factors or the impact of credit
factors may result in increased non-performing assets, which will result in
increased loss reserve provisioning and reduction in earnings. Poor asset
quality can also affect earnings through reduced interest income which can
impair a bank’s ability to service debt obligations or to generate sufficient
income for equity holders. Bank failure may result due to inadequate loss
reserves, inadequate capital to sustain credit losses or reduced earnings due to
non-performing assets. A Fund will not have control over the asset quality of
the financial institutions in which the Fund will invest, and these institutions
may experience substantial increases in the level of their non-performing assets
which may have a material adverse impact on the Fund’s investments.
◦Capital
Risk.
A bank’s capital position is extremely important to its overall financial
condition and serves as a cushion against losses. U.S. banking regulators have
established specific capital requirements for regulated banks. Federal banking
regulators proposed amended regulatory capital regulations in response to the
Dodd-Frank Act and the international capital and liquidity requirements set
forth by the Basel Committee on Banking Supervision (“Basel III”) protocols
which would impose even more stringent capital requirements. In the event that a
regulated bank falls below certain capital adequacy standards, it may become
subject to regulatory intervention including, but not limited to, being placed
into a FDIC-administered receivership or conservatorship. The regulatory
provisions under which the regulatory authorities act are intended to protect
depositors. The deposit insurance fund and the banking system are not intended
to protect shareholders or other investors in other securities issued by a bank
or its holding company. The effect of inadequate capital can have a potentially
adverse consequence on the institution’s financial condition, its ability to
operate as a going concern and its ability to operate as a regulated financial
institution and may have a material adverse impact on a Fund’s investments.
◦Earnings
Risk.
Earnings are the primary means for financial institutions to generate capital to
support asset growth, to provide for loan losses and to support their ability to
pay dividends to shareholders. The quantity as well as the quality of earnings
can be affected by excessive or inadequately managed credit risk that may result
in losses and require additions to loss reserves, or by high levels of market
risk that may unduly expose an institution’s earnings to volatility in interest
rates. The quality of earnings may also be diminished by undue reliance on
extraordinary gains, nonrecurring events, or favorable tax effects. Future
earnings may be adversely affected by an inability to forecast or control
funding and operating expenses, net interest margin compression improperly
executed or ill-advised business strategies, or poorly managed or uncontrolled
exposure to other risks. Deficient earnings can result in inadequate capital
resources to support asset growth or insufficient cash flow to meet the
financial institution’s near term obligations. Under certain circumstances, this
may result in the financial institution being required to suspend operations or
the imposition of a cease-and-desist order by regulators which could potentially
impair a Fund’s investments.
◦Management
Risk.
The ability of management to identify, measure, monitor and control the risks of
an institution’s activities and to ensure a financial institution’s safe, sound
and efficient operation in compliance with applicable laws
and
regulations are critical. Depending on the nature and scope of an institution’s
activities, management practices may need to address some or all of the
following risks: credit, market, operating, reputation, strategic, compliance,
legal, liquidity and other risks. A Fund will not have direct or indirect
control over the management of the financial institutions in which the Fund will
invest and, given the Fund’s long-term investment strategy, it is likely that
the management teams and their policies may change. The inability of management
to operate their financial institution in a safe, sound and efficient manner in
compliance with applicable laws and regulations, or changes in management of
financial institutions in which a Fund invests, may have an adverse impact on
the Fund’s investment.
◦Litigation
Risk.
Financial institutions face significant legal risks in their businesses, and the
volume of claims and amount of damages and penalties claimed in litigation and
regulatory proceedings against financial institutions remain high. Substantial
legal liability or significant regulatory action against the companies in which
a Fund invests could have material adverse financial effects or cause
significant reputational harm to these companies, which in turn could seriously
harm their business prospects. Legal liability or regulatory action against the
companies in which a Fund invests could have material adverse financial effects
on the Fund and adversely affect the Fund’s earnings and book value.
◦Market
Risk.
The financial institutions in which a Fund will invest are directly and
indirectly affected by changes in market conditions. Market risk generally
represents the risk that values of assets and liabilities or revenues will be
adversely affected by changes in market conditions. Market risk is inherent in
the financial instruments associated with the operations and activities
including loans, deposits, securities, short-term borrowings, long-term debt,
trading account assets and liabilities, and derivatives of the financial
institutions in which a Fund will invest. Market risk includes, but is not
limited to, fluctuations in interest rates, equity and futures prices, changes
in the implied volatility of interest rates, equity and futures prices and price
deterioration or changes in value due to changes in market perception or actual
credit quality of the issuer. Accordingly, depending on the instruments or
activities impacted, market risks can have wide ranging, complex adverse effects
on the operations and overall financial condition of the financial institutions
in which a Fund will invest as well as adverse effects on the Fund’s results
from operations and overall financial condition.
◦Monetary
Policy Risk.
Monetary policies have had, and will continue to have, significant effects on
the operations and results of financial institutions. There can be no assurance
that a particular financial institution will not experience a material adverse
effect on its net interest income in a changing interest rate environment.
Factors such as the liquidity of the global financial markets, and the
availability and cost of credit may significantly affect the activity levels of
customers with respect to the size, number and timing of transactions.
Fluctuation in interest rates, which affect the value of assets and the cost of
funding liabilities, are not predictable or controllable, may vary and may
impact economic activity in various regions.
◦Competition.
The group of industries related to banks and diversified financials, including
the banking sector, is extremely competitive, and it is expected that the
competitive pressures will increase. Merger activity in the financial services
industry has resulted in and is expected to continue to result in, larger
institutions with greater financial and other resources that are capable of
offering a wider array of financial products and services. The group of
industries related to banks and diversified financials has become considerably
more concentrated as numerous financial institutions have been acquired by or
merged into other institutions. The majority of financial institutions in which
a Fund will invest will be relatively small with significantly fewer resources
and capabilities than larger institutions; this size differential puts them at a
competitive disadvantage in terms of product offering and access to capital.
Technological advances and the growth of e-commerce have made it possible for
non-financial institutions and non-bank financial institutions to offer products
and services that have traditionally been offered by banking and other financial
institutions. It is expected that the cross-industry competition and
inter-industry competition will continue to intensify and may be adverse to the
financial institutions in which a Fund invests.
◦Regulatory
Risk.
Financial institutions, including community banks, are subject to various state
and federal banking regulations that impact how they conduct business, including
but not limited to how they obtain funding, their ability to operate, and the
value of a Fund’s investments. Changes to these regulations could have an
adverse effect on their operations and operating results and a Fund’s
investments. The Funds expect to make long-term investments in financial
institutions that are subject to various state and federal regulations and
oversight. Congress, state legislatures and the various bank regulatory agencies
frequently introduce proposals to change the laws and regulations governing the
banking industry in response to the Dodd-Frank Act, Consumer Financial
Protection Bureau (the “CFPB”) rulemaking or otherwise. The likelihood and
timing of any proposals or legislation and the impact they might have on the
Fund’s investments in financial institutions affected by such changes cannot be
determined and any such changes may be adverse to a Fund’s investments.
Ownership of the stock of certain types of regulated banking institutions may
subject a Fund to additional regulations. Investments in banking institutions
and transactions related to a Fund’s investments may require approval from one
or more regulatory authorities. If a Fund were deemed to be a
bank
holding company or thrift holding company, bank holding companies or thrift
holding companies that invest in the Fund would be subject to certain
restrictions and regulations.
•Fixed-Income
Instruments Risks. Changes
in interest rates generally will cause the value of fixed-income instruments
held by a Fund to vary inversely to such changes. Prices of longer-term
fixed-income instruments generally fluctuate more than the prices of
shorter-term fixed income instruments as interest rates change. In addition, a
fund with a longer average portfolio duration will be more sensitive to changes
in interest rates than a fund with a shorter average portfolio duration.
Duration is a measure used to determine the sensitivity of a security’s price to
changes in interest rates that incorporates a security’s yield, coupon, final
maturity and call features, among other characteristics. However, duration may
not accurately reflect the true interest rate sensitivity of instruments held by
a Fund and, therefore the Fund’s exposure to changes in interest rates. If an
issuer calls or redeems an instrument held by a Fund during a time of declining
interest rates, a Fund might need to reinvest the proceeds in an investment
offering a lower yield, and therefore may not benefit from any increase in value
as a result of declining interest rates.
Fixed-income
instruments that are fixed-rate are generally more susceptible than floating
rate instruments to price volatility related to changes in prevailing interest
rates. The prices of floating rate fixed-income instruments tend to have less
fluctuation in response to changes in interest rates, but will have some
fluctuation, particularly when the next interest rate adjustment on such
security is further away in time or adjustments are limited in amount over time.
A Fund may invest in short-term securities that, when interest rates decline,
affect the Fund’s yield as these securities mature or are sold and the Fund
purchases new short-term securities with lower yields. Subordinated debt
securities that receive payments of interest and principal after other more
senior security holders are paid carry the risk that the issuer will not be able
to meet its obligations and that the subordinated investments may lose value. An
obligor’s willingness and ability to pay interest or to repay principal due in a
timely manner may be affected by its cash flow.
Fixed-income
and debt market conditions are highly unpredictable and some parts of the market
are subject to dislocations. In response to the outbreak of COVID-19, as with
other serious economic disruptions, governmental authorities and regulators
enacted significant fiscal and monetary policy changes, including providing
direct capital infusions into companies, creating new monetary programs and
lowering interest rates considerably. These actions present heightened risks to
fixed-income and debt instruments, and such risks could be even further
heightened if these actions are reversed or are ineffective in achieving their
desired outcomes. In light of these actions and current conditions, interest
rates and bond yields in the U.S. and many other countries were, until recently,
at or near historic lows, and some countries experienced negative rates and
yields. Low or negative interest rates magnify the Fund’s susceptibility to
interest rate risk and diminishing yield and performance. More recently,
interest rates in the U.S. and many other countries have begun rising.
Fluctuations in interest rates expose fixed-income and debt markets to
significant volatility and reduced liquidity for the Fund's investments.
•Floating
or Variable Rate Securities Risk.
Floating
or variable rate securities pay interest at rates that adjust in response to
changes in a specified interest rate or reset at predetermined dates (such as
the end of a calendar quarter). Securities with floating or variable interest
rates are generally less sensitive to interest rate changes than securities with
fixed interest rates, but may decline in value if their interest rates do not
rise as much, or as quickly, as comparable market interest rates. Conversely,
floating or variable rate securities will not generally increase in value if
interest rates decline. The impact of interest rate changes on floating or
variable rate securities is typically mitigated by the periodic interest rate
reset of the investments. Floating or variable rate securities can be rated
below investment grade or unrated; therefore, a Fund relies heavily on the
analytical ability of the Adviser. Lower-rated floating or variable rate
securities are subject to many of the same risks as high yield securities,
although these risks are reduced when the instruments are senior and secured as
opposed to many high yield securities that are junior and unsecured. Floating or
variable rate securities are often subject to restrictions on resale, which can
result in reduced liquidity.
•Foreign
Securities Risks.
Certain
foreign countries may impose exchange control regulations, restrictions on
repatriation of profit on investments or of capital invested, local taxes on
investments, and restrictions on the ability of issuers of non-U.S. securities
to make payments of principal and interest to investors located outside the
country, whether from currency blockage or otherwise. In addition, the Funds
will be subject to risks associated with adverse political and economic
developments in foreign countries, including seizure or nationalization of
foreign deposits, the imposition of economic or trade sanctions, different legal
systems and laws relating to bankruptcy and creditors’ rights and the potential
inability to enforce legal judgments, all of which could cause a Fund to lose
money on its investments in non-U.S. securities. The type and severity of
sanctions and other similar measures, including counter sanctions and other
retaliatory actions, that may be imposed could vary broadly in scope, and their
impact is difficult to ascertain. These types of measures may include, but are
not limited to, banning a sanctioned country or certain persons or entities
associated with such country from global payment systems that facilitate
cross-border payments, restricting the settlement of securities transactions by
certain investors, and freezing the assets of particular countries, entities or
persons. The imposition of sanctions and other similar measures could, among
other things, result in a decline in the value and/or liquidity of securities
issued by the sanctioned country or companies located in or economically tied to
the sanctioned country, downgrades in the credit ratings of the sanctioned
country's securities or those of companies located in or economically tied to
the sanctioned country, currency devaluation or volatility, and increased market
volatility
and disruption in the sanctioned country and throughout the world. Sanctions and
other similar measures could directly or indirectly limit or prevent a Fund from
buying and selling securities (in the sanctioned country and other markets),
significantly delay or prevent the settlement of securities transactions, and
adversely impact a Fund's liquidity and performance. The cost of servicing
external debt will also generally be adversely affected by rising international
interest rates, as many external debt obligations bear interest at rates which
are adjusted based upon international interest rates. Because non-U.S.
securities may trade on days when a Fund’s shares are not priced, NAV may change
at times when the Fund’s shares cannot be sold.
