ck0001540305-20221031
Blue Horizon BNE ETF
(BNE)
Listed
on NYSE
Arca, Inc.
PROSPECTUS
February 28,
2023
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
of these securities or passed upon the accuracy or adequacy of this Prospectus.
Any representation to the contrary is a criminal offense.
Blue
Horizon BNE ETF
FUND
SUMMARY
Investment Objective
The Blue Horizon BNE ETF (the
“Fund”) seeks to track the performance, before fees and expenses, of the Blue
Horizon New Energy Economy 100 Index (the “Index”).
Fees and Expenses of the
Fund
The
following table describes the fees and expenses you may pay if you buy, hold,
and sell shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and Example
below.
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Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment) |
Management
Fees |
0.89% |
Distribution
and/or Service (12b-1) Fees |
0.00% |
Other
Expenses |
0.00% |
Total
Annual Fund Operating Expenses |
0.89% |
Less
Fee Waiver1 |
(0.02)% |
Total
Annual Fund Operating Expenses Less Fee Waiver |
0.87% |
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1
The Fund’s investment
adviser has agreed to waive two basis points (0.02%) of its management fees for
the Fund until at least February 28,
2024. This agreement may only be terminated before that date by
or with the consent of the Fund’s Board of Trustees.
Expense 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 continue to hold or 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. Although your actual costs may be higher
or lower, based on these assumptions your costs would be:
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1
Year |
3
Years |
5
Years |
10
Years |
$89 |
$282 |
$491 |
$1,094 |
Portfolio
Turnover
The Fund pays transaction
costs, such as commissions, when it buys and sells securities (or “turns over”
its portfolio). A higher portfolio turnover rate may indicate higher transaction
costs and may result in higher taxes when Shares are held in a taxable account.
These costs, which are not reflected in annual fund operating expenses or in the
Example, affect the Fund’s performance. For the fiscal year ended October 31,
2022, the Fund’s portfolio turnover rate was 65% of the average value of its
portfolio.
Principal Investment
Strategy
The
Fund uses a “passive management” (or indexing) approach to track the
performance, before fees and expenses, of the Index. The Index seeks to track
the performance of a portfolio of companies that are leaders, enablers, and
beneficiaries of a transformational shift in the way energy is produced, stored,
distributed, and consumed. The Index was created in 2020 and is owned by Blue
Horizon Capital LLC (“Blue Horizon” or the “Index Provider”).
Blue
Horizon New Energy Economy 100 Index
The
Index consists of a portfolio of approximately 100 U.S. and foreign companies
from the following New Energy Economy Sectors (collectively, companies
participating in the “New Energy Economy”):
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Electric
Vehicles & Other New Energy Consuming Applications |
Companies
whose core products, services, technologies, or intellectual property are
being transformed by advances in the way energy is used or consumed
(e.g.,
electric vehicles, portable consumer devices and electronics, devices that
improve mobility, and tools). |
Energy
Distribution |
Companies
driving advancements in the distribution of energy (e.g.,
micro grids, distributed energy systems, smart grids, charging
infrastructure and services, and related infrastructure).
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Energy
Storage |
Companies
developing new technologies, products, or services for the storage of
energy (e.g.,
batteries, thermal units, mechanical units, chemical units, and related
battery sub-components). |
Energy
Materials |
Companies
engaged in activities related to the mining and production or refinement
of critical elements, critical intermediates, specialty materials,
performance materials, advanced material systems, and sub-systems used
across the New Energy Economy. |
Energy
Generation |
Companies
engaged in making clean or alternative energy generation more cost
effective, safe, and sustainable (e.g.,
energy generation from solar, wind, hydrogen, fusion, fission, geothermal,
biofuels, and clean
fuels). |
Companies
eligible for inclusion in the Index are those included in the Blue Horizon New
Energy Economy Universe (the “BH Universe”), a proprietary database of companies
in the New Energy Economy Sectors listed above. Companies in the BH Universe are
then screened for investibility requirements including a market capitalization
in excess of $200 million and a minimum average daily value traded of $1
million. Companies in the BH Universe are then further screened for relevance to
their applicable New Energy Economy Sectors, and assigned a score based on
revenue, market share, growth, and technology leadership relative to their New
Energy Economy Sectors. Companies with stronger ties to the New Energy Economy
Sectors receive higher scores, and the companies with the highest scores are
included in the Index, subject to a maximum of 30 companies in any one New
Energy Economy Sector.
The
Index is rebalanced semi-annually, and Index constituents are equally weighted
at the time of each rebalance. The Index is reconstituted (i.e.,
companies added or removed from the Index) when the Index Provider determines
that changes to the Index constituents are appropriate to maintain the integrity
of the Index’s theme, e.g.,
by removing companies that are no longer a leader in their New Energy Economy
Sector or adding companies that have gained relevance in their New Energy
Economy Sector.
The
Fund’s Investment Strategy
The
Fund will generally use a “replication” strategy to achieve its investment
objective, meaning the Fund will generally invest in all of the component
securities of the Index in the same approximate proportions as in the
Index. However, the Fund may use a “representative sampling” strategy, meaning
it may invest in a sample of the securities 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 Fund’s 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 is expected to concentrate (i.e., hold more than 25% of its total assets)
in securities of an industry or group of related industries to approximately the
same extent as the Index. As of October 31, 2022, the Index was not concentrated
in any industry or group of related industries; however, securities in the
energy, industrial, and materials sectors made up a significant portion of the
Index.
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 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 per share
(“NAV”), trading price, yield, total return and/or ability to meet its
objectives. For more information about the risks of investing in the Fund, see
the section in the Fund’s Prospectus titled “Additional Information About the
Fund.”
