Virtus ETF Trust II

 

VIRTUS DUFF & PHELPS CLEAN ENERGY ETF

VIRTUS NEWFLEET ABS/MBS ETF

VIRTUS NEWFLEET HIGH YIELD BOND ETF

VIRTUS SEIX SENIOR LOAN ETF

VIRTUS STONE HARBOR EMERGING MARKETS HIGH YIELD BOND ETF

VIRTUS TERRANOVA U.S. QUALITY MOMENTUM ETF

Table of Contents

 

Shareholder Letter (unaudited)

September 2023

Dear Shareholder:

On behalf of Virtus ETF Advisers LLC (the “Adviser”), I am pleased to present the shareholder report for the Virtus ETF Trust II (the “Trust”) for the annual fiscal period ended July 31, 2023.

The Adviser is part of Virtus Investment Partners, a distinctive partnership of boutique investment managers singularly committed to the long-term success of individual and institutional investors.

The report provides financial statements and portfolio information for the following funds within the Trust:

•Virtus Duff & Phelps Clean Energy ETF (VCLN)

•Virtus Newfleet ABS/MBS ETF (VABS)

•Virtus Newfleet High Yield Bond ETF (BLHY)

•Virtus Seix Senior Loan ETF (SEIX)

•Virtus Stone Harbor Emerging Markets High Yield Bond ETF (VEMY) – This fund commenced operations on December 12, 2022 and seeks current income and capital appreciation by investing in emerging market high yield debt securities, both sovereign and corporate.

•Virtus Terranova U.S. Quality Momentum ETF (JOET)

On behalf of the Adviser and our fund Sub-Advisers, thank you for your investment. If you have questions, please contact your financial adviser, or call 1-888-383-0553. For more information about the funds and the other ETFs we offer, we invite you to visit our website, www.virtusetfs.com.

Sincerely,

William Smalley
President

Virtus ETF Trust II

This material must be accompanied or preceded by the prospectus.

Management’s Discussion of Fund Performance (unaudited)

July 31, 2023

Virtus Duff & Phelps Clean Energy ETF (VCLN)

How did the markets perform during the ETF’s fiscal year ended July 31, 2023?

The S&P Global Clean Energy Index (net) (the “Index”) declined 17.12% for the 12-month period. From a sector standpoint, the primary drivers of the Index’s negative performance were information technology and industrials. Rising interest rates were a consistent headwind for both sectors. Over the course of the fiscal year, the yield on the 10-year U.S. Treasury rose from about 2.6% to about 3.9%, and peaked at about 4.2%. This increase in rates pressured equity valuations. For the technology sector in particular, the increase in rates had an impact on consumer-facing companies like those in the rooftop solar market, where increased borrowing costs had a negative impact on demand. Further pressuring the rooftop solar sector was the fact that California, one of the largest rooftop solar markets in the U.S., enacted a significant policy change during the period that caused a temporary slowdown in demand and a corresponding increase in inventories.

On a positive note, the passage of the Inflation Reduction Act (IRA) in the U.S. was described by many companies as a “game-changer.” As a result, the European Union (EU) developed the Green Deal Industrial Plan which introduced measures similar to those of the IRA regarding increased renewable targets, local content rules, supply of critical raw materials, and access to funding. During the period, the IRA appeared to initiate a global pro-investment policy response that has the potential to positively impact clean energy for years to come.

What factors affected the performance of the ETF during its fiscal year?

For the 12 months through July 31, 2023, the Fund generated a total return of -13.55% based on net asset value and -13.91% based on market price, versus -17.12% for its benchmark, the S&P Global Clean Energy Index (net).

Two of the Fund’s strongest contributors during the period were First Solar and Iberdrola. The IRA was a game-changer for First Solar as it provided the company with a distinct competitive advantage as the only large U.S. manufacturer of solar panels. First Solar demonstrated one of the most visible earnings-growth profiles in the clean-energy industry during the period, as evidenced by its fully contracted backlog through at least 2026. Iberdrola posted strong results for fiscal year 2022, including a dividend that was nicely above consensus. Iberdrola continued to benefit from its global renewables build-out plan, while higher inflationary costs were more than absorbed by higher electric power sales prices.

