ck0001683471-20220430
Merk Stagflation ETF
(STGF)
Listed
on NYSE
Arca, Inc.
PROSPECTUS
May 2,
2022
These
securities have not been approved or disapproved by the U.S. Securities and
Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission
(“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Merk
Stagflation ETF
TABLE
OF CONTENTS
FUND
SUMMARY
Investment Objective
The
Merk Stagflation ETF (the “Fund”) seeks to track the performance, before fees
and expenses, of the Solactive StagflationTM Index (the “Index”).
Fees and Expenses of the
Fund
This
table describes the fees and expenses that you may pay if you buy, hold, and
sell shares of the Fund (“Shares”). 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.
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Shareholder
Fees
(fees
paid directly from your investment) |
None |
Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fee1 |
0.40% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses2 |
0.00% |
Acquired
Fund Fees and Expenses2,3 |
0.05% |
Total
Annual Fund Operating Expenses |
0.45% |
1
Merk Investments LLC, the
Fund’s investment adviser (the “Adviser”), has contractually agreed to waive the
management fee it receives from the Fund in an amount equal to the management
fee paid to the Adviser by the Subsidiary (defined below). The agreement may be
terminated by the Adviser at the conclusion of any one-year term or by the
Fund’s Board of Trustees at any time, and when the Adviser ceases to serve as
such. The Adviser also has contractually agreed, through May 3,
2023, to waive 0.10% of the fee received as Sponsor to the
VanEck Merk Gold Trust in connection with the Subsidiary’s investment in the
VanEck Merk Gold Trust.
2
Estimated for the current fiscal
year.
3
Acquired Fund Fees and
Expenses (AFFE) are the indirect costs of investing in other investment
companies.
Example
This Example is
intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds. The Example assumes that you invest $10,000 in the
Fund for the time periods indicated and then redeem 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. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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 the Total Annual Fund Operating Expenses
or in the Example, affect the Fund’s performance. Because the Fund is newly
organized, portfolio turnover information is not yet
available.
Principal Investment
Strategies
The
Fund uses a “passive management” (or indexing) approach to seek to track the
performance, before fees and expenses, of the Index which, in turn, seeks to
track the performance of components that are expected to benefit, either
directly or indirectly, from persistent inflation, including in an environment
of weak economic growth (stagflation). The Index is owned and maintained by
Solactive AG.
Solactive
Stagflation Index
The
Index is a rules-based index that allocates its exposure to the four funds
listed below, each of which represents a stagflation-sensitive asset class.
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Asset
Class |
Asset
Allocation Minimum |
Asset
Allocation Maximum |
Index
Component |
U.S.
Treasury Protected Securities |
55% |
85% |
Schwab
U.S. TIPS ETF |
Real
Estate |
5% |
15% |
Vanguard
Real Estate ETF |
Gold |
5% |
15% |
VanEck
Merk Gold Trust |
Oil |
5% |
15% |
Invesco
DB Oil Fund |
Relative
weights within the Index change according to a trend-following methodology,
which follows a systematic process that is designed to identify price trends in
gold, oil and real estate. Weights in the Index are increased or decreased based
on whether the respective price trends are upward or downward trending. A strong
positive trend in any of the three asset classes will lead to a respective Index
weight close to but not greater than 15% of the total asset allocation. A strong
negative trend in any of the three asset classes will lead to a respective Index
weight close to but not less than 5% of the asset allocation. The remainder of
the asset allocation in the Index is balanced with an allocation to U.S.
Treasury Protected Securities (“TIPS”), which are securities issued by the U.S.
Treasury that are designed to provide inflation protection to investors. The
Index is rebalanced whenever a change in price trend in gold, oil or real estate
is detected or any of these asset classes has exceeded its minimum or maximum
allocation, as described above.
The
components of the Index include both exchange-traded investment companies (each,
an “ETF” and collectively, “ETFs”) registered pursuant to the Investment Company
Act of 1940 (the “1940 Act”), similar to the Fund, and exchange-traded vehicles
that are not registered investment companies and thus, not afforded all of the
investor protections of the 1940 Act (together with ETFs, “ETVs”). Certain of
the ETVs in which the Fund may invest may be commodity pools subject to
regulation by the Commodity Futures Trading Commission, such as the Invesco DB
Oil Fund.
Allocation
to an ETV allows the Index to indirectly obtain exposure to an underlying asset
class such as TIPS and real estate or commodities such as gold or oil without
investing in the individual securities that make up the ETV or taking physical
delivery of the underlying investments or commodities.
The
Fund’s Investment Strategy
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning it generally will invest in all of the components of the
Index in approximately the same proportions as in the Index. However, the Fund
may use a “representative sampling” strategy, meaning it may invest in a sample
of the components in the Index whose risk, return and other characteristics
closely resemble the risk, return and other characteristics of the Index as a
whole, when the Adviser believes it is in the best interests of the Fund
(e.g.,
when replicating the Index involves practical difficulties or substantial costs,
an Index constituent becomes temporarily illiquid, unavailable, or less liquid,
or as a result of legal restrictions or limitations that apply to the Fund but
not to the Index).
The
Fund also may invest in securities or other investments not included in the
Index, but which the Adviser believes will help the Fund track the Index. For
example, the Fund may invest in securities that are not components of the Index
to reflect various corporate actions and other changes to the Index (such as
reconstitutions, additions, and deletions).
The
Fund will invest, through the Subsidiary (as defined below), in the VanEck Merk
Gold Trust (“OUNZ”), a physical gold ETV sponsored by the Adviser. As sponsor of
OUNZ, the Adviser is entitled to a Sponsor’s Fee of 0.25% of the net asset value
of OUNZ.
The
Fund expects to gain exposure to commodities by investing in a wholly-owned
subsidiary of the Fund organized under the laws of the Cayman Islands (the
“Subsidiary”). The Adviser also serves as the investment adviser to the
Subsidiary. The Fund’s investment in the Subsidiary is intended to provide the
Fund with indirect exposure to commodities within the limits of current federal
income tax laws applicable to investment companies such as the Fund, which limit
the ability of investment companies to invest directly in commodities. The
Subsidiary has the same investment objective as the Fund, but it may invest in
commodities to a greater extent than the Fund. Except as otherwise noted, for
purposes of this Prospectus, references to the Fund’s investments include the
Fund’s indirect investments through the Subsidiary. Because the Fund intends to
elect to be treated as a regulated investment company (“RIC”) under the Internal
Revenue Code of 1986, as amended (the “Internal Revenue Code”), the size of the
Fund’s investment in the Subsidiary generally will be limited to 25% of the
Fund’s total assets, tested at the end of each fiscal quarter.
To
the extent the Index concentrates (i.e., holds more than 25% of its total assets)
in the securities of a particular industry or group of related industries, the
Fund will concentrate its investments to approximately the same extent as the
Index.
The
Fund is classified as a “non-diversified” investment company under the 1940
Act.
Principal Investment Risks
The principal risks of investing in the Fund are summarized
below. The principal risks are presented in alphabetical order to
facilitate finding particular risks and comparing them with those of other
funds. Each risk summarized below is considered a “principal risk” of investing
in the Fund, regardless of the order in which it appears. As with
any investment, there is a risk that you could lose all or a
portion of your investment in the
Fund. Some or all of these risks may adversely affect the
Fund’s net asset value (“NAV”), trading price, yield, total return and/or
ability to meet its objective. The following risks could affect the value
of your investment in the Fund:
•Cash
Transaction Risk.
The Fund expects to effect certain of its creations and redemptions for cash,
rather than in-kind securities. The Fund may be required to sell or unwind
portfolio investments to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize a capital gain that it might not
have recognized if it had made a redemption in kind. As a result, the Fund may
pay out higher annual capital gain distributions than if the in-kind redemption
process was used. The use of cash creations and redemptions may also cause the
Fund’s shares to trade in the market at wider bid-ask spreads or greater
premiums or discounts to the Fund’s NAV. Further, effecting purchases and
redemptions primarily in cash may cause the Fund to incur certain costs, such as
portfolio transaction costs. These costs can decrease the Fund’s NAV if not
offset by an authorized participant transaction fee.
•Commodities
Risk.
Exposure to investments in physical commodities subjects the Fund to greater
volatility than investments in traditional securities, such as stocks and bonds.
