Securities Act Registration No. 333-187668
Investment Company Act Reg. No. 811-22819
Pre-Effective Amendment No. ____ ☐
Post-Effective Amendment No. 100 ☒
Amendment No. 101 ☒
Michael D. Mabry, Esq.
It is proposed that this filing will
become effective (check appropriate box):
Neither the Securities
and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the
accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
DETERMINATION OF NET ASSET VALUE
The NAV of the Shares for the Fund is equal
to the Fund’s total assets minus the Fund’s total liabilities divided by the total number of Shares outstanding. Interest
and investment income on the Trust’s assets accrue daily and are included in the Fund’s total assets. Expenses and
fees (including investment advisory, management, administration and distribution fees, if any) accrue daily and are included in
the Fund’s total liabilities. The NAV that is published is rounded to the nearest cent; however, for purposes of determining
the price of Creation Units, the NAV is calculated to five decimal places.
The pricing and valuation of portfolio securities
is determined in good faith in accordance with procedures approved by, and under the direction of, the Board. In determining the
value of the Fund’s assets, equity securities are generally valued at market using quotations from the primary market in
which they are traded. Debt securities (other than short-term investments) are valued on the basis of broker quotes or valuations
provided by a pricing service, which in determining value utilizes information regarding recent sales, market transactions in comparable
securities, quotations from dealers, and various relationships between securities. Short-term investments having a remaining maturity
of 60 days or less are valued at amortized cost, which approximates market value. Other assets, such as accrued interest, accrued
dividends and cash are also included in determining the NAV. The Fund normally uses third party pricing services to obtain market
quotations.
Securities and assets for which market quotations
are not readily available or which cannot be accurately valued using the Fund’s normal pricing procedures are valued by the
Trust’s Fair Value Pricing Committee at fair value as determined in good faith under policies approved by the Board. Fair
value pricing may be used, for example, in situations where (i) portfolio securities, such as securities with small capitalizations,
are so thinly traded that there have been no transactions for that security over an extended period of time; (ii) an event occurs
after the close of the exchange on which a portfolio security is principally traded that is likely to change the value of the portfolio
security prior to the Fund’s NAV calculation; (iii) the exchange on which the portfolio security is principally traded closes
early; or (iv) trading of the particular portfolio security is halted during the day and does not resume prior to the Fund’s
NAV calculation. Pursuant to policies adopted by the Board, the Adviser consults with BNY Mellon and the Sub-Adviser on a regular
basis regarding the need for fair value pricing. The Fund’s policies regarding fair value pricing are intended to result
in a calculation of the Fund’s NAV that fairly reflects portfolio security values as of the time of pricing. A portfolio
security’s “fair value” price may differ from the price next available for that portfolio security using the
Fund’s normal pricing procedures, and the fair value price may differ substantially from the price at which the security
may ultimately be traded or sold. If the fair value price differs from the price that would have been determined using the Fund’s
normal pricing procedures, you may receive more or less proceeds or Shares from redemptions or purchases of Fund Shares, respectively,
than you would have otherwise received if the portfolio security were priced using the Fund’s normal pricing procedures and
the prices used to determine the Fund’s Indicative Intra-Day Value (“
IIV
”),
which could result in the market prices for Shares deviating from NAV.
The performance of the Fund may also be affected if a portfolio
security’s fair value price were to differ from the security’s price using the Fund’s normal pricing procedures.
The Board monitors and evaluates the Fund’s use of fair value pricing, and periodically reviews the results of any fair valuation
under the Trust’s policies.
To the extent the assets of the Fund are invested
in other open-end investment companies that are registered under the 1940 Act, the Fund’s NAV is calculated based upon the
NAVs reported by such registered open-end investment companies, and the prospectuses for these companies explain the circumstances
under which they will use fair value pricing and the effects of using fair value pricing.
The NAV is determined as of the close of regular
trading on the Exchange, normally 4:00 p.m. Eastern time, on each day that the Exchange is open for business. Currently, the Exchange
is closed on weekends and in recognition of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s
Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
INDICATIVE INTRA-DAY VALUE
The approximate value of the Fund’s investments
on a per-Share basis, the Indicative Intra-Day Value, or IIV, is disseminated by the Exchange every 15 seconds during hours of
trading on the Exchange The IIV should not be viewed as a “real-time” update of NAV because the IIV may not be calculated
in the same manner as NAV, which is computed once per day.
The IIV for the Fund is calculated during hours
of trading on the Exchange by dividing the “Estimated Fund Value” as of the time of the calculation by the total number
of outstanding Shares of that Fund. “
Estimated Fund Value
” is the sum of the estimated amount of cash held in
the Fund’s portfolio, the estimated amount of accrued interest owed to the Fund and the estimated value of the securities
held in the Fund’s portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based
on the same portfolio holdings disclosed on the Fund’s website at www.InfraCapPFFR.com.
Although the Trust provides information used
to calculate the IIV, the Trust is not involved in the actual calculation of the IIV and is not responsible for the calculation
or dissemination of the IIV. The Trust makes no warranty as to the accuracy of the IIV.
PREMIUM/DISCOUNT INFORMATION
Information regarding the extent and frequency
with which market prices of Shares have tracked the Fund’s NAV for the most recently completed calendar year and the most
recently completed calendar quarters since that year will be available without charge on the Fund’s website.
FREQUENT TRADING
The Board has not adopted policies and procedures
with respect to frequent purchases and redemptions of Fund Shares by Fund shareholders (“
market timing
”). In
determining not to adopt market timing policies and procedures, the Board noted that, unlike traditional mutual funds, the Fund’s
Shares can only be purchased and redeemed directly from the Fund in Creation Units by Authorized Participants, and that the vast
majority of trading in the Fund’s Shares occurs on the secondary market. Because secondary market trades do not involve the
Fund directly, it is unlikely those trades would cause many of the harmful effects of market timing, including dilution, disruption
of portfolio management, increases in the Fund’s trading costs and the realization of capital gains. With respect to trades
directly with the Fund, to the extent effected in-kind (namely, for securities), those trades do not cause any of the harmful effects
that may result from frequent cash trades. To the extent trades are effected in whole or in part in cash, the Board noted that
those trades could result in dilution to the Fund and increased transaction costs (and the Fund may impose higher transaction fees
to offset these increased costs), which could negatively impact the Fund’s ability to achieve its investment objective. However,
the Board noted that direct trading on a short-term basis by Authorized Participants is critical to ensuring that the Fund’s
Shares trade at or close to NAV. The Fund also imposes transaction fees on purchases and redemptions of Creation Units that are
designed to offset the Fund’s transfer and other transaction costs associated with the issuance and redemption of Creation
Units. Given this structure, the Board determined that it is
not necessary to adopt market timing policies and procedures. The Fund
reserves the right to reject any purchase order at any time
and reserves the right to impose restrictions on disruptive or excessive trading in Creation Units.
The Board has instructed the officers of the
Trust to review reports of purchases and redemptions of Creation Units on a regular basis to determine if there is any unusual
trading in the Fund’s Shares. The officers of the Trust will report to the Board any such unusual trading in Creation Units
that is disruptive to the Fund. In such event, the Board may reconsider its decision not to adopt market timing policies and procedures.
DISTRIBUTIONS
The Fund intends to qualify each year
as a regulated investment company under the Code. As a regulated investment company, the Fund generally pays no federal income
tax on the income and gains it distributes to shareholders. The Fund expects to distribute substantially all of its net investment
income monthly and its net realized capital gains, if any, at least annually. The Fund may distribute such income dividends and
capital gains more frequently, if necessary, in order to reduce or eliminate federal excise or income taxes on the Fund. The amount
of any distribution will vary, and there is no guarantee the Fund will pay either an income dividend or a capital gains distribution.
Distributions may be reinvested automatically in additional whole Shares only if the broker through whom you purchased Shares makes
such option available.
Each year, you will receive an annual
statement (Form 1099) of your account activity to assist you in completing your federal, state and local tax returns. Distributions
declared in December to shareholders of record in such month, but paid in January, are taxable as if they were paid in December.
The Fund make every effort to search for reclassified income to reduce the number of corrected forms mailed to you. However, when
necessary, you will receive a corrected Form 1099 to reflect reclassified information.
At the time you purchase your Fund Shares,
the price of Shares may reflect undistributed income, undistributed capital gains, or net unrealized appreciation in value of portfolio
securities held by the Fund. For taxable investors, a subsequent distribution to you of such amounts, although constituting a return
of your investment, would be taxable. Buying Shares in the Fund just before it declares an income dividend or capital gains distribution
is sometimes known as “buying a dividend.”
Federal
Income Taxes
FUND DISTRIBUTIONS
The Fund expects, based on its investment
objective and strategies, that its distributions, if any, will be taxable as ordinary income, capital gains, or some combination
of both. This is true whether you reinvest your distributions in additional Fund Shares or receive them in cash. For federal income
tax purposes, Fund distributions of short-term capital gains are taxable to you as ordinary income. Fund distributions of long-term
capital gains are taxable to you as long-term capital gains no matter how long you have owned your Shares. Because the income of
the Fund is primarily derived from investments in U.S. REITs, generally none or only a small portion of the income dividends paid
to you by the Fund is anticipated to be qualified dividend income eligible for taxation by individuals at long-term capital gain
tax rates.
Because of “noncash” expenses
such as property depreciation, the cash flow of a REIT that owns properties will exceed its taxable income. The REIT, and in turn
the Fund, may distribute this excess cash to shareholders. Such a distribution is classified as a return of capital. Return of
capital distributions generally are not taxable to you. Your cost basis in your Fund shares will be decreased by the amount of
any return of capital. Any return of capital distributions in excess of your cost basis will be treated as capital gain.
SALE OF FUND SHARES
A sale or exchange of Fund Shares
is a taxable event and, accordingly, a capital gain or loss may be recognized. Currently, any capital gain or loss realized
upon a sale of Fund Shares generally is treated as long-term capital gain or loss if the Shares have been held for more than
one year and as short-term capital gain or loss if the Shares have been held for one year or less. The ability to deduct
capital losses may be limited.
TAX TREATMENT OF FUND SHAREHOLDERS
An additional 3.8% Medicare tax is imposed
on certain net investment income (including ordinary dividends and capital gain distributions received from the Fund and net gains
from redemptions or other taxable dispositions of Fund Shares) of U.S. individuals, estates and trusts to the extent that such
person’s “modified adjusted gross income” (in the case of an individual) or “adjusted gross income”
(in the case of an estate or trust) exceeds a threshold amount. This Medicare tax, if applicable, is reported by you on, and paid
with, your federal income tax return.
Fund distributions and gains from the
sale or exchange of your Fund Shares generally are subject to state and local taxes.
Non-U.S. investors may be subject to
U.S. withholding tax at a 30% or lower treaty rate and U.S. estate tax and are subject to special U.S. tax certification requirements
to avoid backup withholding and claim any treaty benefits. Exemptions from U.S. withholding tax are provided for certain capital
gain dividends paid by the Fund from net long-term capital gains, interest-related dividends and short-term capital gain dividends,
if such amounts are reported by the Fund. However, notwithstanding such exemptions from U.S. withholding at the source, any such
dividends and distributions of income and capital gains will be subject to backup withholding at a rate of 28% if you fail to properly
certify that you are not a U.S. person.
Under the Foreign Account Tax Compliance
Act (“FATCA”), a 30% withholding tax is imposed on payments or distributions made by the Fund to certain foreign entities,
referred to as foreign financial institutions or nonfinancial foreign entities, that fail to comply (or be deemed compliant) with
extensive reporting and withholding requirements designed to inform the U.S. department of the Treasury of U.S.-owned foreign investment
accounts: (a) income dividends and (b) after December 31, 2018, certain capital gain distributions, return of capital distributions
and the proceeds arising from the sale of Fund shares. Information about a shareholder in the Fund may be disclosed to the IRS,
non-U.S. taxing authorities or other parties as necessary to comply with FATCA. Withholding also may be required if a foreign entity
that is a shareholder of the Fund fails to provide the appropriate certifications or other documentation concerning its status
under FATCA.
WITHHOLDING
By law, if you do not provide your proper
taxpayer identification number and certain required certifications, you may be subject to backup withholding on any distributions
of income, capital gains or proceeds from the sale of your Shares. Withholding is also imposed if the Internal Revenue Service
(“IRS”) requires it. When withholding is required, the amount will be 28% of any distributions or proceeds paid.
CREATION UNITS
An Authorized Participant who exchanges
equity securities for Creation Units generally will recognize a gain or a loss. The gain or loss will be equal to the difference
between the market value of the Creation Units (plus any cash received by the Authorized Participant as part of the issue) at the
time of purchase and the exchanger’s aggregate basis in the securities surrendered. A person who exchanges Creation Units
for equity securities generally will recognize a gain or loss equal to the difference between the exchanger’s basis in the
Creation Units (plus any cash received by the Authorized Participant as part of the redemption) and the aggregate market value
of the securities received (plus any cash paid by the Authorized Participant as part of the redemption). The IRS, however, may
assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the rules governing
“wash sales,” or on the basis that there has been no significant change in economic position. Persons exchanging securities
should consult their own tax advisor with respect to whether the wash sale rules apply and when a loss might be deductible.
Under current federal tax laws, any
capital gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares
have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.
If the Fund redeems Creation Units in
cash, it may recognize more capital gains than it will if it redeems Creation Units in-kind.
This discussion of “Federal
Income Taxes” is not intended or written to be used as tax advice. Because everyone’s tax situation is unique, you
should consult your tax professional about federal, state, local or foreign tax consequences before making an investment in the
Fund. For additional information, see the “Taxation” section of the Statement of Additional Information.
