Prospectus
June
30, 2022
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NASDAQ
Ticker | XFCSX |
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Principal
U.S. Market: NYSE Arca | FCSH |
Federated Hermes Short Duration Corporate ETF
A Portfolio of Federated Hermes ETF Trust
A fund
seeking to provide current income by investing in a diversified portfolio of
investment-grade, fixed-income securities.
As with
all funds, the Securities and Exchange Commission (SEC) has not approved or
disapproved these securities or passed upon the adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
Not
FDIC Insured ▪ May Lose Value ▪ No Bank Guarantee
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Management
Fee |
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Distribution
(12b-1) Fee1 |
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Other
Expenses |
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Total
Annual Fund Operating Expenses |
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Fee
Waivers and/or Expense Reimbursements2 |
( |
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Total
Annual Fund Operating Expenses After Fee Waivers and/or Expense
Reimbursements |
1
2
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1
Year |
$ |
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3
Years |
$ |
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5
Years |
$ |
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10
Years |
$ |
1
2
3
FUND
MANAGEMENT
The
Fund’s Investment Adviser is Federated Investment Management
Company.
The
Fund’s portfolio managers are jointly and primarily responsible for day to day
management of the Fund.
John
Gentry, CFA, Senior Portfolio Manager, has been the Fund’s portfolio manager
since its inception in December
of 2021.
Robert
Matthews, CFA, Portfolio Manager, has been the Fund’s portfolio manager since
its inception in December
of 2021.
purchase
and sale of fund shares
The
Fund is an exchange-traded fund (ETF). Individual Fund Shares may only be
purchased and sold on a national securities
exchange through a broker-dealer and may not be purchased or redeemed directly
with the Fund. The price of Fund Shares is based on market price, and because
ETF shares trade at market prices rather than net asset value (NAV), Shares may
trade at a price greater than NAV (a premium) or less than NAV (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 a 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
FederatedInvestors.com.
Tax
Information
The
Fund’s distributions are taxable as ordinary income or capital gains except when
your investment is through a 401(k)
plan, an Individual Retirement Account or other tax-advantaged investment
plan.
Payments
to Broker-Dealers and Other Financial Intermediaries
If
you purchase the Fund through a broker-dealer or other financial intermediary
(such as a bank), the Fund and/or its related
companies may pay the intermediary for the sale of Fund Shares and related
services. These payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to recommend the Fund
over another investment. Ask your salesperson or visit your financial
intermediary’s website for more information.
4
The
Fund is an actively managed exchange-traded fund (ETF), and the Shares of the
Fund are listed for trading on NYSE Arca.
The market price for a Share of the Fund may be different from the Fund‘s most
recent net asset value (NAV). ETFs are funds that trade like other publicly
traded securities. Unlike shares of a mutual fund, which can be bought and
redeemed from the issuing fund by all shareholders at a price based on NAV,
Shares of the Fund may be purchased or redeemed directly from the Fund at NAV
solely by Authorized Participants. Also, unlike shares of a mutual fund, Shares
of the Fund are listed on a national securities exchange and trade in the
secondary market at market prices that change throughout the day.
The
Fund’s investment objective is to seek current income. The investment objective
may be changed by the Fund’s Board
without shareholder approval. While there is no assurance that the Fund will
achieve its investment objective, it endeavors to do so by following the
principal strategies and policies described in this Prospectus. The Fund’s
Statement of Additional Information (SAI) provides information about the Fund’s
non-principal strategies.
The
Fund’s investment adviser (the “Adviser”) actively manages the Fund’s portfolio
seeking current income in accordance
with the Fund’s investment policy parameters for limiting credit risk and Share
price volatility attributable to interest rate risk. With respect to the limits
on credit risk, the fixed-income securities in which the Fund invests consist
primarily of investment-grade, fixed-income securities, consisting primarily of
corporate debt securities. Corporate debt securities, including notes, bonds,
debentures and commercial paper, are fixed-income securities usually issued by
businesses to finance their operations. To pursue the Fund’s investment
strategy, the Adviser can invest in instruments directly or through investing in
other investment companies, including, for example, affiliated funds advised by
the Adviser or its affiliates.
Investment-grade
securities are rated in one of the four highest categories BBB or higher by a
nationally recognized statistical rating
organization (NRSRO), or if unrated, of comparable quality as determined by the
Adviser. Consistent with the Bloomberg 1-5 Year Corporate Index, the Fund’s
benchmark, the Fund may, from time to time, have larger allocations to certain
broad market sectors in attempting to achieve its investment objective. The Fund
may invest up to 10% of its assets in fixed-income securities rated below
investment-grade. Noninvestment-grade securities may also be referred to as
below investment-grade securities. A description of the various types of
securities in which the Fund invests, and their risks, immediately follows this
strategy section.
The
Fund may also invest in U.S. Treasury securities, U.S. government agency
securities, (including mortgage-backed securities
issued or guaranteed by U.S. government agencies or instrumentalities),
mortgage-backed securities (MBS), asset-backed securities and Commercial
mortgage-backed securities (CMBS).
The
Fund’s Share price volatility attributable to interest rate risk is managed by
maintaining, under normal market conditions,
a dollar-weighted average portfolio duration to 3.5 years or less.
Within
the 3.5 year or less portfolio duration range, the Adviser may seek to change
the Fund’s interest rate volatility exposure,
by lengthening or shortening duration from time to time based on its interest
rate outlook. If the Adviser expects interest rates to decline, it will
generally lengthen the Fund’s duration. If the Adviser expects interest rates to
increase, it will generally shorten the Fund’s duration. The Adviser formulates
its interest rate outlook and otherwise attempts to anticipate changes in
economic and market conditions by analyzing a variety of factors, such
as:
◾ current
and expected U.S. growth;
◾ current
and expected interest rates and inflation;
◾ the
Federal Reserve Board’s monetary policy; and
◾ changes in
the supply of or demand for U.S. government securities.
In
addition to managing the Fund’s portfolio duration, the Adviser may seek to
enhance the Fund’s total return, of which
current income is a component, by selecting securities, within the Fund’s
credit-quality range, that the Adviser expects will offer the best relative
value. In other words, in selecting securities, the Adviser assesses whether the
Fund will be adequately compensated for assuming the risks (such as credit risk)
of a particular security by comparing the security to other securities without
those risks. The Adviser continually analyzes a variety of economic and market
indicators in order to arrive at the projected yield “spread” of each security
type. (The spread is the difference between the yield of a security versus the
yield of a U.S. Treasury security with a comparable average life.) The
security’s projected spread is weighed against the security’s credit risk (in
the case of corporate securities) and its risk of prepayment (in the case of
mortgage-backed securities) in order to complete the analysis.
Corporate
debt securities generally offer higher yields than U.S. government securities to
compensate for credit risk. Similarly,
asset and mortgage-backed securities generally offer higher yields versus U.S.
Treasury securities and non-mortgage-backed agency securities, to compensate for
prepayment risk. The Adviser invests the Fund’s portfolio seeking the higher
relative returns of corporate debt securities and asset and mortgage-backed
securities, when available, while maintaining appropriate portfolio
diversification and attempting to limit the associated credit or prepayment
risks.
5
The
Adviser attempts to manage the Fund’s credit risk by selecting corporate debt
securities that make default in the payment of
principal and interest less likely. The Adviser uses corporate earnings analysis
to determine which business sectors and credit ratings are most advantageous for
investment by the Fund. In selecting individual corporate fixed-income
securities, the Adviser analyzes a company’s business, competitive position and
financial condition to assess whether the security’s credit risk is commensurate
with its potential return. Some of the corporate debt securities in which the
Fund invests are considered to be “foreign securities,” as that term is defined
in this Prospectus. Foreign securities are securities of issuers based outside
the United States. The Fund considers an issuer to be based outside the United
States if it is organized under the laws of, or has its principal office located
in another country, the principal trading market for its securities is in
another country, or it (directly or through its consolidated subsidiaries)
derived in its most current fiscal year at least 50% of its total assets,
capitalization, gross revenue or profit from goods produced, services performed
or sales made in another country.
The
Adviser attempts to manage the Fund’s prepayment risk by selecting
mortgage-backed securities with characteristics
that make prepayment less likely. Characteristics that the Adviser may consider
in selecting securities include the average interest rates of the underlying
mortgages and the federal agencies (if any) that securitize the mortgages. The
Adviser attempts to assess the relative returns and risks for mortgage-backed
securities by analyzing how the timing, amount and division of cash flows might
change in response to changing economic and market conditions.
There
is no assurance that the Adviser’s efforts to forecast market interest rates and
assess the impact of market interest rates in
particular will be successful.
The
Fund may use derivative contracts, in particular, futures contracts, option
contracts and swap contracts, to implement
elements of its investment strategy. For example, the Fund may use derivative
contracts to increase or decrease the portfolio’s exposure to the investment(s)
underlying the derivative in an attempt to benefit from changes in the value of
the underlying investment(s). Additionally, by way of example, the Fund may use
derivative contracts in an attempt to:
◾ increase
or decrease the effective duration of the Fund portfolio;
◾ obtain
premiums from the sale of derivative contracts;
◾ realize
gains from trading a derivative contract; or
◾ hedge
against potential losses.
There
can be no assurance that the Fund’s use of derivative contracts will work as
intended. Derivative investments made by
the Fund are included within the Fund’s 80% policy (as described below) and are
calculated at market value.
Although
the Fund may invest in securities of any maturity and the value of the Fund’s
Shares will fluctuate, the Adviser
will seek to manage the magnitude of fluctuation by limiting, under normal
market conditions, the Fund’s dollar-weighted average duration to 3.5 years or
less. Duration measures the price sensitivity of a fixed-income security to
changes in interest rates.
The
Fund will invest its assets so that at least 80% of its net assets (plus any
borrowings for investment purposes) are invested
in corporate fixed-income investments. The Fund will notify shareholders at
least 60 days in advance of any change in its investment policy that would
enable the Fund to invest, under normal circumstances, less than 80% of its net
assets in corporate fixed-income investments.
TEMPORARY
INVESTMENTS
The
Fund may temporarily depart from its principal investment strategies by
investing its assets in shorter-term debt securities
and similar obligations or holding cash. It may do this in response to unusual
circumstances, such as: adverse market, economic or other conditions (for
example, to help avoid potential losses, or during periods when there is a
shortage of appropriate securities); to maintain liquidity to meet shareholder
redemptions; or to accommodate cash inflows. It is possible that such
investments could affect the Fund’s investment returns and/or the ability to
achieve the Fund’s investment objectives.
