The
information in this Prospectus is not complete and may be changed. The Trust may
not sell these securities
until
the registration statement filed with the Securities and Exchange Commission is
effective. This Prospectus
is
not an offer to sell these securities and is not soliciting an offer to buy
these securities in any jurisdiction
where
the offer or sale is not permitted.
Subject
to Completion
Preliminary
Prospectus dated August 1, 2023
Ethereum
Strategy ETF [ ]
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Principal
U.S. Listing Exchange for the Fund: [ ] |
The
U.S. Securities and Exchange Commission (“SEC”) and the Commodity Futures
Trading Commission (“CFTC”) 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. |
800.826.2333
vaneck.com
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VANECK®
ETHEREUM
STRATEGY ETF |
SUMMARY
INFORMATION
INVESTMENT
OBJECTIVE
VanEck®
Ethereum Strategy ETF (the “Fund”) seeks capital appreciation.
FUND
FEES AND EXPENSES
The
following tables describe 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 tables and examples
below.
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Shareholder
Fees (fees paid directly from your investment) |
None |
Annual
Fund Operating Expenses
(expenses
that you pay each year as a percentage of the value of your
investment)
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Management
Fee |
[
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Current
Income Tax Expense(a) |
[
]% |
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Deferred
Income Tax Expense(a) |
[
]% |
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Other
Expenses(b)(c) |
[
]% |
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Total
Annual Fund Operating Expenses(c) |
[
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(a)The
Fund is classified for federal income tax purposes as a taxable regular
corporation or Subchapter “C” corporation. As a “C” corporation, the Fund
accrues a current and deferred tax expense. The deferred tax expense represents
the future tax liability associated with the capital appreciation of its
investments. The Fund’s accrued current and deferred tax liabilities, if any,
will be reflected in its net assets value per share. An estimate of current and
deferred income tax expenses/(benefit) is dependent upon the Fund’s net
investment income/(loss) and realized and unrealized gains/(losses) on
investments, and such expenses/(benefits) may vary greatly from year to year and
from day to day depending on the performance of the Fund’s investments and
general market conditions. Therefore, any estimate of current and deferred
income tax expenses/(benefit) cannot be reliably predicted from year to year.
Future actual income tax expense (if any) will be incurred over many years
depending on if and when investment gains are realized, the then-current tax
basis of assets and federal income tax rates, the level of net loss
carryforwards and other factors. The above table assumes no current and deferred
tax expenses as the Fund has not commenced operations and thus does not have
sufficient operating history to accurately estimate anticipated current and
deferred tax expenses.
(b)“Other
Expenses” are based on estimated amounts for the current fiscal
year.
(c) Van
Eck Absolute Return Advisers Corporation (the “Adviser”) will pay all expenses
of the Fund, except for the fee payment under the investment management
agreement, acquired fund fees and expenses, interest expense, offering costs,
trading expenses, taxes and extraordinary expenses. Notwithstanding the
foregoing, the Adviser has agreed to pay the offering costs [and trading
expenses that are net account or similar fees charged by futures commission
merchants (“FCMs”)] until at least [ ].
EXPENSE
EXAMPLE
This
example is intended to help you compare the cost of investing in the Fund with
the cost of investing in other funds. This example does not take into account
brokerage commissions that you pay when purchasing or selling Shares of the
Fund.
The
example assumes that you invest $10,000 in the Fund for the time periods
indicated and then sell or hold all of your Shares at the end of those periods.
The example also assumes that your investment has a 5% annual return and that
the Fund’s operating expenses remain the same [(except that the example
incorporates the Adviser’s agreement to pay certain costs and fees for only the
first year)]. Although
your actual costs may be higher or lower, based on these assumptions, your costs
would be:
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YEAR |
EXPENSES |
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[
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3 |
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PORTFOLIO
TURNOVER
The
Fund will pay transaction costs, such as commissions, when it purchases and
sells securities (or “turns over” its portfolio). A higher portfolio turnover
will cause the Fund to incur additional transaction costs and may result in
higher taxes at the Fund level and may increase the Fund’s current and
accumulated earnings and profits, which will result in a greater portion of
Fund’s distributions being treated as dividends. These taxes and costs, which
are not reflected in annual fund operating expenses or in the example, may
affect the Fund’s performance. Because the Fund is newly organized, no portfolio
turnover figures are available.
PRINCIPAL
INVESTMENT STRATEGIES
The
Fund is an actively managed exchange-traded fund (“ETF”) that seeks to achieve
its investment objective by investing, under normal circumstances, in
standardized, cash-settled Ether (“ETH”) futures contracts (“ETH Futures”)
traded on commodity exchanges registered with the Commodity Futures Trading
Commission (“CFTC”). Currently, the only commodity exchange registered with the
CFTC on which ETH Futures are traded is the Chicago Mercantile Exchange (the
“CME”).
The Fund does not invest in ETH or other digital assets directly.
The
Fund seeks to invest in ETH Futures so that the total value of the ETH to which
the Fund has economic exposure is approximately 100% of the total assets of the
Fund (the “Target Exposure”). If the Fund reaches the Target Exposure, based on
current estimates, approximately [ ]% of the Fund’s net assets (which are the
total assets of the Fund less the sum of the Fund’s accrued liabilities) will
have economic exposure to ETH. To the extent that the Fund’s economic exposure
to ETH exceeds 100% of the net assets of the Fund, the Fund will generally have
leveraged exposure to the value of ETH. This means that any changes in the value
of ETH will generally result in proportionally larger changes in the Fund’s net
asset value (“NAV”), including the potential for greater losses than if the
Fund’s exposure to the value of ETH were unleveraged.There can be no assurance
that the Fund will be able to achieve or maintain the Target
Exposure.
The
Fund seeks to achieve and maintain the Target Exposure by using leverage
inherent in ETH Futures, and may also obtain leverage in the form of borrowings,
which would typically be in the form of loans from banks, and may be on a
secured or unsecured basis and at fixed or variable rates of interest.
Therefore, the Fund is subject to leverage risk as described further below.
The
Fund expects to invest its remaining assets in any one or more of the following
to provide liquidity, serve as margin or collateralize the Fund’s investments in
ETH Futures: U.S. Treasuries, other U.S. government obligations, money market
funds and funds that invest in short-term bonds, cash and cash-like equivalents
(e.g., high quality commercial paper and similar instruments that are rated
investment grade or, if unrated, of comparable quality, as the Adviser
determines), mortgage-backed securities issued or guaranteed by U.S. government
agencies, instrumentalities or sponsored enterprises of the U.S. government
(whether or not the securities are U.S. government securities) (together,
"Agency MBS"), municipal debt securities, Treasury inflation-protected
securities, sovereign debt obligations of non-U.S. countries, and repurchase
agreements (the "Cash and Fixed Income Investments").
The
Fund is classified as a non-diversified fund under the Investment Company Act of
1940, as amended (the “1940 Act”), and, therefore, may invest a greater
percentage of its assets in a particular issuer.
ETH
and ETH Futures are relatively new asset classes and therefore the Fund’s
investments in ETH Futures are subject to unique and substantial risks,
including the risk that the value of the Fund’s investments could decline
rapidly, including to zero. ETH and ETH Futures have historically been more
volatile than traditional asset classes. You should be prepared to lose your
entire investment.
If
the Fund is unable to achieve the Target Exposure because it is approaching or
has exceeded position limits or because of liquidity or other constraints, the
Fund may invest in equity securities of “ETH-related companies.” For these
purposes, ETH-related companies are companies listed on a U.S. stock exchange
that the Adviser believes provide returns that generally correspond, or are
closely related, to the performance of ETH or ETH Futures. For example, the Fund
may invest in U.S. listed companies offering digital asset trading
platforms.
The
Fund may engage in active and frequent trading of portfolio
holdings.
Ether
ETH
is a digital asset that is created and transmitted through the operations of the
peer-to-peer Ethereum network, a dispersed network of computers that operates on
cryptographic software protocols based on open source code. It is widely
understood that no single intermediary or entity operates or controls the
Ethereum network (referred to as “decentralization”), the transaction validation
and recordkeeping infrastructure of which is collectively maintained by a
disparate user base. The Ethereum network allows people to exchange tokens of
value, or ETH, which are recorded on a distributed public recordkeeping system
or ledger known as a blockchain (the “Ethereum Blockchain”), and which can be
used to pay for goods and services, including computational power on the
Ethereum network, or converted to fiat currencies, such as the U.S. dollar, at
rates determined on digital asset exchanges or in individual peer-to-peer
transactions. Furthermore, by combining the recordkeeping system of the Ethereum
Blockchain with a flexible scripting language that is programmable and can be
used to implement sophisticated logic and execute a wide variety of
instructions, the Ethereum network is intended to act as a foundational
infrastructure layer that users can build their own custom software programs on
top of (instead of using centralized web servers), with users paying fees in ETH
for the computational resources consumed by running their programs. In theory,
anyone can build their own custom software programs on the Ethereum network. In
this way, the Ethereum network represents a project to expand blockchain
deployment beyond just a limited-purpose, peer-to-peer private money system into
a flexible, distributed alternative computing infrastructure that is resistant
to censorship and available to all.
ETH
Futures
Futures
contracts are financial contracts the value of which depends on, or is derived
from, the underlying reference asset. In the case of ETH Futures, the underlying
reference asset is ETH. Futures contracts may be physically-settled or
cash-settled. The only futures contracts in which the Fund invests are
cash-settled ETH Futures traded on commodity exchanges registered with the CFTC.
Currently, the only commodity exchange registered with the CFTC on which ETH
Futures are traded is the CME. “Cash-settled” means that when the relevant
futures contract expires, if the value of the underlying asset exceeds the
futures contract price, the seller pays to the purchaser cash in the amount of
that excess, and if the futures contract price exceeds the value of the
underlying asset, the purchaser pays to the seller cash in the amount of that
excess. In a cash-settled futures contract on ETH, the amount of cash to be paid
is equal to the difference between the value of the ETH underlying the futures
contract at the close of the last trading day of the contract and the futures
contract price specified in the agreement. The CME has specified that the value
of ETH underlying ETH Futures traded on the CME will be determined by reference
to a volume-weighted average of ETH trading prices on multiple ETH trading
venues, as discussed below.
Futures
contracts exhibit “futures basis,” which refers to the difference between the
current market value of the underlying ETH (the “spot” price) and the price of
the cash-settled futures contracts. A negative futures basis exists when
cash-settled ETH Futures generally trade at a premium to the current market
value of ETH. If a negative futures basis exists, the Fund’s investments in ETH
Futures will generally underperform a direct investment in ETH, and, therefore,
it may be more difficult for the Fund to maintain the Target
Exposure.
Futures
contracts expire on a designated date, referred to as the “expiration date.” The
Fund generally seeks to invest in “front month” ETH Futures. “Front month”
contracts are the monthly contracts with the nearest expiration date. ETH
Futures are cash-settled on their expiration date unless they are “rolled” prior
to expiration. The Fund intends to “roll” its ETH Futures prior to expiration.
Typically, the Fund will roll to the next “nearby” ETH Futures. The “nearby”
contracts are those contracts with the next closest expiration
date.
Cash
and Fixed Income Investments
In
addition to the Fund’s ETH Futures, the Fund expects to have significant
holdings of Cash and Fixed Income Investments. The Cash and Fixed Income
Investments are intended to provide liquidity and to serve as collateral for the
Fund’s ETH Futures. The amount of Cash and Fixed Income Investments held by the
Fund may change over time and will be determined primarily by the amount needed
to seek to achieve or maintain the Target Exposure.
PRINCIPAL
RISKS OF INVESTING IN THE FUND
Investors
in the Fund should be willing to accept a high degree of volatility in the price
of the Fund’s Shares and the possibility of significant losses. An investment in
the Fund involves a substantial degree of risk. An investment in the Fund is not
a deposit with a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Therefore, you should
consider carefully the following risks before investing in the Fund, each of
which could significantly and adversely affect the value of an investment in the
Fund.
Market
and Volatility Risk.
The value of the Fund’s investments, including ETH Futures, is subject to market
risk. Market risk is the risk that the value of the investments to which the
Fund is exposed will fall, which could occur due to general market or economic
conditions or other factors.
The
value of ETH and, therefore, of the Fund’s ETH Futures, could decline rapidly,
including to zero. You should be prepared to lose your entire
investment.
Investment
Risk. The
Fund will generally hold its ETH Futures during periods in which the value of
ETH is flat or declining as well as during periods in which the value of ETH is
rising, and the Adviser will generally not seek to change the Fund’s exposure
based on daily price changes.
Risks
Related to ETH and ETH Futures.
Digital assets such as ETH were only introduced recently, and the medium-to-long
term value of the Shares is subject to a number of factors relating to the
capabilities and development of blockchain technologies and to the fundamental
investment characteristics of digital assets that are uncertain and difficult to
evaluate, such as the infancy of the Ethereum network’s development, the
Ethereum network’s dependence on relatively new technologies such as
cryptographic software protocols, the Ethereum network’s dependence on the role
played by validators and core developers, the future success (or lack thereof)
of the Ethereum network and its core developers in continuing to upgrading the
Ethereum network’s source code to improve transaction processing speed and
overall efficiency, and generally to expand the network’s capabilities, and the
potential for malicious activity. Moreover, because blockchain technology and
digital assets, including ETH, have been in existence for a short period of time
and are continuing to develop, there may be additional risks in the future that
are impossible to predict or evaluate.On September 15, 2022, the Ethereum
network implemented a change from a proof-of work model, whereby transactions
are validated and newly created ETH is issued by network participants expending
specialized computational power, to a proof-of-stake model, whereby transactions
are validated by network participants that “stake” ETH to compete to be randomly
selected to validate transactions and are generally rewarded in proportion to
the amount of ETH staked. The proof-of-stake consensus mechanism provides lower
energy consumption in the validation of the network and facilitates future
upgrades intended to provide, among other goals, potentially faster transaction
times. It is not clear how all elements of the
Ethereum
network will unfold over time. Futures networks changes to implement these
upgrades are currently planned and may introduce unknown or unanticipated risks
to the network.
The
value of the Shares relates closely to the value of the ETH and fluctuations in
the price of ETH will adversely affect the value of the Shares. Due to the
nature of private keys, ETH transactions are irrevocable and stolen or
incorrectly transferred ETH may be irretrievable. As a result, any incorrectly
executed ETH transaction, to the extent it effects the market price of ETH,
could adversely affect an investment in the Fund. ETH accounts are subject to
security threats that could results in a loss of assets. The Ethereum network’s
decentralized governance structure may negatively affect its ability to grow and
respond to challenges. A temporary or permanent “fork” of the Ethereum
Blockchain could adversely affect the short-, medium-, or long-term value of ETH
and an investment in the Fund. A “hard fork” of the Ethereum network, where less
than a substantial majority of users and miners (under the former proof-of-work
model) or validators (under the current proof-of-stake model) consent to a
proposed modification, and the modification is not compatible with the software
prior to its modification, could result in one group of users running the
pre-modified software and the other running the modified software. If miners or
validators expend fewer resources on the Ethereum network, it could increase the
likelihood of a malicious actor obtaining control. The Ethereum network has
forked in the past. In 2016, a fork resulted in the creation of Ethereum and
Ethereum Classic networks. Recently, in connection with the network upgrade on
September 15, 2022, a group of miners wishing to continue the proof-of-work
model forked the network to create a new blockchain that continues to use
proof-or-work consensus. Following a fork, holders of one asset such as ETH will
hold equal amounts of assets resulting from the fork, in this case, assets on
the Ethereum proof-of-work blockchain. The ETH Futures in which the Fund will
invest do not grant rights to any assets resulting from a fork; therefore, the
Fund and its shareholders will not receive assets resulting from the fork in the
case of any such event.
The
price of ETH on the ETH market has exhibited periods of extreme volatility,
which could have a negative impact on the performance of the Fund. ETH exchanges
on which ETH trades are relatively new and, in some cases, unregulated, and,
therefore, may be more exposed to fraud and security breaches than established,
regulated exchanges for other financial assets or instruments, which could have
a negative impact on the performance of the Fund.
Competition
from the emergence or growth of other digital assets could have a negative
impact on the price of ETH and adversely affect the value of the Shares. Smart
contracts, including those relating to decentralized finance applications, are a
new technology and their ongoing development and operation may result in
problems, which could reduce the demand for ETH or cause a wider loss of
confidence in the Ethereum network, either of which could have an adverse impact
on the value of ETH.
The
regulation of ETH and related products and services continues to evolve and will
impact ETH and its usage in a variety of manners. There is a possibility of
future regulatory change altering, perhaps to a material extent, the nature of
an investment in the Fund or the ability of the Fund to continue to operate.
Additionally, if in the future ETH is determined to be a security, or actions
are taken by the United States or foreign government or quasi-governmental
agency to exert regulatory authority over ETH, the Ethereum network, ETH
trading, or related activities impacting other parts of the digital asset
market, these developments may adversely impact ETH and therefore may have an
adverse effect on the value of an investment in the Fund.
All
networked systems are vulnerable to various kinds of attacks. As with any
computer network, the ETH network contains certain flaws. For example, the ETH
network is currently vulnerable to a “51% attack” where, if a validator were to
gain control of more than 50% of the staked ETH, a malicious actor would be able
to gain full control of the network and the ability to manipulate the
blockchain. Further, smart contracts on the network may create systemic risk for
the price of ETH in the event of an exploit. A significant portion of ETH is
held by a small number of holders sometimes referred to as “whales.” These
holders have the ability to manipulate the price of ETH. As a digital asset, ETH
is subject to cybersecurity risks, including the risk that malicious actors will
exploit flaws in its code or structure that will allow them to, among other
things, steal ETH held by others, control the blockchain, steal personally
identifying information, or issue significant amounts of ETH in contravention of
the ETH protocols. The occurrence of any of these events is likely to have a
significant adverse impact on the price and liquidity of ETH and ETH Futures and
therefore the value of an investment in the Fund. Additionally, the ETH
network’s functionality relies on the Internet. A significant disruption of
Internet connectivity affecting large numbers of users or geographic areas could
impede the functionality of the ETH network. Any technical disruptions or
regulatory limitations that affect Internet access may have an adverse effect on
the ETH network, the price of ETH and ETH Futures, and the value of an
investment in the Fund.
Futures
Contract Risk. The
use of futures contracts involves risks that are in addition to, and potentially
greater than, the risks of investing directly in securities and other more
traditional assets. The market for ETH Futures may be less developed, and
potentially less liquid and more volatile, than more established futures
markets. While the ETH Futures market has grown substantially since ETH Futures
commenced trading, there can be no assurance that this growth will continue. ETH
Futures are subject to collateral requirements and daily limits that may limit
the Fund's ability to achieve the Target Exposure. Margin requirements for ETH
Futures traded on the CME may be substantially higher than margin requirements
for many other types of futures contracts. If the Fund is unable to meet its
investment objective, the Fund's returns may be lower than expected.
Additionally, these collateral requirements may require the Fund to liquidate
its position when it otherwise would not do so. Futures contracts exhibit
“futures basis,” which refers to the difference between the current market value
of the underlying ETH (the “spot” price) and the price of the cash-settled
futures contracts. A negative futures basis exists when cash-settled ETH Futures
generally trade at a premium to the current market value of ETH. If a negative
futures basis exists, the Fund’s investments in ETH Futures will generally
underperform a direct investment in ETH, and, therefore, it may be more
difficult for the Fund to maintain the Target Exposure. If the Fund’s ability to
achieve the Target Exposure is disrupted for any reason, including limited
liquidity in the ETH Futures market, a disruption to the ETH Futures, or as a
result of margin requirements or position limits
imposed
by the Fund’s FCM, the CME or the CFTC, the Fund may not be able to achieve its
investment objective and may experience significant losses.
This
risk may be adversely affected by “negative roll yields” in “contango”
markets.
The Fund will “roll” out of one futures contract as the expiration date
approaches and into another futures contract on ETH with a later expiration
date. The "rolling" feature creates the potential for a significant negative
effect on the Fund's performance that is independent of the performance of the
spot prices of the ETH. The "spot price" of a commodity is the price of that
commodity for immediate delivery, as opposed to a futures price, which
represents the price for delivery on a specified date in the future. The Fund
would be expected to experience negative roll yield if the futures prices of ETH
tend to be greater than the spot price of ETH. A market where futures prices are
generally greater than spot prices is referred to as a "contango" market.
Therefore, if the futures market for a given commodity is in contango, then the
value of a futures contract on that commodity would tend to decline over time
(assuming the spot price remains unchanged), because the higher futures price
would fall as it converges to the lower spot price by expiration. Extended
period of contango may cause significant and sustained losses. Additionally,
because of the frequency with which the Fund may roll ETH Futures, the impact of
contango on Fund performance may be greater than it would have been if the Fund
rolled ETH Futures less frequently.
Derivatives
Risk.