FUND WEBSITE
AND DISCLOSURE OF PORTFOLIO HOLDINGS
The Trust maintains a website for the Fund
at www.InfraCapPFFR.com. The website for the Fund contains the following information, on a per-Share basis, for the Fund: (i) the
prior Business Day’s NAV; (ii) the reported midpoint of the bid-ask spread at the time of NAV calculation (the “
Bid-Ask
Price
”); (iii) a calculation of the premium or discount of the Bid-Ask Price against such NAV; and (iv) data in chart
format displaying the frequency distribution of discounts and premiums of the Bid-Ask Price against the NAV, within appropriate
ranges, for each of the four previous calendar quarters (or for the life of the Fund if, shorter). In addition, on each Business
Day, before the commencement of trading in Shares on the Exchange, the Trust will disclose on the Fund’s website the identities
and quantities of the portfolio securities and other assets held by the Fund that will form the basis for the calculation of NAV
at the end of the Business Day.
A description of the Trust’s policies
and procedures with respect to the disclosure of the Fund’s portfolio securities is available in the SAI.
OTHER INFORMATION
The Fund is not sponsored, endorsed, sold or
promoted by the Exchange. The Exchange makes no representation or warranty, express or implied, to the owners of Shares or any
member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability
of the Fund to achieve its objective. The Exchange has no obligation or liability in connection with the administration, marketing
or trading of the Fund.
For purposes of the 1940 Act, the Fund is a
registered investment company, and the acquisition of Shares by other registered investment companies and companies relying on
exemption from registration as investment companies under Section 3(c)(1) or 3(c)(7) of the 1940 Act is subject to the restrictions
of Section 12(d)(1) of the 1940 Act, except as permitted by an exemptive order that permits registered investment companies to
invest in the Fund beyond those limitations.
STATEMENT OF ADDITIONAL INFORMATION
INFRACAP
REIT PREFERRED ETF (PFFR)
December 2, 2016
a series of the
ETFis Series Trust I
1540 Broadway
New York, NY 10036
Telephone:
(212)
593-4383
TABLE OF CONTENTS
This Statement of Additional Information
(“
SAI
”) is meant to be read in conjunction with the prospectus (“
Prospectus
”) for InfraCap
REIT Preferred ETF (Ticker: PFFR) (the “
Fund
”) dated the same date as this SAI, which incorporates this SAI
by reference in its entirety. Because this SAI is not itself a prospectus, no investment in shares of the Fund should be made solely
upon the information contained herein. Copies of the Prospectus for the Fund may be obtained at no charge by writing or calling
the Fund at the address or phone number shown above. Capitalized terms used but not defined herein have the same meanings as in
the Prospectus. No person has been authorized to give any information or to make any representations other than those contained
in this SAI and the Prospectus, and, if given or made, such information or representations may not be relied upon as having been
authorized by the Trust. The SAI does not constitute an offer to sell securities.
Audited financial statements are not
presented for the Fund since the Fund is newly formed and had not yet commenced operations as of the date of this SAI. Once available,
you may obtain a copy of the Fund’s annual report at no charge by request to the Fund at the address or phone number noted
below.
A copy of the Prospectus for the Fund may be
obtained, without charge, by calling (212) 593-4383 or visiting www.InfraCapPFFR.com, or writing to the Trust, c/o ETF Distributors
LLC, 1540 Broadway, New York, NY 10036.
GENERAL DESCRIPTION OF THE TRUST AND THE
FUND
The ETFis Series Trust I (the “
Trust
”)
was organized as a Delaware statutory trust on September 20, 2012 and is registered with the Securities and Exchange Commission
(the “
SEC
”) as an open-end management investment company under the Investment Company Act of 1940, as amended
(the “
1940 Act
”). The Trust currently consists of 10 investment portfolios: the Fund, InfraCap MLP ETF (Ticker:
AMZA); BioShares Biotechnology Products Fund (Ticker: BBP); BioShares Biotechnology Clinical Trials Fund (Ticker: BBC); Tuttle
Tactical Management U.S. Core ETF (Ticker: TUTT); Tuttle Tactical Management Multi-Strategy Income ETF (Ticker: TUTI); Virtus Newfleet
Multi-Sector Unconstrained Bond ETF (Ticker: NFLT); Reaves Utilities ETF (Ticker: UTES); iSectors Post-MPT Growth ETF (Ticker:
PMPT); and Cumberland Municipal Bond ETF (Ticker: CUMB). Other portfolios may be added to the Trust in the future. The Fund is
classified as a non-diversified management investment company under the 1940 Act. The shares of the Fund are referred to herein
as “
Fund Shares
” or “
Shares
”. The offering of Shares is registered under the Securities Act
of 1933, as amended (the “
Securities Act
”).
The Fund’s investment adviser is Virtus
ETF Advisers LLC (the “
Adviser
”). The Adviser has been registered as an investment adviser with the SEC since
October 2013. The Fund’s sub-adviser is Infrastructure Capital Advisors, LLC (the “
Sub-Adviser
”). The
Sub-Adviser has been registered as an investment adviser with the SEC since June 2014.
The Fund offers and issues Shares at net asset
value (the “
NAV
”) only in aggregations of a specified number of Shares (each, a “
Creation Unit
”),
generally in exchange for a basket of equity securities included in the Fund’s portfolio (the “
Deposit Securities
”),
together with the deposit of a specified cash payment (the “
Cash Component
”). Shares are redeemable only in
Creation Units and, generally, in exchange for Deposit Securities and a Cash Component. Creation Units are aggregations of 50,000
Shares of the Fund and are available only to certain large institutions, referred to as “
Authorized Participants
”,
that enter into agreements with the Distributor. In the event of the liquidation of the Fund, the Trust may lower the number of
Shares in a Creation Unit.
EXCHANGE LISTING AND TRADING
Fund Shares trade on the NYSE Arca, Inc.
(the “
Exchange
”) at market prices that may be below, at or above NAV. There can be no assurance that the
requirements of the Exchange necessary for the Fund to maintain the listing of its Shares will continue to be met. The
Exchange will consider the suspension of trading and delisting of the Shares of the Fund from listing if (i) following the
initial 12-month period beginning upon the commencement of trading of Fund Shares, there are fewer than 50 beneficial owners
of Shares of the Fund for 30 or more consecutive trading days, (ii) the intra-day NAV of the Fund is no longer calculated or
available, or (iii) any other event occurs or condition exists that, in the opinion of the Exchange, makes further dealings
on the Exchange inadvisable. The Exchange will remove the Shares of the Fund from listing and trading upon termination of the
Fund.
As in the case of other stocks traded on the
Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels.
The Trust reserves the right to adjust the
price levels of the Shares in the future to maintain convenient trading ranges for investors. Any adjustments would be accomplished
through stock splits or reverse stock splits, which would have no effect on the net assets of the Fund.
OTHER INVESTMENT POLICIES
The following policies supplement the
Fund’s investment objective and policies as described in the Prospectus for the Fund.
GENERAL INVESTMENT RISKS.
All
investments in securities and other financial instruments involve a risk of financial loss. No assurance can be given that the
Fund’s investment program will be successful. Investors should carefully review the descriptions of the Fund’s investments
and its risks in this SAI and the Prospectus.
EXCHANGE TRADED FUNDS AND INVESTMENTS
IN OTHER INVESTMENT COMPANIES.
Exchange Traded Products (“ETPs”).
The Fund may invest in exchange-traded funds (“
ETFs
”), exchange-traded notes (“
ETNs
”)
and other ETPs. The shares of an ETF may be assembled in a block (typically 50,000 shares) known as a creation unit and redeemed
in kind for a portfolio of the underlying securities (based on the ETF’s net asset value) together with a cash payment generally
equal to accumulated dividends as of the date of redemption. Conversely, a creation unit may be purchased from the ETF by depositing
a specified portfolio of the ETF’s underlying securities, as well as a cash payment generally equal to accumulated dividends
of the securities (net of expenses) up to the time of deposit. The Fund’s ability to redeem creation units may be limited
by the 1940 Act, which provides that the ETFs will not be obligated to redeem shares held by the Fund in an amount exceeding one
percent of their total outstanding securities during any period of less than 30 days. ETPs other than ETFs are issued in shares
or units, and trade on exchanges like ETFs.
There is a risk that the underlying
ETPs in which the Fund invests may terminate due to extraordinary events that may cause any of the service providers to the ETPs,
such as the trustees or sponsors, to close or otherwise fail to perform their obligations to the ETPs. Also, because the ETPs in
which the Fund invests may be granted licenses by agreement to use various indices as a basis for determining their compositions
and/or otherwise to use certain trade names, the ETPs may terminate if such license agreements are terminated. In addition, an
ETP may terminate if its net assets fall below a certain amount. Although the Fund believes that, in the event of the termination
of an underlying ETP, it will be able to invest instead in shares of an alternate ETP with a similar strategy, there is no guarantee
that shares of an alternate ETP would be available for investment at that time.
Investments in ETPs involve certain
inherent risks generally associated with investments in conventional registered investment companies (e.g., mutual funds) that
hold a portfolio of securities including, without limitation: (1) risks that the general level of security prices for the ETP’s
investment strategy may decline, thereby adversely affecting the value of each share or unit of the ETP; (2) an index-based ETP
may not fully replicate the performance of its benchmark index because of the temporary unavailability of certain index securities
in the secondary market or discrepancies between the ETP and the index with respect to the weighting of securities or number of
stocks held; and (3) an index ETP may also be adversely affected by the performance of the specific index, market sector or group
of industries on which it is based. In addition, ETPs are subject to the following risks that do not apply to conventional funds:
(1) the market price of an ETP’s shares may trade at a discount to its net asset value; (2) an active trading market for
an ETP’s shares may not develop or be maintained; (3) trading of an ETP’s shares may be halted if the listing exchange
deems such action appropriate; and (4) ETP shares may be delisted from the exchange on which they trade, or activation of “circuit
breakers” (which are tied to large decreases in stock prices) may halt trading temporarily. ETPs are also subject to the
risks of the underlying securities the ETP is designed to track or invest in.
Money Market Mutual Funds
. In
order to maintain sufficient liquidity or to implement investment strategies, the Fund may invest a portion of its assets in shares
of one or more money market funds. Generally, money market mutual funds are registered investment companies that seek to earn income
consistent with the preservation of capital and maintenance of liquidity by investing primarily in high quality money market instruments,
including, without limitation, U.S. government obligations, bank obligations and high-grade corporate instruments. An investment
in a money market mutual fund is not insured or guaranteed by the Federal Deposit Insurance Company or any other governmental agency,
entity or person. While investor losses in money market mutual funds have been rare, they are possible. In addition, the Fund will
incur additional indirect expenses to the extent it invests in shares of money market mutual funds due to acquired fund fees and
other costs.
Other Investment Companies.
Under
the 1940 Act, the Fund may not acquire shares of another investment company (ETFs or other investment companies) if, immediately
after such acquisition, the Fund and its affiliated persons would hold more than 3% of the ETF’s or investment company’s
total outstanding stock (“
3% Limitation
”). Accordingly, the Fund is subject to the 3% Limitation unless (i)
the ETF or the Fund has received an order for exemptive relief from the 3% Limitation from the SEC that is applicable to the Fund;
and (ii) the ETF and the Fund take appropriate steps to comply with any conditions in such order. The SEC has issued such exemptive
orders to numerous ETFs and their investment advisers, which permit investment companies to invest in such ETFs (“
Exempted
ETFs
”) beyond the 3% Limitation, subject to certain terms and conditions, including, without limitation, that such investment
companies enter into an agreement with the Exempted ETF.
To the extent the 3% Limitation applies
to certain ETFs, that limitation may prevent the Fund from allocating its investments in the manner that the Sub-Adviser considers
optimal, or cause the Sub-Adviser to select a similar basket of stocks (pre-selected groups of securities related by index or sector
made available through certain brokers at a discount brokerage rate) (“
Stock Baskets
”) or a similar index-based
mutual fund or other investment company as an alternative. The Fund’s investments in other investment companies will be subject
to the same 3% Limitation described above.
Under the 1940 Act, to the extent that
the Fund relies upon Section 12(d)(1)(F) in purchasing securities issued by another investment company, the Fund must either seek
instructions from its shareholders with regard to the voting of all proxies with respect to its investment in such securities (ETFs
and other investment companies) and vote such proxies only in accordance with the instructions, or vote the shares held by it in
the same proportion as the vote of all other holders of the securities. In the event that there is a vote of ETF or other investment
company shares held by the Fund, the Fund intend to vote such shares in the same proportion as the vote of all other holders of
such securities.
EQUITY SECURITIES.
The Fund may
invest in equity securities, both directly and indirectly through investment in shares of ETFs and other investment companies,
American Depositary Receipts (“
ADRs
”) and other types of securities and instruments described in this SAI and
in the Prospectus. The equity portion of the Fund’s portfolio may include common stocks traded on domestic or foreign securities
exchanges or on the over-the-counter market. In addition to common stocks, the equity portion of the Fund’s portfolio may
also include preferred stocks, convertible preferred stocks, convertible bonds or other equity securities. Prices of equity securities
in which the Fund invests may fluctuate in response to many factors, including, but not limited to, the activities of the individual
companies whose securities the Fund owns, general market and economic conditions, interest rates and specific industry changes.
Such price fluctuations subject the Fund to potential losses. In addition, regardless of any one company’s particular prospects,
a declining stock market may produce a decline in prices for all equity securities, which could also result in losses for the Fund.
Market declines may continue for an indefinite period of time, and investors should understand that during temporary or extended
bear markets, the value of equity securities will decline.
FOREIGN
SECURITIES.
The Fund may invest directly or indirectly
in foreign debt or equity securities traded on U.S. exchanges, in over-the-counter markets or in the form of ADRs described below.
The Fund may also invest in foreign currency and foreign currency-denominated securities. Investing in securities issued by companies
whose principal business activities are outside the United States may involve significant risks not present in domestic investments.
The value of securities denominated in or indexed to foreign currencies, and of dividends and interest from such securities, can
change significantly when foreign currencies strengthen or weaken relative to the U.S. dollar. Foreign securities markets generally
have less trading volume and less liquidity than U.S. markets, and prices on some foreign markets can be highly volatile. Many
foreign countries lack uniform accounting and disclosure standards comparable to those applicable to U.S. companies, and it may
be more difficult to obtain reliable information regarding an issuer’s financial condition and operations. Some foreign countries
impose conditions and restrictions on foreigners’ ownership of interests in local issuers, including, without limitation,
restricting ownership to certain classes of investment in an issuer, which may reduce potential investment returns and impair disposition
of those investments. Additional costs associated with an investment in foreign securities may include higher custodial fees than
those applicable to domestic custodial arrangements and transaction costs of foreign currency conversions.