The
following provides general information on the Fund’s principal investments. The
Fund’s Statement of Additional Information
(SAI) provides information about the Fund’s non-principal investments and may
provide additional information about the Fund’s principal
investments.
6
Fixed-Income
Securities
Fixed-income
securities pay interest, dividends or distributions at a specified rate. The
rate may be a fixed percentage of the
principal or may be adjusted periodically. In addition, the issuer of a
fixed-income security must repay the principal amount of the security, normally
within a specified time. Fixed-income securities provide more regular income
than equity securities. However, the returns on fixed-income securities are
limited and normally do not increase with the issuer’s earnings. This limits the
potential appreciation of fixed-income securities as compared to equity
securities.
A
security’s yield measures the annual income earned on a security as a percentage
of its price. A security’s yield will increase
or decrease depending upon whether it costs less (a “discount”) or more (a
“premium”) than the principal amount. If the issuer may redeem the security
before its scheduled maturity, the price and yield on a discount or premium
security may change based upon the probability of an early redemption.
Securities with higher risks generally have higher yields.
The
following describes the fixed-income securities in which the Fund principally
invests:
Corporate
Debt Securities (A Type of Fixed-Income Security)
Corporate
debt securities are fixed-income securities issued by businesses. Notes, bonds,
debentures and commercial paper are
the most prevalent types of corporate debt securities. The Fund may also
purchase interests in bank loans to companies. The credit risks of corporate
debt securities vary widely among issuers.
In
addition, the credit risk of an issuer’s debt security may vary based on its
priority for repayment. For example, higher ranking
(“senior”) debt securities have a higher priority than lower ranking
(“subordinated”) securities. This means that the issuer might not make payments
on subordinated securities while continuing to make payments on senior
securities. In addition, in the event of bankruptcy, holders of senior
securities may receive amounts otherwise payable to the holders of subordinated
securities. Some subordinated securities, such as trust-preferred and
capital-securities notes, also permit the issuer to defer payments under certain
circumstances. For example, insurance companies issue securities known as
surplus notes that permit the insurance company to defer any payment that would
reduce its capital below regulatory requirements.
Treasury
Securities (A Type of Fixed-Income Security)
Treasury
securities are direct obligations of the federal government of the United
States. Treasury securities are generally
regarded as having minimal credit risks.
Government
Securities (A Type of Fixed-Income Security)
Government
securities are issued or guaranteed by a federal agency or instrumentality
acting under federal authority. Some
government securities, including those issued by Government National Mortgage
Association (“Ginnie Mae”), are supported by the full faith and credit of the
United States and are guaranteed only as to the timely payment of interest and
principal.
Other
government securities receive support through federal subsidies, loans or other
benefits, but are not backed by the full
faith and credit of the United States. For example, the U.S. Treasury is
authorized to purchase specified amounts of securities issued by (or otherwise
make funds available to) the Federal Home Loan Bank System, Federal Home Loan
Mortgage Corporation (“Freddie Mac”) and Federal National Mortgage Association
(“Fannie Mae”) in support of such obligations.
Some
government agency securities have no explicit financial support and are
supported only by the credit of the applicable
agency, instrumentality or corporation. The U.S. government has provided
financial support to Freddie Mac and Fannie Mae, but there is no assurance that
it will support these or other agencies in the future.
The
Fund treats mortgage-backed securities guaranteed by a federal agency or
instrumentality as government securities. Although
such a guarantee protects against credit risk, it does not eliminate it entirely
or reduce other risks.
Asset-Backed
Securities (A Type of Fixed-Income Security)
Asset-backed
securities are payable from pools of obligations other than mortgages. Most
asset-backed securities involve
consumer or commercial debts with maturities of less than 10 years. However,
almost any type of fixed-income assets (including other fixed-income securities)
may be used to create an asset-backed security. Asset-backed securities may take
the form of commercial paper, notes or pass-through certificates. Asset-backed
securities have prepayment risks. Like CMOs, asset-backed securities may be
structured like Floaters, Inverse Floaters, IOs and POs.
Mortgage-Backed
Securities (A Type of Fixed-Income Security)
A
mortgage-backed security (MBS) is a type of pass-through security, which is a
pooled debt obligation repackaged as interests
that pass principal and interest through an intermediary to investors. In the
case of MBS, the ownership interests are issued by a trust and represent
participation interests in pools of adjustable and fixed-rate mortgage loans.
MBS are most commonly issued or guaranteed by the U.S. government (or one of its
agencies or instrumentalities). Unlike
7
conventional
debt obligations, MBS provide monthly payments derived from the monthly interest
and principal payments (including any prepayments) made by the individual
borrowers on the pooled mortgage loans. Most MBS make these payments monthly;
however, certain MBS are backed by mortgage loans which do not generate monthly
payments but rather generate payments less frequently.
The
MBS acquired by the Fund could be secured by fixed-rate mortgages, adjustable
rate mortgages or hybrid adjustable
rate mortgages. Adjustable rate mortgages are mortgages whose interest rates are
periodically reset when market rates change. A hybrid adjustable rate mortgage
(“hybrid ARM”) is a type of mortgage in which the interest rate is fixed for a
specified period and then resets periodically, or floats, for the remaining
mortgage term. Hybrid ARMs are usually referred to by their fixed and floating
periods. For example, a “5/1 ARM” refers to a mortgage with a five-year,
fixed-interest rate period, followed by 25 annual interest rate adjustment
periods.
Investments
in MBS expose the Fund to interest rate, prepayment and credit
risks.
Government
Mortgage-Backed Securities (MBS) (A Type of Fixed-Income Security)
A
government MBS is a type of pass-through security, which is a pooled debt
obligation repackaged as interests that pass
principal and interest through an intermediary to investors. In the case of
government MBS, the ownership interest is issued by a trust and represents
participation interests in pools of adjustable and fixed-rate mortgage loans.
Government MBS are issued or guaranteed by the U.S. government (or one of its
agencies or instrumentalities). Unlike conventional debt obligations, MBS
provide monthly payments derived from the monthly interest and principal
payments (including any prepayments) made by the individual borrowers on the
pooled mortgage loans. Most government MBS make these payments monthly; however,
certain MBS are backed by mortgage loans which do not generate monthly payments
but rather generate payments less frequently.
Investments
in government MBS expose the Fund to interest rate, prepayment and credit
risks.
Foreign
Securities
Foreign
securities are securities of issuers based outside the United States. To the
extent a Fund invests in securities included
in its applicable broad-based securities market index, the Fund may consider an
issuer to be based outside the United States if the applicable index classifies
the issuer as based outside the United States. Accordingly, the Fund may
consider an issuer to be based outside the United States if the issuer satisfies
at least one, but not necessarily all, of the following:
◾ it is
organized under the laws of, or has its principal office located in, another
country;
◾ the
principal trading market for its securities is in another country;
◾ it
(directly or through its consolidated subsidiaries) derived in its most current
fiscal year at least 50% of its total assets, capitalization, gross revenue or
profit from goods produced, services performed or sales made in another country;
or
◾ it is
classified by an applicable index as based outside the United
States.
The
foreign securities in which the Fund invests will be predominately denominated
in the U.S. dollar. Along with the risks
normally associated with domestic securities of the same type, foreign
securities are subject to currency risks and risks of foreign
investing.
Lower-Rated,
Fixed-Income Securities
Lower-rated,
fixed-income securities are securities rated below investment grade (i.e., BB or
lower) by a nationally recognized
statistical rating organization (NRSRO). There is no minimal acceptable rating
for a security to be purchased or held by the Fund and the Fund may purchase or
hold unrated securities and securities whose issuers are in
default.
Derivative
Contracts
Derivative
contracts are financial instruments that require payments based upon changes in
the values of designated securities,
commodities, currencies, indices, or other assets or instruments including other
derivative contracts, (each a “Reference Instrument” and collectively,
“Reference Instruments”). Each party to a derivative contract may sometimes be
referred to as a counterparty. Some derivative contracts require payments
relating to an actual, future trade involving the Reference Instrument. These
types of derivatives are frequently referred to as “physically settled”
derivatives. Other derivative contracts require payments relating to the income
or returns from, or changes in the market value of, a Reference Instrument.
These types of derivatives are known as “cash-settled” derivatives, since they
require cash payments in lieu of delivery of the Reference
Instrument.
8
Many
derivative contracts are traded on securities or commodities exchanges. In this
case, the exchange sets all the terms of
the contract except for the price. Investors make payments due under their
contracts through the exchange. Most exchanges require investors to maintain
margin accounts through their brokers to cover their potential obligations to
the exchange. Parties to the contract make (or collect) daily payments to the
margin accounts to reflect losses (or gains) in the value of their contracts.
This protects investors against potential defaults by the other party to the
contract. Trading contracts on an exchange also allows investors to close out
their contracts by entering into offsetting contracts.
The
Fund may also trade derivative contracts over-the-counter (OTC) in transactions
negotiated directly between the Fund and a
financial institution. OTC contracts do not necessarily have standard terms, so
they may be less liquid and more difficult to close out than exchange-traded
contracts. In addition, OTC contracts with more specialized terms may be more
difficult to value than exchange-traded contracts, especially in times of
financial stress.
The
market for swaps and other OTC derivatives was largely unregulated prior to the
enactment of federal legislation known as
the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank
Act”). Regulations enacted by the Commodity Futures Trading Commission (the
“CFTC”) under the Dodd-Frank Act require the Fund to clear certain swap
contracts through a clearing house or central counterparty (a
“CCP”).
To
clear a swap through the CCP, the Fund will submit the contract to, and post
margin with, a futures commission merchant
(FCM) that is a clearing house member. The Fund may enter into the swap with a
financial institution other than the FCM and arrange for the contract to be
transferred to the FCM for clearing, or enter into the contract with the FCM
itself. If the Fund must centrally clear a transaction, the CFTC’s regulations
also generally require that the swap be executed on a registered exchange or
through a market facility that is known as a swap execution facility or SEF.
Central clearing is presently required only for certain swaps; the CFTC is
expected to impose a mandatory central clearing requirement for additional
derivative instruments over time.
The
CCP, SEF and FCM are all subject to regulatory oversight by the CFTC. In
addition, most derivative market participants
are now regulated as swap dealers or major swap participants and are subject to
certain minimum capital and margin requirements and business conduct standards.
Similar regulatory requirements are expected to apply to derivative contracts
that are subject to the jurisdiction of the SEC, although the SEC has not yet
finalized its regulations. In addition, uncleared OTC swaps will be subject to
regulatory collateral requirements that could adversely affect the Fund’s
ability to enter into swaps in the OTC market. These developments could cause
the Fund to terminate new or existing swap agreements or to realize amounts to
be received under such instruments at an inopportune time.
