Prospectus
December
16,
2022
Invesco
Exchange-Traded Self-Indexed Fund Trust
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Invesco
RAFITM
Strategic Emerging Markets ETF |
The
Nasdaq Stock Market LLC |
The
U.S. Securities and Exchange Commission (“SEC”) has not approved or disapproved
these securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
The Invesco
RAFITM Strategic
Emerging Markets ETF (the “Fund”) seeks to track the investment results (before
fees and expenses) of the Invesco Strategic Emerging Markets Index (the
“Underlying Index”).
This table
describes the fees and expenses that you may pay if you buy, hold, and sell
shares of the Fund (“Shares”). You
may pay other fees, such as brokerage commissions and other fees to financial
intermediaries, which are not reflected in the table and example
below.
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Management
Fees |
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Other
Expenses |
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Total
Annual Fund Operating Expenses |
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The example assumes
that you invest $10,000 in the Fund for the time periods indicated and then sell
all of your Shares at the end of those periods. The example also assumes that
your investment has a 5% return each year and that the Fund's operating expenses
remain the same. This example does not include brokerage commissions that
investors may pay to buy and sell Shares. Although your actual costs may be
higher or lower, your costs, based on these assumptions, would
be:
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1
Year |
3
Years |
5
Years |
10
Years |
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$ |
$ |
$ |
$ |
The Fund generally
will invest at least 80% of its total assets in securities that comprise the
Underlying Index and American depositary receipts (“ADRs”) and global depositary
receipts (“GDRs”) that are based on securities in the Underlying
Index.
Strictly
in accordance with its guidelines and mandated procedures, Invesco Indexing
LLC (the “Index Provider”) compiles and maintains the Underlying Index, which is
designed to measure the performance of equity securities of emerging market
companies that tend to have larger, higher quality businesses. The Index
Provider is affiliated with Invesco Capital Management LLC, the Fund’s
investment adviser (the “Adviser”), and Invesco Distributors, Inc., the Fund’s
distributor (the “Distributor”).
The
Index Provider selects components for inclusion in the Underlying Index from an
investment universe of foreign equity securities with at least one year of
trading history, issued by companies located in countries designated as emerging
market countries. Each eligible equity security is assigned a business-size
score (“Business-Size Score”) based on the equally-weighted average of the
following four factors of company size over the prior five years (or, if
shorter, the life of the security): sales, operating cash flow, total return of
capital (dividends and share repurchases) and book value. For real estate
securities (real estate investment trusts (“REITs”) and
common stocks of
companies in the real estate sector), operating cash flow is replaced by funds
from operations and book value is replaced by total assets.
Each
eligible security is then assigned a quality score (“Quality Score”)
based
on the equally-weighted average of the following two quality factors of its
company’s business: efficiency (calculated as the ratio of sales-to-assets in
the prior year) and growth (calculated as the percentage change in the ratio of
sales-to-assets over the prior five years (or, if shorter, the life of the
security)).
Each
eligible security is ranked in descending order by its Business-Size
Score.
Those securities ranked in the top 90% by Business-Size Score are eligible for
inclusion in the Underlying Index and, of those, the 80% with the highest
Quality Scores are included in the Underlying Index. Securities in the
Underlying Index are weighted proportionally to their float-adjusted
Business-Size Scores.
As
of October 31, 2022,
the following countries were classified as emerging markets by the Index
Provider: Brazil, Chile, China, Colombia, Czech Republic, Egypt, Greece,
Hungary, India, Indonesia, Kuwait, Malaysia, Mexico, Peru, the Philippines,
Poland, Qatar, Saudi Arabia, South Africa, Taiwan, Thailand, Turkey, the United
Arab Emirates and Vietnam.
As
of October 31, 2022,
the Underlying Index was comprised of 459
constituents with
market capitalizations ranging from approximately $1.79
billion to
$2.04
trillion.
The
Fund employs a “full replication” methodology in seeking to track the Underlying
Index, meaning that the Fund generally invests in all of the securities
comprising the Underlying Index in proportion to their weightings in the
Underlying Index.
Concentration
Policy. The Fund will
concentrate its investments (i.e., invest more than 25% of the value of its net
assets) in securities of issuers in any one industry or group of industries only
to the extent that the Underlying Index reflects a concentration in that
industry or group of industries. The Fund will not otherwise concentrate its
investments in securities of issuers in any one industry or group of
industries.
The following
summarizes the principal risks of investing in the Fund.
Market
Risk.
Securities in the Underlying Index are subject to market fluctuations. You
should anticipate that the value of the Shares will decline, more or less, in
correlation with any decline in value of the securities in the Underlying Index.
Additionally, natural or environmental disasters, widespread disease or other
public health issues, war, military conflict, acts of terrorism or other events
could result in increased premiums or discounts to the Fund’s net asset value
(“NAV”).
Index
Risk.
Unlike many investment companies, the Fund does not utilize an investing
strategy that seeks returns in excess of the Underlying Index. Therefore, the
Fund would not necessarily buy or sell a security unless that security is added
or removed, respectively, from the Underlying Index, even if that security
generally is underperforming. Additionally, the Fund rebalances its portfolio in
accordance with the Underlying Index, and, therefore, any changes to the
Underlying Index’s rebalance schedule will result in corresponding changes to
the Fund’s rebalance
schedule.
Emerging
Markets Investment Risk. Investments in the
securities of issuers in emerging market countries involve risks often not
associated with investments in the securities of issuers in developed countries.
Securities in emerging markets may be subject to greater price fluctuations than
securities in more developed markets. Companies in emerging market countries
generally may be subject to less stringent regulatory, disclosure,
1
financial
reporting, accounting, auditing and recordkeeping standards than companies in
more developed countries. In addition, information about such companies may be
less available and reliable. Emerging markets usually are subject to greater
market volatility, political, social and economic instability, uncertainty
regarding the existence of trading markets and more governmental limitations on
foreign investment than are more developed markets. Securities law in many
emerging market countries is relatively new and unsettled. Therefore, laws
regarding foreign investment in emerging market securities, securities
regulation, title to securities, and shareholder rights may change quickly and
unpredictably, and the ability to bring and enforce actions, or to obtain
information needed to pursue or enforce such actions, may be limited. In
addition, the enforcement of systems of taxation at federal, regional and local
levels in emerging market countries may be inconsistent and subject to sudden
change. Investments in emerging market
securities may be
subject to additional transaction costs, delays in settlement procedures,
unexpected market closures, and lack of timely information. In addition, lack of
relevant data and reliable public information, including financial information,
about securities in emerging markets may contribute to incorrect weightings and
data and computational errors when the Index Provider selects securities for
inclusion in the Underlying Index or rebalances the Underlying
Index.
Foreign
Investment Risk. Investments in the
securities of non-U.S. issuers involve risks beyond those associated with
investments in U.S. securities. Foreign securities may have relatively low
market liquidity, greater market volatility, decreased publicly available
information and less reliable financial information about issuers, and
inconsistent and potentially less stringent accounting, auditing and financial
reporting requirements and standards of practice, including recordkeeping
standards, comparable to those applicable to domestic issuers. Foreign
securities also are subject to the risks of expropriation, nationalization,
political instability or other adverse political or economic developments and
the difficulty of enforcing obligations in other countries. Investments in
foreign securities also may be subject to dividend withholding or confiscatory
taxes, currency blockage and/or transfer restrictions and higher transactional
costs. As the Fund will invest in securities denominated in foreign currencies,
fluctuations in the value of the U.S. dollar relative to the values of other
currencies may adversely affect investments in foreign securities and may
negatively impact the Fund's returns.
Geographic
Concentration Risk. A natural or other
disaster could occur in a country or geographic region in which the Fund
invests, which could affect the economy or particular business operations of
companies in that specific country or geographic region and adversely impact the
Fund’s investments in the affected region.
China
Exposure Risk. The value of
securities of companies that derive the majority of their revenues from China is
likely to be more volatile than that of other issuers. The economy of China
differs, often unfavorably, from the U.S. economy in such respects as structure,
general development, government involvement, wealth distribution, rate of
inflation, growth rate, allocation of resources and capital reinvestment. The
Chinese central government historically has exercised substantial control over
virtually every sector of the Chinese economy through administrative regulation
and/or state ownership. Actions of the Chinese government authorities continue
to have a substantial effect on economic conditions in China. It is difficult
for non-Chinese investors to directly access securities in China because of
investment and trading restrictions. These limitations and restrictions may
impact the availability, liquidity, and pricing of certain
securities.
Investments
in Chinese companies may be made through a special structure known as
a variable interest entity (“VIE”) that is designed to provide foreign
investors, such as the Fund, with exposure to Chinese companies that operate in
certain sectors in which China restricts or prohibits foreign investments.
Investments in VIEs may pose additional risks because the investment is made
through an intermediary shell company that has entered into service and other
contracts with the underlying Chinese operating company in order to provide
investors with exposure to
the operating
company but does not represent equity ownership in the operating company. The
value of the shell company is derived from its ability to consolidate the VIE
into its financials pursuant to contractual arrangements that allow the shell
company to exert a degree of control over, and obtain economic benefits arising
from, the VIE without formal legal ownership. The contractual arrangements
between the shell company and the operating company may not be as effective in
providing operational control as direct equity ownership, and a foreign
investor’s rights may be limited. While VIEs are a longstanding industry
practice and are well known by Chinese officials and regulators, the structure
has not been formally recognized under Chinese law and it is uncertain whether
Chinese officials or regulators will withdraw their implicit acceptance of the
structure. It is also uncertain whether the contractual arrangements, which may
be subject to conflicts of interest between the legal owners of the VIE and
foreign investors, would be enforced by Chinese courts or arbitration bodies.
Prohibitions of these structures by the Chinese government, or the inability to
enforce such contracts, from which the shell company derives its value, would
likely cause the VIE-structured holding(s) to suffer significant, detrimental,
and possibly permanent loss, and in turn, adversely affect the Fund’s returns
and net asset value. In addition, actions by the U.S. government, such as
delisting of certain Chinese companies from U.S. securities exchanges or
otherwise restricting their operations in the U.S., may negatively impact the
value of such securities held by the Fund.
Equity
Risk.
Equity risk is the risk that the value of equity securities, including common
stocks, may fall due to both changes in general economic conditions that impact
the market as a whole, as well as factors that directly relate to a specific
company or its industry. Such general economic conditions include changes in
interest rates, periods of market turbulence or instability, or general and
prolonged periods of economic decline and cyclical change. It is possible that a
drop in the stock market may depress the price of most or all of the common
stocks that the Fund holds. In addition, equity risk includes the risk that
investor sentiment toward one or more industries will become negative, resulting
in those investors exiting their investments in those industries, which could
cause a reduction in the value of companies in those industries more broadly.
The value of a company's common stock may fall solely because of factors, such
as an increase in production costs, that negatively impact other companies in
the same region, industry or sector of the market. A company's common stock also
may decline significantly in price over a short period of time due to factors
specific to that company, including decisions made by its management or lower
demand for the company's products or services. For example, an adverse event,
such as an unfavorable earnings report or the failure to make anticipated
dividend payments, may depress the value of common stock.
Small-
and Mid-Capitalization Company Risk. Investing in
securities of small- and mid-capitalization companies involves greater risk than
customarily is associated with investing in larger, more established companies.
These companies' securities may be more volatile and less liquid than those of
more established companies. These securities may have returns that vary,
sometimes significantly, from the overall securities market. Often small- and
mid-capitalization companies and the industries in which they focus are still
evolving and, as a result, they may be more sensitive to changing market
conditions.
REIT
Risk. REITs are pooled
investment vehicles that trade like stocks and invest substantially all of their
assets in real estate, and may qualify for special tax considerations. REITs are
subject to certain risks inherent in the direct ownership of real estate,
including without limitation, a possible lack of mortgage funds and associated
interest rate risks, overbuilding, property vacancies, increases in property
taxes and operating expenses, changes in zoning laws, losses due to
environmental damages and changes in neighborhood values and appeal to
purchasers. Further, failure of a company to qualify as a REIT under federal tax
law may have adverse consequences to the REIT’s shareholders. In addition, REITs
may have
2
expenses, including
advisory and administration expenses, and REIT shareholders will incur a
proportionate share of the underlying expenses.
Industry
Concentration Risk. In following its
methodology, the Underlying Index from time to time may be concentrated to a
significant degree in securities of issuers operating in a single industry or
industry group. To the extent that the Underlying Index concentrates in the
securities of issuers in a particular industry or industry group, the Fund will
also concentrate its investments to approximately the same extent. By
concentrating its investments in an industry or industry group, the Fund may
face more risks than if it were diversified broadly over numerous industries or
industry groups. Such industry-based risks, any of which may adversely affect
the companies in which the Fund invests, may include, but are not limited to,
the following: general economic conditions or cyclical market patterns that
could negatively affect supply and demand in a particular industry; competition
for resources, adverse labor relations, political or world events; obsolescence
of technologies; and increased competition or new product introductions that may
affect the profitability or viability of companies in an industry. In addition,
at times, such industry or industry group may be out of favor and underperform
other industries or the market as a whole.
ADR
and GDR Risk. ADRs are
certificates that evidence ownership of shares of a foreign issuer and are
alternatives to purchasing the underlying foreign securities directly in their
national markets and currencies. GDRs are certificates issued by an
international bank that generally are traded and denominated in the currencies
of countries other than the home country of the issuer of the underlying shares.
ADRs and GDRs may be subject to certain of the risks associated with direct
investments in the securities of foreign companies, such as currency, political,
economic and market risks, because their values depend on the performance of the
non-dollar denominated underlying foreign securities. Moreover, ADRs and GDRs
may not track the price of the underlying foreign securities on which they are
based, and their value may change materially at times when U.S. markets are not
open for trading.
Currency
Risk.
Because the Fund's NAV is determined in U.S. dollars, the Fund's NAV could
decline if the currency of a non-U.S. market in which the Fund invests
depreciates against the U.S. dollar. Generally, an increase in the value of the
U.S. dollar against a foreign currency will reduce the value of a security
denominated in that foreign currency, thereby decreasing the Fund's overall NAV.
Exchange rates may be volatile and may change quickly and unpredictably in
response to both global economic developments and economic conditions, causing
an adverse impact on the Fund. As a result, investors have the potential for
losses regardless of the length of time they intend to hold Shares.