Investing in physical commodities, whether directly or indirectly, is
speculative and can be extremely volatile. The commodities markets may fluctuate
rapidly based on a variety of factors, including overall market movements;
economic events and policies; changes in interest rates or inflation rates;
changes in monetary and exchange control programs; war; acts of terrorism;
natural disasters; and technological developments. Variables such as disease,
drought, floods, weather, trade, embargoes, tariffs and other political events,
in particular, may have a larger impact on commodity prices than on traditional
securities. The prices of commodities can also fluctuate widely due to supply
and demand disruptions in major producing or consuming regions. Because certain
commodities may be produced in a limited number of countries and may be
controlled by a small number of producers, political, economic and
supply-related events in such countries could have a disproportionate impact on
the prices of such commodities. These factors may affect the value of the Fund
in varying ways, and different factors may cause the value and the volatility of
the Fund to move in inconsistent directions at inconsistent rates. The current
or “spot” prices of physical commodities may also affect, in a volatile and
inconsistent manner, the prices of futures contracts in respect of the relevant
commodity.
•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 (“APs”) 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.
•Equity
Market Risk. The
equity securities held in the Fund’s portfolio may experience sudden,
unpredictable drops in value or long periods of decline in value. This may occur
because of factors that affect securities markets generally or factors affecting
specific issuers, industries, sectors or companies in which the Fund invests.
Common stocks are generally exposed to greater risk than other types of
securities, such as preferred stocks and debt obligations, because common
stockholders generally have inferior rights to receive payment from issuers.
•ETF
Risks.
The Fund is an ETF, and, as a result of its structure, it is exposed 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 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.
◦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.
•ETV
Risk.
The risks of investing in an ETV generally reflect the same risks as owning the
underlying securities or other instruments to which the ETV is designed to
provide exposure. The shares of certain ETVs may trade at a premium or discount
to their intrinsic value (i.e.,
the market value may differ from the net asset value of an ETV’s shares). For
example, supply and demand for shares of an ETV or market disruptions may cause
the market price of the ETV to deviate from the value of the ETV’s investments,
which may be emphasized in less liquid markets. By investing in an ETV, the Fund
indirectly bears the proportionate share of any fees and expenses of the ETV in
addition to Fund’s direct fees and expenses. Additionally, trading in an ETV may
be halted by the exchange on which it trades.
•Gold
Investment Risk. The
Fund may be sensitive to changes in the price of gold. Competitive pressures may
have a significant effect on the financial condition of companies in such
industry. Also, such companies are highly dependent on the price of certain
precious metals. These prices may fluctuate substantially over short periods of
time, so the Fund’s Share price may be more volatile than other types of
investments. The price of gold rises and falls in response to many factors,
including: economic cycles; changes in inflation or expectations about inflation
in various countries; interest rates; currency fluctuations; metal sales by
governments, central banks, or international agencies; investment speculation;
resource availability; fluctuations in industrial and commercial supply and
demand; government regulation of the metals and materials industries; and
government prohibitions or restrictions on the private ownership of certain
precious and rare metals.
•Inflation-Indexed
Securities Risk. The
principal amount of an inflation-indexed security typically increases with
inflation and decreases with deflation, as measured by a specified index. It is
possible that, in a period of declining inflation rates, the Fund could receive
at maturity less than the initial principal amount of an inflation-indexed
security. Changes in the values of inflation-indexed securities may be difficult
to predict, and it is possible that an investment in such securities will have
an effect different from that anticipated.
•Liquidity
Risk.
Liquidity risk exists when particular investments are difficult to purchase or
sell. This can reduce the Fund's returns because the Fund may be unable to
transact at advantageous times or prices.
•Market
Risk. The
trading prices of securities and other instruments fluctuate in response to a
variety of factors. These factors include events impacting the entire market or
specific market segments, such as political, market and economic developments,
as well as events that impact specific issuers. The Fund’s NAV and market price,
like security and commodity prices generally, may fluctuate significantly in
response to these and other factors. As a result, an investor could lose money
over short or long periods of time. U.S. and international markets have
experienced significant periods of volatility in recent years due to a number of
these factors, including the impact of the COVID-19 pandemic and related public
health issues, growth concerns in the U.S. and overseas, uncertainties regarding
interest rates, trade tensions and the threat of tariffs imposed by the U.S. and
other countries. These developments as well as other events could result in
further market volatility and negatively affect financial asset prices, the
liquidity of certain securities and the normal operations of securities
exchanges and other markets. It is unknown how long circumstances related to the
pandemic will persist, whether they will reoccur in the future, whether efforts
to support the economy and financial markets will be successful, and what
additional implications may follow from the pandemic. The impact of these events
and other epidemics or pandemics in the future could adversely affect Fund
performance.
•New
Fund Risk. The
Fund is a recently organized investment company with no operating history. As a
result, prospective investors have no track record or history on which to base
their investment decision.
•Non-Diversification
Risk.
Because the Fund is “non-diversified,” it may
invest a greater percentage of its assets in the securities of a single issuer
or a lesser number of issuers than if it was a diversified fund. As a result,
the Fund may be more exposed to the risks associated with and developments
affecting an individual issuer or a lesser number of issuers than a fund that
invests more widely. This may increase the Fund’s volatility and cause the
performance of a relatively small number of issuers to have a greater impact on
the Fund’s performance.
•Oil
Investment Risk.
Several factors may affect the price of crude oil and, in turn, the WTI crude
oil futures contracts and other assets to which the Fund may have either
indirect or direct exposure. These factors include, but are not limited to,
significant increases or decreases in the available supply or demand of crude
oil, storage costs, technological factors related to new or improved extraction,
refining and processing equipment and/or methods, a significant change in the
attitude of speculators and investors towards crude oil, large purchases or
sales of crude oil by governments or large institutions, other political factors
such as new regulations or political discord in oil producing countries, as well
as a significant increase or decrease in crude oil hedging activity by crude oil
producers. Contemporaneous with the onset of the COVID-19 pandemic in the U.S.,
crude oil markets experienced shocks to the supply of and demand for crude oil.
This led to an oversupply of crude oil, which impacted the price of crude oil
and futures contracts on crude oil and caused historic volatility in the market
for crude oil and crude oil futures contracts. More recently, in response to
Russia’s military invasion of Ukraine in 2022, the United States banned oil and
other energy imports from Russia, and the United Kingdom made a commitment to
phase out oil imports from Russia by the end of 2022. The extent and duration of
the war in Ukraine and the longevity and severity of sanctions remain unknown,
but they could have a significant adverse impact on the price and availability
of certain commodities throughout the world, including
oil.
•Passive
Investment Risk.
The Fund is not actively managed and the Adviser would not sell shares of an
equity security due to current or projected underperformance of a security
industry or sector unless that security is removed from the Index or the selling
of shares of that security is otherwise required upon a rebalancing of the Index
as addressed in the Index methodology.
•Real
Estate Companies Risk. Investment
in real estate companies exposes the Fund to the risks of owning real estate
directly. Real estate is highly sensitive to general and local economic
conditions and developments. The U.S. real estate market may experience and has,
in the past, experienced a decline in value, with certain regions experiencing
significant losses in property values. Many real estate companies utilize
leverage (and some may be highly leveraged), which increases investment risk and
the risk normally associated with debt financing, and could potentially increase
the Fund’s volatility and losses. Exposure to such real estate may adversely
affect Fund performance.
•Subsidiary
Investment Risk. By
investing in the Subsidiary, the Fund is indirectly exposed to the risks
associated with the Subsidiary’s investments. The derivatives and other
investments held by the Subsidiary are generally similar to those that are
permitted to be held by the Fund and are subject to the same risks that apply to
similar investments if held directly by the Fund. The Subsidiary is not
registered under the 1940 Act, and, unless otherwise noted in this Prospectus,
is not subject to all the investor protections of the 1940 Act. Changes in the
laws of the United States and/or the Cayman Islands could result in the
inability of the Fund and/or the Subsidiary to continue to operate as it does
currently and could adversely affect the Fund. For example, the Cayman Islands
does not currently impose any income, corporate or capital gains tax or
withholding tax on the Subsidiary. If Cayman Islands law changes such that the
Subsidiary must pay Cayman Islands taxes, Fund shareholders would likely suffer
decreased investment returns.
•Tax
Risk.