Until
the mandated rulemaking and regulations are implemented completely, it will not
be possible to determine the complete
impact of the Dodd-Frank Act and related regulations on the Fund.
Depending
on how the Fund uses derivative contracts and the relationships between the
market value of a derivative contract
and the Reference Instrument, derivative contracts may increase or decrease the
Fund’s exposure to the risks of the Reference Instrument, and may also expose
the Fund to liquidity and leverage risks. OTC contracts also expose the Fund to
credit risks in the event that a counterparty defaults on the contract, although
this risk may be mitigated by submitting the contract for clearing through a
CCP.
Payment
obligations arising in connection with derivative contracts are frequently
required to be secured with margin (which is
commonly called “collateral”).
The
Fund may invest in a derivative contract if it is permitted to own, invest in,
or otherwise have economic exposure to the
Reference Instrument. The Fund is not required to own a Reference Instrument in
order to buy or sell a derivative contract relating to that Reference
Instrument. The Fund may trade in the following specific types and/or
combinations of derivative contracts:
Futures
Contracts (A Type of Derivative)
Futures
contracts provide for the future sale by one party and purchase by another party
of a specified amount of a Reference Instrument at a
specified price, date and time. Entering into a contract to buy a Reference
Instrument is commonly referred to as buying a contract or holding a long
position in the asset. Entering into a contract to sell a Reference Instrument
is commonly referred to as selling a contract or holding a short position in the
Reference Instrument. Futures contracts are considered to be commodity
contracts. The Adviser has claimed an exclusion from the definition of the term
“commodity pool operator” under the Commodity Exchange Act with respect to the
Fund and, therefore, is not subject to registration or regulation as a commodity
pool operator with respect to the Fund. Futures contracts traded OTC are
frequently referred to as forward contracts. The Fund can buy or sell financial
futures (such as interest rate futures, index futures and security futures), as
well as, currency futures and currency forward contracts.
9
Option
Contracts (A Type of Derivative)
Option
contracts (also called “options”) are rights to buy or sell a Reference
Instrument for a specified price (the “exercise
price”) during, or at the end of, a specified period. The seller (or “writer”)
of the option receives a payment, or premium, from the buyer, which the writer
keeps regardless of whether the buyer uses (or exercises) the option. A call
option gives the holder (buyer) the right to buy the Reference Instrument from
the seller (writer) of the option. A put option gives the holder the right to
sell the Reference Instrument to the writer of the option. Options may be bought
or sold on a wide variety of Reference Instruments. Options that are written on
futures contracts will be subject to margin requirements similar to those
applied to futures contracts.
Swap
Contracts (A Type of Derivative)
A
swap contract (also known as a “swap”) is a type of derivative contract in which
two parties agree to pay each other (swap) the
returns derived from Reference Instruments. Swaps do not always involve the
delivery of the Reference Instruments by either party, and the parties might not
own the Reference Instruments underlying the swap. The payments are usually made
on a net basis so that, on any given day, the Fund would receive (or pay) only
the amount by which its payment under the contract is less than (or exceeds) the
amount of the other party’s payment. Swap agreements are sophisticated
instruments that can take many different forms and are known by a variety of
names. Common types of swaps in which the Fund may invest include interest rate
swaps, caps and floors, total return swaps, credit default swaps and currency
swaps.
OTHER
INVESTMENTS, TRANSACTIONS, TECHNIQUES
Asset
Segregation
In
order to cover its obligations in connection with derivative contracts or
special transactions, the Fund will either own the
underlying assets, enter into offsetting transactions or set aside cash or
readily marketable securities in each case, as provided by the SEC or SEC staff
guidance. This requirement may cause the Fund to miss favorable trading
opportunities, due to a lack of sufficient cash or readily marketable
securities. This requirement may also cause the Fund to realize losses on
offsetting or terminated derivative contracts or special
transactions.
Investing
in Securities of Other Investment Companies
The
Fund may invest its assets in securities of other investment companies,
including the securities of affiliated money market funds, as an
efficient means of implementing its investment strategies, managing its
uninvested cash and/or other investment reasons consistent with the Fund’s
investment objective and investment strategies. The Fund may also invest in loan
instruments primarily by investing in another investment company (which is not
available for general investment by the public) that owns those securities and
that is advised by an affiliate of the Adviser. The Fund may also invest in such
instruments directly. These other investment companies are managed independently
of the Fund and incur additional fees and/or expenses which would, therefore, be
borne indirectly by the Fund in connection with any such investment. These
investments also can create conflicts of interests for the Adviser to the Fund
and the investment adviser to the acquired fund. For example, a conflict of
interest can arise due to the possibility that the Adviser to the Fund could
make a decision to redeem the Fund’s investment in the acquired fund. In the
case of an investment in an affiliated fund, a conflict of interest can arise
if, because of the Fund’s investment in the acquired fund, the acquired fund is
able to garner more assets, thereby growing the acquired fund and increasing the
management fees received by the investment adviser to the acquired fund, which
would either be the Adviser or an affiliate of the Adviser. However, the Adviser
believes that the benefits and efficiencies of making investments in other
investment companies should outweigh the potential additional fees and/or
expenses and resulting conflicts of interest. In light of the Fund’s investments
in other investment companies, other registered investment companies may be
limited in their ability to invest in the Fund.
Section
12(d)(1) of the 1940 Act restricts investments by investment companies in the
securities of other investment companies.
The Fund intends to limit its investments in other investment companies,
including private funds, to 10% or less. 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 rules. In order for a
registered investment company to invest in shares of the Fund beyond the
limitations of Section 12(d)(1), the registered investment company must enter
into an agreement with the Fund.
Securities
Lending
The
Fund may lend portfolio securities to borrowers that the Adviser deems
creditworthy. In return, the Fund receives cash or
liquid securities from the borrower as collateral. The borrower must furnish
additional collateral if the market value of the loaned securities increases.
Also, the borrower must pay the Fund the equivalent of any dividends or interest
received on the loaned securities.
10
The
Fund will reinvest cash collateral in highly liquid short-term obligations that
qualify as an acceptable investment for the Fund.
However, the Fund must pay interest to the borrower for the use of cash
collateral. An acceptable investment into which the Fund may reinvest cash
collateral includes, among other acceptable investments, securities of
affiliated money market funds (including affiliated institutional prime money
market funds with a “floating” net asset value that can impose redemption fees
and liquidity gates, impose certain operational impediments to investing cash
collateral, and, if net asset value decreases, result in the Fund having to
cover the decrease in the value of the cash collateral).
Loans
are subject to termination at the option of the Fund or the borrower. The Fund
will not have the right to vote on securities
while they are on loan. However, the Fund will attempt to terminate a loan in an
effort to reacquire the securities in time to vote on matters that are deemed to
be material by the Adviser. There can be no assurance that the Fund will have
sufficient notice of such matters to be able to terminate the loan in time to
vote thereon. The Fund may pay administrative and custodial fees in connection
with a loan and may pay a negotiated portion of the interest earned on the cash
collateral to a securities lending agent or broker. Securities lending
activities are subject to interest rate risks and credit risks.
Investment
Ratings for Investment-Grade Securities
The
Adviser will determine whether a security is investment grade based upon the
credit ratings given by one or more NRSROs.
For example, Standard & Poor’s, an NRSRO, assigns ratings to
investment-grade securities (AAA, AA, A and BBB including modifiers,
sub-categories and gradations) based on their assessment of the likelihood of
the issuer’s inability to pay interest or principal (default) when due on each
security. Lower credit ratings correspond to higher credit risk. If a security
has not received a rating, the Fund must rely entirely upon the Adviser’s credit
assessment that the security is comparable to investment grade. The presence of
a ratings modifier, sub-category or gradation (for example, a (+) or (-)) is
intended to show relative standing within the major rating categories and does
not affect the security credit rating for purposes of the Fund’s investment
parameters. If a security is downgraded below the minimum quality grade
discussed above, the Adviser will reevaluate the security, but will not be
required to sell it.
Investment
Ratings for Noninvestment-Grade Securities
Noninvestment-grade
securities are rated below BBB- by an NRSRO. These bonds have greater economic,
credit and liquidity
risks than investment-grade securities.
Additional
Information Regarding the Security Selection Process
As part
of analysis in its security selection
process, among other factors, the Adviser also evaluates whether environmental,
social and governance factors could have a positive or negative impact on the
risk profiles of many issuers or guarantors in the universe of securities in
which the Fund may invest. The Adviser may also consider information derived
from active engagements conducted by its in-house stewardship team with certain
issuers or guarantors on environmental, social and governance topics. This
qualitative analysis does not automatically result in including or excluding
specific securities but may be used by Federated Hermes as an additional input
in its
primary
analysis.
The
following provides general information on the risks associated with the Fund’s
principal investments. Any additional
risks associated with the Fund’s non-principal investments are described in the
Fund’s SAI. The Fund’s SAI also may provide additional information about the
risks associated with the Fund’s principal investments.
Interest
Rate Risk
Prices
of fixed-income securities rise and fall in response to changes in interest
rates. Generally, when interest rates rise, prices of
fixed-income securities fall. However, market factors, such as the demand for
particular fixed-income securities, may cause the price of certain fixed-income
securities to fall while the prices of other securities rise or remain
unchanged.
The
longer the duration of a fixed-income security, the more susceptible it is to
interest rate risk. The duration of a fixed-income
security may be equal to or shorter than the stated maturity of a fixed-income
security. Recent and potential future changes in monetary policy made by central
banks and/or their governments are likely to affect the level of interest rates.
Duration measures the price sensitivity of a fixed-income security given a
change in interest rates. For example, if a fixed-income security has an
effective duration of three years, a 1% increase in general interest rates would
be expected to cause the security’s value to decline about 3% while a 1%
decrease in general interest rates would be expected to cause the security’s
value to increase about 3%.
The
impact of interest rate changes on the value of floating rate investments is
typically reduced by periodic interest rate resets.
Variable and floating rate loans and securities generally are less sensitive to
interest rate changes, but may decline in value if their interest rates do not
rise as much or as quickly as interest rates in general. Conversely, variable
and floating rate loans and securities generally will not increase in value as
much as fixed rate debt instruments if interest rates decline.
11
ISSUER
Credit Risk
It
is possible that interest or principal on securities will not be paid when due.
Such non-payment or default may reduce the value
of the Fund’s portfolio holdings, its share price and its
performance.