The only derivatives in which the Fund currently intends to invest are ETH
Futures traded on commodity exchanges registered with the CFTC. Currently, the
only commodity exchange registered with the CFTC on which ETH Futures are traded
is the CME. The use of derivatives presents risks different from, and possibly
greater than, the risks associated with investing directly in traditional
securities. The use of derivatives by the Fund can lead to losses because of
adverse movements in the price or value of the underlying reference asset, which
may be magnified by certain features of the derivatives. Derivative strategies
often involve leverage, which may exaggerate a loss, potentially causing the
Fund to lose more money than it originally committed to initial margin, and more
money than it would have lost had it invested in the underlying reference asset.
The values of derivatives may move in unexpected ways, especially in unusual
market conditions, and may result in increased volatility, among other
consequences. There may be imperfect correlation between changes in the market
value of a derivative and the value of its underlying reference asset, and this
may be exaggerated in times of market stress or volatility. ETH Futures require
the Fund to post margin or collateral or otherwise maintain liquid assets in a
manner that satisfies contractual undertakings and regulatory requirements. In
order to satisfy margin or other requirements, the Fund may need to sell
securities from its portfolio or exit positions at a time when it may be
disadvantageous to do so. All of this could, in turn, affect the Fund’s ability
to fully execute its investment strategies and/or achieve its investment
objective. The use of derivatives may also increase the amount of taxes payable
by shareholders because changes in government regulation of derivatives could
affect the character, timing and amount of the Fund’s taxable income or gains.
Other risks arise from the Fund’s potential inability to terminate or sell
derivative positions. A liquid secondary market may not always exist for the
Fund’s derivative positions at times when the Fund might wish to terminate or
sell such positions. The use of derivatives also involves the risk of mispricing
or improper valuation and that changes in the value of the derivative may not
correlate perfectly with the underlying reference rate. Derivatives may be
subject to changing government regulation that could impact the Fund’s ability
to use certain derivatives and their cost.
Counterparty
Risk.
Investing in derivatives and repurchase agreements involves entering into
contracts with third parties (i.e., counterparties). The use of derivatives and
repurchase agreements involves risks that are different from those associated
with ordinary portfolio securities transactions. The Fund will be subject to
credit risk (i.e., the risk that a counterparty is or is perceived to be
unwilling or unable to make timely payments or otherwise meet its contractual
obligations) with respect to the amount it expects to receive from
counterparties to derivatives and repurchase agreements entered into by the
Fund. If a counterparty becomes bankrupt or fails to perform its obligations, or
if any collateral posted by the counterparty for the benefit of the Fund is
insufficient or there are delays in the Fund's ability to access such
collateral, the value of an investment in the Fund may decline. The counterparty
to a listed futures contract is the derivatives clearing organization for the
listed future. The listed future is held through a FCM acting on behalf of the
Fund. Consequently, the counterparty risk on a listed futures contract is the
creditworthiness of the FCM and the exchange's clearing corporation. From time
to time, the Fund may only have one FCM with which it transacts ETH Futures,
which may heighten such risk.
Investment
Capacity Risk.
The Adviser may determine to modify the Fund’s exposure to ETH in response to
extreme market conditions, as determined in the sole discretion of the Adviser,
and to avoid exceeding any position limits applicable to ETH Futures established
by the CME or the CFTC. The position limits by the CME prevent any single
investor, such as the Fund (together with all other accounts managed by the
Adviser required to be aggregated), from holding more than a specified number of
ETH Futures. These position limits may prevent the Fund from entering into the
desired amount of ETH Futures at times. Because the Fund is new, it does not
anticipate that the CME’s position limits will adversely affect the Fund’s
ability to achieve the Target Exposure until the Fund’s assets under management
grow significantly. FCMs utilized by the Fund may also impose limits on the
amount of exposure to ETH Futures the Fund can obtain through such FCMs. As a
result, the Fund may need to transact through a number of FCMs to achieve the
Target Exposure. If not enough FCMs are willing to transact with the Fund, or if
exposure limits imposed by such FCMs do not provide sufficient exposure, the
Fund may not be able to achieve the Target Exposure. Any modification to the
Fund’s exposure to ETH may cause the Fund to exit its ETH Futures at
disadvantageous times or prices. The Fund may not succeed in achieving or
maintaining its Target Exposure, possibly maintaining substantially lower
exposure for extended periods of time. If the Fund’s ability to achieve the
Target Exposure is disrupted for any reason including,
for
example, limited liquidity in the ETH Futures market, a disruption to the ETH
Futures market, or as a result of margin requirements or position limits imposed
by the Fund's FCMs, the CME or the CFTC, the Fund may not be able to achieve its
investment objective and may experience significant losses.
If
the Fund is unable for any reason to achieve the Target Exposure, the Adviser,
in its sole discretion, may invest the Fund's assets in Cash and Fixed Income
Investments. To the extent that the Fund invests in Cash and Fixed Income
Investments, the Fund’s performance should be expected to differ from the
performance of ETH Futures and its returns may be lower than
expected.
Target
Exposure and Rebalancing Risk.
Although the Fund seeks to achieve and maintain the Target Exposure to ETH, it
is possible in certain circumstances that the Fund may not succeed in achieving
or maintaining its target exposure, possibly maintaining substantially lower
exposure for extended periods of time.
Borrowing
and Leverage Risk. The
Fund seeks to achieve and maintain the Target Exposure by using leverage
inherent in ETH Futures, and may also obtain leverage in the form of borrowings,
which would typically be in the form of loans from banks, and may be on a
secured or unsecured basis and at fixed or variable rates of interest.
Therefore, the Fund is subject to leverage risk. Leverage can have the effect of
magnifying the Fund’s exposure to changes in the value of its assets and may
also result in increased volatility in the Fund’s NAV. This means the Fund will
have the potential for greater gains, as well as the potential for greater
losses, than if the Fund owned its assets on an unleveraged basis.
Indirect
Investment Risk. There
are several factors, such as deviations between the price of ETH Futures and the
price of ETH and the potential for “negative roll yields” in “contango” markets,
that may cause the returns of the Fund to differ substantially from the returns
from holding an amount of ETH directly.
Credit
Risk. Credit
risk refers to the possibility that the issuer or guarantor of a debt security
or a counterparty to exchange-traded ETH Futures, such as an FCM or an
exchange’s clearing corporation, will be unable and/or unwilling to make timely
interest payments and/or repay the principal on its debt or to otherwise honor
its obligations and/or default completely. Bonds are subject to varying degrees
of credit risk, depending on the issuer’s financial condition and on the terms
of the securities, which may be reflected in credit ratings. There is a
possibility that the credit rating of a bond may be downgraded after purchase or
the perception of an issuer’s credit worthiness may decline, which may adversely
affect the value of the security.
Interest
Rate Risk. Debt
securities, such as bonds, are also subject to interest rate risk. Interest rate
risk refers to fluctuations in the value of a bond resulting from changes in the
general level of interest rates. When the general level of interest rates goes
up, the prices of most debt securities go down. When the general level of
interest rates goes down, the prices of most debt securities go up. The
prevailing historically low interest rate environment increases the risks
associated with rising interest rates, including the potential for periods of
volatility and increased redemptions. In addition, debt securities, such as
bonds, with longer durations tend to be more sensitive to interest rate changes,
usually making them more volatile than debt securities with shorter durations.
In addition, in response to the COVID-19 pandemic, as with other serious
economic disruptions, governmental authorities and regulators are enacting
significant fiscal and monetary policy changes, including providing direct
capital infusions into companies, creating new monetary programs and lowering
interest rates . These actions present heightened risks to debt instruments, and
such risks could be even further heightened if these actions are unexpectedly or
suddenly reversed or are ineffective in achieving their desired
outcomes.
Illiquidity
Risk. Illiquidity
risk is the risk that the investments held by the Fund may be difficult or
impossible to sell at the time that the Fund would like without significantly
changing the market value of the investment. The Fund may invest at the time of
purchase up to 15% of its net assets in illiquid securities. The market for ETH
Futures is still developing and may experience periods of significant
illiquidity. During such times it may be difficult or impossible for the Fund to
buy or sell a position at the desired price. Market disruptions or volatility
can also make it difficult to transact a position at a reasonable price and
sufficient size. Illiquid markets may cause losses, which could be significant.
The large size of the positions which the Fund and other similar funds may
acquire may increase the risk of illiquidity by making positions more difficult
to liquidate or by increasing the losses incurred while trying to do
so.
Investing
in Other Investment Companies Risk. The
Fund’s investment in another investment company which is limited to money market
funds or funds that invest in short-term bonds, may subject the Fund indirectly
to the underlying risks of the investment company. The Fund also will bear its
share of the underlying investment company’s fees and expenses, which are in
addition to the Fund’s own fees and expenses.
Management
Risk. The
Fund is subject to management risk because it is an actively managed ETF. In
managing the Fund’s portfolio, the Adviser will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
New
Fund Risk.
The
Fund is a new fund, with a limited or no operating history and a small asset
base. There can be no assurance that the Fund will grow to or maintain a viable
size. Due to the Fund's small asset base, certain of the Fund's expenses and its
portfolio transaction costs may be higher than those of a fund with a larger
asset base. To the extent that the Fund does
not
grow to or maintain a viable size, it may be liquidated, and the expenses,
timing and tax consequences of such liquidation may not be favorable to some
shareholders.
Non-Diversified
Risk. The
Fund is a separate investment portfolio of VanEck ETF Trust (the “Trust”), which
is an open-end investment company registered under the 1940 Act. The Fund is
classified as a “non-diversified” fund under the 1940 Act. Moreover, the Fund is
subject to the risk that it will be more volatile than a diversified fund
because the Fund may invest its assets in a smaller number of issuers or may
invest a larger proportion of its assets in a single issuer. Moreover, the gains
and losses on a single investment may have a greater impact on the Fund’s NAV
and may make the Fund more volatile than more diversified funds.
Operational
Risk.
The Fund is exposed to operational risk 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 system failures.
Portfolio
Turnover Risk. The
Fund’s portfolio turnover and frequent trading of ETH Futures may result in
higher transaction costs than if the Fund traded less frequently. High portfolio
turnover may result in increased transaction costs to the Fund, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of the ETH Futures and on reinvestment of the Fund’s assets. High portfolio
turnover may also result in higher taxes at the Fund level and may increase the
Fund’s current and
accumulated
earnings and profits, which will result in a greater portion of Fund’s
distributions being treated as dividends.
Regulatory
Risk. Changes
in the laws or regulations of the United States, including any changes to
applicable tax laws and regulations, could impair the ability of the Fund to
achieve its investment objective and could increase the operating expenses of
the Fund. The Adviser is registered as a "commodity pool operator" ("CPO") under
the U.S. Commodity Exchange Act of 1936, as amended ("CEA") and the rules of the
CFTC and is subject to CFTC regulation with respect to the Fund. The CFTC has
adopted rules regarding the disclosure, reporting and recordkeeping requirements
that will apply with respect to the Fund as a result of the Adviser's
registration as a CPO. Generally, these rules allow for substituted compliance
with CFTC disclosure and shareholder reporting requirements, based on the
Adviser's compliance with comparable SEC requirements. This means that for most
of the CFTC's disclosure and shareholder reporting applicable to the Adviser as
the Fund's CPO, the Adviser's compliance with SEC disclosure and shareholder
reporting will be deemed to fulfill the Adviser's CFTC compliance obligations.
However, as a result of CFTC regulation with respect to the Fund, the Fund may
incur additional compliance and other expenses. The Adviser is also registered
as a "commodity trading advisor" ("CTA") but relies on an exemption with respect
to the Fund from CTA regulations available for a CTA that also serves as the
Fund's CPO. The CFTC has neither reviewed nor approved the Fund, their
investment strategies, or this Prospectus.
Repurchase
Agreements Risk. A
repurchase agreement exposes the Fund to the risk that the party that sells the
security may default on its obligation to repurchase it. The Fund may lose money
if it cannot sell the security at the agreed-upon time and price or the security
loses value before it can be sold.
Tax
Risk.
Unlike traditional mutual funds that are structured as regulated investment
companies for U.S. federal income tax purposes, the Fund has not elected and has
no current intention to elect to be treated as a regulated investment company
under the Code because the extent of our direct investments in ETH Futures would
generally prevent the Fund from meeting the qualification requirements under the
Code for regulated investment companies. The Code generally provides that a
regulated investment company does not pay an entity level income tax provided
that it distributes all or substantially all of its income and satisfies certain
source of income and asset diversification requirements. The regulated
investment company taxation rules have no current application to the Fund or to
the Fund’s shareholders. The Fund will be taxable as a regular corporation for
U.S. federal income tax purposes. As a result, the Fund will be subject to
corporate income tax (currently at a rate of 21%, but subject to legislative
change) to the extent the Fund recognizes taxable income, and the Fund will also
be subject to state and local income taxes.
In
calculating the Fund’s daily NAV, the Fund will, among other things, account for
its current taxes and deferred tax liability and/or asset balances. The Fund
will accrue a deferred income tax liability balance, at the effective statutory
U.S. federal income tax rate (currently at a rate of 21%, but subject to
legislative change) plus an estimated state and local income tax rate, for its
future tax liability associated with the capital appreciation of its investments
and the distributions received by the Fund (if any) and for any net operating
gains. Any deferred tax liability balance will reduce the Fund’s NAV. The Fund
may also accrue a deferred tax asset balance, which reflects an estimate of the
Fund’s future tax benefit associated with net operating losses and unrealized
losses. Any deferred tax asset balance will increase the Fund’s NAV. To the
extent the Fund has a deferred tax asset balance, consideration is given as to
whether or not a valuation allowance, which would offset the value of some or
all of the deferred tax asset balance, is required. The daily estimate of the
Fund’s current taxes and deferred tax liability and/or asset balances used to
calculate the Fund’s NAV could vary significantly from the Fund’s actual tax
liability or benefit, and, as a result, the determination of the Fund’s actual
tax liability or benefit may have a material impact on the Fund’s NAV. From time
to time, the Fund may modify its estimates or assumptions regarding its current
taxes and deferred tax liability and/or asset balances as new information
becomes available, which modifications in estimates or assumptions may have a
material impact on the Fund’s NAV and trading price. Shareholders, including
authorized participants (“APs”), who sell their shares or who redeem their
shares at a NAV that is based on
estimates
of the Fund’s current taxes and deferred tax liability and/or asset balances may
benefit at the expense of remaining shareholders (or remaining shareholders may
benefit at the expense of redeeming shareholders) if the estimates are
later
revised
or ultimately differ from the Fund’s actual tax liability and/or asset
balances.
The
rules dealing with U.S. federal income taxation and the rates themselves are
constantly under review in the legislative process and by the Internal Revenue
Service (“IRS”) and the U.S. Treasury Department. Changes in tax laws or
regulations or future interpretations of such laws or regulations, or changes in
accounting, tax and valuation practices, could adversely affect the Fund and/or
the Fund’s shareholders, potentially retroactively.
Risk
of Cash Transactions.
Because the Fund currently intends to effect redemptions for cash, rather than
for in-kind distributions, it may be required to sell portfolio securities in
order to obtain the cash needed to distribute redemption proceeds, which
involves transaction costs that the Fund may not have incurred had it effected
redemptions entirely in kind. These costs may include brokerage costs and/or
taxable gains or losses, which may be imposed on the Fund and decrease the
Fund’s NAV to the extent such costs are not offset by a transaction fee payable
to an AP. Taxable gains may result in higher taxes at the Fund level and may
increase the Fund’s current and accumulated earnings and profits, which will
result in a greater portion of Fund’s distributions, if any, being treated as
dividends. In addition, the Fund will not be taxable as a RIC. As a result, an
investment in the Fund may be less tax-efficient than an investment in a more
conventional ETF. Other ETFs generally are RICs and are able to make in-kind
redemptions and avoid realizing gains in connection with transactions designed
to raise cash to meet redemption requests. Additionally, transactions may have
to be carried out over several days if the futures market in which the Fund
operates is relatively illiquid and may involve considerable transaction fees
and taxes.
Authorized
Participant Concentration Risk.
The
Fund may have a limited number of financial institutions that act as APs, none
of which are obligated to engage in creation and/or redemption transactions. To
the extent that those APs exit the business, or are unable to or choose not to
process creation and/or redemption orders, and no other AP is able to step
forward to create and redeem, there may be a significantly diminished trading
market for Shares or Shares may trade like closed-end funds at a greater
discount (or premium) to NAV and possibly face trading halts and/or de-listing.
The AP concentration risk may be heightened in scenarios where APs have limited
or diminished access to the capital required to post collateral.
No
Guarantee of Active Trading Market.
While Shares are listed on the Exchange, there can be no assurance that an
active trading market for the Shares will be maintained. Further, secondary
markets may be subject to irregular trading activity, wide bid/ ask spreads and
extended trade settlement periods in times of market stress because market
makers and APs may step away from making a market in the Shares and in executing
creation and redemption orders, which could cause a material deviation in the
Fund’s market price from its NAV.
Trading
Issues.
Trading
in Shares on 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.
Fund
Shares Trading, Premium/Discount Risk and Liquidity of Fund Shares.
The market price of the Shares may fluctuate in response to the Fund’s NAV, the
intraday value of the Fund’s holdings and supply and demand for Shares. The
Adviser cannot predict whether Shares will trade above, below, or at their most
recent NAV. Disruptions to creations and redemptions, the existence of market
volatility or potential lack of an active trading market for Shares (including
through a trading halt), as well as other factors, may result in Shares trading
at a significant premium or discount to NAV or to the intraday value of the
Fund’s holdings. If a shareholder purchases Shares at a time when the market
price is at a premium to the NAV or sells Shares at a time when the market price
is at a discount to the NAV, the shareholder may pay significantly more or
receive significantly less than the underlying value of the Shares that were
bought or sold or the shareholder may be unable to sell his or her Shares. The
securities held by the Fund may be traded in markets that close at a different
time than the Exchange. Liquidity in those securities may be reduced after the
applicable closing times. Accordingly, during the time when the Exchange is open
but after the applicable market closing, fixing or settlement times, bid-ask
spreads on the Exchange and the resulting premium or discount to the Shares’ NAV
may widen. Additionally, in stressed market conditions, the market for the
Fund’s Shares may become less liquid in response to deteriorating liquidity in
the markets for the Fund’s underlying portfolio holdings. There are various
methods by which investors can purchase and sell Shares. Investors should
consult their financial intermediaries before purchasing or selling Shares of
the Fund.
U.S.
Government Securities.
Different U.S. government securities are subject to different levels of credit
risk depending on the nature of the particular government support for that
security. The market value of U.S. government securities may fluctuate and are
subject to investment risks, and the value of U.S. government securities may be
adversely affected by changes in interest rates. In addition, it is possible
that the issuers of some U.S. government securities will not be able to timely
meet their payment obligations in the future, and there is a risk of
default.
Debt
Securities Risk. Debt
securities are subject to credit risk and interest rate risk. Credit risk refers
to the possibility that the issuer of a debt security will be unable to make
interest payments or repay principal when it becomes due. Various factors could
affect the issuer’s ability to make timely interest or principal payments,
including changes in the issuer’s financial condition or in
general
economic conditions. Interest rate risk refers to fluctuations in the value of a
debt security resulting from changes in the general level of interest rates.
When the general level of interest rates rises, the value of debt securities
will tend to fall, and if interest rates fall, the values of debt securities
will tend to rise.
Certain
financial instruments in which the Fund may invest may pay interest based on, or
otherwise have payments tied to, the London Inter-bank Offered Rate (“LIBOR”),
Euro Interbank Offered Rate and other similar types of reference rates (each, a
“Reference Rate”). Due to the uncertainty regarding the future utilization of
LIBOR and certain other Reference Rates, and the nature of any replacement rate,
the potential effect of a transition away from LIBOR and certain other Reference
Rates could, among other negative consequences, adversely impact the pricing,
liquidity, value of, return on and trading for a broad array of financial
products, including any Reference Rate-linked securities, loans and derivatives
in which the Fund may invest; require extensive negotiations of and/or
amendments to agreements and other documentation governing Reference Rate-linked
investments products; lead to disputes, litigation or other actions with
counterparties or portfolio companies regarding the interpretation and
enforceability of “fallback” provisions that provide for an alternative
reference rate in the event of Reference Rate unavailability; or cause the Fund
to incur additional costs in relation to any of the above factors.