Foreign markets may offer less protection to
investors than U.S. markets. Foreign issuers, brokers and securities markets may be subject to less government supervision. Foreign
securities trading practices, including, without limitation, those involving the release of assets in advance of payment, may involve
increased risks in the event of a failed trade or the insolvency of a broker-dealer, and may involve substantial delays. It may
also be difficult to enforce legal rights in foreign countries because of inconsistent legal interpretations or less defined legal
and regulatory provisions or because of corruption or influence on local courts.
Investing abroad also involves different political
and economic risks. Foreign investments may be affected by actions of foreign governments adverse to the interests of U.S. investors,
including, without limitation, the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions
on U.S. investment or on the ability to repatriate assets or convert currency into U.S. dollars or other governmental intervention.
There may be a greater possibility of default by foreign governments or foreign government-sponsored enterprises, and securities
issued or guaranteed by foreign governments, their agencies, instrumentalities or political subdivisions may or may not be supported
by the full faith and credit and taxing power of the foreign government. Investments in foreign countries also involve a risk of
local political, economic or social instability, military action or unrest or adverse diplomatic developments. There is no assurance
that the Sub-Adviser will be able to anticipate these potential events or counter their effects.
American Depositary Receipts (“ADRs”).
ADRs provide a method whereby the Fund may invest in securities issued by companies whose principal business activities are
outside the United States. ADRs are receipts typically issued by a U.S. bank or trust company evidencing ownership of the underlying
securities, and may be issued as sponsored or unsponsored programs. In sponsored programs, an issuer has made arrangements to have
its securities trade in the form of ADRs. In unsponsored programs, the issuer may not be directly involved in the creation of the
program. Although regulatory requirements with respect to sponsored and unsponsored programs are generally similar, in some cases
it may be easier to obtain financial information from an issuer that participates in a sponsored program.
Emerging Market Securities.
The
Fund may invest a portion of its assets in emerging markets. An “emerging market” is any country that the World Bank,
the International Finance Corporation or the United Nations or its authorities has determined to have a low or middle income economy.
Investing in emerging markets involves exposure to potentially unstable governments, the risk of nationalization of business, restrictions
on foreign ownership, prohibitions on repatriation of assets and a system of laws that may offer less protection of property rights.
Emerging market economies may be based on only a few industries, may be highly vulnerable to changes in local and global trade
conditions, and may suffer from extreme and volatile debt burdens or inflation rates. The securities markets in emerging markets
are substantially smaller, less liquid and more volatile than the major securities markets in the United States and other developed
countries. A high proportion of the shares of many issuers may be held by a limited number of persons and financial institutions,
which may limit the number of shares available for investment by the Fund. A limited number of issuers in emerging markets may
represent a disproportionately large percentage of market capitalization and trading value. The limited liquidity of securities
markets in these countries may also affect the Fund’s ability to acquire or dispose of securities at the price and time it
wishes to do so. The inability of the Fund to dispose fully and promptly of positions in declining markets would cause the Fund’s
net asset value to decline as the values of the unsold positions are marked to lower prices. In addition, these securities markets
are susceptible to being influenced by large investors trading significant blocks of securities.
Foreign Currency Transactions.
Investments
in foreign securities involve currency risk. The Fund may engage in various transactions to hedge currency risk, but is not required
to do so. The instruments the Fund may use for this purpose include, without limitation, forward foreign currency contracts, foreign
currency futures contracts and options on foreign currencies.
A forward foreign currency contract is an obligation
to purchase or sell a specified currency at a future date, which may be any fixed number of days from the date of the contract
agreed upon by the parties, at a price established at the time of the contract. These contracts are entered into directly between
currency traders and their customers. The Fund may use these contracts to purchase or sell a foreign currency for the purpose of
locking in the U.S. dollar price of foreign securities the Fund has agreed to purchase or the amount in U.S. dollars that the Fund
will receive when it has sold foreign securities.
Currency futures contracts are similar to forward
currency contracts, except that they are traded on exchanges (and have margin requirements) and are standardized as to contract
size and delivery date. The Fund may purchase or sell foreign currency futures contracts to protect against fluctuations in the
U.S. dollar values of foreign securities. For example, the Fund may sell a futures contract on a foreign currency when it holds
securities denominated in that currency and it anticipates a decline in the value of that currency relative to the U.S. dollar.
If such a decline were to occur, the resulting adverse effect on the value of the foreign-denominated securities may be offset,
in whole or in part, by gains on the futures contract.
A currency option is the right - but not the
obligation - to buy (in the case of a call) or sell (in the case of a put) a set amount of one currency for another at a predetermined
time in the future. The two parties to a currency option contract are the option buyer and the option seller/writer. The option
buyer may, for an agreed upon price, purchase from the option writer a commitment that the option writer will sell (or purchase)
a specified amount of a foreign currency upon demand. The option extends only until the stated expiration date. The rate at which
one currency can be purchased or sold is one of the terms of the option and is called the strike price. The total description of
a currency option includes the underlying currencies, the contract size, the expiration date, the strike price and whether the
option is an option to purchase the underlying currency (a call) or an option to sell the underlying currency (a put). There are
three types of option expirations: American-style, European-style and Bermuda-style. American-style options can be exercised on
any business day prior to the expiration date. European-style options can be exercised at expiration only. Bermuda-style options
can be exercised at the date of expiration, and on certain specified dates that occur between the purchase date and the date of
expiration.
The use of foreign currency transactions involves
risks, including, without limitation, the risk of imperfect correlation between movements in futures or options prices and movements
in the price of currencies which are the subject of the hedge. The successful use of foreign currency transactions also depends
on the ability of the Sub-Adviser to correctly forecast interest rate movements, currency rate movements and general stock market
price movements. There can be no assurance that the Sub-Adviser’s judgment will be accurate. The use of foreign currency
transactions also exposes the Fund to the general risks of investing in futures and options contracts, including, without limitation:
the risk of an illiquid market and the risk of adverse regulatory actions. Any of these factors may cause the Fund to lose money
on its foreign currency transactions.
CONVERTIBLE SECURITIES.
In addition
to common and preferred stocks, the Fund may invest directly or indirectly in securities convertible into common stock. Convertible
securities eligible for purchase by the Fund include, without limitation, convertible bonds, convertible preferred stocks and warrants.
A warrant is an instrument issued by a corporation which gives the holder the right to subscribe to a specific amount of the corporation’s
capital stock at a set price for a specified period of time. Warrants do not represent ownership of the securities, but only the
right to buy the securities. The price of warrants do not necessarily move parallel to the prices of their underlying securities.
Warrants may be considered speculative in that they have no voting rights, pay no dividends and have no rights with respect to
the assets of their issuing corporation. Warrant positions will not be used to increase the leverage of the Fund; consequently,
warrant positions are generally accompanied by cash positions equivalent to the required exercise amount. The Fund’s ability
to invest in warrants is limited by its investment restrictions.
REAL ESTATE SECURITIES.
The Fund
will not invest directly in real estate, but may invest in readily marketable securities issued by companies that invest in real
estate or interests therein. The Fund may also invest in readily marketable interests in real estate investment trusts (“
REITs
”).
REITs are generally publicly traded on national stock exchanges and in the over-the-counter market and have varying degrees of
liquidity. Investments in real estate securities are subject to risks inherent in the real estate market, including, without limitation,
risks related to changes in interest rates, possible declines in the value of and demand for real estate, adverse general and local
economic conditions, possible lack of availability of mortgage funds, overbuilding in a given market and environmental problems.
The Fund may invest in global real estate companies
outside the U.S. These companies include, but are not limited to, companies with similar characteristics to a REIT structure, in
which revenue consists primarily of rent derived from owned, income producing real estate properties, dividend distributions as
a percentage of taxable net income are high (generally greater than 80%), debt levels are generally conservative and income derived
from development activities is generally limited.
Mortgage REITs.
Mortgage REITs
lend money to developers and owners of properties and invest primarily in mortgages and similar real estate interests. Mortgage
REITs receive interest payments from the owners of the mortgaged properties. Accordingly, mortgage REITs are subject to the credit
risk of the borrowers to whom they extend funds. Credit risk is the risk that the borrower will not be able to make interest and
principal payments on the loan to the REIT when they are due. Mortgage REITs also are subject to the risk that the value of mortgaged
properties may be less than the amounts owed on the properties. If a mortgage REIT is required to foreclose on a borrower, the
amount recovered in connection with the foreclosure may be less than the amount owed to the mortgage REIT.
Mortgage REITs are subject to significant
interest rate risk. During periods when interest rates are declining, mortgages are often refinanced or prepaid. Refinancing or
prepayment of mortgages may reduce the yield of mortgage REITs. When interest rates decline, however, the value of a REIT’s
investment in fixed rate obligations can be expected to rise. Conversely, when interest rates rise, the value of a REIT’s
investment in fixed rate obligations can be expected to decline. In addition, rising interest rates generally increase the costs
of obtaining financing, which could cause the value of a mortgage REIT’s investments to decline. A REIT’s investment
in adjustable rate obligations may react differently to interest rate changes than an investment in fixed rate obligations. As
interest rates on adjustable rate mortgage loans are reset periodically, yields on a REIT’s investment in such loans will
gradually align themselves to reflect changes in market interest rates, causing the value of such investments to fluctuate less
dramatically in response to interest rate fluctuations than would investments in fixed rate obligations.
Mortgage REITs typically use leverage
(and in many cases, may be highly leveraged), which increases investment risk and could adversely affect a REIT’s operations
and market value in periods of rising interest rates, increased interest rate volatility, downturns in the economy and reductions
in the availability of financing or deterioration in the conditions of the REIT’s mortgage-related assets.
Equity REITs.
Certain REITs may
make direct investments in real estate. These REITs are often referred to as “Equity REITs.” Equity REITs invest primarily
in real properties and earn rental income from leasing those properties. Equity REITs may also realize gains or losses from the
sale of properties. Equity REITs will be affected by conditions in the real estate rental market and by changes in the value of
the properties they own. A decline in rental income may occur because of extended vacancies, limitations on rents, the failure
to collect rents, increased competition from other properties or poor management. Equity REITs also can be affected by rising interest
rates. Rising interest rates may cause investors to demand a high annual yield from future distributions that, in turn, could decrease
the market prices for such REITs. In addition, rising interest rates also increase the costs of obtaining financing for real estate
projects. Because many real estate projects are dependent upon receiving financing, this could cause the value of the Equity REITs
in which the Fund invests to decline.
MONEY MARKET INSTRUMENTS.
The
Fund may invest directly and indirectly in money market instruments including, without limitation, U.S. Government obligations
or corporate debt obligations (including, without limitation, those subject to repurchase agreements). Money market instruments
also may include, without limitation, Banker’s Acceptances and Certificates of Deposit of domestic branches of banks, Commercial
Paper, and Master Notes.
Banker’s Acceptances
are time drafts drawn on and “accepted” by a bank. When
a bank “accepts” such a time draft, it assumes liability for its payment. When the Fund acquires a Banker’s Acceptance,
the bank that “accepted” the time draft is liable for payment of interest and principal when due. The Banker’s
Acceptance carries the full faith and credit of such bank. A
Certificate
of Deposit
is an unsecured, interest bearing
debt obligation of a bank.
Commercial Paper
is an unsecured, short-term debt obligation of a bank, corporation, or other
borrower. Commercial Paper maturity generally ranges from two to 270 days and is usually sold on a discounted basis rather than
as an interest-bearing instrument. The Fund will invest directly in Commercial Paper only if it is rated in one of the top two
rating categories by Moody’s, S&P or Fitch or, if not rated, is of equivalent quality in the Sub-Adviser’s opinion.
Commercial Paper may include Master Notes of the same quality.
Master Notes
are unsecured obligations which are redeemable
upon demand of the holder and which permit the investment of fluctuating amounts at varying rates of interest. Master Notes may
be acquired by the Fund through the Master Note program of the Fund’s custodian bank, acting as administrator thereof. The
Sub-Adviser will monitor, on a continuous basis, the earnings power, cash flow and other liquidity ratios of the issuer of each
Master Note held by the Fund.
ILLIQUID INVESTMENTS.
The Fund
may invest up to 15% of its net assets in illiquid securities, which are investments that cannot be sold or disposed of in the
ordinary course of business within seven days at approximately the prices at which they are valued. Under the supervision of the
Board of Trustees of the Trust (the “
Board
”), the Sub-Adviser determines the liquidity of the Fund’s investments,
and through reports from the Sub-Adviser, the Board monitors investments in illiquid instruments. In determining the liquidity
of the Fund’s investments, the Sub-Adviser may consider various factors including, without limitation: (i) the frequency
of trades and quotations; (ii) the number of dealers and prospective purchasers in the marketplace; (iii) dealer undertakings to
make a market; (iv) the nature of the security (including, without limitation, any demand or tender features); and (v) the nature
of the marketplace for trades (including, without limitation, the ability to assign or offset the Fund’s rights and obligations
relating to the investment). If through a change in values, net assets or other circumstances, the Fund were in a position where
more than 15% of its net assets were invested in illiquid securities, it would seek to take appropriate steps to protect liquidity.
An investment in illiquid securities poses risks of potential delays in resale and uncertainty in valuation. Limitations on resale
may have an adverse effect on the marketability of portfolio securities and the Fund may be unable to dispose of illiquid securities
promptly or at reasonable prices.
RESTRICTED SECURITIES.
Within
its limitations on investment in illiquid securities, the Fund may purchase restricted securities that generally can be sold in
privately negotiated transactions, pursuant to an exemption from registration under the federal securities laws or in a registered
public offering. Where registration is required for a restricted security held by the Fund, the Fund may be obligated to pay all
or part of the registration expense, and a considerable period may elapse between the time it decides to seek registration and
the time the Fund may be permitted to sell a security under an effective registration statement. If during such a period adverse
market conditions were to develop, the Fund might obtain a less favorable price than prevailed when it decided to seek registration
of the security.