Many
fixed-income securities receive credit ratings from nationally recognized
statistical rating organizations (NRSROs)
such as Fitch Rating Service, Moody’s Investor Services, Inc. and Standard &
Poor’s that assign ratings to securities by assessing the likelihood of an
issuer and/or guarantor default. Higher credit ratings correspond to lower
perceived credit risk and lower credit ratings correspond to higher perceived
credit risk. Credit ratings may be upgraded or downgraded from time to time as
an NRSRO’s assessment of the financial condition of a party obligated to make
payments with respect to such securities and credit risk changes. The impact of
any credit rating downgrade can be uncertain. Credit rating downgrades may lead
to increased interest rates and volatility in financial markets, which in turn
could negatively affect the value of the Fund’s portfolio holdings, its share
price and its investment performance. Credit ratings are not a guarantee of
quality. Credit ratings may lag behind the current financial conditions of the
issuer and/or guarantor and do not provide assurance against default or other
loss of money. Credit ratings do not protect against a decline in the value of a
security. If a security has not received a rating, the Fund must rely entirely
upon the Adviser’s credit assessment.
Fixed-income
securities generally compensate for greater credit risk by paying interest at a
higher rate. The difference between
the yield of a security and the yield of a U.S. Treasury security or other
appropriate benchmark with a comparable maturity (the “spread”) measures the
additional interest paid for risk. Spreads may increase generally in response to
adverse economic or market conditions. A security’s spread may also increase if
the security’s rating is lowered, or the security is perceived to have an
increased credit risk. An increase in the spread will cause the price of the
security to decline if interest rates remain unchanged.
Counterparty
Credit Risk
Credit
risk includes the possibility that a party to a transaction involving the Fund
will fail to meet its obligations. This could
cause the Fund to lose money or to lose the benefit of the transaction or
prevent the Fund from selling or buying other securities to implement its
investment strategy.
Liquidity
Risk
Trading
opportunities are more limited for fixed-income securities that have not
received any credit ratings, have received
ratings below investment grade or are not widely held.
Trading
opportunities are more limited for CMOs that have complex terms or that are not
widely held. These features may make
it more difficult to sell or buy a security at a favorable price or time.
Consequently, the Fund may have to accept a lower price to sell a security, sell
other securities to raise cash or give up an investment opportunity, any of
which could have a negative effect on the Fund’s performance. Infrequent trading
of securities may also lead to an increase in their price
volatility.
Liquidity
risk also refers to the possibility that the Fund may not be able to sell a
security or close out a derivative contract
when it wants to. If this happens, the Fund will be required to continue to hold
the security or keep the position open and the Fund could incur
losses.
OTC
derivative contracts generally carry greater liquidity risk than exchange-traded
contracts. This risk may be increased
in times of financial stress, if the trading market for OTC derivative contracts
becomes restricted.
Risk
of Foreign Investing
Foreign
securities pose additional risks because foreign economic or political
conditions may be less favorable than those of
the United States. Securities in foreign markets may also be subject to taxation
policies that reduce returns for U.S. investors.
Foreign
companies may not provide information (including financial statements) as
frequently or to as great an extent as
companies in the United States. Foreign companies may also receive less coverage
than U.S. companies by market analysts and the financial press. In addition,
foreign countries may lack uniform accounting, auditing and financial reporting
standards or regulatory requirements comparable to those applicable to U.S.
companies. These factors may prevent the Fund and its Adviser from obtaining
information concerning foreign companies that is as frequent, extensive and
reliable as the information available concerning companies in the United
States.
Foreign
countries may have restrictions on foreign ownership of securities or may impose
exchange controls, capital flow
restrictions or repatriation restrictions which could adversely affect the
liquidity of the Fund’s investments.
Call
Risk
Call
risk is the possibility that an issuer may redeem a fixed-income security before
maturity (a “call”) at a price below its
current market price. An increase in the likelihood of a call may reduce the
security’s price.
12
If
a fixed-income security is called, the Fund may have to reinvest the proceeds in
other fixed-income securities with lower
interest rates, higher credit risks or other less favorable
characteristics.
Risk
Associated with Noninvestment-Grade Securities
Securities
rated below investment grade, also known as junk bonds, generally entail greater
economic, credit and liquidity
risks than investment-grade securities. For example, their prices are more
volatile, economic downturns and financial setbacks may affect their prices more
negatively, and their trading market may be more limited. These securities are
considered speculative with respect to the issuer’s ability to pay interest and
repay principal.
NEW
FUND RISK
A
new fund’s performance may not represent how the fund is expected to or may
perform in the long term if, and when, it becomes
larger and has fully implemented its investment strategies. Investment positions
may have a disproportionate impact (negative or positive) on performance in new
funds. New funds may also require a period of time before they are fully
invested in securities that meet their investment objectives and policies and
achieve a representative portfolio composition. Fund performance may be lower or
higher during this “ramp-up” period, and may also be more volatile, than would
be the case after the fund is fully invested. Similarly, a new fund’s investment
strategy may require a longer period of time to show returns that are
representative of the strategy. New funds have limited performance histories for
investors to evaluate and new funds may not attract sufficient assets to achieve
investment and trading efficiencies. If a new fund were to fail to successfully
implement its investment strategies or achieve its investment objective,
performance may be negatively impacted, and any resulting liquidation could
create negative transaction costs for the fund and tax consequences for
investors.
UNDERLYING
FUND RISK
The
risk that the Fund’s performance is closely related to the risks associated with
the securities and other investments held by
underlying funds and that the ability of a Fund to achieve its investment
objective will depend upon the ability of underlying funds to achieve their
respective investment objectives. The Fund bears Underlying Fund fees and
expenses indirectly.
ETF
Risk
As
an ETF, the Fund is subject to the following risks:
Authorized
Participants Concentration Risk. To the
extent that the Fund invests in instruments that trade outside of a
collateralized settlement system, it may have a limited number of financial
institutions that act as Authorized Participants. To the extent they cannot or
are otherwise unwilling to engage in creation and redemption transactions with
the Fund and no other Authorized Participant steps in, trading in Shares of the
Fund may be significantly diminished and the market price of Shares may
represent a significant discount to net asset value (NAV). Shares may also face
delisting from the Exchange.
Premium/Discount
Risk. The NAV
of the Fund’s Shares will generally fluctuate with changes in the market value
of the Fund’s securities holdings. The market prices of Fund Shares will
generally fluctuate in accordance with changes in the Fund’s NAV and supply and
demand of Shares on the secondary market. It cannot be predicted whether Fund
Shares will trade below, at or above their NAV. As a result, shareholders of the
Fund may pay more than NAV when purchasing Shares and receive less than NAV when
selling Fund Shares. This risk is heightened in times of market volatility and
steep market declines, particularly to the extent that the Fund’s portfolio
holdings are or become illiquid. In such market conditions, market or stop-loss
orders to sell the ETF Shares may be executed at market prices that are
significantly below that day’s NAV, as subsequently calculated. In addition,
Authorized Participants and/or market makers in the Fund’s Shares may step away
from the market, resulting in a disruption to creations and redemptions, which
may result in trading prices that differ significantly from the Fund’s NAV. In
addition, market prices of Fund Shares may deviate significantly from the NAV if
the number of Fund Shares outstanding is small, such that there is less active
trading in Fund Shares. Investors purchasing and selling Fund Shares in the
secondary market may not experience investment results consistent with those
experienced by those creating and redeeming directly with the Fund.
Secondary
Market Trading Risk. Investors
buying or selling Shares in the secondary market will normally pay brokerage
commissions, which are often a fixed amount and may be a significant
proportional cost for investors buying or selling relatively small amounts of
Shares. In addition, secondary market investors will incur the cost of the
difference between the price that an investor is willing to pay for Shares (the
bid price) and the price at which an
13
investor
is willing to sell Shares (the ask price). This difference in bid and ask prices
is often referred to as the “spread” or “bid/ask spread.” The bid/ask spread
varies over time for Shares based on trading volume and market liquidity, and is
generally lower if the Fund’s Shares have more trading volume and market
liquidity and higher if the Fund’s Shares have little trading volume and market
liquidity. Increased market volatility may cause increased bid/ask
spreads.
Although
Fund Shares are listed for trading on the Exchange, there can be no assurance
that an active trading market for such Shares will develop or be maintained or
that the Fund’s Shares will continue to be listed. Trading in Fund Shares may be
halted due to market conditions or for reasons that, in the view of the
Exchange, make trading in Shares inadvisable. In addition, trading in Shares is
subject to trading halts caused by extraordinary market volatility pursuant to
Exchange “circuit breaker” rules. There can be no assurance that the
requirements of the Exchange necessary to maintain the listing of any Fund will
continue to be met or will remain unchanged or that the Shares will trade with
any volume, or at all.
Cash
Transactions Risk. Like other
ETFs, the Fund sells and redeems its Shares only in large blocks called Creation
Units and only to Authorized Participants. Unlike most other ETFs, however, the
Fund expects to effect its creations and redemptions at least partially or fully
for cash, rather than in-kind securities.
Other ETFs
generally are able to make in-kind redemptions and avoid realizing gains in
connection with redemption requests. Effecting redemptions for cash may cause
the Fund to sell portfolio securities in order to obtain the cash needed to
distribute redemption proceeds. Such dispositions may occur at an inopportune
time, resulting in potential losses to the Fund or difficulties in meeting
shareholder redemptions, and involve transaction costs. If the Fund recognizes
gain on these sales, this generally will cause the Fund to recognize gain it
might not otherwise have recognized if it were to distribute portfolio
securities in-kind or to recognize such gain sooner than would otherwise have
been required. The Fund generally intends to distribute these gains to
shareholders to avoid being taxed on this gain at the Fund level and otherwise
comply with the special tax rules that apply to it. This strategy may cause
shareholders to be subject to tax on gains they would not otherwise be subject
to, or at an earlier date than, if they had made an investment in another
ETF.
In
addition, cash transactions may have to be carried out over several days if the
securities market in which the Fund is trading is less liquid and may involve
considerable transaction expenses and taxes. These brokerage fees and taxes,
which will be higher than if the Fund sold and redeemed its Shares principally
in-kind, may be passed on to purchasers and redeemers of Creation Units in the
form of creation and redemption transaction fees. However, the Fund has capped
the total fees that may be charged in connection with the redemption of Creation
Units at 2% of the value of the Creation Units redeemed. To the extent
transaction and other costs associated with a redemption exceed that cap, those
transaction costs will be borne by the Fund’s remaining shareholders. These
factors may result in wider spreads between the bid and the offered prices of
the Fund’s Shares than for other ETFs.
Leverage
Risk
Leverage
risk is created when an investment, which includes, for example, an investment
in a derivative contract, exposes
the Fund to a level of risk that exceeds the amount invested. Changes in the
value of such an investment magnify the Fund’s risk of loss and potential for
gain. Investments can have these same results if their returns are based on a
multiple of a specified index, security or other benchmark.