Issuer-Specific
Changes Risk. The value of an
individual security or particular type of security may be more volatile than the
market as a whole and may perform differently from the value of the market as a
whole.
Valuation
Risk.
Financial information related to securities of non-U.S. issuers may be less
reliable than information related to securities of U.S. issuers, which may make
it difficult to obtain a current price for a non-U.S. security held by the Fund.
In certain circumstances, market quotations may not be readily available for
some Fund securities, and those securities may be fair valued. The value
established for a security through fair valuation may be different from what
would be produced if the security had been valued using market quotations. Fund
securities that are valued using techniques other than market quotations,
including “fair valued” securities, may be subject to greater fluctuations in
their value from one day to the next than would be the case if market quotations
were used. In addition, there is no assurance that the Fund could sell a
portfolio security for the value established for it at any time, and it is
possible that the Fund would incur a loss because a security is sold at a
discount to its established value.
Valuation
Time Risk. Because foreign
exchanges may be open on days when the Fund does not price its Shares, the value
of the non-U.S. securities in the Fund’s portfolio may change on days when you
will not be able to purchase or sell your Shares. As a result, trading spreads
and the resulting premium or discount on the Shares may widen, and, therefore,
increase the
difference between the market price of the Shares and the NAV of such
Shares.
Non-Correlation
Risk.
The Fund's return may not match the return of the Underlying Index for a number
of reasons. For example, the Fund incurs operating expenses not applicable to
the Underlying Index, and incurs costs in buying and selling securities,
especially when rebalancing the Fund's securities holdings to reflect changes in
the composition of the Underlying Index. In addition, the performance of the
Fund and the Underlying Index may vary due to asset valuation differences and
differences between the Fund's portfolio and the Underlying Index resulting from
legal restrictions, costs or liquidity
constraints.
Authorized
Participant Concentration Risk. Only authorized
participants (“APs”) may engage in creation or redemption transactions directly
with the Fund. The Fund has a limited number of institutions that may act as APs
and such APs have no obligation to submit creation or redemption orders.
Consequently, there is no assurance that APs will establish or maintain an
active trading market for the Shares. This risk may be heightened to the extent
that securities held by the Fund are traded outside a collateralized settlement
system. In that case, APs may be required to post collateral on certain trades
on an agency basis (i.e., on behalf of other market participants), which only a
limited number of APs may be able to do. In addition, to the extent that APs
exit the business or are unable to proceed with creation and/or redemption
orders with respect to the Fund and no other AP is able to step forward to
create or redeem Creation Units (as defined below), this may result in a
significantly diminished trading market for Shares, and Shares may be more
likely to trade at a premium or discount to the Fund's NAV and to face trading
halts and/or delisting. Investments in non-U.S. securities, which may have lower
trading volumes
or
could experience extended market closures or trading halts, may increase the
risk that APs may not be able to effectively create or redeem Creation Units or
the risk that the Shares may be halted and/or delisted.
Market
Trading Risk. The Fund faces
numerous market trading risks, including the potential lack of an active market
for the Shares, losses from trading in secondary markets, and disruption in the
creation/redemption process of the Fund. In stressed market conditions, the
market for Shares may become less liquid in response to deteriorating liquidity
in the markets for the Fund’s portfolio holdings, which may cause a variance in
the market price of Shares and their underlying NAV. In addition, an exchange or
market may issue trading halts on specific securities or financial instruments.
As a result, the ability to trade certain securities or financial instruments
may be restricted, which may disrupt the Fund’s creation/redemption process,
potentially affect the price at which Shares trade in the secondary market,
and/or result in the Fund being unable to trade certain securities or financial
instruments at all. In these circumstances, the Fund may be unable to rebalance
its portfolio, may be unable to accurately price its investments and/or may
incur substantial trading losses. Any of these factors may lead to the Shares
trading at a premium or discount to the Fund's
NAV.
Operational
Risk.
The Fund is exposed to operational risks arising from a number of 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 and
the Adviser seek to reduce these operational risks through controls and
procedures. However, these measures do not address every possible risk and may
be inadequate to address these risks.
Shares
May Trade at Prices Different than NAV. Shares trade on a
stock exchange at prices at, above or below the Fund’s most recent NAV. The
Fund’s NAV is calculated at the end of each business day and fluctuates with
changes in the market value of the Fund’s holdings. The trading price of the
Shares fluctuates continuously throughout trading hours on the exchange, based
on both the relative market supply of, and demand for, the Shares and the
underlying value of the Fund’s portfolio holdings. As a result, the trading
prices of the Shares may deviate from the Fund’s NAV. ANY OF
3
THESE FACTORS,
AMONG OTHERS, MAY LEAD TO THE SHARES TRADING AT A PREMIUM OR DISCOUNT TO
NAV.
The bar chart below
shows how the Fund has performed. The table below the bar chart shows the Fund’s
average annual total returns (before and after taxes). The bar chart
and table provide an indication of the risks of investing in the Fund by showing
how the Fund's total returns have varied from year to year and by showing how
the Fund’s average annual total returns compared with a broad measure of market
performance and an additional index with characteristics relevant to the
Fund. Although the information shown in
the bar chart and the table gives you some idea of the risks involved in
investing in the Fund, the Fund’s past performance (before and after taxes) is
not necessarily indicative of how the Fund will perform in the
future.
Updated
performance information is available online at www.invesco.com/ETFs .
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Period
Ended |
Returns |
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Average Annual Total Returns (for the periods ended December 31, 2021)
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Inception
Date |
1
Year |
Since
Inception |
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Return
Before Taxes |
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Return
After Taxes on Distributions |
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Return
After Taxes on Distributions and Sale of Fund
Shares |
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Invesco
Strategic Emerging Markets Index (Net) reinvested
dividends net of withholding taxes, but reflects
no
deduction for fees, expenses or other
taxes) |
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MSCI
Emerging Markets Index (Net) (reflects reinvested
dividends
net of withholding taxes, but reflects no
deduction
for fees, expenses or other taxes) |
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Management
of the Fund
Investment
Adviser. Invesco Capital
Management LLC (the “Adviser”).
Portfolio
Managers
The following
individuals are responsible jointly and primarily for the day-to-day management
of the Fund’s portfolio:
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Name |
Title
with Adviser/Trust |
Date
Began
Managing
the
Fund |
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Peter
Hubbard |
Head of
Equities and Director of
Portfolio
Management of the
Adviser;
Vice President of the Trust |
September
2018 |
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Michael
Jeanette |
Senior
Portfolio Manager of the
Adviser |
September
2018 |
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Pratik
Doshi |
Portfolio
Manager of the Adviser |
December
2019 |
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Tony
Seisser |
Portfolio
Manager of the Adviser |
September
2018 |
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Purchase
and Sale of Shares
The Fund issues and
redeems Shares at NAV only with APs and only in large blocks of 50,000 Shares
(each block of Shares is called a “Creation Unit”) or multiples thereof
(“Creation Unit Aggregations”), generally in exchange for the deposit or
delivery of a basket of securities. However, the Fund also reserves the right to
permit or require Creation Units to be issued in exchange for cash. Except when
aggregated in Creation Units, the Shares are not redeemable securities of the
Fund.
Individual
Shares may only be bought and sold in the secondary market (i.e., on a
national securities exchange) through a broker or dealer at a market price.
Because the Shares trade at market prices rather than NAV, Shares may trade at a
price greater than NAV (at a premium), at NAV, or less than NAV (at a discount).
An investor 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, including information on the Fund’s NAV, market price, premiums and
discounts, and bid-ask spreads, is available online at
www.invesco.com/ETFs.
Tax
Information
The Fund’s
distributions generally are taxed as ordinary income, capital gains or some
combination of both, unless you are investing through a tax-advantaged
arrangement, such as a 401(k) plan or an individual retirement account, in which
case your distributions may be taxed as ordinary income when withdrawn from such
account.
Payments
to Broker-Dealers and Other Financial Intermediaries
If you purchase the
Fund through a broker-dealer or other financial intermediary (such as a bank),
the Fund’s distributor or its related companies may pay the intermediary for
certain Fund-related activities, including those that are designed to make the
intermediary more knowledgeable about exchange-traded products, such as the
Fund, as well as for marketing, education or other initiatives related to the
sale or promotion of Shares. These payments may create a conflict of interest by
influencing the broker-dealer or other intermediary and your salesperson or
financial adviser to recommend the Fund over another investment. Ask your
salesperson or financial adviser or visit your financial intermediary’s website
for more information.
Additional Information About the Fund’s Strategies and Risks
Principal
Investment Strategies
The Fund generally
will invest at least 80% of its total assets in securities that comprise the
Underlying Index. The Fund operates as an index fund and is not actively
managed, meaning that it does
not
seek to outperform the
Underlying Index.
Rather,
the
Fund seeks to generally track the performance of the Underlying
Index
as
closely as possible
(i.e.,
it
seeks to
obtain
a high degree of correlation with the Underlying Index and to minimize “tracking
error” between the two). Tracking error means the variation between the
4
Fund’s annual
return and the return of the Underlying Index. Because the Underlying Index is a
financial calculation based on a grouping of financial instruments, while the
Fund is an actual investment portfolio, the Fund may experience tracking error
for a number of reasons when tracking the performance of the Underlying Index.
For example, the Fund incurs operating expenses and transaction costs not
applicable to the Underlying Index.
As an
index fund, the Fund does not take temporary defensive positions during periods
of adverse market, economic or other conditions.
The
Fund employs a “full replication” methodology in seeking to track the Underlying
Index, meaning that it generally invests in all of the securities comprising the
Underlying Index in proportion to the weightings of the securities in the
Underlying Index. However, under various circumstances, it may not be possible
or practicable to purchase all of those securities in those same weightings. In
those circumstances, the Fund may purchase a sample of securities in the
Underlying Index.
A
“sampling” methodology means that the Adviser uses a quantitative analysis to select
securities from the Underlying Index universe to obtain a representative sample
of securities that have, in the aggregate, investment characteristics similar to
the Underlying Index, in terms of key risk factors, performance attributes and
other characteristics. These include industry weightings, market capitalization,
return variability, earnings valuation, yield and other financial
characteristics of securities. When employing a sampling methodology, the
Adviser bases the quantity of holdings in the Fund on a number of factors,
including asset size of the Fund, and generally expects the Fund to hold less
than the total number of securities in the Underlying Index. However, the
Adviser reserves the right to invest the Fund in as many securities as it
believes necessary to achieve the Fund’s investment objective. To the extent the
Fund uses a sampling strategy, it may have a larger tracking error than if it
used a full replication strategy.
At
times,
the
Fund may utilize one or more additional investment techniques in seeking to
track the Underlying Index.
Such
techniques may include: (i) overweighting or underweighting a component security
in the Fund’s portfolio compared to its weight in the Underlying Index, (ii)
purchasing securities not contained in the Underlying Index that the Adviser
believes are appropriate to substitute for certain securities in the Underlying
Index, (iii) selling securities included in the Underlying Index in anticipation
of their removal from the Underlying Index, or (iv)
purchasing
securities not included in the Underlying Index in anticipation of their
addition to the Underlying Index.
Additional
information about the construction of the Fund’s Underlying Index is set forth
below.
Invesco
Strategic Emerging Markets Index
The Underlying
Index includes constituents of the Invesco Indexing Investable Universe (the
“Investable Universe”), which is designed to capture the investable segment of
the global equity market. Publicly-listed equity securities or securities that
exhibit equity-like characteristics are eligible for inclusion in the Investable
Universe. The Investment Universe excludes limited partnerships, mutual funds,
exchange-traded funds, warrants, rights and investment trusts (other than real
estate investment trusts). The Investable Universe includes securities that meet
certain security-level liquidity criteria, including trading history, free
float, size and trading volume minimums. Each security in the Investable
Universe is categorized as being of a particular country, region, developing or
emerging market, market-capitalization size, sector and industry based on the
Investable Universe Methodology. In accordance with the Investable Universe
Methodology, a security is assigned a country based on a review of three
criteria: (i) where a company has its headquarters; (ii) where a
company is incorporated; and (iii) the country most relevant for trading
the company’s securities. For developed and emerging markets separately, each
eligible security in the Investable Universe is ranked by total market
capitalization. Companies in the top 96% of total market capitalization for
developed markets and the top 98% of total market capitalization for emerging
markets are included in the Investable Universe. To reduce turnover, current
constituents will
remain in the Investable Universe at each annual rebalance if they are in the
top 99% of total market capitalization for developed markets and the top 99.5%
of total market capitalization for emerging markets. The Investable Universe is
rebalanced annually in June. In addition, constituents may be added to or
removed from the Investable Universe in March, September and
December.
The
Underlying Index is designed to measure the performance of equity securities of
emerging market companies that tend to have larger, higher quality businesses.
The Index Provider selects components for inclusion in the Underlying Index from
the Investable Universe that have at least one year of trading history and that
are characterized as equities of such companies.
Each
eligible equity security is assigned a Business-Size Score based on the
equally-weighted average of the following four factors of company size over the
prior five years (or, if shorter, the life of the security): sales, operating
cash flow, total return of capital (dividends and share repurchases) and book
value. For each measure of company size, a ratio is calculated for each security
as the sum of that measure over the previous five years divided by the sum of
that measure for all securities in the Investable Universe over the previous
five years. For real estate securities (REITs and common stocks of companies in
the real estate sector), operating cash flow is replaced by funds from
operations and book value is replaced by total assets.
Each
eligible security is then assigned a Quality Score based on the equally-weighted
average of the following two quality factors of its company’s business:
efficiency (calculated as the ratio of sales-to-assets in the prior year) and
growth (calculated as the percentage change in the ratio of sales-to-assets over
the prior five years (or, if shorter, the life of the security)).
Each
eligible security is ranked in descending order by its Business-Size
Score.
Those securities ranked in the top 90% by Business-Size Score are eligible for
inclusion in the Underlying Index and, of those, the 80% with the highest
Quality Scores are included in the Underlying Index. Securities in the
Underlying Index are weighted proportionally to their float-adjusted
Business-Size Scores. Securities are excluded if pricing data is not
available.
The
Underlying Index is rebalanced annually effective the third Friday in
June.
In addition, constituents may be removed from the Underlying Index in March,
September and December if the constituents are removed from the Investable
Universe. The Fund is rebalanced and updated in accordance with the Underlying
Index.