Foreign
banks and securities depositories at which a Fund holds its foreign securities
and cash may be recently organized or new to the foreign custody business and
may be subject to only limited or no regulatory oversight. Additionally, many
foreign governments do not supervise and regulate stock exchanges, brokers and
the sale of securities to the same extent as does the United States and may not
have laws to protect investors that are comparable to U.S. securities laws.
Settlement and clearance procedures in certain foreign markets may result in
delays in payment for or delivery of securities not typically associated with
settlement and clearance of U.S. investments.
Less
information may be publicly available with respect to foreign issuers than is
available with respect to U.S. companies. Accounting standards in non-U.S.
countries may differ from U.S. accounting standards. If the accounting standards
in another country do not require as much detail as U.S. accounting standards,
it may be more difficult to completely and accurately assess a company’s
financial condition. The volume of transactions on foreign stock exchanges is
generally lower than the volume of transactions on U.S. exchanges. Therefore,
the market for securities that trade on foreign stock exchanges may be less
liquid and their prices may be more volatile than securities that trade on U.S.
securities.
In
recent years, the European financial markets have experienced volatility and
adverse trends due to concerns about economic downturns in, or rising government
debt levels of, several European countries. These events may spread to other
countries in Europe, including countries that do not use the Euro. These events
may affect the value and liquidity of certain of the Fund’s investments.
•General
Market Risk. The
capital markets may experience periods of disruption, instability and volatility
due to, among other things, social, political, economic and other conditions and
events such as natural disasters, terrorism, epidemics and pandemics. Such
conditions may materially and adversely affect the markets globally and the
issuers, industries, governments and jurisdictions in which a Fund invests,
which may have a negative impact on a Fund’s performance. These impacts can be
exacerbated by failures of governments and societies to adequately respond to an
emerging event or threat.
The
NAV of a Fund and investment return will fluctuate based upon changes in the
value of its portfolio securities. The market value of securities in which a
Fund invests is based upon the market’s perception of value and is not
necessarily an objective measure of the securities’ value. Other general market
risks include: (i) the market may not recognize what the Adviser believes to be
the true value or growth potential of the securities held by the Fund; (ii) the
earnings of the companies in which a Fund invests will not continue to grow at
expected rates, thus causing the price of the underlying securities to decline;
(iii) the smaller a company’s market capitalization, the greater the potential
for price fluctuations and volatility of its securities due to lower trading
volume for the securities, less publicly available information about the company
and less liquidity in the market for the security; (iv) the potential for price
fluctuations in the security of a medium capitalization company may be greater
than that of a large capitalization company; (v) the Adviser’s judgment as to
the growth potential or value of a security may prove to be wrong; and
(vi) a decline in investor demand for the securities held by a Fund also
may adversely affect the value of the securities.
In
addition, securities in a Fund’s portfolio may cause a Fund to lose value and/or
underperform in comparison to securities in general financial markets, a
particular financial market or other asset classes due to a number of factors,
including inflation (or expectations for inflation), deflation (or expectations
for deflation), interest rates, global demand for particular products or
resources, market instability, debt crises and downgrades, embargoes, tariffs,
sanctions and other trade barriers, regulatory events, other governmental trade
or market control programs and related geopolitical events. In addition, the
value of a Fund’s investments may be negatively affected by the occurrence of
global events, such as war, terrorism, environmental disasters, natural
disasters or events, country instability, and infectious disease
epidemics/pandemics. These events could reduce consumer demand or economic
output, result in market closures, travel restrictions or quarantines, and
significantly adversely impact the economy. Governmental and quasi-governmental
authorities and regulators throughout the world have previously responded to
serious economic disruptions with a variety of significant fiscal and monetary
policy changes, including but not limited to, direct capital infusions into
companies, new monetary programs and dramatically lower interest rates. An
unexpected or sudden reversal of these policies, or the ineffectiveness of these
policies, could increase volatility in securities markets, which could adversely
affect a Fund’s investments. Any market disruptions could also prevent a Fund
from executing advantageous investment decisions in a timely manner. Increasing
interconnectivity between global economies and financial markets can lead to
events or conditions in one country, region or financial market adversely
impacting a different country, region or financial market. Thus, investors
should closely monitor current market conditions to determine whether a Fund
meets their individual financial needs and tolerance for risk.
•High-Yield
Securities Risks.
Below
investment grade instruments are commonly referred to as “junk” or high-yield
instruments and are regarded as predominantly speculative with respect to the
issuer’s capacity to pay interest and repay principal. Lower grade instruments
may be particularly susceptible to economic downturns. It is likely that a
prolonged or deepening economic recession could adversely affect the ability of
the issuers of such instruments to repay principal and pay interest thereon,
increase the incidence of default for such instruments and severely disrupt the
market value of such instruments.
Lower
grade instruments, though higher yielding, are characterized by higher risk. The
retail secondary market for lower grade instruments, which are often thinly
traded or subject to irregular trading, may be less liquid than that for higher
rated instruments. Such instruments can be more difficult to sell and to value
than higher rated instruments because there is generally less public information
available about such securities. As a result, subjective judgment may play a
greater role in valuing such instruments. Adverse conditions could make it
difficult at times for a Fund to sell certain instruments or could result in
lower prices than those used in calculating the Fund’s NAV. Because of the
substantial risks associated with investments in lower grade instruments,
investors could lose money on their investment in the Fund, both in the
short-term and the long-term.
•Illiquid
Investments Risks. A
Fund may invest up to 15% of its net assets in illiquid investments. A Fund may
also invest in restricted securities. Investments in restricted securities could
have the effect of increasing the amount of a Fund’s assets invested in illiquid
investments if qualified institutional buyers are unwilling to purchase these
securities.
Illiquid
and restricted investments may be difficult to dispose of at a fair price at the
times when a Fund believes it is desirable to do so. The market price of
illiquid and restricted investments generally is more volatile than that of more
liquid investments, which may adversely affect the price that a Fund pays for or
recovers upon the sale of such investments. Illiquid and restricted investments
are also more difficult to value, especially in challenging markets. The
Adviser’s judgment may play a greater role in the valuation process. Investment
of a Fund’s assets in illiquid and restricted securities may restrict the Fund’s
ability to take advantage of market opportunities. To dispose of an unregistered
security, a Fund, where it has contractual rights to do so, may have to cause
such security to be registered. A considerable period may elapse between the
time the decision is made to sell the security and the time the security is
registered, thereby enabling a Fund to sell it. Contractual restrictions on the
resale of securities vary in length and scope and are generally the result of a
negotiation between the issuer and acquirer of the securities. In either case, a
Fund would bear market risks during that period. Liquidity risk may impact a
Fund’s ability to meet shareholder redemptions and as a result, the Fund may be
forced to sell securities at inopportune prices.
Certain
fixed-income instruments are not readily marketable and may be subject to
restrictions on resale. Fixed-income instruments may not be listed on any
national securities exchange and no active trading market may exist for certain
of the fixed-income instruments in which a Fund will invest. Where a secondary
market exists, the market for some fixed-income instruments may be subject to
irregular trading activity, wide bid/ask spreads and extended trade settlement
periods. Trade settlement periods may take longer than seven days for
transactions of leveraged loans, meaning it could take the Fund significant time
to receive money after selling its investments. In addition, dealer inventories
of certain securities are at historic lows in relation to market size, which
indicates a potential for reduced liquidity as dealers may be less able to “make
markets” for certain fixed-income securities.
Certain
Structured Products, including CLOs, CDOs, CMOs, CBOs, and other asset-backed
securities and debt securitizations, may be thinly traded or have a limited
trading market. Structured Products are typically privately offered and sold,
and thus, are not registered under the securities laws, which means less
information about the security may be available as compared to publicly offered
securities and only certain institutions may buy and sell them. As a result,
investments in Structured Products may be characterized by a Fund as illiquid
securities.
•Interest
Rate Risk.
Rising interest rates tend to extend the duration of securities, making them
more sensitive to changes in interest rates. The value of longer-term securities
generally changes more in response to changes in interest rates than
shorter-term securities. As a result, in a period of rising interest rates,
securities may exhibit additional volatility and may lose value. In response to
the outbreak of COVID-19, as with other serious economic disruptions,
governmental authorities and regulators enacted significant fiscal and monetary
policy changes, including providing direct capital infusions into companies,
creating new monetary programs and lowering interest rates considerably. As a
result, interest rates in the United States and many parts of the world were,
until recently, near recent historically low levels. More recently, interest
rates in the United States and many other countries have begun rising. Changing
interest rates, including rates that fall below zero, may have unpredictable
effects on markets, including market volatility, and may adversely affect the
Fund's performance. A change in interest rates may be sudden and significant,
with unpredictable effects on the financial markets and the Fund's investments.
Should interest rates decrease, the Fund's investments in certain variable-rate
and fixed rate debt securities may be adversely affected.
•Large
Shareholder Transactions Risk.
Shares of the Funds are offered to certain other investment companies, large
retirement plans and other large investors. In addition, a third party investor,
the Adviser or an affiliate of the Adviser, an AP, a market maker, or another
entity may invest in the Fund and hold its investment for a limited period of
time. As a result, a Fund is subject to the risk that shareholders may purchase
or redeem a large amount of shares of the Fund. To satisfy such large
shareholder redemptions, a Fund may have to sell portfolio securities at times
when it would not otherwise do so, which may
negatively
impact the Fund’s NAV and liquidity. In addition, large purchases of Fund shares
could adversely affect a Fund’s performance to the extent that the Fund does not
immediately invest cash it receives and therefore holds more cash than it
ordinarily would. Large shareholder activity could also generate increased
transaction costs and cause adverse tax consequences. In addition, transactions
by large shareholders may account for a large percentage of the trading volume
on the Exchange and may, therefore, have a material effect on the market price
of the Shares.
•LIBOR
Risk.
Instruments in which a Fund invests may pay interest at floating rates based on
LIBOR or may be subject to interest caps or floors based on LIBOR. A Fund and
issuers of instruments in which a Fund invests may also obtain financing at
floating rates based on LIBOR. Derivative instruments utilized by a Fund and/or
issuers of instruments in which a Fund may invest may also reference LIBOR. The
Fund also may utilize leverage or borrowings primarily based on LIBOR. One-week
and two-month U.S. Dollar LIBOR settings were discontinued at the end of 2021,
and the United Kingdom Financial Conduct Authority (“FCA”), which regulates
LIBOR, has announced that the remaining U.S. Dollar LIBOR settings will continue
to be provided on a representative basis until mid-2023. As of January 1, 2022,
as a result of supervisory guidance from U.S. regulators, some U.S. regulated
entities have ceased entering into new LIBOR contracts with limited exceptions.
While publication of the one- three- and six- month Sterling and Japanese yen
LIBOR settings continued for a limited time on the basis of a changed
methodology (known as “synthetic LIBOR”), these synthetic LIBOR settings were
designated by the FCA as unrepresentative of the underlying market they sought
to measure and were solely available for use in legacy transactions. The FCA has
indicated that they will require the publication of synthetic LIBOR for the
one-, three- and six-month for U.S. Dollar LIBOR settings after June 30, 2023,
until at least the end of September 2024, although usage of these synthetic
LIBOR settings may be prohibited or prevented by applicable law. Certain
bank-sponsored committees in other jurisdictions, including Europe, the United
Kingdom, Japan and Switzerland, have selected alternative reference rates
denominated in other currencies. Abandonment of or modifications to LIBOR may
affect the value, liquidity or return on certain Fund investments that reference
LIBOR without including fallback provisions and may result in costs incurred in
connection with closing out positions and entering into new trades. Any pricing
adjustments to a Fund’s investments resulting from a substitute reference rate
may also adversely affect the Fund’s performance and/or NAV. The effect of a
phase out of LIBOR on instruments in which the Fund may invest is currently
unclear.