Two of the largest detractors from Fund performance during the 12-month period were Enphase Energy and SolarEdge Technologies. Both companies are the leading technology and equipment providers to the U.S. rooftop solar industry. As mentioned, the increase in interest rates and change in California’s rooftop solar policy had a negative impact on the performance for both companies.

The preceding information is the opinion of the investment adviser and sub-adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

(1)The S&P Global Clean Energy Index (net) is designed to measure the performance of companies in global clean energy-related businesses from both developed and emerging markets, with a target constituent count of 100, calculated on a total return basis with net dividends reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)Commencement of operations on August 3, 2021.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the New York Stock Exchange Arca (“NYSE”), ordinarily 4:00 p.m. Eastern time, on each day during which the NYSE is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk.

Clean Energy Industry: Developments in the clean energy segment could adversely affect the price and valuations of portfolio holdings. These developments include swift price and supply fluctuations caused by events relating to international politics, the success of project development and tax and other governmental regulatory policies. There could also be weak demand for clean energy company products or services, the obsolescence of existing technology or short product cycles, and falling prices and profits due to the supply of, and demand for, oil and gas along with competition from new market entrants.

Limited Number of Investments: Because the portfolio has a limited number of securities, it may be more susceptible to factors adversely affecting its securities than a portfolio with a greater number of securities.

Non-Diversified: The portfolio is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the portfolio invests more of its assets in the securities of fewer issuers than would a diversified portfolio.

Foreign & Emerging Markets: Investing in foreign securities, especially in emerging markets, subjects the portfolio to additional risks such as increased volatility, currency fluctuations, less liquidity, and political, regulatory, economic, and market risk.

Market Volatility: The value of the securities in the portfolio may go up or down in response to the prospects of individual companies and/or general economic conditions. Price changes may be short- or long-term. Local, regional or global events such as war, acts of terrorism, the spread of infectious illness or other public health issue, recessions, or other events could have a significant impact on the portfolio and its investments, including hampering the ability of the portfolio’s manager(s) to invest the portfolio’s assets as intended.

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Virtus Duff & Phelps Clean Energy ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

Virtus Duff & Phelps Clean Energy ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Virtus Newfleet ABS/MBS ETF (VABS)

How did the markets perform during the ETF’s fiscal year ended July 31, 2023?

Performance over the 12-month period can be defined by the higher move in interest rates and by the Federal Reserve’s (the Fed’s) continued use of quantitative tightening. The Fed’s target interest rate rose from 2.5% to 5.5% during the period, over the course of seven rate hikes. The yield on the two-year U.S. Treasury note went from 2.89% to 4.88% during the fiscal year. There were few areas with positive returns in mainstream fixed income as the Bloomberg U.S. Aggregate Bond Index returned -3.37%, while the securitized debt component of the Index returned -4.50%. Securities with greater sensitivity to changes in interest rates that offered higher yields were able to generate positive total returns.

The economy, as measured by gross domestic product (GDP), bounced back from two consecutive negative GDP quarters in the first half of 2022 to post four solid positive quarters averaging 2.6% growth through June 30, 2023. Inflation as measured by the Consumer Price Index (CPI) continued to ease, seeing only a 3% year-over-year increase as of June 2023.

Unemployment levels remained at record lows during the fiscal year, buoying consumer confidence. Consumer prices rose steadily while the market saw stable to rising prices for autos, housing, and rents. In turn, credit performance within the securitized markets remained strong as asset price inflation buttressed securitized deal structures. Investors retreated to consumer-backed assets during the second half of the fiscal year as fears of recession abated. The consumer proved resilient and security prices gained due to stronger fundamentals and favorable supply technical factors.

What factors affected the performance of the ETF during its fiscal year?

The securitized market experienced excellent credit performance and was the real driver of returns for the Fund versus the benchmark. The Fund’s return based on net asset value for the 12 months ended July 31, 2023, was 2.62%, and its return based on market price was 2.51%, versus a total return of 1.71% for the ICE BofA 1-3 Year A-BBB US Corporate Index, the Fund’s benchmark.

Positive contributors to the Fund’s returns included subordinate auto asset-backed securities (ABS), private label credit card ABS, and select holdings in floating rate commercial mortgage-backed securities (CMBS), including securities-backed leading regional super malls.