Principal
Risks of Investing in the Fund
The following
provides additional information regarding certain of the principal risks
identified under “Principal Risks of Investing in the Fund” in the Fund's
“Summary Information” section. Any of the following risks may impact the Fund’s
NAV which could result in the Fund trading at a premium or discount to
NAV.
Market
Risk.
Securities in the Underlying Index are subject to market fluctuations, and the
Fund could lose money due to short-term market movements and over longer periods
during market downturns. You should anticipate that the value of the Shares will
decline, more or less, in correlation with any decline in value of the
securities in the Underlying Index. The value of a security may decline due to
general market conditions, economic trends or events that are not specifically
related to the issuer of the security or due to factors that affect a particular
industry or group of industries. During a general downturn in the securities
markets, multiple asset classes may be negatively affected. Additionally,
natural or environmental disasters, widespread disease or other public health
issues, war, military conflict, acts of terrorism or other events could result
in increased premiums or discounts to the Fund’s NAV.
COVID-19
Risk.
The “COVID-19”
strain
of coronavirus has resulted in instances of market closures and dislocations,
extreme volatility, liquidity constraints and increased trading costs. Efforts
to contain its
5
spread have
resulted in travel restrictions, disruptions of health care
systems, business
operations (including business closures) and supply chains, layoffs, lower
consumer demand and employee availability, and defaults and credit downgrades,
among other significant economic impacts
that
have disrupted global economic activity across many industries.
Such
economic impacts may exacerbate other pre-existing political, social and
economic risks locally or globally and cause general concern and uncertainty.
The full economic impact and ongoing effects of COVID-19 (or other future
epidemics or pandemics) at the macro-level and on individual businesses are
unpredictable and may result in significant and prolonged effects on the Fund’s
performance.
Market
Disruption Risks Related to Russia-Ukraine Conflict.
Following Russia’s
invasion of Ukraine in late February 2022, various countries, including the
United States, as well as North Atlantic Treaty Organization (NATO) member
countries and the European Union, issued broad-ranging economic sanctions
against Russia. The war in Ukraine (and the potential for further sanctions in
response to Russia’s continued military activity) may escalate. These and other
corresponding events, have had, and could continue to have, severe negative
effects on regional and global economic and financial markets, including
increased volatility, reduced liquidity, and overall uncertainty. The negative
impacts may be particularly acute in certain sectors including, but not limited
to, energy and financials. Russia may take additional countermeasures or
retaliatory actions (including cyberattacks), which could exacerbate negative
consequences on global financial markets. The duration of the conflict and
corresponding sanctions and related events cannot be predicted. The foregoing
may result in a negative impact on Fund performance and the value of an
investment in the Fund, even beyond any direct investment exposure the Fund may
have to Russian issuers or the adjoining geographic regions.
Index
Risk.
Unlike many investment companies that are “actively managed,” the Fund is a
“passive” investor and therefore does not utilize an investing strategy that
seeks returns in excess of the Underlying Index. Therefore, the Fund would not
necessarily buy or sell a security unless that security is added or removed,
respectively, from the Underlying Index, even if that security generally is
underperforming. If a specific security is removed from the Underlying Index,
the Fund may be forced to sell such security at an inopportune time or for a
price lower than the security’s current market value. The Underlying Index may
not contain the appropriate mix of securities for any particular economic cycle.
Additionally, the Fund rebalances its portfolio in accordance with the
Underlying Index, and, therefore, any changes to the Underlying Index’s
rebalance schedule will result in corresponding changes to the Fund’s rebalance
schedule. Further, unlike with an actively managed fund, the Adviser does not
use techniques or defensive strategies designed to lessen the impact of periods
of market volatility or market decline. This means that, based on certain market
and economic conditions, the Fund’s performance could be lower than other types
of funds with investment advisers that actively manage their portfolio assets to
take advantage of market opportunities or defend against market
events.
Foreign
and Emerging Markets Investment Risk. Investments in
foreign securities involve risks that are beyond those associated with
investments in U.S. securities, and investments in securities of issuers in
emerging market countries involve risks not often associated with investments in
securities of issuers in developed countries. Fluctuations in the value of the
U.S. dollar relative to the values of other currencies may adversely affect
investments in foreign and emerging market securities. Foreign and emerging
markets may have greater concentration in a few industries, resulting in greater
vulnerability to regional and global trade conditions. Emerging market countries
may also have higher rates of inflation and more rapid and extreme fluctuations
in inflation rates and greater sensitivity to interest rate changes. Issuers in
emerging markets also may have relatively low market liquidity, decreased
publicly available and less reliable information, and inconsistent and less
stringent regulatory, disclosure, accounting, auditing
and financial
reporting requirements and standards of practice, including recordkeeping
standards, comparable to those applicable to issuers in more developed markets.
As a result, the nature and quality of such information may vary. The ability to
conduct adequate due diligence in emerging markets may be limited. In addition,
certain emerging market countries have material limitations on Public Company
Accounting Oversight Board (“PCAOB”) inspection, investigation and enforcement
capabilities which hinder the ability to engage in independent oversight or
inspection of accounting firms located in or operating in certain emerging
markets; therefore, there is no guarantee that the quality of financial
reporting or the audits conducted by audit firms of emerging market issuers meet
PCAOB standards.
Foreign
and emerging market securities also are subject to the risks of expropriation,
nationalization or other adverse political or economic developments and the
difficulty of enforcing obligations in other countries. Investments in foreign
and emerging market securities also may be subject to dividend withholding or
confiscatory taxes, currency blockage and/or transfer restrictions and higher
transactional costs. Emerging markets are subject to greater market volatility,
lower trading volume, political, social and economic instability, uncertainty
regarding the existence of trading markets and more governmental limitations on
foreign investment than more developed markets. In addition, securities in
emerging markets may be subject to greater price fluctuations than securities in
more developed markets. Securities law in many emerging market countries is
relatively new and unsettled. Therefore, laws regarding foreign investment in
emerging market securities, securities regulation, title to securities, and
shareholder rights may change quickly and unpredictably. The ability to bring
and enforce actions in emerging market countries, or to obtain information
needed to pursue or enforce such actions, may be limited, and shareholder claims
may be difficult or impossible to pursue. In addition, the taxation systems at
the federal, regional and local levels in emerging market countries may be less
transparent and inconsistently enforced, and subject to sudden change. Emerging
market countries may have a higher degree of corruption and fraud than developed
market countries, as well as counterparties and financial institutions with less
financial sophistication, creditworthiness and/or resources. Investments in
emerging market
securities may also
be subject to delays in settlement procedures, unexpected market closures, and
lack of timely information. Lack of relevant data and reliable public
information, including financial information, about securities in emerging
markets may contribute to incorrect weightings and data and computational errors
when the Index Provider selects securities for inclusion in the Underlying Index
or rebalances the Underlying Index.
Each
country has different laws specific to that country that impact investments, which
may increase the risks to which investors are subject. Country-specific rules or
legislation addressing investment-related transactions may inhibit or prevent
certain transactions from transpiring in a particular country.
Furthermore,
foreign exchanges and broker-dealers generally are subject to less
government and exchange scrutiny and regulation than their U.S. counterparts.
Differences in clearance and settlement procedures in foreign markets may cause
delays in settlement of the Fund's trades effected in those markets and could
result in losses to the Fund due to subsequent declines in the value of the
securities subject to the trades. Depositary receipts also involve substantially
identical risks to those associated with investments in foreign securities.
Additionally, the issuers of certain depositary receipts, particularly
unsponsored or unregistered depositary receipts, have 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.
Geographic
Concentration Risk. Funds that are
less diversified across geographic regions or countries are generally riskier
than more geographically diversified funds. The economies and financial markets
of certain regions can be interdependent and may all decline at the same time. A
natural or other disaster could occur in a country or geographic region in
6
which the Fund
invests, which could affect the economy or particular business operations of
companies in that specific country or geographic region and adversely impact the
Fund's investments in the affected region.
China
Investment Risk. Investments in
companies located or operating in Greater China (normally considered to be the
geographical area that includes mainland China, Hong Kong, Macau and
Taiwan)
involve risks and
considerations not typically associated with investments in the U.S. and other
Western nations, such as greater government control over the economy; political,
legal and regulatory uncertainty; nationalization, expropriation, or
confiscation of property; difficulty in obtaining information necessary for
investigations into and/or litigation against Chinese companies, as well as in
obtaining and/or enforcing judgments; limited legal remedies for shareholders;
alteration or discontinuation of economic reforms; military conflicts, either
internal or with other countries; inflation, currency fluctuations and
fluctuations in inflation and interest rates that may have negative effects on
the economy and securities markets of Greater China; and Greater China’s
dependency on the economies of other Asian countries, many of which are
developing countries. Events in any one country within Greater China may impact
the other countries in the region or Greater China as a whole. For example,
changes to their political and economic relationships with mainland China could
adversely impact the Fund’s investments in Taiwan and Hong Kong. Further, health
events, such as the COVID-19 coronavirus outbreak, may cause uncertainty and
volatility in the Chinese economy, especially in the consumer discretionary
(leisure, retail, gaming, tourism), industrials, and commodities sectors.
Additionally, the difficulties of the Public Company Accounting Oversight Board
to inspect audit work papers and practices of PCAOB-registered accounting firms
in China with respect to their audit work of U.S. reporting companies may impose
significant additional risks associated with investments in China.
Investments
in Chinese companies may be made through a special structure known as
a variable interest entity (“VIE”) that is designed to provide foreign
investors, such as the Fund, with exposure to Chinese companies that operate in
certain sectors in which China restricts or prohibits foreign investments.
Investments in VIEs may pose additional risks because the investment is made
through an intermediary shell company that has entered into service and other
contracts with the underlying Chinese operating company in order to provide
investors with exposure to the operating company, but does not represent equity
ownership in the operating company. As a result, such investment may limit the
rights of an investor with respect to the underlying Chinese operating company.
VIEs allow the shell company to exert a degree of control over, and obtain
economic benefits arising from, the VIE without formal legal ownership.
However,
the
contractual arrangements between the shell company and the operating company may
not be as effective in providing operational control as direct equity ownership,
and a foreign investor’s rights may be limited
by,
for
example,
actions of the
Chinese government which could determine that the underlying contractual
arrangements on which control of the VIE is based are invalid. The contractual
arrangement on which the VIE structure is based would likely be subject to
Chinese law and jurisdiction, which could raise questions about how recourse is
sought.
Investments
through VIEs may be affected by conflicts of interest and duties between
the legal owners of the VIE and the stockholders of the listed holding company,
which could adversely impact the value of investments. VIEs are not formally
recognized under Chinese law. Recently, the Chinese government provided new
guidance to and placed restrictions on China-based companies raising capital
offshore, including through VIEs, and investors face uncertainty about future
actions by the Chinese government that could significantly affect the operating
company’s financial performance and the enforceability of the contractual
arrangements underlying the VIE structure.
Certain
securities issued by companies located or operating in Greater China, such
as China A-shares, are subject to trading restrictions and suspensions, quota
limitations and sudden changes in those limitations, and operational, clearing
and settlement risks. Significant portions of the Chinese securities markets may
become rapidly illiquid, as Chinese issuers have the ability to suspend the
trading of their equity securities, and have shown a willingness to exercise
that option in response to market volatility and other events. The liquidity of
Chinese securities may shrink or disappear suddenly and without warning as a
result of adverse economic, market or political events, or adverse investor
perceptions, whether or not accurate.
Export
growth continues to be a major driver of China’s rapid economic growth.
As
a result, a reduction in spending on Chinese products and services, the
institution of tariffs or other trade barriers (or the threat thereof), or a
downturn in any of the economies of China’s key trading partners may have an
adverse impact on the Chinese economy. The ongoing trade
dispute and imposition of tariffs between China and the United States continues
to introduce uncertainty into the Chinese economy and may result in reductions
in international trade, the oversupply of certain manufactured goods,
substantial price reductions of goods and possible failure of individual
companies and/or large segments of China’s export industry, which could have a
negative impact on the Fund’s performance. Events such as these and their
consequences are difficult to predict and it is unclear whether further tariffs
may be imposed or other escalating actions may be taken in the future. In
addition, actions by the U.S. government, such as delisting of certain Chinese
companies from U.S. securities exchanges or otherwise restricting their
operations in the U.S., may negatively impact the value of such securities held
by the Fund. From time to time, certain companies in which the Fund invests may
operate in, or have dealings with, countries subject to sanctions or embargoes
imposed by the U.S. Government and the United Nations and/or in countries the
U.S. Government identified as state sponsors of terrorism. One or more of these
companies may be subject to constraints under U.S. law or regulations that could
negatively affect the company’s performance.
Additionally,
developing countries,
such
as those in Greater China, may subject the Fund’s investments to a number of tax
rules,
and
the application of many of those rules may be uncertain.
Moreover,
China
has implemented a number of tax reforms in recent years, and may amend or revise
its existing tax laws and/or procedures in the future,
possibly with
retroactive effect. Changes in applicable Chinese tax law could reduce the
after-tax profits of the
Fund,
directly or
indirectly,
including by
reducing the after-tax profits of companies in China in which the Fund
invests.
Chinese taxes that
may apply to the Fund’s investments include income tax or withholding tax on
dividends, interest or gains earned by the Fund, business tax and stamp duty.
Uncertainties in Chinese tax rules could result in unexpected tax liabilities
for the Fund.
Equity
Risk.
Equity risk is the risk that the value of equity securities, including common
stocks, will fall. The value of an equity security may fall due to changes in
general economic conditions that impact the market as a whole and that are
relatively unrelated to an issuer or its industry. These conditions include
changes in interest rates, specific periods of overall market turbulence or
instability, or general and prolonged periods of economic decline and cyclical
change. An issuer's common stock in particular may be especially sensitive to,
and more adversely affected by, these general movements in the stock market; it
is possible that a drop in the stock market may depress the price of most or all
of the common stocks that the Fund holds.
In
addition, equity risk includes the risk that investor sentiment toward,
and
perceptions regarding, one or more particular industries or economic sectors
will become negative, resulting in those investors exiting their investments in
those industries, which could cause a reduction in the value
7
of companies in
those industries or sectors more broadly. Price changes of equity securities may
occur in a particular region, industry, or sector of the market, and as a
result, the value of an issuer's common stock may fall solely because of
factors, such as increases in production costs, that negatively impact other
companies in the same industry or in a number of different
industries.