While
some instruments may contemplate a scenario where LIBOR is no longer available
by providing for an alternative rate setting methodology, not all instruments
may have such provisions, and there is significant uncertainty regarding the
effectiveness of any such alternative methodologies. To the extent that any
replacement rate differs from that utilized for a Structured Product that holds
those securities, the Structured Product would experience an interest rate
mismatch between its assets and liabilities. Recently, some Structured Products
have included, or have been amended to include, language permitting the
Structured Product’s investment manager to implement a market replacement rate
upon the occurrence of certain material disruption events. However, not all
Structured Products may adopt such provisions, nor can there be any assurance
that Structured Products’ investment managers will undertake the suggested
amendments when able. In cases where LIBOR replacement language is absent or
insufficient, certain legislative transition mechanisms may apply, causing LIBOR
to be replaced with a rate selected by the Board of Governors of the Federal
Reserve System. On March 15, 2022, the Adjustable Interest Rate (LIBOR) Act was
signed into law. This law provides a statutory fallback mechanism on a
nationwide basis to replace LIBOR with a benchmark rate that is selected by the
Board of Governors of the Federal Reserve System and based on the Secured
Overnight Financing Rate (“SOFR”) for certain contracts that reference LIBOR and
contain no, or insufficient, fallback provisions. Final implementing regulations
in respect of the law have been promulgated although the effect that they may
have on the transition from LIBOR is uncertain. The transition from LIBOR to
alternative interest rates could lead to significant short-term and long-term
uncertainty and market instability. It remains uncertain how such changes would
affect the Fund, issuers of instruments in which the Fund invests and financial
markets generally.
Alteration
of the terms of a debt instrument or a modification of the terms of other types
of contracts to replace LIBOR or another interbank offered rate (“IBOR”) with a
new reference rate could result in a taxable exchange and the realization of
income and gain/loss for U.S. federal income tax purposes. The IRS has issued
final regulations regarding the tax consequences of the transition from IBOR to
a new reference rate in debt instruments and non-debt contracts. Under the final
regulations, alteration or modification of the terms of a debt instrument to
replace an operative rate that uses a discontinued IBOR with a qualified rate
(as defined in the final regulations) including true up payments equalizing the
fair market value of contracts before and after such IBOR transition, to add a
qualified rate as a fallback rate to a contract whose operative rate uses a
discontinued IBOR or to replace a fallback rate that uses a discontinued IBOR
with a qualified rate would not be taxable. The IRS may provide additional
guidance, with potential retroactive effect.
•Liquidity
and Valuation Risks.
It may be difficult for a Fund to purchase and sell particular investments
within a reasonable time at a favorable price. The capacity of traditional
fixed-income market makers has not kept pace with the consistent growth in the
fixed-income markets in recent years, which has led to reductions in the
capacity of such market makers to engage in fixed-income trading and, as a
result, dealer inventories of corporate fixed-income and floating rate
instruments are at or near historic lows relative to market size. These concerns
may be more pronounced in the case of high yield fixed-income and floating rate
instruments than higher quality fixed-income instruments. Market makers tend to
provide stability and liquidity to debt-securities markets through their
intermediary services, and their reduced capacity and number could lead to
diminished liquidity and increased volatility in the fixed-income markets. As a
result, a Fund could be unable to pay redemption proceeds
within
the allowable time period due to adverse market conditions, an unusually high
volume of redemption requests or other reasons, unless it sells other portfolio
investments under unfavorable conditions, thereby adversely affecting the Fund.
In addition, a Fund’s ability to sell an instrument under favorable conditions
may also be negatively impacted by, among other things, the sale of the same or
similar instruments by other market participants at the same time.
To
the extent that there is not an established liquid market for instruments in
which a Fund invests, or there is a reduced number or capacity of traditional
market makers with respect to certain instruments, trading in such instruments
may be relatively inactive or irregular. In addition, during periods of reduced
market liquidity or market turmoil, or in the absence of readily accessible
market quotations for an investment in a Fund’s portfolio, the ability of the
Fund to assign an accurate daily value to that investment may be limited and the
Adviser, on behalf of the Fund, may be required to perform a fair valuation of
the instrument. Fair value determinations are inherently subjective and reflect
good faith judgments based on available information. Accordingly, there can be
no assurance that the determination of an instrument’s fair value, conducted in
accordance with the valuation procedures, will in fact approximate the price at
which a Fund could sell that instrument at the time of the fair valuation. The
Funds rely on various sources of information to value investments and calculate
net asset value. The Funds may obtain pricing information from third parties
that are believed to be reliable. In certain cases, this information may be
unavailable or this information may be inaccurate because of errors by the third
parties, technological issues, absence of current or reliable market data or
otherwise, which could impact a Fund’s ability to accurately value its
investments or calculate its NAV.
Investors
who purchase or redeem shares of a Fund on days when the Fund is holding
instruments that have been fair valued may receive fewer or more shares or lower
or higher redemption proceeds than they would have received if the instruments
had not been fair valued or if the Fund had employed an alternative valuation
methodology. Such risks may be more pronounced in a rising interest rate
environment, and, to the extent the Fund that holds a significant percentage of
fair valued or otherwise difficult to value securities, it may be particularly
susceptible to the risks associated with valuation. For additional information
about valuation determinations, see “Determination of Net Asset Value” below.
Portions of a Fund’s portfolio that are fair valued or difficult to value vary
from time to time. A Fund’s shareholder reports contain detailed information
about a Fund’s holdings that are fair valued or difficult to value, including
values of such holdings as of the dates of the reports.
•Management
Risk.
Each Fund is actively managed and its performance may reflect the Adviser’s
ability to make decisions which are suited to achieving a Fund’s investment
objective. Additionally, the Adviser’s consideration of certain ESG factors when
making investment decisions may affect a Fund’s performance relative to that of
funds that do not consider ESG factors. Due to its active management, a Fund
could underperform other funds with a similar investment objective.
•Mortgage-Backed
and Asset-Backed Securities Risks. The
price paid by a Fund for asset-backed securities, the yield the Fund expects to
receive from such securities and the average life of such securities are based
on a number of factors, including the anticipated rate of prepayment of the
underlying assets. The value of these securities may be significantly affected
by changes in lending standards, interest rates and lending rates, and the risks
associated with the market’s perception of issuers, the creditworthiness of the
parties involved, and investing in real estate securities. The foregoing risks
or similar developments may adversely impact the default risk for the properties
and loans underlying mortgage-backed securities investments, the value of and
income generated by these investments, and could also result in reduced
mortgage-backed securities liquidity. The foregoing risks or similar
developments may adversely impact the default risk for the properties and loans
underlying mortgage-backed securities investments, the value of and income
generated by these investments, and could also result in reduced mortgage-backed
securities liquidity.
The
ability of a Fund to successfully utilize these instruments may depend on the
ability of the Fund’s Adviser to forecast interest rates and other economic
factors correctly. These securities may have a structure that makes their
reaction to interest rate changes and other factors difficult to predict, making
their value highly volatile.
In
addition to the risks associated with other asset-backed securities as described
above, mortgage-backed securities are subject to the general risks associated
with investing in real estate securities; that is, they may lose value if the
value of the underlying real estate to which a pool of mortgages relates
declines. In addition, mortgage-backed securities comprised of subprime
mortgages and investments in other asset-backed securities collateralized by
subprime loans may be subject to a higher degree of credit risk and valuation
risk. Additionally, such securities may be subject to a higher degree of
liquidity risk, because the liquidity of such investments may vary dramatically
over time.
In
addition, CMOs, which are mortgage-backed securities that are typically
collateralized by mortgage loans or mortgage pass-through securities, and
multi-class pass-through securities, are commonly structured as equity interests
in a trust composed of mortgage loans or other mortgage-backed securities. CMOs
are usually issued in multiple classes, often referred to as “tranches,” with
each tranche having a specific fixed or floating coupon rate and stated maturity
or final distribution date. Under the traditional CMO structure, the cash flows
generated by the mortgages or mortgage pass-through securities in the collateral
pool are used to first pay interest and then pay principal to the holders of the
CMOs. Subject to the provisions of individual CMO issues, the cash flow
generated by the underlying collateral (to the extent it exceeds the amount
required to pay the stated interest) is used to retire the bonds. As a result of
these and other structural characteristics, CMOs entail greater
market,
prepayment and liquidity risks than other mortgage-backed securities, and may be
more volatile or less liquid than other mortgage-backed securities.
Mortgage-backed
securities may be issued by governments or their agencies and instrumentalities,
such as, in the United States, Ginnie Mae, Fannie Mae and Freddie Mac. They may
also be issued by private issuers but represent an interest in or are
collateralized by pass-through securities issued or guaranteed by a government
or one of its agencies or instrumentalities. In addition, mortgage-backed
securities may be issued by private issuers and be collateralized by securities
without a government guarantee. Such securities usually have some form of
private credit enhancement.
Pools
created by private issuers generally offer a higher rate of interest than
government and government-related pools because there are no direct or indirect
government or agency guarantees of payments. Notwithstanding that such pools may
be supported by various forms of private insurance or guarantees, there can be
no assurance that the private insurers or guarantors will be able to meet their
obligations under the insurance policies or guarantee arrangements. A Fund may
invest in private mortgage pass-through securities without such insurance or
guarantees. Any mortgage-backed securities that are issued by private issuers
are likely to have some exposure to subprime loans as well as to the mortgage
and credit markets generally. In addition, such securities are not subject to
the underwriting requirements for the underlying mortgages that would generally
apply to securities that have a government or government-sponsored entity
guarantee, thereby increasing their credit risk. The risk of non-payment is
greater for mortgage-related securities that are backed by mortgage pools that
contain subprime loans, but a level of risk exists for all loans. Market factors
adversely affecting mortgage loan repayments may include a general economic
downturn, high unemployment, a general slowdown in the real estate market, a
drop in the market prices of real estate, or an increase in interest rates
resulting in higher mortgage payments by holders of adjustable rate mortgages.
•NAV
Risk
(UltraShort
Income ETF only).
The Fund is not a money market fund, does not attempt to maintain a stable NAV,
and is not subject to the rules that govern the quality, maturity, liquidity and
other features of securities that money market funds may purchase. Under normal
conditions, the Fund’s investment may be more susceptible than a money market
fund to interest rate risk, valuation risk, credit risk, and other risks
relevant to the Fund’s investments. The Fund’s NAV per share will fluctuate.
•New
Fund Risk.
Each Fund is a recently organized investment company with limited operating
history. As a result, prospective investors have no track record or history on
which to base their investment decision. Moreover, investors will not be able to
evaluate a Fund against one or more comparable funds on the basis of relative
performance until the Fund has established a track record. In addition, until
the Fund achieves a larger scale, the performance of certain of its investments
may disproportionately impact the performance of the Fund, which may be subject
to heightened volatility. As a new fund, the Fund also may be subject to a
“ramp-up” period during which it may not be fully invested or able to meet its
investment objective or investment policies. A new fund or a fund with fewer
assets under management may be more significantly affected by purchases and
redemptions of its Creation Units than a fund with relatively greater assets
under management would be affected by purchases and redemptions of its shares.
As compared to a larger fund, a new or smaller fund is more likely to sell a
comparatively large portion of its portfolio to meet significant Creation Unit
redemptions, or invest a comparatively large amount of cash to facilitate
Creation Unit purchases, in each case when the fund otherwise would not seek to
do so. Such transactions may cause funds to make investment decisions at
inopportune times or prices or miss attractive investment opportunities. Such
transactions may also accelerate the realization of taxable income if sales of
securities resulted in gains and the fund redeems Creation Units for cash, or
otherwise cause a fund to perform differently than intended. While such risks
may apply to funds of any size, such risks are heightened in funds with fewer
assets under management. In addition, new funds may not be able to fully
implement their investment strategy immediately upon commencing investment
operations, which could reduce investment performance.
•Non-Diversification
Risk.
Each Fund is classified as “non-diversified” under the 1940 Act. A
non-diversified fund is not limited by the 1940 Act with regard to the
percentage of its assets that may be invested in the securities of a single
issuer. Consequently, the securities of a particular issuer or a small number of
issuers may constitute a significant portion of a Fund’s investment portfolio.
This may adversely affect a Fund’s performance or subject a Fund’s shares to
greater price volatility than that experienced by more diversified investment
companies.
•Other
Investment Companies Risks. Because
the Funds generally invest in other investment companies (including those that
are part of the same group of investment companies as the Funds (“affiliated
underlying funds”)) that invest in fixed-income securities, risks associated
with investments in other investment companies will include fixed-income
securities risks. In addition to the brokerage costs associated with a Fund’s
purchase and sale of the underlying securities, ETFs and mutual funds incur fees
that are separate from those of a Fund. As a result, a Fund’s shareholders will
indirectly bear a proportionate share of the operating expenses of the ETFs and
mutual funds, in addition to Fund expenses. Because a Fund is not required to
hold shares of underlying funds for any minimum period, it may be subject to,
and may have to pay, short-term redemption fees imposed by the underlying funds.