Primary detractors from the Fund’s relative performance included residential mortgage-backed securities (RMBS) with longer durations, or greater sensitivity to changes in interest rates. This included more interest rate-sensitive mortgage-backed securities (MBS) issued by Ellington Financial and Verus Securitization Trust.

The preceding information is the opinion of the investment adviser and sub-adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

(1)The ICE BofA 1-3 Year A-BBB US Corporate Index measures performance of U.S. corporate bond issues rated A through BBB, inclusive (based on an average of Moody’s, S&P and Fitch), with a remaining term to final maturity less than 3 years. The index is calculated on a total return basis. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)Commencement of operations on February 9, 2021.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the New York Stock Exchange Arca (“NYSE”), ordinarily 4:00 p.m. Eastern time, on each day during which the NYSE is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

MBS and ABS Risks: MBS and ABS may be less liquid than other bonds, and may be more sensitive than other bonds to the market’s perception of issuers and creditworthiness of payees, particularly in declining general economic conditions when concern regarding mortgagees’ ability to pay (e.g., the ability of homeowners, commercial mortgagees, consumers with student loans, automobile loans or credit card debtholders to make payments on the underlying loan pools) rises, which may result in the Fund experiencing difficulty selling or valuing these securities. MBS and ABS issued by participants in housing and commercial real estate finance, as well as asset-backed markets generally, have experienced extraordinary weakness and volatility at various times in recent years, and may decline quickly in the event of a substantial economic or market downturn.

Fixed Income Securities Risks: Risks of investments in fixed income securities include, without limitation, credit risk, interest rate risk, liquidity risk, maturity risk and prepayment risk. These risks could affect the value of investments in which the Fund invests, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments.

Credit Risk: The value of fixed income securities is dependent on the creditworthiness of their issuers. A deterioration in the financial condition or credit rating of an issuer, changes in the market’s perception of the issuer’s financial strength, or a deterioration in general economic conditions may have an adverse effect on the value of the investment and may cause an issuer to fail to pay principal and interest when due.

Interest Rate Risk. The value of the Fund’s fixed income investments will generally vary inversely with the direction of prevailing interest rates. In general, rising interest rates will negatively impact the price of a fixed rate debt instrument and falling interest rates will have a positive effect on price. Risks associated with rising interest rates are heightened given that interest rates in the U.S. are near historic lows. Adjustable rate instruments also react to interest rate changes in a similar manner, although generally to a lesser degree (depending, however, on the characteristics of the reset terms, including the index chosen, frequency of reset and reset caps or floors, among other factors). Interest rate sensitivity is generally more pronounced and less predictable in instruments with uncertain payment or prepayment schedules.

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Virtus Newfleet ABS/MBS ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

​

Virtus Newfleet ABS/MBS ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Virtus Newfleet High Yield Bond ETF (BLHY)

How did the markets perform during the ETF’s fiscal year ended July 31, 2023?

The Bloomberg U.S. High Yield 2% Issuer Capped Bond Index generated a 4.42% return for the fiscal year ended July 31, 2023. The high yield market in general was volatile as investor fears of a recession continuously shifted. In addition, the banking system stress surrounding the collapse of Silicon Valley Bank drove heightened volatility in March of 2023. The high yield market largely rallied from late spring through the end of the fiscal year as a series of favorable economic data releases led investors to view a soft landing for the economy as the most likely scenario. The optimism was fueled by the fact that inflation appeared to recede during the period, while economic growth remained robust.

Credit spreads tightened by more than 1.00% during the fiscal year, which helped offset the rise in “risk-free” rates. Spread refers to the additional compensation of high yield bonds over ​U.S. Treasuries, which are considered the “risk-free” comparison from a credit risk perspective. Single-B-rated securities outperformed on a total return basis as they had less exposure to changes in interest rates than double-B-rated securities, and saw more spread tightening than triple-C-rated securities.

From an industry perspective, gaming, financial/lease, and leisure were the largest contributors to returns for the high yield market, while media cable, wirelines, and media other were the largest detractors. Looking at total returns, oil field services had the highest return, at over 20%, while media cable had the lowest, at -4.8%.

What factors affected the performance of the ETF during its fiscal year?