•Associated
Risks of New Energy Economy Companies. New
Energy Economy companies include energy, industrial, infrastructure, and
logistics companies, among others, and will therefore be susceptible to adverse
economic, environmental, business, regulatory, or other occurrences affecting
such companies. New Energy Economy companies may be affected by the obsolescence
of existing technology, short product cycles, falling prices and profits,
competition from new market entrants and general economic conditions. In
addition, intense competition and legislation resulting in more strict
government regulations and enforcement policies and specific expenditures for
cleanup efforts can significantly affect this sector. Risks associated with
hazardous materials, fluctuations in energy prices and supply and demand of
alternative energy fuels, energy conservation, the success of exploration
projects and tax and other government regulations can significantly affect New
Energy Economy companies. Also, supply and demand for specific products or
services, the supply and demand for oil and gas, the price of oil and gas,
production spending, government regulation, world events and economic conditions
may affect this sector.
•Concentration
Risk.
The
Fund’s investments will be concentrated in an industry or group of industries to
the extent that the Index is so concentrated. In such event, the value of the
Shares may rise and fall more than the value of shares of a fund that invests in
securities of companies in a broader range of industries.
•Depositary
Receipt Risk.
Depositary
Receipts involve risks similar to those associated with investments in foreign
securities, such as changes in political or economic conditions of other
countries and changes in the exchange rates of foreign currencies. Depositary
Receipts listed on U.S. exchanges are issued by banks or trust companies and
entitle the holder to all dividends and capital gains that are paid out on the
underlying foreign shares (“Underlying Shares”). When the Fund invests in
Depositary Receipts as a substitute for an investment directly in the Underlying
Shares, the Fund is exposed to the risk that the Depositary Receipts may not
provide a return that corresponds precisely with that of the Underlying Shares.
•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, or sectors in which the Fund invests. Common
stocks are generally exposed to greater risk than other types of securities,
such as preferred stock and debt obligations, because common stockholders
generally have inferior rights to receive payment from issuers. In addition,
local, regional or global events such as war, including Russia’s invasion of
Ukraine, acts of terrorism, spread of infectious diseases or other public health
issues, recessions, rising inflation, or other events could have
a
significant negative impact on the Fund and its investments. For example, the
global pandemic caused by COVID-19, a novel coronavirus, and the aggressive
responses taken by many governments, including closing borders, restricting
international and domestic travel, and the imposition of prolonged quarantines
or similar restrictions, has had negative impacts, and in many cases severe
impacts, on markets worldwide. The COVID-19 pandemic has caused prolonged
disruptions to the normal business operations of companies around the world and
the impact of such disruptions is hard to predict. Such events may affect
certain geographic regions, countries, sectors and industries more significantly
than others. Such events could adversely affect the prices and liquidity of the
Fund’s portfolio securities or other instruments and could result in disruptions
in the trading markets.
•ETF
Risks.
The
Fund is an ETF, and, as a result of an ETF’s 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 Authorized
Participants (“APs”). In addition, there may be a limited number of market
makers and/or liquidity providers in the marketplace. To the extent either of
the following events occur, Shares may trade at a material discount to NAV 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. Because
securities held by the Fund may trade on foreign exchanges that are closed when
the Fund’s primary listing exchange is open, there are likely to be deviations
between the current price of a security and the security’s last quoted price
from the closed foreign market. This may result in premiums and discounts that
are greater than those experienced by domestic ETFs.
◦Trading. Although
Shares are listed for trading on NYSE Arca, Inc. (the “Exchange”) and may be
traded on U.S. exchanges other than the Exchange, there can be no assurance that
Shares will trade with any volume, or at all, on any stock exchange. In stressed
market conditions, the liquidity of Shares may begin to mirror the liquidity of
the Fund’s underlying portfolio holdings, which can be significantly less liquid
than Shares, and this could lead to differences between the market price of the
Shares and the underlying value of those Shares.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. Investments in non-U.S. securities also
may be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. These and other factors
can make investments in the Fund more volatile and potentially less liquid than
other types of investments.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Fund’s adviser relies upon the Index Provider and
its agents to compile, determine, maintain, construct, reconstitute, rebalance,
compose, calculate (or arrange for an agent to calculate), and disseminate the
Index accurately. Any losses or costs associated with errors made by the Index
Provider or its agents generally will be borne by the Fund and its shareholders.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial
resources,
and management personnel and tend to concentrate on fewer geographical markets
relative to large-capitalization companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and earnings.
•Models
and Data Risk. The
composition of the Index is heavily dependent on proprietary quantitative models
as well as information and data supplied by third parties (“Models and
Data”).
When
Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon may lead to securities being included in or excluded from the
Index that would have been excluded or included had the Models and Data been
correct and complete. If the composition of the Index reflects such errors, the
Fund’s portfolio can be expected to reflect the errors, too.
•Passive
Investment Risk.
The Fund is not actively managed, and its 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, the selling
of shares of that security is otherwise required upon a reconstitution or
rebalancing of the Index, or is necessary to comply with investment policies
that apply to the Fund but not the Index.
•Sector
Risk.
To the extent the Fund invests more heavily in particular sectors of the
economy, its performance will be especially sensitive to developments that
significantly affect those sectors.
◦Energy
Sector Risk.
The energy sector is comprised of energy, industrial, infrastructure, and
logistics companies, and will therefore be susceptible to adverse economic,
environmental, business, regulatory, or other occurrences affecting that sector.