Risk
of Investing in Derivative Contracts
The
Fund’s exposure to derivative contracts (either directly or through its
investment in another investment company) involves
risks different from, or possibly greater than, the risks associated with
investing directly in securities and other traditional investments. First,
changes in the value of the derivative contracts in which the Fund invests may
not be correlated with changes in the value of the underlying Reference
Instruments or, if they are correlated, may move in the opposite direction than
originally anticipated. Second, while some strategies involving derivatives may
reduce the risk of loss, they may also reduce potential gains or, in some cases,
result in losses by offsetting favorable price movements in portfolio holdings.
Third, there is a risk that derivative contracts may be erroneously priced or
improperly valued and, as a result, the Fund may need to make increased cash
payments to the counterparty. Fourth, exposure to derivative contracts may have
tax consequences to the Fund and its shareholders. For example, derivative
contracts may cause the Fund to realize increased ordinary income or short-term
capital gains (which are treated as ordinary income for Federal income tax
purposes) and, as a result, may increase taxable distributions to shareholders.
In addition, under certain circumstances certain derivative contracts may cause
the Fund to: (a) incur an excise tax on a portion of the income related to those
contracts; and/or (b) reclassify, as a return of capital, some or all of the
distributions previously made to shareholders during the fiscal year as dividend
income. Fifth, a common provision in OTC derivative contracts permits the
counterparty
14
to
terminate any such contract between it and the Fund, if the value of the Fund’s
total net assets declines below a specified level over a given time period.
Factors that may contribute to such a decline (which usually must be
substantial) include significant shareholder redemptions and/or a marked
decrease in the market value of the Fund’s investments. Any such termination of
the Fund’s OTC derivative contracts may adversely affect the Fund (for example,
by increasing losses and/or costs, and/or preventing the Fund from fully
implementing its investment strategies). Sixth, the Fund may use a derivative
contract to benefit from a decline in the value of a Reference Instrument. If
the value of the Reference Instrument declines during the term of the contract,
the Fund makes a profit on the difference (less any payments the Fund is
required to pay under the terms of the contract). Any such strategy involves
risk. There is no assurance that the Reference Instrument will decline in value
during the term of the contract and make a profit for the Fund. The Reference
Instrument may instead appreciate in value creating a loss for the Fund.
Seventh, a default or failure by a CCP or an FCM (also sometimes called a
“futures broker”), or the failure of a contract to be transferred from an
Executing Dealer to the FCM for clearing, may expose the Fund to losses,
increase its costs, or prevent the Fund from entering or exiting derivative
positions, accessing margin, or fully implementing its investment strategies.
The central clearing of a derivative and trading of a contract over a SEF could
reduce the liquidity in, or increase costs of entering into or holding, any
contracts. Finally, derivative contracts may also involve other risks described
in this Prospectus, such as interest rate, credit, liquidity and leverage
risks.
RISK
RELATED TO THE ECONOMY
The
value of the Fund’s portfolio may decline in tandem with a drop in the overall
value of the markets in which the Fund
invests and/or other markets based on negative developments in the U.S. and
global economies. Economic, political and financial conditions, or industry or
economic trends and developments, may, from time to time, and for varying
periods of time, cause volatility, illiquidity or other potentially adverse
effects in the financial markets, including the fixed-income market. The
commencement, continuation or ending of government policies and economic
stimulus programs, changes in monetary policy, increases or decreases in
interest rates, or other factors or events that affect the financial markets,
including the fixed-income markets, may contribute to the development of or
increase in volatility, illiquidity, shareholder redemptions and other adverse
effects which could negatively impact the Fund’s performance. For example, the
value of certain portfolio securities may rise or fall in response to changes in
interest rates, which could result from a change in government policies, and has
the potential to cause investors to move out of certain portfolio securities,
including fixed-income securities, on a large scale. This may increase
redemptions from funds that hold large amounts of certain securities and may
result in decreased liquidity and increased volatility in the financial markets.
Market factors, such as the demand for particular portfolio securities, may
cause the price of certain portfolio securities to fall while the prices of
other securities rise or remain unchanged.
Epidemic
and Pandemic Risk
An outbreak of respiratory
disease caused by a novel coronavirus was first detected in China in late 2019
and subsequently spread globally (“COVID-19”). This coronavirus has resulted in
closing borders, enhanced health screenings, disruptions to healthcare service
preparation and delivery, quarantines, cancellations, and disruptions to supply
chains, workflow operations and consumer activity, as well as general concern
and uncertainty. The impact of this coronavirus may continue for an extended
period of time and has resulted in substantial economic volatility. Health
crises caused by outbreaks, such as the coronavirus outbreak, may exacerbate
other pre-existing political, social and economic risks. The impact of this
outbreak, and other epidemics and pandemics that may arise in the future, could
continue to negatively affect the worldwide economy, as well as the economies of
individual countries, individual companies, including certain Fund service
providers and issuers of the Fund’s investments, and the markets in general in
significant and unforeseen ways. Any such impact could adversely affect the
Fund’s performance.
The United
States has responded to the COVID-19 pandemic and resulting economic distress
with fiscal and monetary stimulus packages. In late March 2020, the government
passed the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”),
a stimulus package providing for over $2.2 trillion in resources to small
businesses, state and local governments, and individuals that have been
adversely impacted by the COVID-19 pandemic. In addition, in mid-March 2020 the
U.S. Federal Reserve (“Fed”) cut interest rates to historically low levels and
announced a new round of quantitative easing, including purchases of corporate
and municipal government bonds. The Fed also enacted various programs to support
liquidity operations and funding in the financial markets, including expanding
its reverse repurchase agreement operations, adding $1.5 trillion of liquidity
to the banking system; establishing swap lines with other major central banks to
provide dollar funding; establishing a program to support money market funds;
easing various bank capital buffers; providing funding backstops for businesses
to provide bridging loans for up to four years; and providing funding to help
credit flow in asset-backed securities markets. The Fed also plans to extend
credit to small- and medium-sized businesses.
15
MBS
Risk
MBS
have unique risks. A rise in interest rates may cause the value of MBS held by
the Fund to decline. The mortgage loans
underlying MBS generally are subject to a greater rate of principal prepayments
in a declining interest rate environment and to a lesser rate of principal
prepayments in an increasing interest rate environment. If the underlying
mortgages are paid off sooner than expected, the Fund may have to reinvest this
money in mortgage-backed or other securities that have lower yields. Hybrid ARMs
also involve special risks. Like ARMs, hybrid ARMs have periodic and lifetime
limitations on the increases that can be made to the interest rates that
mortgagors pay. Therefore, if during a floating rate period, interest rates rise
above the interest rate limits of the hybrid ARM, the Fund will not benefit from
further increases in interest rates. See “Prepayment and Extension Risk” and
“Interest Rate Risk.” CMOs with complex or highly variable prepayment terms
generally entail greater market, prepayment and liquidity risks than other MBS.
For example, their prices are more volatile and their trading market may be more
limited.
MBS
are subject to the risk that payments made on a security will not be made when
due. Payments on MBS are primarily
derived from the interest and principal payments of the underlying mortgages.
Some MBS also have guarantees or other structural features that provide
additional support for interest and principal payments on the MBS if payments on
the underlying mortgages are not made. MBS are subject to the risk that the
underlying mortgage borrowers fail to make timely payments of interest and
principal and that any guarantee or other structural feature, if present, is
insufficient to enable the timely payment of interest and principal on the MBS.
The structure of certain CMO interests held by the Fund may cause the Fund to be
paid interest and/or principal on its investment only after holders of other
interests in that particular CMO have received the full repayment of principal
or interest on their investments. MBS are most commonly issued or guaranteed by
GSEs, but also may be issued or guaranteed by private entities, which generally
entail greater risk. Certain MBS issued by GSEs are not backed by or entitled to
the full faith and credit of the U.S. government, but are, however, supported
through federal subsidies, loans or other benefits. The Fund also may invest in
certain MBS issued by GSEs that have no explicit financial support, and are
supported only by the credit of the applicable GSEs (in addition to the
underlying mortgages and related debt service payments). The U.S. government has
provided financial support to Freddie Mac and Fannie Mae, but there is no
assurance that it will support these or other GSEs in the future. Although
certain MBS are guaranteed as to timely payment of interest and principal by a
GSE, the market prices for such securities are not guaranteed and will
fluctuate.
Prepayment
AND EXTENSION Risk
Unlike
traditional fixed-income securities, which pay a fixed rate of interest until
maturity (when the entire principal amount is
due), payments on mortgage-backed securities include both interest and a partial
payment of principal. Partial payment of principal may be comprised of scheduled
principal payments as well as unscheduled payments from the voluntary
prepayment, refinancing or foreclosure of the underlying loans. These
unscheduled prepayments of principal create risks that can adversely affect a
fund holding mortgage-backed securities.
For
example, when interest rates decline, the values of mortgage-backed securities
generally rise. However, when interest
rates decline, unscheduled prepayments can be expected to accelerate, and the
Fund would be required to reinvest the proceeds of the prepayments at the lower
interest rates then available. Unscheduled prepayments would also limit the
potential for capital appreciation on mortgage-backed securities.
Conversely,
when interest rates rise, the values of mortgage-backed securities generally
fall. Since rising interest rates typically
result in decreased prepayments, this could lengthen the average lives of
mortgage-backed securities, and cause their value to decline more than
traditional fixed-income securities.
Generally,
mortgage-backed securities compensate for the increased risk associated with
prepayments by paying a higher
yield. The additional interest paid for risk is measured by the difference
between the yield of a mortgage-backed security and the yield of a U.S. Treasury
security or other appropriate benchmark with a comparable maturity (the
“spread”). An increase in the spread will cause the price of the mortgage-backed
security to decline. Spreads generally increase in response to adverse economic
or market conditions. Spreads may also increase if the security is perceived to
have an increased prepayment risk or is perceived to have less market
demand.
SECTOR
RISK
Companies
with similar characteristics may be grouped together in broad categories called
sectors. Sector risk is the possibility
that a certain sector may underperform other sectors or the market as a whole.
To the extent the Fund invests in a particular sector or sectors, its
performance will be more susceptible to economic, business or other developments
and risks affecting that sector. Such factors may vary depending upon the sector
and economic conditions at the time.
16
technology
Risk
The
Adviser uses various technologies in managing the Fund, consistent with its
investment objective(s) and strategy
described in this Prospectus. For example, proprietary and third-party data and
systems are utilized to support decision-making for the Fund. Data imprecision,
software or other technology malfunctions, programming inaccuracies and similar
circumstances may impair the performance of these systems, which may negatively
affect Fund performance.