For the 12 months ended July 31, 2023, the Fund generated a total return of 6.31% based on net asset value and 6.37% based on market price, versus 4.42% for its benchmark, the Bloomberg U.S. High Yield 2% Issuer Capped Bond Index. The Fund outperformed its benchmark by more than 1.9% due to strong selection within the high yield rating tiers, especially triple-Cs, which returned over 10%. In addition, the Fund was underweight double-Bs relative to its benchmark, which were the worst performing rating tier. The Fund maintained some out-of-index exposures that were generally a drag on performance.

From an industry perspective, investments in health care, metals & mining, and industrial other were the largest contributors to Fund performance, while technology, leisure, and automotive were the largest detractors. From an individual security perspective, the top three contributors were bonds of New Enterprise Stone & Lime, Taseko Mines, and Global Infrastructure Solutions, while the bottom three contributors were Rackspace Technology, Hearthside Foods, and DISH DBS. Lastly, the Fund had a slightly lower duration, or sensitivity to changes in interest rates, than the Index, which contributed to the outperformance given the move higher in “risk-free” rates during the fiscal year.

The preceding information is the opinion of the investment adviser and sub-adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

(1)The Bloomberg U.S. High-Yield 2% Issuer Capped Bond Index is a market capitalization-weighted index that measures fixed rate non-investment grade debt securities of U.S. and non-U.S. corporations. No single issuer accounts for more than 2% of market cap. The index is calculated on a total return basis. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)The Fund commenced operations on December 5, 2016.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the New York Stock Exchange Arca (“NYSE”), ordinarily 4:00 p.m. Eastern time, on each day during which the NYSE is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Fixed Income Securities: Risks of investments in fixed income securities include, without limitation, credit risk, interest rate risk, liquidity risk, maturity risk and prepayment risk. These risks could affect the value of investments of the Fund, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments.

Credit Risk: The value of fixed income securities is dependent on the creditworthiness of their issuers.A deterioration in the financial condition or credit rating of an issuer, changes in the market’s perception of the issuer’s financial strength, or a deterioration in general economic conditions may have an adverse effect on the value of the investment and may cause an issuer to fail to pay principal and interest when due.

Interest Rate Risk. The value of the Fund’s fixed income investments will generally vary inversely with the direction of prevailing interest rates.In general, rising interest rates will negatively impact the price of a fixed rate debt instrument and falling interest rates will have a positive effect on price.Risks associated with rising interest rates are heightened given that interest rates in the U.S.are near historic lows.Adjustable rate instruments also react to interest rate changes in a similar manner, although generally to a lesser degree (depending, however, on the characteristics of the reset terms, including the index chosen, frequency of reset and reset caps or floors, among other factors).Interest rate sensitivity is generally more pronounced and less predictable in instruments with uncertain payment or prepayment schedules.

Junk Bonds or High Yield Securities: High yield securities are generally subject to greater levels of credit quality risk than investment grade securities. The retail secondary market for these “junk bonds” may be less liquid than that of higher-rated fixed income securities, and adverse conditions could make it difficult at times to sell these securities or could result in lower prices than higher-rated fixed income securities. These risks can reduce the value of the Fund’s shares and the income it earns.

Foreign Securities: Investments in foreign securities involve the risk of possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets of the Fund from foreign markets, political or financial instability, or diplomatic and other developments which could affect such investments. Further, foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. These risks are generally greater in emerging markets.

Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times.

Loan Participation and Assignment: The principal risk associated with acquiring loan participation interests and assignments is the credit risk associated with the underlying corporate borrower. There is also a risk that there may not be a readily available market for loan participation interests or assignments and, in some cases, this could result in the Fund disposing of such securities at a substantial discount from face value or holding such securities until maturity.

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Virtus Newfleet High Yield Bond ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

Virtus Newfleet High Yield Bond ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Virtus Seix Senior Loan ETF (SEIX)

How did the markets perform during the ETF’s fiscal year ended July 31, 2023?

Fixed income markets saw some difficulty in 2022 and into 2023 as the Federal Reserve (the Fed) raised interest rates more than expected, culminating in a 5.00% increase in the Federal funds rate by the end of the 12-month period. Fixed rate debt struggled during the Fed’s continued rate hikes, but floating rate bank loan debt did well as its short duration, or lower sensitivity to changes in interest rates, and floating rate structure enabled it to take advantage of the hike in its short-term reference rates (LIBOR and SOFR). The Ukraine war, while continuing, became less of a major risk factor, as a resilient U.S. economy took center stage with growth, and inflation, being the main topics of discussion. While inflation declined from 2022’s high levels, the market remained concerned that inflation could be stickier for a longer period of time, thus keeping the Fed focused on rate hikes.