ETFs are subject to additional risks such as the fact that the market price of
its shares may trade above or below its NAV or an active market may not develop.
A Fund has no control over the investments and related risks taken by the
underlying funds in which it invests.
In
addition to risks generally associated with investments in investment company
securities, ETFs are subject to the following risks that do not apply to
traditional mutual funds: (i) the market price of an ETF’s shares may be
above or below its NAV; (ii) an active trading market for an ETF’s shares
may not develop or be maintained; (iii) the ETF may employ an investment
strategy that utilizes high leverage ratios; (iv) trading of an ETF’s
shares may be halted if the listing exchange’s officials deem such action
appropriate; and (v) underlying ETF shares may be de-listed from the
exchange or the activation of market-wide “circuit breakers” (which are tied to
large decreases in stock prices) may temporarily stop stock trading.
A
Fund’s investments in other investment companies may include investments in
closed-end funds (“CEFs”). Shares of CEFs frequently trade at a price per share
that is less than a fund’s NAV. There can be no assurance that the market
discount on shares of any CEF purchased by a Fund will ever decrease or that
when the Fund seeks to sell shares of a CEF it can receive the NAV of those
shares. CEFs have lower levels of daily volume when compared to open-end
companies. There are greater risks involved in investing in securities with
limited market liquidity.
The
Adviser may be subject to potential conflicts of interest in allocating a Fund’s
assets to underlying funds, such as a potential conflict in selecting affiliated
underlying funds over unaffiliated underlying funds. In addition, a Fund’s
portfolio managers may be subject to potential conflicts of interest in
allocating the Fund’s assets among underlying funds, as certain of the Fund’s
portfolio managers may also manage an affiliated underlying fund in which the
Fund may invest. Both the Adviser and a Fund’s portfolio managers have a
fiduciary duty to a Fund to act in the Fund’s best interest when selecting
underlying funds. Under the oversight of the Board of Trustees, the Adviser will
carefully analyze any such potential conflicts of interest and will take steps
to minimize and, where possible, eliminate them.
Additionally,
to the extent that a Fund serves as an “acquired fund” to another affiliated or
unaffiliated investment company, the Fund’s ability to invest in other
investment companies and private funds may be limited and, under these
circumstances, the Fund’s investments in other investment companies and private
funds will be consistent with applicable law and/or exemptive rules adopted by
or exemptive orders obtained from the SEC. For example, to the extent the Fund
serves as an acquired fund in a fund of funds arrangement in reliance on Rule
12d1-4 under the Investment Company Act, the Fund would be prohibited from
purchasing or otherwise acquiring the securities of an investment company or
private fund if, after such purchase or acquisition, the aggregate value of the
Fund’s investments in such investment companies and private funds would exceed
10% of the value of the Fund’s total assets, subject to limited exceptions
(including for investments in money market funds).
•Portfolio
Turnover Risk.
The
Fund’s annual portfolio turnover rate may vary greatly from year to year, as
well as within a given year. The portfolio turnover rate is not considered a
limiting factor in the execution of investment decisions for the Fund. High
portfolio turnover may result in the realization of net short-term capital gains
by the Fund which, when distributed to shareholders, will be taxable as ordinary
income. A high portfolio turnover may increase the Fund’s current and
accumulated earnings and profits, resulting in a greater portion of the Fund’s
distributions being treated as a dividend to the Fund’s shareholders. In
addition, a higher portfolio turnover rate results in correspondingly greater
brokerage and other transactional expenses that are borne by the
Fund.
•Prepayment
Risk. When
interest rates decline, fixed income securities with stated interest rates may
have their principal paid earlier than expected. This may result in a Fund
having to reinvest that money at lower prevailing interest rates, which can
reduce the returns of the Fund.
•Rating
Agencies Risk. Rating
agencies may fail to make timely changes in credit ratings and an issuer’s
current financial condition may be better or worse than a rating indicates. In
addition, rating agencies are subject to an inherent conflict of interest
because they are often compensated by the same issuers whose securities they
grade.
•Regulatory
and Legal Risks.
U.S. and non-U.S. government agencies and other regulators regularly adopt new
regulations and legislatures enact new statutes that affect the investments held
by a Fund, the strategies used by a Fund or the level of regulation or taxation
that applies to a Fund. These statutes and regulations and any future statutes
and regulations may impact the investment strategies, performance, costs and
operations of a Fund or the taxation of its shareholders. Changes in government
legislation, regulation and/or intervention may change the way the Adviser or a
Fund is regulated, affect the expenses incurred directly by a Fund and the value
of its investments and limit and/or preclude a Fund’s ability to implement, or
increase a Fund’s costs associated with implementing, its investments
strategies. Changes to tax laws and regulations may also result in certain tax
consequences for a Fund and/or investors. Government regulation may change
frequently and may have significant adverse consequences. Moreover, government
regulation may have unpredictable and unintended effects. In addition to
exposing a Fund to potential new costs and expenses, additional regulation or
changes to existing regulation may also require changes to a Fund’s investment
practices. The Adviser cannot predict the effects of any new governmental
regulation that may be implemented, and there can be no assurance that any new
governmental regulation will not adversely affect a Fund’s ability to achieve
its respective investment objective.
•REIT
Risk (Income
ETF only).
Investments in REITs involve unique risks. REITs may have limited financial
resources, may trade less frequently and in limited volume, and may be more
volatile than other securities. The value of a REIT may also rise and fall in
response to the management skill and creditworthiness of the issuer. In
addition, to the extent the Fund holds interests in REITs, it is expected that
investors in the Fund will bear two layers of asset-based management fees and
expenses (directly at
the
Fund level and indirectly at the REIT level). The risks of investing in REITs
include certain risks associated with the direct ownership of real estate and
the real estate industry in general. These include risks related to general,
regional and local economic conditions; fluctuations in interest rates and
property tax rates; shifts in zoning laws, environmental regulations and other
governmental action such as the exercise of eminent domain; cash flow
dependency; increased operating expenses; lack of availability of mortgage
funds; losses due to natural disasters; overbuilding; losses due to casualty or
condemnation; changes in property values and rental rates; the management or
development of properties, which may be subject to mortgage loans that are
subject to the risk of default; and other factors.
•Repurchase
Agreement Risks. Repurchase
agreements typically involve the acquisition by a Fund of fixed-income
securities from a selling financial institution such as a bank or broker-dealer.
The agreement provides that a Fund will sell the securities back to the
institution at a fixed time in the future. Repurchase agreements involve the
risk that a seller will become subject to bankruptcy or other insolvency
proceedings or fail to repurchase a security from a Fund. In such situations, a
Fund may incur losses including as a result of (i) a possible decline in
the value of the underlying security during the period while a Fund seeks to
enforce its rights thereto, (ii) a possible lack of access to income on the
underlying security during this period, and (iii) expenses of enforcing its
rights.
•Residential
Loans and Mortgages Risk.
The Fund may acquire residential loans and mortgages (including through
participations, assignments and whole loans) from third-party mortgage
originators. In addition to interest rate, default and other risks of fixed
income securities, residential loans and mortgages carry additional risks,
including the possibility that the quality of the collateral may decline in
value and the potential for the liquidity of residential loans and mortgages to
vary over time. In addition, in the event that a loan is foreclosed on, the Fund
could become the owner (in whole or in part) of any collateral, which may
include, among other things, real estate or other real or personal property, and
the Fund would bear the costs and liabilities of owning, holding or disposing of
such property. These risks are greater for subprime residential and mortgage
loans.
The
Fund may also experience difficulty disposing of loans, which do not trade in a
liquid market and typically can only be sold to a limited number of
institutional investors. The absence of a liquid market for these instruments
could adversely impact their value and may inhibit the Fund’s ability to dispose
of them at times when it would be desirable to do so, including in response to
particular economic events, such as a deterioration in the creditworthiness of
the borrower. Because they do not trade in a liquid market residential loans may
also be difficult for the Fund to value.
Investing
in loans may subject the Fund to greater levels of credit risk, call risk,
settlement risk and liquidity risk than other types of fixed income instruments.
Transactions involving loans may also involve greater costs than transactions
involving more actively traded securities. In addition, a number of factors,
including restrictions on transfers, irregular trading activity and wide bid/ask
spreads, and extended trade settlement periods may make it more difficult for
the Fund to acquire, dispose of or accurately price such instruments relative to
other types of investments. As a result, the Fund may not be able to realize the
full value for loans and there may be extended delays in the Fund’s receipt of
proceeds from the sale of a loan, which could adversely impact the Fund’s
performance. Because transactions in many loans are subject to extended trade
settlement periods, proceeds from the sale of a loan may not be immediately
available to the Fund. As a result, proceeds related to the sale of loans may
not be available to make additional investments or to meet the Fund’s repurchase
obligations for a period after the sale of the loans, and, as a result, the Fund
may have to sell other investments or engage in borrowing transactions if
necessary to raise cash to meet its obligations.
When
acquiring residential loans, the Fund relies on third-party mortgage originators
to originate mortgage loans that comply with applicable law. Mortgage loan
originators and brokers are subject to strict and evolving consumer protection
laws and other legal obligations with respect to the origination of residential
mortgage loans. These laws may be highly subjective and open to interpretation
and, as a result, a regulator or court may determine that that there has been a
violation where an originator or servicer of mortgage loans reasonably believed
that the law or requirement had been satisfied. Failure or alleged failure of
originators or servicers to comply with these laws and regulations could subject
the Fund, as an assignee or purchaser of these loans or securities backed by
these loans, to, among other things, delays in foreclosure proceedings,
increased litigation expenses, monetary penalties and defenses to foreclosure,
including by recoupment or setoff of finance charges and fees collected, and in
some cases could also result in rescission of the affected residential mortgage
loans, which could adversely impact the Fund’s business and financial results.
While some of these laws may not explicitly hold the Fund responsible for the
legal violations of these third parties, federal and state agencies and private
litigants have increasingly sought to impose such liability. Various regulators
and plaintiffs’ lawyers have also sought to hold assignees of mortgage loans
liable for the alleged violations of the originating lender under theories of
express or implied assignee liability. Accordingly, the Fund may be subject to
fines, penalties or civil liability based upon the conduct of the mortgage
lenders that originated the mortgage loans such Fund holds.
Despite
the Fund’s efforts to manage credit risk related to the residential mortgage
loans the Fund acquires, there are many aspects of credit risk that the Fund
cannot control. The Fund’s due diligence process may not be effective at
preventing or limiting compliance violations or borrower delinquencies and
defaults, and the loan servicing companies that service the mortgage loans may
not comply with applicable servicing regulations or investor requirements. Prior
to acquiring loans, the Fund will perform due diligence and the Fund will rely
on resources and data available to it from the seller, which may be
limited.
The Fund’s due diligence efforts may not detect matters that could lead to
losses. If the Fund’s due diligence processes are not adequate, and the Fund
fails to detect certain loan defects or compliance issues related to
origination, the Fund may incur losses. The Fund could also incur losses if a
counterparty that sold the Fund a loan is unwilling or unable (e.g., due to its
financial condition) to repurchase that loan or asset or pay damages to the Fund
if the Fund determines subsequent to purchase that one or more of the
representations or warranties made to the Fund in connection with the sale was
inaccurate. There may be less readily available information about loans and
their underlying borrowers than is the case for other types of investments and
issuers. In addition, because loans may not be considered “securities,”
investors in loans, such as the Fund, may not be entitled to rely on the
anti-fraud protections of the federal securities laws, although they may be
entitled to certain contractual remedies.
The
mortgage loans that the Fund purchases, and in which the Fund directly and
indirectly invests through RMBS, CMBS or other investments, may be concentrated
in a specific state or states. Weak economic conditions in these locations or
any other location (which may or may not affect real property values), may
affect the ability of borrowers to repay their mortgage loans on time.
Properties in certain jurisdictions may be more susceptible than homes located
in other parts of the country to certain types of uninsurable hazards, such as
earthquakes, floods, hurricanes, wildfires and other natural disasters. Declines
in the residential real estate market of a particular jurisdiction may reduce
the values of properties located in that jurisdiction, which would result in an
increase in the loan-to-value ratios. Any increase in the market value of
properties located in a particular jurisdiction would reduce the loan-to-value
ratios of the mortgage loans and could, therefore, make alternative sources of
financing available to the borrowers at lower interest rates, which could result
in an increased rate of prepayment of the mortgage loans.