The energy sector has historically experienced substantial price volatility. At
times, the performance of these investments may lag the performance of other
sectors or the market as a whole. Companies operating in the energy sector are
subject to specific risks, including, among others, fluctuations in commodity
prices; reduced consumer demand for commodities such as oil, natural gas, or
petroleum products; reduced availability of natural gas or other commodities for
transporting, processing, storing, or delivering; slowdowns in new construction;
extreme weather or other natural disasters; and threats of attack by terrorists
on energy assets. Additionally, energy sector companies are subject to
substantial government regulation and changes in the regulatory environment for
energy companies may adversely impact their profitability. Over time, depletion
of natural gas reserves and other energy reserves may also affect the
profitability of energy companies.
◦Industrial
Sector Risk. The
industrial sector can be significantly affected by, among other things,
worldwide economic growth, supply and demand for specific products and services,
rapid technological developments, international political and economic
developments, environmental issues, tariffs and trade barriers, and tax and
governmental regulatory policies. As the demand for, or prices of, industrials
increase, the value of the Fund’s investments generally would be expected to
also increase. Conversely, declines in the demand for, or prices of, industrials
generally would be expected to contribute to declines in the value of such
securities. Such declines may occur quickly and without warning and may
negatively impact the value of the Fund and your investment.
◦Materials
Sector Risk. Companies
in the materials sector may be adversely impacted by the volatility of commodity
prices, changes in exchange rates, depletion of resources, over-production,
litigation and changes in government regulations, among other
factors.
•Tracking
Error Risk.
As
with all index funds, the performance of the Fund and the 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.
Performance
The following
performance information indicates some of the risks of investing in the
Fund. The bar chart shows the Fund’s performance for calendar
years ended December 31. The table illustrates how the Fund’s average annual
returns for the 1-year and since inception periods compare with those of a broad
measure of market performance and the Index. The Fund’s past performance,
before and after taxes, does not necessarily indicate how it will perform in the
future. Updated performance information is available on the
Fund’s website at www.bne-etf.com.
Calendar Year Total
Returns
During the period of time shown
in the bar chart, the Fund’s highest quarterly return
was 7.13% for the quarter ended December 31, 2022,
and the lowest quarterly return was
-19.00% for the quarter ended June 30,
2022.
Average Annual Total Returns
For the Periods Ended December 31,
2022
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Blue
Horizon BNE ETF |
1
Year |
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Since
Inception
(12/8/2020) |
Return Before
Taxes |
-19.18% |
| -3.59% |
Return After Taxes on
Distributions |
-19.12% |
| -3.56% |
Return After Taxes on Distributions and
Sale of Fund Shares |
-11.20% |
| -2.66% |
Blue
Horizon New Energy Economy 100 Total Return Index
(reflects no deduction for
fees, expenses, or taxes) |
-18.17% |
| -2.24% |
S&P
500 Energy Sector Total Return Index
(reflects
no deduction for fees, expenses, or taxes) |
65.71% |
| 54.24% |
S&P
500 Total Return Index
(reflects
no deduction for fees, expenses, or taxes) |
-18.11% |
| 3.34% |
After-tax returns are
calculated using the historical highest individual federal marginal income tax
rates during the period covered by the table above and do not reflect the impact
of state and local taxes. Actual after-tax returns
depend on an investor’s tax situation and may differ from those shown. After-tax
returns shown are not relevant to investors who hold their Shares through
tax-deferred arrangements such as an individual retirement account (“IRA”) or
other tax-advantaged accounts. In certain cases, the figure
representing “Return After Taxes on Distributions and Sale of Shares” may be
higher than the other return figures for the same period. A higher after-tax
return results when a capital loss occurs upon redemption and provides an
assumed tax deduction that benefits the
investor.
Management
Investment
Adviser: Exchange
Traded Concepts, LLC (the “Adviser”) serves as the Fund’s investment
adviser.
Portfolio
Managers: Andrew
Serowik, a Portfolio Manager of the Adviser, has served as a portfolio manager
of the Fund since its inception in December 2020. Todd Alberico and Gabriel Tan,
each a Portfolio Manager of the Adviser, have served as a portfolio manager of
the Fund since June 2021.
Purchase
and Sale of Shares
Shares
are listed on the Exchange, and individual Shares may only be bought and sold in
the secondary market through brokers 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).
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.
Investors
may incur costs attributable to the difference between the highest price a buyer
is willing to pay to purchase Shares (bid) and the lowest price a seller is
willing to accept for Shares (ask) when buying or selling Shares in the
secondary market (the “bid-ask spread”). Recent information about the Fund,
including its NAV, market price, premiums and discounts, and bid-ask spreads is
available on the Fund’s website at www.bne-etf.com.
Tax
Information
Fund
distributions are generally taxable as ordinary income, qualified dividend
income, or capital gains (or a combination), unless your investment is in an 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
Additional
Information about the Fund’s 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.
Additional
Information about the Index. Blue
Horizon Capital LLC (the “Index Provider”) was founded in 2020 and is wholly
owned by Genlith Inc., a private Nevada corporation focused on the new energy
economy. The Index Provider created and is responsible for maintaining and
applying the methodology of the Index. The Index is calculated by Indxx, LLC
(the “Index Calculation Agent”), an independent third-party that is not
affiliated with the Fund, the Adviser, the Index Provider, the Fund’s
distributor, or any of their respective affiliates. The Index Calculation Agent
provides information to the Fund about the Index constituents and does not
provide investment advice with respect to the desirability of investing in,
purchasing, or selling securities.
The
Index Provider is not affiliated with ETF Series Solutions (the “Trust”), the
Adviser, the Fund’s administrator, custodian, transfer agent, or the Distributor
(defined below), or any of their respective affiliates. The Index Provider
provides information to the Fund about the constituents of the Index and does
not provide investment advice with respect to the desirability of investing in,
purchasing or selling securities. The Adviser has entered into an arrangement
with the Index Provider pursuant to which the Adviser is permitted to use the
Index. The Adviser is sub-licensing rights to the Index to the Fund at no
charge.