Investors witnessed a regional banking crisis in March 2023 after Silicon Valley Bank’s (SVB) bankruptcy filing awakened the market to a risk associated with the Fed’s increase in rates. Most banks categorize their investment holdings into two buckets: Available for Sale (AFS) and Held to Maturity (HTM). The AFS grouping is a smaller portion of the investment portfolio and is marked to market. In the case of rising interest rates, fixed rate debt will trade lower, with losses unrealized until sold, as lower prices are needed to offset the rise in rates. The AFS category assumes much of that mark-to-market loss. The HTM group, typically a much larger portion of a bank’s portfolio, is not marked to market. Should there be a need to immediately sell these securities during times of financial stress, losses may occur due to unexpected and unaccounted for reasons. Such was the case for SVB and eventually Signature Bank and First Republic Bank. This remained an issue in the marketplace through the end of the fiscal year, as the Fed continued to raise rates, placing pressure on banks’ investment portfolios.

Despite the rise in interest rates during the 12-month period, the U.S. economy continued to grow and inflationary pressures continued to linger. While there was a modest increase in defaults in the bank loan sector, they remained slightly below historical norms.

What factors affected the performance of the ETF during its fiscal year?

For the 12 months ended July 31, 2023, the ETF generated a total return of 9.46% based on net asset value and 9.60% based on market price, versus the ETF’s benchmark, the Credit Suisse Leveraged Loan Index, which returned 9.49%. The Fund’s focus on higher quality issues contributed positively to performance as concerns about strained consumers, a possible banking crisis, and fears of higher rates impacting the bottom line of floating rate debt issuers continue to swirl around the market. There were periods of low-quality rallies over the year as the recession anticipated in the first half of 2023 continued to be pushed further out. However, risk concerns eventually re-entered the conversation and the outperformance of higher quality assets resumed, thereby helping the Fund’s 12-month return.

The preceding information is the opinion of the investment adviser and sub-adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

(1)The Credit Suisse Leveraged Loan Index is a market-weighted index that tracks the investable universe of the U.S. dollar denominated leveraged loans. The index is calculated on a total return basis. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)Commencement of operations on April 24, 2019.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the New York Stock Exchange Arca (“NYSE”), ordinarily 4:00 p.m. Eastern time, on each day during which the NYSE is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Fixed Income Securities: Risks of investments in fixed income securities include, without limitation, credit risk, interest rate risk, liquidity risk, maturity risk and prepayment risk. These risks could affect the value of investments of the Fund, possibly causing the Fund’s share price and total return to be reduced and fluctuate more than other types of investments.

Junk Bonds or High Yield Securities: High yield securities are generally subject to greater levels of credit quality risk than investment grade securities. The retail secondary market for these “junk bonds” may be less liquid than that of higher-rated fixed income securities, and adverse conditions could make it difficult at times to sell these securities or could result in lower prices than higher-rated fixed income securities. These risks can reduce the value of the Fund’s shares and the income it earns.

Foreign Securities: Investments in foreign securities involve the risk of possible adverse changes in investment or exchange control regulations or currency exchange rates, expropriation or confiscatory taxation, limitation on the removal of cash or other assets of the Fund from foreign markets, political or financial instability, or diplomatic and other developments which could affect such investments. Further, foreign securities often trade with less frequency and volume than domestic securities and therefore may exhibit greater price volatility. These risks are generally greater in emerging markets.

Loans: Loans may be unsecured or not fully collateralized, may be subject to restrictions on resale and/or trade infrequently on the secondary market. Loans can carry significant credit and call risk, can be difficult to value and have longer settlement times than other investments, which can make loans relatively illiquid at times.

Loan Participation and Assignment: The principal risk associated with acquiring loan participation interests and assignments is the credit risk associated with the underlying corporate borrower. There is also a risk that there may not be a readily available market for loan participation interests or assignments and, in some cases, this could result in the Fund disposing of such securities at a substantial discount from face value or holding such securities until maturity.

Non-Diversified: The portfolio is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the portfolio invests more of its assets in the securities of fewer issuers than would a diversified portfolio.

