3. Risk
Factors (continued):
Equity
Risk.
The prices of equity securities rise and fall daily. These price movements may
result from factors affecting individual companies, industries
or the securities market as a whole. In addition, equity markets tend to move in
cycles, which may cause stock prices to fall
over short or extended periods of time.
Market
Capitalization Risk. Securities issued by
companies of different market capitalizations tend to go in and out of favor
based on
market and economic conditions. During a period when securities of a particular
market capitalization fall behind other types of investments, a fund’s
performance could be impacted.
Large-Cap
Company Risk. Certain funds invest
in large-cap company stocks. Large-cap companies are generally more mature and
the
securities issued by these companies may not be able to reach the same levels of
growth as the securities issued by small- or mid-cap
companies.
Mid-Cap
Company Risk. Certain funds invest
in mid-cap company stocks. Mid-cap companies may be more vulnerable to adverse
business
or economic events than larger, more established companies and the value of
securities issued by these companies may move
sharply.
Small-Cap
Company Risk. Certain funds invest
in small-cap company stocks. Securities issued by small-cap companies may be
riskier
than those issued by larger companies, and their prices may move sharply,
especially during market upturns and downturns.
Foreign
Investment Risk. A fund’s investments
in securities of foreign issuers involve certain risks that may be greater than
those associated with
investments in securities of U.S. issuers. These include risks of adverse
changes in foreign economic, political, regulatory and other
conditions; changes in currency exchange rates or exchange control regulations
(including limitations on currency movements
and exchanges); the imposition of economic sanctions or other government
restrictions; differing accounting, auditing, financial
reporting and legal standards and practices; differing securities market
structures; and higher transaction costs. These risks may
negatively impact the value or liquidity of a fund’s investments and could
impair the fund’s ability to meet its investment objective
or invest in accordance with its investment strategy. There is a risk that
investments in securities denominated in, and/or receiving
revenues in, foreign currencies will decline in value relative to the U.S.
dollar. Foreign securities also include American Depositary
Receipts (ADRs), Global Depositary Receipts (GDRs) and European Depositary
Receipts (EDRs), which may be less liquid than the
underlying shares in their primary trading market, and GDRs, in particular, many
of which are issued by companies in emerging
markets, may be more volatile. Foreign securities may also include investments
in variable interest entities (VIEs) structures,
which are created by China-based operating companies in jurisdictions outside of
China to obtain indirect financing due to
Chinese regulations that prohibit non-Chinese ownership of those companies. To
the extent a fund’s investments in a single country or a
limited number of countries represent a large percentage of the fund’s assets,
the fund’s performance may be adversely affected by
the economic, political, regulatory and social conditions in those countries,
and the fund’s price may be more volatile than the
price of a fund that is geographically diversified.
Emerging
Markets Risk. Certain funds invest
in emerging markets. Emerging market countries may be more likely to experience
political turmoil or
rapid changes in market or economic conditions than more developed countries.
Emerging market countries often have less
uniformity in accounting, auditing, financial reporting and record keeping
requirements and greater risk associated with the custody of
securities. In addition, the financial stability of issuers (including
governments) in emerging market countries may be more
precarious than in developed countries. As a result, there may be an increased
risk of illiquidity and price volatility associated with a
fund’s investments in emerging market countries, which may be magnified by
currency fluctuations relative to the U.S. dollar, and, at
times, it may be difficult to value such investments.
Sampling
Index Tracking Risk. Certain funds may not
fully replicate the index and may hold securities not included in the index. As
a
result, a fund is subject to the risk that the investment adviser’s investment
management strategy, the implementation of which is subject to a number
of constraints, may not produce the intended results. Because certain funds
utilize a sampling approach they may not track the
return of their respective index as well as they would if the funds purchased
all of the securities in their respective index.
Tracking
Error Risk. As index funds, each
fund seeks to track the performance of its respective index, although it may not
be successful in doing
so. The divergence between the performance of a fund and the index, positive or
negative, is called “tracking error.” Tracking
error can be caused by many factors and it may be significant.
Derivatives
Risk.
Each fund may use derivatives to enhance returns or hedge against market
declines. Examples of derivatives are options, futures,
options on futures and swaps. An option is the right, but not the obligation, to
buy or sell an instrument at a specific price on or
before a specific date. A future is an agreement to buy or sell a financial
instrument at a specific price on a