CALCULATION
OF NET ASSET VALUE
The
Fund’s net asset value of a Share (NAV) is determined as of the end of regular
trading on the New York Stock Exchange
(NYSE) (normally 4:00 p.m. Eastern time) each day the NYSE is open. The Fund
calculates the NAV by valuing its assets, subtracting its liabilities and
dividing the balance by the number of Shares outstanding. The Fund’s current NAV
and/or public offering price may be found at FederatedInvestors.com, via
online news sources and in certain newspapers.
When
the Fund holds securities that trade principally in foreign markets on days the
NYSE is closed, the value of the Fund’s
assets may change on days you cannot purchase or redeem Shares. This may also
occur when the U.S. markets for fixed-income securities are open on a day the
NYSE is closed.
In
calculating its NAV, the Fund generally values investments as
follows:
◾ Fixed-income
securities are fair valued using price evaluations provided by a pricing service
approved by the Board of Trustees (“Board”).
◾ Derivative
contracts listed on exchanges are valued at their reported settlement or closing
price, except that options are valued at the mean of closing bid and asked
quotations.
◾ Over-the-counter
(OTC) derivative contracts are fair valued using price evaluations provided by a
pricing service approved by the Board.
If
any price, quotation, price evaluation or other pricing source is not readily
available when the NAV is calculated, if the Fund
cannot obtain price evaluations from a pricing service or from more than one
dealer for an investment within a reasonable period of time as set forth in the
Fund’s valuation policies and procedures, or if information furnished by a
pricing service, in the opinion of the Valuation Committee, is deemed not
representative of the fair value of such security, the Fund uses the fair value
of the investment determined in accordance with the procedures generally
described below. There can be no assurance that the Fund could obtain the fair
value assigned to an investment if it sold the investment at approximately the
time at which the Fund determines its NAV per share.
Shares
of other funds are valued based upon their reported NAVs. The prospectuses for
these funds explain the circumstances
under which they will use fair value pricing and the effects of using fair value
pricing.
Fair
Valuation and Significant Events Procedures
The
Board has ultimate responsibility for determining the fair value of investments
for which market quotations are not readily
available. The Board has appointed a Valuation Committee comprised of officers
of the Fund, the Adviser and certain of the Adviser’s affiliated companies to
assist in determining fair value and in overseeing the calculation of the NAV.
The Board has also authorized the use of pricing services recommended by the
Valuation Committee to provide fair value evaluations of the current value of
certain investments for purposes of calculating the NAV. In the event that
market quotations and price evaluations are not available for an investment, the
Valuation Committee determines the fair value of the investment in accordance
with procedures adopted by the Board. The Board periodically reviews and
approves the fair valuations made by the Valuation Committee and any changes
made to the procedures. The Fund’s SAI discusses the methods used by pricing
services and the Valuation Committee to assist the Board in valuing
investments.
Using
fair value to price investments may result in a value that is different from an
investment’s most recent closing price and
from the prices used by other funds to calculate their NAVs. The application of
the fair value procedures to an investment represent a good faith determination
of such investment’s fair value. There can be no assurance that the Fund could
obtain the fair value assigned to an investment if it sold the investment at
approximately the time at which the Fund determines its NAV per share, and the
actual value could be materially different.
The
Board also has adopted procedures requiring an investment to be priced at its
fair value whenever the Adviser determines
that a significant event affecting the value of the investment has occurred
between the time as of which the price of the investment would otherwise be
determined and the time as of which the NAV is computed. An event is considered
significant if there is both an affirmative expectation that the investment’s
value will change in response to the event and a reasonable basis for
quantifying the resulting change in value.
17
Examples
of significant events that may occur after the close of the principal market on
which a security is traded, or after the
time of a price evaluation provided by a pricing service or a dealer,
include:
◾ Political
or other developments affecting the economy or markets in which an issuer
conducts its operations or its securities are traded; and
◾ Announcements
concerning matters such as acquisitions, recapitalizations or litigation
developments or a natural disaster affecting the issuer’s operations or
regulatory changes or market developments affecting the issuer’s
industry.
For
other significant events, the Fund may seek to obtain more current quotations or
price evaluations from alternative pricing
sources. If a reliable alternative pricing source is not available, the
Valuation Committee will determine the fair value of the investment using
another method approved by the Board. The Board has ultimate responsibility for
any fair valuations made in response to a significant event.
The
fair valuation of securities following a significant event can serve to reduce
arbitrage opportunities for short-term traders to
profit at the expense of long-term investors in the Fund. For example, such
arbitrage opportunities may exist when the market on which portfolio securities
are traded closes before the Fund calculates its NAV, which is typically the
case with Asian and European markets. However, there is no assurance that these
significant event procedures will prevent dilution of the NAV by short-term
traders.
individual
shares
Shares
of the Fund are listed for trading on a national securities exchange during the
trading day. The Fund’s primary listing exchange is NYSE
Arca. Shares can be bought and sold throughout the trading day like Shares of
other publicly traded companies, and when you buy or sell the Fund’s Shares in
the secondary market, you will pay or receive the market price. However, there
can be no guarantee that an active trading market will develop or be maintained,
or that the Fund Shares listing will continue or remain unchanged. Buying or
selling the Fund’s Shares involves certain costs that apply to all securities
transactions. For example, when buying or selling Shares of the Fund through a
financial intermediary, you may incur a brokerage commission or other charges
determined by your financial intermediary. The commission is frequently a fixed
amount and may be a significant cost for investors seeking to buy or sell small
amounts of Shares. In addition, you may also incur the cost of the spread (the
difference between the bid price (the price secondary market investors are
willing to pay for Shares) and the ask price (the price at which secondary
market investors are willing to sell Shares)). The spread varies over time for
Shares of the Fund based on its trading volume and market liquidity, and is
generally less if the Fund has more trading volume and market liquidity and more
if the Fund has less trading volume and market liquidity.
Creations
and Redemptions
Shares
of the Fund may only be acquired through the Distributor and redeemed directly
with the Fund by or through an Authorized
Participant in Creation Units or multiples thereof. A Creation Unit is comprised
of 10,000 Shares, as discussed in the “Creations and Redemptions” section of the
SAI. “Authorized Participants” are registered clearing agents that enter into an
agreement with the Distributor to transact in Creation Units. For a list of the
Fund’s Authorized Participants, contact the Distributor at 888-400-7838. Once
created, Shares of the Fund normally trade in the secondary market in amounts
less than a Creation Unit.
The
Fund is open on every “Business Day,” which is any day the NYSE is open. The New
York Stock Exchange (NYSE) is open for trading
Monday through Friday and is closed on 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. On days when the NYSE closes earlier than normal, the
Fund may require orders to create or redeem Creation Units to be placed earlier
in the day. See the “Creations and Redemptions” section of the SAI.
Purchases
and redemptions of Creation Units will take place in-kind and/or for cash at the
discretion of the Fund. The determination
of whether purchases and redemptions of Creation Units will be for cash or
in-kind depends primarily on the regulatory requirements and settlement
mechanisms relevant to the Fund’s portfolio holdings and the Fund is not limited
to engaging in in-kind transactions to any particular market circumstances. As
further described in the SAI, Creation Units typically are issued on a two
Business Days (“T+2”) basis after a purchase order has been received in good
order and the transfer of good title to the Fund of any in-kind securities
and/or cash required to purchase a Creation Unit have been completed (subject to
certain exceptions). Similarly, and also as further described in the SAI,
deliveries of redemption proceeds by the Fund generally will be made on a T+2
basis after a redemption order has been received in good order and the requisite
number of Fund Shares have been delivered (subject to certain exceptions). The
Fund reserves the right to settle Creation Unit transactions on a basis other
than T+2 in order to, among other matters, accommodate
18
non-U.S.
market holiday schedules, closures and settlement cycles, to account for
different treatment among non-U.S. and U.S. markets of dividend record dates and
ex-dividend dates (i.e., the last day the holder of a security can sell the
security and still receive dividends payable on the security) and in certain
other circumstances. The Fund may delay settlement for up to 15 days from the
date an order has been submitted in good order and the requisite cash and/or
assets delivered to the relevant Fund to accommodate foreign holidays, as
further described in the SAI, and otherwise may delay redemptions up to seven
days or longer as permitted by applicable law, regulations and interpretations,
such as where unusual market conditions affect the NYSE or an emergency exists
which makes it impracticable for the Fund to dispose of or value securities it
owns or the Fund has received an SEC exemptive order.
The
Fund intends to comply with the U.S. federal securities laws in accepting
securities for deposit and satisfying redemptions
with redemption securities by, among other means, assuring that any securities
accepted for deposit and any securities used to satisfy redemption requests will
be sold in transactions that would be exempt from registration under the
Securities Act. Further, an Authorized Participant that is not a “qualified
institutional buyer,” as such term is defined under Rule 144A of the Securities
Act, will not be able to receive restricted securities eligible for resale under
Rule 144A.
For
more information on how to buy and sell Shares of the Fund, call 1-800-341-7400
or visit FederatedInvestors.com.
Share
Trading Prices
The
trading prices of the Fund’s Shares listed on its Exchange may differ from the
Fund’s daily NAV and will normally be
affected by market forces, such as supply and demand, economic conditions, the
market value of the Fund’s disclosed portfolio holdings and other factors. As a
result, trading prices may be lower, higher or the same as the Fund’s NAV; and
investors may pay more than NAV when buying Shares and receive less than NAV
when selling Shares through the Exchange.
Book
Entry
Shares
of the Fund are held in book-entry form, which means that no stock certificates
are issued. The Depository Trust Company
(DTC) or its nominee is the record owner of all outstanding Shares of the Fund
and is recognized as the owner of all Shares for all purposes.
Investors
owning Shares of the Fund are beneficial owners as shown on the records of DTC
or its participants. DTC serves as
the securities depository for Shares of the Fund. DTC participants include
securities brokers and dealers, banks, trust companies, clearing corporations
and other institutions that directly or indirectly maintain a custodial
relationship with DTC. As a beneficial owner of Shares, you are not entitled to
receive physical delivery of stock certificates or to have Shares registered in
your name, and you are not considered a registered owner of Shares. Therefore,
to exercise any right as an owner of Shares, you must rely upon the procedures
of DTC and its participants. These procedures are the same as those that apply
to any other exchange-traded securities that you hold in book-entry or “street
name” form.
Premium/Discount
Information
The
NAV of the Fund will fluctuate with changes in the market value of its portfolio
holdings. The market price of the Fund will
fluctuate in accordance with changes in its NAV, as well as market supply and
demand.