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track. The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Virtus Seix Senior Loan ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

​

Virtus Seix Senior Loan ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Virtus Stone Harbor Emerging Markets High Yield Bond ETF (VEMY)

Inception December 12, 2022

How did the markets perform during the ETF’s fiscal period from December 12, 2022, through July 31, 2023?

By the end of 2022, tentative signs of easing inflation in the U.S. prompted cautious optimism about the global inflation outlook, which led to forecasts of less aggressive monetary tightening in 2023. Nevertheless, stubbornly high inflation readings globally, banking sector stress stemming from the rapid increase in the U.S. Fed funds rate, and uncertainty over the outcome of the U.S. debt ceiling debate weighed on market sentiment in February and March of 2023.

Concerns over each of these issues subsided by the end of the fiscal period – particularly as inflation data appeared to suggest the effects of tightening were continuing to filter through the economy. These developments supported investor sentiment in emerging markets (EM) bond markets. In addition, during this time, markets pushed expectations for a possible U.S. recession further into the future. Further support to EM debt markets came from bilateral lenders and multilateral lenders, including the International Monetary Fund, which continued to lend to many of the most challenged EM sovereign credits, effectively reducing default risk.

Against this backdrop, EM debt spreads narrowed on average, reflecting lower perceived near-term default risks among sovereign and corporate borrowers.

What factors affected the performance of the ETF during the fiscal period?

The Fund outperformed its benchmark, the J.P. Morgan Hard Currency Credit 50-50 (EMBIG Diversified and CEMBI Broad Diversified) High Yield Index, as a result of country selection in hard currency sovereign debt and country exposure in hard currency corporate debt. Returns that were not explained by credit decisions were positive.

The top contributors to relative performance in hard currency sovereign debt included overweights in Argentina, El Salvador, and Pakistan. In hard currency corporate debt, an underweight exposure in China, overweight exposure and issue selection in Ghana, and issue selection in Jamaica all enhanced performance.

The top detractors from performance in hard currency sovereign debt included an overweight and issue selection in Ecuador, an underweight and issue selection in Sri Lanka, and an overweight and issue selection in Mexico. In hard currency corporate debt, overweight exposures and issue selection in Brazil and Mexico detracted most from relative performance. Underweight exposure in Ukraine also detracted from relative returns.

The preceding information is the opinion of the investment adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

*Total return calculated for a period of less than 1 year is not annualized

(1)The J.P. Morgan Hard Currency Credit 50-50 (EMBIG Diversified and CEMBI Broad Diversified) High Yield Index tracks liquid, US-dollar emerging market fixed and floating-rate debt instruments issued by corporate, sovereign, and quasi-sovereign entities. The index tracks instruments that are classified as high yield (HY) in the established J.P. Morgan EMBI Global Diversified and J.P. Morgan CEMBI Broad Diversified indices and combines them with an equal weight (50-50). The index is calculated on a total return basis with dividends reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)Commencement of operations on December 12, 2022.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the Nasdaq Stock Market (“Nasdaq”), ordinarily 4:00 p.m. Eastern time, on each day during which the Nasdaq is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Emerging Markets Investing: Emerging markets securities may be more volatile, or more greatly affected by negative conditions, than those of their counterparts in more established foreign markets.

Credit & Interest: Debt securities are subject to various risks, the most prominent of which are credit and interest rate risk. The issuer of a debt security may fail to make interest and/or principal payments. Values of debt securities may rise or fall in response to changes in interest rates, and this risk may be enhanced with longer-term maturities.

Foreign Investing: Investing in foreign securities subjects the portfolio to additional risks such as increased volatility; currency fluctuations; less liquidity; less publicly available information about the foreign investment; and political, regulatory, economic, and market risk.

Junk Bonds or High Yield Securities: High yield securities are generally subject to greater levels of credit quality risk than investment grade securities.The retail secondary market for these “junk bonds” may be less liquid than that of higher-rated fixed income securities, and adverse conditions could make it difficult at times to sell these securities or could result in lower prices than higher-rated fixed income securities.These risks can reduce the value of the Fund’s shares and the income it earns.

Non-Diversified: The portfolio is not diversified and may be more susceptible to factors negatively impacting its holdings to the extent the portfolio invests more of its assets in the securities of fewer issuers than would a diversified portfolio.