Municipal
Securities Risk. Municipal
securities are subject to the risk that litigation, legislation or other
political events, local business or economic conditions, credit rating
downgrades, or the bankruptcy of the issuer could have a significant effect on
an issuer’s ability to make payments of principal and/or interest or otherwise
affect the value of such securities. Certain municipalities may have difficulty
meeting their obligations due to, among other reasons, changes in underlying
demographics. Municipal securities can be significantly affected by political
changes as well as uncertainties in the municipal market related to government
regulation, taxation, legislative changes or the rights of municipal security
holders. Because many municipal securities are issued to finance similar
projects, especially those relating to education, health care, transportation,
utilities and water and sewer, conditions in those sectors can affect the
overall municipal market. Municipal securities include general obligation bonds,
which are backed by the “full faith and credit” of the issuer, which has the
power to tax residents to pay bondholders. Timely payments depend on the
issuer’s credit quality, ability to raise tax revenues and ability to maintain
an adequate tax base. General obligation bonds generally are not backed by
revenues from a specific project or source. Municipal securities also include
revenue bonds, which are generally backed by revenue from a specific project or
tax. The issuer of a revenue bond makes interest and principal payments from
revenues generated from a particular source or facility, such as a tax on
particular property or revenues generated from a municipal water or sewer
utility or an airport. Revenue bonds generally are not backed by the full faith
and credit and general taxing power of the issuer. The market for municipal
bonds may be less liquid than for taxable bonds. There may be less information
available on the financial condition of issuers of municipal securities than for
public corporations. Municipal instruments may be susceptible to periods of
economic stress, which could affect the market values and marketability of many
or all municipal obligations of issuers in a state, U.S. territory, or
possession. For example, the COVID-19 pandemic has significantly stressed the
financial resources of many municipal issuers, which may impair a municipal
issuer’s ability to meet its financial obligations when due and could adversely
impact the value of its bonds, which could negatively impact the performance of
the Fund.
Money
Market Funds Risk. An
investment in a money market fund is not a bank deposit and is not insured or
guaranteed by any bank, the Federal Deposit Insurance Corporation (“FDIC”) or
any other government agency. Although money market funds seek to preserve the
value of investments at $1.00 per share, it is possible for the Fund to lose
money if shares of money market funds in which it invests fall below $1.00 per
share.
Securitized/Mortgage-Backed
Securities Risk. Investments
in mortgage-backed securities are subject to the risk of significant credit
downgrades, dramatic changes in liquidity, and defaults to a greater extent than
many other types of fixed-income investments. During periods of falling interest
rates, mortgage-backed securities may be called or prepaid, which may result in
the Fund having to reinvest proceeds in other investments at a lower interest
rate. During periods of rising interest rates, the average life of
mortgage-backed securities may extend, which may lock in a below-market interest
rate, increase the security’s duration and interest rate sensitivity, and reduce
the value of the security. The Fund may invest in mortgage-backed securities
issued or backed by federal agencies or government sponsored enterprises or that
are part of a government-sponsored program, which may subject the Fund to the
risks noted above. The values of assets or collateral underlying mortgage-backed
securities may decline and, therefore, may not be adequate to cover underlying
obligations. Enforcing rights against the underlying assets or collateral may be
difficult, and the underlying assets or collateral may be insufficient if the
issuer defaults.
Sovereign
Bond Risk. Investments
in sovereign bonds involve special risks not present in corporate bonds. The
governmental authority that controls the repayment of the bonds may be unable or
unwilling to make interest payments and/or repay the principal on its bonds or
to otherwise honor its obligations. If an issuer of sovereign bonds defaults on
payments of principal and/or interest, the Fund may have limited recourse
against the issuer. During periods of economic uncertainty, the market prices of
sovereign bonds, and the Fund’s NAV, may be more volatile than prices of
corporate bonds, which may result in losses. In the past, certain governments of
emerging market countries have declared themselves unable to meet their
financial obligations on a timely basis, which has resulted in losses for
holders of sovereign bonds.
ETH-Related
Company Risk. If
the Fund is unable to achieve the Target Exposure because it is approaching or
has exceeded position limits or because of liquidity or other constraints, the
Fund may invest in equity securities of “ETH-related companies.” There can be no
assurance that the returns of ETH-related companies will correspond, or be
closely-related, to the performance
of
ETH or ETH Futures. ETH-related companies face rapid changes in technology,
intense competition including the development and acceptance of competing
platforms or technologies, loss or impairment of intellectual property rights,
cyclical economic patterns, shifting consumer preferences, evolving industry
standards, adverse effects of changes to a network’s or software’s protocols, a
rapidly changing regulatory environment, and dependency on certain key personnel
(including highly skilled financial services professionals and software
engineers). ETH-related companies may be susceptible to operational and
information security risks including those associated with hardware or software
failures, interruptions, or delays in service by third party vendors, and
security breaches. Certain ETH-related companies may be subject to the risks
associated with investing directly in digital assets, including cryptocurrencies
and crypto tokens.
Equity
Securities Risk.
The value of the equity securities held by the Fund may fall due to general
market and economic conditions, perceptions regarding the markets in which the
issuers of securities held by the Fund participate, or factors relating to
specific issuers in which the Fund invests. Equity securities are subordinated
to preferred securities and debt in a company’s capital structure with respect
to priority in right to a share of corporate income, and therefore will be
subject to greater dividend risk than preferred securities or debt instruments.
In addition, while broad market measures of equity securities have historically
generated higher average returns than fixed income securities, equity securities
have generally also experienced significantly more volatility in those returns,
although under certain market conditions fixed income securities may have
comparable or greater price volatility.
PERFORMANCE
The
Fund has not yet commenced operations and therefore does not have a performance
history. Once available, the Fund’s performance information will be accessible
on the Fund’s website at www.vaneck.com.
PORTFOLIO
MANAGEMENT
Investment
Adviser.
Van Eck Absolute Return Advisers Corporation.
Portfolio
Manager.
The following individual is primarily responsible for the day-to-day management
of the Fund’s portfolio:
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Title
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Date
Began Managing the Fund |
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Portfolio
Manager |
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PURCHASE
AND SALE OF FUND SHARES
For
important information about the purchase and sale of Fund Shares, tax
information and payments to broker-dealers and other financial intermediaries,
please turn to the “Summary Information About Purchases and Sales of Fund
Shares, Taxes and Payments to Broker-Dealers and Other Financial Intermediaries”
section of this Prospectus.
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SUMMARY
INFORMATION ABOUT PURCHASES AND SALES OF FUND SHARES, TAXES AND
PAYMENTS TO BROKER-DEALERS AND OTHER FINANCIAL
INTERMEDIARIES |
PURCHASE
AND SALE OF FUND SHARES
Individual
Shares of the Fund may only be purchased and sold in secondary market
transactions through a broker or dealer at a market price. Shares of the Fund
are listed on the Exchange, and because Shares trade at market prices rather
than NAV, Shares of the Fund may trade at a price greater than NAV (i.e.,
a “premium”) or less than NAV (i.e.,
a “discount”).
An
investor may incur costs attributable to the difference between the highest
price a buyer is willing to pay to purchase Shares of the Fund (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 about the Fund’s NAV, market price, premiums
and discounts, and bid-ask spreads, is included on the Fund’s website at
www.vaneck.com.
TAX
INFORMATION
The
Fund is treated as a regular corporation, or “C” corporation, for U.S. federal,
state and local income tax purposes. Distributions by the Fund of cash or
property in respect of the Shares will be treated as dividends for U.S. federal
income tax purposes to the extent paid from the Fund’s current or accumulated
earnings and profits (as determined under U.S. federal income tax principles).
Subject to certain holding period and other requirements, any such dividend will
be eligible (i) to be treated as “qualified dividend income” taxable at long
term capital gain rates (subject to certain holding period requirements) in the
case of shareholders taxed as individuals and (ii) for the dividends received
deduction (subject to certain holding period requirements) in the case of
corporate shareholders. If the Fund’s distributions exceed the Fund’s current
and accumulated earnings and profits, such excess will be treated first as a
tax-free return of capital to the extent of the shareholder’s tax basis in the
Shares (thus reducing a shareholder’s adjusted tax basis in the Shares), and
thereafter as capital gain assuming the Shares are held as a capital asset.
There can be no assurance as to what portion of any future distribution will
consist of return of capital (as opposed to taxable dividend income). Unlike a
regulated investment company, the Fund will not be able to pass-through the
character of its recognized net capital gain by paying “capital gain dividends.”
Upon the sale of Shares, a shareholder generally will recognize capital gain or
loss equal to the difference between the amount realized on the sale and the
shareholder’s adjusted tax basis in the Shares sold. See “U.S. Federal Income
Tax Considerations.”
PAYMENTS
TO BROKER-DEALERS AND OTHER FINANCIAL INTERMEDIARIES
The
Adviser and its related companies may pay broker-dealers or other financial
intermediaries (such as a bank) for the sale of the Fund Shares and related
services. These payments may create a conflict of interest by influencing your
broker-dealer or other intermediary or its employees or associated persons to
recommend the Fund over another investment. Ask your financial adviser or visit
your financial intermediary’s website for more information.
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ADDITIONAL
INFORMATION ABOUT THE FUND’S INVESTMENT STRATEGIES AND
RISKS |
PRINCIPAL
INVESTMENT STRATEGIES
The
Fund pursues its investment strategy primarily by investing in ETH Futures. In
addition, the Fund expects to have significant holdings of Cash and Fixed Income
Investments. The Cash and Fixed Income Investments are intended to provide
liquidity and to serve as collateral for the Fund’s ETH Futures. The Fund does
not invest in ETH or other digital assets directly.
The
Fund seeks to invest in ETH Futures until it reaches the Target Exposure. If the
Fund reaches the Target Exposure, based on current estimates, approximately [ ]%
of the Fund’s net assets (which are the total assets of the Fund less the sum of
the Fund’s accrued liabilities) will have economic exposure to ETH. To the
extent that the Fund’s economic exposure to ETH exceeds 100% of the net assets
of the Fund (which are the total assets of the Fund less the sum of the Fund’s
accrued liabilities), the Fund will generally have leveraged exposure to the
value of ETH. This means that any changes in the value of ETH will generally
result in proportionally larger changes in the Fund’s NAV, including the
potential for greater losses than if the Fund’s exposure to the value of ETH
were unleveraged. There can be no assurance that the Fund will be able to
achieve or maintain the Target Exposure.
ETH
and ETH Futures are relatively new asset classes and therefore the Fund’s
investments in ETH Futures are subject to unique and substantial risks,
including the risk that the value of the Fund’s investments could decline
rapidly, including to zero. ETH and ETH Futures have historically been more
volatile than traditional asset classes. You should be prepared to lose your
entire investment.
The
Fund is subject to the position limits and position accountability levels
established by the CME or the CFTC, which may be changed at any time. The
position limits by the CME prevent any single investor, such as the Fund
(together with all other accounts managed by the Adviser required to be
aggregated), from holding more than a specified number of ETH Futures. The CME’s
current ETH Futures spot-month net position limit is 8,000 contracts, and the
position accountability level is 20,000 contracts. A “spot month” is the month
in which a futures contract matures and becomes deliverable. “Net position”
refers to the difference between open long contracts by a market participant and
open short contracts by such participant in any one commodity. “Position
accountability level” refers to levels which a market participant may exceed and
not be in violation of the rules of the CME but such participant may be required
to provide the CME with information regarding its positions.
For
cash management or temporary defensive purposes in times of adverse or unstable
market, economic or political conditions, the Fund can invest up to 100% of its
assets in investments that may be inconsistent with its principal investment
strategy. Generally, the Fund would invest in money market instruments or in
other short-term U.S. or foreign government securities. The Fund might also hold
these types of securities as interim investments pending the investment of
proceeds from the sale of its shares or the sale of its portfolio investments or
to meet anticipated redemptions of its shares.
The
Fund may engage in active and frequent trading of portfolio
holdings.
Overview
of the ETH Industry and Market
ETH
and the Ethereum Network
ETH
is the digital asset that powers the Ethereum network, which is a peer-to-peer,
open-source network that no single intermediary or entity operates or controls
(referred to as “decentralization”). ETH is not issued by governments, banks or
any other centralized authority.
Unlike
the Bitcoin network, the Ethereum network is not intended to be effectively a
limited-purpose payment platform dedicated to recording transfers of bitcoin.
Instead, by combining the Ethereum Blockchain with a flexible scripting language
that could be used to implement sophisticated logic and execute a wide variety
of instructions, the Ethereum network was designed to act as a foundational
infrastructure layer that would enable users to create their own rules for
ownership, transaction formats and state transition functions that they could
build into custom software programs of their own creation. On top of the
Ethereum network’s foundational layer, users can write and deploy “smart
contracts”, which are general-purpose code that executes on every computer in
the Ethereum network and which govern the transmission of information and value
based on a set of logical conditions. Smart contract operations are executed on
the Ethereum Blockchain in exchange for payment of ETH. Users can also build
complex applications, or “decentralized applications”, which employ the Ethereum
Blockchain as a back-end infrastructure instead of centralized web servers, and
which may also have an online interface or “front end” through which their own
users interact with the decentralized application. Decentralized applications
execute operations on the Ethereum Blockchain through associated smart
contracts. Using smart contracts and decentralized applications built on top of
the Ethereum Blockchain, users can create markets, vote in elections, store data
files or registries of debts or promises, represent the ownership of property,
play games, and even issue their own digital assets and tokens (other than ETH)
inside decentralized applications and transfer them in accordance with
sophisticated sets of conditional instructions embedded into smart contracts,
allowing decentralized economies to develop.
The
infrastructure of the Ethereum network is collectively maintained on a
distributed basis by the network’s self-selected participants, consisting of
“validators”, who run special software to validate transactions; developers of
the Ethereum protocol, who maintain and contribute updates to the Ethereum
network’s source code; developers of decentralized applications and smart
contracts, which run on top of the Ethereum network; and users, who download and
maintain on their individual computer a full or partial copy of the blockchain
and related software. There is currently no maximum cap on the total number of
ETH that can be issued or outstanding. The value of ETH is determined by the
supply of and demand for ETH on the digital asset exchanges or in peer-to-peer
transactions.
Among
other things, ETH is used to pay for transaction fees, or “gas fees,” associated
with the computational services required to process transactions or run smart
contracts on the Ethereum network. This model is designed to increase the
efficiency of the Ethereum network by making wasteful code more costly to
execute, to prevent accidental or malicious infinite loops, as well as to
promote the economic viability of the Ethereum network by compensating network
participants who contribute computational resources for their contributions.
Decentralized applications and smart contracts must obtain ETH to pay gas fees
in order to operate, creating one source of demand for ETH, alongside
speculation and other sources.
ETH
Mining, Transaction Validation and Staking – Creation of New ETH
Initial
Creation of ETH
Unlike
other digital assets such as ETH, which are solely created through a progressive
mining process, 72.0 million ETH were created in connection with the launch of
the Ethereum network. Following the launch of the Ethereum network, ETH supply
increased through a progressive mining process until a recent upgrade on
September 15, 2022, referred to as the “Merge”, eliminated the mining process
and transitioned the network to a proof-of-stake consensus model.
Proof-of-Stake
Validator Rewards
The
Ethereum network is kept running by computers all over the world. In order to
incentivize those who incur the opportunity costs of staking ETH to secure the
network by validating transactions, there is a reward that is given to the
validators approximately every 6.4 minutes based on validator performance. Every
15 seconds, on average, a new block is added to the Ethereum Blockchain with the
latest transactions processed by the network. Prior to the Merge, the miner that
generated this block was awarded 2.0 ETH, with approximately 13,000 ETH in
mining rewards created per day. Following the Merge, mining rewards no longer
occur; ETH is created only as staking rewards in an amount of approximately
1,600 ETH per day. This amount will vary with the number of amount of ETH
staked.
This
reward system is the method by which new ETH enter into
circulation.
Proof-of-Stake
Mining Process
Unlike
proof-of-work, in which miners expend computational resources to compete to
validate transactions and are rewarded ETH in proportion to the amount of
computational resources expended, in proof-of-stake, miners (sometimes called
validators) risk or “stake” ETH to compete to be randomly selected to validate
transactions and are rewarded ETH in proportion to the amount of ETH staked. Any
malicious activity by a miner, such as mining multiple blocks, disagreeing with
the eventual consensus or otherwise violating protocol rules, results in the
forfeiture or “slashing” of a portion of the staked ETH. Proof-of-stake is
viewed as more energy efficient and scalable than proof-of-work and is sometimes
referred to as “virtual mining.”
Limits
on ETH Supply
The
rate at which new ETH are mined and put into circulation is expected to vary.
ETH issuances are currently capped by the Ethereum network to ETH issued via
staking rewards (expected to be approximately 1,600 ETH per day), but there is
no maximum cap on the total number of ETH outstanding.
Target
Exposure, Borrowing and Leverage
Although
the Fund seeks to maintain the Target Exposure to ETH, the maximum exposure to
ETH that the Fund is able to achieve will be primarily determined by: the amount
of exposure to ETH provided by the ETH Futures held by the Fund. In addition,
the Fund expects to periodically rebalance its positions in ETH Futures in order
to seek to achieve or maintain the Target Exposure and may carry out any such
rebalancing over a period of time in order to allow the Fund to rebalance its
positions in a manner intended to reduce transaction costs.
In
addition, the Fund’s actual exposure to ETH at any particular point in time may
be less than the Target Exposure, and may be materially less. At any time at
which the Fund’s exposure to ETH is less than 100% of the Fund’s net assets
(assets (which are the total assets of the Fund less the sum of the Fund’s
accrued liabilities), any changes in the value of ETH will generally result in
proportionally smaller changes in the Fund’s NAV. At any time at which the
Fund’s exposure to ETH is greater than 100% of the Fund’s net assets, any
changes in the value of ETH will generally result in proportionally larger
changes in the Fund’s NAV. In addition, because the Fund does not invest
directly in ETH, the Fund is exposed to futures basis and to deviations between
the price of ETH Futures and the price of ETH, and any changes in the value of
ETH may result in proportionally smaller or larger changes in the value of the
Fund’s ETH Futures. As a result, there can be no assurance that changes in the
value of the Fund resulting from the Fund’s investments will track changes in
the value of ETH.
The
Fund seeks to achieve and maintain the Target Exposure by using leverage
inherent in ETH Futures and may also obtain leverage in the form of borrowings,
which would typically be in the form of loans from banks, may be on a secured or
unsecured basis and at fixed or variable rates of interest. The Fund’s ETH
Futures will provide leverage to the extent they give the Fund exposure to an
amount of underlying ETH with a greater value than the amount of collateral the
Fund is required to post to its FCM. An FCM is a brokerage firm that solicits or
accepts orders to buy or sell futures contracts and accepts money or other
assets
from customers to support such orders. FCMs are required to be registered with
the CFTC and to be members of the NFA. From time to time, the Fund may only have
one FCM with which it transacts ETH Futures, which may heighten such
risk.
The
Fund’s investments in ETH Futures will be treated as “derivatives” under Rule
18f-4 (“Rule 18f-4”) under the 1940 Act. Rule 18f-4 regulates the use of
derivative instruments and certain related transactions by funds. Pursuant to
Rule 18f-4, the Fund will in the future adopt and implement a derivatives risk
management program to govern its use of derivatives, and the Fund’s derivatives
exposure (including its use of ETH Futures) is limited through a value-at-risk
(“VaR”) test. Very generally, VaR is an estimate of an instrument’s or
portfolio’s potential losses over a given time horizon and at a specified
confidence level. Rule 18f-4 may restrict the Fund’s ability to engage in
certain derivatives transactions and/or increase the costs of such derivatives
transactions.
The
1940 Act requires the Fund to maintain continuous asset coverage of not less
than 300% with respect to all borrowings. This means that the value of the
Fund’s total indebtedness may not exceed one-third of the value of its total
assets (including such indebtedness). The Fund also may borrow money from banks
or other lenders for temporary purposes in an amount not to exceed 5% of the
Fund’s assets. Such temporary borrowings are not subject to the asset coverage
requirements discussed above. Investments or trading practices that involve
contractual obligations to pay in the future may be subject to the same
requirements unless the Fund designates liquid assets in an amount the Fund
believes to be equal to the Fund’s contractual obligations (marked-to-market on
a daily basis) or, for certain instruments, appropriately “covers” such
obligations with offsetting positions.
Forms
of Attack Against the ETH Network
All
networked systems are vulnerable to various kinds of attacks. As with any
computer network, the ETH network contains certain flaws. For example, the ETH
network is currently vulnerable to a “51% attack” where, if a validator were to
gain control of more than 50% of the staked ETH, a malicious actor would be able
to gain full control of the network and the ability to manipulate the
blockchain, including interrupting the recording of new blocks by preventing
other validators from completing blocks. A significant portion of ETH is held by
a small number of holders sometimes referred to as “whales.” These holders have
the ability to manipulate the price of ETH.
In
addition, many digital asset networks have been subjected to a number of denial
of service attacks, which has led to temporary delays in block creation and in
the transfer of ETH. Any similar attacks on the ETH Network that impact the
ability to transfer ETH could have a material adverse effect on the price of
ETH.
ETH
Market and ETH Trading Platforms
In
addition to using ETH to engage in transactions, investors may purchase and sell
ETH to speculate as to the value of ETH in the ETH market, or as a long term
investment to diversify their portfolio. The value of ETH within the market is
determined, in part, by the supply of and demand for ETH in the ETH market,
market expectations for the adoption of ETH by individuals, the number of
merchants that accept ETH as a form of payment and the volume of private end
user to end user transactions.