The Fund may gain most of its exposure to the commodities markets through its
investment in the Subsidiary, which may invest directly or indirectly in
commodity-linked derivative instruments. In order for the Fund to qualify as a
RIC under Subchapter M of the Internal Revenue Code, the Fund must, among other
requirements, derive at least 90% of its gross income for each taxable year from
sources generating “qualifying income” for purposes of the “qualifying income
test,” which is described in more detail in the section titled “Federal Income
Taxes” in the SAI. The Fund’s investment in the Subsidiary is expected to
provide the Fund with exposure to the commodities markets within the limitations
of the federal tax requirements of Subchapter M of the Internal Revenue Code for
qualification as a RIC. The “Subpart F” income (defined in Section 951 of the
Internal Revenue Code to include passive income, including from commodity-linked
derivatives) of the Fund attributable to its investment in the Subsidiary is
“qualifying income” to the Fund to the extent that such income is derived with
respect to the Fund’s business of investing in stock, securities or currencies.
The Fund expects its “Subpart F” income attributable to its investment in the
Subsidiary to be derived with respect to the Fund’s business of investing in
stock, securities or currencies and accordingly expects its “Subpart F” income
attributable to its investment in the Subsidiary to be treated as “qualifying
income.” Furthermore, while the applicable rules do not require distributions
from the Subsidiary, the Fund intends to cause the Subsidiary to make
distributions that would allow the Fund to make timely distributions to its
shareholders. The Fund generally will be required to include in its own taxable
income the “Subpart F” income of the Subsidiary for a tax year, regardless of
whether the Fund receives a distribution of the Subsidiary’s income in that tax
year, and this income would nevertheless be subject to the distribution
requirement for qualification as a RIC and would be taken into account for
purposes of the 4% excise tax. The Adviser will carefully monitor the Fund’s
investments in the Subsidiary to ensure that no more than 25% of the Fund’s
assets are invested in the Subsidiary to comply with the Fund’s asset
diversification test as described in more detail in the SAI.
If
the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund’s taxable income would be subject to tax
at the Fund level and to a further tax at the shareholder level when such income
is distributed. In such event, in order to re-qualify for taxation as a RIC, the
Fund might be required to recognize unrealized gains, pay substantial taxes and
interest and make certain distributions. This would cause investors to incur
higher tax liabilities than they otherwise would have incurred and would have a
negative impact on Fund returns. In such event, the Fund’s Board of Trustees may
determine to reorganize or close the Fund or materially change the Fund’s
investment objective and strategies. In the event that the Fund fails to qualify
as a RIC, the Fund will promptly notify shareholders of the implications of that
failure.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and its Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
•U.S.
Treasury Obligations Risk.
U.S. Treasury obligations, including U.S. TIPS, may differ from other fixed
income securities in their interest rates, maturities, times of issuance and
other characteristics. Similar to other issuers, changes to the financial
condition or credit rating of the U.S. government may cause the value of the
Fund’s U.S. Treasury obligations to decline. With respect to TIPS, interest
payments are unpredictable and will fluctuate as the principal and corresponding
interest payments are adjusted for inflation. There can be no assurance that the
Consumer Price Index (“CPI”) will accurately measure the real rate of inflation
in the prices of goods and services. TIPS are also subject to credit risk and
duration risk. Credit risk is the risk that an issuer will not make timely
payments of principal and interest. Duration risk is the risk that holding long
duration and long maturity investments will magnify certain other risks,
including interest rate risk and credit risk.
•Whipsaw
Markets Risk.
The Fund may be subject to the forces of “whipsaw” markets (as opposed to choppy
or stable markets), in which significant price movements develop but then
repeatedly reverse. “Whipsaw” describes a situation where a security’s price is
moving in one direction but then quickly pivots to move in the opposite
direction. Such market conditions could cause substantial losses to the
Fund.
Performance
The Fund is new and therefore does not have a
performance history for a full calendar year. In the future,
performance information for the Fund will be presented in this section. Updated
performance information is available on the Fund’s website at www.merkfunds.com.
Management
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Investment
Adviser: |
Merk
Investments LLC |
Portfolio
Managers: |
Axel
Merk, President and Chief Investment Officer of the Adviser, Daniel Lucas,
CFA, Managing Director - Quantitative Research & Trading of the
Adviser, and Nicholas Reece, CFA, Vice President - Macro Research &
Investment Strategy of the Adviser, and each a Portfolio Manager of the
Adviser, have been portfolio managers of the Fund since its inception in
May 2022 |
Purchase
and Sale of 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.merkfunds.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.
ADDITIONAL
INFORMATION ABOUT THE FUND
Investment
Objective
The
Fund’s investment objective has been adopted as a non-fundamental investment
policy and may be changed without shareholder approval upon written notice to
shareholders.
Principal
Investment Strategy
TIPS
are marketable securities whose principal is adjusted based on changes in the
Consumer Price Index. With inflation (an increase in the CPI), the principal
increases, and with deflation (a decrease in the CPI), the principal decreases.
The relationship between TIPS and the CPI affects both the principal amount paid
when a TIPS instrument matures and the amount of interest that a TIPS instrument
pays semi-annually. When a TIPS instrument matures, the principal paid is the
greater of the CPI-adjusted principal or the original principal. TIPS pay
interest at a fixed rate. However, because the fixed rate is applied to the
CPI-adjusted principal, interest payments can vary in amount from one period to
the next. If inflation occurs, the interest payment increases. In the event of
deflation, the interest payment decreases. The Fund may purchase TIPS of any
maturity.
Principal
Investment Risks
An
investment in the Fund entails risks. The Fund could lose money, or its
performance could trail that of other investment alternatives. The following
provides additional information about the Fund’s principal risks. It is
important that investors closely review and understand these risks before making
an investment in the Fund. Just as in the Fund’s summary section, the principal
risks are presented in alphabetical order to facilitate finding particular risks
and comparing them with those of other funds. Each risk summarized below is
considered a “principal risk” of investing in the Fund, regardless of the order
in which it appears.
•Cash
Transaction Risk.
The Fund expects to effect certain of its creations and redemptions for cash,
rather than in-kind securities. The Fund may be required to sell or unwind
portfolio investments to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize a capital gain that it might not
have recognized if it had made a redemption in-kind. As a result, the Fund may
pay out higher annual capital gain distributions than if the in-kind redemption
process was used. The use of cash creations and redemptions may also cause the
Fund’s shares to trade in the market at wider bid-ask spreads or greater
premiums or discounts to the Fund’s NAV. As a practical matter, only
institutions and large investors, such as market makers or other large broker
dealers, create or redeem shares directly through the Fund. Most investors will
buy and sell shares of the Fund on an exchange through a broker-dealer.
Furthermore, the Fund may not be able to execute cash transactions for creation
and redemption purposes at the same price used to determine the Fund’s NAV. To
the extent that the maximum additional charge for creation or redemption
transactions is insufficient to cover the execution shortfall, the Fund’s
performance could be negatively impacted.
•Commodities
Risk. Exposure
to investments in physical commodities subjects the Fund to greater volatility
than investments in traditional securities, such as stocks and bonds. Investing
in physical commodities, whether directly or indirectly, is speculative and can
be extremely volatile. Volatility in the commodities markets may be caused by
changes in overall market movements; economic events and policies; war; acts of
terrorism; natural disasters; and technological developments. The current or
“spot” prices of physical commodities may also affect, in a volatile and
inconsistent manner, the prices of futures contracts in respect of the relevant
commodity. Certain commodities are used primarily in one industry, and
fluctuations in levels of activity in one industry may have a disproportionate
effect on global demand for a particular commodity. Moreover, recent growth in
industrial production and gross domestic product has made some developing
nations oversized users of commodities and has increased the extent to which
certain commodities prices are influenced by those markets. Certain of the ETVs
in which the Fund may invest are expected to be commodity pools that provide
exposure to physical commodities such as precious metals or non-physical
commodities, such as oil futures contracts.
•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 the Fund) and their service providers may be prone to operational and
information security risks resulting from cyber-attacks and/or technological
malfunctions. In general, cyber-attacks are deliberate, but unintentional events
may have similar effects. Cyber-attacks 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 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, APs 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. For instance, cyber-attacks or technical malfunctions
may interfere with the processing of shareholder or other transactions, affect
the 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 the Fund to regulatory fines, penalties or
financial losses, reimbursement or other compensation costs, and additional
compliance costs. Cyber-attacks 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. The Fund may also incur substantial costs for
cybersecurity risk management in order to prevent cyber incidents in the future.
The Fund and its shareholders could be negatively impacted as a
result.
•Equity
Market Risk. Common
stocks are susceptible to general stock market fluctuations and to volatile
increases and decreases in value as market confidence in and perceptions of
their issuers change. These investor perceptions are based on various and
unpredictable factors including: expectations regarding government, economic,
monetary and fiscal policies; inflation and interest rates; economic expansion
or contraction; and global or regional political, economic and banking crises.