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track.The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Virtus Stone Harbor Emerging Markets High Yield Bond ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

Virtus Stone Harbor Emerging Markets High Yield Bond ETF (continued)

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Virtus Terranova U.S. Quality Momentum ETF (JOET)

How did the markets perform during the ETF’s fiscal year ended July 31, 2023?

U.S. equities rebounded during the first half of the fiscal year, surprising many investors after their sharp decline in 2022. The tech-heavy Nasdaq Composite^® Index had its best half-year in 40 years. The U.S. economy proved resilient in the face of the Federal Reserve’s (the Fed’s) aggressive monetary policy tightening and was able to avoid a much-anticipated recession.

Higher interest rates set off a regional banking crisis in March 2023 with the collapses of Silicon Valley Bank, Signature Bank, and First Republic Bank. After hitting 40-year highs in the summer of 2022, inflation marched steadily down during the fiscal year. Investors were hopeful that this would provide an open door for the Fed to pause on lifting interest rates.

The S&P 500^® Index returned 13.02% for the 12 months ended July 31, 2023, as the information technology and the communication services sectors were the best performers, while interest-rate sensitive groups including real estate and utilities were the leading detractors.

What factors affected the performance of the ETF during its fiscal year?

For the 12 months ended July 31, 2023, the Fund’s total return based on net asset value (NAV) was 9.72%. The Fund’s total return based on market price was 9.67%. For the same period, the Terranova U.S. Quality Momentum Index returned 10.17%. Tracking error largely reflected the Fund’s expense ratio and trading and management costs.

Positive contributors to Fund performance included positions in the financials, information technology, and consumer discretionary sectors. Arch Capital Group, Broadcom, and D.R. Horton were the largest contributors for the fiscal year.

Specific names in the consumer discretionary, information technology, consumer staples, and health care sectors detracted from Fund performance. The largest negative contributors were Tesla, Enphase Energy, and Advanced Micro Devices. The Fund no longer holds Enphase Energy at the fiscal year end.

The preceding information is the opinion of the investment adviser. Any such opinions are subject to change at any time based upon market or other conditions and should not be relied upon as investment advice. Statements of fact are from sources considered reliable, but the investment adviser makes no representation or warranty as to their completeness or accuracy. Past performance is no guarantee of future results, and there is no guarantee that market forecasts will be realized.

Performance as of 7/31/2023

  

(1)The Terranova U.S. Quality Momentum Index is an equally weighted index designed to provide diversified exposure to quality momentum large-cap equities listed in the United States. The index is calculated on a total return basis with dividends reinvested. The index is unmanaged, its returns do not reflect any fees, expenses, or sales charges, and is not available for direct investment.

(2)Commencement of operations on November 17, 2020.

Performance data quoted represents past performance and past performance does not guarantee future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than the original cost. Current performance data may be higher or lower than actual data quoted. Returns do not reflect the deduction of taxes a shareholder would pay on Fund distributions or the redemption of Fund shares. For the most current month-end performance data please visit www.virtusetfs.com or call toll free (800) 243-4361. Market price returns are based on the mid-point of the highest bid and lowest offer for Fund shares as of the scheduled close of regular trading on the Nasdaq Stock Market (“Nasdaq”), ordinarily 4:00 p.m. Eastern time, on each day during which the Nasdaq is open for trading, and do not represent the returns an investor would receive if shares were traded at other times.

Equity Securities: The market price of equity securities may be adversely affected by financial market, industry, or issuer-specific events. Focus on a particular style or on small or medium-sized companies may enhance that risk.

Momentum Factor Investing: Momentum investing is subject to the risk that the securities may be more volatile than the market as a whole. There may be periods when the momentum style of investing is out of favor and therefore, the investment performance of the portfolio may suffer.

Management’s Discussion of Fund Performance (unaudited) (continued)

July 31, 2023

Passive Strategy/Index Risk: A passive investment strategy seeking to track the performance of the underlying Index may result in the portfolio holding securities regardless of market conditions or their current or projected performance. This could cause the portfolio’s returns to be lower than if the portfolio employed an active strategy.

Momentum Factor Investing: Momentum investing is subject to the risk that the securities may be more volatile than the market as a whole. There may be periods when the momentum style of investing is out of favor and therefore, the investment performance of the portfolio may suffer.