•Reverse
Repurchase Agreement Risks. A
reverse repurchase agreement is the sale by a Fund of a debt obligation to a
party for a specified price, with the simultaneous agreement by the Fund to
repurchase that debt obligation from that party on a future date at a higher
price. Similar to borrowing, reverse repurchase agreements provide a Fund with
cash for investment purposes, which creates leverage and subjects a Fund to the
risks of leverage, including increased volatility. Reverse repurchase agreements
also involve the risk that the other party may fail to return the securities in
a timely manner or at all. A Fund could lose money if it is unable to recover
the securities and the value of collateral held by the Fund, including the value
of the investments made with cash collateral, is less than the value of
securities. Reverse repurchase agreements also create Fund expenses and require
that a Fund have sufficient cash available to purchase the debt obligations when
required. Reverse repurchase agreements also involve the risk that the market
value of the debt obligation that is the subject of the reverse repurchase
agreement could decline significantly below the price at which a Fund is
obligated to repurchase the security. In the event the buyer of securities under
a reverse repurchase agreement files for bankruptcy or becomes insolvent, a
Fund’s use of the proceeds from the sale of the securities may be restricted
pending a determination by the other party, or its trustee or receiver, whether
to enforce a Fund’s obligations to repurchase the securities. Reverse repurchase
agreements also may be viewed as borrowings made by the Fund and are a form of
leverage which also may increase the volatility of the Fund.
•Risks
Relating to A Fund’s RIC Status. To
qualify and remain eligible for the special tax treatment accorded to a RIC and
its shareholders under the Internal Revenue Code of 1986, as amended (the
“Code”), a Fund must meet certain source-of-income, asset diversification and
annual distribution requirements. Very generally, to qualify as a RIC, a Fund
must derive at least 90% of its gross income for each taxable year from
dividends, interest, payments with respect to certain securities loans, gains
from the sale or other disposition of stock, securities or foreign currencies,
net income from certain publicly traded partnerships or other income derived
with respect to its business of investing in stock or other securities. A Fund
must also meet certain asset diversification requirements at the end of each
quarter of each of its taxable years. Failure to meet these diversification
requirements on the last day of a quarter may result in a Fund having to dispose
of certain investments quickly to prevent the loss of RIC status. Any such
dispositions could be made at disadvantageous prices or times, and may result in
substantial losses to a Fund. In addition, to be eligible for the special tax
treatment accorded RICs, a Fund must meet the annual distribution requirement,
requiring it to distribute with respect to each taxable year an amount at least
equal to 90% of the sum of its “investment company taxable income” (generally
its taxable ordinary income and realized net short-term capital gains in excess
of realized net long-term capital losses, if any, and determined without regard
to any deduction for dividends paid) and its net tax-exempt income (if any), to
its shareholders. If a Fund fails to qualify as a RIC for any reason and becomes
subject to corporate tax, the resulting corporate taxes could substantially
reduce its net assets, the amount of income available for distribution and the
amount of its distributions. Such a failure would have a material adverse effect
on a Fund and its shareholders. In addition, a Fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make
substantial distributions to re-qualify as a RIC.
•Sector
Risk. To
the extent a Fund invests more heavily in particular sectors of the economy, its
performance will be especially sensitive to developments that significantly
affect those sectors.
•Structured
Products Risks.
A Fund may invest in Structured Products, including CLOs, CDOs, CMOs, CBOs, and
other asset-backed securities and debt securitizations. Structured Products are
subject to the normal interest rate, default and other risks associated with
fixed-income securities and asset-backed securities. Additionally, the risks of
an investment in a Structured Product depend largely on the type of the
collateral securities and the class of the Structured Product or other
asset-backed
security
in which a Fund invests. A Fund generally may have the right to receive payments
only from the Structured Product, and generally does not have direct rights
against the issuer or the entity that sold the underlying collateral assets.
Such collateral may be insufficient to meet payment obligations and the quality
of the collateral may decline in value or default. Also, the class of the
Structured Product may be subordinate to other classes, values may be volatile,
and disputes with the issuer may produce unexpected investment results.
The
ability of the Structured Product to make distributions will be subject to
various limitations, including the terms and covenants of the debt it issues.
For example, performance tests (based on interest coverage or other financial
ratios or other criteria) may restrict a Fund’s ability, as holder of the equity
interests in a Structured Product, to receive cash flow from these investments.
There is no assurance any such performance tests will be satisfied. Also, a
Structured Product may take actions that delay distributions in order to
preserve ratings and to keep the cost of present and future financings lower or
the Structured Product may be obligated to retain cash or other assets to
satisfy over-collateralization requirements commonly provided for holders of the
Structured Product’s debt. As a result, there may be a lag, which could be
significant, between the repayment or other realization on a loan or other
assets in, and the distribution of cash out of, a Structured Product, or cash
flow may be completely restricted for the life of the Structured Product. If a
Fund does not receive cash flow from any such Structured Product that is
necessary to satisfy the annual distribution requirement for maintaining a
Fund’s RIC status, and a Fund is unable to obtain cash from other sources
necessary to satisfy this requirement, a Fund could fail to maintain its status
as a RIC, which would have a material adverse effect on a Fund’s financial
performance.
Structured
Products are typically privately offered and sold, and thus, are not registered
under the securities laws, which means less information about the security may
be available as compared to publicly offered securities and only certain
institutions may buy and sell them. As a result, investments in certain
Structured Products or other asset-backed securities may be characterized by a
Fund as illiquid securities. An active dealer market may exist for Structured
Products that can be resold in Rule 144A transactions, but there can be no
assurance that such a market will exist or will be active enough for a Fund to
sell such securities. A Fund may invest in any tranche of a Structured Product,
including the subordinated/equity tranches. If applicable accounting
pronouncements or SEC staff guidance require a Fund to consolidate the
Structured Product’s financial statements with a Fund’s financial statements,
any debt issued by the Structured Product would be generally treated as if it
were issued by a Fund. Further, there can be no assurance that a bankruptcy
court, in the exercise of its broad equitable powers, would not order that a
Fund’s assets and liabilities be substantively consolidated with those of a
Structured Product, rather than kept separate, and that creditors of the
Structured Product would have claims against the consolidated bankruptcy estate
(including a Fund’s assets). If a Structured Product is not consolidated with a
Fund, a Fund’s only interest in the Structured Product will be the value of its
retained subordinated interest and the income allocated to it, which may be more
or less than the cash a Fund received from the Structured Product, and none of
the Structured Product’s liabilities would be reflected as a Fund’s liabilities.
If the assets of a Structured Product are not consolidated with a Fund’s assets
and liabilities, then the leverage incurred by such Structured Product may or
may not be treated as borrowings by a Fund for purposes applicable limitations
on a Fund’s ability to issue debt.
In
addition to the general risks associated with fixed-income securities discussed
herein, Structured Products carry additional risks, including, but not limited
to: (i) the possibility that distributions from collateral securities will not
be adequate to make interest or other payments; (ii) the quality of the
collateral may default, decline in value or quality or be downgraded by a rating
agency; (iii) the possibility that the investments in Structured Products are
subordinate to other classes or tranches thereof; (iv) the complex structure of
the security may not be fully understood at the time of investment and may
produce disputes among investors or with the issuer or unexpected investment
results; and (v) a forced “fire sale” liquidation may occur due to technical
defaults such as coverage test failures.
The
activities of the issuers of certain Structured Products will generally be
directed by a collateral manager. In a Fund’s capacity as holder of interests in
such a Structured Product, a Fund is generally not able to make decisions with
respect to the management, disposition or other realization of any investment,
or other decisions regarding the business and affairs, of the Structured
Product. Consequently, the success of the securitizations in will depend, in
part, on the financial and managerial expertise of the collateral manager.
To
the extent that an affiliate of the Adviser serves as the sponsor and/or
collateral manager of a Structured Product in which a Fund invests, or the
Adviser or its affiliates hold other interests in Structured Products in which a
Fund invests, a Fund may be limited in its ability to participate in certain
transactions with the Structured Product and may not be able to dispose of its
interests in the Structured Product if no secondary market exists for the
interests. Even if a secondary market exists, the Adviser or its affiliates at
times may possess material non-public information that may restrict a Fund’s
ability to dispose of its interests in the Structured Product. A Fund does not
currently contemplate making investments in any specific investments sponsored
by the Adviser or an affiliate; however, to the extent a Fund does, it will do
so only as permitted under the 1940 Act and the rules thereunder.
To
the extent the Fund invests in the equity tranches of a Structured Product, such
investments typically represent the first loss position, are unrated and are
subject to greater risk. To the extent that any losses are incurred by the
Structured Product in respect of any collateral, such losses will be borne first
by the owners of the equity interests, which may include the Fund. Any
equity
interests that a Fund holds in a Structured Product will not be secured by the
assets of the Structured Product or guaranteed by any party, and a Fund will
rank behind all creditors of the Structured Product, including the holders of
the secured notes issued by the Structured Product. Equity interests are
typically subject to certain payment restrictions in the indenture governing the
senior tranches. Accordingly, equity interests may not be paid in full, may be
adversely impacted by defaults by a relatively small number of underlying assets
held by the Structured Product and may be subject to up to 100% loss. Structured
Products may be highly levered, and therefore equity interests may be subject to
a higher risk of loss, including the potential for total loss. The market value
of equity interests may be significantly affected by a variety of factors,
including changes in interest rates, changes in the market value of the
collateral held by the securitization, defaults and recoveries on that
collateral and other risks associated with that collateral. The leveraged nature
of equity interest is likely to magnify these impacts. Equity interests
typically do not have a fixed coupon and payments on equity interests will be
based on the income received from the underlying collateral and the payments
made to the senior tranches, both of which may be based on floating rates. While
the payments on equity interest will be variable, equity interests may not offer
the same level of protection against changes in interest rates as other floating
rate instruments. Equity interests are typically illiquid investments and
subject to extensive transfer restrictions, and no party is under any obligation
to make a market for equity interests. At times, there may be no market for
equity interests, and a Fund may not be able to sell or otherwise transfer
equity interests at their fair value, or at all, in the event that it determines
to sell them.
•Uncertain
Tax Treatment.
A Fund may invest a portion of its net assets in below investment grade
instruments. Investments in these types of instruments and certain other
instruments may present special tax issues for the Fund. U.S. federal income tax
rules are not entirely clear about issues such as when the Fund may cease
accruing interest, OID or market discount, when and to what extent deductions
may be taken for bad debts or worthless instruments, how payments received on
obligations in default should be allocated between principal and income and
whether exchanges of debt obligations in a bankruptcy or workout context are
taxable. Although a Fund will seek to address these and other issues to the
extent necessary to seek to ensure that it distributes sufficient income that it
does not become subject to U.S. federal income or excise tax, no assurances can
be given that the Fund will not be adversely affected as a result of such
issues.
•Unrated
Securities Risks.
The Fund may purchase unrated securities which are not rated by a rating agency
if the Adviser determines that the security is of comparable quality to a rated
security that the Fund may purchase. Unrated securities may be less liquid than
comparable rated securities and involve the risk that the Adviser may not
accurately evaluate the security’s comparative credit rating. Analysis of
creditworthiness of issuers of high yield securities may be more complex than
for issuers of higher-quality debt securities. To the extent that the Fund
purchases unrated securities, the Fund’s success in achieving its investment
objective may depend more heavily on the Adviser’s creditworthiness analysis
than if the Fund invested exclusively in rated securities.
•U.S.
Government Securities Risks.
Some obligations issued or guaranteed by U.S. government agencies,
instrumentalities or GSEs, including, for example, pass-through certificates
issued by Ginnie Mae, are supported by the full faith and credit of the U.S.
Treasury. Other obligations issued by or guaranteed by federal agencies or GSEs,
such as securities issued by Fannie Mae or Freddie Mac, are supported by the
discretionary authority of the U.S. government to purchase certain obligations
of the federal agency or GSE, while other obligations issued by or guaranteed by
federal agencies or GSEs, such as those of the Federal Home Loan Banks, are
supported by the right of the issuer to borrow from the U.S. Treasury. The
maximum potential liability of the issuers of some U.S. government securities
held by a Fund may greatly exceed their current resources, including their legal
right to support from the U.S. Treasury. It is possible that these issuers will
not have the funds to meet their payment obligations in the future.
PORTFOLIO
HOLDINGS
INFORMATION
Information
about the Funds’ daily portfolio holdings is available at
www.angeloakcapital.com. A description of the Funds’ policies and procedures
with respect to the disclosure of the Funds’ portfolio holdings is available in
the Funds’ Statement of Additional Information (“SAI”).
MANAGEMENT
OF
THE
FUNDS
Adviser.