Derivative
Instruments.
The Fund will comply with and adhere to all limitations on the manner and extent to which it effects transactions
in derivative instruments (including, without limitation, futures and options on such futures) imposed by the provisions of the
1940 Act applicable to the issuance of senior securities. Additionally, the Trust, on behalf of the Fund, has claimed an exclusion
from the definition of the term “commodity pool operator” pursuant to Rule 4.5 under the Commodity Exchange Act, as
amended (the “
CEA
”). Therefore, the Fund is not subject to regulation or registration as a commodity pool operator
under the CEA.
The Dodd-Frank Wall Street Reform and
Consumer Protection Act, enacted in July 2010, provided for new regulation of the derivatives market, including, without limitation,
clearing, margin, reporting and registration requirements. Because the legislation continues to be implemented, its ultimate impact
remains unclear. Regulations could, among other things, restrict the Fund’s ability to engage in derivatives transactions
(for example, by making certain types of derivatives transactions no longer available to the Fund) and/or increase the costs of
such derivatives transactions (for example, by increasing margin or capital requirements), either of which could adversely affect
the Fund’s derivative positions or the Fund’s use of derivatives generally.
Options.
The Fund may write call and put options on securities, ETFs or security indexes to seek income or may purchase or
write put or call options for hedging purposes. Although not required to do so, the Fund will typically write a call option only
if the option is “covered” by the Fund holding a position in the underlying securities or by other means which would
permit immediate satisfaction of the Fund’s obligation as writer of the option. The purchase and writing of options involves
certain risks. During the option period, a covered call writer has, in return for the premium on the option, given up the opportunity
to profit from a price increase in the underlying securities above the exercise price, but, as long as its obligation as a writer
continues, has retained the risk of loss should the price of the underlying security decline. The writer of an option may have
no control over the time when it may be required to fulfill its obligation as a writer of the option. Once an option writer has
received an exercise notice, it cannot effect a closing purchase transaction in order to terminate its obligation under the option
and must deliver the underlying securities at the exercise price. If a put or call option purchased by the Fund is not sold when
it has remaining value, and if the market price of the underlying security, in the case of a put, remains equal to or greater than
the exercise price or, in the case of a call, remains less than or equal to the exercise price, the Fund will lose its entire investment
in the option. There can be no assurance that a liquid market will exist when the Fund seeks to close out an option position. Furthermore,
if trading restrictions or suspensions are imposed on the options market, the Fund may be unable to close out a position.
Futures Contracts.
A futures
contract is a bilateral agreement to buy or sell a security (or deliver a cash settlement price, in the case of a contract relating
to an index or otherwise not calling for physical delivery at the end of trading in the contracts) for a set price in the future.
Futures contracts are designated by boards of trade that have been designated “contracts markets” by the Commodity
Futures Trading Commission (“
CFTC
”). No purchase price is paid or received when the contract is entered into.
Instead, the Fund, upon entering into a futures contract (and to maintain the Fund’s open positions in futures contracts),
would be required to deposit with its custodian in a segregated account in the name of the futures broker an amount of cash, U.S.
government securities, suitable money market instruments or liquid, high-grade fixed income securities, known as “initial
margin”. The margin required for a particular futures contract is set by the exchange on which the contract is traded, and
may be significantly modified from time to time by the exchange during the term of the contract. Futures contracts are customarily
purchased and sold on margin that may range upward from less than 5% of the value of the contract being traded. By using futures
contracts as a risk management technique, given the greater liquidity in the futures market than in the cash market, it may be
possible to accomplish certain results more quickly and with lower transaction costs.
If the price of an open futures contract
changes (by increase in the case of a sale or by decrease in the case of a purchase) so that the loss on the futures contract reaches
a point at which the margin on deposit does not satisfy margin requirements, the broker will require an increase in the margin.
However, if the value of a position increases because of favorable price changes in the futures contract so that the margin deposit
exceeds the required margin, the broker will pay the excess to the Fund. These subsequent payments, called “variation margin,”
to and from the futures broker, are made on a daily basis as the price of the underlying assets fluctuate, making the long and
short positions in the futures contract more or less valuable, a process known as “marking to market”.
The Fund will incur brokerage fees when
it purchases and sell futures contracts. Positions taken in the futures markets are not normally held until delivery or cash settlement
is required, but are instead liquidated through offsetting transactions which may result in a gain or a loss. While futures positions
taken by the Fund will usually be liquidated in this manner, the Fund may instead make or take delivery of underlying securities
whenever it appears economically advantageous for the Fund to do so. A clearing organization associated with the exchange on which
futures are traded assumes responsibility for closing out transactions and guarantees that, as between the clearing members of
an exchange, the sale and purchase obligations will be performed with regard to all positions that remain open at the termination
of the contract.
Securities Index Futures Contracts
.
Purchases or sales of securities index futures contracts may be used in an attempt to protect the Fund’s current or intended
investments from broad fluctuations in securities prices. A securities index futures contract does not require the physical delivery
of securities, but merely provides for profits and losses resulting from changes in the market value of the contract to be credited
or debited at the close of each trading day to the respective accounts of the parties to the contract. On the contract’s
expiration date, a final cash settlement occurs, and the futures positions are simply closed out. Changes in the market value of
a particular index futures contract reflect changes in the specified index of securities on which the future is based.
By establishing an appropriate “short”
position in an index future, the Fund may also seek to protect the value of its portfolio against an overall decline in the market
for the securities on which the future is based. Alternatively, in anticipation of a generally rising market, the Fund can seek
to avoid losing the benefit of apparently low current prices by establishing a “long” position in securities index
futures and later liquidating that position as particular securities are in fact acquired. To the extent that these hedging strategies
are successful, the Fund will be affected to a lesser degree by adverse overall market price movements than would otherwise be
the case.
Limitations on Purchase and Sale
of Futures Contracts
. Futures can be volatile instruments and involve certain risks. If the Sub-Adviser applies a hedge in
the Fund’s portfolio at an inappropriate time or judges market movements incorrectly, futures strategies may lower the Fund’s
return. The Fund could also experience losses if the prices of its futures positions were poorly correlated with its other investments,
or if it could not close out its positions because of an illiquid market.
In general, the Fund will not purchase
or sell futures contracts unless either (i) the futures contracts are purchased for “bona fide hedging” purposes (as
defined under the CFTC regulations); or (ii) if purchased for other purposes, (A) the sum of the amounts of initial margin deposits
and premiums required to establish such positions on the Fund’s existing futures would not exceed 5% of the liquidation value
of the Fund’s total assets or (B) the aggregate
net notional value of commodity futures,
commodity options contracts, or swaps positions determined at the time the most recent position was established does not exceed
100% of the liquidation value of the Fund’s total assets, after taking into account unrealized profits and unrealized losses
on any such positions it has entered into.
In instances involving the purchase
of futures contracts, the Fund will deposit in a segregated account with its custodian an amount of cash, cash equivalents and/or
appropriate securities equal to the cost of such futures contracts, to the extent that such deposits are required under the 1940
Act.
Additional Information Regarding Leverage.
Certain
derivatives involve leverage; that is, the amount invested may be less than the full economic exposure of the derivative instrument,
and the Fund could lose more than the amount invested. Federal securities laws, regulations and guidance may require the Fund to
segregate assets or to otherwise hold instruments that offset the Fund’s current obligations under the derivative instrument.
This process is known as “cover.” The Fund will not enter into any derivative transaction unless it can comply with guidance
from the SEC regarding cover, and, if SEC guidance so requires, the Fund will segregate cash or liquid assets with a value
at least sufficient to cover its current obligations under the derivative transaction or otherwise “cover” the transaction
in accordance with applicable SEC guidance. If a large portion of the Fund’s assets is used for cover, it could affect portfolio
management or the Fund’s ability to meet redemption requests or other current obligations. The leverage involved in certain
derivative transactions may result in the Fund’s NAV being more sensitive to changes in the value of the related investment. To
the extent the Fund writes put and call options, the Fund will “cover” its obligations in accordance with applicable
SEC guidance.
FORWARD COMMITMENT AND WHEN-ISSUED
SECURITIES.
The Fund may purchase securities on a when-issued basis or for settlement at a future date if the Fund holds sufficient
liquid assets to meet the purchase price. In such purchase transactions, the Fund will not accrue interest on the purchased security
until the actual settlement. Similarly, if a security is sold for a forward date, the Fund will accrue the interest until the settlement
of the sale. When-issued security purchases and forward commitments have a higher degree of risk of price movement before settlement
due to the extended time period between the execution and settlement of the purchase or sale. As a result, the exposure to the
counterparty of the purchase or sale is increased. Although the Fund would generally purchase securities on a forward commitment
or when-issued basis with the intention of taking delivery, the Fund may sell such a security prior to the settlement date if the
Sub-Adviser felt such action was appropriate. In such a case, the Fund could incur a short-term gain or loss.
SHORT SALES OF SECURITIES.
The
Fund may make short sales, which are transactions in which the Fund sells a security it does not own in anticipation of a decline
in the market value of that security. To complete a short sale transaction, the Fund will borrow the security from a broker-dealer,
which generally involves the payment of a premium and transaction costs. The Fund then sells the borrowed security to a buyer in
the market. The Fund will then cover the short position by buying shares in the market either (i) at its discretion or (ii) when
called by the broker-dealer lender. Until the security is replaced, the Fund is required to pay the broker-dealer lender any dividends
or interest that accrue during the period of the loan. In addition, the net proceeds of the short sale will be retained by the
broker to the extent necessary to meet regulatory or other requirements, until the short position is closed out.
The Fund will incur a loss as a result
of a short sale if the price of the security increases between the date of the short sale and the date on which the Fund replaces
the borrowed security. The Fund will realize a gain if the security declines in price between those dates. The amount of any gain
will be decreased, and the amount of any loss increased by the amount of the premium, dividends, interest or expenses the Fund
may be required to pay in connection with a short sale. When the Fund makes a short sale, the Fund will segregate liquid assets
(such as cash, U.S. government securities, or equity securities) on the Fund’s books and/or in a segregated account at the
Fund’s custodian or broker (or an affiliate thereof) in an amount sufficient to cover the current value of the securities
to be replaced as well as any dividends, interest and/or transaction costs due to the broker-dealer lender, to the extent such
deposit is required by applicable law and/or the parties involved in the transaction. In determining the amount to be segregated,
any securities that have been sold short by the Fund will be marked to market daily. To the extent the market price of the
security sold short increases and more assets are required to meet the Fund’s short sale obligations, additional assets will
be segregated to ensure adequate coverage of the Fund’s short position obligations.
In addition, the Fund may make short
sales “against the box,” i.e., when the Fund sells a security short while owning securities equivalent in kind and
amount to the securities sold short (or securities convertible or exchangeable into such securities) and will hold such securities
while the short sale is outstanding. The Fund will incur transaction costs, including, without limitation, interest, in connection
with opening, maintaining and closing short sales against the box.
LENDING OF PORTFOLIO SECURITIES.
In order to generate additional income, the Fund may lend portfolio securities in an amount up to 33⅓% of its total assets
to broker-dealers, major banks or other recognized domestic institutional borrowers of securities which the Sub-Adviser has determined
are creditworthy under guidelines established by the Board. In determining whether the Fund will lend securities, the Sub-Adviser
will consider all relevant facts and circumstances. The Fund may not lend securities to any company affiliated with an investment
adviser to the Fund. Each loan of securities will be collateralized by cash, securities or letters of credit. The Fund might experience
a loss if the borrower defaults on the loan.
The borrower at all times during the
loan must maintain with the Fund cash or cash equivalent collateral, or provide to the Fund an irrevocable letter of credit equal
in value to at least 100% of the value of the securities loaned. While the loan is outstanding, the borrower will pay the Fund
any interest paid on the loaned securities, and the Fund may invest the cash collateral to earn additional income. Alternatively,
the Fund may receive an agreed-upon amount of interest income from the borrower who has delivered equivalent collateral or a letter
of credit. It is anticipated that the Fund may share with the borrower some of the income received on the collateral for the loan
or the Fund will be paid a premium for the loan. Loans are subject to termination at the option of the Fund or the borrower at
any time. The Fund may pay reasonable administrative and custodial fees in connection with a loan, and may pay a negotiated portion
of the income earned on the cash to the borrower or placing broker. As with other extensions of credit, there are risks of delay
in recovery or even loss of rights in the collateral should the borrower fail financially.
Borrowing.
The Fund may, subject to the restrictions of the 1940 Act, borrow money from banks as a temporary measure. For example, the Fund
may borrow money to meet redemption requests or for extraordinary or emergency purposes. In the event the Fund should ever borrow
money under these conditions, such borrowing could increase the Fund’s costs and thus reduce the value of the Fund’s
assets. The 1940 Act presently allows the Fund to borrow from any bank (including, without limitation, pledging, mortgaging or
hypothecating assets) provided that, immediately after any such borrowing, there is an asset coverage of at least 300% for all
such borrowings, and provided further that, in the event that the Fund’s asset coverage at any time falls below 300%, the
Fund reduce its existing borrowings (within three days, excluding Sundays and holidays) to the extent necessary to comply with
the foregoing limitation.
INVESTMENT
LIMITATIONS
The Fund has adopted the following investment
limitations, which cannot be changed without approval by holders of a majority of its outstanding voting Shares. A “majority”
for this purpose means the lesser of (i) 67% of the Fund’s outstanding Shares represented in person or by proxy at a meeting
at which more than 50% of its outstanding Shares are represented; or (ii) more than 50% of the Fund’s outstanding Shares.
Unless otherwise indicated, percentage limitations apply at the time of purchase of the applicable securities.
FUNDAMENTAL RESTRICTIONS.