Quality Factor Investing Risk: Investing based on a quality factor is subject to the risk that the past performance of these companies’ securities does not continue or that the returns on a quality style of investing are less than returns on other styles of investing or the overall stock market .

Exchange Traded Funds: The value of an ETF may be more volatile than the underlying portfolio of securities the ETF is designed to track.The costs of owning the ETF may exceed the cost of investing directly in the underlying securities.

Market Price/NAV: Shares of ETFs often trade at a discount to their net asset value, which may increase investors’ risk of loss. At the time of sale, an investor’s shares may have a market price that is above or below the Fund’s NAV.

No Guarantee: There is no guarantee that the Fund will meet its objective.

Prospectus: For additional information on risks, please see the Fund’s prospectus. The Fund may not be suitable for all investors.

Value of a $10,000 Investment Since Inception at Net Asset Value

The chart above represents historical performance of a hypothetical investment of $10,000 over the life of the Fund, assuming reinvestment of distributions. Past performance does not guarantee future results.

Virtus Terranova U.S. Quality Momentum ETF (continued)

Shareholder Expense Examples (unaudited)

 

We believe it is important for you to understand the impact of costs on your investment. All funds have operating expenses. As a shareholder of the Virtus Duff & Phelps Clean Energy ETF, Virtus Newfleet ABS/MBS ETF, Virtus Newfleet High Yield Bond ETF, Virtus Seix Senior Loan ETF, Virtus Stone Harbor Emerging Markets High Yield Bond ETF and Virtus Terranova U.S. Quality Momentum ETF (each, a “Fund”) you may incur two types of costs: (1) transaction costs, which include brokerage commissions that you pay when purchasing or selling shares of the Fund; and (2) ongoing costs, which include advisory fees and other fund expenses, if any. The following example is intended to help you understand your ongoing costs (in dollars and cents) of investing in a Fund and to compare these costs with the ongoing costs of investing in other funds. The examples are based on an investment of $1,000 invested at the beginning of the period and held throughout the entire period (February 1, 2023 to July 31, 2023).

Actual expenses

The first line under each Fund in the table below provides information about actual account values and actual expenses. You may use the information in this line, together with the amount you invested, to estimate the expenses that you paid over the period. Simply divide your account value by $1,000 (for example, an $8,600 account value divided by $1,000 = 8.6), then multiply the result by the number in the first line for your Fund under the heading entitled “Expenses Paid During Period” to estimate the expenses you paid on your account during this period.

Hypothetical example for comparison purposes

The second line under each Fund in the table provides information about hypothetical account values and hypothetical expenses based on each Fund’s actual expense ratio and an assumed rate of return of 5% per year before expenses, which is not each Fund’s actual return. The hypothetical account values and expenses may not be used to estimate the actual ending account balance or expenses you paid for the period. You may use this information to compare the ongoing costs of investing in each Fund and other funds. To do so, compare this 5% hypothetical example with the 5% hypothetical examples that appear in the shareholder reports of the other funds. Please note that the expenses shown in the table are meant to highlight your ongoing costs only and do not reflect any transactional costs, such as brokerage commissions paid on purchases and sales of Fund shares. Therefore, the second line under each Fund in the table is useful in comparing ongoing Fund costs only and will not help you determine the relative total costs of owning different funds.

In addition, if these transactional costs were included, your costs would have been higher.

  

(1)Assuming 5% return before expenses.

(2)Annualized expense ratios reflect expenses net of waived fees or reimbursed expenses, if applicable.

(3)Expenses are calculated using each Fund’s annualized expense ratio, multiplied by the average account value for the period, multiplied by 181/365 (to reflect the six-month period).

Schedule of Investments — Virtus Duff & Phelps Clean Energy ETF

July 31, 2023

Schedule of Investments — Virtus Duff & Phelps Clean Energy ETF (continued)

July 31, 2023

The following table summarizes valuation of the Fund’s investments under the fair value hierarchy levels as of July 31, 2023.

Schedule of Investments — Virtus Newfleet ABS/MBS ETF

July 31, 2023

Schedule of Investments — Virtus Newfleet ABS/MBS ETF (continued)

July 31, 2023

Schedule of Investments — Virtus Newfleet ABS/MBS ETF (continued)

July 31, 2023

Schedule of Investments — Virtus Newfleet High Yield Bond ETF

July 31, 2023