If you held common stock, or common stock equivalents, of any given issuer, you
would generally be exposed to greater risk than if you held preferred stocks and
debt obligations of the issuer because common stockholders, or holders of
equivalent interests, generally have inferior rights to receive payments from
issuers in comparison with the rights of preferred stockholders, bondholders,
and other creditors of such issuers.
Beginning
in the first quarter of 2020, financial markets in the United States and around
the world experienced extreme and in many cases unprecedented volatility and
severe losses due to the global pandemic caused by COVID‑19, a novel
coronavirus. The pandemic has resulted in a wide range of social and economic
disruptions, including closed borders, voluntary or compelled quarantines of
large populations, stressed healthcare systems, reduced or prohibited domestic
or international travel, supply chain disruptions, and so-called “stay-at-home”
orders throughout much of the United States and many other countries. The
fall-out from these disruptions has included the rapid closure of businesses
deemed “non-essential” by federal, state, or local governments and rapidly
increasing unemployment, as well as greatly reduced liquidity for certain
instruments at times. Some sectors of the economy and individual issuers have
experienced particularly large losses. Such disruptions may continue for an
extended period of time or reoccur in the future to a similar or greater extent.
In response, the U.S. government and the Federal Reserve have taken
extraordinary actions to support the domestic economy and financial markets,
resulting in very low interest rates and in some cases negative yields. It is
unknown how long circumstances related to the pandemic will persist, whether
they will reoccur in the future, whether efforts to support the economy and
financial markets will be successful, and what additional implications may
follow from the pandemic. The impact of these events and other epidemics or
pandemics in the future could adversely affect Fund performance.
•ETF
Risks.
The Fund is an ETF, and, as a result of its structure, it is exposed 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 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.
•ETV
Risk.
The Fund may invest in other ETVs, including ETFs and exchange-traded vehicles
that are not registered investment companies. In addition to the risks
associated with the underlying assets held by an ETF, investments in other ETFs
are subject to the following additional risks: (1) the ETF’s shares may trade at
a price above or below its NAV; (2) an active trading market for the ETF’s
shares may not develop or be maintained; (3) the listing exchange may halt
trading of an ETF’s shares or delist the ETF if deemed appropriate by the
exchange’s officials; (4) a passively managed ETF may not accurately track the
performance of the reference asset; and (5) a passively managed ETF would not
necessarily sell a security because the issuer of the security was in financial
trouble unless the security is removed from the index the ETF seeks to track.
Investment in ETFs may involve duplication of management fees and certain other
expenses, as the Fund indirectly bears its proportionate share of any expenses
paid by the ETFs in which it invests.
The
risks of investing in exchange-traded vehicles not registered under the 1940
Act, which may include commodity pools, generally reflect the risks of owning
the ETV’s underlying investments or commodities. Additionally, ETVs are subject
to the risk that a lack of liquidity in the shares of the ETV can cause the
value of an ETV’s shares to be more volatile than the underlying investments or
commodities. An ETV that invests in physical gold or silver may be, or may
become, subject to regulatory trading limits that could adversely affect the
value of its shares and could affect its ability to pursue its investment
objective. Additionally, ETVs not registered under the 1940 Act are not subject
to the regulatory scheme and investor protections of the 1940 Act. In the event
such an ETV that is held by the Fund defaults on its obligations to its
shareholders, including the Fund, shareholders will not have a claim on the
ETV’s holdings. In addition, income derived from certain ETVs that provide
exposure to commodities is generally not qualifying income for purposes of the
Fund’s RIC diversification tests under the Internal Revenue Code and may
adversely affect the Fund’s qualification as a RIC.
•Gold
Risk. The
Fund may be sensitive to changes in the price of gold. Competitive pressures may
have a significant effect on the financial condition of companies in such
industry. Also, such companies are highly dependent on the price of certain
precious metals. These prices may fluctuate substantially over short periods of
time, so the Fund’s Share price may be more volatile than other types of
investments. The prices of precious metals rise and fall in response to many
factors, including: economic cycles; changes in inflation or expectations about
inflation in various countries; interest rates; currency fluctuations; metal
sales by governments, central banks, or international agencies; investment
speculation; resource availability; fluctuations in industrial and commercial
supply and demand; government regulation of the metals and materials industries;
and government prohibitions or restrictions on the private ownership of certain
precious and rare metals.
In
times of stable economic growth, traditional equity and debt investments could
offer greater appreciation potential, and the value of precious metals may be
adversely affected, which could in turn affect the Fund’s returns. The
production and sale of precious metals by governments, central banks, or other
large holders can be affected by various economic, financial, social, and
political factors, which may be unpredictable and may have a significant impact
on the supply and prices of precious metals. Economic and political conditions
in those countries that are the largest producers of precious metals may have a
direct effect on the production and marketing of such metals and on sales of
central bank holdings. Some precious metals mining operation companies may hedge
their exposure to falls in precious metals prices by selling forward future
production, which may result in lower returns during periods when the price of
precious metals increases. The precious metals industry can be significantly
affected by events relating to international political developments, the success
of exploration projects, commodity prices, and tax and government regulations.
If a natural disaster or other event with a significant economic impact occurs
in a region where the companies in which the Fund invests operate, such disaster
or event could negatively affect the profitability of such companies and, in
turn, the Fund’s investment in them.
•Inflation-Indexed
Securities Risk. The
principal amount of an inflation-indexed security typically increases with
inflation and decreases with deflation, as measured by a specified index. It is
possible that, in a period of declining inflation rates, the Fund could receive
at maturity less than the initial principal amount of an inflation-indexed
security. Although the holders of U.S. TIPS receive no less than the par value
of the security at maturity, if the Fund purchases U.S. TIPS in the secondary
market whose principal values have previously been adjusted upward and there is
a period of subsequent declining inflation rates, the Fund may receive at
maturity less than it invested. Depending on the changes in inflation rates
during the period the Fund holds an inflation-indexed security, the Fund may
earn less on the security than on a conventional bond. The principal amounts of
inflation-indexed
securities
are typically only adjusted periodically, and changes in the values of the
securities may only approximately reflect changes in inflation rates and may
occur substantially after the changes in inflation rates in question
occur.
•Liquidity
Risk.
Liquidity
risk exists when particular investments are difficult to purchase or sell. To
the extent the Fund invests in illiquid securities or securities that become
less liquid, such investments may have a negative effect on the returns of the
Fund because the Fund may be unable to sell the illiquid securities at an
advantageous time or price. To the extent that the Fund’s principal investment
strategies involve investing in securities with substantial market and/or credit
risk, the Fund will tend to have the greatest exposure to liquidity risk. Liquid
investments may become illiquid after purchase by the Fund, particularly during
periods of market turmoil. Illiquid investments may be harder to value,
especially in changing markets, and if the Fund is forced to sell these
investments to meet redemption requests or for other cash needs, the Fund may
suffer a loss. There can be no assurance that a security that is deemed to be
liquid when purchased will continue to be liquid for as long as it is held by
the Fund.
•Market
Risk. The
trading prices of securities and other instruments fluctuate in response to a
variety of factors. These factors include events impacting the entire market or
specific market segments, such as political, market and economic developments,
as well as events that impact specific issuers. The Fund’s NAV and market price,
like security and commodity prices generally, may fluctuate significantly in
response to these and other factors. As a result, an investor could lose money
over short or long periods of time. U.S. and international markets have
experienced significant periods of volatility in recent years due to a number of
economic, political and global macro factors, including public health issues,
growth concerns in the U.S. and overseas, uncertainties regarding interest
rates, trade tensions and the threat of tariffs imposed by the U.S. and other
countries. These developments as well as other events could result in further
market volatility and negatively affect financial asset prices, the liquidity of
certain securities and the normal operations of securities exchanges and other
markets, which could have an adverse effect on the Fund.
COVID-19
has resulted in a pandemic and major disruption to economies and markets around
the world, including the United States. The pandemic has resulted in a wide
range of social and economic disruptions, including closed borders, voluntary or
compelled quarantines of large populations, stressed healthcare systems, reduced
or prohibited domestic or international travel, supply chain disruptions, and
so-called “stay-at-home” orders throughout much of the United States and many
other countries. Financial markets have experienced extreme volatility and
severe losses, and trading in many instruments has been disrupted. Some sectors
of the economy and individual issuers have experienced particularly large
losses. Such disruptions may continue for an extended period of time or reoccur
in the future to a similar or greater extent. Liquidity for many instruments has
been greatly reduced for periods of time. In response to these disruptions, the
U.S. government and the Federal Reserve have taken extraordinary actions to
support the domestic economy and financial markets, resulting in very low
interest rates and in some cases negative yields. It is unknown how long
circumstances related to the pandemic will persist, whether they will reoccur in
the future, whether efforts to support the economy and financial markets will be
successful, and what additional implications may follow from the pandemic. The
impact of these events and other epidemics or pandemics in the future could
adversely affect Fund performance.