The
most common means of determining a reference value is by surveying trading
platforms where secondary markets for ETH exist. The most prominent ETH trading
platforms are often referred to as “exchanges”, although they are not regulated
and do not report trade information in the same way as a national securities
exchange. As such, there is some difference in the form, transparency and
reliability of trading data from ETH trading platforms. Generally speaking, ETH
data is available from these trading platforms with publicly disclosed
valuations for each executed trade, measured by one or more fiat currencies such
as the U.S. dollar or Euro or another digital asset such as ether or tether.
Over-the-counter ("OTC") dealers or market makers do not typically disclose
their trade data.
Competition
ETH
is second largest digital asset by market capitalization of the more than
approximately 12,000 digital assets. In addition, many consortiums and financial
institutions are also researching and investing resources into private or
permissioned smart contracts platforms rather than open platforms like the ETH
network. Competition from the emergence or growth of alternative digital assets
and smart contracts platforms, such as Solana, Binance Smart Chain, Cosmos,
Polkadot, and numerous others, could have a negative impact on the demand for,
and price of, ETH and thereby adversely affect the value of ETH Futures and an
investment in the Fund.
Regulation
of ETH
ETH
and other digital assets have increasingly attracted attention from U.S. and
foreign regulators. Such regulatory attention has included enforcement actions
for violations of securities and commodities laws, as well as the release of
regulatory guidance explaining how existing regulatory regimes apply to digital
assets, and orders approving certain digital asset related products. In more
limited cases, new legislation or regulations have been proposed or adopted to
govern the use of digital assets and their networks.
U.S.
federal and state agencies have been examining the operations of digital asset
networks, digital asset users and the digital asset trading platforms, with
particular focus on the extent to which digital assets can be used to launder
the proceeds of illegal activities or fund criminal or terrorist enterprises and
the safety and soundness of trading platforms or other service providers that
hold
digital assets for users. Many of these state and federal agencies have issued
consumer advisories regarding the risks posed by digital assets to investors. In
addition, federal and state agencies, and other countries have issued rules or
guidance about the treatment of digital asset transactions or requirements for
businesses engaged in digital asset activity. For example, on February 26, 2021,
the SEC’s Division of Examinations issued a risk alert entitled “Continued Focus
on Digital Asset Securities” discussing observations made by its staff during
examinations of investment advisers, broker-dealers, and transfer agents
regarding digital asset securities.
Various
U.S. federal and state and foreign jurisdictions have, and may continue to, in
the near future, adopt laws, regulations or directives that affect the ETH
Network, the ETH markets, and their users, particularly digital asset trading
platforms and service providers that fall within such jurisdictions’ regulatory
scope. There remains significant uncertainty regarding the US and foreign
government and quasi-governmental regulatory actions with respect to digital
assets and digital asset exchanges. Foreign laws, regulations or directives may
conflict with those of the U.S. and may negatively impact the acceptance of ETH
by users, merchants and service providers and may therefore impede the growth or
sustainability of the ETH economy in the European Union, China, South Korea,
India and the U.S. and globally, or otherwise negatively affect the value of
ETH.
The
effect of any future regulatory change on the Fund or ETH is impossible to
predict, but such change could be substantial and adverse to the Fund and the
value of the Fund’s shares.
ETH
Reference Rate.
The MVIS®
CryptoCompare Ethereum Benchmark Rate is a U.S. dollar-denominated composite
reference rate for the price of ETH. The index is calculated daily between 00:00
and 24:00 (CET) and the index values are disseminated to data vendors. The index
is disseminated in USD and the closing value is calculated based on one hour
volume weighted average price.
The
MVIS®
CryptoCompare Ethereum Benchmark Rate is designed to be a robust price for ETH
in USD. There is no component other than ETH in the index. The underlying
exchanges are sourced from the industry leading CryptoCompare Exchange Benchmark
review report. CryptoCompare Exchange Benchmark was established in 2019 as a
tool designed to bring clarity to the digital asset exchange sector by providing
a framework for assessing risk and in turn bringing transparency and
accountability to a complex and rapidly evolving market. The CryptoCompare
Exchange Benchmark methodology utilizes a combination of qualitative and
quantitative metrics to analyze a comprehensive data set, covering more than 165
exchanges across eight categories of evaluation. The CryptoCompare Exchange
Benchmark review report assigns a grade to each exchange which helps identify
what it believes to be the lowest risk exchanges in the industry. Based on the
CryptoCompare Exchange Benchmark, MVIS initially selects the top five exchanges
by rank for inclusion in the MVIS®
CryptoCompare Ethereum Benchmark Rate. If an eligible exchange is in the top
five by rank for two consecutive semi-annual reviews, it replaces the lowest
ranked exchange. If an eligible exchange is downgraded by two or more notches in
a semi-annual review and is no longer in the top five by rank, it is replaced by
the highest ranked non-component exchange. Adjustments to exchange coverage are
announced four business days prior to the first business day of each of March
and September at 23:00 CET. The MVIS®
CryptoCompare Ethereum Benchmark Rate is rebalanced at 16:00:00 ET on the last
business day of each of February and August. The current exchange composition of
the MVIS®
CryptoCompare Ethereum Benchmark Rate is Bitstamp, Coinbase, Gemini, itBit and
Kraken.
FUNDAMENTAL
AND NON-FUNDAMENTAL POLICIES
The
Fund’s investment objective and each of its other investment policies are
non-fundamental policies that may be changed by the Board of Trustees of the
Trust (the “Board of Trustees”) without shareholder approval, except as noted in
this Prospectus or the Statement of Additional Information (“SAI”) under the
section entitled “Investment Policies and Restrictions— Investment
Restrictions.”
RISKS
OF INVESTING IN THE FUND
The
following section provides additional information regarding the principal risks
identified under “Principal Risks of Investing in the Fund” in the Fund’s
“Summary Information” section followed by additional risk information.
Investors
in the Fund should be willing to accept a high degree of volatility in the price
of the Fund’s Shares and the possibility of significant losses. An investment in
the Fund involves a substantial degree of risk. An investment in the Fund is not
a deposit with a bank and is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Therefore, you should
consider carefully the following risks before investing in the Fund, each of
which could significantly and adversely affect the value of an investment in the
Fund.
Market
and Volatility Risk.
The value of the Fund’s investments, including ETH Futures, is subject to market
risk. Market risk is the risk that the value of the investments to which the
Fund is exposed will fall, which could occur due to general market or economic
conditions or other factors.
The
value of ETH and, therefore, of the Fund’s ETH Futures, could decline rapidly,
including to zero. You should be prepared to lose your entire
investment.
Investment
Risk.
The Fund will generally hold its ETH Futures during periods in which the value
of ETH is flat or declining as well as during periods in which the value of ETH
is rising, and the Adviser will generally not seek to change the Fund’s exposure
based on daily price changes.
Risk
Related to ETH.
The Fund may be subject to the following risks as a result of its investments in
ETH Futures:
Digital
Asset Risk. Digital
assets such as ETH were only introduced recently, and the medium-to-long term
value of the Shares is influenced by a wide variety of factors affecting the
Ethereum network that are uncertain and difficult to evaluate, such as the
infancy of the Ethereum network’s development, the Ethereum network’s dependence
on relatively new technologies such as cryptographic software protocols, the
Ethereum network’s dependence on the role played by validators and core
developers, the continued success (or lack thereof) of the Ethereum network and
its core developers in upgrading the Ethereum network’s source code to improve
transaction processing speed and overall efficiency, and generally to expand the
network’s capabilities, and the potential for malicious activity. For example,
the following are some of the Ethereum network risks that could materially
adversely affect the value of the Shares:
•The
trading prices of many digital assets associated with blockchain protocols,
including ETH, have experienced extreme volatility in recent periods and may
continue to do so. The ETH markets may be experiencing a bubble or may
experience a bubble again in the future. Extreme volatility in the future,
including further declines in the trading prices of ETH, could have a material
adverse effect on the value of the Shares and the Shares could lose all or
substantially all of their value.
•Blockchain
protocols and the software used to operate them are in the early stages of
development. Given the infancy of the development of blockchain protocols,
parties may be unwilling to transact in digital assets, which would dampen the
growth, if any, of such blockchain protocols, including the Ethereum network,
and lead to the decline in value of their associated digital assets, including
ETH.
•Digital
asset networks are dependent upon the internet. A disruption of the internet or
a blockchain network, such as the Ethereum network, would affect the ability to
transfer digital assets, including ETH, and, consequently, adversely affect
their value.
•The
Ethereum network is in the process of implementing software upgrades and other
changes to its protocol, which may be unsuccessful or introduce new
vulnerabilities to the network.
•The
Ethereum network has no central decision-making body or clear manner in which
participants can come to an agreement other than through widespread, voluntary
consensus. If key constituencies such as validators, core developers, or users
of the Ethereum network, or sub-groups within such constituencies, are unable to
reach consensus among themselves and the wider Ethereum community about proposed
changes, it may negatively impact the Ethereum network’s utility, operations,
and ability to adapt and face challenges, including technical and scaling
challenges. In extreme cases, it could (and has) lead to a hard fork, with
different network participants supporting different versions of the Ethereum
network that lack interchangeability. Governance issues and divisions within the
Ethereum community could lead to a decline in the price of ETH.
•The
open-source nature of many blockchain protocols, such as the Ethereum network,
means that core developers are generally not directly compensated for their
contributions in maintaining and developing such protocols and the related
source code. As a result, the core developers and other contributors may lack a
financial incentive to maintain or develop the network, or may lack the
resources to adequately address emerging issues or to execute planned changes to
such source code. Alternatively, some developers may be funded by companies
whose interests are at odds with other participants in the Ethereum network. If
the Ethereum network is unable to retain the services of core developers who
maintain the Ethereum protocol, there may not be sufficient network level
support for the Ethereum protocol, and it will have difficulty solving its
scaling challenges or implementing other futures upgrades, which could lead to a
decline in the price of ETH.
•Validators,
the Ethereum protocol’s core developers, developers of decentralized
applications and smart contracts, and users may switch to or adopt other
blockchain or digital asset networks at the expense of their engagement with the
Ethereum network, which may negatively impact the Ethereum network and could
lead to a decline in the price of ETH.
•Decentralized
application and smart contract developers depend on being able to obtain ETH to
be able to run their programs and operate their businesses. In particular,
decentralized applications and smart contracts require ETH in order to pay the
gas fees needed to power such applications and smart contracts and execute
transactions. As such, they represent a significant source of demand for ETH.
ETH’s price volatility (particularly where ETH prices increase), or the Ethereum
network’s wider inability to meet the demands of decentralized applications and
smart contracts in terms of inexpensive, reliable, and prompt transaction
execution (including during congested periods), or to solve its scaling
challenges or increase its throughput, may discourage such decentralized
application and smart contract developers from using the Ethereum network as the
foundational infrastructure layer for building their applications and smart
contracts. If decentralized application and smart contract developers abandon
the Ethereum Blockchain for other blockchain or digital asset networks or
protocols for whatever reason, the value of ETH could be negatively
affected.
•To
the extent that any validators cease to record transactions that do not include
the payment of a transaction fee in solved blocks or do not record a transaction
because the transaction fee is too low, such transactions will not be recorded
on the Ethereum Blockchain until a block is solved by a validator who does not
require the
payment
of transaction fees or is willing to accept a lower fee, if there is one. Any
widespread delays in the recording of transactions could result in a loss of
confidence in the Ethereum network, resulting in a decline in ETH
prices.
•In
the past, flaws in the source code for digital asset networks have been exposed
and exploited, including flaws that resulted in the theft of users’ digital
assets. The cryptography underlying the Ethereum Blockchain or the source code
for ETH or the Ethereum network could prove to be flawed or ineffective, the
process of implementing hard forks could result in vulnerabilities in either the
old or the new network developing or being exposed, or developments in
mathematics and/or technology, such as advances in quantum computing, could
result in such cryptography becoming ineffective. Even if another digital asset
other than ETH were affected by similar circumstances, any reduction in
confidence in the robustness of the source code or cryptography underlying
digital assets generally could negatively affect the demand for all digital
assets, including ETH, and therefore adversely affect the value of the
Shares.
•As
a result of the Merge, the Ethereum Blockchain now uses proof-of-stake consensus
model, which may subject the network and ETH to new and unexpected
vulnerabilities not applicable to proof-of-work consensus models.
Moreover,
because blockchain technology and digital assets, including ETH, have been in
existence for a short period of time and are continuing to develop, there may be
additional risks in the future that are impossible to predict or evaluate as of
the date of this prospectus. It is not clear how all elements of the Ethereum
network will unfold over time, specifically with regard to governance between
validators, developers and users, including with respect to future network
upgrades, as well as the long-term security of the Ethereum
network.
“51%
Attack” Risk. If
the majority of the staked ETH dedicated to validating transactions on the
Ethereum network is controlled by a bad actor (often referred to as a “51%
attack”), it may be able to alter the Ethereum Blockchain on which the Ethereum
network and ETH transactions rely. This could occur if the bad actor were to
construct fraudulent blocks or prevent certain transactions from completing in a
timely manner, or at all. It could be possible for the malicious actor to
control, exclude or modify the ordering of transactions, though it could not
generate new ETH or transactions. Further, a bad actor could “double-spend” its
own ETH (i.e., spend the same ETH in more than one transaction) and prevent the
confirmation of other users’ transactions for so long as it maintained control.
Reversing any changes made to the Ethereum Blockchain may be impossible.
Further, a malicious actor could create a flood of transactions in order to slow
down confirmations of transactions on the Ethereum network. If a bad actor gains
control of a majority of the processing power on the Ethereum network, or the
feasibility of such an occurrence increases, there may be a negative effect on
an investment in the Fund.
Extreme
Volatility Risk. The
price of ETH as determined by the ETH market has experienced periods of extreme
volatility and may be influenced by a wide variety of factors. Speculators and
investors who seek to profit from trading and holding ETH generate a significant
portion of ETH demand. Such speculation regarding the potential future
appreciation in the value of ETH may cause the price of ETH to increase.
Conversely, a decrease in demand for or speculative interest regarding ETH may
cause the price to decline. The volatility of the price of ETH, particularly
arising from speculative activity, may have a negative impact on the performance
of the Fund.
ETH
Exchanges Risk. Over
the past several years, a number of ETH exchanges have been closed or faced
issues due to fraud, failure, security breaches or governmental regulations. The
nature of the assets held at ETH exchanges makes them appealing targets for
hackers and a number of ETH exchanges have been victims of cybercrimes. In many
of these instances, the customers of such ETH exchanges were not compensated or
made whole for the partial or complete losses of their account balances in such
ETH exchanges. No ETH exchange is immune from these risks. While the Fund itself
does not buy or sell ETH on ETH exchanges, the closure or temporary shutdown of
ETH exchanges due to fraud, business failure, hackers or malware, or
government-mandated regulation may reduce confidence in the Ethereum network and
can slow down the mass adoption of ETH. Further, such ETH exchange failures or
that of any other major component of the overall ETH ecosystem can have an
adverse effect on ETH markets and the price of ETH and could therefore have a
negative impact on the performance of the Fund.
Scaling
Risk. Many
digital asset networks face significant scaling challenges due to the fact that
public blockchains generally face a tradeoff between security and scalability.
If increases in throughput on the Ethereum network lag behind growth in usage of
ETH, average fees and settlement times may increase considerably. The Ethereum
network has been, at times, at capacity, which has led to increased transaction
fees and decreased settlement speeds. Increased fees and decreased settlement
speeds could preclude certain uses for ETH, and could reduce demand for, and the
price of, ETH, which could adversely impact the value of the Shares. Many
developers are actively researching and testing scalability solutions for public
blockchains that do not necessarily result in lower levels of security or
decentralization. However, there is no guarantee that any of the mechanisms in
place or being explored for increasing the scale of settlement of the Ethereum
network transactions will be effective, or how long these mechanisms will take
to become effective, which could adversely impact the value of the
Shares.
Ethereum
Upgrade Risk.
The Ethereum community implements upgrades to the Ethereum network from time to
time. The most recent upgrade, the Merge, transitioned the network from
proof-of-work to proof of stake. As a result of the Merge, new ETH are only
issued as staking rewards, but these rewards will not be accessible until a
planned future upgrade which will allow for their withdrawal. Any or all of the
planned future upgrades may fail to work as intended or to deliver the expected
functionality, may never occur or may be cancelled, postponed, delayed, or
otherwise stymied by governance or technical challenges or other causes, may
introduce bugs, exploitable flaws, software defects, vulnerabilities or
cybersecurity issues into the source code of the Ethereum network, may cause
speculative sentiment to turn negative, or may have other deleterious effects.
It is possible that these upgrades will never occur, that the transition will be
only partially implemented. Lack of successful implementation of these planned
and other future network upgrades may have a negative effect on the market value
of ETH.
Smart
Contracts Risk. Smart
contracts are programs that run on the Ethereum Blockchain that execute
automatically when certain conditions are met. Since smart contracts typically
cannot be stopped or reversed, vulnerabilities in their programming can have
damaging effects. In some cases, smart contracts can be controlled by one or
more “admin keys” or users with special privileges, or “super users”. These
users may have the ability to unilaterally make changes to the smart contract,
enable or disable features on the smart contract, change how the smart contract
receives external inputs and data, and make other changes to the smart contract.
Many
decentralized finance applications are currently deployed on the Ethereum
network, and smart contracts relating to decentralized finance applications
currently represent a significant source of demand for ETH. Decentralized
finance applications may achieve their investment purposes through
self-executing smart contracts that may allow users to invest digital assets in
a pool from which other users can borrow without requiring an intermediate party
to facilitate these transactions. These investments may earn interest to the
investor based on the rates at which borrowers repay the loan, and can generally
be withdrawn by the investor. For smart contracts that hold a pool of digital
asset reserves, smart contract super users or admin key holders may be able to
extract funds from the pool, liquidate assets held in the pool, or take other
actions that decrease the value of the digital assets held by the smart contract
in reserves. Even for digital assets that have adopted a decentralized
governance mechanism, such as smart contracts that are governed by the holders
of a governance token, such governance tokens can be concentrated in the hands
of a small group of core community members, who would be able to make similar
changes unilaterally to the smart contract. If any such super user or group of
core members unilaterally make adverse changes to a smart contract, the design,
functionality, features and value of the smart contract, its related digital
assets may be harmed. In addition, assets held by the smart contract in reserves
may be stolen, misused, burnt, locked up or otherwise become unusable and
irrecoverable. Super users can also become targets of hackers and malicious
attackers. Furthermore, the underlying smart contracts may be insecure, contain
bugs or other vulnerabilities, or otherwise may not work as intended. Any of the
foregoing could cause users of the decentralized finance application to be
negatively affected, or could cause the decentralized finance application to be
the subject of negative publicity. Because decentralized finance applications to
date are primarily built on the Ethereum network and represent a significant
source of demand for ETH, public confidence in the Ethereum network itself could
be negatively affected as a result of a smart contract exploit, and the value of
ETH could decrease.
Stablecoin
Risk. While
the Fund does not invest in stablecoins, it may nonetheless be exposed to the
risks that stablecoins pose for the ETH market through its exposure to ETH.
Stablecoins are digital assets designed to have a stable value over time as
compared to typically volatile digital assets, and are typically marketed as
being pegged to a fiat currency, such as the U.S. dollar. Although the prices of
stablecoins are intended to be stable, in many cases their prices fluctuate,
sometimes significantly. This volatility has in the past apparently impacted the
price of ETH. Stablecoins are a relatively new phenomenon, and it is impossible
to know all of the risks that they could pose to participants in the ETH market.
In addition, some have argued that some stablecoins, particularly Tether, are
improperly issued without sufficient backing in a way that could cause
artificial rather than genuine demand for ETH, raising its price. The New York
Attorney General filed suit against Tether’s operators and its affiliates in
2019 in connection with some of these allegations. In February 2021, the New
York Attorney General entered into a settlement agreement with Tether requiring
Tether to, among other things, pay a penalty and discontinue trading activity
with any New York person or entity. On October 15, 2021, the CFTC settled
similar charges against Tether and required Tether to pay a civil penalty and to
cease and desist from any further violations of the CEA and CFTC regulations.
Volatility in stablecoins, operational issues with stablecoins (for example,
technical issues that prevent settlement), issues relating to the quality and
liquidity of reserves of stablecoins (such as whether the stablecoin issuer is
able to liquidate reserves quickly enough to meet redemption requestions) or
regulatory concerns about stablecoin issuers or intermediaries, such as
exchanges, that support stablecoins, could impact individuals’ willingness to
trade on trading venues that rely on stablecoins and could impact the price of
ETH, and in turn, the Fund’s ETH Futures.
ETH
Cybersecurity Risk.