Equity
risk also includes the financial risks of a specific company, including that the
value of the company's securities may fall as a result of factors directly
relating to that company, such as decisions made by its management or lower
demand for the company's products or services. In particular, the common stock
of a company may decline significantly in price over short periods of time. For
example, an adverse event, such as an unfavorable earnings report, may depress
the value of common stock; similarly, the common stock of an issuer may decline
in price if the issuer fails to make anticipated dividend payments because,
among other reasons, the issuer experiences a decline in its financial
condition.
Small-
and Mid-Capitalization Company Risk.
Securities of
small- and mid-capitalization companies may be more volatile and thinly traded
(that is, less liquid) than those of more established companies. These
securities may have returns that vary, sometimes significantly, from the overall
securities market. Often small- and mid-capitalization companies and the
industries in which they focus are still evolving and, as a result, they may be
more sensitive to changing market conditions. In addition, small- and
mid-capitalization companies are typically less financially stable than larger,
more established companies, and they may depend on a small number of essential
personnel, making them more vulnerable to loss of personnel. Smaller
capitalization companies also normally have less diverse product lines than
large capitalization companies and are more susceptible to adverse developments
concerning their products. As such, small-and mid-capitalization companies
typically are more likely to be adversely affected than large capitalization
companies by changes in earnings results, business prospects, investor
expectations or poor economic or market conditions.
REIT
Risk.
The REITs in which the Fund may invest will be subject to risks inherent in the
direct ownership of real estate. These risks include, among others: fluctuations
in the value of the underlying properties; defaults by borrowers or tenants;
market saturation; changes in general and local economic conditions; decreases
in market rates for rents; changes in the availability, cost and terms of
mortgage funds; increased competition, property taxes, capital expenditures, or
operating expenses; and other occurrences, including the impact of changes in
environmental laws that may affect the real estate industry. A REIT that fails
to comply with federal tax requirements affecting REITs may be subject to
federal income taxation, or the federal tax requirement that a REIT distribute
substantially all of its net income to its shareholders may result in a REIT
having insufficient capital for future expenditures. The value of a REIT can
depend on the structure of and cash flow generated by the REIT. In addition,
like mutual funds, REITs have expenses, including advisory and administration
fees, that their shareholders pay. As a result, an investor may absorb duplicate
levels of fees when the Fund invests in REITs. In addition, REITs are subject to
certain provisions under federal tax law. The failure of a company to qualify as
a REIT could have adverse consequences for the Fund, including significantly
reducing the return to the Fund on its investment in such company. Mortgage
REITs lend money to developers and owners of properties and invest primarily in
mortgages and similar real estate interests. Mortgage REITs receive interest
payments from the owners of the mortgaged properties. Accordingly, mortgage
REITs are subject to the credit risk of the borrowers to whom they extend funds.
Credit risk is the risk that the borrower will not be able to make interest and
principal payments on the loan to the REIT when they are due. Mortgage REITs
also are subject to the risk that the value of mortgaged properties may be less
than the amounts owed on the properties. If a mortgage REIT is required to
foreclose on a borrower, the amount recovered in connection with the foreclosure
may be less than the amount owed to the mortgage REIT. Mortgage REITs are
subject to
significant interest rate risk. During periods when interest rates are
declining, mortgages are often refinanced or prepaid. Refinancing or prepayment
of mortgages may reduce the yield of mortgage REITs. When interest rates
decline, however, the value of a REIT’s investment in fixed rate obligations can
be expected to rise. Conversely, when interest rates rise, the value of a REIT’s
investment in fixed rate obligations can be expected to decline. In addition,
rising interest rates generally increase the costs of obtaining financing, which
could cause the value of a mortgage REIT’s investments to decline. A REIT’s
investment in adjustable rate obligations may react differently to interest rate
changes than an investment in fixed rate obligations. As interest rates on
adjustable rate mortgage loans are reset periodically, yields on a REIT’s
investment in such loans will gradually align themselves to reflect changes in
market interest rates, causing the value of such investments to fluctuate less
dramatically in response to interest rate fluctuations than would investments in
fixed rate obligations.
Mortgage
REITs typically use leverage (and in many cases, may be highly leveraged),
which increases investment risk and could adversely affect a REIT’s operations
and market value in periods of rising interest rates, increased interest rate
volatility, downturns in the economy and reductions in the availability of
financing or deterioration in the conditions of the REIT’s mortgage-related
assets.
Industry
Concentration Risk. In following its
methodology, the Underlying Index from time to time may be concentrated to a
significant degree in securities of issuers operating in a single industry or
industry group. To the extent that the Underlying Index concentrates in the
securities of issuers in a particular industry or industry group, the Fund will
also concentrate its investments to approximately the same extent. By
concentrating its investments in an industry or industry group, the Fund may
face more risks than if it were diversified broadly over numerous industries or
industry groups. Such industry-based risks, any of which may adversely affect
the companies in which the Fund invests, may include, but are not limited to,
the following: general economic conditions or cyclical market patterns that
could negatively affect supply and demand in a particular industry, competition
for resources, adverse labor relations, political or world events, obsolescence
of technologies, and increased competition or new product introductions that may
affect the profitability or viability of companies in an industry. In addition,
at times, such industry or industry group may be out of favor and underperform
other industries or the market as a whole. Information about the Fund’s exposure
to a particular industry or industry group is available in the Fund’s Annual and
Semi-Annual Reports to Shareholders, as well as on required forms filed with the
SEC.
ADR
and GDR Risk. ADRs are
certificates that evidence ownership of shares of a foreign issuer and are
alternatives to purchasing the underlying foreign securities directly in their
national markets and currencies. GDRs are certificates issued by an
international bank that generally are traded and denominated in the currencies
of countries other than the home country of the issuer of the underlying shares.
ADRs and GDRs may be subject to certain of the risks associated with direct
investments in the securities of foreign companies, such as currency, political,
economic and market risks, because their values depend on the performance of the
non-dollar denominated underlying foreign securities. Moreover, ADRs and GDRs
may not track the price of the underlying foreign securities on which they are
based, and their value may change materially at times when U.S. markets are not
open for trading.
Certain
countries may limit the ability to convert ADRs into the underlying foreign
securities and vice versa, which may cause the securities of the foreign company
to trade at a discount or premium to the market price of the related ADR. ADRs
may be purchased through “sponsored” or “unsponsored” facilities. A sponsored
facility is established jointly by a depositary and the issuer of the underlying
security. A depositary may establish an unsponsored facility without
participation by the issuer of the deposited security. Unsponsored receipts may
involve higher expenses and may be less liquid. Holders of unsponsored ADRs
generally bear all the costs of such facilities, and the depositary of an
unsponsored facility frequently is
8
under no obligation
to distribute shareholder communications received from the issuer of the
deposited security or to pass through voting rights to the holders of such
receipts in respect of the deposited securities.
GDRs
can involve currency risk since, unlike ADRs, they may not be U.S. dollar-denominated.
Because the Fund’s NAV is determined in U.S. dollars, the Fund’s NAV could
decline if the currency of the non-U.S. market in which the Fund invests
depreciates against the U.S. dollar, even if the value of the Fund’s holdings,
measured in the foreign currency, increases.
Currency
Risk.
Because the Fund’s NAV is determined in U.S. dollars, the Fund’s NAV could
decline if the currency of the non-U.S. market in which the Fund invests
depreciates against the U.S. dollar, even if the value of the Fund’s holdings,
measured in the foreign currency, increases. Generally, an increase in the value
of the U.S. dollar against a foreign currency will reduce the value of a
security denominated in that foreign currency, thereby decreasing the Fund’s
overall NAV. In addition, fluctuations in the exchange values of currencies
could affect the economy or particular business operations of companies in a
geographic region in which the Fund invests, causing an adverse impact on the
Fund. As a result, investors have the potential for losses regardless of the
length of time they intend to hold Shares.
When
the Fund receives income in foreign currencies, the Fund will compute and
distribute its income in U.S. dollars, and the computation of income will be
made on the date that the Fund earns the income at the foreign exchange rates in
effect on that date. Therefore, if the values of the relevant foreign currencies
fall relative to the U.S. dollar between the earning of the income and the time
at which the Fund converts the foreign currencies to U.S. dollars, the Fund may
be required to liquidate securities in order to make distributions if it has
insufficient cash in U.S. dollars to meet distribution requirements.
Furthermore,
the Fund may incur costs in connection with conversions between U.S.
dollars and foreign currencies. Foreign exchange dealers realize a profit based
on the difference between the prices at which they are buying and selling
various currencies. Thus, a dealer normally will offer to sell a foreign
currency to the Fund at one rate, while offering a lesser rate of exchange
should the Fund desire immediately to resell that currency to the dealer. The
Fund will conduct its foreign currency exchange transactions either on a spot
(i.e., cash) basis at the spot rate prevailing in the foreign currency exchange
market, or through entering into forwards, futures or options contracts to
purchase or sell foreign currencies.
Issuer-Specific
Changes Risk. The performance of
the Fund depends on the performance of individual securities to which the Fund
has exposure. The value of an individual security or particular type of security
may be more volatile than the market as a whole and may perform worse than the
market as a whole, causing the value of its securities to decline. Poor
performance may be caused by poor management decisions, competitive pressures,
changes in technology, expiration of patent protection, disruptions in supply,
labor problems or shortages, corporate restructurings, fraudulent disclosures or
other factors. Issuers may, in times of distress or at their own discretion,
decide to reduce or eliminate dividends, which may also cause their stock prices
to decline.
Valuation
Risk.
Financial information related to securities of non-U.S. issuers may be less
reliable than information related to securities of U.S. issuers, which may make
it difficult to obtain a current price for a non-U.S. security held by the Fund.
In certain circumstances, market quotations may not be readily available for
some securities, and those securities may be fair valued. The value established
for a security through fair valuation may be different from what would be
produced if the security had been valued using market quotations. Fund
securities that are valued using techniques other than market quotations,
including “fair valued” securities, may be subject to greater fluctuations in
their value from one day to the next than would be the case if market quotations
were used. In addition, there is no assurance that the Fund could sell a
portfolio security for the value established for it at any time, and it is
possible that the Fund would incur a loss because a security is sold at a
discount to its established value.
Valuation
Time Risk. Because foreign
exchanges may be open on days when the Fund does not price its Shares, the value
of the non-U.S. securities in the Fund’s portfolio may change on days when you
will not be able to purchase or sell your Shares. As a result, trading spreads
and the resulting premium or discount on the Shares may widen, and, therefore,
increase the difference between the market price of the Shares and the NAV of
such Shares.
Non-Correlation
Risk. The Fund’s returns
may not match the returns of the Underlying Index (that is, it may experience
tracking error) for a number of reasons. For example, the Fund incurs operating
expenses not applicable to the Underlying Index and incurs costs in buying and
selling securities, especially when rebalancing the Fund’s securities holdings
to reflect changes in the composition of the Underlying Index. To the extent
that the Fund has recently commenced operations and/or otherwise has a
relatively small amount of assets, such transaction costs could have a
proportionally greater impact on the Fund. Additionally, if the Fund uses a
sampling approach, it may result in returns for the Fund that are not as
well-correlated with the return of the Underlying Index as would be the case if
the Fund purchased all of the securities in the Underlying Index in the
proportions represented in the Underlying Index.
The
performance of the Fund and the Underlying Index may vary due to asset valuation
differences and differences between the Fund’s portfolio and the Underlying
Index resulting from legal restrictions, costs or liquidity constraints.
Additionally, if the Fund issues or redeems Creation Units principally for cash,
it will incur higher costs in buying or selling securities than if it issued and
redeemed Creation Units principally in-kind, which may contribute to tracking
error. The Fund may fair value certain of the securities it holds. To the extent
the Fund calculates its NAV based on fair value prices, the Fund’s ability to
track the Underlying Index may be adversely affected. Since the Underlying Index
is not subject to the tax diversification requirements to which the Fund must
adhere, the Fund may be required to deviate its investments from the securities
contained in, and relative weightings of, the Underlying Index. The Fund may not
invest in certain securities included in the Underlying Index due to liquidity
constraints. Liquidity constraints also may delay the Fund’s purchase or sale of
securities included in the Underlying Index. For tax efficiency purposes, the
Fund may sell certain securities to realize losses, causing it to deviate from
the Underlying Index.
The
Fund generally attempts to remain fully invested in the constituents
of the
Underlying Index. However, the Adviser may not fully invest the Fund’s assets at
times, either as a result of cash flows into the Fund, to retain a reserve of
cash to meet redemptions and expenses, or because of low assets.
The
investment activities of one or more of the Adviser’s affiliates, including other
subsidiaries of the Adviser’s parent company, Invesco Ltd., for their
proprietary accounts and for client accounts also may adversely impact the
Fund’s ability to track the Underlying Index. For example, in regulated
industries, certain emerging or international markets and under corporate and
regulatory ownership definitions, there may be limits on the aggregate amount of
investment by affiliated investors that may not be exceeded, or that may not be
exceeded without the grant of a license or other regulatory or corporate
consent, or, if exceeded, may cause the Adviser, the Fund or other client
accounts to suffer disadvantages or business restrictions. As a result, the Fund
may be restricted in its ability to acquire particular securities due to
positions held by the Fund and the Adviser’s affiliates.
Authorized
Participant Concentration Risk. Only APs may
engage in creation or redemption transactions directly with the Fund. The Fund
has a limited number of institutions that may act as APs, and such APs have no
obligation to submit creation or redemption orders. Consequently, there is no
assurance that APs will establish or maintain an active trading market for the
Shares. The risk may be heightened to the extent that securities held by the
Fund are traded outside a collateralized settlement system. In that case, APs
may be required to post collateral on certain trades on an agency basis
9
(i.e., on behalf of
other market participants), which only a limited number of APs may be able to
do. In addition, to the extent that APs exit the business or are unable to
proceed with creation and/or redemption orders with respect to the Fund and no
other AP is able to step forward to create or redeem Creation Units, this may
result in a significantly diminished trading market for Shares, and Shares may
be more likely to trade at a premium or discount to NAV and to face trading
halts and/or delisting. Investments in non-U.S. securities, which may have lower
trading volumes or could experience extended market closures or trading halts,
may increase the risk that APs may not be able to effectively create or redeem
Creation Units or the risk that the Shares may be halted and/or
delisted.