•New
Fund Risk. The
Fund is a recently organized investment company with no 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 the
Fund against one or more comparable funds on the basis of relative performance
until the Fund has established a track record.
•Non-Diversification
Risk.
Because the Fund is “non-diversified,” it may invest a greater percentage of its
assets in the securities of a single issuer or a lesser number of issuers than
if it was a diversified fund. As a result, the Fund may be more exposed to the
risks associated with and developments affecting an individual issuer or a
lesser number of issuers than a fund that invests more widely. This may increase
the Fund’s volatility and cause the performance of a relatively small number of
issuers to have a greater impact on the Fund’s performance.
•Oil
Investment Risk.
Several factors may affect the price of crude oil and, in turn, the WTI crude
oil futures contracts and other assets, if any, to which the Fund may be
exposed, including, but not limited to:
◦Significant
increases or decreases in the available supply of crude oil due to natural or
technological factors. Natural factors would include depletion of known
cost-effective sources for crude oil or the impact of severe weather on the
ability to produce or distribute crude oil. Technological factors would include
increases in availability created by new or improved extraction, refining and
processing equipment and methods or decreases caused by failure or
unavailability of major refining and processing equipment (for example, shutting
down or constructing oil refineries).
◦A
significant change in the attitude of speculators and investors towards crude
oil. Should the speculative community take a negative or positive view towards
crude oil, it could cause a change in world prices of crude oil, which could
have a corresponding positive or negative impact on the price of the Fund’s
shares.
◦Large
purchases or sales of crude oil by the official sector. Governments and large
institutions have large commodities holdings or may establish major commodities
positions. For example, nations with centralized or nationalized oil production
and organizations such as the Organization of Petroleum Exporting Countries
control large physical quantities of crude oil. If
one
or more of these institutions decides to buy or sell crude oil in amounts large
enough to cause a change in world prices, the price of the Fund’s shares will be
affected.
◦Political
factors such as imposition of regulations or entry into trade treaties, as well
as political disruptions caused by societal breakdown, insurrection and/or war
may greatly influence crude oil supply and prices. For example, in response to
Russia’s military invasion of Ukraine in 2022, the United States recently banned
oil and other energy imports from Russia, and the United Kingdom made a
commitment to phase out oil imports from Russia by the end of 2022.
◦A
significant increase or decrease in crude oil hedging activity by crude oil
producers. Should there be an increase or decrease in the level of hedge
activity of crude oil producing companies, countries and/or organizations, it
could cause a change in world prices of crude oil, causing the price of the
Fund’s shares to be affected.
•Passive
Investment Risk.
The Fund is not actively managed and the Adviser would not sell shares of an
equity security due to current or projected underperformance of a security
industry or sector unless that security is removed from the Index or the selling
of shares of that security is otherwise required upon a rebalancing of the Index
as addressed in the Index methodology.
•Real
Estate Companies Risk.
Investment in real estate companies exposes the Fund to the risks of owning real
estate directly. 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; increased operating expenses; lack of
availability of mortgage funds or other limits to accessing the credit or
capital markets; losses due to natural disasters; overbuilding; losses due to
casualty or condemnation; changes in property values and rental rates; and other
factors. Real estate is highly sensitive to general and local economic
conditions and developments. The U.S. real estate market may, in the future,
experience and has, in the past, experienced a decline in value, with certain
regions experiencing significant losses in property values. Many real estate
companies utilize leverage (and some may be highly leveraged), which increases
investment risk and the risk normally associated with debt financing, and could
potentially increase the Fund’s volatility and losses. Exposure to such real
estate may adversely affect Fund performance.
•Subsidiary
Investment Risk. By
investing in the Subsidiary, the Fund is indirectly exposed to the risks
associated with the Subsidiary’s investments. The derivatives and other
investments held by the Subsidiary are generally similar to those that are
permitted to be held by the Fund and are subject to the same risks that apply to
similar investments if held directly by the Fund. The Subsidiary is not
registered under the 1940 Act, and, unless otherwise noted in this Prospectus,
is not subject to all the investor protections of the 1940 Act. Changes in the
laws of the United States and/or the Cayman Islands could result in the
inability of the Fund and/or the Subsidiary to continue to operate as it does
currently and could adversely affect the Fund. For example, the Cayman Islands
does not currently impose any income, corporate or capital gains tax or
withholding tax on the Subsidiary. If Cayman Islands law changes such that the
Subsidiary must pay Cayman Islands taxes, Fund shareholders would likely suffer
decreased investment returns.
•Tax
Risk.
The Fund may gain most of its exposure to the commodities markets through its
investment in the Subsidiary, which may invest directly or indirectly in
commodity-linked derivative instruments. In order for the Fund to qualify as a
RIC under Subchapter M of the Internal Revenue Code, the Fund must, among other
requirements, derive at least 90% of its gross income for each taxable year from
sources generating “qualifying income” for purposes of the “qualifying income
test,” which is described in more detail in the section titled “Federal Income
Taxes” in the SAI. The Fund’s investment in the Subsidiary is expected to
provide the Fund with exposure to the commodities markets within the limitations
of the federal tax requirements of Subchapter M of the Internal Revenue Code for
qualification as a RIC. The “Subpart F” income (defined in Section 951 of the
Internal Revenue Code to include passive income, including from commodity-linked
derivatives) of the Fund attributable to its investment in the Subsidiary is
“qualifying income” to the Fund to the extent that such income is derived with
respect to the Fund’s business of investing in stock, securities or currencies.
The Fund expects its “Subpart F” income attributable to its investment in the
Subsidiary to be derived with respect to the Fund’s business of investing in
stock, securities or currencies and accordingly expects its “Subpart F” income
attributable to its investment in the Subsidiary to be treated as “qualifying
income.” The Fund generally will be required to include in its own taxable
income the “Subpart F” income of the Subsidiary for a tax year, regardless of
whether the Fund receives a distribution of the Subsidiary’s income in that tax
year, and this income would nevertheless be subject to the distribution
requirement for qualification as a RIC and would be taken into account for
purposes of the 4% excise tax. The Adviser will carefully monitor the Fund’s
investments in the Subsidiary to ensure that no more than 25% of the Fund’s
assets are invested in the Subsidiary to comply with the Fund’s asset
diversification test as described in more detail in the SAI.
To
the extent the Fund invests in commodities and certain commodity-linked
derivative instruments directly, the Fund will seek to restrict its income from
such instruments that do not generate qualifying income to a maximum of 10% of
their gross income (when combined with its other investments that produce
non-qualifying income) to comply with the qualifying income test necessary for
the Fund to qualify as a RIC under Subchapter M of the Internal Revenue Code.
However, the Fund may generate more non-qualifying income than anticipated, may
not be able to generate qualifying income in a particular taxable year at levels
sufficient to meet the qualifying income test, or may not be able to accurately
predict the non-qualifying income from these investments. The extent to which
the Fund directly or indirectly invests in commodities or commodity-linked
derivatives may be
limited
by the qualifying income and asset diversification tests, which the Fund must
continue to satisfy to maintain its status as a RIC.
If
the Fund did not qualify as a RIC for any taxable year and certain relief
provisions were not available, the Fund’s taxable income would be subject to tax
at the Fund level and to a further tax at the shareholder level when such income
is distributed. In such event, in order to re-qualify for taxation as a RIC, the
Fund might be required to recognize unrealized gains, pay substantial taxes and
interest and make certain distributions. This would cause investors to incur
higher tax liabilities than they otherwise would have incurred and would have a
negative impact on Fund returns. In such event, the Fund’s Board of Trustees may
determine to reorganize or close the Fund or materially change the Fund’s
investment objective and strategies. In the event that the Fund fails to qualify
as a RIC, the Fund will promptly notify shareholders of the implications of that
failure.
•Tracking
Error Risk. As
with all index funds, the performance of the Fund and its Index may differ from
each other for a variety of reasons. For example, the Fund incurs operating
expenses and portfolio transaction costs not incurred by the Index. In addition,
the Fund may not be fully invested in the securities of the Index at all times
or may hold securities not included in the Index.