There
may be differences–premiums
or discounts–between the daily market prices on secondary markets for Shares of
the Fund
and the Fund’s NAV. NAV is the price per share at which the Fund issues and
redeems Shares. The Fund’s market price may be at, above or below its NAV. A
premium is the amount that the Fund is trading above the reported NAV, expressed
as a percentage of the NAV. A discount is the amount that the Fund is trading
below the reported NAV, expressed as a percentage of the NAV. A discount or
premium could be significant. Information regarding the Fund’s NAV, market price
and daily premiums or discounts can be found at https://www.federatedinvestors.com/products/exchange-traded-funds/short-duration-corporate-etf.do.
Investments
by Registered Investment Companies
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, including that such investment companies enter
into an agreement with the Fund.
Continuous
Offering
The
method by which Creation Units of Fund Shares are created and traded may raise
certain issues under applicable securities
laws. Because new Creation Units of Shares are issued and sold by the Fund on an
ongoing basis, a “distribution,” as such term is used in the Securities Act, may
occur at any point. Broker-dealers and other persons are cautioned that some
activities on their part may, depending on the circumstances, result in their
being deemed participants in a distribution in a manner which could render them
statutory underwriters and subject them to the prospectus delivery requirement
and liability provisions of the Securities Act.
19
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
the 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
characterization as an underwriter.
Broker-dealer
firms should also note that dealers who are not “underwriters” but are effecting
transactions in Shares, whether or
not participating in the distribution of Shares, are generally required to
deliver a prospectus. This is because the prospectus delivery exemption in
Section 4(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 engaging in ordinary
secondary market transactions) and thus dealing with the Shares that are part of
an overallotment within the meaning of Section 4(3)(C) of the Securities Act,
will be unable to take advantage of the prospectus delivery exemption provided
by Section 4(3) of the Securities Act. For delivery of prospectuses to exchange
members, the prospectus delivery mechanism of Rule 153 under the Securities Act
is only available with respect to transactions on a national
exchange.
Dealers
effecting transactions in the Fund’s Shares, whether or not participating in
this distribution, are generally required
to deliver a Prospectus. This is in addition to any obligation of dealers to
deliver a Prospectus when acting as underwriters.
The
Fund and its affiliated service providers may pay fees as described below to
financial intermediaries (such as broker-dealers,
banks, investment advisers or third-party administrators) whose customers are
shareholders of the Fund.
RULE
12b-1 FEES
The
Board has adopted a Rule 12b-1 Plan, which allows payment of marketing fees of
up to 0.25% of the Fund’s average
net assets. The Fund’s Shares have no present intention of paying, accruing or
incurring any Rule 12b-1 Fees until such time as approved by the Fund’s Board of
Trustees.
ADDITIONAL
PAYMENTS TO FINANCIAL INTERMEDIARIES
The
Distributor may pay out of its own resources amounts to certain financial
intermediaries, including broker-dealers, banks,
registered investment advisers, independent financial planners and retirement
plan administrators, that support the sale of Shares or provide services to Fund
shareholders. The amounts of these payments could be significant, and may create
an incentive for the financial intermediary or its employees or associated
persons to recommend or sell Shares of the Fund to you. Not all financial
intermediaries receive such payments, and the amount of compensation may vary by
intermediary. In some cases, such payments may be made by or funded from the
resources of companies affiliated with the Distributor (including the Adviser).
These payments are not reflected in the fees and expenses listed in the fee
table section of the Fund’s Prospectus and described above because they are not
paid by the Fund.
These
payments are negotiated and may be based on such factors as: the number or value
of Shares that the financial intermediary
sells or may sell; the value of client assets invested; the level and types of
services or support furnished by the financial intermediary; or the Fund’s
and/or other Federated Hermes funds’ relationship with the financial
intermediary. These payments may be in addition to payments, as described above,
made by the Fund to the financial intermediary. In connection with these
payments, the financial intermediary may elevate the prominence or profile of
the Fund and/or other Federated Hermes funds, within the financial
intermediary’s organization by, for example, placement on a list of preferred or
recommended funds and/or granting the Distributor preferential or enhanced
opportunities to promote the funds in various ways within the financial
intermediary’s organization. You can ask your financial intermediary for
information about any payments it receives from the Distributor or the Fund and
any services provided, as well as about fees and/or commissions it
charges.
20
Fund
Distributions
The
Fund distributes substantially all of its net investment income to shareholders
in the form of dividends. The Fund intends to
declare and distribute income dividends monthly to shareholders of record. In
addition, the Fund distributes any net capital gains earned from the sale of
portfolio securities to shareholders no less frequently than annually. Net
short-term capital gains may be paid more frequently. Dividend payments are made
through DTC participants and indirect participants to beneficial owners then of
record with proceeds received from the Fund.
No
dividend reinvestment service is provided by the Trust. Financial intermediaries
may make available the DTC book-entry
Dividend Reinvestment Service for use by beneficial owners of Fund Shares for
reinvestment of their dividend distributions. Beneficial owners should contact
their financial intermediary to determine the availability and costs of the
service and the details of participation therein. Financial intermediaries may
require beneficial owners to adhere to specific procedures and timetables. If
this service is available and used, dividend distributions of both income and
net capital gains will be automatically reinvested in additional whole Shares of
the Fund purchased in the secondary market.
TAX
INFORMATION
The
Fund sends an IRS Form 1099 and an annual statement of your account activity to
assist you in completing your federal,
state and local tax returns. Fund distributions of dividends and capital gains
are taxable to you whether paid in cash or reinvested in the Fund. Dividends are
taxable at different rates depending on the source of dividend income.
Distributions of net short-term capital gains are taxable to you as ordinary
income. Distributions of net long-term capital gains are taxable to you as
long-term capital gains regardless of how long you have owned your
Shares.
Fund
distributions are expected to be primarily dividends. Redemptions and exchanges
are taxable sales. Please consult your tax
adviser regarding your federal, state and local tax liability.
Taxes
on Creations and Redemptions of Creation Units
A
person who purchases a Creation Unit by exchanging securities in-kind generally
will recognize a gain or loss equal to the
difference between: (i) the sum of the market value of the Creation Units at the
time of the exchange and any net amount of cash received by the Authorized
Participant in the exchange; and (ii) the sum of the purchaser’s aggregate basis
in the securities surrendered and any net amount of cash paid for the Creation
Units. A person who redeems Creation Units and receives securities in-kind from
the Fund will generally recognize a gain or loss equal to the difference between
the redeemer’s basis in the Creation Units, and the aggregate market value of
the securities received and any net cash received. The IRS, however, may assert
that a loss realized upon an in-kind exchange of securities for Creation Units
or an exchange of Creation Units for securities 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 effecting in-kind creations or
redemptions should consult their own tax adviser with respect to these matters.
The Fund has the right to reject an order for Creation Units if the purchaser
(or a group of purchasers) would, upon obtaining the Shares so ordered, own 80%
or more of the outstanding Shares of the Fund and if, pursuant to section 351 of
the Code, the Fund would have a basis in the deposit securities different from
the market value of such securities on the date of deposit. The Fund also has
the right to require information necessary to determine beneficial share
ownership for purposes of the 80% determinations.
FREQUENT
TRADING POLICIES
As
described above, when buying or selling shares of the Fund through a financial
intermediary, you may incur a brokerage
commission or other charges determined by your financial intermediary. Due to
these brokerage costs, if any, frequent buying and selling of Fund Shares on the
secondary market may detract significantly from investment returns.
The
Trust’s Board of Trustees has determined not to adopt policies and procedures
designed to prevent or monitor for frequent
purchases and redemptions of the Fund’s shares because the Fund sells and
redeems its shares at NAV only in Creation Units pursuant to the terms of an
Authorized Participant Agreement between the Authorized Participant and the
Distributor, and such direct trading between the Fund and Authorized
Participants is critical to ensuring that the Fund’s shares trade at or close to
NAV. Further, the vast majority of trading in Fund shares occurs on the
secondary market, which does not involve the Fund directly and therefore does
not cause the Fund to experience many of the harmful effects of market timing,
such as dilution and disruption of portfolio management. In addition, the Fund
imposes a transaction fee on Creation Unit transactions, which is designed to
offset transfer and other transaction costs incurred by the Fund in connection
with the issuance and redemption of Creation Units and may employ fair valuation
pricing to minimize potential dilution from market timing The Fund reserves the
right to reject any purchase order at any time and reserves the right to impose
restrictions on disruptive, excessive, or short-term trading.
21
Portfolio
Holdings Information
A
description of the Trust’s policies and procedures with respect to the
disclosure of the Fund’s portfolio securities is available
in the Fund’s Statement of Additional Information. The Fund discloses its
portfolio holdings daily at FederatedInvestors.com. Fund
fact sheets are also available on FederatedInvestors.com and
provide information regarding the Fund’s top holdings. Other information may be
requested by calling 1-800-341-7400.
Declaration
of Trust Provisions
The
Board has adopted, and from time to time amends, an Amended and Restated
Declaration of Trust for the Trust and the Fund,
which governs its operations and by which each shareholder shall be held
expressly to have agreed to be bound by the provisions thereof.
The
Fund’s Declaration of Trust also places limitations on the forum in which claims
against the Trust may be heard and
includes a waiver of a jury trial. Other than federal securities law claims,
claims against the Trust are required to be brought in the Court of Chancery of
the State of Delaware to the extent there is subject matter jurisdiction in such
court for the claims asserted or, if not, then in the Superior Court of the
State of Delaware. Accordingly, shareholders may be required to bring claims in
an inconvenient or less favorable forum.
The
Board governs the Fund. The Board selects and oversees the Adviser, Federated
Investment Management Company.
The Adviser manages the Fund’s assets, including buying and selling portfolio
securities. Federated Advisory Services Company (FASC), an affiliate of the
Adviser, provides certain support services to the Adviser. The fee for these
services is paid by the Adviser and not by the Fund. The address of the Adviser
and FASC is 1001 Liberty Avenue, Pittsburgh, PA 15222-3779.
The
Fund has received and can rely upon an order from the Securities and Exchange
Commission (SEC) that permits the
Adviser, subject to approval by the Board of Trustees, to appoint a subadviser
or change the terms of a subadvisory agreement without obtaining shareholder
approval. The Fund is permitted to rely upon the SEC order to change
subadvisers, or the fees paid to a subadviser, without the expense and delays
associated with obtaining shareholder approval of the change. This order does
not, however, permit the Adviser to increase the aggregate advisory fee rate of
the Fund without the approval of the shareholders.
The
Adviser, and
other advisory subsidiaries of Federated Hermes combined, advise approximately
102 registered
investment
companies spanning equity, fixed-income and money market mutual funds and also
manage a variety of other pooled investment vehicles, private investment
companies and customized separately managed accounts (including
non-U.S./offshore funds).