Angel Oak Capital Advisors, LLC (“the Adviser”), 3344 Peachtree Road NE, Suite
1725, Atlanta, Georgia 30326, serves as investment adviser to the Funds. The
Adviser has overall supervisory management responsibility for the general
management and investment of each Fund’s portfolio. The Adviser was formed in
2009 and provides advisory services to registered investment companies,
unregistered funds, institutions, and other investors. As of March 31, 2023, the
Adviser had assets under management of approximately $12.18 billion. The Adviser
is 93.3% owned by Angel Oak Asset Management Holdings, LLC.
The
Income ETF is required to pay the Adviser a fee equal to 0.99% of the Fund’s
average daily net assets. The UltraShort Income ETF is required to pay the
Adviser a fee equal to 0.55% of the Fund’s average daily net assets. Under the
advisory agreement, the Adviser is responsible for substantially all the
expenses of the Funds (including expenses of the Trust relating to the Funds),
except for the advisory fees, payments under a Fund’s 12b-1 plan (if any),
interest expenses, dividend and interest expenses related to short
sales,
taxes, acquired fund fees and expenses (other than fees for funds advised by the
Adviser), and litigation and potential litigation and other extraordinary
expenses not incurred in the ordinary course of a Fund’s business. A discussion
of the factors that the Board of Trustees considered in approving the Funds’
advisory agreement is available in the Funds’ annual
report
to shareholders for the fiscal period ended January 31, 2023.
The
Adviser has contractually agreed to waive its fees and/or reimburse certain
expenses (exclusive of interest expenses, dividend and interest expenses related
to short sales, taxes, acquired fund fees and expenses (other than fees for
funds advised by the Adviser which are waived), brokers’ commissions and any
other transaction related expenses and fees arising out of transactions effected
on behalf of the Fund, and litigation and potential litigation and other
extraordinary expenses not incurred in the ordinary course of the Fund’s
business) to limit the Total Annual Fund Operating Expenses after Fee
Waiver/Expense Reimbursement to 0.79% of the Income ETF’s average daily net
assets and 0.29% of the UltraShort Income ETF’s average daily net assets (the
“Expense Limits”) through May 31, 2024. The Expense Limits exclude certain
expenses (e.g., interest on borrowings), and consequently, each Fund’s Total
Annual Fund Operating Expenses after Fee Waiver/Expense Reimbursement may be
higher than such Fund’s Expense Limit. The contractual waivers and expense
reimbursements may be changed or eliminated at any time by the Board of
Trustees, on behalf of a Fund, upon 60 days’ written notice to the Adviser. The
contractual waivers and expense reimbursements may not be terminated by the
Adviser without the consent of the Board of Trustees. The Adviser may recoup
from a Fund any waived amount or reimbursed expenses with respect to the Fund
pursuant to this agreement if such recoupment does not cause the Fund to exceed
the current Expense Limit or the Expense Limit in place at the time of the
waiver or reimbursement (whichever is lower) and the recoupment is made within
three years after the end of the month in which the Adviser incurred the
expense.
In
addition, the Adviser has contractually agreed through at least May 31,
2024 to waive the amount of the Fund’s management fee to the extent necessary to
offset the proportionate share of the management fees incurred by the Fund
through its investment in an underlying fund for which the Adviser also serves
as investment adviser. This arrangement may only be changed or eliminated by the
Board of Trustees upon 60 days’ written notice to the Adviser.
Management
of any Subadviser to a Fund. The
Funds, the Trust and the Adviser have obtained an exemptive order with respect
to the Funds that permits the Funds to operate in a “manager of managers”
structure whereby the Adviser, subject to certain conditions, can hire new
subadvisers for the Funds, and materially amend the terms of subadvisory
agreements with subadvisers, each subject to Board approval but without
obtaining prior shareholder approval. Consequently, under the exemptive order,
the Adviser has the ultimate responsibility (subject to oversight by the Board)
to oversee the subadvisers and recommend their hiring, termination, and
replacement. Within 90 days of retaining a new subadviser, shareholders of the
Fund(s) will receive notification of the change. The manager of managers
structure enables the Funds to operate with greater efficiency and without
incurring the expense and delays associated with obtaining shareholder approval
of subadvisory agreements. The structure does not permit investment advisory
fees paid by the Funds to be increased or change the Adviser’s obligations under
its investment advisory agreement with the Trust. Furthermore, any subadvisory
agreements with affiliates of the Funds or the Adviser will require shareholder
approval.
PORTFOLIO
MANAGERS
The
Adviser’s investment team includes:
Sam
Dunlap is Chief Investment Officer, Public Strategies of the Adviser and a
Portfolio Manager of each Fund. Mr. Dunlap is also responsible for managing some
of the separately managed accounts for the Adviser’s clients. Mr. Dunlap began
his capital markets career in 2002 and has investment experience across multiple
sectors of fixed income markets. Prior to joining the Adviser in 2009, Mr.
Dunlap spent six years marketing and structuring interest rate derivatives with
SunTrust Robinson Humphrey where he focused on both interest rate hedging
products and interest rate linked structured notes. Mr. Dunlap’s previous
experience included two years at Wachovia in Charlotte, North Carolina
supporting the agency mortgage pass-through trading desk. Mr. Dunlap received a
B.A. in Economics from the University of Georgia.
Clayton
Triick, CFA®, is
a Senior Portfolio Manager of the Adviser and a Portfolio Manager of each
Fund. Mr. Triick is a portfolio manager within the asset-backed securities
markets within the structured products group and focuses on cross asset
allocation and interest rate risk management of Angel Oak funds, the short
duration strategies, and institutional separately managed accounts.
Mr. Triick has been in the investment management industry since 2008 and
has experience across multiple sectors of fixed income. Prior to joining Angel
Oak in 2011, Mr. Triick worked for YieldQuest Advisors, where he was a
member of the investment committee focusing on interest rate risk, currency
risk, and commodity of the portfolios alongside directly managing the closed-end
fund allocations within portfolios and individual accounts. Mr. Triick holds a
B.B.A. in Finance from the Farmer School of Business at Miami University in
Oxford, Ohio and holds the Chartered Financial Analyst (CFA®)
designation.
Colin
McBurnette is a Senior Portfolio Manager of the Adviser and Portfolio Manager of
each Fund. Mr. McBurnette focuses on security and portfolio analytics. Prior to
joining the Adviser in 2012, Mr. McBurnette worked for Prodigus Capital
Management, where he served on the investment committee and ran the analytics
group. He was responsible for acquisition and management of their distressed
debt portfolio, as well as the development of their proprietary financial
technology platform. Previously, Mr. McBurnette worked in the Real Estate
Capital Markets group for Wachovia Bank and Wells Fargo where he focused on risk
management
for their commercial real estate REPO lines. Mr. McBurnette holds a B.B.A. in
Finance and in Real Estate from the University of Georgia.
Berkin
Kologlu is a Senior Portfolio Manager of the Adviser and Portfolio Manager of
each Fund. Mr. Kologlu has over 20 years’ experience in fixed income
products and focuses on building and managing strategies within the
Collateralized Loan Obligation (CLO) market. He spent the previous six years as
an Executive Director at UBS, covering structured products and client solutions.
Prior to UBS, Mr. Kologlu worked at Bank of America, where he focused on
the structuring and marketing of CLOs and synthetic CDOs backed by corporate
credit. Before Bank of America, Mr. Kologlu worked in Turkey as a
commercial banker, where he was responsible for lending to large cap
corporations. He received his MBA from Duke University’s Fuqua School of
Business and his B.S. in Civil Engineering from Bogazici University in Istanbul,
Turkey.
Kin
Lee is a Senior Portfolio Manager of the Adviser and Portfolio Manager of each
Fund. Mr. Lee focuses on building and managing strategies within the Commercial
Mortgage-Backed Securities (CMBS) market. Mr. Lee began his career in 1993 and
most recently served as Executive Director at Nomura Securities International
from 2012 until he joined the Adviser in 2014. He also held the previous role of
Head of CMBS Trading for both Mizuho Securities and RBS Greenwich Capital. Mr.
Lee also worked in CMBS trading with Credit Suisse and Donaldson, Lufkin, &
Jenrette. Mr. Lee holds a B.S. in Industrial Management and Economics from
Carnegie Mellon University.
Matthew
R. Kennedy, CFA®,
is Head of Corporate Credit and Senior Portfolio Manager of the Adviser and
Portfolio Manager of each Fund. Mr. Kennedy has over 20 years of capital
markets and asset management experience. Prior to joining the Adviser in 2016,
Mr. Kennedy spent seven years as a portfolio manager with Rainier
Investment Management, LLC, where he served as Director of Fixed Income
Management and was responsible for managing the Predecessor High Yield Fund
among other clients. Mr. Kennedy began his investment career in 1995 at GE
Financial Assurance, where he served as a Senior Analyst and made investment
recommendations for investment grade, high yield, and private placement
portfolios. From 1991 through 1994, he was a CPA and Auditor at Deloitte &
Touche. Mr. Kennedy is a member of the CFA Institute and the Seattle
Society of Financial Analysts. He holds the Chartered Financial Analyst
designation. Mr. Kennedy received his Bachelor of Arts degree in Business
Administration, with specializations in Finance and Accounting, from Washington
State University.
Nichole
Hammond, CFA®,
is a Senior Portfolio Manager of the Adviser and Portfolio Manager of each Fund.
Ms. Hammond has over 20 years’ experience in the corporate bond market
across multiple industrial and financial subsectors. Prior to joining the
Adviser in 2017, Ms. Hammond spent 15 years at Wells Capital Management. Ms.
Hammond was most recently a Senior Analyst for Wells Capital Management’s
Montgomery Core Fixed Income team, responsible for research and investment
strategy in the corporate bond portfolio with a focus on global financials. Ms.
Hammond holds a B.A. in Business Administration, specializing in Finance, from
the University of Washington. She also holds the Chartered Financial Analyst
(CFA®)
designation and is a member of the CFA®
Institute.
Johannes
Palsson is a Senior Portfolio Manager of the Adviser and Portfolio Manager of
each Fund. Mr. Palsson’s primary focus is on investment research and
management of community and regional bank debt across the Adviser’s investment
strategies. Prior to joining Angel Oak in 2011, Mr. Palsson served as Chief
Financial Officer for The Brand Banking Company, where he managed the overall
finance function. He began his career at SunTrust Robinson Humphrey in 1996,
where the scope of his responsibilities included interest rate risk modeling and
investment strategies. Mr. Palsson holds a B.S. degree in Finance from Georgia
State University and an M.B.A. from Emory University’s Goizueta Business School.
Cheryl
Pate, CFA®, is
a Senior Portfolio Manager at the Adviser and a Portfolio Manager of each Fund.
Ms. Pate has more than 15 years’ experience in financial services and
primarily focuses on investment research in the community and regional bank debt
space. Ms. Pate joined the Adviser in 2017 from Morgan Stanley, where she
spent 10 years in equity research focusing on the financial sector.
Ms. Pate led the Consumer & Specialty Finance research team as an
Executive Director and Senior Lead Analyst. Ms. Pate’s research coverage
included the consumer finance, specialty finance, mortgage
servicing/originations, mortgage REIT, payments, fintech and banking industries.
Ms. Pate holds a B.S. in Commerce (Finance) from the University of British
Columbia and an M.B.A. from Duke University’s Fuqua School of
Business.
Ward
Bortz is a Managing Director and Portfolio Manager of the Adviser and a
Portfolio Manager of each Fund. Mr. Bortz’s portfolio management
responsibilities are focused on the firm’s ETFs and strategy design. He has been
in the financial services industry since 2006. Before joining the Adviser, Mr.
Bortz was a senior investment professional at some of the largest asset managers
in the world, including Invesco, BlackRock and Dimensional Fund Advisors. He
worked in a variety of roles including portfolio management, research, trading
and strategy across fixed income, equities, and alternatives. Mr. Bortz holds a
B.A. degree in Economics from the University of Chicago and an M.B.A. focused on
finance and asset pricing from Columbia Business School.
The
Funds’ SAI provides additional information about the portfolio managers,
including their compensation structure, other accounts managed, and ownership of
shares of the Funds.