•U.S.
Treasury Obligations Risk.
U.S. Treasury obligations, including U.S. TIPS, may differ from other fixed
income securities in their interest rates, maturities, times of issuance and
other characteristics. Similar to other issuers, changes to the financial
condition or credit rating of the U.S. government may cause the value of the
Fund’s U.S. Treasury obligations to decline. The total public debt of the United
States as a percentage of gross domestic product has grown rapidly since the
beginning of the 2008 financial downturn and is expected to rise even further as
the U.S. government implements crisis-fighting efforts in response to the
COVID-19 outbreak. Although high debt levels do not necessarily indicate or
cause economic problems, they may create certain systemic risks if sound debt
management practices are not implemented. A high national debt level may
increase market pressures to meet government funding needs, which may drive debt
cost higher and cause a country to sell additional debt, thereby increasing
refinancing risk. A high national debt also raises concerns that a government
will not be able to make principal or interest payments when they are due. In
the worst case, unsustainable debt levels can cause a decline in the value of
the dollar (which may lead to inflation), and can prevent the U.S. government
from implementing effective counter-cyclical fiscal policy in economic
downturns. U.S. Treasury securities are currently given the top rating by all
major ratings agencies except Standard & Poor’s Ratings Services, which
rates them AA+, one grade below their top rating. Since downgrading U.S.
Treasury securities from AAA to AA+ in 2011, Standard & Poor’s Ratings
Services has affirmed its rating. A downgrade of the ratings of U.S. government
debt obligations, such as U.S. Treasury obligations, which are often used as a
benchmark for other borrowing arrangements, could result in higher interest
rates for individual and corporate borrowers, cause disruptions in the
international bond markets and have a substantial negative effect on the U.S.
economy. A downgrade of U.S. Treasury securities from another ratings agency or
a further downgrade below AA+ rating by Standard & Poor’s Ratings Services
may cause the value of the Fund’s U.S. Treasury obligations to
decline.
In
response to the outbreak of COVID-19, as with other serious economic
disruptions, governmental authorities and regulators are enacting 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 unexpectedly or suddenly reversed or are ineffective in achieving their
desired outcomes. In light of these actions and current conditions, interest
rates and bond yields in the United States and many other countries are at or
near historic lows, and in some cases, such rates and yields are negative,
magnifying interest rate risk and diminishing yield and performance. The current
environment has also caused volatility and illiquidity in the markets. In
particular, in March 2020, the COVID-19 crisis triggered a short period of heavy
investor demand for trading in U.S. Treasury obligations, leading to reduced
liquidity in the Treasuries market during that period.
With
respect to TIPS, interest payments are unpredictable and will fluctuate as the
principal and corresponding interest payments are adjusted for inflation. There
can be no assurance that the CPI will accurately measure the real rate of
inflation in the prices of goods and services. TIPS are also subject to credit
risk and duration risk. Credit risk is the risk that an issuer will not make
timely payments of principal and interest. Duration risk is the risk that
holding long duration and long maturity investments will magnify certain other
risks, including interest rate risk and credit risk.
•Whipsaw
Markets Risk.
The Fund may be subject to the forces of “whipsaw” markets (as opposed to choppy
or stable markets), in which significant price movements develop but then
repeatedly reverse. “Whipsaw” describes a situation where a security’s price is
moving in one direction but then quickly pivots to move in the opposite
direction. There are two types of whipsaw patterns. The first involves an upward
movement in a price, which is then followed by a drastic downward move causing
the price to fall relative to its original position. The second type occurs when
a share price drops in value for a short time and then suddenly surges upward to
a positive gain relative to the original position. Such market conditions could
cause substantial losses to the Fund.
PORTFOLIO
HOLDINGS INFORMATION
Information
about the Fund’s daily portfolio holdings is available at www.merkfunds.com. A
complete description of the Fund’s policies and procedures with respect to the
disclosure of the Fund’s portfolio holdings is available in the Fund’s Statement
of Additional Information (“SAI”).
MANAGEMENT
Investment
Adviser
Merk
Investments LLC, serves as the investment adviser and has overall responsibility
for the general management and administration of the Fund. The Adviser also
arranges for transfer agency, custody, fund administration, and all other
non-distribution related services necessary for the Fund to operate. The Adviser
is a Delaware limited liability company and is located at 1150 Chestnut Street,
Menlo Park, California 94025. For the services it provides to the Fund, the Fund
pays the Adviser a unified management fee, which is calculated daily and paid
monthly, at an annual rate of 0.40% of the Fund’s average daily net
assets.
Under
the Investment Advisory Agreement, the Adviser has agreed to pay all expenses of
the Fund except for the fee paid to the Adviser pursuant to the Investment
Advisory Agreement, interest charges on any borrowings, taxes, brokerage
commissions and other expenses incurred in placing orders for the purchase and
sale of securities and other investment instruments, acquired fund fees and
expenses, accrued deferred tax liability, extraordinary expenses, and
distribution fees and expenses paid by the Listed Funds Trust (“Trust”) under
any distribution plan adopted pursuant to Rule 12b-1 under the 1940 Act (the
“Excluded Expenses”).
The
Adviser has contractually agreed to waive the management fee it receives from
the Fund in an amount equal to the management fee paid to the Adviser by the
Subsidiary. The agreement may be terminated by the Adviser at the conclusion of
any one-year term or by the Fund’s Board of Trustees at any time, and when the
Adviser ceases to serve as such. The Adviser also has contractually agreed,
through May 3, 2023, to waive 0.10% of the fee it receives as Sponsor to the
VanEck Merk Gold Trust in connection with the Subsidiary’s investment in the
VanEck Merk Gold Trust.
The
basis for the Trust’s Board of Trustees’ (the “Board”) approval of the Fund’s
Investment Advisory Agreement will be available in the Fund’s first Annual or
Semi-Annual Report to Shareholders.
Management
of the Subsidiary
The
Adviser also serves as the investment adviser and has overall responsibility for
the general management and administration of the Subsidiary, pursuant to a
separate investment advisory agreement between the Adviser and the Subsidiary.
Under the agreement, the Adviser provides the Subsidiary with the same type of
management, under essentially the same terms, as it provides the Fund, including
that the Adviser has agreed to pay all expenses of the Subsidiary except for the
management fee paid to the Adviser pursuant to its investment management
agreement with the Subsidiary, interest charges on any borrowings, taxes,
brokerage commissions and other expenses incurred in placing orders for the
purchase and sale of securities and other investment instruments, acquired fund
fees and expenses, accrued deferred tax liability, and extraordinary expenses.
The Adviser has contractually agreed to waive the management fee it receives
from the Fund in an amount equal to the management fee paid to the Adviser by
the Subsidiary. The Subsidiary has also entered into separate contracts for the
provision of custody, transfer agency, and accounting services with the same
service providers that provide those services to the Fund.
Portfolio
Managers
Axel
Merk, Daniel Lucas, and Nicholas Reece are jointly and primarily responsible for
the day-to-day management of the Fund’s portfolio.
Mr.
Merk is the President and Chief Investment Officer of the Adviser, which he
founded in Switzerland in 1994 and relocated to California in 2001. Mr. Merk
holds a B.A. in Economics and a M.Sc. in Computer Science from Brown
University.
Mr.
Lucas is Managing Director - Quantitative Research & Trading of the Adviser.
He focuses on quantitative research and systematic investment strategies, and
oversees the development of data and trading systems. Prior to joining the
Adviser in 2013, Mr. Lucas was a Quantitative Analyst at Kellner Capital and an
M&A Associate at Network Corporate Finance. He also worked at Deutsche
Bank’s FX & Commodities Options Trading desk in Frankfurt, Germany, trading
a variety of currencies and precious metals derivatives. Mr. Lucas holds a
M.Sc. in Financial Engineering (MFE) from the Haas School of Business at UC
Berkeley as well as a Master’s degree from the University of Stuttgart, where he
studied finance, economics and management. He is a Chartered Financial Analyst
(CFA) charterholder.
Mr.
Reece is Vice President - Macro Research & Investment Strategy of the
Adviser. He is a member of the Portfolio Management Group and focuses on
macroeconomic research, regularly publishing reports on the market and economy.
Prior to joining the Adviser in 2012, he gained experience working on capital
markets deals with Paul Hastings in Hong Kong, and with Atlantis Investment
Management. Mr. Reece holds a B.A. in Economics from Trinity College and is a
Chartered Financial Analyst (CFA) charterholder.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation structure, other accounts that the Portfolio Managers manage and
the Portfolio Managers’ ownership of Shares.