As
a matter of fundamental policy, the Fund may not:
|
|
(1)
|
issue senior securities, except as permitted by the 1940 Act;
|
|
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(2)
|
borrow money (including, without limitation, borrowing to meet redemptions), except to the extent permitted under the 1940 Act;
|
|
|
(3)
|
pledge, mortgage or hypothecate its assets;
|
|
|
(4)
|
act as underwriter except to the extent that, in connection with the disposition of portfolio securities, the Fund may be deemed to be an underwriter under certain federal securities laws;
|
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(5)
|
make loans, provided that the Fund may lend its portfolio securities in an amount up to 33⅓% of total Fund assets;
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(6)
|
purchase or sell real estate or interests in real estate; provided, however, that the Fund may purchase and sell securities which are secured by real estate and securities of companies which invest or deal in real estate (including, without limitation, investments in REITs and mortgage-backed securities);
|
|
|
(7)
|
invest more than 25% of its total assets in any particular industry or group of industries, except that the Fund will concentrate to approximately the same extent that the Fund’s index concentrates in the securities of such particular industry or group of industries; or
|
|
|
(8)
|
invest in commodities.
|
NON-FUNDAMENTAL RESTRICTIONS.
The
following investment limitations are not fundamental and may be changed by the Board without shareholder approval. As a matter
of non-fundamental policy, the Fund may not:
|
|
(1)
|
purchase securities on margin (but the Fund may obtain such short-term credits as may be necessary for the clearance of transactions);
|
|
|
(2)
|
make investments for the purpose of exercising control or management over a portfolio company;
|
|
|
(3)
|
invest in securities of other registered investment companies, except as permitted under the 1940 Act;
|
|
|
(4)
|
invest in interests in oil, gas or other mineral exploration or development programs, although the Fund may invest in the common stock of companies that invest in or sponsor such programs;
|
|
|
(5)
|
purchase warrants if as a result the Fund would then have more than 5% of its total net assets (taken at the lower of cost or current value) invested in warrants; or
|
|
|
(6)
|
invest more than 15% of its net assets in illiquid securities.
|
With respect to the fundamental and
non-fundamental investment restrictions above, if a percentage limitation is adhered to at the time of investment, a later increase
or decrease in percentage resulting from any change in value or net assets will not result in a violation of such restriction (i.e.,
percentage limitations are determined at the time of purchase); provided, however, that the treatment of the fundamental restrictions
related to borrowing money and issuing senior securities are exceptions to this general rule.
With respect to the above fundamental
investment restriction on borrowing money, the entry into options, forward contracts, futures contracts, including, without limitation,
those relating to indices, and options on futures contracts or indices will not constitute borrowing.
With respect to the above fundamental
investment restriction on pledging, mortgaging or hypothecating assets, any such activity to the extent necessary to secure permitted
borrowings and to the extent related to the deposit of assets in escrow in connection with (i) writing covered put or call options,
(ii) the purchase of securities on a when-issued or forward commitment basis, or (iii) collateral or initial or variation margin
arrangements with respect to options, forward contracts, futures contracts (including, without limitation, those relating to indices),
or options on futures contracts or indices will not be considered pledging, mortgaging or hypothecating assets.
With respect to the above fundamental
investment restriction on making loans, investment in U.S. government obligations, short-term commercial paper, certificates of
deposit, bankers’ acceptances and repurchase agreements will not be deemed to be the making of a loan.
With respect to the above
fundamental investment restriction regarding concentration in a particular industry, (i) securities of the U.S. Government
(including its agencies and instrumentalities), tax-exempt securities of state or municipal governments and their political
subdivisions and investments in other registered investment companies are not considered to be issued by members of any
industry (although the Fund will consider the holdings of an underlying registered investment company in applying its
concentration policy), (ii) if the Fund invests in a revenue bond tied to a particular industry, the Fund will consider such
investment to be issued by a member of the industry to which the revenue bond is tied, and (iii) in the case of loan
participations where the Fund is not in a direct debtor/creditor relationship with the borrower, both the financial
intermediary and the ultimate borrower are considered issuers.
With respect to the above fundamental
investment restriction on investments in commodities, the purchase or sale by the Fund of options, forward contracts, futures contracts
(including, without limitation, those relating to indices), options on futures contracts or indices or interests in equity securities
issued by companies (including, without
limitation, investment companies) that
hold or invest in one or more commodities as their sole or principal business activity will not be considered an investment in
commodities.
With respect to the above non-fundamental
investment restriction on purchasing securities on margin, short sales of securities and futures trades, forward contracts or similar
trades requiring margin deposits or other use of a margin account will not be considered purchasing securities on margin.
The 1940 Act allows the Fund to borrow
from any bank (including, without limitation, pledging, mortgaging or hypothecating assets) in an amount up to 33⅓% of its
total assets and the Fund will, to the extent necessary, reduce its existing borrowings (within three days, excluding Sundays and
holidays) to comply with the provisions of the 1940 Act.
MANAGEMENT
AND OTHER SERVICE PROVIDERS
The Board is responsible for the supervision
and oversight of the Fund. The Board approves all significant agreements between the Trust, on behalf of the Fund, and those companies
that furnish services to the Fund; reviews the performance of the Fund; and oversees the business activities of the Fund. This
section of the SAI provides information about the persons who serve as trustees (“
Trustees
”) and executive officers
to the Trust, as well as the entities that provide services to the Trust.
TRUSTEES AND OFFICERS.
Following
are the Trustees and executive officers of the Trust, their ages and addresses, their present positions with the Trust, and their
principal occupations during the past five years. Those Trustees who are “interested persons” as defined in the 1940
Act (“
Interested Trustees
”) and those Trustees who are not “interested persons” as defined in the
1940 Act (“
Independent Trustees
”) are identified in the table. The address of each Trustee and executive officer
of the Trust, unless otherwise indicated, is 1540 Broadway, 16th Floor, New York, NY 10036.
|
Name and Age
|
Position(s) held with Trust
|
Length of Time Served
|
Principal Occupation(s)
During Past Five Years
|
Number of Portfolios in Fund Complex Overseen by Trustee*
|
Other
Directorships
Held by
Trustee During
Past Five
Years
|
|
Independent Trustees
|
|
James Simpson
Year of Birth: 1970
|
Trustee
|
Since Inception
|
President, ETP Resources, LLC (2009-present) (a financial services consulting company); Vice President, Northern Trust Securities, Inc. and Vice President, Northern Trust Global Investments (2008-2009)
|
13
|
Trustee (since 2015), Virtus ETF Trust II (3 portfolios)
|
|
Robert S. Tull
Year of Birth: 1952
|
Trustee
|
Since Inception
|
Independent Consultant (2013-present); Chief Operating Officer, Factor Advisors, LLC (2010-2013); Chief Operating Officer, GlobalShares (2009-2010)
|
13
|
Trustee (since 2015), Virtus ETF Trust II (3 portfolios)
|
|
Stephen O’Grady
Year of Birth: 1946
|
Trustee
|
Since September 2014
|
Lead Market Maker, GFI Group (2011-2012); Partner, Kellogg Capital Markets (2004-2011)
|
13
|
Trustee (since 2015), Virtus ETF Trust II (3 portfolios); Trustee (since 2013), Greenhaven Continuous Commodity ETF (GCC); Trustee (since 2014), Acacia Group LLC
|
|
Myles J. Edwards
Year of Birth: 1961
|
Trustee
|
Since November 2016
|
General Counsel, CCO and COO, Shufro, Rose & Co., LLC (2014 – present); General Counsel and CC), Constellation Wealth Advisers, LLC (2011 – 2014)
|
13
|
Trustee (since 2015), Virtus ETF Trust II (3 portfolios)
|
|
*The Fund Complex consists of the Trust and Virtus ETF Trust II.
|
|
Interested Trustee**
|
|
William J. Smalley
Year of Birth: 1983
|
Trustee, President, Chief Executive Officer and Secretary
|
Since Inception
|
President, Virtus ETF Solutions LLC (2012-present); Managing Principal, ETF Distributors LLC (2012-present); President, Virtus ETF Trust II (2015-present); Vice President, Factor Advisors, LLC (2010-2012); Vice President, MacroMarkets, LLC (2006-2010)
|
13
|
None
|
|
** Mr. Smalley is an Interested Trustee because he is an employee of the Adviser.
|
|
OTHER EXECUTIVE OFFICERS
|
|
Brinton W. Frith
Year of Birth: 1969
|
Treasurer and Chief Financial Officer
|
Since Inception
|
Managing Director, Virtus ETF Solutions LLC (2013-present); Treasurer, ETFis Series Trust I (2012 – present); President, Javelin Investment Management, LLC (2008-2013)
|
N/A
|
N/A
|
|
Nancy J. Engberg
Year of Birth: 1956
|
Chief Compliance Officer
|
Since 2015
|
Vice President (since 2008) and Chief Compliance Officer (2008 to 2011 and since 2016), Virtus Investment Partners, Inc. and/or certain of its subsidiaries; various officer positions (since 2003) with Virtus affiliates; Vice President and Chief Compliance Officer (since 2011), Virtus Mutual Fund Complex; Vice President (since 2010) and Chief Compliance Officer (since 2011), Virtus Variable Insurance Trust; Vice President and Chief Compliance Officer (since 2011), Virtus Closed-End Funds; Vice President and Chief Compliance Officer (since 2013), Virtus Alternative Solutions Trust; Chief Compliance Officer (since 2015), ETFis Series Trust I.
|
N/A
|
N/A
|
Board Structure.
The Trust’s Board
includes four Independent Trustees and one Interested Trustee, Mr. Smalley, who is Chairman of the Board.
Each
Trustee serves an indefinite term, until a successor is
elected, qualified and serving as a Trustee
.
The Board has not appointed an Independent Trustee to serve as lead Independent Trustee. The Board believes this structure
is appropriate because, among other things, the Board’s current small size and the small number of funds in the Trust permit
Trust management to communicate with each Independent Trustee as and when needed, and permit each Independent Trustee to be involved
in each committee of the Board (each a “
Committee
”) as well as each Board function. The Board may consider appointing
an independent Chairman or a lead Independent Trustee in the future, particularly if the Board’s size or the Trust’s
complexity materially increases.
With respect to risk oversight, the Board holds
four regular meetings each year to consider and address matters involving the Trust and the Fund. During these meetings, the Board
receives reports from the Adviser, the Trust’s sub-advisers, Trust management, the Fund’s administrator, transfer agent
and distributor, and the Trust’s Chief Compliance Officer (the “
CCO
”), on regular quarterly items and,
where appropriate and as needed, on specific issues. As part of its oversight function, the Board also may hold special meetings
or communicate directly with Trust management or the CCO to address matters arising between regular meetings. The Board has established
a committee structure that includes an Audit Committee and a Nominating Committee (discussed in more detail below). Each Committee
is comprised entirely of Independent Trustees.
Qualification of Trustees.
The Board
has considered each Trustee’s experience, qualifications, attributes and skills in light of the Board’s function and
the Trust’s business and structure, and has determined that each Trustee possesses experience, qualifications, attributes
and skills that enable the Trustee to be an effective member of the Board. In this regard, the Board has considered the following
specific experience, qualifications, attributes and/or skills for each Trustee:
|
James Simpson
|
Mr. Simpson has experience as an independent director for other ETFs and as President of ETP Resources, a financial information services company that provides detailed reference data on U.S.-listed exchange-traded products. He also has experience working for financial institutions and securities exchanges and has consulted with respect to the development of exchange-traded products.
|
|
Robert S. Tull
|
Mr. Tull has experience as an independent director for other ETFs and as a consultant to financial companies and as chief operating officer to financial services companies. Mr. Tull has also assisted with the development of exchange-traded products.
|
|
Stephen O’Grady
|
Mr. O’Grady has experience as an independent director for other ETFs and in the development and operation of ETF trading systems and futures exchanges and has served as president of an options brokerage firm.
|
|
Myles J. Edwards
|
Mr. Edwards has experience as general counsel, chief compliance officer and chief operating officer of SEC registered investment advisers, hedge funds and FINRA member broker-dealers.
|
|
William J. Smalley
|
Mr. Smalley has experience in the financial industry, including the development of exchange-traded products, and is a founder of the Adviser and the Distributor.
|
The Board has determined that each of the Trustees’
careers and background, combined with their interpersonal skills and general understanding of financial and other matters, enable
the Trustees to effectively participate in and contribute to the Board’s functions and oversight of the Trust. References
to the qualifications, attributes and skills of Trustees are pursuant to requirements of the SEC, do not constitute holding out
the Board or any Trustee as having any special expertise or experience, and shall not impose any greater responsibility on any
such person or on the Board by reason thereof.
Trustee Standing Committees.
The
Board has established the following standing committees:
Audit Committee:
The Independent
Trustees are the current members of the Audit Committee. The Audit Committee oversees the Fund’s accounting and financial
reporting policies and practices, reviews the results of the annual audits of the Fund’s financial statements and interacts
with the Fund’s independent auditors on behalf of the Board. The Audit Committee also serves in the role of the Trust’s
qualified legal compliance committee and, as such, receives, investigates and makes recommendations as to appropriate remedial
action in connection with any report of evidence of a material violation of securities laws or breach of fiduciary duty or similar
violation by the Trust, its officers, Trustees or agents. The Audit Committee operates pursuant to an Audit Committee Charter and
meets periodically as necessary.
Nominating Committee:
The
Independent Trustees are the current members of the Nominating Committee. The Nominating Committee nominates, selects and appoints
Independent Trustees to fill vacancies on the Board and to stand for election at appropriate meetings of the shareholders of the
Trust. The Nominating Committee meets only as necessary. The Nominating Committee generally will not consider nominees recommended
by shareholders of the Trust.
Beneficial Ownership of Shares of
the Fund.
Because the Fund is newly organized, none of the Trustees own Shares of the Fund as of the date of this SAI.
Ownership In Fund Affiliates
.
As of the date of this SAI, none of the Independent Trustees, nor members of their immediate families, owned, beneficially or of
record, securities of the Adviser, the Sub-Adviser, the Fund’s principal underwriter or any affiliate of the Adviser, the
Sub-Adviser or the principal underwriter.
Compensation.