Market
Trading Risk. The Fund faces
numerous market trading risks, including losses from trading in secondary
markets, periods of high volatility and disruption in the creation/redemption
process of the Fund. Although Shares are listed for trading on a securities
exchange, there can be no assurance that an active trading market for Shares
will develop or be maintained by market makers or APs, that Shares will continue
to trade on any such exchange or that Shares will continue to meet the
requirements for listing on an exchange. Any of these factors, among others, may
lead to the Shares trading at a premium or discount to the Fund’s NAV. As a
result, an investor could lose money over short or long periods. Further, the
Fund may experience low trading volume and wide bid/ask spreads. Bid/ask spreads
vary over time based on trading volume and market liquidity (including for the
underlying securities held by the Fund), and are generally lower if Shares have
more trading volume and market liquidity and higher if Shares have little
trading volume and market liquidity.
In
stressed market conditions, the market for Shares may become less liquid in response
to deteriorating liquidity in the markets for the Fund’s portfolio holdings,
which may cause a variance in the market price of Shares and their underlying
NAV. In addition, an exchange or market may issue trading halts on specific
securities or financial instruments. As a result, the ability to trade certain
securities or financial instruments may be restricted, which may disrupt the
Fund’s creation/redemption process, potentially affect the price at which Shares
trade in the secondary market, and/or result in the Fund being unable to trade
certain securities or financial instruments at all. In these circumstances, the
Fund may be unable to rebalance its portfolio, may be unable to accurately price
its investments and/or may incur substantial trading losses.
Operational
Risk.
The Fund is exposed to operational risks arising from a number of 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 and
the Adviser seek to reduce these operational risks through controls and
procedures. However, these measures do not address every possible risk and may
be inadequate to address these risks.
Shares
May Trade at Prices Different than NAV. Shares trade on a
stock exchange at prices at, above or below the Fund’s most recent NAV. The
Fund’s NAV is calculated at the end of each business day and fluctuates with
changes in the market value of the Fund’s holdings. The trading price of the
Shares fluctuates continuously throughout trading hours on the exchange, based
on both the relative market supply of, and demand for, the Shares and the
underlying value of the Fund’s portfolio holdings. As a result, the trading
prices of the Shares may deviate from the Fund’s NAV. ANY OF THESE FACTORS,
AMONG OTHERS, MAY LEAD TO THE SHARES TRADING AT A PREMIUM OR DISCOUNT TO NAV.
The Adviser cannot predict whether the Shares will trade below, at or above the
Fund’s NAV. Exchange prices are not expected to correlate exactly with the
Fund’s NAV due to timing reasons, supply and demand imbalances and other
factors. In addition, disruptions to creations and redemptions, including
disruptions at market makers, APs, or other market participants, or periods of
significant market volatility or stress, may result in trading prices for the
Shares that differ significantly from the value of the Fund’s underlying
holdings, with the result that investors may pay significantly more or receive
significantly less than
the underlying
value of the Shares bought or sold. This can be reflected as a spread between
the bid and ask prices for the Fund quoted during the day or a premium or
discount in the closing price from the Fund’s NAV. Additionally, APs may be less
willing to create or redeem the Shares if there is a lack of an active market
for such Shares or the Fund’s underlying investments, which may contribute to
the Shares trading at a premium or discount.
Non-Principal
Investment Strategies
The
Fund, after investing at least 80% of its total assets in securities
that
comprise the Underlying Index, may invest its remaining assets in securities
(including other funds) not included in the Underlying Index, and in money
market instruments, including repurchase agreements and other funds, including
affiliated funds, that invest exclusively in money market instruments (subject
to applicable limitations under the Investment Company Act of 1940,
as
amended (the “1940 Act”) or exemptions therefrom) convertible securities,
structured notes (notes on which the amount of principal repayment and interest
payments is based on the movement of one or more specified factors, such as the
movement of a particular security or securities index) and in futures contracts,
options and options on futures contracts. The Fund may use options, futures
contracts, convertible securities and structured notes to seek performance that
corresponds to the
Underlying Index
and to manage cash flows. The Adviser anticipates that it may take approximately
two business days (a business day is any day that the New York Stock Exchange
(“NYSE”) is open) for additions to, and deletions from the Underlying Index to
fully settle in the portfolio composition of the Fund.
In
accordance with 1940 Act rules, the Fund has adopted a policy to invest, under
normal circumstances, at least 80% of the value of its net assets (plus the
amount of any borrowings for investment purposes) in the particular types of
securities, and/or in securities of companies operating in the particular
industries or economic sectors that are suggested by the Fund’s name (the “80%
investment policy”). The Fund considers the securities suggested by its name to
be those securities that comprise the
Underlying Index.
Therefore, the Fund anticipates meeting its 80% investment policy because it
already generally invests at least 80% of its total assets in securities that
comprise the Underlying Index, in accordance with its principal investment
strategies.
The
Fund's investment objective and the 80% investment policy are non-fundamental
policies that the Board of Trustees (the “Board”) of the Invesco Exchange-Traded
Self-Indexed Fund Trust (the “Trust”) may change without shareholder approval
upon 60 days' prior written notice to shareholders.
The
fundamental and non-fundamental policies of the Fund are set forth in the Fund’s
Statement of Additional Information (“SAI”) under the section “Investment
Restrictions.”
Borrowing
Money
The Fund may borrow
money up to the limits set forth in the Fund’s SAI under the section “Investment
Restrictions.”
Securities
Lending
The Fund may lend
its portfolio securities to brokers, dealers, and other financial institutions.
In connection with such loans, the Fund receives liquid collateral equal to at
least 102% (105% for international securities) of the value of the loaned
portfolio securities. This collateral is marked-to-market on a daily
basis.
Additional
Risks of Investing in the Fund
The Fund may also
be subject to certain other non-principal risks associated with its investments
and investment strategies. The following provides additional non-principal risk
information regarding investing in the Fund.
Affiliated
Index Provider Risk. The Index Provider
is an affiliated person of the Adviser, which poses the appearance of a conflict
of interest. For example, a potential conflict could arise between an affiliated
person of the Index Provider or the Adviser and the Fund if that entity
attempted to use
10
information
regarding changes and composition of the Underlying Index to the detriment of
the Fund. Additionally, potential conflicts could arise with respect to the
personal trading activity of personnel of the affiliated person who may have
access to, or knowledge of, pending changes to the Underlying Index's
composition methodology or the constituent securities in the Underlying Index
prior to the time that information is publicly disseminated. If shared, such
knowledge could facilitate “front-running” (which describes an instance in which
other persons trade ahead of the Fund). Although the Adviser and the Index
Provider have taken steps designed to ensure that these potential conflicts are
mitigated (e.g., via the adoption of policies and procedures that are designed
to minimize potential conflicts of interest and the implementation of
informational barriers designed to minimize the potential for the misuse of
information about the Underlying Index), there can be no assurance that such
measures will be successful.
Cash
Transaction Risk. The Fund
generally expects to make in-kind redemptions to avoid being taxed at the fund
level on gains on the distributed portfolio securities. However, from time to
time, the Fund reserves the right to effect redemptions for cash, rather than
in-kind. In such circumstances, the Fund may be required to sell portfolio
securities to obtain the cash needed to distribute redemption proceeds.
Therefore, the Fund may recognize a capital gain on these sales that might not
have been incurred if the Fund had made a redemption in-kind. This may decrease
the tax efficiency of the Fund compared to utilizing an in-kind redemption
process.
Convertible
Securities Risk. A convertible
security generally is a preferred stock that may be converted within a specified
period of time into common stock. Convertible securities nevertheless remain
subject to the risks of both debt securities and equity securities. As with
other equity securities, the value of a convertible security tends to increase
as the price of the underlying stock goes up, and to decrease as the price of
the underlying stock goes down. Declining common stock values therefore also may
cause the value of the Fund’s investments to decline. Like a debt security, a
convertible security provides a fixed-income stream and also tends to decrease
in value when interest rates rise. Moreover, many convertible securities have
credit ratings that are below investment grade and are subject to the same risks
as lower-rated debt securities, which are considered to have more speculative
characteristics and greater susceptibility to default or decline in market value
than investment grade (or higher-rated) securities.
Cybersecurity
Risk.
With
the increased use of technologies such as the Internet to conduct business, the
Fund, like all companies, may be susceptible to operational,
information
security and related risks. Cybersecurity incidents involving the Fund and its
service providers (including,
without limitation,
the Adviser,
fund
accountant,
custodian,
transfer agent and
financial
intermediaries)
have the ability to cause disruptions and impact business operations,
potentially resulting in financial losses, impediments to trading, the inability
of Fund shareholders to transact business, violations of applicable privacy and
other laws, regulatory fines, penalties, reputational damage, reimbursement or
other compensation costs, and/or additional compliance costs. Similar adverse
consequences could result from cybersecurity incidents affecting issuers of
securities in which the Fund invests, counterparties with which the Fund
engages, governmental and other regulatory authorities, exchanges and other
financial market operators, banks, brokers, dealers, insurance companies, other
financial institutions and other parties. The Fund and its shareholders could be
negatively impacted as a result.
Derivatives
Risk.
The Fund may invest in derivatives, such as futures contracts, options, and
options on futures contracts, as applicable. Derivatives are financial
instruments that derive their value from an underlying asset, such as a
security, index or exchange rate. Their use is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities
transactions.
Derivatives may be riskier than other types of investments and may be more
volatile,
less
tax efficient and less liquid than other securities.
Derivatives
may be used to create synthetic exposure to an underlying asset or to hedge a
portfolio risk. If the Fund uses derivatives to “hedge” a portfolio risk, the
change in value of a derivative may not correlate as expected with the
underlying asset being hedged, and it is possible that the hedge therefore may
not succeed. In addition, given their complexity, derivatives may be difficult
to value.
Derivatives
are subject to a number of risks including credit risk, interest rate risk,
and market risk. Credit risk refers to the possibility that a counterparty will
be unable and/or unwilling to perform under the agreement. Interest rate risk
refers to fluctuations in the value of an asset resulting from changes in the
general level of interest rates. Over-the-counter derivatives are also subject
to counterparty risk (sometimes referred to as “default risk”), which is the
risk that the other party to the contract will not fulfill its contractual
obligations.
Derivatives
may be especially sensitive to changes in economic and market conditions,
and their use may give rise to a form of leverage. Leverage may cause the
portfolio of the Fund to be more volatile than if the portfolio had not been
leveraged because leverage can exaggerate the effect of any increase or decrease
in the value of securities and other instruments held by the Fund. For some
derivatives, such leverage could result in losses that exceed the original
amount invested in the derivative.
The
Fund’s use of derivatives may be limited by the requirements for taxation of the
Fund as a regulated investment company, as well as by regulatory
changes.
Index
Provider Risk. The Fund seeks to
track the investment results, before fees and expenses, of the Underlying Index,
as published by the Index Provider. There is no assurance that the Index
Provider will compile the Underlying Index accurately, or that the Underlying
Index will be determined, composed or calculated accurately. While the Index
Provider gives descriptions of what the Underlying Index is designed to achieve,
the Index Provider generally does not provide any warranty or accept any
liability in relation to the quality, accuracy or completeness of data in the
Underlying Index, and it generally does not guarantee that the Underlying Index
will be in line with its methodology. Errors made by the Index Provider with
respect to the quality, accuracy and completeness of the data within the
Underlying Index may occur from time to time and may not be identified and
corrected by the Index Provider for a period of time, if at all. Additionally,
because the Index Provider is relatively new to the business of creating indexes
generally, and to compiling and maintaining the Underlying Index specifically,
there may be a greater risk that errors will not be detected as quickly as they
might be in the case of an index that has been maintained over time by a
different index provider or licensed to a multitude of different users.
Therefore, gains, losses or costs associated with Index Provider errors will
generally be borne by the Fund and its shareholders.
Index
Rebalancing Risk. Pursuant to the
methodology that the Index Provider uses to calculate and maintain the
Underlying Index, a security may be removed from the Underlying Index in the
event that it does not comply with the eligibility requirements of the
Underlying Index. As a result, the Fund may be forced to sell securities at
inopportune times or for prices other than at current market values or may elect
not to sell such securities on the day that they are removed from the Underlying
Index, due to market conditions or otherwise. Due to these factors, the
variation between the Fund’s annual return and the return of the Underlying
Index may increase significantly.
Apart
from scheduled rebalances, the Index Provider may carry out additional ad hoc
rebalances to the Underlying Index, for example, to correct an error in the
selection of index constituents. 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
11
tracking error
risk. Therefore, errors and additional ad hoc rebalances carried out by the
Index Provider may increase the Fund’s costs and market exposure.
Large
Shareholder Risk. Certain
shareholders, including a third party investor, the Adviser or an affiliate of
the Adviser, an AP, a lead market maker, or another entity, may from time to
time own a substantial amount of Shares or may invest in the Fund and hold its
investment for a limited period of time solely to facilitate the commencement of
the Fund or to facilitate the Fund achieving a specified size or scale. There
can be no assurance that any large shareholder would not redeem its investment.
Dispositions of a large number of Shares by these shareholders may adversely
affect the Fund’s liquidity and net assets to the extent such transactions are
executed directly with the Fund in the form of redemptions through an AP, rather
than executed in the secondary market. These redemptions may also force the Fund
to sell portfolio securities when it might not otherwise do so, which may
negatively impact the Fund’s NAV and increase the Fund’s brokerage costs.
Further, such sales may accelerate the realization of taxable income and/or
gains to shareholders, or the Fund may be required to sell its more liquid Fund
investments to meet a large redemption, in which case the Fund’s remaining
assets may be less liquid, more volatile, and more difficult to price. To the
extent the Fund permits cash purchases, large purchases of Shares may adversely
affect the Fund’s performance to the extent that the Fund is delayed in
investing new cash and is required to maintain a larger cash position than it
ordinarily would. To the extent these large shareholders transact in shares on
the secondary market, such transactions may account for a large percentage of
the trading volume on the Fund’s exchange and may, therefore, have a material
upward or downward effect on the market price of the Shares. To the extent the
Fund permits redemptions in cash, the Fund may hold a relatively large
proportion of its assets in cash in anticipation of large redemptions, diluting
its investment returns.