Federated
Hermes’ assets under management totaled approximately $668.9 billion in assets
as of December 31, 2021. Federated Hermes was established in 1955 as Federated
Investors, Inc. and is one of the largest investment managers in the United
States with nearly
2,000
employees. Federated Hermes provides investment products to more than 11,000
investment professionals and institutions.
The
Adviser advises approximately 74 registered
investment
companies and also manages
sub-advised
funds.
The Adviser’s
assets under
management
totaled approximately $399.6 billion in assets as of December 31,
2021.
PORTFOLIO
MANAGEMENT INFORMATION
The
Fund’s portfolio managers are jointly and primarily responsible for day to day
management of the Fund.
John
Gentry
John
Gentry, CFA, Senior Portfolio Manager, has been the Fund’s portfolio manager
since its inception in December
of 2021.
Mr.
Gentry is a Senior Portfolio Manager and Head of the Domestic High Grade
Corporate Bond Group. He is responsible
for day to day management of the Fund focusing on asset allocation, interest
rate strategy and security selection. He has been with the Adviser or an
affiliate since 1995; has worked in investment management since 1990; has
managed investment portfolios since 1997. Education: B.A., University of
Virginia; M.B.A., Cornell University.
22
Robert
Matthews
Robert
Matthews, CFA, Portfolio Manager, has been the Fund’s portfolio manager since
its inception in December
of 2021.
Mr.
Matthews is responsible for day to day management of the Fund focusing on asset
allocation and security selection. He has
been with the Adviser or an affiliate since 2007; has worked in investment
management since 2010; has managed investment portfolios since 2018. Education:
B.S., Washington & Jefferson College; M.B.A., Robert Morris
University.
The
Fund’s SAI provides additional information about the Portfolio Managers’
compensation, management of other accounts
and ownership of securities in the Fund.
ADVISORY
FEES
The
Fund’s investment advisory contract provides for payment to the Adviser of an
annual investment advisory fee of 0.39% of
the Fund’s average daily net assets. The Adviser may contractually or
voluntarily waive a portion of its fee or reimburse the Fund for certain
operating expenses. The Adviser and its affiliates have also agreed to certain
“Fee Limits” as described in the footnote to the “Risk/Return Summary: Fees and
Expenses” table found in the “Fund Summary” section of the
Prospectus.
Under
the Investment Advisory Agreement between the Trust and the Adviser, the Adviser
is responsible for reviewing, supervising
and administering the Fund’s investment program and the general management and
administration of the Trust. In this regard, among other things, the Adviser
arranges for transfer agency, custody, fund administration and accounting, and
other non-distribution related services necessary for the Fund to operate. The
Adviser may engage a subadviser to assist it in managing the Fund’s investments,
but will be responsible for overseeing any subadvisers. The Adviser manages the
Fund’s business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits its officers and
employees to serve as officers or Trustees of the Trust. Under the Investment
Advisory Agreement, the Adviser bears all of its own costs associated with
providing advisory services to the Fund. In addition, the Adviser has
contractually agreed to pay all operating expenses of the Fund, except: (i)
interest and taxes (including, but not limited to, income, excise, transaction,
transfer and withholding taxes) and registration fees and expenses; (ii)
expenses of the Fund incurred with respect to the acquisition and disposition of
portfolio securities and the execution of portfolio transactions, including
brokerage commissions and short sale dividend or interest expense; (iii)
expenses incurred in connection with any distribution plan adopted by the Trust
in compliance with Rule 12b-1 under the 1940 Act, including distribution fees;
(iv) Acquired Fund Fees and Expenses; (v) litigation expenses; (vi)
proxy-related expenses; (vii) tax reclaim recovery expenses; and (viii) any
expenses determined to be extraordinary expenses. Nevertheless, there exists a
risk that a Trust service provider will seek recourse against the Trust if is
not timely paid by the Adviser for the fees and expenses for which it is
responsible, which could materially adversely affect the Fund.
A
discussion of the Board’s review of the Fund’s investment advisory contract will
be available in the Fund’s annual and
semi-annual shareholder reports for the periods ended April 30 and October 31,
respectively.
FINANCIAL
HIGHLIGHTS
The
Financial Highlights will help you understand the Fund’s financial performance
for its past five fiscal years, or since inception, if the
life of the Fund is shorter. Some of the information is presented on a per Share
basis. Total returns represent the rate an investor would have earned (or lost)
on an investment in the Fund, assuming reinvestment of any dividends and capital
gains.
This information has been
audited by Ernst and
Young
LLP,
an
independent
registered public accounting firm, whose
report, along
with the Fund’s audited financial statements, is included in the
Annual
Report.
23
Financial
Highlights
(For a Share Outstanding Throughout
the Period)
|
|
Period
Ended
4/30/2022
1 |
|
Net
Asset Value, Beginning of Period |
$25.04 |
|
Income
From Investment Operations: |
|
|
Net
investment income (loss)2
|
0.14 |
|
Net
realized and unrealized gain (loss) |
(1.39) |
|
TOTAL
FROM INVESTMENT OPERATIONS |
(1.25) |
|
Less
Distributions: |
|
|
Distributions
from net investment income |
(0.14) |
|
Net
Asset Value, End of Period |
$23.65 |
|
Total
Return3
|
(5.01)% |
|
Ratios
to Average Net Assets: |
|
|
Net
expenses4
|
0.29%5
|
|
Net
investment income |
1.51%5
|
|
Expense
waiver/reimbursement6
|
0.12%5
|
|
Supplemental
Data: |
|
|
Net
assets, end of period (000 omitted) |
$24,594 |
|
Portfolio
turnover7 |
3% |
|
1 |
Reflects
operations for the period from December 16, 2021 (commencement of
operations) to April 30, 2022. |
|
2 |
Calculated
based on average shares outstanding during the
period. |
|
3 |
Based
on net asset value. |
|
4 |
Amount
does not reflect net expenses incurred by investment companies in which
the Fund may invest. |
|
5 |
Computed
on an annualized basis. |
|
6 |
This
expense decrease is reflected in both the net expense and the net
investment income ratios shown above. Amount does not reflect expense
waiver/
reimbursement
recorded by investment companies in which the Fund may
invest. |
|
7 |
Securities
that mature are considered sales for purposes of this
calculation. |
Further information about the Fund’s
performance is contained in the Fund’s Annual Report, dated April 30, 2022,
which can be obtained free of charge.
24
Appendix A: Hypothetical Investment and Expense
Information
The
following chart provides additional hypothetical information about the effect of
the Fund’s expenses, including investment
advisory fees and other Fund costs, on the Fund’s assumed returns over a 10-year
period. The chart shows the estimated expenses that would be incurred in respect
of a hypothetical investment of $10,000, assuming a 5% return each year, and an
investor’s continued holding of Shares. The chart assumes that Shares are
purchased at the Fund’s net asset value. However, individual Shares cannot be
purchased or redeemed at net asset value, and rather are typically bought and
sold on an exchange at a market price, which may be higher or lower than net
asset value. The chart also assumes that the Fund’s annual expense ratio stays
the same throughout the 10-year period and that all dividends and distributions
are reinvested. The annual expense ratio used in the chart is the gross expense
ratio as stated in the “Fees and Expenses” table of this Prospectus (and thus
may not reflect any fee waiver or expense reimbursement currently in effect).
The hypothetical investment information does not reflect the effect of charges
such as brokerage commissions or other fees to financial intermediaries that you
may pay (if any). Fund returns, as well as fees and expenses, may fluctuate over
time, and your actual investment returns and total expenses may be higher or
lower than those shown below.
|
FEDERATED
HERMES SHORT DURATION CORPORATE ETF | |||||
|
ANNUAL
EXPENSE RATIO: 0.42% | |||||
|
MAXIMUM
FRONT-END SALES CHARGE: NONE | |||||
|
Year |
Hypothetical
Beginning
Investment |
Hypothetical
Performance
Earnings |
Investment
After
Returns |
Hypothetical
Expenses |
Hypothetical
Ending
Investment |
|
1 |
$10,000.00 |
$500.00 |
$10,500.00 |
$42.96 |
$10,458.00 |
|
2 |
$10,458.00 |
$522.90 |
$10,980.90 |
$44.93 |
$10,936.98 |
|
3 |
$10,936.98 |
$546.85 |
$11,483.83 |
$46.99 |
$11,437.89 |
|
4 |
$11,437.89 |
$571.89 |
$12,009.78 |
$49.14 |
$11,961.75 |
|
5 |
$11,961.75 |
$598.09 |
$12,559.84 |
$51.39 |
$12,509.60 |
|
6 |
$12,509.60 |
$625.48 |
$13,135.08 |
$53.74 |
$13,082.54 |
|
7 |
$13,082.54 |
$654.13 |
$13,736.67 |
$56.20 |
$13,681.72 |
|
8 |
$13,681.72 |
$684.09 |
$14,365.81 |
$58.78 |
$14,308.34 |
|
9 |
$14,308.34 |
$715.42 |
$15,023.76 |
$61.47 |
$14,963.66 |
|
10 |
$14,963.66 |
$748.18 |
$15,711.84 |
$64.29 |
$15,649.00 |
|
Cumulative |
|
$6,167.03 |
|
$529.89 |
|
25
An SAI dated June 30,
2022, includes additional information about the Fund and is incorporated by
reference into this Prospectus. The SAI contains a description of the Fund’s
policies and procedures with respect to the disclosure of its portfolio
securities. To obtain the SAI and other information without charge, and to make
inquiries, call your financial intermediary or the Fund at
1-800-341-7400.
The
Fund’s
shareholder reports, when available, will be made available on FederatedInvestors.com/FundInformation, and you will be notified
and provided with a link each time a report is posted to the website. You may
request to receive paper reports from the Fund or from your financial
intermediary, free of charge, at any time. You may also request to receive
documents through e-delivery.
These
documents, as well as additional information about the Fund (including portfolio
holdings, performance and distributions), are also available on FederatedInvestors.com.
You can
obtain information about the Fund (including the SAI) by accessing Fund
information from the EDGAR Database on the SEC’s website at sec.gov. You can
purchase copies of this information by contacting the SEC by email at
[email protected].
Federated Hermes
Short Duration Corporate ETF
Federated Hermes Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Federated Hermes Funds
4000 Ericsson Drive
Warrendale, PA 15086-7561
Contact us
at
FederatedInvestors.com
or call 1-800-341-7400.
or call 1-800-341-7400.
Federated Securities
Corp., Distributor
Investment
Company Act File No. 811-23730
CUSIP
31423L107
Q455366
(6/22)
© 2022 Federated Hermes,
Inc.