Management
of the Fund. The
Fund and the Adviser have received an exemptive order from the SEC permitting
the Adviser (subject to certain conditions and the Board’s approval) to select
or change sub-advisers without obtaining shareholder approval. The order also
permits the Adviser to materially amend the terms of agreements with a
sub-adviser (including an increase in the fee paid by the Adviser to the
sub-adviser (and not paid by the Fund)) or to continue the employment of a
sub-adviser after an event that would otherwise cause the automatic termination
of services with Board approval, but without shareholder approval. Shareholders
will be notified of any sub-adviser changes.
Additional
Information about the Fund’s Principal Risks. This
section provides additional information regarding the principal risks described
in the Fund Summary. As in the Fund Summary, the principal risks below are
presented in alphabetical order to facilitate finding particular risks and
comparing them with other funds. Each risk described below is considered a
“principal risk” of investing in the Fund, regardless of the order in which it
appears. Each of the factors below could have a negative impact on the Fund’s
performance and trading prices.
•Associated
Risks of New Energy Economy Companies. New
Energy Economy companies include energy, industrial, infrastructure, and
logistics companies, among others, and will therefore be susceptible to adverse
economic, environmental, business, regulatory, or other occurrences affecting
such companies. New Energy Economy companies may be affected by the obsolescence
of existing technology, short product cycles, falling prices and profits,
competition from new market entrants and general economic conditions. In
addition, intense competition and legislation resulting in more strict
government regulations and enforcement policies and specific expenditures for
cleanup efforts can significantly affect this sector. Risks associated with
hazardous materials, fluctuations in energy prices and supply and demand of
alternative energy fuels, energy conservation, the success of exploration
projects and tax and other government regulations can significantly affect New
Energy Economy companies. Also, supply and demand for specific products or
services, the supply and demand for oil and gas, the price of oil and gas,
production spending, government regulation, world events and economic conditions
may affect this sector.
•Concentration
Risk. The
Fund may be susceptible to an increased risk of loss, including losses due to
adverse occurrences affecting the Fund more than the market as a whole, to the
extent that the Fund’s investments are concentrated in the securities of a
particular issuer or issuers, country, region, market, industry, group of
industries, sector, or asset class.
•Depositary
Receipt Risk.
The Fund may hold the securities of non-U.S. companies in the form of American
Depositary Receipts (“ADRs”) and Global Depositary Receipts (“GDRs”). ADRs are
negotiable certificates issued by a U.S. financial institution that represent a
specified number of shares in a foreign stock and trade on a U.S. national
securities exchange, such as the New York Stock Exchange. Sponsored ADRs are
issued with the support of the issuer of the foreign stock underlying the ADRs
and carry all of the rights of common shares, including voting rights. GDRs are
similar to ADRs but may be issued in bearer form and are typically offered for
sale globally and held by a foreign branch of an international bank. The
underlying issuers of certain depositary receipts, particularly unsponsored or
unregistered depositary receipts, are under no obligation to distribute
shareholder communications to the holders of such receipts, or to pass through
to them any voting rights with respect to the deposited securities. Issuers of
unsponsored depositary receipts are not contractually obligated to disclose
material information in the U.S. and, therefore, such information may not
correlate to the market value of the unsponsored depositary receipt. The
underlying securities of the ADRs and GDRs in the Fund’s portfolio are usually
denominated or quoted in currencies other than the U.S. Dollar. As a result,
changes in foreign currency exchange rates may affect the value of the Fund’s
portfolio. In addition, because the underlying securities of ADRs and GDRs trade
on foreign exchanges at times when the U.S. markets are not open for trading,
the value of the securities underlying the ADRs and GDRs may change materially
at times when the U.S. markets are not open for trading, regardless of whether
there is an active U.S. market for Shares.
•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; local, regional or global events
such
as acts of terrorism or war, including Russia’s invasion of Ukraine; and global
or regional political, economic, public health, 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 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, and supply chain disruptions affecting the United
States and many other countries. Some sectors of the economy and individual
issuers have experienced particularly large losses as a result of these
disruptions, and 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. Many countries, including the U.S.,
are subject to few restrictions related to the spread of COVID-19. 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 an ETF’s structure, it is exposed to the
following risks:
◦APs,
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 the spread 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. The market price of Fund shares during the trading day,
like the price of any exchange-traded security, includes a “bid-ask” spread
charged by the exchange specialist, market makers or other participants that
trade the Fund shares. In times of severe market disruption, the bid-ask spread
can increase significantly. At those times, Fund shares are most likely to be
traded at a discount to NAV, and the discount is likely to be greatest when the
price of Fund shares is falling fastest, which may be the time that you most
want to sell your Fund 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. Because securities held by the
Fund may trade on foreign exchanges that are closed when the Fund’s primary
listing exchange is open, there are likely to be deviations between the current
price of a security and the security’s last quoted price from the closed foreign
market. This may result in premiums and discounts that are greater than those
experienced by domestic ETFs.
◦Trading.
Although Shares are listed for trading on the Exchange and may be listed or
traded on U.S. and non-U.S. stock exchanges other than the Exchange, there can
be no assurance that an active trading market for such Shares will develop or be
maintained. Trading in Shares may be halted due to market conditions or for
reasons that, in the view of the Exchange, make
trading
in Shares inadvisable. In addition, trading in Shares on the Exchange is subject
to trading halts caused by extraordinary market volatility pursuant to Exchange
“circuit breaker” rules, which temporarily halt trading on the Exchange when a
decline in the S&P 500®
Index during a single day reaches certain thresholds (e.g.,
7%, 13%, and 20%). Additional rules applicable to the Exchange may halt trading
in Shares when extraordinary volatility causes sudden, significant swings in the
market price of Shares. There can be no assurance that Shares will trade with
any volume, or at all, on any stock exchange. In stressed market conditions, the
liquidity of Shares may begin to mirror the liquidity of the Fund’s underlying
portfolio holdings, which can be significantly less liquid than Shares, and this
could lead to differences between the market price of the Shares and the
underlying value of those Shares.