Leverage
Risk.
To the extent that the Fund borrows money, it may be leveraged. Leveraging
generally exaggerates the effect on NAV of any increase or decrease in the
market value of the Fund’s portfolio securities. Borrowing creates interest
expenses and other expenses (e.g., commitment fees) for the Fund that affect the
Fund’s performance. Interest expenses are excluded from the Fund expenses borne
by the Adviser under the unitary management fee.
Licensing,
Custody and Settlement Risk. Approval of
governmental authorities may be required prior to investing in the securities of
companies based in certain foreign countries. Delays in obtaining such an
approval would delay investments in the particular country, and, as a
consequence, the Fund may not be able to invest in all of the securities
included in the
Underlying Index
while an approval is pending. Rules adopted under the 1940 Act permit the Fund
to maintain its foreign securities and cash in the custody of certain eligible
non-U.S. banks and securities depositories. Certain banks in foreign countries
that are eligible foreign sub-custodians may be recently organized or otherwise
lack extensive operating experience. In addition, in certain countries there may
be legal restrictions or limitations on the ability of the Fund to recover
assets held in custody by a foreign sub-custodian in the event of the bankruptcy
of the sub-custodian. Settlement systems in emerging markets may be less well
organized than in developed markets. Thus, there may be a risk that settlement
may be delayed and that cash or securities of the Fund may be in jeopardy
because of failures of or defects in the systems. Under the laws of certain
countries in which the Fund invests, the Fund may be required to release local
shares before receiving cash payment or may be required to make cash payment
prior to receiving local shares.
Money
Market Funds Risk. Money market funds
are subject to management fees and other expenses, and the Fund's investments in
money market funds will cause it to bear proportionately the costs incurred by
the money market funds' operations while simultaneously paying its own
management fees and expenses. An investment in a money market fund is not
insured or guaranteed by the Federal Deposit Insurance Corporation or any other
government agency; it is possible to lose money by investing in a
money market fund.
To the extent that the Fund invests in money market funds, the Fund will be
subject to the same risks that investors experience when investing in money
market funds. These risks may include the impact of significant fluctuations in
assets as a result of the cash sweep program or purchase and redemption activity
in those funds.
Money
market funds are open-end registered investment companies that historically
have traded at a stable $1.00 per share price. However, money market funds that
do not meet the definition of a “retail money market fund” or “government money
market fund” under the 1940 Act are required to transact at a floating NAV per
share (i.e., in a manner similar to how all other non-money market mutual funds
transact), instead of at a $1.00 stable share price. Money market funds may also
impose liquidity fees and redemption gates for use in times of market stress. If
the Fund invested in a money market fund with a floating NAV, the impact on the
trading and value of the money market instrument may negatively affect the
Fund's return potential.
Natural
Disaster/Epidemic Risk. Natural or
environmental disasters, such as earthquakes, fires, floods, hurricanes,
tsunamis and other severe weather-related phenomena generally, and widespread
disease, including pandemics and epidemics, have been and may be highly
disruptive to economies and markets, adversely impacting individual companies,
sectors, industries, markets, currencies, interest and inflation rates, credit
ratings, investor sentiment, and other factors affecting the value of the Fund’s
investments. Additionally, if a sector or sectors in which the Underlying Index
is concentrated is negatively impacted to a greater extent by such events, the
Fund may experience heightened volatility. Given the increasing interdependence
among global economies and markets, conditions in one country, market, or region
are increasingly likely to adversely affect markets, issuers, and/or foreign
exchange rates in other countries, including the U.S. Any such events could have
a significant adverse impact on the value of the Fund’s
investments.
Repurchase
Agreements Risk. Repurchase
agreements are agreements pursuant to which the Fund acquires securities from a
third party with the understanding that the seller will repurchase them at a
fixed price on an agreed date. Repurchase agreements may be characterized as
loans secured by the underlying securities. If the seller of securities under a
repurchase agreement defaults on its obligation to repurchase the underlying
securities, as a result of its bankruptcy or otherwise, the Fund will seek to
dispose of such securities, which could involve costs or delays. If the seller
becomes insolvent and subject to liquidation or reorganization under applicable
bankruptcy or other laws, the Fund’s ability to dispose of the underlying
securities may be restricted. If the seller fails to repurchase the securities,
the Fund may suffer a loss to the extent proceeds from the sale of the
underlying securities are less than the repurchase prices.
Risks
of Futures and Options.
The
Fund may enter into U.S. futures contracts, options and options on futures
contracts to simulate full investment in the Underlying Index, or to manage cash
flows. The Fund will not use futures or options for speculative purposes. The
Fund intends to use futures and options contracts to limit its risk exposure to
levels comparable to direct investment in securities.
An
option gives a holder the right to buy or sell a specific security or an
index
at a specified price within a specified period of time. An option on a futures
contract gives the purchaser the right, in return for the premium paid, to
assume a position in the underlying futures contract at a specified price at any
time prior to the expiration date of the option. Options can offer large amounts
of leverage, which may result in the Fund’s NAV being more sensitive to changes
in the value of the related instrument. The purchase of put or call options
could be based upon predictions as to anticipated trends; such predictions could
prove to be incorrect resulting in loss of part or all of the premium paid. The
risk of trading uncovered call options in some strategies (e.g., selling
uncovered stock index futures contracts) potentially is unlimited.
Futures
contracts provide for the future sale by one party and purchase by another party of
a specified amount of a specific instrument or index at a
12
specified future
time and at a specified price. Because futures contracts project price levels in
the future, market circumstances may cause a discrepancy between the price of
the stock index future and the movement in the Underlying Index. In the event of
adverse price movements, the Fund would remain required to make daily cash
payments to maintain its required margin. There is no assurance that a liquid
secondary market will exist for any particular futures contract at any
particular time. The risk of loss in trading futures contracts potentially is
unlimited.
Securities
Lending Risk. Securities lending
involves a risk of loss because the borrower may fail to return the securities
in a timely manner or at all. If the Fund lends its securities and is unable to
recover the securities loaned, it may sell the collateral and purchase a
replacement security in the market. Lending securities entails a risk of loss to
the Fund if and to the extent that the market value of the loaned securities
increases and the collateral is not increased accordingly. Any cash received as
collateral for loaned securities will be invested in an affiliated money market
fund. This investment is subject to market appreciation or depreciation and the
Fund will bear any loss on the investment of its cash
collateral.
Structured
Notes Risk. Investments in
structured notes involve risks including interest rate risk, credit risk and
market risk. Depending on the factors used, changes in interest rates and
movement of such factors may cause significant price fluctuations. Structured
notes may be less liquid than other types of securities and more volatile than
the reference factor underlying the note. This means that the Fund may lose
money if the issuer of the note defaults, as the Fund may not be able to readily
close out its investment in such notes without incurring losses.
Trading
Issues Risk. Investors buying or
selling Shares in the secondary market may pay brokerage commissions or other
charges, which may be a significant proportional cost for investors seeking to
buy or sell relatively small amounts of Shares. Moreover, trading in Shares on
The Nasdaq Stock Market LLC (the “Exchange”) 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 the
Exchange’s “circuit breaker” rules. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of the Fund will
continue to be met or will remain unchanged. Foreign exchanges may be open on
days when Shares are not priced, and therefore, if the Fund holds securities
that are primarily listed on such exchanges, the value of such securities in the
Fund’s portfolio may change on days when shareholders will not be able to
purchase or sell Shares.
Tax Structure of ETFs
Unlike interests in
conventional mutual funds, which typically are bought and sold only at closing
NAVs, Shares are traded throughout the day in the secondary market on a national
securities exchange, and are created and redeemed principally in-kind in
Creation Units at each day’s next calculated NAV. These in-kind arrangements are
designed to protect shareholders from the adverse effects on the Fund’s
portfolio that could arise from frequent cash creation and redemption
transactions. In a conventional mutual fund, redemptions can have an adverse tax
impact on taxable shareholders because the mutual fund may need to sell
portfolio securities to obtain cash to meet such redemptions. These sales may
generate taxable gains that must be distributed to the shareholders of the
mutual fund, whereas the Shares’ in-kind redemption mechanism generally will not
lead to such taxable events for the Fund or its shareholders.
The
Fund may recognize gains as a result of rebalancing its securities holdings to reflect
changes in the securities included in the Underlying Index. The Fund also may be
required to distribute any such gains to its shareholders to avoid adverse
federal income tax consequences. For
information
concerning the tax consequences of distributions, see the section entitled
“Dividends, Other Distributions and Taxes” in this Prospectus.
Portfolio Holdings
A description of
the Trust's policies and procedures with respect to the disclosure of the Fund’s
portfolio holdings is available in the Fund’s SAI, which is available at
www.invesco.com/ETFs.
Management of the Fund
Invesco Capital
Management LLC is a registered investment adviser with its offices at 3500 Lacey
Road, Suite 700, Downers Grove, IL 60515. Invesco Capital Management LLC
serves as the investment adviser to the Invesco Actively Managed Exchange-Traded
Commodity Fund Trust, Invesco Actively Managed Exchange-Traded Fund Trust,
Invesco Exchange-Traded Fund Trust, Invesco Exchange-Traded Fund Trust II,
Invesco Exchange-Traded Self-Indexed Fund Trust and Invesco India
Exchange-Traded Fund Trust, a family of ETFs, with combined assets under
management of $170.5 billion as of October 31, 2022.
As
the Fund’s investment adviser, the Adviser has overall responsibility
for
selecting and continuously monitoring the Fund’s investments, managing the
Fund’s business affairs, and providing certain clerical, bookkeeping and other
administrative services for the Trust.
Portfolio
Managers
The Adviser uses a
team of portfolio managers, investment strategists and other investment
specialists in managing the Fund. This team approach brings together many
disciplines and leverages the Adviser's extensive resources. In this regard,
Peter Hubbard, Michael Jeanette, Pratik Doshi and Tony Seisser (the “Portfolio
Managers”) are jointly and primarily responsible for the day-to-day management
of the Fund.
Each
Portfolio Manager is responsible for various functions related to portfolio
management, including investing cash flows, coordinating with other team members
to focus on certain asset classes, implementing investment strategies and
researching and reviewing investment strategies.
Each
Portfolio Manager has limitations on their authority for
risk management and compliance purposes that the Adviser believes to be
appropriate.
◾
Peter Hubbard, Head
of Equities and Director of Portfolio Management of the Adviser and Vice
President of the Trust, has been responsible for the management of the Fund
since September 2018. He has been responsible for the management of certain
funds in the Invesco family of ETFs since June 2007 and has been associated with
the Adviser since 2005.
◾
Michael Jeanette,
Senior Portfolio Manager of the Adviser, has been responsible for the management
of the Fund since September 2018. He has been responsible for the management of
certain funds in the Invesco family of ETFs since August 2008 and has been
associated with the Adviser since 2008.
◾
Pratik Doshi,
Portfolio Manager of the Adviser, has been responsible for the management of the
Fund since December 2019. He has been responsible for the management of certain
funds in the Invesco family of ETFs since October 2019 and has been associated
with the Adviser since 2018. Prior to joining the Adviser, Mr. Doshi earned his
MBA from the University of Chicago from 2016 to 2018.
◾
Tony Seisser,
Portfolio Manager of the Adviser, has been responsible for the management of the
Fund since September 2018. He has been responsible for the management of certain
funds in the Invesco family of ETFs since August 2014 and has been associated
with the Adviser since 2013.
13
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.
Advisory
Fees
Pursuant to an
investment advisory agreement between the Adviser and the Trust (the “Investment
Advisory Agreement”), the Fund pays the Adviser an annual unitary management fee
equal to 0.35% of its average daily net assets (the “Advisory
Fee”).
Out
of the Fund's unitary management fee, the Adviser pays substantially all
expenses of the Fund, including the cost of transfer agency, custody, fund
administration, legal, audit and other services, except for distribution fees,
if any, brokerage expenses, taxes, interest, Acquired Fund Fees and Expenses, if
any, litigation expenses, and other extraordinary expenses, including proxy
expenses (except for such proxies related to: (i) changes to the Investment
Advisory Agreement, (ii) the election of any Board member who is an “interested
person” of the Trust, or (iii) any other matters that directly benefit the
Adviser).
The
Fund may invest in money market funds that are managed by affiliates of the
Adviser and other funds (including ETFs) managed by the Adviser or affiliates of
the Adviser (collectively, “Underlying Affiliated Investments”). The indirect
portion of the advisory fees that the Fund incurs through such Underlying
Affiliated Investments is in addition to the Advisory Fee payable to the Adviser
by the Fund. Therefore, the Adviser has agreed to waive the Advisory Fee payable
by the Fund in an amount equal to the lesser of: (i) 100% of the net advisory
fees earned by the Adviser or an affiliate of the Adviser that are attributable
to the Fund’s Underlying Affiliated Investments or (ii) the Advisory Fee
available to be waived. This waiver does
not
apply to the Fund’s investment of cash collateral received for securities
lending. This waiver is in place through at least August 31, 2024, and there is
no guarantee that the Adviser will extend it past that date.
A
discussion regarding the basis for the Board's approval of the Investment Advisory
Agreement with respect to the Fund is available in the Fund’s Annual Report to
Shareholders for the fiscal year ended August 31, 2022.
How to Buy and Sell Shares
The Fund issues or
redeems its Shares at NAV per Share only in Creation Units or Creation Unit
Aggregations.
Most
investors buy and sell Shares in secondary market transactions through brokers.
Shares are listed for trading on the secondary market on the Exchange. Shares
can be bought and sold throughout the trading day like other publicly traded
shares. There is no minimum investment. Although Shares generally are purchased
and sold in “round lots” of 100 Shares, brokerage firms typically permit
investors to purchase or sell Shares in smaller “odd lots,” at no per share
price differential. When buying or selling Shares through a broker, you will
incur customary brokerage commissions and charges, and you may pay some or all
of the spread between the bid and the offered price in the secondary market on
each leg of a round trip (purchase and sale) transaction.
The
Shares trade on the Exchange under the symbol “ISEM.”
Share
prices are reported in dollars and cents per Share.