Officers of the
Trust and the Trustees who are interested persons of the Trust or the Adviser receive no salary from the Trust. Each Independent
Trustee receives $2,000 per year per series of the Trust. The Trust reimburses each Trustee and officer of the Trust
for his or her travel and other expenses relating to attendance at Board or committee meetings. For the fiscal year ended October
31, 2017, the Trustees are estimated to receive the following compensation:
|
Name of Trustee
|
Aggregate Compensation From the Fund
1
|
Pension or Retirement Benefits Accrued As Part of Fund Expenses
|
Estimated Annual Benefits Upon Retirement
|
Total Compensation From Fund Complex Paid to Trustees
1
|
|
Independent Trustees
|
|
James Simpson
|
$2,000
|
None
|
None
|
$28,000
|
|
Robert S. Tull
|
$2,000
|
None
|
None
|
$28,000
|
|
Stephen O’Grady
|
$2,000
|
None
|
None
|
$28,000
|
|
Myles J. Edwards
|
$2,000
|
None
|
None
|
$28,000
|
|
Interested Trustee
|
|
William J. Smalley
|
None
|
None
|
None
|
None
|
1
As of October 31,
2016, the Fund had not yet commenced operations. Fees are estimated for the fiscal year ending October 31, 2017.
CODES OF ETHICS.
The Trust, the Adviser,
the Sub-Adviser and the Fund’s principal underwriter have each adopted a code of ethics, as required by Rule 17j-1 under
the 1940 Act, that is designed to prevent personnel of the Trust, the Adviser, the Sub-Adviser and the Fund’s principal underwriter
subject to the codes from engaging in deceptive, manipulative or fraudulent activities in connection with securities held or to
be acquired by the Fund (which securities may also be held by persons subject to the codes). The codes of ethics permit personnel
of the Trust, the Adviser, the Sub-Adviser and the principal underwriter subject to the codes to invest in securities, including,
without limitation, securities that may be purchased or held by the Fund, subject to certain restrictions and pre-approval requirements.
In addition, the codes of ethics of the Trust, the Adviser, the Sub-Adviser and the principal underwriter require that access persons
of such entities report their personal securities transactions and holdings, which are reviewed for compliance with the code of
ethics.
Anti-Money
Laundering Program
.
The Trust has adopted an anti-money laundering (“
AML
”) program, as required
by applicable law, that is designed to prevent the Fund from being used for money laundering or the financing of terrorist activities.
The Trust’s AML Compliance Officer is responsible for implementing and monitoring the operations and internal controls of
the program. Compliance officers at certain of the Fund’s service providers are also responsible for monitoring aspects of
the AML program. The AML program is subject to the continuing oversight of the Board.
PROXY VOTING POLICIES.
The Trust
has adopted a proxy voting and disclosure policy that delegates to each Fund’s proxy voting manager the authority to vote
proxies for the Fund, subject to oversight of the Board. The Sub-Adviser serves as the proxy voting manager for the Fund. Copies
of the Trust’s Proxy Voting Policy and Procedures and the Sub-Adviser’s Proxy Voting Policy and Procedures are included
as
Appendix A
and
Appendix B
, respectively, to this SAI.
No later than August 31 of each year,
the Trust files Form N-PX with the SEC. Form N-PX states how the Fund voted proxies relating to portfolio securities during the
most recent 12-month period ended June 30. The Fund’s proxy voting records, as set forth in its most recent Form N-PX filing,
will be available upon request, without charge, by calling the Fund at (866) 383-7636. This information will also be available
on the SEC’s website at http://www.sec.gov.
CONTROL PERSONS AND PRINCIPAL HOLDERS
OF SECURITIES
As of the date of this SAI, the Fund had no
Shares outstanding.
MANAGEMENT SERVICES
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Management of the Fund”.
Adviser.
The Fund’s Adviser is Virtus ETF Advisers LLC, located at 1540 Broadway,
New York, NY 10036. The Adviser was organized as a Delaware limited liability company in August 2013 and, since April 2015, has
been a majority-owned subsidiary of Virtus Partners, Inc. (“
VPI
”), a wholly owned subsidiary of Virtus Investment
Partners, Inc. (ticker: VRTS) (together with its affiliates, “
Virtus
”). Virtus is a public company that operates
a multi-manager asset management business and has substantial experience in the investment management and investment company industries.
As of June 30, 2016, on a collective basis, Virtus-affiliated registered investment advisers manage over $45.1 billion in
assets. The Adviser has served as the investment adviser of the Fund since the inception of the Fund’s operations. The Adviser
also serves as investment adviser to each other series of the Trust and each series of Virtus ETF Trust II, an open-end management
investment company registered with the SEC.
The Adviser serves as investment adviser to
the Fund and has overall responsibility for the general management and administration of the Trust, pursuant to an investment advisory
agreement between the Trust and the Adviser (the “
Advisory Agreement
”). The Advisory Agreement is effective
for an initial two-year period and will remain in effect thereafter only so long as such renewal and continuance is specifically
approved at least annually by the Board or by vote of a majority of the Fund’s outstanding voting securities, provided the
continuance is also approved by a majority of the Independent Trustees. The Advisory Agreement is terminable without penalty on
60 days’ notice by the Board or by vote of a majority of the outstanding voting securities of the Fund. The Advisory Agreement
provides that it will terminate automatically in the event of its “assignment,” as such term is defined in the 1940
Act.
Under the Advisory Agreement, the Adviser
is not liable for any error of judgment or mistake of law or for any loss suffered by the Fund in connection with the matters to
which the Advisory Agreement relates, except a loss resulting from a breach of fiduciary duty with respect to the receipt of compensation
for services; or a loss resulting from willful misfeasance, bad faith or gross negligence on the part of the Adviser in the performance
of its duties; or from the reckless disregard of its duties and obligations under the Advisory Agreement.
Adviser Compensation.
The Adviser
is entitled to receive a fee, payable monthly, at the annual rate of the greater of 0.45% of the Fund’s average daily net
assets or $25,000 per year (the “Advisory Fee”). The Fund has not paid any advisory fees to the Adviser as of the date
of this Prospectus. The Advisory Fee is structured as a “unified fee.” The Adviser has delegated to the Sub-Adviser
the obligation to pay all of the ordinary operating expenses of the Fund, except for the Advisory Fee; payments under any 12b-1
plan adopted by the Fund; taxes and other governmental fees; brokerage fees, commissions and other transaction expenses; interest
and other costs of borrowing; litigation or arbitration expenses; acquired fund fees and expenses; and extraordinary or other non-routine
expenses of the Fund; each of which is paid by the Fund.
The Adviser has engaged the Sub-Adviser
to manage the Fund’s investments in accordance with the stated investment objective and policies of the Fund, subject to
the oversight and supervision of the Adviser and the Board.
Sub-Adviser.
The Fund’s sub-adviser is Infrastructure Capital Advisors, LLC, 1325 Avenue of the Americas, 28th Floor, New York,
NY, 10019. The Sub-Adviser serves in that capacity pursuant to a sub-advisory contract (the “
Sub-Advisory Agreement
”)
with the Adviser and the Trust on behalf of the Fund as approved by the Board. The Sub-Adviser makes day-to-day investment decisions
for the Fund and selects broker-dealers for executing portfolio transactions, subject to the Sub-Adviser’s best execution
obligations and the Trust’s and the Sub-Adviser’s brokerage policies.
The Sub-Adviser was organized as a New York
limited liability company in January 2012. The Sub-Adviser has served as the sub-adviser of the Fund since the inception of the
Fund’s operations. The Sub-Adviser is controlled by Jay D. Hatfield, its co-founder and president. Mr. Hatfield has been
managing investments for clients, including private investment funds and another ETF, since 2001. As of June 30, 2016, the Sub-Adviser
had approximately $199.95 million in assets under management.
Sub-Adviser Compensation.
The
Adviser pays the Sub-Adviser out of the Advisory Fee it receives from the Fund. The Adviser retains a portion of the Advisory
Fee that is equal to the greater of (i) an annualized rate of 0.075% of the average daily net asset value of the Fund, during
the prior calendar month, or (ii) a minimum annual fee of $25,000 per calendar year. The remainder of the Advisory Fee is
paid by the Adviser to the Sub-Adviser as full compensation for its services.
Portfolio
ManagerS.
Jay D. Hatfield, co-founder and president of the Sub-Adviser, and Edward F. Ryan, co-founder, chief financial
officer and chief operating officer of the Sub-Adviser, have served as portfolio managers for the Fund since the inception of the
Fund’s operations. The portfolio managers are primarily responsible for the day-to-day management of the Fund.
Ownership of Fund Shares.
The
portfolio managers did not own any Shares of the Fund as of the date of this SAI because the Fund had not yet commenced operations.
Other Accounts.
In addition to
the Fund, Mr. Hatfield is responsible for the day-to-day management of certain other accounts. The table below shows the number
of, and total assets in, such other accounts as of September 30, 2016. As of the date of this SAI, Mr. Ryan is not responsible
for the day-to-day management of any other accounts, other than the Fund.
|
Portfolio Manager
|
Type of Accounts
|
Total Number
of Other
Accounts Managed
|
Total Assets
of Other
Accounts Managed
|
Number of Accounts where Advisory Fee is Based upon Account Performance
|
Total Assets where Advisory Fee is Based upon Account Performance
|
|
Jay D. Hatfield
|
Other Pooled Investment Vehicles
|
4
|
$175,639,800
|
3
|
$28,260,944
|
|
Separately Managed Accounts
|
8
|
$24,310,694
|
---
|
---
|
Material Conflicts of Interest.
Because
the portfolio managers may at times manage multiple portfolios for multiple clients, the potential for conflicts of interest exists.
The portfolio managers may manage portfolios having substantially the same investment style as the Fund. However, the portfolios
managed by the portfolio managers may not have portfolio compositions identical to those of the Fund due, for example, to specific
investment limitations or guidelines present in some portfolios or accounts but not others. The portfolio managers may purchase
securities for one portfolio and not another portfolio, and the performance of securities purchased for one portfolio may vary
from the performance of securities purchased for other portfolios. The portfolio managers may place transactions on behalf of other
accounts that are directly or indirectly contrary to investment decisions made on behalf of the Fund, or make investment decisions
that are similar to those made for the Fund, both of which have the potential to adversely impact the Fund depending on market
conditions. For example, the portfolio managers may purchase a security in one portfolio while appropriately selling that same
security in another portfolio. In addition, some of these portfolios may have fee structures that are or have the potential to
be higher than the advisory fees paid by the Fund, which can cause potential conflicts in the allocation of investment opportunities
between the Fund and the other accounts. In addition, current trading practices would not allow the Sub-Adviser to intentionally
favor one portfolio over another as trades are executed as trade orders are received.
Compensation.
The portfolio managers
are compensated by the Sub-Adviser and do not receive any compensation directly from the Fund or the Adviser. Mr. Hatfield, as
an owner of the Sub-Adviser, is thus entitled to profits related to his ownership. Since profits are expected to increase
as assets increase, Mr. Hatfield is expected to receive increased profits as an owner of the Sub-Adviser as assets of the Fund
increase. Mr. Ryan receives compensation in the form of a base salary that is determined by the advisory fee revenue generated
by the Sub-Adviser’s assets under management. Thus, Mr. Ryan’s compensation is aligned with the interests of the Sub-Adviser’s
clients, including the Fund and its investors. Mr. Ryan may also earn a bonus each year based on the profitability of the Sub-Adviser.
OTHER SERVICE PROVIDERS
ADMINISTRATOR.
Under the Administrative Services Agreement, Virtus ETF Solutions LLC (the “
Administrator
”) serves
as the operational administrator of the Trust. The Administrator’s address is 1540 Broadway, New York, NY 10036. Under the
Administrative Services Agreement, the Administrator supervises the overall administration of the Trust and the Fund including,
among other responsibilities, the coordination and day-to-day oversight of the Fund’s operations, the service providers’
communications with the Fund and each other and assistance with Trust, Board and contractual matters related to the Fund and other
series of the Trust. The Administrator also provides persons satisfactory to the Board to serve as officers of the Trust. The
Administrator will be indemnified in connection with or arising out of performance of its obligations and duties under this Agreement,
except for losses resulting from the willful malfeasance, bad faith or gross negligence of Administrator in the performance of
such obligations and duties. The Sub-Adviser pays the Administrator out of the Sub-Adviser’s advisory fee; however, the
Fund is newly formed and has not paid any fees for administration services as of the date of this SAI.
ACCOUNTING,
Custodian and Transfer Agent.
Under the Fund Administration and Accounting Agreement (the “
Accounting Services
Agreement
”), The Bank of New York Mellon (“
BNY Mellon
” or the “
Accounting Services Administrator
”)
serves as accounting administrator for the Fund. BNY Mellon’s principal address is One Wall Street, New York, NY 10286. Under
the Administration Agreement, BNY Mellon provides necessary administrative, legal, tax, accounting services and financial reporting
for the maintenance and operations of the Trust and the Fund. In addition, BNY Mellon makes available the office space, equipment,
personnel and facilities required to provide such services.
BNY Mellon provides accounting and administration
services to the Trust, including, among other responsibilities, assisting in the preparation and filing of documents required for
compliance by the Fund with applicable laws and regulations and arranging for the maintenance of books and records of the Fund.
The Sub-Adviser pays the Accounting Services
Administrator out of the Sub-Adviser’s advisory fee; however, the Fund is newly formed and has not paid any fees for accounting
administration services as of the date of this SAI.
BNY Mellon serves as custodian of the Fund’s
assets (the “
Custodian
”). The Custodian has agreed to (1) make receipts and disbursements of money on behalf
of the Fund; (2) collect and receive all income and other payments and distributions on account of the Fund’s portfolio investments;
(3) respond to correspondence from Fund shareholders and others relating to its duties; and (4) make periodic reports to the Fund
concerning the Fund’s operations. The Custodian does not exercise any supervisory function over the purchase and sale of
securities. The Sub-Adviser pays the Custodian out of the Sub-Adviser’s advisory fee; however, the Fund is newly formed and
has not paid any fees for the Custodian’s services as of the date of this SAI.