ADDITIONAL
PAYMENTS
TO
DEALERS
In
addition to dealer concessions and payments made by the Distributor for
distribution and shareholder servicing, the Adviser or its affiliates, at their
own expense and out of their own assets, may make additional payments
(“Additional Payments”) to, or enter
into
arrangements with, financial intermediaries or other persons in consideration of
services, arrangements, significant investments in Fund shares or other
activities that the Adviser and its affiliates believe may, among other things,
benefit a Fund’s business, facilitate investment in Fund shares or otherwise
benefit the Fund’s shareholders. Additional Payments include payments to certain
selling or shareholder servicing agents for the Funds, which includes
broker-dealers. These Additional Payments are made in connection with the sale
and distribution of shares of the Funds or for services to the Funds and their
shareholders. These Additional Payments, which may be significant, are paid by
the Adviser or its affiliates, out of their own resources, which may include
profits derived from servicing the Funds. Such payments by such parties may
create an incentive for these financial institutions to recommend that you
purchase Fund shares. Payments of the type described above are sometimes
referred to as revenue sharing payments.
In
return for these Additional Payments, the Adviser expects to receive certain
marketing or servicing advantages that are not generally available to funds that
do not make such payments. Such advantages are expected to include, without
limitation, significant investments in the Fund; placement of the Funds on a
list of funds offered as investment options to the selling agent’s clients
(sometimes referred to as “Shelf Space”); access to the selling agent’s
registered representatives; and the ability to assist in training and educating
the selling agent’s registered representatives.
The
Additional Payments may create potential conflicts of interests between an
investor and a selling agent who is recommending a particular fund over other
funds. Before investing, you should consult with your financial consultant and
review carefully any disclosure by the selling agent as to what monies they
receive from fund advisers and distributors, as well as how your financial
consultant is compensated.
HOW
TO
BUY
AND
SELL
SHARES
Each
Fund issues and redeems Shares at NAV only in Creation Units. Only APs may
acquire Shares directly from a Fund, and only APs may tender their Shares for
redemption directly to a Fund, at NAV. APs must be a member or participant of a
clearing agency registered with the SEC and must execute a Participant Agreement
that has been agreed to by the Distributor (defined below), and that has been
accepted by a Fund’s transfer agent, with respect to purchases and redemptions
of Creation Units. Once created, Shares trade in the secondary market in
quantities less than a Creation Unit.
Most
investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange and can be
bought and sold throughout the trading day like other publicly traded
securities.
When
buying or selling Shares through a broker, you will incur customary brokerage
commissions and charges, and you may pay some or all of the spread between the
bid and the offer price in the secondary market on each leg of a round trip
(purchase and sale) transaction. In addition, because secondary market
transactions occur at market prices, you may pay more than NAV when you buy
Shares and receive less than NAV when you sell those Shares.
In
addition, certain affiliates of the Fund and the Adviser may purchase and resell
Shares of the Funds pursuant to this Prospectus.
Book
Entry
Shares
are held in book-entry form, which means that no stock certificates are issued.
The Depository Trust Company (“DTC”) or its nominee is the record owner of all
outstanding Shares.
Investors
owning Shares are beneficial owners as shown on the records of DTC or its
participants. DTC serves as the securities depository for all Shares. DTC’s
participants include securities brokers and dealers, banks, trust companies,
clearing corporations and other institutions that directly or indirectly
maintain a custodial relationship with DTC. As a beneficial owner of Shares, you
are not entitled to receive physical delivery of stock certificates or to have
Shares registered in your name, and you are not considered a registered owner of
Shares. Therefore, to exercise any right as an owner of Shares, you must rely
upon the procedures of DTC and its participants. These procedures are the same
as those that apply to any other securities that you hold in book entry or
“street name” through your brokerage account.
Frequent
Purchases and Redemptions of Shares
The
Funds impose no restrictions on the frequency of purchases and redemptions of
Shares. In determining not to approve a written, established policy, the Board
evaluated the risks of market timing activities by Fund shareholders. Purchases
and redemptions by APs, who are the only parties that may purchase or redeem
Shares directly with a Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Funds accommodate
frequent purchases and redemptions by APs. However, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and redemptions, the Funds employ fair value pricing and may impose transaction
fees on purchases and redemptions of Creation Units to cover the custodial and
other costs incurred by a Fund in effecting trades. In addition, the Funds and
the Adviser reserve the right to reject any purchase order at any time.
Determination
of NAV
The
price you pay for your shares is based on the applicable Fund’s NAV. Each Fund’s
NAV is calculated at the close of trading (normally 4:00 p.m. Eastern Time) on
each day the NYSE is open for business (the NYSE is closed on weekends, most
federal holidays and Good Friday). Each Fund’s NAV is calculated by dividing the
value of the Fund’s total assets (including interest and dividends accrued but
not yet received) minus liabilities (including accrued expenses) by the total
number of shares outstanding.
In
the event a Fund holds portfolio securities that trade in foreign markets or
that are primarily listed on foreign exchanges that trade on weekends or other
days when the Fund does not price its shares, the NAV of the Fund’s shares may
change on days when shareholders will not be able to purchase or sell the Fund’s
shares.
In
calculating a Fund’s NAV, portfolio investments for which market quotations are
readily available are valued at market value, which is ordinarily determined
based on official closing prices or the last reported sale prices of an
instrument. Where no such closing price or sale price is reported, market value
is determined based on quotes obtained from market makers or prices supplied by
one or more third-party pricing source (“Pricing Services”), which may include
evaluated prices. The types of investments in which the Funds typically invest
are generally valued on the basis of evaluated prices provided by Pricing
Services. Such prices may be based on a number of factors, including, among
other things, information obtained from market makers and estimates based on
recent market prices for investments with similar characteristics. If market or
evaluated prices are not readily available (including when they are not
reliable), or if an event occurs after the close of the trading market but
before the calculation of the applicable NAV that materially affects the values,
assets may be valued at a fair value, pursuant to guidelines established by the
Adviser as the Funds’ valuation designee. For example, the Funds may be
obligated to fair value a foreign security because many foreign markets operate
at times that do not coincide with those of the major U.S. markets. Events that
could affect the values of foreign portfolio holdings may occur between the
close of the foreign market and the time of determining the NAV, and would not
otherwise be reflected in the NAV. When pricing securities using the fair value
guidelines, the Adviser (with the assistance of the Funds’ Pricing Services and
other service providers) seek to assign the value that represents the amount
that a Fund might reasonably expect to receive upon a current sale of the
securities. The fair value guidelines include the consideration of pricing
information from one or more Pricing Service, which information is monitored by
the Adviser daily. The Board of Trustees oversees the Adviser’s implementation
of the fair value guidelines.
Notwithstanding
the foregoing, given the subjectivity inherent in fair valuation and the fact
that events could occur after NAV calculation, the actual market prices for a
security may differ from the fair value of that security as determined by the
Funds at the time of NAV calculation. Thus, discrepancies between fair values
and actual market prices may occur on a regular and recurring basis. These
discrepancies do not necessarily indicate that the fair value methodology is
inappropriate. The Adviser will adjust the fair values assigned to securities in
the Funds’ portfolios, to the extent necessary, as soon as market prices become
available. The Adviser (and the Funds’ service providers) continually monitor
and evaluate the appropriateness of their fair value methodologies through
systematic comparisons of fair values to the actual next available market prices
of securities contained in the Funds’ portfolios. To the extent a Fund invests
in other mutual funds, the Fund’s NAV is calculated based, in part, upon the
NAVs of such mutual funds; the prospectuses for those mutual funds in which the
Funds will invest describe the circumstances under which those mutual funds will
use fair value pricing, which, in turn, affects their NAVs.
Because
the Funds rely on various sources to calculate their NAVs, the Funds are subject
to certain operational risks associated with reliance on the Pricing Services
and other third-party service providers and data sources. A Fund’s NAV
calculation may be impacted by operational risks arising from factors such as
failures in systems and technology. Such failures may result in delays in the
calculation of a Fund’s NAV and/or the inability to calculate NAV over extended
time periods. The Funds may be unable to recover any losses associated with such
failures.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Funds. Householding is a
method of delivery, based on the preference of the individual investor, in which
a single copy of certain shareholder documents can be delivered to investors who
share the same address, even if their accounts are registered under different
names. Householding for the Funds is available through certain broker-dealers.
If you are interested in enrolling in householding and receiving a single copy
of prospectuses and other shareholder documents, please contact your
broker-dealer. If you are currently enrolled in householding and wish to change
your householding status, please contact your broker-dealer.
DIVIDENDS,
DISTRIBUTIONS,
AND
TAXES
Dividends
and Distributions
Each
Fund typically distributes to its shareholders net investment income, if any, on
a monthly basis and distributes any net realized capital gains to its
shareholders at least annually. Each Fund will declare and pay net investment
income and capital gain distributions in cash, if any. Distributions in cash may
be reinvested automatically in additional whole Shares only if the broker
through whom you purchased Shares makes such option available. Your broker is
responsible for distributing the income and capital gain distributions to
you.
Taxes
The
following discussion is a summary of some important U.S. federal income tax
considerations generally applicable to investments in the Funds. Your investment
in a Fund may have other tax implications. Please consult your tax advisor about
the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws.
Each
Fund has elected or intends to elect and intends to qualify each year for
treatment as a RIC. If a Fund meets certain minimum distribution requirements, a
RIC is not subject to tax at the fund level on income and gains from investments
that are timely distributed to shareholders. However, a Fund’s failure to
qualify as a RIC or to meet minimum distribution requirements would result (if
certain relief provisions were not available) in fund-level taxation and,
consequently, a reduction in income available for distribution to shareholders.
Unless
your investment in Shares is made through a tax-exempt entity or tax-advantaged
account, such as an IRA plan, you need to be aware of the possible tax
consequences when a Fund makes distributions, when you sell your Shares listed
on the Exchange, and when you purchase or redeem Creation Units (APs only).
Taxes
on Distributions
Each
Fund intends to distribute, at least annually, substantially all of its net
investment income and net capital gains. For federal income tax purposes,
distributions of investment income are generally taxable as ordinary income or
qualified dividend income. Taxes on distributions of capital gains (if any) are
determined by how long a Fund owned the investments that generated them, rather
than how long a shareholder has owned his or her Shares. Sales of assets held by
a Fund for more than one year generally result in long-term capital gains and
losses, and sales of assets held by a Fund for one year or less generally result
in short-term capital gains and losses. Distributions of a Fund’s net capital
gain (the excess of net long-term capital gains over net short-term capital
losses) that are reported by such Fund as capital gain dividends (“Capital Gain
Dividends”) will be taxable as long-term capital gains, which for non-corporate
shareholders are subject to tax at reduced rates of up to 20% (lower rates apply
to individuals in lower tax brackets). Distributions of short-term capital gain
will generally be taxable as ordinary income. Dividends and distributions are
generally taxable to you whether you receive them in cash or reinvest them in
additional Shares.
Distributions
reported by a Fund as “qualified dividend income” are generally taxed to
non-corporate shareholders at rates applicable to long-term capital gains,
provided holding period and other requirements are met. “Qualified dividend
income” generally is income derived from dividends paid by U.S. corporations or
certain foreign corporations that are either incorporated in a U.S. possession
or eligible for tax benefits under certain U.S. income tax treaties. In
addition, dividends that a Fund received in respect of stock of certain foreign
corporations may be qualified dividend income if that stock is readily tradable
on an established U.S. securities market. Dividends received by a Fund from an
ETF or underlying fund taxable as a RIC may be treated as qualified dividend
income generally only to the extent so reported by such ETF or underlying fund.
Corporate shareholders may be entitled to a dividends received deduction for the
portion of dividends they receive from a Fund that are attributable to dividends
received by the Fund from U.S. corporations, subject to certain limitations.
Certain of a Fund’s investment strategies may limit its ability to make
distributions eligible for the reduced rates applicable to qualified dividend
income.
Dividends
received by a Fund from an ETF or underlying fund taxable as a RIC may be
treated as qualified dividend income generally only to the extent so reported by
such ETF or underlying fund.
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from a Fund.
U.S.
individuals with income exceeding specified thresholds are subject to a 3.8% tax
on all or a portion of their “net investment income,” which includes interest,
dividends, and certain capital gains (generally including capital gains
distributions and capital gains realized on the sale of Shares). This 3.8% tax
also applies to all or a portion of the undistributed net investment income of
certain shareholders that are estates and trusts.
In
general, your distributions are subject to federal income tax for the year in
which they are paid. Certain distributions paid in January, however, may be
treated as paid on December 31 of the prior year. Distributions are generally
taxable even if they are paid from income or gains earned by a Fund before your
investment (and thus were included in the Shares’ NAV when you purchased your
Shares).
You
may wish to avoid investing in a Fund shortly before a dividend or other
distribution, because such a distribution will generally be taxable even though
it may economically represent a return of a portion of your investment.