If the source code or cryptography underlying ETH proves to be flawed or
ineffective, malicious actors may be able to steal ETH held by others, which
could negatively impact the demand for ETH and therefore adversely impact the
price of ETH. In the past, flaws in the source code for ETH have been
discovered, including those that resulted in the loss of users’ ETH. Several
errors and defects have been publicly found and
corrected,
including those that disabled some functionality for users and exposed users’
personal information. Discovery of flaws in or exploitations of the source code
that allow malicious actors to take or create money in contravention of known
network rules have occurred. In addition, the cryptography underlying ETH could
prove to be flawed or ineffective, or developments in mathematics and/or
technology, including advances in digital computing, algebraic geometry and
quantum computing, could result in such cryptography becoming ineffective. In
any of these circumstances, a malicious actor may be able to steal ETH held by
others, which could adversely affect the demand for ETH and therefore adversely
impact the price of ETH. Even if the affected digital asset is not ETH, any
reduction in confidence in the source code or cryptography underlying digital
assets generally could negatively impact the demand for ETH and therefore
adversely affect the Fund’s ETH Futures.
If
an exploitation or attack on the ETH network occurs, it could result in a loss
of public confidence in ETH and a decline in the value of ETH and, as a result,
adversely impact the Fund’s ETH Futures.
Internet
Disruption Risk.
ETH is dependent upon the internet. A significant disruption in internet
connectivity could disrupt the ETH network’s operations until the disruption is
resolved and have an adverse effect on the price of ETH. In particular, some
variants of digital assets have been subjected to a number of denial-of-service
attacks, which have led to temporary delays in block creation and in the
transfer of the digital assets. While in certain cases in response to an attack,
an additional hard fork has been introduced to increase the cost of certain
network functions, the relevant network has continued to be the subject of
additional attacks. Moreover, it is possible that if ETH increases in value, it
may become a bigger target for hackers and subject to more frequent hacking and
denial-of-service attacks.
ETH
is also susceptible to border gateway protocol (“BGP”) hijacking. Such an attack
can be a very effective way for an attacker to intercept traffic en route to a
legitimate destination. BGP hijacking impacts the way different nodes and
validators are connected to one another to isolate portions of them from the
remainder of the network, which could lead to a risk of the network allowing
double-spending and other security issues. If BGP hijacking occurs on the ETH
network, participants may lose faith in the security of ETH, which could
adversely affect ETH’s value and consequently the Fund’s ETH
Futures.
Any
future attacks that impact the ability to transfer ETH could have a material
adverse effect on the price of ETH and on the Fund’s ETH Futures.
ETH
Regulatory Risk.
As ETH and digital assets have grown in both popularity and market size, the
U.S. Congress and a number of U.S. federal and state agencies have been
examining the operations of digital asset networks, digital asset users and the
digital asset exchange market. Many of these state and federal agencies have
brought enforcement actions and issued advisories and rules relating to digital
asset markets. Ongoing and future regulatory actions with respect to digital
assets generally or any single digital asset in particular may alter, perhaps to
a materially adverse extent, the nature of an investment in the ETH and/or the
ability of the Fund to continue to operate.
Future
Regulatory Action Risk.
Current and future legislation, SEC and CFTC rulemaking, and other regulatory
developments may impact the manner in which ETH is treated for classification
and clearing purposes. In particular, certain transactions in ETH may be deemed
to be commodity interests under the CEA or ETH may be classified by the SEC as a
“security” under U.S. federal securities laws. Public statements by senior
officials at the SEC, including a June 2018 speech by the director of the SEC’s
Division of Corporation Finance, indicate that such officials do not believe
that ETH is a security. Such statements are not official policy statements by
the SEC and reflect only the speaker’s views, which are not binding on the SEC
or any other agency or court. If ETH is determined to be a “security” under
federal or state securities laws by the SEC or any other agency, or in a
proceeding in a court of law or otherwise, it may have material adverse
consequences for ETH as a digital asset.
ETH
Tax Treatment Risk. Current
IRS guidance indicates that convertible virtual currency, defined as a digital
representation of value that functions as a medium of exchange, a unit of
account, and/or a store of value that has an equivalent value in real currency,
or that acts as a substitute for real currency, should be treated and taxed as
property, and that transactions involving the payment of convertible virtual
currency for goods and services should be treated as barter transactions. While
this treatment allows for the possibility of capital gains treatment, it creates
a potential tax reporting requirement in any circumstance where the ownership of
convertible virtual currency passes from one person to another, usually by means
of convertible virtual currency transactions (including off-blockchain
transactions), which could discourage the use of ETH as a medium of exchange,
especially for a holder of ETH that has appreciated in value.
A
number of states have issued their own guidance regarding the tax treatment of
certain digital assets for state income or sales tax purposes. The New York
State Department of Taxation and Finance (“NYSDTF”), for example, has issued
guidance regarding the application of state tax law to virtual currency. The
agency determined that New York State would follow IRS guidance with respect to
the treatment of virtual currency for state income tax purposes. Furthermore,
the NYSDTF concluded that virtual currency is a form of “intangible property,”
meaning that transactions using virtual currency to purchase goods or services
may be subject to state sales tax under barter transaction treatment. Where a
state adopts a different treatment, such treatment may have negative
consequences for investors in digital assets,
including
the potential imposition of a greater tax burden on investors in digital assets
or the potential imposition of greater costs on the acquisition and disposition
of digital assets. In either case, such different tax treatment may potentially
have a negative effect on the price of ETH and on the Fund’s ETH
Futures.
Intellectual
Property Risk.
Third parties may assert intellectual property claims relating to the holding
and transfer of ETH and its source code. Regardless of the merit of any
intellectual property or other legal action, any threatened action that reduces
confidence in long-term viability or the ability of end-users to hold and
transfer ETH may adversely affect the Fund’s ETH Futures. Additionally, a
meritorious intellectual property claim could prevent end-users from accessing,
holding, or transferring ETH. As a result, an intellectual property claim
against large ETH participants could adversely affect the Fund’s ETH
Futures.
ETH
Trading Venues Operational Risk.
Venues through which ETH trades are relatively new. ETH trading venues are
generally subject to different regulatory requirements than venues for trading
more traditional assets, and may be subject to limited or no regulation,
especially outside the U.S. Furthermore, many such trading venues, including
exchanges and over-the-counter trading venues, do not provide the public with
significant information regarding their ownership structure, management teams,
corporate practices or regulatory compliance. ETH trading venues may impose
daily, weekly, monthly or customer-specific transaction or distribution limits
or suspend withdrawals entirely, rendering the exchange of ETH for fiat currency
difficult or impossible. Participation in ETH trading on some venues requires
users to take on credit risk by transferring digital assets from a personal
account to a third party’s account, which could discourage trading on those
venues.
Over
the past several years, a number of ETH exchanges have been closed due to fraud,
failure or security breaches. In many of these instances, the customers of such
exchanges were not compensated or made whole for the partial or complete losses
of their account balances in such exchanges. While smaller trading venues are
less likely to have the infrastructure and capitalization that make larger
trading venues more stable, larger trading venues are more likely to be
appealing targets for hackers and “malware” (i.e., software used or programmed
by attackers to disrupt computer operation, gather sensitive information or gain
access to private computer systems). ETH trading venues that are regulated
typically must comply with minimum net worth, cybersecurity, and anti-money
laundering requirements, but are not typically required to protect customers to
the same extent that regulated securities exchanges or futures exchanges are
required to do so.
Furthermore,
many ETH trading venues lack certain safeguards put in place by exchanges for
more traditional assets to enhance the stability of trading on the exchanges and
prevent “flash crashes,” such as limit-down circuit breakers. As a result, the
prices of ETH on trading venues may be subject to larger and/or more frequent
sudden declines than assets traded on more traditional exchanges.
Operational
problems or failures by ETH trading venues and fluctuations in ETH prices may
reduce confidence in these venues or in ETH generally, which could adversely
affect the price of ETH and therefore adversely affect the Fund’s ETH
Futures.
Political
or Economic Crisis Risk.
As an alternative to fiat currencies that are backed by central governments, ETH
is subject to supply and demand forces based upon the desirability of an
alternative, decentralized means of buying and selling goods and services, and
it is unclear how such supply and demand will be impacted by geopolitical
events. Nevertheless, political or economic crises may motivate large-scale
acquisitions or sales of ETH, either globally or locally. Large-scale sales of
ETH would result in a reduction in its price and adversely affect the Fund’s ETH
Futures.
Large
Scale ETH Sale Risk. There
is no registry showing which individuals or entities own ETH or the quantity of
ETH that is owned by any particular person or entity. It is possible, and in
fact, reasonably likely, that a small group of early ETH adopters hold a
significant proportion of the ETH that has been created to date. There are no
regulations in place that would prevent a large holder of ETH from selling ETH
it holds. To the extent such large holders of ETH engage in large-scale sales or
distributions, either on nonmarket terms or in the ordinary course, it could
result in a reduction in the price of ETH and adversely affect an investment in
the Fund.
Futures
Contract Risk.
The use of futures contracts involves risks that are in addition to, and
potentially greater than, the risks of investing directly in securities and
other more traditional assets. The market for ETH Futures may be less developed,
and potentially less liquid and more volatile, than more established futures
markets. While the ETH Futures market has grown substantially since ETH Futures
commenced trading, there can be no assurance that this growth will continue. ETH
Futures are subject to collateral requirements and daily limits that may limit
the Fund’s ability to achieve the Target Exposure. Margin requirements for ETH
Futures traded on the CME may be substantially higher than margin requirements
for many other types of futures contracts. If the Fund is unable to meet its
investment objective, the Fund’s returns may be lower than expected.
Additionally, these collateral requirements may require the Fund to liquidate
its position when it otherwise would not do so. Futures contracts exhibit
“futures basis,” which refers to the difference between the current market value
of the underlying ETH (the “spot” price) and the price of the cash-settled
futures contracts. A negative futures basis exists when cash-settled ETH Futures
generally trade at a premium to the current market value of ETH. If a negative
futures basis exists, the Fund’s investments in ETH Futures
will
generally underperform a direct investment in ETH, and, therefore, it may be
more difficult for the Fund to maintain the Target Exposure. If the Fund’s
ability to achieve the Target Exposure is disrupted for any reason including,
for example, limited liquidity in the ETH Futures market, a disruption to the
ETH Futures market, or as a result of margin requirements or position limits
imposed by the Fund’s FCMs, the CME or the CFTC, the Fund may not be able to
achieve its investment objective and may experience significant losses. If the
Fund is unable for any reason to achieve the Target Exposure, the Adviser, in
its sole discretion, may invest the Fund’s assets in Cash and Fixed Income
Investments. To the extent the Fund invests in Cash and Fixed Income
Investments, the Fund’s performance should be expected to differ from the
performance of ETH Futures and its returns may be lower than
expected.
This
risk may be adversely affected by “negative roll yields” in “contango” markets.
The Fund will “roll” out of one ETH Futures as the expiration date approaches
and into another ETH Futures with a later expiration date. The "rolling" feature
creates the potential for a significant negative effect on the Fund's
performance that is independent of the performance of the spot prices of the
ETH. The "spot price" of a commodity is the price of that commodity for
immediate delivery, as opposed to a futures price, which represents the price
for delivery on a specified date in the future. The Fund would be expected to
experience negative roll yield if ETH Futures prices tend to be greater than the
spot price of ETH. A market where futures prices are generally greater than spot
prices is referred to as a "contango" market. Therefore, if the futures market
for a given commodity is in contango, then the value of a futures contract on
that commodity would tend to decline over time (assuming the spot price remains
unchanged), because the higher futures price would fall as it converges to the
lower spot price by expiration.
Derivatives
Risk. The
only derivatives in which the Fund currently intends to invest are ETH Futures
traded on commodity exchanges registered with the CFTC. Currently, the only
commodity exchange registered with the CFTC on which ETH Futures are traded is
the CME.
The
use of derivatives presents risks different from, and possibly greater than, the
risks associated with investing directly in traditional securities. The use of
derivatives by the Fund can lead to losses because of adverse movements in the
price or value of the underlying reference asset, which may be magnified by
certain features of the derivatives. Derivative strategies often involve
leverage, which may exaggerate a loss, potentially causing the Fund to lose more
money than it originally committed to initial margin, and more money than it
would have lost had it invested in the underlying reference asset. The values of
derivatives may move in unexpected ways, especially in unusual market
conditions, and may result in increased volatility, among other consequences.
There may be imperfect correlation between changes in the market value of a
derivative and the value of its underlying reference asset, and this may be
exaggerated in times of market stress or volatility. ETH Futures require the
Fund to post margin or collateral or otherwise maintain liquid assets in a
manner that satisfies contractual undertakings and regulatory requirements. In
order to satisfy margin or other requirements, the Fund may need to sell
securities from its portfolio or exit positions at a time when it may be
disadvantageous to do so. All of this could, in turn, affect the Fund’s ability
to fully execute its investment strategies and/or achieve its investment
objective. The use of derivatives may also increase the amount of taxes payable
by shareholders because changes in government regulation of derivatives could
affect the character, timing and amount of the Fund’s taxable income or gains.
Other risks arise from the Fund’s potential inability to terminate or sell
derivative positions. A liquid secondary market may not always exist for the
Fund’s derivative positions at times when the Fund might wish to terminate or
sell such positions. The use of derivatives also involves the risk of mispricing
or improper valuation and that changes in the value of the derivative may not
correlate perfectly with the underlying reference rate. Derivatives may be
subject to changing government regulation that could impact the Fund’s ability
to use certain derivatives and their cost.
In
October 2020, the Securities and Exchange Commission (the “SEC”) adopted a final
rule related to the use of derivatives, short sales, reverse repurchase
agreements and certain other transactions by registered investment companies
(the “derivatives rule”). The derivatives rule requires funds to trade
derivatives and other transactions that create future fund payment or delivery
obligations subject to a value-at-risk (“VaR”) leverage limit, and certain
derivatives risk management program and reporting requirements. Generally, these
requirements apply unless a fund qualifies as a “limited derivatives user,” as
defined in the derivatives rule. Under the derivatives rule, when a fund trades
reverse repurchase agreements or similar financing transactions, including
certain tender option bonds, it needs to aggregate the amount of indebtedness
associated with the reverse repurchase agreements or similar financing
transactions with the aggregate amount of any other senior securities
representing indebtedness when calculating the fund’s asset coverage ratio or
treat all such transactions as derivatives transactions. Reverse repurchase
agreements or similar financing transactions aggregated with other indebtedness
do not need to be included in the calculation of whether a fund is a limited
derivatives user, but for funds subject to the VaR testing, reverse repurchase
agreements and similar financing transactions must be included for purposes of
such testing whether treated as derivatives transactions or not. The SEC also
provided guidance in connection with the derivatives rule regarding use of
securities lending collateral that may limit a fund's securities lending
activities. In addition, under the derivatives rule, the Fund is permitted to
invest in a security on a when-issued or forward-settling basis, or with a
non-standard settlement cycle, and the transaction will be deemed not to involve
a senior security under the 1940 Act, provided that (i) the Fund intends to
physically settle the transaction and (ii) the transaction will settle within 35
days of its trade date (the “Delayed-Settlement Securities Provision”). The Fund
may otherwise engage in such transactions that do not meet the conditions of the
Delayed-Settlement Securities Provision so long as the Fund treats any such
transaction as a “derivatives transaction” for purposes of compliance with the
derivatives rule. Furthermore, under the derivatives rule, the Fund will
be
permitted to enter into an unfunded commitment agreement, and such unfunded
commitment agreement will not be subject to the asset coverage requirements
under the 1940 Act, if the Fund reasonably believes, at the time it enters into
such agreement, that it will have sufficient cash and cash equivalents to meet
its obligations with respect to all such agreements as they come due.
Counterparty
Risk.
Investing in derivatives and repurchase agreements involves entering into
contracts with third parties (i.e., counterparties). The use of derivatives and
repurchase agreements involves risks that are different from those associated
with ordinary portfolio securities transactions. The Fund will be subject to
credit risk (i.e., the risk that a counterparty is or is perceived to be
unwilling or unable to make timely payments or otherwise meet its contractual
obligations) with respect to the amount it expects to receive from
counterparties to derivatives and repurchase agreements entered into by the
Fund. If a counterparty becomes bankrupt or fails to perform its obligations, or
if any collateral posted by the counterparty for the benefit of the Fund is
insufficient or there are delays in the Fund's ability to access such
collateral, the value of an investment in the Fund may decline. The counterparty
to a listed futures contract is the derivatives clearing organization for the
listed future. The listed future is held through an FCM acting on behalf of the
Fund. Consequently, the counterparty risk on a listed futures contract is the
creditworthiness of the FCM and the exchange's clearing corporation. From time
to time, the Fund may only have one FCM with which it transacts ETH Futures,
which may heighten such risk.
Investment
Capacity Risk.
The Adviser may determine to modify the Fund’s exposure to ETH in response to
extreme market conditions, as determined in the sole discretion of the Adviser,
and to avoid exceeding any position limits applicable to ETH Futures established
by the CME or the CFTC. The position limits by the CME prevent any single
investor, such as the Fund (together with all other accounts managed by the
Adviser required to be aggregated), from holding more than a specified number of
ETH Futures. These position limits may prevent the Fund from entering into the
desired amount of ETH Futures at times. The Fund does not anticipate that the
CME’s position limits will adversely affect the Fund’s ability to achieve the
Target Exposure until the Fund’s assets under management grow significantly.
FCMs utilized by the Fund may also impose limits on the amount of exposure to
ETH Futures the Fund can obtain through such FCMs. As a result, the Fund may
need to transact through a number of FCMs to achieve the Target Exposure. If not
enough FCMs are willing to transact with the Fund, or if exposure limits imposed
by such FCMs do not provide sufficient exposure, the Fund may not be able to
achieve the Target Exposure. Any modification to the Fund’s exposure to ETH may
cause the Fund to exit its ETH Futures at disadvantageous times or prices. The
Fund may not succeed in achieving or maintaining its Target Exposure, possibly
maintaining substantially lower exposure for extended periods of time. If the
Fund’s ability to achieve the Target Exposure
is
disrupted for any reason including, for example, limited liquidity in the ETH
Futures market, a disruption to the ETH Futures market, or as a result of margin
requirements or position limits imposed by the Fund’s FCMs, the CME or the CFTC,
the Fund may not be able to achieve its investment objective and may experience
significant losses.
If
the Fund is unable for any reason to achieve Target Exposure, the Adviser, in
its sole discretion, may invest the Fund’s assets in Cash and Fixed Income
Investments. To the extent that the Fund invests in Cash and Fixed Income
Investments, the Fund’s performance should be expected to differ from the
performance of ETH Futures and its returns may be lower than
expected.
Target
Exposure and Rebalancing Risk.
Although the Fund seeks to achieve and maintain the Target Exposure to ETH, it
is possible in certain circumstances that the Fund may not succeed in achieving
or maintaining its target exposure, possibly maintaining substantially lower
exposure for extended periods of time.
Borrowing
and Leverage Risk.
The Fund seeks to achieve and maintain the Target Exposure by using leverage
inherent in ETH Futures and may also obtain leverage in the form of borrowings,
which would typically be in the form of loans from banks, and may be on a
secured or unsecured basis and at fixed or variable rates of interest.
Therefore, the Fund is subject to leverage risk. Leverage can have the effect of
magnifying the Fund’s exposure to changes in the value of its assets and may
also result in increased volatility in the NAV. This means the Fund will have
the potential for greater gains, as well as the potential for greater losses,
than if the Fund owned its assets on an unleveraged basis. The Fund is required
to comply with the derivatives rule when they engage in transactions that create
future Fund payment or delivery obligations.
Indirect
Investment Risk.
There are several factors, such as deviations between the price of ETH Futures
and the price of ETH and the potential for “negative roll yields” in “contango”
markets, that may cause the returns of the Fund to differ substantially from the
returns from holding an amount of ETH directly.
Credit
Risk. Credit
risk is the risk that the issuer or guarantor of a debt security or a
counterparty to exchange-traded ETH Futures, such as an FCM or an exchange’s
clearing corporation, will be unable or unwilling to make timely principal,
interest or settlement payments or otherwise honor its obligations. The Fund
invests in debt securities that are subject to varying degrees of risk that the
issuers of the securities will have their credit ratings downgraded or will
default, potentially reducing the value of the securities.
Interest
Rate Risk.
Debt
securities are subject to interest rate risk. Interest rate risk refers to
fluctuations in the value of a security resulting from changes in the general
level of interest rates. When the general level of interest rates goes up, the
prices of most debt securities and certain Preferred Securities go down. When
the general level of interest rates goes down, the prices of most debt
securities go up. Many factors can cause interest rates to rise, including
central bank monetary policy, rising inflation rates
and
general economic conditions. The prevailing historically low interest rate
environment increases the risk associated with rising interest rates, including
the potential for periods of volatility and increased redemptions.
In
addition, debt securities, such as bonds, with longer durations tend to be more
sensitive to interest rate changes, usually making them more volatile than debt
securities, such as bonds, with shorter durations. To the extent the Fund
invests a substantial portion of its assets in debt securities with longer-term
maturities, rising interest rates may cause the value of the Fund’s investments
to decline significantly.