Other
Service Providers
Foreside
Fund Services, LLC (the “Distributor”) is the principal underwriter and
distributor of the Fund’s shares. The Distributor’s principal address is Three
Canal Plaza, Suite 100, Portland, Maine 04101. The Distributor will not
distribute shares in less than whole Creation Units, and it does not maintain a
secondary market in the shares. The Distributor is a broker-dealer registered
under the
Securities
Exchange Act of 1934 and a member of the Financial Industry Regulatory
Authority, Inc. (“FINRA”). The Distributor has no role in determining the
policies of the Fund or the securities that are purchased or sold by the Fund
and is not affiliated with the Adviser or any of its affiliates.
U.S.
Bancorp Fund Services, LLC, doing business as U.S. Bank Global Fund Services,
located at 615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the
administrator, transfer agent and index receipt agent for the Fund.
U.S.
Bank National Association, located at 1555 N. Rivercenter Drive, Suite 302,
Milwaukee, Wisconsin 53212, serves as the custodian for the Fund.
Morgan,
Lewis & Bockius LLP, located at 1111 Pennsylvania Avenue, N.W., Washington,
D.C. 20004, serves as legal counsel to the Trust.
BBD,
LLP, located at 1835 Market Street, 3rd Floor, Philadelphia, Pennsylvania 19103,
serves as the Fund’s independent registered public accounting firm. The
independent registered public accounting firm is responsible for auditing the
annual financial statements of the Fund.
HOW
TO BUY AND SELL SHARES
The
Fund issues and redeems Shares only in Creation Units at the NAV per share next
determined after receipt of an order from an AP. Only APs may acquire Shares
directly from the Fund, and only APs may tender their Shares for redemption
directly to the Fund, at NAV. APs must be a member or participant of a clearing
agency registered with the SEC and must execute a Participant Agreement that has
been agreed to by the Distributor, and that has been accepted by the 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.
Individual 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.
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
Fund imposes 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 the Fund, are an essential part of the ETF process and help
keep Share trading prices in line with NAV. As such, the Fund accommodates
frequent purchases and redemptions by APs. However, 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 Fund employs fair value
pricing and may impose transaction fees on purchases and redemptions of Creation
Units to cover the custodial and other costs incurred by the Fund in effecting
trades. In addition, the Fund and the Adviser reserve the right to reject any
purchase order at their discretion.
Determination
of Net Asset Value
The
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (the “NYSE”), generally 4:00 p.m. Eastern time, each day the
NYSE is open for business. The NAV is calculated by dividing the Fund’s net
assets by its Shares outstanding.
In
calculating its NAV, the Fund generally values its assets on the basis of market
quotations, last sale prices, or estimates of value furnished by a pricing
service or brokers who make markets in such instruments. The values of non-U.S.
dollar denominated securities are converted to U.S. dollars using foreign
currency exchange rates generally determined as of 4:00 p.m., Eastern time (NYSE
close).
If
such information is not available for a security held by the Fund or is
determined to be unreliable, the security will be valued at fair value estimates
under guidelines established by the Board (as described below).
Applicable
federal tax requirements generally limit the degree to which the Fund may invest
in the Subsidiary to an amount not exceeding 25% of its total assets. The
Subsidiary prices its portfolio investments pursuant to the same pricing and
valuation methodologies and procedures employed by the Fund. The Subsidiary
offers to redeem all or a portion of its shares at the current NAV per share
every day the Fund is open for business. The value of shares of the Subsidiary
will fluctuate with the value of the Subsidiary’s portfolio
investments.
Fair
Value Pricing
The
Board has adopted procedures and methodologies to fair value Fund securities
whose market prices are not “readily available” or are deemed to be unreliable.
For example, such circumstances may arise when: (i) a security has been
de-listed or has had its trading halted or suspended; (ii) a security’s primary
pricing source is unable or unwilling to provide a price; (iii) a security’s
primary trading market is closed during regular market hours; or (iv) a
security’s value is materially affected by events occurring after the close of
the security’s primary trading market. Generally, when fair valuing a security,
the Fund will take into account all reasonably available information that may be
relevant to a particular valuation including, but not limited to, fundamental
analytical data regarding the issuer, information relating to the issuer’s
business, recent trades or offers of the security, general and/or specific
market conditions and the specific facts giving rise to the need to fair value
the security. Fair value determinations are made in good faith and in accordance
with the fair value methodologies included in the Board-adopted valuation
procedures. Due to the subjective and variable nature of fair value pricing,
there can be no assurance that the Adviser will be able to obtain the fair value
assigned to the security upon the sale of such security.
Investments
by Registered Investment Companies
Section
12(d)(1) of the 1940 Act restricts investments by registered investment
companies in the securities of other investment companies. Registered investment
companies are permitted to invest in the Fund beyond the limits set forth in
section 12(d)(1), subject to certain terms and conditions, including that such
investment companies enter into an agreement with the Fund.
Delivery
of Shareholder Documents – Householding
Householding
is an option available to certain investors of the Fund. 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 Fund 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
The
Fund expects to pay out dividends, if any, and distribute any net realized
capital gains to its shareholders at least annually. The Fund will declare and
pay capital gain distributions, if any, in cash. 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 Fund. Your investment
in the Fund may have other tax implications. Please consult your tax adviser
about the tax consequences of an investment in Shares, including the possible
application of foreign, state, and local tax laws. This summary does not apply
to shares held in an IRA or other tax-qualified plans, which are generally not
subject to current tax. Transactions relating to shares held in such accounts
may, however, be taxable at some time in the future. This summary is based on
current tax laws, which may change.
The
Fund intends to elect and to qualify each year for treatment as a RIC. If it
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, the 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 the 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
The
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 the Fund owned the
investments that generated them, rather than how long a shareholder has owned
his or her Shares. Sales of assets held by the Fund for more than one year
generally result in long-term capital gains and losses, and sales of assets held
by the Fund for one year or less generally result in short-term capital gains
and losses. Distributions of the Fund’s net capital gain (the excess of net
long-term capital gains over net short-term capital losses) that are reported by
the 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 the 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 the Fund receives 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. The Fund’s investment
strategies will significantly limit its ability to distribute dividends eligible
to be treated as qualified dividend income. Corporate shareholders may be
entitled to a dividends received deduction for the portion of dividends they
receive from the Fund that are attributable to dividends received by the Fund
from U.S. corporations, subject to certain limitations. The Fund’s investment
strategies will significantly limit its ability to distribute dividends eligible
for the dividends received deduction for corporate shareholders.
A
RIC that receives business interest income may pass through its net business
interest income for purposes of the tax rules applicable to the interest expense
limitations under Section 163(j) of the Internal Revenue Code. A RIC’s total
“Section 163(j) Interest Dividend” for a tax year is limited to the excess of
the RIC’s business interest income over the sum of its business interest expense
and its other deductions properly allocable to its business interest income. A
RIC may, in its discretion, designate all or a portion of ordinary dividends as
Section 163(j) Interest Dividends, which would allow the recipient shareholder
to treat the designated portion of such dividends as interest income for
purposes of determining such shareholder’s interest expense deduction limitation
under Section 163(j). This can potentially increase the amount of a
shareholder’s interest expense deductible under Section 163(j). In general, to
be eligible to treat a Section 163(j) Interest Dividend as interest income, you
must have held your shares in a Series for more than 180 days during the 361-day
period beginning on the date that is 180 days before the date on which the share
becomes ex-dividend with respect to such dividend. Section 163(j) Interest
Dividends, if so designated by a Series, will be reported to your financial
intermediary or otherwise in accordance with the requirements specified by the
Internal Revenue Service (the “IRS”).
Shortly
after the close of each calendar year, you will be informed of the amount and
character of any distributions received from the Fund.
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 the Fund before
your investment (and thus were included in the Shares’ NAV when you purchased
your Shares).
You
may wish to avoid investing in the 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
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
the 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
your Shares from 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. The 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),
the 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.
The
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 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 the 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 the 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 Internal Revenue 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 IRS 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 adviser with respect to whether wash
sale rules apply and when a loss might be deductible.
The
Fund may include a payment of cash in addition to, or in place of, the delivery
of a basket of securities upon the redemption of Creation Units. The Fund may
sell portfolio securities to obtain the cash needed to distribute redemption
proceeds. This may cause the Fund to recognize investment income and/or capital
gains or losses that it might not have recognized if it had completely satisfied
the redemption in kind. As a result, the Fund may be less tax efficient if it
includes such a cash payment in the proceeds paid upon the redemption of
Creation Units.