•Foreign
Securities Risk.
Investments in non-U.S. securities involve certain risks that may not be present
with investments in U.S. securities. For example, investments in non-U.S.
securities may be subject to risk of loss due to foreign currency fluctuations
or to political or economic instability. There may be less information publicly
available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may be
subject to different accounting, auditing, financial reporting and investor
protection standards than U.S. issuers. Investments in non-U.S. securities may
be subject to withholding or other taxes and may be subject to additional
trading, settlement, custodial, and operational risks. With respect to certain
countries, there is the possibility of government intervention and expropriation
or nationalization of assets. Because legal systems differ, there is also the
possibility that it will be difficult to obtain or enforce legal judgments in
certain countries. Since foreign exchanges may be open on days when the Fund
does not price its Shares, the value of the securities in the Fund’s portfolio
may change on days when shareholders will not be able to purchase or sell the
Shares. Conversely, Shares may trade on days when foreign exchanges are closed.
Each of these factors can make investments in the Fund more volatile and
potentially less liquid than other types of investments.
•Index
Provider Risk. There
is no assurance that the Index Provider, or any agents that act on its behalf,
will compile the Index accurately, or that the Index will be determined,
maintained, constructed, reconstituted, rebalanced, composed, calculated or
disseminated accurately. The Adviser relies upon the Index Provider and its
agents to compile, determine, maintain, construct, reconstitute, rebalance,
compose, calculate (or arrange for an agent to calculate), and disseminate the
Index accurately. Any losses or costs associated with errors made by the Index
Provider or its agents generally will be borne by the Fund and its shareholders.
To correct any such error, the Index Provider or its agents may carry out an
unscheduled rebalance of the Index or other modification of Index constituents
or weightings. When the Fund in turn rebalances its portfolio, any transaction
costs and market exposure arising from such portfolio rebalancing will be borne
by the Fund and its shareholders. Unscheduled rebalances also expose the Fund to
additional tracking error risk. Errors in respect of the quality, accuracy, and
completeness of the data used to compile the Index may occur from time to time
and may not be identified and corrected by the Index Provider for a period of
time or at all, particularly where the Index is less commonly used as a
benchmark by funds or advisors. For example, during a period where the Index
contains incorrect constituents, the Fund tracking the Index would have market
exposure to such constituents and would be underexposed to the Index’s other
constituents. Such errors may negatively impact the Fund and its shareholders.
The Index Provider and its agents rely on various sources of information to
assess the criteria of issuers included in the Index, including information that
may be based on assumptions and estimates. Neither the Fund nor the Adviser can
offer assurances that the Index’s calculation methodology or sources of
information will provide an accurate assessment of included
issuers.
•Market
Capitalization Risk.
◦Large-Capitalization
Investing.
The securities of large-capitalization companies may be relatively mature
compared to smaller companies and therefore subject to slower growth during
times of economic expansion. Large-capitalization companies may also be unable
to respond quickly to new competitive challenges, such as changes in technology
and consumer tastes.
◦Mid-Capitalization
Investing. The
securities of mid-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
large-capitalization companies, but they may also be subject to slower growth
than small-capitalization companies during times of economic expansion. The
securities of mid-capitalization companies generally trade in lower volumes and
are subject to greater and more unpredictable price changes than large
capitalization stocks or the stock market as a whole, but they may also be
nimbler and more responsive to new challenges than large-capitalization
companies. Some mid-capitalization companies have limited product lines,
markets, financial resources, and management personnel and tend to concentrate
on fewer geographical markets relative to large-capitalization
companies.
◦Small-Capitalization
Investing. The
securities of small-capitalization companies may be more vulnerable to adverse
issuer, market, political, or economic developments than securities of
larger-capitalization companies. The securities of small-capitalization
companies generally trade in lower volumes and are subject to greater and more
unpredictable price changes than larger capitalization stocks or the stock
market as a whole. Some small capitalization companies have limited product
lines, markets, and financial and managerial resources and tend to concentrate
on fewer geographical markets relative to larger capitalization companies. There
is typically less publicly available information concerning
smaller-capitalization companies than for larger, more established companies.
Small-capitalization companies also may be particularly sensitive to changes in
interest rates, government regulation, borrowing costs and earnings.
•Models
and Data Risk.
When Models and Data prove to be incorrect or incomplete, any decisions made in
reliance thereon expose the Indexes and the Funds to potential risks. Some of
the models used to construct each Index are predictive in nature. The use of
predictive models has inherent risks. For example, such models may incorrectly
forecast future behavior, leading to potential losses. In addition, in
unforeseen or certain low-probability scenarios (often involving a market
disruption of some kind), such models may produce unexpected results, which can
result in losses for a Fund. Furthermore, because predictive models are usually
constructed based on historical data supplied by third parties, the success of
relying on such models may depend heavily on the accuracy and reliability of the
supplied historical data.
•Passive
Investment Risk.
The Fund invests in the securities included in, or representative of, the Index
regardless of their investment merit. The Fund does not attempt to outperform
the Index or take defensive positions in declining markets. As a result, the
Fund’s performance may be adversely affected by a general decline in the market
segments relating to the Index. The returns from the types of securities in
which the Fund invests may underperform returns from the various general
securities markets or different asset classes. This may cause the Fund to
underperform other investment vehicles that invest in different asset classes.