APs
may acquire Shares directly from the Fund, and APs may tender their Shares for
redemption directly to the Fund, at NAV per Share only in Creation Units or
Creation Unit Aggregations, and in accordance with the procedures described in
the SAI.
Under
normal circumstances, the Fund will pay out redemption proceeds to a
redeeming AP within two days after the AP’s redemption request is received, in
accordance with the process set forth in the Fund’s SAI and in the agreement
between the AP and the Fund’s distributor. However, the Fund reserves the right,
including under stressed market conditions, to take up to seven days after the
receipt of a redemption
request to pay an
AP, all as permitted by the 1940 Act. If the Fund has foreign investments in a
country where local market holiday(s) prevent the Fund from delivering such
foreign investments to an AP in response to a redemption request, the Fund may
take up to 15 days after the receipt of the redemption request to deliver such
investments to the AP.
The
Fund anticipates meeting redemption requests either by paying redemption proceeds
to an AP primarily through in-kind redemptions or in cash. Cash used for
redemptions will be raised from the sale of portfolio assets or may come from
existing holdings of cash or cash equivalents. If the Fund holds Rule 144A
securities, an AP that is not a “qualified institutional buyer,” as such term is
defined under Rule 144A of the Securities Act of 1933, as amended (the
“Securities Act”), will not be able to receive those Rule 144A
securities.
The
Fund may liquidate and terminate at any time without shareholder approval.
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 and is recognized as the record owner of all Shares for all
purposes.
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.
Participants in DTC 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 stocks that you hold in
book entry or “street name” form.
Share
Trading Prices
The trading prices
of Shares on the Exchange may differ from the Fund’s daily NAV. Market forces of
supply and demand, economic conditions and other factors may affect the trading
prices of Shares.
Frequent Purchases and Redemptions of Shares
Shares may be
purchased and redeemed directly from the Fund only in Creation Units by APs. The
vast majority of trading in Shares occurs on the secondary market and does not
involve the Fund directly. In-kind purchases and redemptions of Creation Units
by APs and cash trades on the secondary market are unlikely to cause many of the
harmful effects of frequent purchases or redemptions of the Shares. Cash
purchases and/or redemptions of Creation Units, however, can result in increased
tracking error, disruption of portfolio management, dilution to the Fund and
increased transaction costs, which could negatively impact the Fund’s ability to
achieve its investment objective, and may lead to the realization of capital
gains. These consequences may increase as the frequency of cash purchases and
redemptions of Creation Units by APs increases. However, direct trading by APs
is critical to ensuring that Shares trade at or close to NAV.
To
minimize these potential consequences of frequent purchases and redemptions of
Shares, the Fund imposes transaction fees on purchases and redemptions of
Creation Units to cover the custodial and other costs the Fund incurs in
effecting trades. In addition, the Adviser monitors trades by APs for patterns
of abusive trading and the Fund reserves the right not to accept orders from APs
that the Adviser has determined may be disruptive to the management of the Fund,
or otherwise are not in the best interests of the Fund. For these reasons, the
Board has not adopted policies and procedures with respect to frequent purchases
and redemptions of Shares.
14
Dividends, Other Distributions and Taxes
Dividends
and Other Distributions
Generally,
dividends from net investment income, if any, are declared and paid quarterly by
the Fund. The Fund also intends to distribute its net realized capital gains, if
any, to shareholders annually. Dividends and other distributions may be declared
and paid more frequently to comply with the distribution requirements of
Subchapter M of the Internal Revenue Code of 1986, as amended (the “Code”), and
to avoid a federal excise tax imposed on regulated investment
companies.
Distributions
in cash may be reinvested automatically in additional whole Shares only
if the broker through whom you purchased Shares makes such option
available.
Taxes
The Fund intends to
qualify each year as a regulated investment company (“RIC”) and, as such, is not
subject to entity-level tax on the income and gain it distributes. If you are a
taxable investor, dividends and distributions you receive generally are taxable
to you whether you reinvest distributions in additional Shares or take them in
cash. Every year, you will be sent information showing the amount of dividends
and distributions you received during the prior calendar year. In addition,
investors in taxable accounts should be aware of the following basic tax points
as supplemented below where relevant:
Fund
Tax Basics
◾
The Fund earns
income generally in the form of dividends or interest on its investments. This
income, less expenses incurred in the operation of the Fund, constitutes the
Fund's net investment income from which dividends may be paid to shareholders.
If you are a taxable investor, distributions of net investment income generally
are taxable to you as ordinary income.
◾
Distributions of
net short-term capital gains are taxable to you as ordinary income. A fund with
a high portfolio turnover rate (a measure of how frequently assets within the
fund are bought and sold) is more likely to generate short-term capital gains
than a fund with a low portfolio turnover rate.
◾
Distributions of
net long-term capital gains are taxable to you as long-term capital gains no
matter how long you have owned your Shares.
◾
A portion of income
dividends paid by the Fund may be reported as qualified dividend income eligible
for taxation by individual shareholders at long-term capital gain rates,
provided certain holding period requirements are met. These reduced rates
generally are available for dividends derived from the Fund's investment in
stocks of domestic corporations and qualified foreign corporations. Should the
Fund invest primarily in debt securities, either none or only a nominal portion
of the dividends paid by the Fund will be eligible for taxation at these reduced
rates.
◾
The use of
derivatives by the Fund may cause the Fund to realize higher amounts of ordinary
income or short-term capital gain, distributions from which are taxable to
individual shareholders at ordinary income tax rates rather than at the more
favorable tax rates for long-term capital gain.
◾
Distributions
declared to shareholders with a record date in October, November or December–if
paid to you by the end of January–are taxable for federal income tax purposes as
if received in December.
◾
Any long-term or
short-term capital gains realized on the sale of your Shares will be subject to
federal income tax.
◾
Upon termination of
the Fund, a shareholder will receive a liquidating distribution(s) which should
be treated as payment in exchange for the
Shares held by the
shareholder. As a result, each shareholder should recognize gain or loss in an
amount equal to the difference between the shareholder’s adjusted tax basis in
his or her shares and the liquidating distribution(s) he or she receives, except
to the extent the Shares are held in a tax-advantaged arrangement. A liquidating
distribution may be subject to backup withholding as described
below.
◾
A shareholder's
cost basis information will be provided on the sale of any of the shareholder's
Shares, subject to certain exceptions for exempt recipients. Please contact the
broker (or other nominee) that holds your Shares with respect to reporting of
your cost basis and available elections for your account.
◾
At the time you
purchase your Shares, the Fund's NAV may reflect undistributed income or
undistributed capital gains. A subsequent distribution to you of such amounts,
although constituting a return of your investment, would be taxable. Buying
Shares just before the Fund declares an income dividend or capital gains
distribution is sometimes known as “buying a dividend.” In addition, the Fund's
NAV may, at any time, reflect net unrealized appreciation, which may result in
future taxable distributions to you.
◾
By law, if you do
not provide the Fund with your proper taxpayer identification number and certain
required certifications, you may be subject to backup withholding on any
distributions of income, capital gains, or proceeds from the sale of your
Shares. The Fund also must withhold if the IRS instructs it to do so. When
withholding is required, the amount will be 24% of any distributions or proceeds
paid.
◾
An additional 3.8%
Medicare tax is imposed on certain net investment income (including ordinary
dividends and capital gain distributions received from the Fund and net gains
from taxable dispositions of Shares) of U.S. individuals, estates and trusts to
the extent that such person's “modified adjusted gross income” (in the case of
an individual) or “adjusted gross income” (in the case of an estate or trust)
exceeds a threshold amount. This Medicare tax, if applicable, is reported by you
on, and paid with, your federal income tax return.
◾
You will not be
required to include the portion of dividends paid by the Fund derived from
interest on U.S. government obligations in your gross income for purposes of
personal and, in some cases, corporate income taxes in many state and local tax
jurisdictions. The percentage of dividends that constitutes dividends derived
from interest on federal obligations will be determined annually. This
percentage may differ from the actual percentage of interest received by the
Fund on federal obligations for the particular days on which you hold
shares.
◾
Fund distributions
and gains from the sale of Shares generally are subject to state and local
income taxes.
◾
If the Fund
qualifies to pass through the tax benefits from foreign taxes it pays on its
investments, and elects to do so, then any foreign taxes it pays on these
investments may be passed through to you. You will then be required to include
your pro rata share of these taxes in gross income, even though not actually
received by you, and will be entitled either to deduct your share of these taxes
in computing your taxable income, or to claim a foreign tax credit for these
taxes against your U.S. federal income tax.
◾
Foreign investors
should be aware that U.S. withholding, special certification requirements to
avoid U.S. backup withholding and claim any treaty benefits, and estate taxes
may apply to an investment in the Fund.
◾
Under the Foreign
Account Tax Compliance Act (“FATCA”), a 30% withholding tax is imposed on income
dividends made by the Fund to certain foreign entities, referred to as foreign
financial institutions or non-financial foreign entities, that fail to comply
(or be deemed compliant) with extensive reporting and withholding requirements
designed to inform
15
the U.S. Department
of the Treasury of U.S.-owned foreign investment accounts. After December 31,
2018, FATCA withholding also would have applied to certain capital gain
distributions, return of capital distributions and the proceeds arising from the
sale of Shares; however, based on proposed regulations issued by the IRS, which
can be relied upon currently, such withholding is no longer required unless
final regulations provide otherwise (which is not expected). The Fund may
disclose the information that it receives from its shareholders to the IRS,
non-U.S. taxing authorities or other parties as necessary to comply with FATCA
or similar laws. Withholding also may be required if a foreign entity that is a
shareholder of the Fund fails to provide the Fund with appropriate
certifications or other documentation concerning its status under
FATCA.
◾
If the Fund invests
in an underlying fund taxed as a RIC, please see any relevant section below for
more information regarding the Fund’s investment in such underlying
fund.
◾
The above
discussion concerning the taxability of Fund dividends and distributions and of
sales of Shares is inapplicable to investors that generally are exempt from
federal income tax, such as retirement plans that are qualified under Section
401 and 403 of the Code and individual retirement accounts (“IRAs”) and Roth
IRAs.
Taxes
on Purchase and Redemption of Creation Units
To the extent that
the Fund permits in-kind transactions, an AP that exchanges equity securities
for a Creation Unit generally will recognize a capital gain or loss equal to the
difference between the market value of the Creation Units at the time of
exchange (plus any cash received by the AP as part of the issue) and the sum of
the AP's aggregate basis in the securities surrendered plus any cash component
paid. Similarly, an AP that redeems a Creation Unit in exchange for securities
generally will recognize a capital gain or loss equal to the difference between
the AP's basis in the Creation Units (plus any cash paid by the AP as part of
the redemption) and the aggregate market value of the securities received (plus
any cash received by the AP as part of the redemption). The IRS, however, may
assert that a loss realized upon an exchange of securities for a Creation Unit,
or of a Creation Unit for securities, cannot be deducted currently under the
rules governing “wash sales” or on the ground that there has been no significant
change in the AP's economic position. An AP exchanging securities should consult
its own tax advisor(s) with respect to whether wash sale rules apply and when a
loss otherwise might not be deductible.
Any
capital gain or loss realized on a redemption of a Creation Unit generally is
treated as long-term capital gain or loss if the Shares have been held for more
than one year and as short-term capital gain or loss if the Shares have been
held for one year or less, assuming that such Creation Units are held as a
capital asset. If you purchase or redeem one or more Creation Units, you will be
sent a confirmation statement showing how many Shares you purchased or sold and
at what price.
The
foregoing discussion summarizes some of the more important
possible consequences under current federal, state and local tax law of an
investment in the Fund. It is not a substitute for personal tax advice. You also
may be subject to state, local and/or foreign tax on the Fund's distributions
and sales and/or redemptions of Shares. Consult your personal tax advisor(s)
about the potential tax consequences of an investment in the Shares under all
applicable tax laws.
Distributor
Invesco
Distributors, Inc. (the “Distributor”) serves as the distributor of Creation
Units for the Fund on an agency basis. The Distributor does not maintain a
secondary market in Shares. The Distributor is an affiliate of the
Adviser and the Index Provider.
Net Asset Value
The NAV for the
Fund will be calculated and disseminated daily on each day that the NYSE is open
for trading. The Bank of New York Mellon (“BNYM”) normally calculates the Fund’s
NAV as of the regularly scheduled close of business of the NYSE (normally 4:00
p.m., Eastern time). The Fund’s NAV is based on prices at the time of closing,
and U.S. fixed-income assets may be valued as of the announced closing time for
trading in fixed-income instruments in a particular market or exchange. NAV is
calculated by deducting all of the Fund’s liabilities from the total value of
its assets and then dividing the result by the number of Shares outstanding,
rounding to the nearest cent. Generally, the portfolio securities are recorded
in the NAV no later than the trade date plus one day. In determining
NAV,
expenses are
accrued and applied daily and securities and other assets for which market
quotations are readily available and reliable are valued at market value. The
Trust’s Board has designated the Adviser to fair value the Fund’s portfolio
securities and other assets for which market quotations are not readily
available and reliable in accordance with Board-approved policies and related
Adviser procedures (the “Valuation Procedures”), subject to the Board’s
oversight.
Securities
listed or traded on an exchange (except convertible securities)
generally are valued at the last trade price or official closing price that day
as of the close of the exchange where the security primarily trades. Securities
of investment companies that are not exchange-traded (e.g., open-end mutual
funds) are valued using such company’s end-of-business day NAV per share,
whereas securities of investment companies that are exchange-traded
are
valued at the last trade price or official closing price on the exchange on
which they primarily trade. Deposits, other obligations of U.S. and non-U.S.
banks and financial institutions, and cash equivalents are valued at their daily
account value. Fixed-income securities (including convertible securities)
normally are valued on the basis of prices provided by independent pricing
services. Pricing services generally value fixed-income
securities assuming
orderly transactions of institutional round lot size, but the Fund may hold or
transact in the same securities in smaller, odd lot sizes. Odd lots often trade
at lower prices than institutional round lots, and their value may be adjusted
accordingly. Futures contracts are valued at the daily settlement price set by
an exchange on which they are principally traded. U.S.
exchange-traded
options are valued at the mean between the last bid and asked prices from the
exchange on which they principally trade. Non-U.S.
exchange-traded
options are valued at the final settlement price set by the exchange on which
they trade. Options not listed on an exchange and swaps generally are valued
using pricing provided from independent pricing services. Unlisted securities
will be valued using prices provided by independent pricing services or by
another method that the Adviser, in its judgment, believes better reflects the
security’s fair value in accordance with the Valuation Procedures.