In
addition, in response to the COVID-19 pandemic, as with other serious economic
disruptions, governmental authorities and regulators are enacting significant
fiscal and monetary policy changes, including providing direct capital infusions
into companies, creating new monetary programs and lowering interest rates.
These actions present heightened risks to debt instruments, and such risks could
be even further heightened if these actions are unexpectedly or suddenly
reversed or are ineffective in achieving their desired outcomes.
Illiquidity
Risk. Illiquidity
risk is the risk that the investments held by the Fund may be difficult or
impossible to sell at the time that the Fund would like without significantly
changing the market value of the investment. The Fund may invest at the time of
purchase up to 15% of its net assets in illiquid securities. The market for ETH
Futures is still developing and may experience periods of significant
illiquidity. During such times it may be difficult or impossible for the Fund to
buy or sell a position at the desired price. Market disruptions or volatility
can also make it difficult to transact a position at a reasonable price and
sufficient size. Illiquid markets may cause losses, which could be significant.
The large size of the positions which the Fund and other similar funds may
acquire may increase the risk of illiquidity by making positions more difficult
to liquidate or by increasing the losses incurred while trying to do
so.
Investing
in Other Investment Companies Risk. The
Fund’s investment in another investment company, which is limited to money
market funds or funds that invest in short-term bonds, may subject the Fund
indirectly to the underlying risks of the investment company. The Fund also will
bear its share of the underlying investment company’s fees and expenses, which
are in addition to the Fund’s own fees and expenses. Shares of underlying ETFs
may trade at prices that reflect a premium above or a discount below the
investment company’s NAV. If investment company securities are purchased at a
premium to net asset value, the premium may not exist when those securities are
sold and the Fund could incur a loss.
Management
Risk.
The Fund is subject to management risk because it is an actively managed ETF. In
managing the Fund’s portfolio, the Adviser will apply investment techniques and
risk analyses in making investment decisions for the Fund, but there can be no
guarantee that these will produce the desired results.
New
Fund Risk. The
Fund is a new fund, with a limited or no operating history and a small asset
base. There can be no assurance that the Fund will grow to or maintain a viable
size. Due to the Fund's small asset base, certain of the Fund's expenses and its
portfolio transaction costs may be higher than those of a fund with a larger
asset base. To the extent that the Fund does not grow to or maintain a viable
size, it may be liquidated, and the expenses, timing and tax consequences of
such liquidation may not be favorable to some shareholders.
Market
Risk. The
value of certain of the Fund’s investments, including ETH Futures, is subject to
the risks associated with investing in the securities market, including general
economic conditions, sudden and unpredictable drops in value, exchange trading
suspensions and closures and public health risks. These risks may be magnified
if certain social, political, economic and other conditions and events (such as
natural disasters, epidemics and pandemics, terrorism, conflicts and social
unrest) adversely interrupt the global economy; in these and other
circumstances, such events or developments might affect companies world-wide.
Overall securities values could decline generally or could underperform other
investments. An investment in the Fund may lose money.
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 spread have resulted in travel
restrictions, disruptions of healthcare systems, business operations and supply
chains, layoffs, lower consumer demand, and defaults, 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. The ongoing effects of COVID-19
are unpredictable and may result in significant and prolonged effects on the
Fund’s performance.
Non-Diversified
Risk.
A non-diversified fund may invest a larger portion of its assets in a single
issuer than a “diversified” fund. A “diversified” fund is required by the 1940
Act, generally, with respect to 75% of the value of its total assets, to invest
not more than 5% of such assets in the securities of a single issuer and not to
hold more than 10% of the outstanding voting securities of a single issuer. A
non-diversified fund’s greater investment in a single issuer makes the fund more
susceptible to financial, economic or market events impacting such issuer. A
decline in the value of or default by a single security in the non-diversified
fund’s portfolio may have a greater negative effect than a similar decline or
default by a single security in a diversified portfolio.
Operational
Risk. The
Fund is exposed to operational risk 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 system failures.
Portfolio
Turnover Risk.
The Fund’s portfolio turnover and frequent trading of ETH Futures may result in
higher transaction costs than if the Fund traded less frequently. High portfolio
turnover may result in increased transaction costs to the Fund, including
brokerage commissions, dealer mark-ups and other transaction costs on the sale
of the ETH Futures and on reinvestment of the Fund’s assets. High portfolio
turnover may also result in higher taxes at the Fund level and may increase the
Fund’s current and accumulated earnings and profits, which will result in a
greater portion of Fund’s distributions being treated as dividends.
Regulatory
Risk.
Changes in the laws or regulations of the United States, including any changes
to applicable tax laws and regulations, could impair the ability of the Fund to
achieve its investment objective and could increase the operating expenses of
the Fund. The Adviser is registered as a CPO under CEA and the rules of the CFTC
and is subject to CFTC regulation with respect to the Fund. The CFTC has adopted
rules regarding the disclosure, reporting and recordkeeping requirements that
will apply with respect to the Fund as a result of the Adviser’s registration as
a CPO. Generally, these rules allow for substituted compliance with CFTC
disclosure and shareholder reporting requirements, based on the Adviser’s
compliance with comparable SEC requirements. This means that for most of the
CFTC’s disclosure and shareholder reporting applicable to the Adviser as the
Fund’s CPO, the Adviser’s compliance with SEC disclosure and shareholder
reporting will be deemed to fulfill the Adviser’s CFTC compliance obligations.
However, as a result of CFTC regulation with respect to the Fund, the Fund may
incur additional compliance and other expenses. The Adviser is also registered
as a CTA but relies on an exemption with respect to the Fund from CTA
regulations available for a CTA that also serves as the Fund’s CPO. The CFTC has
neither reviewed nor approved the Fund, their investment strategies, or this
Prospectus.
Repurchase
Agreements Risk. A
repurchase agreement exposes the Fund to the risk that the party that sells the
security may default on its obligation to repurchase it. The Fund may lose money
if it cannot sell the security at the agreed-upon time and price or the security
loses value before it can be sold.
Tax
Risk.
Unlike traditional funds that are structured as regulated investment companies
for U.S. federal income tax purposes, the Fund has not elected and has no
current intention to elect to be treated as a regulated investment company under
the Code because the extent of our direct investments in ETH Futures would
generally prevent the Fund from meeting the qualification requirements under the
Code for regulated investment companies. The Code generally provides that a
regulated investment company does not pay an entity level income tax provided
that it distributes all or substantially all of its income and satisfies certain
source of income and asset diversification requirements. The regulated
investment company taxation rules have no current application to the Fund or to
the Fund’s shareholders. The Fund will be taxable as a regular corporation for
U.S. federal income tax purposes and, as a result, the Fund will be subject to
corporate income tax (currently at a rate of 21%, but subject to legislative
change) to the extent the Fund recognizes taxable income, and the Fund will also
be subject to state and local income taxes.
In
calculating the Fund’s daily NAV, the Fund will, among other things, account for
its current taxes and deferred tax liability and/or asset balances. The Fund
will accrue a deferred income tax liability balance, at the effective statutory
U.S. federal income tax rate (currently at a rate of 21%, but subject to
legislative change) plus an estimated state and local income tax rate, for its
future tax liability associated with the capital appreciation of its investments
and the distributions received by the Fund (if any) and for any net operating
gains. Any deferred tax liability balance will reduce the Fund’s NAV. The Fund
may also accrue a deferred tax asset balance, which reflects an estimate of the
Fund’s future tax benefit associated with net operating losses and unrealized
losses. Any deferred tax asset balance will increase the Fund’s NAV. To the
extent the Fund has a deferred tax asset balance, consideration is given as to
whether or not a valuation allowance, which would offset the value of some or
all of the deferred tax asset balance, is required. The daily estimate of the
Fund’s current taxes and deferred tax liability and/or asset balances used to
calculate the Fund’s NAV could vary significantly from the Fund’s actual tax
liability or benefit, and, as a result, the determination of the Fund’s actual
tax liability or benefit may have a material impact on the Fund’s NAV. From time
to time, the Fund may modify its estimates or assumptions regarding its current
taxes and deferred tax liability and/or asset balances as new information
becomes available, which modifications in estimates or assumptions may have a
material impact on the Fund’s NAV or trading price. Shareholders, including APs,
who sell their shares or who redeem their shares at a NAV that is based on
estimates of the Fund’s current taxes and deferred tax liability and/or asset
balances may benefit at the expense of remaining shareholders (or remaining
shareholders may benefit at the expense of redeeming shareholders) if the
estimates are later revised or ultimately differ from the Fund’s actual tax
liability and/or asset balances.
The
Fund’s taxable dividends paid will be qualified dividend income eligible for
taxation at long term capital gains rates in most circumstances (subject to
certain holding period requirements). The Fund will not pay capital gains
dividends. ETH futures are expected to be marked to market for tax purposes as
of each year end. The total realized gain or loss from such ETH Futures required
to be marked-to-market will be taxed to Fund as 60% long-term and 40% short-term
capital gain or loss.
The
rules dealing with U.S. federal income taxation and the rates themselves are
constantly under review in the legislative process and by the IRS and the U.S.
Treasury Department. Changes in tax laws or regulations or future
interpretations of such laws or regulations, or changes in accounting, tax and
valuation practices, could adversely affect the Fund and/or the Fund’s
shareholders, potentially retroactively.
Risk
of Cash Transactions.
Because the Fund currently intends to effect redemptions for cash, rather than
for in-kind distributions, it may be required to sell portfolio securities in
order to obtain the cash needed to distribute redemption proceeds, which
involves transaction costs that the Fund may not have incurred had it effected
redemptions entirely in kind. These costs may include brokerage costs and/or
taxable gains or losses, which may be imposed on the Fund and decrease the
Fund’s NAV to the extent such costs are not offset by a transaction fee payable
to an AP. Taxable gains may result in higher taxes at the Fund level and may
increase the Fund’s current and accumulated earnings and profits, which will
result in a greater portion of Fund’s distributions, if any, being treated as
dividends. In addition, the Fund will not be taxable as a RIC. As a result, an
investment in the Fund may be less tax-efficient than an investment in a more
conventional ETF. Other ETFs generally are RICs and are able to make in-kind
redemptions and avoid realizing gains in connection with transactions designed
to raise cash to meet redemption requests. Additionally, transactions may have
to be carried out over several days if the futures market in which the Fund
operates is relatively illiquid and may involve considerable transaction fees
and taxes.
Authorized
Participant Concentration Risk. The
Fund may have a limited number of financial institutions that act as APs, none
of which are obligated to engage in creation and/or redemption transactions. To
the extent that those APs exit the business, or are unable to or choose not to
process creation and/or redemption orders, and no other AP is able to step
forward to create and redeem, there may be a significantly diminished trading
market for Shares or Shares may trade like closed-end funds at a greater
discount (or premium) to NAV and possibly face trading halts and/or de-listing.
The AP concentration risk may be heightened in scenarios where APs have limited
or diminished access to the capital required to post collateral.
No
Guarantee of Active Trading Market. While
Shares are listed on the Exchange, there can be no assurance that an active
trading market for the Shares will be maintained. Further, secondary markets may
be subject to irregular trading activity, wide bid/ask spreads and extended
trade settlement periods in times of market stress because market makers and APs
may step away from making a market in the Shares and in executing creation and
redemption orders, which could cause a material deviation in the Fund’s market
price from its NAV. Van Eck Securities Corporation, the distributor of the
Shares (the “Distributor”), does not maintain a secondary market in the Shares.
Investors purchasing and selling Shares in the secondary market may not
experience investment results consistent with those experienced by those APs
creating and redeeming directly with the Fund.
Decisions
by market makers or APs to reduce their role or “step away” from these
activities in times of market stress could inhibit the effectiveness of the
arbitrage process in maintaining the relationship between the underlying value
of the Fund’s portfolio securities and the Fund’s market price. This reduced
effectiveness could result in Fund Shares trading at a price which differs
materially from NAV and also in greater than normal intraday bid/ask spreads for
Fund Shares.
Trading
Issues.
Trading in Shares on 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.
Fund
Shares Trading, Premium/Discount Risk and Liquidity of Fund Shares.
Disruptions to creations and redemptions, the existence of market volatility or
potential lack of an active trading market for Shares (including through a
trading halt), as well as other factors, may result in Shares trading at a
significant premium or discount to NAV or to the intraday value of the Fund’s
holdings. The NAV of the Shares will fluctuate with changes in the market value
of the Fund’s securities holdings. The market price of Shares may fluctuate, in
some cases materially, in accordance with changes in NAV and the intraday value
of the Fund’s holdings, as well as supply and demand on the Exchange. The
Adviser cannot predict whether Shares will trade below, at or above their NAV.
Given the fact that Shares can be created and redeemed by APs in Creation Units,
the Adviser believes that large discounts or premiums to the NAV of Shares
should not be sustained in the long-term. While the creation/redemption feature
is designed to make it likely that Shares normally will trade close to the value
of the Fund’s holdings, market prices are not expected to correlate exactly to
the Fund’s NAV due to timing reasons, supply and demand imbalances and other
factors. The price differences may be due, in large part, to the fact that
supply and demand forces at work in the secondary trading market for Shares may
be closely related to, but not necessarily identical to, the same forces
influencing the prices of the securities of the Fund’s portfolio of investments
trading individually or in the aggregate at any point in time. If a shareholder
purchases Shares at a time when the market price is at a premium to the NAV or
sells Shares at a time when the market price is at a discount to the NAV, the
shareholder may pay significantly more or receive significantly less than the
underlying value of the Shares that were bought or sold or the shareholder may
be unable to sell his or her Shares. Any of these factors, discussed above and
further below, may lead to the Shares trading at a premium or discount to the
Fund’s NAV. Additionally, in stressed market conditions, the market for the
Fund’s Shares may become less liquid in response to deteriorating liquidity in
the markets for the Fund’s underlying portfolio holdings. There are various
methods by which investors can purchase and sell Shares. Investors should
consult their financial intermediaries before purchasing or selling Shares of
the Fund.
When
you buy or sell Shares of the Fund through a broker, you will likely incur a
brokerage commission or other charges imposed by brokers. In addition, the
market price of Shares, like the price of any exchange-traded security, includes
a bid/ask spread charged by the market makers or other participants that trade
the particular security. The spread of the Fund’s Shares varies over time based
on the Fund’s trading volume and market liquidity and may increase if the Fund’s
trading volume, the spread of the Fund’s underlying securities, or market
liquidity decrease. In times of severe market disruption, including when trading
of the
Fund’s
holdings may be halted, the bid/ask spread may increase significantly. This
means that Shares may trade at a discount to the Fund’s NAV, and the discount is
likely to be greatest during significant market volatility.
U.S.
Government Securities. Different
U.S. government securities are subject to different levels of credit risk
depending on the nature of the particular government support for that security.
The market value of U.S. government securities may fluctuate and are subject to
investment risks, and the value of U.S. government securities may be adversely
affected by changes in interest rates. In addition, it is possible that the
issuers of some U.S. government securities will not be able to timely meet their
payment obligations in the future, and there is a risk of default.
Debt
Securities Risk. Debt
securities may include bonds and other forms of debentures or obligations. When
an issuer sells debt securities, it sells them for a certain price, and for a
certain term. Over the term of the security, the issuer promises to pay the
buyer a certain rate of interest, then to repay the principal at maturity. Debt
securities are also bought and sold in the “secondary market”—that is, they are
traded by people other than their original issuers.
Debt
securities are subject to credit risk and interest rate risk. Credit risk refers
to the possibility that the issuer of a debt security will be unable to make
interest payments or repay principal when it becomes due. Various factors could
affect the issuer’s ability to make timely interest or principal payments,
including changes in the issuer’s financial condition or in general economic
conditions. Interest rate risk refers to fluctuations in the value of a debt
security resulting from changes in the general level of interest rates. When the
general level of interest rates rises, the value of debt securities will tend to
fall, and if interest rates fall, the values of debt securities will tend to
rise. Debt securities with longer durations have higher risk and volatility.
Changes in government policies, such as raising the federal funds rate and/or
further tapering “quantitative easing” measures, may increase interest rates
which are currently at or near historic lows. These policy changes, along with
changing market conditions, may lead to periods of heightened volatility in the
debt securities market, reduced liquidity for certain Fund investments and an
increase in Fund redemptions. Interest rate changes and their impact on the Fund
and its share price can be sudden and unpredictable. Changes in the value of a
debt security usually will not affect the amount of income the Fund receives
from it but may affect the value of the Fund’s shares.
Certain
financial instruments in which the Fund may invest may pay interest based on, or
otherwise have payments tied to LIBOR, Euro Interbank Offered Rate and other
similar types of reference rates (each, a “Reference Rate”). Due to the
uncertainty regarding the future utilization of LIBOR and certain other
Reference Rates, and the nature of any replacement rate, the potential effect of
a transition away from LIBOR and certain other Reference Rates could, among
other negative consequences, adversely impact the pricing, liquidity, value of,
return on and trading for a broad array of financial products, including any
Reference Rate-linked securities, loans and derivatives in which the Fund may
invest; require extensive negotiations of and/or amendments to agreements and
other documentation governing Reference Rate-linked investments products; lead
to disputes, litigation or other actions with counterparties or portfolio
companies regarding the interpretation and enforceability of “fallback”
provisions that provide for an alternative reference rate in the event of
Reference Rate unavailability; or cause the Fund to incur additional costs in
relation to any of the above factors.
Municipal
Securities Risk.
Municipal securities are subject to the risk that litigation, legislation or
other political events, local business or economic conditions, credit rating
downgrades or the bankruptcy of an issuer could have a significant effect on the
issuer’s ability to make payments of principal and/or interest or otherwise
affect the value of such securities. In addition, there is a risk that, as a
result of the recent economic crisis, the ability of any issuer to pay, when
due, the principal or interest on its municipal bonds may be materially
affected. Certain municipalities may have difficulty meeting their obligations
due to, among other reasons, changes in underlying demographics. These actions
present heightened risks to debt instruments, and such risks could be even
further heightened if these actions are unexpectedly or suddenly reversed or are
ineffective in achieving their desired outcomes. Municipal instruments may be
susceptible to periods of economic stress, which could affect the market values
and marketability of many or all municipal obligations of issuers in a state,
U.S. territory, or possession. For example, the COVID-19 pandemic has
significantly stressed the financial resources of many municipal issuers, which
may impair a municipal issuer’s ability to meet its financial obligations when
due and could adversely impact the value of its bonds, which could negatively
impact the performance of the Fund.
Municipal
securities can be significantly affected by political changes as well as
uncertainties in the municipal market related to taxation, legislative changes
or the rights of municipal security holders. Because many municipal securities
are issued to finance similar projects, especially those relating to education,
health care, transportation, utilities and water and sewer, conditions in those
sectors can affect the overall municipal market. Municipal securities include
general obligation bonds, which are backed by the “full faith and credit” of the
issuer, which has the power to tax residents to pay bondholders. Timely payments
depend on the issuer’s credit quality, ability to raise tax revenues and ability
to maintain an adequate tax base. General obligation bonds generally are not
backed by revenues from a specific project or source. Municipal securities also
include revenue bonds, which are generally backed by revenue from a specific
project or tax. The issuer of a revenue bond makes interest and principal
payments from revenues generated from a particular source or facility, such as a
tax on particular property or revenues generated from a municipal water or sewer
utility or an airport. Revenue bonds generally are not backed by the full faith
and credit and general taxing power of the issuer. Municipal securities backed
by current or anticipated revenues from a specific project or specific assets
can be negatively affected by the discontinuance of the taxation supporting the
project or assets or the inability to collect revenues for the project or from
the assets.
If
the IRS determines that an issuer of a municipal security has not complied with
applicable tax requirements, interest from the security could become taxable and
the security could decline significantly in value.
The
market for municipal bonds may be less liquid than for taxable bonds. There may
also be less information available on the financial condition of issuers of
municipal securities than for public corporations. The reorganization of a
municipality’s debts may include extending debt maturities, reducing the amount
of principal or interest, refinancing the debt or taking other measures, which
may significantly affect the rights of creditors and the value of the securities
issued by the municipality and the value of the Fund’s investments. The taxing
power of any governmental entity may be limited and an entity’s credit may
depend on factors which are beyond the entity’s control.
Money
Market Funds Risk. An
investment in a money market fund is not a bank deposit and is not insured or
guaranteed by any bank, the FDIC or any other government agency. Although money
market funds seek to preserve the value of investments at $1.00 per share, it is
possible for the Fund to lose money if shares of money market funds in which
they invest fall below $1.00 per share.
Securitized/Mortgage-Backed
Securities Risk. Investments
in mortgage-backed securities, including collateralized mortgage obligations,
are subject to the risk of significant credit downgrades, dramatic changes in
liquidity, and defaults to a greater extent than many other types of
fixed-income investments. During periods of falling interest rates,
mortgage-backed securities may be called or prepaid, which may result in the
Fund having to reinvest proceeds in other investments at a lower interest rate.