Different types of securities (for example, large-, mid- and
small-capitalization stocks) tend to go through cycles of doing better – or
worse – than the general securities markets. In the past, these periods have
lasted for as long as several years.
•Sector
Risk. To
the extent the Fund invests more heavily in particular sectors of the economy,
its performance will be especially sensitive to developments that significantly
affect those sectors. The Fund may invest a significant portion of its assets in
the following sectors and, therefore, the performance of the Fund could be
negatively impacted by events affecting each of these sectors.
◦Energy
Sector Risk. The
energy sector is comprised of energy, industrial, infrastructure, and logistics
companies, and will therefore be susceptible to adverse economic, environmental,
business, regulatory, or other occurrences affecting that sector. The energy
sector has historically experienced substantial price volatility. At times, the
performance of these investments may lag the performance of other sectors or the
market as a whole. Companies operating in the energy sector are subject to
specific risks, including, among others, fluctuations in commodity prices;
reduced consumer demand for commodities such as oil, natural gas, or petroleum
products; reduced availability of natural gas or other commodities for
transporting, processing, storing, or delivering; slowdowns in new construction;
extreme weather or other natural disasters; and threats of attack by terrorists
on energy assets. Additionally, energy sector companies are subject to
substantial government regulation and changes in the regulatory environment for
energy companies may adversely impact their profitability. Over time, depletion
of natural gas reserves and other energy reserves may also affect the
profitability of energy companies.
◦Industrial
Sector Risk. The
industrial sector can be significantly affected by, among other things,
worldwide economic growth, supply and demand for specific products and services,
rapid technological developments, international political and economic
developments, environmental issues, tariffs and trade barriers, and tax and
governmental regulatory policies. As the demand for, or prices of, industrials
increase, the value of the Fund’s investments generally would be expected to
also increase. Conversely, declines in the demand for, or prices of, industrials
generally would be expected to contribute to declines in the value of such
securities. Such declines may occur quickly and without warning and may
negatively impact the value of the Fund and your investment.
◦Materials
Sector Risk. Companies
in the materials sector may be adversely affected by commodity price volatility,
exchange rates, import controls, increased competition, depletion of resources,
technical advances, labor relations, over-production, litigation and government
regulations, among other factors. Companies in the materials sector are also at
risk of liability for environmental damage and product liability claims.
Production of materials may exceed demand as a result of market imbalances or
economic downturns, leading to poor investment returns.
•Tracking
Error Risk.
As with all index funds, the performance of the Fund and the Index may vary
somewhat 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. The Fund may use a
representative sampling strategy to achieve its investment objective, if the
Fund’s Adviser believes it is in the best interest of the Fund, which generally
can be expected to produce a greater non-correlation risk.
PORTFOLIO
HOLDINGS INFORMATION
Information
about the Fund’s daily portfolio holdings is available at www.bne-etf.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
Exchange
Traded Concepts, 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 has provided investment advisory services to individual and
institutional accounts since 2009. The Adviser is an Oklahoma limited liability
company and is located at 10900 Hefner Pointe Drive, Suite 400, Oklahoma City,
Oklahoma 73120.
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
0.89% of the Fund’s average daily net assets. However, the Adviser has
contractually agreed to waive two basis points (0.02%) of its unified management
fee for the Fund until at least February 28, 2024. This agreement may only be
terminated before that date by or with the consent of the Fund’s Board of
Trustees.
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 Trust under any distribution plan
adopted pursuant to Rule 12b-1 under the 1940 Act (collectively, “Excluded
Expenses”).
The
Adviser has entered into an arrangement with the Index Provider pursuant to
which the Adviser is permitted to use the Index. The Adviser is sub-licensing
rights to the Index to the Fund at no charge. As part of the arrangement between
the Index Provider and the Adviser, the Index Provider has agreed to assume the
Adviser’s obligation to pay all expenses of the Fund (except the Excluded
Expenses) and, to the extent applicable, pay the Adviser a minimum
fee.
The
basis for the Board of Trustees’ approval of the Fund’s Investment Advisory
Agreement is available in the Fund’s Annual
Report to
Shareholders for the period ended October 31, 2022.
Portfolio
Managers
Andrew
Serowik, Todd Alberico, and Gabriel Tan are jointly and primarily responsible
for the day-to-day management of the Fund’s portfolio.
Mr.
Serowik joined the Adviser from Goldman Sachs in May 2018. He began his career
at Spear, Leeds & Kellogg (“SLK”), continuing with Goldman after its
acquisition of SLK in September 2000. During his career of more than 19 years at
the combined companies, he held various roles, including managing the global
Quant ETF Strats team and One Delta ETF Strats. He designed and developed
systems for portfolio risk calculation, algorithmic ETF trading, and execution
monitoring, with experience across all asset classes. He graduated from the
University of Michigan with a Bachelor of Business Administration degree in
Finance.
Mr.
Alberico joined the Adviser in November 2020. From 2013 to 2020, Mr. Alberico
worked in ETF trading at Virtu Financial. Prior to Virtu Financial, Mr. Alberico
spent time in ETF trading at Goldman Sachs and Cantor Fitzgerald. He spent most
of that time focused on the Trading and Portfolio Risk Management of ETFs
exposed to international and domestic equity. He has worked on several different
strategies including lead market-making and electronic trading, to customer
facing institutional business developing models for block trading as well as
transitional trades. Mr. Alberico graduated from St. John’s University in NY
with a Bachelor of Science degree in Finance.
Mr.
Tan joined the Adviser in May 2019 as an Associate Portfolio Manager and was
promoted to Portfolio Manager in December 2020. From 2013 to 2017, Mr. Tan
worked at UBS and BBR Partners where he served as a financial planning analyst
and a portfolio strategist. During his time there, he developed comprehensive
wealth management solutions focused on portfolio optimization, trust and estate
planning, and tax planning. Mr. Tan graduated from the University of North
Carolina at Chapel Hill with a Bachelor of Science in Business Administration
with a concentration in Investments, a Bachelor of Arts in Economics, and a
Minor in Chinese.
