OPERATIONAL
RISK. The Fund is subject
to risks arising from various operational factors, including, but not limited
to, human error, processing and communication errors, errors of the Fund’s
service providers, counterparties or other third-parties, failed or inadequate
processes and technology or systems failures. The Fund relies on third-parties
for a range of services, including custody. Any delay or failure relating to
engaging or maintaining such service providers may affect the Fund’s ability to
meet its investment objective. Although the Fund and the Fund's investment
advisor seek to reduce these operational risks through controls and procedures,
there is no way to completely protect against such
risks.
OPTIONS
RISK.
The use of options involves investment strategies and risks different from those
associated with ordinary portfolio securities transactions and depends on the
ability of the Fund's portfolio managers to forecast market movements correctly.
The prices of options are volatile and are influenced by, among other things,
actual and anticipated changes in the value of the underlying instrument, or in
interest or currency exchange rates, including the anticipated volatility, which
in turn are affected by fiscal and monetary policies and by national and
international political and economic events. The effective use of options also
depends on the Fund's ability to terminate option positions at times deemed
desirable to do so. There is no assurance that the Fund will be able to effect
closing transactions at any particular time or at an acceptable price. In
addition, there may at times be an imperfect correlation between the movement in
values of options and their underlying securities and there may at times not be
a liquid secondary market for certain options.
PREMIUM/DISCOUNT
RISK.
The market price of the Fund’s shares will generally fluctuate in accordance
with changes in the Fund’s net asset value as well as the relative supply of and
demand for shares on the Exchange. The Fund’s investment advisor cannot predict
whether shares will trade below, at or above their net asset value because the
shares trade on the Exchange at market prices and not at net asset value. Price
differences may be due, in large part, to the fact that supply and demand forces
at work in the secondary trading market for shares will be closely related, but
not identical, to the same forces influencing the prices of the holdings of the
Fund trading individually or in the aggregate at any point in time. However,
given that shares can only be purchased and redeemed in Creation Units, and only
to and from broker-dealers and large institutional investors that have entered
into participation agreements (unlike shares of closed-end funds, which
frequently trade at appreciable discounts from, and sometimes at premiums to,
their net asset value), the Fund’s investment advisor believes that large
discounts or premiums to the net asset value of shares should not be sustained.
During stressed market conditions, the market for the Fund’s shares may become
less liquid in response to deteriorating liquidity in the market for the Fund’s
underlying portfolio holdings, which could in turn lead to differences between
the market price of the Fund’s shares and their net asset value and the bid/ask
spread on the Fund’s shares may widen.
SPECIAL
TAX RISK. The Fund intends to
qualify as a “regulated Investment company” (“RIC”), however, the
federal income tax treatment of certain aspects of the proposed operations of
the Fund are not entirely clear. This includes the tax aspects of the Fund's
options strategy, the possible application of the “straddle” rules, and various
loss limitation provisions of the Internal Revenue Code of 1986, as amended. If,
in any year, the Fund fails to qualify as a regulated investment company under
the applicable tax laws, the Fund would be taxed as an ordinary corporation.
Certain options on an ETF may not qualify as “Section 1256 contracts” under
Section 1256 of the Code, and disposition of such options will likely result in
short-term or long-term capital gains or losses depending on the holding
period.
The
Fund intends to treat any income it may derive from the FLEX Options as
"qualifying income" under the provisions of the Code applicable to
RICs. In addition, based upon language in the legislative history, the Fund
intends to treat the issuer of the FLEX Options as the referenced asset, which,
assuming the referenced asset qualifies as a RIC, would allow the Fund to
qualify for special rules in the RIC diversification requirements. If the income
is not qualifying income or the issuer of the FLEX Options is not appropriately
the referenced asset, the Fund could lose its own status as a
RIC.
To
maintain its status as a RIC, the Fund must distribute 90% of its investment
company taxable income annually. In addition, to avoid a
non-deductible excise tax, the Fund must distribute 98% of its ordinary income
and 98.2% of its capital gain net income. Separately, depending upon the
circumstances, sales to fund redemptions could cause the Fund to recognize
income that the Fund is required to distribute to maintain the Fund's RIC status
and avoid the excise tax. Funding such distributions could require additional
sales, which could require more distributions and affect the projected
performance of the Fund. Alternatively, if the Fund only makes distributions to
maintain its RIC status and becomes subject to the excise tax, that could also
affect the projected performance of the Fund. In either case, the assets sold to
Fund redemptions, distributions or pay the excise tax will not be available to
assist the Fund in meeting its target outcome.
In
the event that a shareholder purchases shares of the Fund shortly before a
distribution by the Fund, the entire distribution may be taxable to the
shareholder even though a portion of the distribution effectively represents a
return of the purchase price.