During periods of rising interest rates, the average life of mortgage-backed
securities may extend, which may lock in a below-market interest rate, increase
the security’s duration and interest rate sensitivity, and reduce the value of
the security. The Fund may invest in mortgage-backed securities issued or backed
by federal agencies or government sponsored enterprises or that are part of a
government-sponsored program, which may subject the Fund to the risks noted
above. The values of assets or collateral underlying mortgage-backed securities
may decline and, therefore, may not be adequate to cover underlying obligations.
Enforcing rights against the underlying assets or collateral may be difficult,
and the underlying assets or collateral may be insufficient if the issuer
defaults.
Sovereign
Bond Risk.
Investment in sovereign bonds involves special risks not present in corporate
bonds. The governmental authority that controls the repayment of the bond may be
unable or unwilling to make interest payments and/or repay the principal on its
debt or to otherwise honor its obligations. If an issuer of sovereign bonds
defaults on payments of principal and/or interest, the Fund may have limited
recourse against the issuer. During periods of economic uncertainty, the market
prices of sovereign bonds, and the Fund’s NAV, may be more volatile than prices
of corporate bonds, which may result in losses. In the past, certain governments
of emerging market countries have declared themselves unable to meet their
financial obligations on a timely basis, which has resulted in losses for
holders of sovereign bonds.
ETH-Related
Company Risk.
If the Fund is unable to achieve the Target Exposure because it is approaching
or has exceeded position limits or because of liquidity or other constraints,
the Fund may invest in equity securities of “ETH-related companies.” There can
be no assurance that the returns of ETH-related companies will correspond, or be
closely-related, to the performance of ETH or ETH Futures. ETH-related companies
face rapid changes in technology, intense competition including the development
and acceptance of competing platforms or technologies, loss or impairment of
intellectual property rights, cyclical economic patterns, shifting consumer
preferences, evolving industry standards, adverse effects of changes to a
network’s or software’s protocols, a rapidly changing regulatory environment,
and dependency on certain key personnel (including highly skilled financial
services professionals and software engineers). ETH-related companies may be
susceptible to operational and information security risks including those
associated with hardware or software failures, interruptions, or delays in
service by third party vendors, and security breaches. Certain ETH-related
companies may be subject to the risks associated with investing directly in
digital assets, including cryptocurrencies and crypto tokens.
Equity
Securities Risk.
The value of the equity securities held by the Fund may fall due to general
market and economic conditions, perceptions regarding the markets in which the
issuers of securities held by the Fund participate, or factors relating to
specific issuers in which the Fund invests. Equity securities are subordinated
to preferred securities and debt in a company’s capital structure with respect
to priority in right to a share of corporate income, and therefore will be
subject to greater dividend risk than preferred securities or debt instruments.
In addition, while broad market measures of equity securities have historically
generated higher average returns than fixed income securities, equity securities
have generally also experienced significantly more volatility in those returns,
although under certain market conditions fixed income securities may have
comparable or greater price volatility.
ADDITIONAL
NON-PRINCIPAL INVESTMENT STRATEGIES
The
Fund may invest in securities issued by money market funds and funds that invest
in short-term bonds, equity securities of ETH-related companies, fixed income
securities, including repurchase agreements or other funds which invest
exclusively in money market instruments. For temporary defensive purposes, the
Fund may invest without limit in money market instruments, including repurchase
agreements or other funds which invest exclusively in money market instruments.
The Fund may also pursue temporary defensive positions in anticipation of or in
an attempt to respond to adverse market, economic, political or other
conditions. Such a position could have the effect of reducing any benefit the
Fund may receive from a market increase.
ADDITIONAL
REGULATORY CONSIDERATIONS
The
Adviser is registered as a CPO under the CEA and the rules of the CFTC and is
subject to CFTC regulation with respect to the Fund. The CFTC has adopted rules
regarding the disclosure, reporting and recordkeeping requirements that will
apply with respect to the Fund as a result of the Adviser’s registration as a
CPO. Generally, these rules allow for substituted compliance with CFTC
disclosure and shareholder reporting requirements, based on the Adviser’s
compliance with comparable SEC requirements. This means that for most of the
CFTC’s disclosure and shareholder reporting applicable to the Adviser as the
Fund’s CPO, the Adviser’s compliance with SEC disclosure and shareholder
reporting will be deemed to fulfill the Adviser’s CFTC compliance obligations.
However, as a result of CFTC regulation with respect to the Fund, the Fund may
incur additional compliance and other expenses. The Adviser is also registered
as a CTA but relies on an exemption with respect to the Fund from CTA
regulations available for a CTA that also serves as the Fund’s CPO. The CFTC has
neither reviewed nor approved the Fund, their investment strategies, or this
Prospectus.
INVESTING
DEFENSIVELY
The
Fund may take temporary defensive positions that are inconsistent with the
Fund’s principal investment strategies in anticipation of or in an attempt to
respond to adverse market, economic, political or other conditions. The Fund may
not achieve its investment objective while it is investing
defensively.
BORROWING
MONEY
The
Fund may borrow money from a bank up to a limit of one-third of the market value
of its assets. To the extent that the Fund borrows money, it may be leveraged.
Leverage generally has the effect of increasing the amount of loss or gain the
Fund might realize, and may increase volatility in the value of the Fund’s
investments.
LENDING
PORTFOLIO SECURITIES
The
Fund may lend its investments in ETH-related companies, U.S. Treasuries and
other U.S. government obligations to brokers, dealers and other financial
institutions desiring to borrow securities to complete transactions and for
other purposes. In connection with such loans, the Fund receives cash, U.S.
government securities and stand-by letters of credit not issued by the Fund’s
bank lending agent equal to at least 102% of the value of the portfolio
securities being loaned. This collateral is marked-to-market on a daily basis.
Although the Fund will receive collateral in connection with all loans of its
securities holdings, the Fund would be exposed to a risk of loss should a
borrower fail to return the borrowed securities (e.g., the Fund would have to
buy replacement securities and the loaned securities may have appreciated beyond
the value of the collateral held by the Fund) or become insolvent. The Fund may
pay fees to the party arranging the loan of securities. In addition, the Fund
will bear the risk that it may lose money because the borrower of the loaned
securities fails to return the securities in a timely manner or at all. The Fund
could also lose money in the event of a decline in the value of any cash
collateral or in the value of investments made with the cash collateral. These
events could trigger adverse tax consequences for the Fund. Substitute payments
for dividends received by the Fund for securities loaned out by the Fund will
not be considered qualified dividend income.
ADDITIONAL
NON-PRINCIPAL RISKS
Shareholder
Risk.
Certain shareholders, including other funds advised by the Adviser, may from
time to time own a substantial amount of the Fund’s Shares. In addition, a third
party investor, the Adviser or an affiliate of the Adviser, an AP, a market
maker, or another entity may invest in the Fund and hold its investment for a
limited period of time. There can be no assurance that any large shareholder
would not redeem its investment. Redemptions by shareholders could have a
negative impact on the Fund. In addition, transactions by large shareholders may
account for a large percentage of the trading volume on the Exchange and may,
therefore, have a material effect on the market price of the Shares. These
transactions may also accelerate the realization of taxable income to the Fund
and shareholders if such sales of investments resulted in gains, and may also
increase transaction costs.
CYBER
SECURITY
The
Fund and its service providers are susceptible to cyber security risks that
include, among other things, theft, unauthorized monitoring, release, misuse,
loss, destruction or corruption of confidential and highly restricted data;
denial of service attacks; unauthorized access to relevant systems; compromises
to networks or devices that the Fund and its service providers use to service
the Fund’s operations; and operational disruption or failures in the physical
infrastructure or operating systems that support the Fund and its service
providers. Cyber attacks against or security breakdowns of the Fund or its
service providers may adversely impact the Fund and its shareholders,
potentially resulting in, among other things, financial losses; the inability of
Fund shareholders to transact business and the Fund to process transactions; the
inability to calculate the Fund’s net asset value; violations of applicable
privacy and other laws; regulatory fines, penalties, reputational damage,
reimbursement or other compensation costs; and/or additional compliance costs.
The Fund may incur additional costs for cyber security risk management and
remediation purposes. In addition, cyber security risks may also impact issuers
of securities in which the Fund invests, which may cause the Fund’s investments
in such issuers to lose value. There can be no assurance that the Fund or its
service providers will not suffer losses relating to cyber attacks or other
information security breaches in the future.
A
description of the Fund’s policies and procedures with respect to the disclosure
of the Fund’s portfolio securities is available in the Fund’s SAI.
Board
of Trustees.
The Board of Trustees of the Trust has responsibility for the general oversight
of the management of the Fund, including general supervision of the Adviser and
other service providers, but is not involved in the day-to-day management of the
Trust. A list of the Trustees and the Trust officers, and their present
positions and principal occupations, is provided in the Fund’s SAI.
Investment
Adviser.
Under the terms of an investment management agreement between the Trust and Van
Eck Absolute Return Advisers Corporation with respect to the Fund (the
“Investment Management Agreement”), Van Eck Absolute Return Advisers Corporation
will serve as the adviser to the Fund and, subject to the supervision of the
Board of Trustees, will be responsible for the day-to-day investment management
of the Fund. The Adviser has been an investment adviser since 1995 and also acts
as adviser or sub-adviser to mutual funds, other ETFs, other pooled investment
vehicles and separate accounts. The Adviser is a wholly-owned subsidiary of Van
Eck Associates Corporation (“VEAC”). As of [ ], VEAC managed approximately $[ ]
in assets. VEAC has been an investment adviser since 1955 and also acts as
adviser or sub-adviser to mutual funds, other ETFs, other pooled investment
vehicles and separate accounts. The Adviser’s principal business address is 666
Third Avenue, 9th Floor, New York, New York 10017. A discussion regarding the
Board of Trustees’ approval of the Investment Management Agreement will be
available in the Trust’s [annual] report for the period ending [ ].
Pursuant
to the Investment Management Agreement, the Adviser is responsible for all
expenses of the Fund, including the costs of transfer agency, custody, fund
administration, legal, audit and other services, except for the fee payment
under the Investment Management Agreement, acquired fund fees and expenses,
interest expense, offering costs, trading expenses, taxes and extraordinary
expenses. For its services to the Fund, the Fund has agreed to pay the Adviser
an annual unitary management fee equal to [ ] of its average daily net assets.
Offering costs excluded from the annual unitary management fee are: (a) legal
fees pertaining to the Fund’s Shares offered for sale, (b) SEC and state
registration fees; and (c) initial fees paid for Shares of the Fund to be listed
on an exchange. Notwithstanding the foregoing, the Adviser has agreed to pay all
such offering costs [and trading expenses that are net account or similar fees
charged by FCMs] until at least [ ].
Manager
of Managers Structure.
The Adviser and the Trust may rely on an exemptive order (the “Order”) from the
SEC that permits the Adviser to enter into investment sub-advisory agreements
with unaffiliated sub-advisers without obtaining shareholder approval. The
Adviser, subject to the review and approval of the Board of Trustees, may select
one or more sub-advisers for the Fund and supervise, monitor and evaluate the
performance of each sub-adviser.
The
Order also permits the Adviser, subject to the approval of the Board of
Trustees, to replace sub-advisers and amend investment sub-advisory agreements,
including applicable fee arrangements, without shareholder approval whenever the
Adviser and the Board of Trustees believe such action will benefit the Fund and
its shareholders. The Adviser thus would have the responsibility (subject to the
oversight of the Board of Trustees) to recommend the hiring and replacement of
sub-advisers as well as the discretion to terminate any sub-adviser and
reallocate the Fund’s assets for management among any other sub-adviser(s) and
itself. This means that the Adviser would be able to reduce the sub-advisory
fees and retain a larger portion of the management fee, or increase the
sub-advisory fees and retain a smaller portion of the management fee. The
Adviser would compensate each sub-adviser out of its management
fee.
Administrator,
Custodian and Transfer Agent.
Van Eck Associates Corporation is the administrator for the Fund (the
“Administrator”), and State Street Bank and Trust Company is the custodian of
the Fund’s assets and provides transfer agency and fund accounting services to
the Fund. The Administrator is responsible for certain clerical, recordkeeping
and/or bookkeeping services which are required to be provided pursuant to the
Investment Management Agreement.
Distributor.
Van Eck Securities Corporation is the distributor of the Shares (the
“Distributor”). The Distributor will not distribute Shares in less than a
specified number of Shares, each called a “Creation Unit,” and does not maintain
a secondary market in the Shares. The Shares are traded in the secondary
market.
The
portfolio manager who is currently responsible for the day-to-day management of
the Fund’s portfolio is [ ].
See
the Fund’s SAI for additional information about the portfolio manager’s
compensation, other accounts managed by the portfolio manager and his respective
ownership of Shares.
DETERMINATION
OF NAV
The
NAV per Share for the Fund is computed by dividing the value of the net assets
of the Fund (i.e.,
the value of its total assets less total liabilities) by the total number of
Shares outstanding. Expenses and fees, including the management fee, are accrued
daily and taken into account for purposes of determining NAV. The NAV of the
Fund is determined each business day as of the close of trading (ordinarily 4:00
p.m., Eastern time) on the New York Stock Exchange.
The
values of the Fund’s portfolio securities are based on the securities’ closing
prices on the markets on which the securities trade, when available. In the
absence of a last reported sales price, or if no sales were reported, and for
other assets for which market quotes are not readily available, values may be
based on quotes obtained from a quotation reporting system, established market
makers or by an outside independent pricing service. Debt instruments with
remaining maturities of more than 60 days are valued at the evaluated mean price
provided by an outside independent pricing service. If an outside independent
pricing service is unable to provide a valuation, the instrument is valued at
the mean of the highest bid and the lowest asked quotes obtained from one or
more brokers or dealers selected by the Adviser. Prices obtained by an outside
independent pricing service may use information provided by market makers or
estimates of market values obtained from yield data related to investments or
securities with similar characteristics and may use a computerized grid matrix
of securities and its evaluations in determining what it believes is the fair
value of the portfolio securities. Short-term debt instruments having a maturity
of 60 days or less are valued at amortized cost. Any assets or liabilities
denominated in currencies other than the U.S. dollar are converted into U.S.
dollars at the current market rates on the date of valuation as quoted by one or
more sources. If a market quotation for a security or other asset is not readily
available or the Adviser believes it does not otherwise accurately reflect the
market value of the security or asset at the time the Fund calculates its NAV,
the security or asset will be fair valued by the Adviser in accordance with the
Trust’s valuation policies and procedures approved by the Board of Trustees. The
Fund may also use fair value pricing in a variety of circumstances, including
but not limited to, situations when the value of a security in the Fund’s
portfolio has been materially affected by events occurring after the close of
the market on which the security is principally traded (such as a corporate
action or other news that may materially affect the price of a security) or
trading in a security has been suspended or halted. In addition, the Fund
currently expects that it will fair value certain of the foreign equity
securities held by the Fund, if any, each day the Fund calculates its NAV,
except those securities principally traded on exchanges that close at the same
time the Fund calculates its NAV.
Accordingly,
the Fund’s NAV may reflect certain portfolio securities’ fair values rather than
their market prices at the time the exchanges on which they principally trade
close. Fair value pricing involves subjective judgments and it is possible that
a fair value determination for a security or other asset is materially different
than the value that could be realized upon the sale of such security or asset.
With respect to securities that are principally traded on foreign exchanges, the
value of the Fund’s portfolio securities may change on days when you will not be
able to purchase or sell your Shares.
INTRADAY
VALUE
The
trading prices of the Fund’s Shares in the secondary market generally differ
from the Fund’s daily NAV and are affected by market forces such as the supply
of and demand for Fund Shares and underlying securities held by the Fund,
economic conditions and other factors. Information regarding the intraday value
of the Fund’s Shares (“IIV”) may be disseminated throughout each trading day by
the Exchange or by market data vendors or other information providers. The IIV
is based on the current market value of the securities and/or cash required to
be deposited in exchange for a Creation Unit. The IIV does not necessarily
reflect the precise composition of the current portfolio of securities held by
the Fund at a particular point in time or the best possible valuation of the
current portfolio. Therefore, the IIV should not be viewed as a “real-time”
update of the Fund’s NAV, which is computed only once a day. The IIV is
generally determined by using current market quotations and/or price quotations
obtained from broker-dealers and other market intermediaries that may trade in
the portfolio securities held by the Fund and valuations based on current market
rates. The quotations and/or valuations of the Fund’s holdings may not be
updated during U.S. trading hours if such holdings do not trade in the United
States. The Fund is not involved in, or responsible for, the calculation or
dissemination of the IIV and makes no warranty as to its accuracy.
RULE
144A AND OTHER UNREGISTERED SECURITIES
An
AP (i.e.,
a person eligible to place orders with the Distributor to create or redeem
Creation Units of the Fund) 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, as part of a redemption,
restricted securities eligible for resale under Rule 144A or other unregistered
securities.
BUYING
AND SELLING EXCHANGE-TRADED SHARES
The
Shares of the Fund are expected to be listed on the Exchange. If you buy or sell
Shares in the secondary market, you will incur customary brokerage commissions
and charges and may pay some or all of the “spread,” which is any difference
between the bid price and the ask price. The spread varies over time for the
Fund’s Shares based on the Fund’s trading volume and market liquidity, and is
generally lower if the Fund has high trading volume and market liquidity, and
generally higher if the Fund has little trading volume and market liquidity
(which is often the case for funds that are newly launched or small in size). In
times of severe market disruption or low trading volume in the Fund’s Shares,
this spread can increase significantly. It is anticipated that the Shares will
trade in the secondary market at prices that may differ to varying degrees from
the NAV of the Shares. During periods of disruptions to creations and
redemptions or the existence of extreme market volatility, the market prices of
Shares are more likely to differ significantly from the Shares’
NAV.
The
Depository Trust Company (“DTC”) serves as securities depository for the Shares.
(The Shares may be held only in book-entry form; stock certificates will not be
issued.) DTC, or its nominee, is the record or registered owner of all
outstanding Shares. Beneficial ownership of Shares will be shown on the records
of DTC or its participants (described below). Beneficial owners of Shares are
not entitled to have Shares registered in their names, will not receive or be
entitled to receive physical delivery of certificates in definitive form and are
not considered the registered holder thereof. Accordingly, to exercise any
rights of a holder of Shares, each beneficial owner must rely on the procedures
of: (i) DTC; (ii) “DTC Participants,” i.e.,
securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations, some of whom (and/or their representatives) own
DTC; and (iii) “Indirect Participants,” i.e.,
brokers, dealers, banks and trust companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly,
through which such beneficial owner holds its interests. The Trust understands
that under existing industry practice, in the event the Trust requests any
action of holders of Shares, or a beneficial owner desires to take any action
that DTC, as the record owner of all outstanding Shares, is entitled to take,
DTC would authorize the DTC Participants to take such action and that the DTC
Participants would authorize the Indirect Participants and beneficial owners
acting through such DTC Participants to take such action and would otherwise act
upon the instructions of beneficial owners owning through them. As described
above, the Trust recognizes DTC or its nominee as the owner of all Shares for
all purposes. For more information, see the section entitled “Book Entry Only
System” in the Fund’s SAI.
The
Exchange is open for trading Monday through Friday and is closed on weekends and
the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Presidents’
Day, Good Friday, Memorial Day, Juneteenth National Independence Day,
Independence Day, Labor Day, Thanksgiving Day and Christmas Day. Because
non-U.S. exchanges may be open on days when the Fund does not price its Shares,
the value of the securities in the Fund’s portfolio may change on days when
shareholders will not be able to purchase or sell the Fund’s
Shares.
The
right of redemption by an AP may be suspended or the date of payment postponed
(1) for any period during which the Exchange is closed (other than customary
weekend and holiday closings); (2) for any period during which trading on the
Exchange is suspended or restricted; (3) for any period during which an
emergency exists as a result of which disposal of the Shares of the Fund or
determination of its NAV is not reasonably practicable; or (4) in such other
circumstance as is permitted by the SEC.
Market
Timing and Related Matters.
The Fund imposes no restrictions on the frequency of purchases and redemptions.
Frequent purchases and redemptions of Fund Shares may attempt to take advantage
of a potential arbitrage opportunity presented by a lag between a change in the
value of the Fund’s portfolio securities after the close of the primary markets
for the Fund’s portfolio securities and the reflection of that change in the
Fund’s NAV (“market timing”). The Board of Trustees considered the nature of the
Fund (i.e.,
a fund whose Shares are expected to trade intraday), that the Adviser monitors
the trading activity of APs for patterns of abusive trading, that the Fund
reserves the right to reject orders that may be disruptive to the management of
or otherwise not in the Fund’s best interests, and that the Fund may fair value
certain of its securities. Given this structure, the Board of Trustees
determined that it is not necessary to impose restrictions on the frequency of
purchases and redemptions for the Fund at the present time.
DISTRIBUTIONS
As
a shareholder of the Fund, you are entitled to your share of the Fund’s
distributions.