BNY Mellon serves as transfer agent and dividend
paying agent for the Fund (the “
Transfer Agent
”). The Transfer Agent has agreed to (1) issue and redeem Shares
of the Fund; (2) make dividend and other distributions to shareholders of the Fund; (3) respond to correspondence by Fund shareholders
and others relating to its duties; (4) maintain shareholder accounts; and (5) make periodic reports to the Fund. The Sub-Adviser
pays the Transfer Agent out of the Sub-Adviser’s advisory fee; however, the Fund is newly formed and has not paid any fees
for the Transfer Agent’s services as of the date of this SAI.
BNY Mellon is the principal operating subsidiary
of The Bank of New York Mellon Corporation.
Distributor.
ETF Distributors LLC (the “
Distributor
”) is located at 1540 Broadway, New York, NY 10036. The Distributor
is a broker-dealer registered under the Securities Exchange Act of 1934, as amended (the “
Exchange Act
”), and
a member of the Financial Industry Regulatory Authority, Inc. (“
FINRA
”).
Shares will be continuously offered for sale
by the Trust through the Distributor only in whole Creation Units, as described in the section of this SAI entitled “Purchase
and Redemption of Creation Units”. The Distributor also acts as an agent for the Trust. The Distributor will deliver a Prospectus
to persons purchasing Shares in Creation Units and will maintain records of both orders placed with it and confirmations of acceptance
furnished by it. The Distributor has no role in determining the investment policies of the Fund or which securities are to be purchased
or sold by the Fund.
The Board has adopted a Distribution and Service
Plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, the Fund is authorized to pay an amount
up to 0.25% of its average daily net assets each year to finance activities primarily intended to result in the sale of Creation
Units of the Fund or the provision of investor services. No Rule 12b-1 fees are currently paid by the Fund, and there are no current
plans to impose these fees. However, in the event Rule 12b-1 fees are charged in the future, they will be paid out of the Fund’s
assets, and over time these fees will increase the cost of your investment and may cost you more than certain other types of sales
charges.
Under the Service and Distribution Plan, and
as required by Rule 12b-1, the Trustees will receive and review after the end of each calendar quarter a written report provided
by the Distributor of the amounts expended under the Plan and the purpose for which such expenditures were made.
ADDITIONAL SERVICE ARRANGEMENTS.
The
Adviser, the Sub-Adviser or their respective affiliates may, out of their own resources, pay amounts to third parties for distribution
or marketing services on behalf of the Fund. The making of these payments could create a conflict of interest for a financial intermediary
receiving such payments.
Independent
Registered Public Accounting Firm.
The Board has selected the firm of BBD, LLP, located at 1835 Market Street, 26th
Floor, Philadelphia, PA 19103, to serve as the independent registered public accounting firm for the Fund for the current fiscal
year, to audit the annual financial statements of the Fund and to prepare the Fund’s federal, state and excise tax returns.
Such firm will audit the financial statements of the Fund at least once each year. A copy of the most recent annual report containing
the audit report will accompany this SAI whenever a shareholder or a prospective investor requests it.
LEGAL COUNSEL.
Stradley Ronon
Stevens & Young, LLP, located at 2005 Market Street, Suite 2600, Philadelphia, PA 19103, serves as counsel to the Trust and
the Independent Trustees.
PORTFOLIO TRANSACTIONS AND BROKERAGE
Subject to the general supervision of
the Board and the Adviser, the Sub-Adviser is responsible for, makes decisions with respect to and places orders for all purchases
and sales of portfolio securities for the Fund. The Sub-Adviser will manage the Fund’s portfolio in accordance with the terms
of the Sub-Advisory Agreement by and among the Trust on behalf of the Fund, the Sub-Adviser and the Adviser. The Sub-Adviser serves
as investment adviser for a number of client accounts, in addition to the Fund.
Brokerage
Selection.
The Fund has adopted, and the Board has approved, policies and procedures relating to the direction of portfolio
securities transactions to brokers. In accordance with these policies and procedures, in selecting brokers to be used in portfolio
transactions, the Sub-Adviser’s general guiding principle is to obtain the best overall execution for each trade, which is
a combination of price and execution. With respect to execution, the Sub-Adviser considers a number of factors, including, without
limitation, the size of the order, the difficulty of execution, the efficiency of the facilities of the executing broker-dealer
(including research services), any risk assumed by an executing broker-dealer and other factors that may be unique to a particular
order. Recognizing the value of these judgmental factors, the Sub-Adviser may select brokers that charge a brokerage commission
that is higher than the lowest commission that might otherwise be available for any given trade. The Sub-Adviser may not give consideration
to sales of Shares of the Fund as a factor in selecting brokers to execute portfolio transactions. The Sub-Adviser may, however,
place portfolio transactions with brokers that are affiliated with the Adviser or the Sub-Adviser or that promote or sell the Shares,
so long as such transactions are done in accordance with the policies and procedures established by the Board that are designed
to ensure that the selection is consistent with the Sub-Adviser’s obligation to seek best execution and not based upon the
broker’s sales efforts.
Under Section 28(e) of the Exchange
Act and the Sub-Advisory Agreement, the Sub-Adviser may, in its discretion, purchase and sell portfolio securities from and to
brokers and dealers that provide the Sub-Adviser with brokerage, research, analysis, advice and similar services, and the Sub-Adviser
may pay to these brokers and dealers, in return for such services, a higher commission or spread than may be charged by other brokers
and dealers, provided that the Sub-Adviser determines in good faith that such commission is reasonable in terms either of that
particular transaction or of the overall responsibility of the Sub-Adviser to the Fund and its other clients and that the total
commission paid by the Fund will be reasonable in relation to the benefits to the Fund and the other clients of the Sub-Adviser
over the long-term. The research received by the Sub-Adviser may include, without limitation: information on the United States
and other world economies; information on specific industries, sectors, groups of securities, individual companies, and political
and other relevant news developments affecting markets and specific securities; technical and quantitative information about markets;
analysis of proxy proposals affecting specific companies; accounting and performance systems that allow the Sub-Adviser to determine
and track investment results; and trading systems that allow the Sub-Adviser to interface electronically with brokerage firms,
custodians and other providers. Research may be received in the form of written reports, telephone contacts, personal meetings,
research seminars, software programs
and access to computer databases. In some instances, research products or services received by the Sub-Adviser may also be used
by the Sub-Adviser for functions that are not research related (i.e. not related to the making of investment decisions). Where
a research product or service has a mixed use, the Sub-Adviser will make a reasonable allocation according to its use and will
pay for the non-research function in cash using its own funds.
The research and investment information
services described above make available to the Sub-Adviser for its analysis and consideration the views and information of individuals
and research staffs of other securities firms. These services may be useful to the Sub-Adviser in connection with advisory clients
other than the Fund, and not all such services may be useful to the Sub-Adviser in connection with the Fund. Although such information
may be a useful supplement to the Sub-Adviser’s own investment research in rendering services to the Fund, the value of such
research and services is not expected to materially reduce the expenses of the Sub-Adviser in the performance of its services under
the Sub-Advisory Agreement and will not reduce the advisory fees payable by the Fund.
The Fund may invest in securities traded
in the over-the-counter market. In these cases, the Fund may initiate trades through brokers on an agency basis and may pay a commission
in connection with the transaction. The Fund may also effect these transactions by dealing directly with the dealers that make
a market in the securities involved, in which case the costs of such transactions would involve dealer spreads rather than brokerage
commissions.
Portfolio
Turnover.
The portfolio turnover rate for the Fund is calculated by dividing the lesser of purchases or sales of portfolio
securities for the reporting period by the monthly average value of the portfolio securities owned during the reporting period.
The calculation excludes all securities whose maturities or expiration dates at the time of acquisition are one year or less. Portfolio
turnover of the Fund may vary greatly from year to year as well as within a particular year, and may be affected by cash requirements
for redemption of Shares and by requirements that enable the Fund to receive favorable tax treatment. Portfolio turnover will not
be a limiting factor in making investment decisions, and the Fund may engage in short-term trading to achieve its investment objectives.
High rates of portfolio turnover could lower performance of the Fund due to increased transaction costs and may also result in
the realization of short-term capital gains taxed at ordinary income tax rates.
DISCLOSURE OF PORTFOLIO HOLDINGS
Portfolio
Disclosure Policy.
The Trust has adopted a Portfolio Holdings Policy (the “
Policy
”) designed to govern
the disclosure of Fund portfolio holdings and the use of material non-public information about Fund holdings. The Policy applies
to all officers, employees and agents of the Fund. The Policy is designed to ensure that the disclosure of information about the
Fund’s portfolio holdings is consistent with applicable legal requirements and otherwise in the best interest of the Fund.
As an ETF, information about the Fund’s
portfolio holdings is made available on a daily basis in accordance with the provisions of any order of the SEC applicable to the
Fund, the regulations of the Exchange and other applicable SEC regulations, orders and no-action relief. Such information typically
reflects all or a portion of the Fund’s anticipated portfolio holdings as of the next Business Day (as defined below). This
information is used in connection with the creation and redemption process and is disseminated on a daily basis through the facilities
of the Exchange, the National Securities Clearing Corporation (the “
NSCC
”) and/or third party service providers.
A “
Business Day
” with respect
to the Fund is any day on which the Exchange is open for business. As of the date of the Prospectus, the Exchange observes the
following holidays: New Year’s Day, Martin Luther King, Jr. Day, Washington’s Birthday, Good Friday, Memorial Day (observed),
Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
The Trust will disclose on the Fund’s
website at the start of each Business Day the identities and quantities of the securities and other assets held by the Fund that
will form the basis of the Fund’s calculation of its NAV on that Business Day. The portfolio holdings so disclosed will be
based on information as of the close of business on the prior Business Day and/or trades that have been completed prior to the
opening of business on that Business Day and that are expected to settle on the Business Day. Online disclosure of such holdings
will be publicly available at no charge. The website for the Fund is www.InfraCapPFFR.com.
The Fund may also send a portion or
all of this information to shareholders of the Fund and to investment company analysts and rating and trading entities. However,
the Fund will not send this information to shareholders of the Fund or to analysts or rating and/or trading entities until the
information is at least 30 days old or until one Business Day after the information has been posted to the Fund’s website.
The officers of the Trust, the Adviser
and/or the Sub-Adviser may share non-public portfolio holdings information with the Fund’s service providers that require
such information for legitimate business and Fund oversight purposes, such as the Fund’s operating administrator, fund accounting
administrator, transfer agent, distributor, custodian, independent registered public accounting firm, and legal counsel as identified
in the Fund’s Prospectus and this SAI and Doremus FP (a financial EDGARizing, typesetting and printing firm). The Fund, the
Adviser and/or the Sub-Adviser may also provide non-public portfolio holdings information to appropriate regulatory agencies as
required by applicable laws and regulations. The Fund’s service providers receiving such non-public information are subject
to confidentiality obligations requiring such service providers to keep non-public portfolio holdings information confidential.
Certain of the service providers have codes of ethics that prohibit trading based on, among other things, non-public portfolio
holdings information.
The Fund, the Adviser and/or the Sub-Adviser
may, from time to time, provide additional portfolio holdings information in the form of quarterly or monthly management letters;
provided, however, that the Fund, the Adviser and/or the Sub-Adviser will not send such quarterly or monthly management letters
to shareholders until such information is either filed with the SEC or publicly disclosed on the Fund’s website. In addition,
non-public portfolio holdings information and other information regarding the investment activities of the Fund may also be disclosed
to rating and ranking organizations for use in connection with their rating or ranking of the Fund.
The Fund currently does not provide
non-public portfolio holdings information to any other third parties. In the future, the Fund may elect to disclose such information
to other third parties if the appropriate officers of the Trust determine that the Fund has a legitimate business purpose for doing
so and the recipient is subject to a duty of confidentiality. The Adviser and the Sub-Adviser, through their respective officers,
are responsible for determining which other third parties have a legitimate business purpose for receiving the Fund’s portfolio
holdings information.
The Fund’s policies regarding
disclosure of portfolio holdings are subject to the continuing oversight and direction of the Board. The Adviser, the Sub-Adviser
and the Administrator are required to report to the Board any known disclosure of the Fund’s portfolio holdings to unauthorized
third parties. The Fund has not entered (and does not currently intend to enter) into any arrangement providing for the receipt
of compensation or other consideration in exchange for the disclosure of non-public portfolio holdings information, other than
the benefits that result to the Fund and its shareholders from providing such information, which include the publication of Fund
ratings and rankings.
The Fund will make available to the
public a complete schedule of its portfolio holdings, as reported on a fiscal quarter basis. This information will generally be
available within 60 days of the Fund’s fiscal quarter end and will remain available until the next fiscal quarter’s
portfolio holdings report becomes available. You may obtain a copy of these quarterly portfolio holdings reports by calling the
Fund at (212) 593-4383. The Fund will also file these quarterly portfolio holdings reports with the SEC on Form N-CSR or Form N-Q,
as applicable. The Fund’s Form N-CSR and Form N-Q are available on the SEC’s website at http://www.sec.gov and may
be reviewed and copied at the SEC’s Public Reference Room in Washington, D.C. The first and third quarter portfolio holdings
reports will be filed with the SEC on Form N-Q, and the second and fourth fiscal quarter portfolio holdings reports will be included
with the semi-annual and annual reports, respectively, which will be sent to shareholders and filed with the SEC on Form N-CSR.
No person is authorized to disclose the Fund’s
portfolio holdings or other investment positions except in accordance with the Policy.
INDICATIVE INTRA-DAY VALUE
The approximate value of the Fund’s investments
on a per-Share basis, the Indicative Intra-Day Value (“
IIV
”), is disseminated by the Exchange every 15 seconds
during hours of trading on the Exchange. The IIV should not be viewed as a “real-time” update of NAV because the IIV
will be calculated by an independent third party and may not be calculated in the exact same manner as NAV, which is computed daily.
The IIV for the Fund is calculated during hours
of trading on the Exchange by dividing the “
Estimated Fund Value
” as of the time of the calculation by the total
number of outstanding Shares. “Estimated Fund Value” is the sum of the estimated amount of cash held in the Fund’s
portfolio, the estimated amount of accrued interest owing to the Fund and the estimated value of the securities held in the Fund’s
portfolio, minus the estimated amount of the Fund’s liabilities. The IIV will be calculated based on the same portfolio holdings
disclosed on the Fund’s website. In determining the estimated value for each of the component securities, the IIV will use
last sale, market prices or other methods that would be considered appropriate for pricing equity securities held by registered
investment companies.