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.
HOW
TO BUY AND SELL SHARES
The
Fund issues and redeems Shares at NAV only in Creation Units. 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 (defined below), 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.
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 bid-ask spread on
your transactions. 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, the Board has also
determined that frequent purchases and redemptions for cash may increase
tracking error and portfolio transaction costs and may lead to the realization
of capital gains. To minimize these potential consequences of frequent purchases
and redemptions, the 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 any
time.
Determination
of NAV
The
Fund’s NAV is calculated as of the scheduled close of regular trading on the New
York Stock Exchange (“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. If such information is
not available for a security held by the Fund or is determined to be unreliable,
the security will be valued by the Adviser at fair value pursuant to procedures
established by the Adviser and approved by the Board (as described
below).
Fair
Value Pricing
The
Adviser has been designated by the Board as the valuation designee for the Fund
pursuant to Rule 2a-5 under the 1940 Act. In its capacity as valuation designee,
the Adviser 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. The Board has appointed the Adviser as
the Fund’s valuation designee to perform all fair valuations of the Fund’s
portfolio investments, subject to the Board’s oversight. Accordingly, the
Adviser has established procedures for its fair valuation of the Fund’s
portfolio investments. Generally, when fair valuing a security held by the Fund,
the Adviser 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 established by the Adviser. Due to the
subjective and variable nature of determining the fair value of a security or
other investment, there can be no assurance that the Adviser’s fair value will
match or closely correlate to any market quotation that subsequently becomes
available or the price quoted or published by other sources. In addition, the
Fund may not 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, including Shares. 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 set forth in
Rule 12d1-4 under the 1940 Act, 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 intends 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 advisor
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 has elected and intends qualify each year for treatment as a RIC under the
Code. 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, 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 received in respect of stock of certain
foreign corporations may be qualified dividend income if that stock is readily
tradable on an established U.S. securities market. Certain of the Fund’s
investment strategies may limit its ability to make distributions eligible for
the reduced rates applicable to qualified dividend income.
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
the Fund’s distributions exceed its earnings and profits, all or a portion of
the distributions made for a taxable year may be recharacterized as a return of
capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholder’s cost basis in Shares and result in a
higher capital gain or lower capital loss when the Shares are sold. After a
shareholder’s basis in Shares has been reduced to zero, distributions in excess
of earnings and profits in respect of those Shares will be treated as gain from
the sale of the Shares.
If
you are neither a resident nor a citizen of the United States or if you are a
foreign entity, distributions (other than Capital Gain Dividends) paid to you by
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
Shares by non-U.S. shareholders generally are not subject to U.S. taxation,
unless you are a nonresident alien individual who is physically present in the
U.S. for 183 days or more per year. 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.
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 (currently 24%) 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
Provided
that a shareholder holds Shares as capital assets, 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 Code. The difference between the
selling price and the cost basis of Shares generally determines the amount of
the capital gain or loss realized on the sale or exchange of Shares. Contact the
broker through whom you purchased your Shares to obtain information with respect
to the available cost basis reporting methods and elections for your account.
Taxes
on Purchases and Redemptions of Creation Units
An
AP having the U.S. dollar as its functional currency for U.S. federal income tax
purposes who exchanges securities for Creation Units generally recognizes a gain
or a loss. The gain or loss will be equal to the difference between the value of
the Creation Units at the time of the exchange and the exchanging AP’s aggregate
basis in the securities delivered, plus the amount of any cash paid for the
Creation Units. An AP who exchanges Creation Units for securities will generally
recognize a gain or loss equal to the difference between the exchanging AP’s
basis in the Creation Units and the aggregate U.S. dollar market value of the
securities received, plus any cash received for such Creation Units. The
Internal Revenue Service may assert, however, that a loss that is realized upon
an exchange of securities for Creation Units may not be currently deducted under
the rules governing “wash sales” (for an AP who does not mark-to-market its
holdings), or on the basis that there has been no significant change in economic
position. APs exchanging securities should consult their own tax advisor with
respect to whether the wash sales rule applies 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.
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.
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.
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 advisor about the
potential tax consequences of an investment in Shares under all applicable tax
laws. For more information, please see the section entitled “Federal Income
Taxes” in the SAI.
DISTRIBUTION
The
Distributor, Quasar Distributors, LLC, a wholly owned subsidiary of Foreside
Financial Group, LLC (d/b/a ACA Group), is a broker-dealer registered with the
SEC. The Distributor distributes Creation Units for the Fund on an agency basis
and does not maintain a secondary market in Shares. The Distributor has no role
in determining the policies of the Fund or the securities that are purchased or
sold by the Fund. The Distributor’s principal address is 111 East Kilbourn
Avenue, Suite 2200, Milwaukee, Wisconsin 53202.
The
Board has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule
12b-1 under the 1940 Act. In accordance with the Plan, 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 the Fund’s 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, free of charge, on the Fund’s
website
www.bne-etf.com.
ADDITIONAL
NOTICES
Shares
are not sponsored, endorsed, or promoted by the Exchange. The Exchange makes no
representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the ability of the Fund to track the total return
performance of the Index or the ability of the Index identified herein to track
the performance of its constituent securities. The Exchange is not responsible
for, nor has it participated in, the determination of the compilation or the
calculation of the Index, nor 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 the Shares.