The
Fund typically earns interest from debt securities. These amounts, net of
expenses, may be passed along to Fund shareholders as dividends. The Fund
realizes capital gains or losses whenever it sells securities. Distributions by
the Fund of cash or property in respect of the Shares will be treated as
dividends for U.S. federal income tax purposes to the extent paid from the
Fund’s current or accumulated earnings and profits (as determined under U.S.
federal income tax principles). Subject to certain holding period and other
requirements, any such dividend will be eligible (i) to be treated as “qualified
dividend income” taxable at long term capital gain rates (subject to certain
holding period requirements) in the case of shareholders taxed as individuals
and (ii) for the dividends received deduction (subject to certain holding period
requirements) in the case of corporate shareholders. If the Fund’s distributions
exceed the Fund’s current and accumulated earnings and profits, such excess will
be treated first as a tax-free return of capital to the extent of the
shareholder’s tax basis in the Shares (thus reducing a shareholder’s adjusted
tax basis in the Shares), and thereafter as capital gain assuming the Shares are
held as a capital asset. There can be no assurance as to what portion of any
future distribution will consist of return of capital (as opposed to taxable
dividend income). Upon the sale of Shares, a shareholder generally will
recognize capital gain or loss equal to the difference between the amount
realized on the sale and the shareholder’s adjusted tax basis in the Shares
sold. See “U.S. Federal Income Tax Considerations.”
Distributions
in cash may be reinvested automatically in additional Shares of the Fund only if
the broker through which you purchased Shares makes such option
available.
TAX
INFORMATION
As
with any investment, you should consider how your Fund investment will be taxed.
The tax information in this Prospectus is provided as general information. You
should consult your own tax professional about the tax consequences of an
investment in the Fund, including the possible application of foreign, state and
local taxes. Unless your investment in the Fund is through a tax-exempt entity
or tax-deferred retirement account, such as a 401(k) plan, you need to be aware
of the possible tax consequences when: (i) the Fund makes distributions, or (ii)
you sell Shares.
The
following is a summary of the material U.S. federal income tax considerations
generally applicable to shareholders that acquire and hold Shares as capital
assets (generally, for investment). The discussion is based upon the Internal
Revenue Code of 1986, as amended (the “Code”), Treasury regulations, judicial
authorities, published positions of the IRS and other applicable authorities,
all as in effect on the date hereof and all of which are subject to change or
differing interpretations (possibly with retroactive effect). This summary does
not address all of the potential U.S. federal income tax consequences that may
be applicable to the Fund or to all categories of investors, some of which may
be subject to special tax rules. No ruling has been or will be sought from the
IRS regarding any matter discussed herein. No assurance can be given that the
IRS would not assert, or that a court would not sustain, a position contrary to
any of the tax aspects set forth below. This summary of U.S. federal income tax
consequences is for general information only. Prospective
investors must consult their own tax advisors as to the U.S. federal income tax
consequences of acquiring, holding and disposing of Shares, as well as the
effects of state, local and non-U.S. tax laws.
For
purposes of this summary, the term “U.S. Shareholder” means a beneficial owner
of Shares that, for U.S. federal income tax purposes, is one of the
following:
•an
individual who is a citizen or resident of the United States;
•a
corporation or other entity taxable as a corporation created in or organized
under the laws of the United States, any state thereof or the District of
Columbia;
•an
estate the income of which is subject to U.S. federal income taxation regardless
of its source; or
•a
trust (i) if a U.S. court is able to exercise primary supervision over the
administration of such trust and one or more U.S. persons have the authority to
control all substantial decisions of such trust or (ii) that has a valid
election in effect under applicable U.S. Treasury regulations to be treated as a
U.S. person.
A
“Non-U.S. Shareholder” is a beneficial owner of Shares that is neither a U.S.
Shareholder nor a partnership for U.S. federal income tax purposes. If a
partnership (including any other entity treated as a partnership for U.S.
federal income tax purposes) holds Shares, the U.S. federal income tax treatment
of a partner in such partnership generally will depend upon the status of the
partner and the activities of the partnership. Partners of partnerships that
hold Shares should consult their tax advisors.
The
Fund
The
Fund is treated as a regular corporation, or “C” corporation, for U.S. federal
income tax purposes. Accordingly, the Fund generally is subject to U.S. federal
income tax on its taxable income at the rates applicable to corporations
(currently 21%). In addition, as a regular corporation, the Fund is subject to
state and local income tax. The extent to which the Fund is required to pay U.S.
corporate income tax could materially reduce the Fund’s cash available to make
distributions on the Shares.
The
Fund will recognize gain or loss on the sale, exchange or other taxable
disposition of its assets equal to the difference between the amount realized by
the Fund on the sale, exchange or other taxable disposition and the Fund’s
adjusted tax basis in such asset. Any such gain will be subject to U.S. federal
income tax at regular corporate rates, regardless of how long the Fund has held
such asset. The Fund will also recognize gain on redemptions in kind of
appreciated positions held by the Fund. To the extent that the Fund has a net
capital loss in any tax year, the net capital loss can be carried back three
years and forward five years to reduce the Fund’s current taxes payable, subject
to certain limitations. The use of ordinary net operating loss carryforwards is
subject to limitation under the Code. In the event a capital loss carryover or
net operating loss carryforward cannot be utilized in the carryover periods, the
Fund’s federal income tax liability may be higher than expected which will
result in less cash available to distribute to shareholders.
The
Fund’s transactions in ETH Futures and certain other investments, to the extent
permitted, will be subject to special provisions of the Code that, among other
things, may affect the character of gains and losses recognized by the Fund
(i.e., may affect whether gains or losses are ordinary versus capital or
short-term versus long-term, currently taxable at the same income tax rate but
netting and loss carryforward availability differ), accelerate recognition of
income to the Fund and defer Fund losses. These provisions also (i) will require
the Fund to mark-to-market certain types of the positions in its portfolio
(i.e., treat them as if they
were
closed out at the end of each year) including ETH Futures purchased on U.S.
exchanges and (ii) may cause the Fund to recognize income without receiving the
corresponding amount of cash.
U.S.
Shareholders
Distributions.
Distributions
by the Fund of cash or property in respect of the Shares, whether taken in cash
or reinvested in Shares, will be treated as dividends for U.S. federal income
tax purposes to the extent paid from the Fund’s current or accumulated earnings
and profits (as determined under U.S. federal income tax principles) and will be
includible in gross income by a U.S. Shareholder upon receipt. Any such dividend
will be eligible for the dividends received deduction if received by an
otherwise qualifying corporate U.S. Shareholder that meets the holding period
and other requirements for the dividends received deduction. Dividends paid by
the Fund to certain non-corporate U.S. Shareholders (including individuals) are
eligible for U.S. federal income taxation at the rates generally applicable to
long-term capital gains for individuals, provided that the U.S. Shareholder
receiving the dividend satisfies applicable holding period and other
requirements.
If
the amount of the Fund distribution exceeds the Fund’s current and accumulated
earnings and profits, such excess will be treated first as a tax-free return of
capital to the extent of the U.S. Shareholder’s tax basis in the Shares
(reducing that basis accordingly), and thereafter as capital gain. Any such
capital gain will be long-term capital gain if such U.S. Shareholder has held
the applicable Shares for more than one year. A distribution will be wholly or
partially taxable to a shareholder if the Fund has current earnings and profits
(as determined for U.S. federal income tax purposes) in the taxable year of the
distribution, even if the Fund has an overall deficit in the Fund’s accumulated
earnings and profits and/or net operating loss or capital loss carryforwards
that reduce or eliminate corporate income taxes in that taxable
year.
Sales
of Shares.
Upon the sale, exchange or other taxable disposition of Shares, a U.S.
Shareholder generally will recognize capital gain or loss equal to the
difference between the amount realized on the sale, exchange or other taxable
disposition and the U.S. Shareholder’s adjusted tax basis in the Shares. Any
such capital gain or loss will be a long-term capital gain or loss if the U.S.
Shareholder has held the Shares for more than one year at the time of
disposition. Long-term capital gains of certain non-corporate U.S. Shareholders
(including individuals) are currently subject to reduced U.S. federal income tax
rates. The deductibility of capital losses is subject to limitations under the
Code.
A
U.S. Shareholder’s adjusted tax basis in its Shares may be less than the price
paid for the Shares as a result of distributions by the Fund in excess of the
Fund’s earnings and profits (i.e., returns of capital).
Information
Reporting and Backup Withholding Requirements. In
general, distributions on the Shares, and payments of the proceeds from a sale,
exchange or other disposition of the Shares paid to a U.S. Shareholder are
subject to information reporting and may be subject to backup withholding unless
the U.S. Shareholder (i) is a corporation or other exempt recipient or (ii)
provides an accurate taxpayer identification number and certifies that it is not
subject to backup withholding. Backup withholding is not an additional tax. Any
amounts withheld under the backup withholding rules from a payment to a U.S.
Shareholder will be refunded or credited against the U.S. Shareholder’s U.S.
federal income tax liability, if any, provided that the required information is
furnished to the IRS.
Each
shareholder will receive, if appropriate, various written notices after the
close of the Fund’s taxable year describing the amount and the U.S. federal
income tax status of distributions that were paid (or that are treated as having
been paid) by the Fund to the shareholder, and the amount of any U.S. federal
taxes withheld, during the preceding taxable year.
Taxes
on Creations and Redemptions of Creation Units.
A person who exchanges securities for Creation Units generally will recognize a
gain or loss. The gain or loss will be equal to the difference between the
market value of the Creation Units at the time of exchange and the sum of the
exchanger’s aggregate basis in the securities surrendered and the amount of any
cash paid for such Creation Units. A person who exchanges Creation Units for
securities will generally recognize a gain or loss equal to the difference
between the exchanger’s basis in the Creation Units and the sum of the aggregate
market value of the securities received. The IRS, however, may assert that a
loss realized upon an exchange of primarily securities for Creation Units cannot
be deducted currently under the rules governing “wash sales,” or on the basis
that there has been no significant change in economic position. Persons
exchanging securities for Creation Units or redeeming Creation Units should
consult their own tax adviser with respect to whether wash sale rules apply and
when a loss might be deductible and the tax treatment of any creation or
redemption transaction.
Under
current U.S. federal income tax laws, any capital gain or loss realized upon a
redemption (or creation) of Creation Units held as capital assets is generally
treated as long-term capital gain or loss if the Shares (or securities
surrendered) have been held for more than one year and as a short-term capital
gain or loss if the Shares (or securities surrendered) have been held for one
year or less.
If
you create or redeem Creation Units, you will be sent a confirmation statement
showing how many Shares you created or sold and at what price.
Medicare
Tax.
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 redemptions or other taxable dispositions of Fund
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 certain threshold
amounts.
Non-U.S.
Shareholders. The
following discussion is a summary of certain United States federal income tax
consequences that will apply to Non-U.S. Shareholders. Special rules may apply
to certain Non-U.S. Shareholders, such as “controlled foreign corporations,”
“passive foreign investment companies” and certain expatriates, among others,
that are subject to special treatment under the Code. Such Non-U.S. Shareholders
should consult their own tax advisors to determine the United States federal,
state, local and other tax consequences that may be relevant to
them.
Distribution.
Distributions
paid by the Fund to Non-U.S. shareholders that are treated as dividends are
generally subject to withholding tax at a 30% rate, unless the tax is reduced or
eliminated by an applicable income tax treaty or the distributions are
effectively connected with a U.S. trade or business of the shareholder. A
Non-U.S. Shareholder who wishes to claim the benefits of an applicable income
tax treaty for dividends will be required (a) to complete Form W-8BEN or Form
W-8BEN-E (or other applicable form) and certify under penalty of perjury that
such holder is not a United States person as defined under the Code and is
eligible for treaty benefits or (b) if Shares are held through certain foreign
intermediaries, to satisfy the relevant certification requirements of applicable
United States Treasury regulations. A Non-U.S. Shareholder eligible for a
reduced rate of United States withholding tax pursuant to an income tax treaty
may obtain a refund of any excess amounts withheld by filing an appropriate
claim for refund with the IRS.
If
the amount of a distribution to a Non-U.S. Shareholder exceeds the Fund’s
current and accumulated earnings and profits, such excess will be treated first
as a tax-free return of capital to the extent of the Non-U.S. Shareholder’s tax
basis in the Shares, and then as capital gain. Capital gain recognized by a
Non-U.S. Shareholder as a consequence of a distribution by the Fund in excess of
its current and accumulated earnings and profits will generally not be subject
to United States federal income tax, except as described below under the caption
“Sales of Shares.”
Sales
of Shares.
Any capital gain realized by a Non-U.S. shareholder upon a sale of Shares of the
Fund will generally not be subject to U.S. federal income or withholding tax
unless (i) the gain is effectively connected with the shareholder’s trade or
business in the United States, or in the case of a shareholder who is a
nonresident alien individual, the shareholder is present in the United States
for 183 days or more during the taxable year and certain other conditions are
met or (ii) the Fund is or has been a U.S. real property holding corporation, as
defined below, at any time within the five-year period preceding the date of
disposition of the Fund’s Shares or, if shorter, within the period during which
the Non-U.S. shareholder has held the Shares. Generally, a corporation is a U.S.
real property holding corporation if the fair market value of its U.S. real
property interests, as defined in the Code and applicable regulations, equals or
exceeds 50% of the aggregate fair market value of its worldwide real property
interests and its other assets used or held for use in a trade or business. The
Fund may be, or may prior to a Non-U.S. shareholder’s disposition of Shares
become, a U.S. real property holding corporation.
As
part of the Foreign Account Tax Compliance Act, (“FATCA”), the Fund may be
required to withhold 30% tax on certain types of U.S. sourced income (e.g.,
dividends, interest, and other types of passive income) paid to (i) foreign
financial institutions (“FFIs”), including non-U.S. investment funds, unless
they agree to collect and disclose to the IRS information regarding their direct
and indirect U.S. account holders and (ii) certain nonfinancial foreign entities
(“NFFEs”), unless they certify certain information regarding their direct and
indirect U.S. owners. To avoid possible withholding, FFIs will need to enter
into agreements with the IRS which state that they will provide the IRS
information, including the names, account numbers and balances, addresses and
taxpayer identification numbers of U.S. account holders and comply with due
diligence procedures with respect to the identification of U.S. accounts as well
as agree to withhold tax on certain types of withholdable payments made to
non-compliant foreign financial institutions or to applicable foreign account
holders who fail to provide the required information to the IRS, or similar
account information and required documentation to a local revenue authority,
should an applicable intergovernmental agreement be implemented. NFFEs will need
to provide certain information regarding each substantial U.S. owner or
certifications of no substantial U.S. ownership, unless certain exceptions
apply, or agree to provide certain information to the IRS.
The
Fund may be subject to the FATCA withholding obligation, and also will be
required to perform due diligence reviews to classify foreign entity investors
for FATCA purposes. Investors are required to agree to provide information
necessary to allow the Fund to comply with the FATCA rules. If the Fund is
required to withhold amounts from payments pursuant to FATCA, investors will
receive distributions that are reduced by such withholding amounts.
Non-U.S.
shareholders are advised to consult their tax advisors with respect to the
particular tax consequences to them of an investment in the Fund, including the
possible applicability of the U.S. estate tax.
The
foregoing discussion summarizes some of the consequences under current U.S.
federal income tax law of an investment in the Fund. It is not a substitute for
personal tax advice. Consult your own tax advisor about the potential tax
consequences of an investment in the Fund under all applicable tax laws. Changes
in applicable tax authority could materially affect the conclusions discussed
above and could adversely affect the Fund, and such changes often
occur.
The
Fund has not yet commenced operations as of the date of this Prospectus and
therefore does not have a financial history.
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PREMIUM/DISCOUNT
INFORMATION |
The
Fund has not yet commenced operations and, therefore, does not have information
about the differences between the Fund’s daily market price on the Exchange and
its NAV. Information regarding how often the closing trading price of the
Shares of the Fund was above (i.e.,
at a premium) or below (i.e.,
at a discount) the NAV of the Fund for the most recently completed calendar year
and the most recently completed calendar quarter(s) since that year (or the life
of the Fund, if shorter) can be found at www.vaneck.com.
CONTINUOUS
OFFERING
The
method by which Creation Units are created and traded may raise certain issues
under applicable securities laws. Because new Creation Units are issued and sold
by the Trust 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 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 Units 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 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 categorization
as an underwriter.
Broker
dealers who are not “underwriters” but are participating in a distribution (as
contrasted to ordinary secondary trading transactions), and thus dealing with
Shares that are part of an “unsold allotment” within the meaning of Section
4(a)(3)(C) of the Securities Act, would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
This is because the prospectus delivery exemption in Section 4(a)(3) 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 ordinary secondary market transactions) and thus dealing with
the Shares that are part of an overallotment within the meaning of Section
4(a)(3)(A) of the Securities Act would be unable to take advantage of the
prospectus delivery exemption provided by Section 4(a)(3) of the Securities Act.
Firms that incur a prospectus delivery obligation with respect to Shares are
reminded that, under Rule 153 of the Securities Act, a prospectus delivery
obligation under Section 5(b)(2) of the Securities Act owed to an exchange
member in connection with a sale on the Exchange is satisfied by the fact that
the prospectus is available at the Exchange upon request. The prospectus
delivery mechanism provided in Rule 153 is only available with respect to
transactions on an exchange.
In
addition, certain affiliates of the Fund and the Adviser may purchase and resell
Fund shares pursuant to this Prospectus.
OTHER
INFORMATION
The
Trust was organized as a Delaware statutory trust on March 15, 2001. Its
Declaration of Trust currently permits the Trust to issue an unlimited number of
Shares of beneficial interest. If shareholders are required to vote on any
matters, each Share outstanding would be entitled to one vote. Annual meetings
of shareholders will not be held except as required by the 1940 Act and other
applicable law. See the Fund’s SAI for more information concerning the Trust’s
form of organization. Section 12(d)(1) of the 1940 Act restricts investments by
investment companies in the securities of other investment companies, including
Shares of the Fund. Registered investment companies are permitted to invest in
the Fund beyond the limits set forth in Section 12(d)(1) subject to certain
terms and conditions set forth in SEC regulations, including that such
investment companies enter into an agreement with the Fund.
The
Prospectus, SAI and any other Fund communication do not create any contractual
obligations between the Fund’s shareholders and the Trust, the Fund, the Adviser
and/or the Trustees. Further, shareholders are not intended third party
beneficiaries of any contracts entered into by (or on behalf of) the Fund,
including contracts with the Adviser or other parties who provide services to
the Fund.
Dechert
LLP serves as counsel to the Trust, including the Fund. [ ] serves as the
Trust’s independent registered public accounting firm and will audit the Fund’s
financial statements annually.
ADDITIONAL
INFORMATION
This
Prospectus does not contain all the information included in the Registration
Statement filed with the SEC with respect to the Fund’s Shares. The Fund’s
Registration Statement, including this Prospectus, the Fund’s SAI and the
exhibits are available on the EDGAR database at the SEC’s website
(http://www.sec.gov), and copies may be obtained, after paying a duplicating
fee, by electronic request at the following email address:
[email protected].
The
SAI for the Fund, which has been filed with the SEC, provides more information
about the Fund. The SAI for the Fund is incorporated herein by reference and is
legally part of this Prospectus. Additional information about the Fund’s
investments is available in the Fund’s annual and semi-annual reports to
shareholders. In the Fund’s annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund’s performance during its last fiscal year. The SAI and the Fund’s annual
and semi-annual reports may be obtained without charge by writing to the Fund at
Van Eck Securities Corporation, the Fund’s Distributor, at 666 Third Avenue, 9th
Floor, New York, New York 10017 or by calling the Distributor at the following
number: Investor Information: 800.826.2333.
Shareholder
inquiries may be directed to the Fund in writing to 666 Third Avenue, 9th Floor,
New York, New York 10017 or by calling 800.826.2333.
The
Fund’s SAI is available at www.vaneck.com.
(Investment
Company Act file no. 811-10325)
[THIS
PAGE INTENTIONALLY LEFT BLANK]
For
more detailed information about the Fund, see the SAI dated [ ], as may be
supplemented from time to time. Additional information about the Fund’s
investments is or will be available in the Fund’s annual and semi-annual reports
to shareholders. In the Fund’s annual report, you will find a discussion of the
market conditions and investment strategies that significantly affected the
Fund’s performance during its last fiscal year.
Call
VanEck at 800.826.2333 to request, free of charge, the annual or semi-annual
reports, the SAI, or other information about the Fund or to make shareholder
inquiries. You may also obtain the SAI or the Fund’s annual or semi-annual
reports, by visiting the VanEck website at www.vaneck.com.
Reports
and other information about the Fund are available on the EDGAR Database on the
SEC’s internet site at http://www.sec.gov. In addition, copies of this
information may be obtained, after paying a duplicating fee, by electronic
request at the following email address: [email protected].
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Transfer
Agent: State Street Bank and Trust Company
SEC
Registration Number: 333-123257
1940
Act Registration Number: 811-10325
[
]PRO |
800.826.2333
www.vaneck.com |