If
a Fund’s distributions exceed its earnings and profits, all or a portion of the
distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in Shares and result in a
higher capital gain or lower capital loss when the Shares are sold. After a
shareholder’s basis in Shares has been reduced to zero, distributions in excess
of earnings and profits in respect of those Shares will be treated as gain from
the sale of the Shares.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
a Fund will generally be subject to a U.S. withholding tax at the rate of 30%,
unless a lower treaty rate applies. Gains from the sale or other disposition of
Shares by non-U.S. shareholders generally are not subject to U.S. taxation,
unless you are a nonresident alien individual who is physically present in the
U.S. for 183 days or more per year. A Fund may, under certain circumstances,
report all or a portion of a dividend as an “interest-related dividend” or a
“short-term capital gain dividend,” which would generally be exempt from this
30% U.S. withholding tax, provided certain other requirements are met. Different
tax consequences may result if you are a foreign shareholder engaged in a trade
or business within the United States or if a tax treaty applies.
Under
legislation generally known as “FATCA” (the Foreign Account Tax Compliance Act),
a Fund is required to withhold 30% of certain ordinary dividends it pays to
shareholders that are foreign entities and that fail to meet prescribed
information reporting or certification requirements.
Each
Fund (or a financial intermediary, such as a broker, through which a shareholder
owns Shares) generally is required to withhold and remit to the U.S. Treasury a
percentage of the taxable distributions and sale or redemption proceeds paid to
any shareholder who fails to properly furnish a correct taxpayer identification
number, who has underreported dividend or interest income, or who fails to
certify that the shareholder is not subject to such withholding.
Taxes
When Shares are Sold on the Exchange
Any
capital gain or loss realized upon a sale of Shares generally is treated as a
long-term capital gain or loss if Shares have been held for more than one year
and as a short-term capital gain or loss if Shares have been held for one year
or less. However, any capital loss on a sale of Shares held for six months or
less is treated as long-term capital loss to the extent of Capital Gain
Dividends paid with respect to such Shares. Any loss realized on a sale will be
disallowed to the extent Shares of a Fund are acquired, including through
reinvestment of dividends, within a 61-day period beginning 30 days before and
ending 30 days after the disposition of Shares. The ability to deduct capital
losses may be limited.
The
cost basis of Shares of a Fund acquired by purchase will generally be based on
the amount paid for the Shares and then may be subsequently adjusted for other
applicable transactions as required by the Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market its
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether wash sale rules apply and when a loss might be deductible.
Any
gain or loss realized upon a creation or redemption of Creation Units will be
treated as capital or ordinary gain or loss, depending on the circumstances. Any
capital gain or loss realized upon redemption of Creation Units is generally
treated as long-term capital gain or loss if Shares have been held for more than
one year and as a short-term capital gain or loss if Shares have been held for
one year or less.
A
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. Such Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause such Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, such Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Each
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. Such Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause such Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, such Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Foreign
Investments by the Funds
To
the extent a Fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest such Fund received from
sources in foreign countries.
Each
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. Such Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause such Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in-kind. As a result, such Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in each Fund. It is not a substitute for
personal tax advice. You also may be subject to state and local tax on Fund
distributions and sales of Shares. Consult your personal tax advisor about the
potential tax consequences of an investment in Shares
under
all applicable tax laws. For more information, please see the section entitled
“Federal Income Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Quasar Distributors, LLC, is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Funds on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Funds or the securities that are purchased or
sold by the Funds. The Distributor’s principal address is 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized
to pay an amount up to 0.25% of its average daily net assets each year for
certain distribution-related activities and shareholder services.
No
Rule 12b-1 fees are currently paid by the Funds, and there are no plans to
impose these fees. However, in the event Rule 12b-1 fees are charged in the
future, because the fees are paid out of Fund assets, over time these fees will
increase the cost of your investment and may cost you more than certain other
types of sales charges.
PREMIUM/DISCOUNT
INFORMATION
Information
regarding how often Shares traded on the Exchange at a price above (i.e., at a
premium) or below (i.e., at a discount) the NAV of each Fund is available on the
Funds’ website at www.angeloakcapital.com.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange is not
responsible for, nor has it participated in the determination of, the timing,
prices, or quantities of Shares to be issued, nor in the determination or
calculation of the equation by which Shares are redeemable. The Exchange has no
obligation or liability to owners of Shares in connection with the
administration, marketing, or trading of Shares.
Without
limiting any of the foregoing, in no event shall the Exchange have any liability
for any lost profits or indirect, punitive, special, or consequential damages
even if notified of the possibility thereof.
The
Adviser and the Funds make no representation or warranty, express or implied, to
the owners of Shares or any member of the public regarding the advisability of
investing in securities generally or in the Funds particularly.
FINANCIAL
HIGHLIGHTS
The
financial highlights tables are intended to help you understand each Fund’s
financial performance for each Fund’s most recent fiscal period. Certain
information reflects financial results for a single Share. The total returns in
the tables represent the rate that an investor would have earned or lost on an
investment in a Fund (assuming reinvestment of all dividends and distributions).
This information has been audited by Cohen & Company Ltd., the Funds’
independent registered public accounting firm, whose report, along with the
Funds’ financial statements, is included in the Funds’ annual report, which is
available upon request.
Angel
Oak Income ETF
Financial
Highlights
(For
a share outstanding during each period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| For the
Period Ended
January 31,
2023 (a) |
|
| Selected
Per Share Data: |
|
|
|
|
|
|
| |
| Net
asset value, beginning of period |
|
|
|
|
|
| $ |
20.00 |
| |
| Income
from investment operations: |
|
|
|
|
|
|
| |
| Net
investment income (loss) |
|
|
|
|
|
| 0.26 |
| (b) |
| Net
realized and unrealized gain (loss) on investments (c) |
|
|
|
|
|
| 0.23 |
| |
| Total
from investment operations |
|
|
|
|
|
| 0.49 |
| |
| Less
distributions to shareholders: |
|
|
|
|
|
|
| |
| From
net investment income |
|
|
|
|
|
| (0.10) |
| |
| Total
distributions |
|
|
|
|
|
| (0.10) |
| |
| Net
asset value, end of period |
|
|
|
|
|
| $ |
20.39 |
| |
|
|
|
|
|
|
|
|
| |
| Total
return on net asset value (d)(e) |
|
|
|
|
|
| 2.41 |
% |
|
| Total
return on market value (d)(f) |
|
|
|
|
|
| 2.49 |
% |
|
|
|
|
|
|
|
|
|
| |
| Ratios
and Supplemental Data: |
|
|
|
|
|
|
| |
| Net
assets, end of period (000’s omitted) |
|
|
|
|
|
| $ |
33,636 |
| |
| Ratio
of expenses to average net asset before waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 0.99 |
% |
|
| Ratio
of expenses to average net assets after waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 0.79 |
% |
|
| Ratio
of net investment income (loss) to average net assets before waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 5.44 |
% |
|
| Ratio
of net investment income (loss) to average net assets after waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 5.64 |
% |
|
| Portfolio
turnover rate (d) |
|
|
|
|
|
| 59.43 |
% |
|
|
|
|
|
|
|
|
|
| |
|
(a) Fund
commenced operations on November 7, 2022. |
|
|
|
|
|
|
| |
| (b) Net
investment income/(loss) per share has been calculated based on average
shares outstanding during the period. |
| (c) Net
realized and unrealized gain (loss) per share may include balancing
amounts necessary to reconcile the change in net asset value per share for
the period, and may not reconcile with the aggregate gain/(loss) in the
Statements of Operations due to share transactions for the
period. |
| (d) Not
annualized for periods less than one year. |
|
|
|
|
|
|
| |
| (e) Total
return on net asset value is computed based upon the net asset value of
common stock on the first business day and the closing net asset value on
the last business day of the period. Dividends and distributions are
assumed to be reinvested. |
| (f) Total
return on market value is computed based upon the New York Stock Exchange
market price of the Fund’s shares and excludes the effect of brokerage
commissions. Dividends and distributions are assumed to be
reinvested. |
| (g) Annualized
for periods less than one year. |
|
|
|
|
|
|
| |
Angel
Oak UltraShort Income ETF
Financial
Highlights
(For
a share outstanding during each period)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
| For the
Period Ended
January 31,
2023 (a) |
|
| Selected
Per Share Data: |
|
|
|
|
|
|
| |
| Net
asset value, beginning of period |
|
|
|
|
|
| $ |
50.00 |
| |
| Income
from investment operations: |
|
|
|
|
|
|
| |
| Net
investment income (loss) |
|
|
|
|
|
| 0.69 |
| (b) |
| Net
realized and unrealized gain (loss) on investments (c) |
|
|
|
|
|
| 0.27 |
| |
| Total
from investment operations |
|
|
|
|
|
| 0.96 |
| |
| Less
distributions to shareholders: |
|
|
|
|
|
|
| |
| From
net investment income |
|
|
|
|
|
| (0.38) |
| |
| Total
distributions |
|
|
|
|
|
| (0.38) |
| |
| Net
asset value, end of period |
|
|
|
|
|
| $ |
50.58 |
| |
|
|
|
|
|
|
|
|
| |
| Total
return on net asset value (d)(e) |
|
|
|
|
|
| 1.92 |
% |
|
| Total
return on market value (d)(f) |
|
|
|
|
|
| 1.90 |
% |
|
|
|
|
|
|
|
|
|
| |
| Ratios
and Supplemental Data: |
|
|
|
|
|
|
| |
| Net
assets, end of period (000’s omitted) |
|
|
|
|
|
| $ |
46,534 |
| |
| Ratio
of expenses to average net asset before waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 0.55 |
% |
|
| Ratio
of expenses to average net assets after waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 0.29 |
% |
|
| Ratio
of net investment income (loss) to average net assets before waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 4.80 |
% |
|
| Ratio
of net investment income (loss) to average net assets after waiver and
reimbursement/recoupment (g) |
|
|
|
|
|
| 5.06 |
% |
|
| Portfolio
turnover rate (d) |
|
|
|
|
|
| 22.80 |
% |
|
|
|
|
|
|
|
|
|
| |
|
(a) Fund
commenced operations on October 24, 2022. |
|
|
|
|
|
|
| |
| (b) Net
investment income/(loss) per share has been calculated based on average
shares outstanding during the period. |
| (c) Net
realized and unrealized gain (loss) per share may include balancing
amounts necessary to reconcile the change in net asset value per share for
the period, and may not reconcile with the aggregate gain/(loss) in the
Statements of Operations due to share transactions for the
period. |
| (d) Not
annualized for periods less than one year. |
|
|
|
|
|
|
| |
| (e) Total
return on net asset value is computed based upon the net asset value of
common stock on the first business day and the closing net asset value on
the last business day of the period. Dividends and distributions are
assumed to be reinvested. |
| (f) Total
return on market value is computed based upon the New York Stock Exchange
market price of the Fund’s shares and excludes the effect of brokerage
commissions. Dividends and distributions are assumed to be
reinvested. |
| (g) Annualized
for periods less than one year. |
|
|
|
|
|
|
| |
FOR
MORE
INFORMATION
You
can find additional information about the Funds in the following
documents:
Annual
and Semi-Annual Reports: While
this Prospectus describes the Funds’ potential investments, the Annual and
Semi-Annual Reports (when available) detail the Funds’ actual investments as of
their report dates. In the annual
report,
you will find a discussion by Fund management of recent market conditions,
economic trends, and investment strategies that significantly affected each
Fund’s performance.
Statement
of Additional Information (SAI): The
SAI supplements the Prospectus and contains detailed information about the Funds
and their investment restrictions, risks, policies, and operations, including
the Funds’ policies and procedures relating to the disclosure of portfolio
holdings by the Funds’ affiliates. A current SAI for the Funds is on file with
SEC and is incorporated into this Prospectus by reference, which means it is
considered part of this Prospectus.
How
to Obtain Copies of Other Fund Documents
You
can obtain free copies of the current SAI and the Funds’ Annual and Semi-Annual
Reports (when available) and request other information about the Funds or make
shareholder inquiries, in any of the following ways:
You
can get free copies of the current Annual and Semi-Annual Reports (when
available), as well as the SAI, by contacting the Funds at (800) 617-0004
or obtain a copy online at www.angeloakcapital.com. You may also request other
information about the Funds and make shareholder inquiries. The requested
documents will be sent within three business days of receipt of the
request.
You
may also obtain reports and other information about the Funds on the EDGAR
Database on the SEC’s Internet site at http://www.sec.gov,
and copies of this information may be obtained, after paying a duplicating fee,
by electronic request at the following e-mail address: [email protected].
Investment
Company Act No. 811-22980