The
Exchange does not guarantee the accuracy and/or the completeness of the Index or
the data included therein. The Exchange makes no warranty, express or implied,
as to results to be obtained by the Fund, owners of Shares, or any other person
or entity from the use of the Index or the data included therein. The Exchange
makes no express or implied warranties, and hereby expressly disclaims all
warranties of merchantability or fitness for a particular purpose with respect
to the Index or the data included therein. 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, the Index Provider, the Exchange, 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. The Fund does not guarantee the accuracy, completeness, or
performance of the Index or the data included therein and shall have no
liability in connection with the Index or Index calculation. The Index Provider
owns the Index and the Index methodology and is a licensor of the Index to the
Adviser and index receipt agent. The Index Provider has contracted with the
Index Calculation Agent to maintain and calculate the Index used by the Fund.
The Index Calculation Agent maintains and calculates the Index used by the Fund.
The index calculation agent shall have no liability for any errors or omissions
in calculating the Index.
FINANCIAL
HIGHLIGHTS
The
financial highlights table is intended to help you understand the Fund’s
financial performance for the Fund’s five most recent fiscal years (or the life
of the Fund, if shorter). Certain information reflects financial results for a
single Fund share. The total returns in the table represent the rate that an
investor would have earned or lost on an investment in the Fund (assuming
reinvestment of all dividends and distributions). This information has been
audited by Cohen & Company, Ltd., the Fund’s independent registered public
accounting firm, whose report, along with the Fund’s financial statements, is
included in the Fund’s annual report, which is available upon request.
For
a capital share outstanding throughout the year/period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
| Year
Ended October 31, 2022 |
|
Period
Ended October 31,
2021(1) |
|
Net
asset value, beginning of year/period |
|
| $ |
30.83 |
|
| $ |
25.00 |
| |
|
|
|
|
|
| |
INCOME
(LOSS) FROM INVESTMENT OPERATIONS: |
|
|
|
|
| |
Net
investment income (loss)(2) |
|
| 0.05 |
|
| 0.03 |
| |
Net
realized and unrealized gain (loss) on investments |
|
| (8.04) |
|
| 5.78 |
|
|
Total
from investment operations |
|
| (7.99) |
|
| 5.81 |
| |
|
|
|
|
|
| |
DISTRIBUTIONS
TO SHAREHOLDERS: |
|
|
|
|
| |
Distributions
from: |
|
|
|
|
| |
Net
investment income |
|
| — |
|
| (0.00) |
(3) |
Total
distributions to shareholders |
|
| — |
|
| (0.00) |
|
|
|
|
|
|
| |
CAPITAL
SHARE TRANSACTIONS: |
|
|
|
|
| |
Transaction
fees |
|
| 0.00 |
|
(3) |
0.02 |
| |
Net
asset value, end of year/period |
|
| $ |
22.84 |
|
| $ |
30.83 |
| |
|
|
|
|
|
| |
Total
return |
|
| -25.92 |
% |
| 23.34 |
% |
(4) |
|
|
|
|
|
| |
SUPPLEMENTAL
DATA: |
|
|
|
|
| |
Net
assets at end of year/period (000’s) |
|
| $ |
6,280 |
|
| $ |
9,249 |
| |
|
|
|
|
|
| |
RATIOS
TO AVERAGE NET ASSETS: |
|
|
|
|
| |
Expenses
before fees waived |
|
| 0.89 |
% |
| 0.89 |
% |
(5) |
Expenses
after fees waived |
|
| 0.87 |
% |
(6) |
0.87 |
% |
(5)(6) |
Net
investment income (loss) before fees waived |
|
| 0.19 |
% |
| 0.11 |
% |
(5) |
Net
investment income (loss) after fees waived |
|
| 0.21 |
% |
(6) |
0.13 |
% |
(5)(6) |
Portfolio
turnover rate (7) |
|
| 65 |
% |
| 76 |
% |
(4) |
(1)Commencement
of operations on December 8, 2020.
(2)Calculated
based on average shares outstanding during the period.
(3)Represents
less than $0.005 per share.
(4)Not
annualized.
(5)Annualized.
(6)The
Adviser has agreed to waive 2 basis points (0.02%) of its management fees for
the Fund until at least February 28, 2023.
(7)Excludes
the impact of in-kind transactions.
Blue
Horizon BNE ETF
|
|
|
|
|
|
|
|
|
|
| |
Adviser
|
Exchange
Traded Concepts, LLC
10900
Hefner Pointe Drive, Suite 400
Oklahoma
City, Oklahoma 73120 |
Index
Provider |
Blue
Horizon Capital LLC
2020
Kings Manor Drive
Weddington,
NC 28104 |
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 |
Custodian |
U.S.
Bank, N.A.
1555
N. Rivercenter Dr., Suite 302
Milwaukee,
Wisconsin 53212 |
Distributor |
Quasar
Distributors, LLC
111
East Kilbourn Avenue, Suite 2200
Milwaukee,
Wisconsin 53202 |
Legal
Counsel |
Morgan,
Lewis & Bockius LLP
1111
Pennsylvania Avenue, NW
Washington,
DC 20004-2541 |
Independent
Registered Public Accounting Firm |
Cohen
& Company, Ltd.
342
North Water Street, Suite 830
Milwaukee,
Wisconsin 53202 |
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 and techniques of
the Fund and certain other additional information. A current SAI dated February
28, 2023 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 is available in the Fund’s
annual
and semi-annual
reports to shareholders. In the annual report you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund’s performance.
You
can obtain free copies of these documents, request other information or make
general inquiries about the Fund by contacting the Fund at Blue Horizon BNE ETF,
c/o U.S. Bank Global Fund Services, P.O. Box 701, Milwaukee, Wisconsin
53201-0701 or calling 1-800-617-0004.
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 Internet website at www.bne-etf.com; or
(SEC
Investment Company Act File No. 811-22668)