Foreign
exchange-traded equity securities are valued at their market value if market
quotations are available and reliable. The Adviser may use various pricing
services to obtain market quotations as well as fair value prices. The Adviser
may discontinue the use of any pricing service at any time.
At
times, a listed security’s market price may not be readily available.
Moreover, even when
market quotations are available for a security, they may be stale or unreliable.
A security’s last market quotation may become stale because, among other
reasons, (i) the security is not traded frequently, (ii) the security ceased
trading before its exchange closed; (iii) market or issuer-specific events
occurred after the security ceased trading; or (iv) the passage of time between
when the security’s trading market closes and when the Fund calculates its NAV
caused the quotation to become stale. A security’s last market quotation may
become unreliable because of (i) certain issuer- or security-specific events,
including a merger or insolvency, (ii) events which affect a geographical area
or an industry segment, such as political events or natural disasters, or (iii)
market events, such as a significant movement in the U.S. market. When a
security’s market price is not readily available, or the Adviser
determines,
in its
judgment, that such
16
price is stale or
unreliable, the Adviser will value the security at fair value in good faith
using the Valuation Procedures. Fund securities that are fair valued may be
subject to greater fluctuation in their value from one day to the next than
would be the case if market quotations were
used.
If
a fair value price provided by a pricing service is unreliable in the
Adviser’s judgment,
the Adviser will fair value the security using the Valuation Procedures. Fair
value pricing involves subjective judgments, and fair value pricing methods may
change from time to time. Consequently, while such determinations may be made in
good faith, it may nevertheless be more difficult for the Fund to accurately
assign a daily value. Because of the inherent uncertainties of valuation, and
the degree of subjectivity in such decisions, it is possible that a fair value
determination for a security is materially different than the value that could
be realized upon the sale of the security. There is no assurance that the Fund
could sell a portfolio security for the value established for it at any time,
and it is possible that the Fund would incur a loss if a security is sold at a
discount to its established value. Because the Fund seeks to track the
Underlying Index, the use of fair value pricing could result in a difference
between the prices used to calculate the Fund’s NAV and the prices used by the
Underlying Index, which may increase the Fund’s tracking error.
Fund Service Providers
BNYM, 240 Greenwich
Street, New York, New York 10286, is the administrator, custodian,
transfer agent and
fund accounting and dividend disbursing agent for the Fund.
Stradley Ronon
Stevens & Young, LLP, 191 North Wacker Drive, Suite 1601, Chicago, Illinois
60606, and 2000 K Street, NW, Suite 700, Washington, D.C. 20006, serves as legal
counsel to the Trust.
PricewaterhouseCoopers
LLP (“PwC”), One North Wacker Drive, Chicago, Illinois 60606, serves as the
Fund’s independent registered public accounting firm. PwC is responsible for
auditing the annual financial statements of the Fund and assists in the
preparation and/or review of the Fund’s federal and state income tax
returns.
17
Financial Highlights
The financial
highlights table below is intended to help you understand the Fund’s financial
performance for the period since the Fund’s inception. Certain information
reflects financial results for a single 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 other
distributions). This information has been derived from the Fund’s financial
statements, which have been audited by PwC, whose report, along with the Fund’s
financial statements, is included in the Fund’s Annual Report for the fiscal
year ended August 31, 2022, which is available upon request.
|
|
Years
Ended August 31, |
For
the Period
September
10, 2018(a)
Through
August
31,
2019 | ||
|
|
2022 |
2021 |
2020 | |
|
Per
Share Operating Performance: |
|
|
|
|
|
Net
asset value at beginning of period |
$29.48 |
$23.97 |
$24.08 |
$25.00 |
|
Net
investment income(b) |
1.63(c) |
0.99 |
0.67 |
1.06 |
|
Net
realized and unrealized gain (loss) on investments |
(6.54) |
5.30 |
(0.20)(d) |
(1.60) |
|
Total
from investment operations |
(4.91) |
6.29 |
0.47 |
(0.54) |
|
Distributions
to shareholders from: |
|
|
|
|
|
Net
investment income |
(1.66) |
(0.78) |
(0.58) |
(0.38) |
|
Net
asset value at end of period |
$22.91 |
$29.48 |
$23.97 |
$24.08 |
|
Market
price at end of period(e) |
$22.88 |
$29.50 |
$24.09 |
$24.09 |
|
Net
Asset Value Total Return(f) |
(17.14)% |
26.70% |
2.03%(d) |
(2.22)%(g) |
|
Market
Price Total Return(f) |
(17.32)% |
26.13% |
2.48% |
(2.19)%(g) |
|
Ratios/Supplemental
Data: |
|
|
|
|
|
Net
assets at end of period (000’s omitted) |
$33,213 |
$28,003 |
$20,376 |
$25,286 |
|
Ratio
to average net assets of: |
|
|
|
|
|
Expenses |
0.35% |
0.35% |
0.35% |
0.39%(h) |
|
Net
investment income |
6.30%(c) |
3.57% |
2.84% |
4.35%(h) |
|
Portfolio
turnover rate(i) |
37% |
30% |
19%(d) |
22% |
|
(a) |
Commencement
of investment operations. |
|
(b) |
Based
on average shares outstanding. |
|
(c) |
Net
investment income per share and the ratio of net investment income to
average net assets include a significant dividend received during the
period. Net investment income per share and the
ratio
of net investment income to average net assets excluding the significant
dividend are $1.45 and 5.61%, respectively. |
|
(d) |
Amount
includes the effect of the Adviser pay-in for an economic loss of $0.07
per share. Had the pay-in not been made, the net asset value total return
would have been 1.73%. In addition, the
portfolio
turnover calculation includes the value of securities purchased and sold
related to this transaction. |
|
(e) |
The
mean between the last bid and ask prices. |
|
(f) |
Net
asset value total return is calculated assuming an initial investment made
at the net asset value at the beginning of the period, reinvestment of all
dividends and distributions at net asset value
during
the period, and redemption at net asset value on the last day of the
period. Net asset value total return includes adjustments in accordance
with accounting principles generally accepted in
the
United States of America and as such, the net asset value for financial
reporting purposes and the returns based upon those net asset values may
differ from the net asset value and returns
for
shareholder transactions. Market price total return is calculated assuming
an initial investment made at the market price at the beginning of the
period, reinvestment of all dividends and
distributions
at market price during the period, and sale at the market price on the
last day of the period. Total investment returns calculated for a period
of less than one year are not annualized. |
|
(g) |
The
net asset value total return from Fund Inception (September 12, 2018, the
first day of trading on the exchange) to August 31, 2019 was (1.95)%. The
market price total return from Fund Inception
to August 31, 2019 was (2.19)%. |
|
(h) |
Ratios
are annualized except for non-recurring costs associated with a proxy
statement of 0.04%. |
|
(i) |
Portfolio
turnover rate is not annualized for periods less than one year, if
applicable, and does not include securities received or delivered from
processing creations or
redemptions. |
18
Index Provider
Invesco Indexing
LLC is the Index Provider for the Underlying Index. The Adviser has entered into
a license agreement with Invesco Indexing LLC to use the Underlying Index. The
Adviser pays licensing fees to Invesco Indexing LLC. The Adviser, in turn, has
entered into a sublicensing arrangement with the Fund to permit the Fund to use
the Underlying Index. The Fund does not pay a fee for the use of the Underlying
Index. The Index Provider has entered into an arrangement with Research
Affiliates, LLC (“RA”), pursuant to which RA provides certain consulting
services in connection with the Underlying Index. The Index Provider (or an
affiliated entity) pays a consulting fee to RA. Also, the Adviser and the
Distributor entered into a co-branding and co-marketing agreement with RA in
connection with the marketing and client support for the Fund. The Adviser pays
a marketing fee to RA from its management fees. RA is not affiliated with the
Trust, the Fund, the Adviser or the Distributor.
Invesco
Indexing LLC is affiliated with the Adviser and the Distributor. The Adviser has in
place a code of ethics designed to prevent misuse of non-public index
information, and the Adviser and the Index Provider have each implemented
significant informational barriers to prevent impermissible sharing of
non-public index information.
Disclaimers
The
name of the Underlying Index is a trademark of Invesco Indexing LLC and has been
licensed for use for certain purposes by the Adviser. The Fund and its Shares
are not sponsored, endorsed, sold or promoted by Invesco Indexing LLC and
Invesco Indexing LLC makes no representation regarding the advisability of
investing in Shares. Invesco Indexing LLC makes no representation or warranty,
express or implied, to the shareholders of the Fund or any member of the public
regarding the advisability of investing in securities generally or in the Fund
particularly or the ability of any data supplied by Invesco Indexing LLC to
track general market performance. Invesco Indexing LLC is an affiliate of the
Adviser and its relationship to the Adviser includes the licensing of certain
trademarks and trade names of Invesco Indexing LLC and of the data supplied by
Invesco Indexing LLC, which is determined and composed by Invesco Indexing LLC.
Invesco Indexing LLC has no obligation to take the needs of the Adviser or the
shareholders of the Fund into consideration in determining or composing the data
supplied by Invesco Indexing LLC. Invesco Indexing LLC is not responsible for
and has not participated in the determination of the prices of the Shares or the
timing of the issuance or sale of the Shares. Invesco Indexing LLC has no
obligation or liability in connection with the administration, marketing or
trading of the Fund or its Shares.
The
Adviser does not guarantee the accuracy and/or the completeness of the Underlying
Index or any data included therein, and the Adviser shall have no liability for
any errors, omissions, restatements, re-calculations or interruptions therein.
The Adviser makes no warranty, express or implied, as to results to be obtained
by the Fund, owners of the Shares or any other person or entity from the use of
the Underlying Index or any data included therein. The Adviser makes no express
or implied warranties and expressly disclaims all warranties of merchantability
or fitness for a particular purpose or use with respect to the Underlying Index
or any data included therein. Without limiting any of the foregoing, in no event
shall the Adviser have any liability for any special, punitive, direct, indirect
or consequential damages (including lost profits) arising out of matters
relating to the use of the Underlying Index, even if notified of the possibility
of such damages.
Premium/Discount Information
Information showing
the number of days the market price of the Shares was greater (at a premium) and
less (at a discount) than the Fund’s NAV for the most recently completed
calendar year and the most recently completed calendar quarters since that year
(or the life of the Fund, if shorter) is available on the Fund’s website at
www.invesco.com/ETFs.
Other Information
Continuous
Offering
The method by which
Creation Unit Aggregations of Shares are created and traded may raise certain
issues under applicable securities laws. Because new Creation Unit Aggregations
of Shares are issued and sold by the Fund on an ongoing basis, a “distribution,”
as such term is used in the Securities Act, may occur at any point.
Broker-dealers and other persons are cautioned that some activities on their
part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory
underwriters and subject them to the prospectus delivery requirement and
liability provisions of the Securities Act.
For
example, a broker-dealer firm or its client may be deemed a statutory
underwriter if it takes Creation Unit Aggregations after placing an order with
the Distributor, breaks them down into constituent Shares and sells such Shares
directly to customers, or if it chooses to couple the creation of a supply of
new Shares with an active selling effort involving the solicitation of secondary
market demand for Shares. A determination of whether one is an underwriter for
purposes of the Securities Act must take into account all the facts and
circumstances pertaining to the activities of the broker-dealer or its client in
the particular case, and the examples mentioned above should not be considered a
complete description of all the activities that could lead to a characterization
as an underwriter.
Broker-dealer
firms also should note that dealers who are not “underwriters” but
are effecting transactions in Shares, whether or not participating in the
distribution of Shares, generally are required to deliver a prospectus. This is
because the prospectus delivery exemption in Section 4(a)(3)(C) of the
Securities Act is not available in respect of such transactions as a result of
Section 24(d) of the 1940 Act. As a result, broker-dealer firms should note that
dealers who are not “underwriters” but are participating in a distribution (as
contrasted with engaging in ordinary secondary market transactions), and thus
dealing with the Shares that are part of an overallotment within the meaning of
Section 4(a)(3)(C) of the Securities Act, will be unable to take advantage of
the prospectus delivery exemption provided by Section 4(a)(3) of the Securities
Act. For delivery of prospectuses to exchange members, the prospectus delivery
mechanism of Rule 153 under the Securities Act only is available with respect to
transactions on a national exchange.
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 the
prospectus and other shareholder documents, please contact your broker-dealer.
If you currently are enrolled in householding and wish to change your
householding status, please contact your broker-dealer.
19
For
More Information
For more detailed
information on the Trust, the Fund and the Shares, you may request a copy of the
Fund’s SAI. The SAI provides detailed information about the Fund and is
incorporated by reference into this prospectus. This means that the SAI legally
is a part of this prospectus. Additional information about the Fund’s
investments also is available in the Fund’s Annual and Semi-Annual Reports to
Shareholders. In the Fund’s current Annual Report, you will find a discussion of
the market conditions and investment strategies that significantly affected the
Fund's performance during the last fiscal year. If you have questions about the
Fund or Shares or you wish to obtain the SAI, Annual Report and/or Semi-Annual
Report, free of charge, or to make shareholder inquiries, please:
|
Call: |
Invesco
Distributors, Inc. at 1-800-983-0903
Monday
through Friday
8:00
a.m. to 5:00 p.m. Central Time |
|
Write: |
Invesco
Exchange-Traded Self-Indexed Fund Trust
c/o
Invesco Distributors, Inc.
11
Greenway Plaza, Suite 1000
Houston,
Texas 77046-1173 |
|
Visit: |
www.invesco.com/ETFs |
Reports
and other information about the Fund are available on the EDGAR Database on
the SEC's Internet site at www.sec.gov, and copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the following
e-mail address: [email protected].
No
person is authorized to give any information or to make any representations
about the Fund and its Shares not contained in this prospectus, and you should
not rely on any other information. Read and keep this prospectus for future
reference.
Dealers
effecting transactions in the Shares, whether or not participating
in this distribution, generally are required to deliver a prospectus. This is in
addition to any obligation of dealers to deliver a prospectus when acting as
underwriters.
The
Trust's registration number under the 1940 Act is 811-23304.
20