Taxation
of the Subsidiary
There
is, at present, no direct taxation in the Cayman Islands and interest, dividends
and gains payable to the Subsidiary will be received free of all Cayman Islands
taxes. The Subsidiary is registered as an “exempted company” pursuant to the
Companies Law (as amended). The Subsidiary has received an undertaking from the
Governor in Cabinet of the Cayman Islands to the effect that, for a period of
twenty years from the date of the undertaking, no law that thereafter is enacted
in the Cayman Islands imposing any tax or duty to be levied on profits, income
or on gains or appreciation, or any tax in the nature of estate duty or
inheritance tax, will apply to any property comprised in or any income arising
under the Subsidiary, or to the shareholders thereof, in respect of any such
property or income.
Investments
in Complex Securities
The
Fund may gain most of its exposure to the commodities markets through its
investment in its Subsidiary, which invests directly in commodity-linked
derivative instruments. The Fund’s investment in its Subsidiary is expected to
provide the Fund with exposure to the commodities markets within the limitations
of the federal tax requirements of Subchapter M of the Internal Revenue Code for
qualification as a RIC. The “Subpart F” income (defined in Section 951 of the
Internal Revenue Code to include passive income, including from commodity-linked
derivatives) of the Fund attributable to its investment in its Subsidiary is
“qualifying income” to the Fund to the extent that such income is derived with
respect to the Fund’s business of investing in stock, securities or currencies.
The Fund expects its “Subpart F” income attributable to its investment in its
Subsidiary to be derived with respect to the Fund’s business of investing in
stock, securities or currencies and accordingly expects its “Subpart F” income
attributable to its investment in its Subsidiary to be treated as “qualifying
income.” The Adviser will carefully monitor the Fund’s investments in its
Subsidiary to ensure that no more than 25% of the Fund’s assets are invested in
its Subsidiary.
Certain
of the Fund’s investments, such as investments in commodities and
commodity-linked derivatives, when made directly, may not produce qualifying
income to the Fund. To the extent the Fund invests directly in commodities and
commodity-linked derivatives, the Fund will seek to restrict its income from
such instruments that do not generate qualifying income to a maximum of 10% of
its gross income (when combined with its other investments that produce
non-qualifying income).
If
the Fund fails to qualify as a RIC and to avail itself of certain relief
provisions, it would be subject to tax at the regular corporate rate without any
deduction for distributions to shareholders, and its distributions would
generally be taxable as dividends. Please see the SAI for a more detailed
discussion, including the availability of certain relief provisions for certain
failures by the Fund to qualify as a RIC.
The
Fund may invest in REITs. “Qualified REIT dividends” (i.e.,
ordinary REIT dividends other than capital gain dividends and portions of REIT
dividends designated as qualified dividend income eligible for capital gain tax
rates) are eligible for a 20% deduction by non-corporate taxpayers. This
deduction, if allowed in full, equates to a maximum effective tax rate of 29.6%
(37% top rate applied
to
income after 20% deduction). Distributions by the Fund to its shareholders that
are attributable to qualified REIT dividends received by the Fund and which the
Fund properly reports as “section 199A dividends,” are treated as “qualified
REIT dividends” in the hands of non-corporate shareholders. A section 199A
dividend is treated as a qualified REIT dividend only if the shareholder
receiving such dividend holds the dividend-paying RIC shares for at least 46
days of the 91-day period beginning 45 days before the shares become
ex-dividend, and is not under an obligation to make related payments with
respect to a position in substantially similar or related property. The Fund is
permitted to report such part of its dividends as section 199A dividends as are
eligible, but is not required to do so.
REITs
in which the Fund invests often do not provide complete and final tax
information to the Fund until after the time that the Fund issues a tax
reporting statement. As a result, the Fund may at times find it necessary to
reclassify the amount and character of its distributions to you after it issues
your tax reporting statement. When such reclassification is necessary, the Fund
(or its administrative agent) will send you a corrected, final Form 1099-DIV to
reflect the reclassified information. If you receive a corrected Form 1099-DIV,
use the information on this corrected form, and not the information on the
previously issued tax reporting statement, in completing your tax
returns.
Net
Investment Income Tax
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.
Foreign
Taxes
To
the extent the Fund invests in foreign securities, it may be subject to foreign
withholding taxes with respect to dividends or interest the Fund received from
sources in foreign countries.
The
foregoing discussion summarizes some of the possible consequences under current
federal tax law of an investment in the 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 adviser 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
Foreside
Fund Services, LLC (the “Distributor”) is the principal underwriter and
distributor of the Fund’s shares. The Distributor’s principal address is Three
Canal Plaza, Suite 100, Portland, Maine 04101. The Distributor will not
distribute shares in less than whole Creation Units, and it does not maintain a
secondary market in the shares. The Distributor is a broker-dealer registered
under the Securities Exchange Act of 1934 and a member of the Financial Industry
Regulatory Authority, Inc. (“FINRA”). The Distributor has no role in determining
the policies of the Fund or the securities that are purchased or sold by the
Fund and is not affiliated with the Adviser or any of its affiliates.
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, the 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 Fund, 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 per share is available on the Fund’s website at
www.merkfunds.com.
ADDITIONAL
NOTICES
Solactive
AG (“Solactive”) is the licensor of Solactive StagflationTM
Index (the “Index”). The financial instruments that are based on the Index are
not sponsored, endorsed, promoted or sold by Solactive in any way and Solactive
makes no express or implied representation, guarantee or assurance with regard
to: (a) the advisability in investing in the financial instruments; (b) the
quality, accuracy and/or completeness of the Index; and/or (c) the results
obtained or to be obtained by any person or entity from the use of the Index.
Solactive does not guarantee the accuracy and/or the completeness of the Index
and shall not have any liability for any errors or omissions with respect
thereto. Notwithstanding Solactive’s obligations to its licensees, Solactive
reserves the right to change the methods of calculation or publication with
respect to the Index and Solactive shall not be liable for any miscalculation of
or any incorrect, delayed or interrupted publication with respect to the Index.
Solactive shall not be liable for any damages, including, without limitation,
any loss of profits or business, or any special, incidental, punitive, indirect
or consequential damages suffered or incurred as a result of the use (or
inability to use) of the Index.
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 Fund 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 Fund particularly.
FINANCIAL
HIGHLIGHTS
Financial
information is not available because the Fund had not commenced operations prior
to the date of this Prospectus.
Merk
Stagflation ETF
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Adviser |
Merk
Investments LLC
1150
Chestnut Street
Menlo
Park, California 94025 |
Custodian |
U.S.
Bank, N.A.
1555
N. Rivercenter Drive, Suite 302
Milwaukee,
Wisconsin 53212 |
Transfer
Agent |
U.S.
Bancorp Fund Services, LLC
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Administrator |
U.S.
Bancorp Fund Services, LLC
d/b/a
U.S. Bank Global Fund Services
615
East Michigan Street
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004-2541 |
Distributor |
Foreside
Fund Services, LLC
Three
Canal Plaza, Suite 100
Portland,
Maine 04101 |
Independent
Registered Public Accounting Firm |
BBD,
LLP
1835
Market Street, 3rd Floor
Philadelphia,
Pennsylvania 19103 |
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Investors
may find more information about the Fund in the following documents:
Statement
of Additional Information: The
Fund’s SAI provides additional details about the investments of the Fund and
certain other additional information. The SAI is on file with the SEC and is
herein incorporated by reference into this Prospectus. It is legally considered
a part of this Prospectus.
Annual/Semi-Annual
Reports:
Additional information about the Fund’s investments will be available in the
Fund’s annual and semi-annual reports to shareholders. In the annual report,
when available, you will find a discussion of the market conditions and
investment strategies that significantly affected the Fund’s performance after
the first fiscal year in which the Fund is in operation.
You
can obtain free copies of these documents, when available, request other
information or make general inquiries about the Fund by contacting the Fund at
Merk Investments LLC, c/o U.S. Bank Global Fund Services, P.O. Box 701,
Milwaukee, Wisconsin 53201-0701 or calling 1-866-271-0093.
Shareholder
reports and other information about the Fund are also available:
• Free
of charge from the SEC’s EDGAR database on the SEC’s website at
http://www.sec.gov; or
• Free
of charge from the Fund’s website at www.merkfunds.com; or
(SEC
Investment Company Act File No. 811-23226)