Although the Trust provides the information
used to calculate the IIV, the Trust is not involved in the actual calculation of the IIV and is not responsible for the calculation
or dissemination of the IIV. The Trust makes no warranty as to the accuracy of the IIV.
ADDITIONAL INFORMATION CONCERNING SHARES
Organization
and Description of Shares of Beneficial Interest.
The Trust is a Delaware statutory trust and a registered investment
company. The Trust was organized on September 20, 2012, and it has authorized capital of an unlimited number of Shares of beneficial
interest of no par value, which may be issued in more than one class or series.
Under Delaware law, the Trust is not required
to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings
of Trust shareholders. If requested by shareholders of at least one-third of the outstanding shares of the Trust or any series
thereof, the Trust will call a meeting of the shareholders of the Trust or the series, as applicable. Shareholders holding two-thirds
of all Trust shares outstanding may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written
consent.
All Shares will be freely transferable; provided,
however, that Shares may not be redeemed individually, but only in Creation Units. The Shares will not have preemptive rights or
cumulative voting rights, and none of the Shares will have any preference to conversion, exchange, dividends, retirements, liquidation,
redemption or any other feature. Shares have equal voting rights, except that, if the Trust creates additional series, only shares
of that series may be entitled to vote on a matter affecting that particular series. Trust shareholders are entitled to require
the Trust to redeem Creation Units if such shareholders are Authorized Participants. The Declaration of Trust confers upon the
Board the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust
may be individually redeemable. The Trust reserves the right to adjust the prices of Shares to maintain convenient trading ranges
for investors. Any such adjustments would be accomplished through splits or reverse splits, which would have no effect on the net
assets of the Fund. If the Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations.
In such an event, you may be required to liquidate or transfer your Shares at an inopportune time, and you may lose money on your
investment.
Book
Entry Only System
.
Depository Trust Company
(“
DTC
”) acts as securities depository for the Fund’s Shares. Shares of the Fund are represented by securities
registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
DTC, a limited-purpose trust company,
was created to hold securities of its participants (the “
DTC Participants
”) and to facilitate the
clearance and settlement of securities transactions among the DTC Participants in such securities through electronic
book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities
certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and
certain other organizations, some of which (and/or their representatives) own DTC. More specifically, DTC is owned by a
number of its DTC Participants and by the New York Stock Exchange, LLC and FINRA. Access to the DTC system is also available
to others such as banks, brokers, dealers and trust
companies that clear through or maintain a
custodial relationship with a DTC Participant, either directly or indirectly (the “
Indirect Participants
”).
Beneficial ownership of Shares is limited to
DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership
of beneficial interests in Shares (owners of such beneficial interests are referred to herein as “
Beneficial Owners
”)
is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants)
and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants).
Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices, statements and other
communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC
is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of the
Fund held by each DTC Participant. The Trust will inquire of each DTC Participant as to the number of Beneficial Owners holding
Shares, directly or indirectly, through such DTC Participant. The Trust will provide each DTC Participant with copies of such notice,
statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order
that such notice, statement or communication may be transmitted by the DTC Participant, directly or indirectly, to such Beneficial
Owners. In addition, the Trust will pay to each DTC Participants a fair and reasonable amount as reimbursement for the expenses
attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Share distributions will be made to DTC or
its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions,
will credit immediately with respect to the DTC Participants’ accounts with payments in amounts proportionate to their respective
beneficial interests in Shares of the Fund as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect
Participants and Beneficial Owners with respect to the Shares held through such DTC Participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the accounts of customers in bearer form or registered in
a “street name,” and will be the responsibility of such DTC Participants.
The Trust has no responsibility or liability
for any aspect of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership
interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests,
or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between the DTC Participants
and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may decide to discontinue providing its
service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect
thereto under applicable law. Under such circumstances, the Trust will take action to find a replacement for DTC to perform its
functions at a comparable cost. The DTC Participants’ rules and policies are made publicly available through DTC’s
website at: www.dtcc.com.
PURCHASE AND REDEMPTION OF CREATION UNITS
Creation.
The Trust issues and sells Shares of the Fund only in Creation Units on a continuous basis through the Distributor,
at their NAV next determined after receipt, on any Business Day, for an order received in proper form.
Fund Deposit.
The consideration for
purchase of a Creation Unit of the Fund generally consists of an in-kind deposit of Deposit Securities for each Creation Unit constituting
a substantial replication, or a representation, of the securities included in the Fund’s portfolio and a Cash Component computed
as described below. Together, the Deposit Securities and the Cash Component constitute the “
Fund Deposit
”, which
represents the minimum initial and subsequent investment amount for a Creation Unit of the Fund. The Cash Component is an amount
equal to the difference between the NAV of the Shares (per Creation Unit) and the market value of the Deposit Securities. If the
Cash Component is a positive number (i.e., the NAV per Creation Unit exceeds the market value of the Deposit Securities), the Cash
Component will be such positive amount. If the Cash Component is a negative number (i.e., the NAV per Creation Unit is less than
the market value of the Deposit Securities), the Cash Component will be such negative amount, and the creator will be entitled
to receive cash from the Fund in an amount equal to the Cash
Component. The Cash Component serves the function
of compensating for any differences between the NAV per Creation Unit and the market value of the Deposit Securities.
The Fund, through the NSCC, makes available
on each Business Day, immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time), the list
of the names and the required number of Shares of each Deposit Security to be included in the current Fund Deposit (based on information
at the end of the previous Business Day) for the Fund. Such Fund Deposit is applicable, subject to any adjustments as described
below, in order to effect creations of Creation Units of the Fund until such time as the next-announced composition of the Deposit
Securities is made available.
The identity and number of Shares of the Deposit
Securities required for the Fund Deposit for the Fund changes as rebalancing adjustments and corporate action events are reflected
from time to time by the Sub-Adviser with a view to the investment objective of the Fund. In addition, the Trust reserves the right
to permit or require the substitution of an amount of cash—i.e., a “cash in lieu” amount—to be added to
the Cash Component to replace any Deposit Security that may not be available in sufficient quantity for delivery, that may not
be eligible for transfer through the Clearing Process (discussed below) or that may not be eligible for trading by an Authorized
Participant or the investor for which it is acting.
In addition to the list of names and numbers
of securities constituting the current Deposit Securities of the Fund Deposit, the Fund, through NSCC, also makes available on
each Business Day the estimated Cash Component, effective through and including the previous Business Day, per outstanding Creation
Unit of the Fund.
Procedures for Creation of Creation Units.
To be eligible to place orders to create a Creation Unit of the Fund, an entity must be (i) a “
Participating Party
”,
i.e., a broker-dealer or other participant in the clearing process through the Continuous Net Settlement System of NSCC (the “
Clearing
Process
”) or a clearing agency that is registered with the SEC, or (ii) a DTC Participant (see “Book Entry Only
System”) and, in each case, must have executed an agreement with the Trust, the Distributor and the Transfer Agent with respect
to creations and redemptions of Creation Units (“
Participant Agreement
”). A Participating Party and DTC Participant
are collectively referred to as an “Authorized Participant”. Investors should contact the Distributor for the names
of Authorized Participants that have signed a Participant Agreement with the Fund. All Shares of the Fund, however created, will
be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
All orders to create Creation Units must be
placed for one or more Creation Unit size aggregations of Shares (50,000 in the case of the Fund). All orders to create Creation
Units, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant),
must be received by the Distributor no later than the close of the regular trading session on the Exchange (ordinarily 4:00 p.m.
Eastern time) (“
Closing Time
”), in each case on the date such order is placed in order for the creation of Creation
Units to be effected based on the NAV of Shares of the Fund as next determined on such date after receipt of the order in proper
form. The date on which an order to create Creation Units (or an order to redeem Creation Units as discussed below) is placed is
referred to as the “
Transmittal Date
”. Orders must be transmitted by an Authorized Participant by telephone
or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement (see “Placement
of Creation Orders Using the Clearing Process” and “Placement of Creation Orders Outside the Clearing Process”).
Severe economic or market disruptions or changes, or telephone or other communication failure, may impede the ability to reach
the Distributor or an Authorized Participant.
Orders to create Creation Units of the Fund
will be placed with an Authorized Participant in the form required by such Authorized Participant. In addition, an Authorized Participant
may request the investor to make certain representations or enter into agreements with respect to the order, i.e., to provide for
payments of cash, when required. Investors should be aware that their particular broker may not have executed a Participant Agreement,
and that, therefore, orders to create Creation Units of the Fund will need to be placed by the investor’s broker through
an Authorized Participant that has executed a Participant Agreement. At any given time there may be only a limited number of broker-dealers
that have executed a Participant Agreement. Those placing orders for Creation Units through the Clearing Process should afford
sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date.
Orders for creation that are effected outside
the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected
using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable
to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution
effectuating the transfer of Deposit Securities and the Cash Component.
Placement of Creation Orders Using the Clearing
Process.
The Clearing Process is the process of creating or redeeming Creation Units through the Continuous Net Settlement
System of NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed
a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Transfer Agent to NSCC, on
behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party’s creation
order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities
and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order
to create Creation Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such
order is received by the Distributor not later than the Closing Time on such Transmittal Date and (ii) all other procedures set
forth in the Participant Agreement are properly followed.
Placement of Creation Orders Outside the
Clearing Process.
Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed
a Participant Agreement. A DTC Participant that wishes to place an order creating Creation Units to be effected outside the Clearing
Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process
and that the creation of Creation Units will instead be effected through a transfer of securities and cash directly through DTC.
A Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the
delivery of the requisite number of Deposit Securities through DTC to the account of the Trust by no later than 11:00 a.m., Eastern
time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities
to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities,
will be determined by the Trust, whose determination will be final and binding. Cash equal to the Cash Component must be transferred
directly to the Trust through the Federal Reserve wire system in a timely manner so as to be received by the Trust no later than
2:00 p.m., Eastern time, on the next Business Day immediately following such Transmittal Date. An order to create Creation Units
outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the
Distributor not later than the Closing Time on such Transmittal Date, and (ii) all other procedures set forth in the Participant
Agreement are properly followed. However, if the Trust does not receive both the requisite Deposit Securities and the Cash Component
by 11:00 a.m. and 2:00 p.m., respectively, on the next Business Day immediately following the Transmittal Date, such order will
be cancelled. Upon written notice to the Distributor, such cancelled order may be resubmitted the following Business Day using
the Fund Deposit as newly constituted to reflect the then current NAV of the Fund. The delivery of Creation Units of the Fund so
created will occur no later than the third Business Day following the day on which the purchase order is deemed received by the
Distributor.
Creation Units may be created in advance of
receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial
deposit will have a value greater than the NAV of the Shares on the date the order is placed in proper form since, in addition
to available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Cash Component
plus
(ii) 115% of the market value of the undelivered Deposit Securities (the “
Additional Cash Deposit
”). The order
will be deemed to be received on the Business Day on which the order is placed, provided that the order is placed in proper form
prior to 3:00 p.m., Eastern time, on such date and federal funds in the appropriate amount are deposited with the Trust by 11:00
a.m., Eastern time, the following Business Day. If the order is not placed in proper form by 3:00 p.m., or federal funds in the
appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be rejected and the investor
will be liable to the Trust for losses, if any, resulting therefrom. An additional amount of cash will be required to be deposited
with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit
with the Trust in an amount at least equal to 115% of the daily marked-to-market value of the missing Deposit Securities. To the
extent that missing Deposit Securities are not received by 1:00 p.m., Eastern time, on the third Business Day following the day
on which the purchase order is deemed received by the Distributor or in the event a marked-to-market payment is not made within
one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit
to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust for the costs incurred
by the Trust in connection with any such purchases.
These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market
value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related
transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once
all of the missing Deposit Securities have been properly received by the Trust or purchased by the Trust and deposited into the
Trust. In addition, a transaction fee will be charged in all cases. The delivery of Creation Units of the Fund so created will
occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor.
Acceptance of Orders for Creation Units.
The Trust reserves the absolute right to reject a creation order transmitted to it by the Distributor in respect of the Fund if
(a) the order is not in proper form; (b) the investor(s), upon obtaining the Shares ordered, would own 80% or more of the currently
outstanding Shares of the Fund; (c) the Deposit Securities delivered are not as disseminated through the facilities of the Exchange
for that date by the Trust, as described above; (d) acceptance of the Deposit Securities would have certain adverse tax consequences
to the Fund; (e) the acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund
Deposit would otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the Trust or the rights of Beneficial
Owners; or (g) as a result of circumstances outside the control of the Trust, the Distributor and the Adviser make it for all practical
purposes impossible to process creation orders. Examples of such circumstances include acts of God or public service or utility
problems such as fires, floods, extreme weather conditions and power outages resulting in telephone, facsimile or computer failures;
market conditions or activities causing trading halts; systems failures involving computer or other information systems affecting
the Trust, the Adviser, the Distributor, DTC, NSCC or any other participant in the creation process; and similar extraordinary
events. The Distributor will notify a prospective creator of a Creation Unit and/or the Authorized Participant acting on behalf
of the creator of a Creation Unit of its rejection of the order of such person. The Trust, the Transfer Agent and the Distributor
are under no duty, however, to give notification of any defects or irregularities in the delivery of Fund Deposits nor will any
of them incur any liability for the failure to give any such notification.
All questions as to the number of shares of
each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be
delivered will be determined by the Trust, and the Trust’s determination will be final and binding.
Creation Transaction Fee.
To compensate
the Trust for transfer and other transaction costs involved in creation transactions through the Clearing Process, investors will
be required to pay a minimum creation transaction fee, assessed per transaction, as follows:
|
Fund Name
|
Creation Transaction Fee
|
|
InfraCap REIT Preferred ETF (Ticker: PFFR)
|
$500
|
The Trust, subject to approval by
the Board, may adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other
such intermediary in addition to an Authorized Participant to effect a creation of a Creation Unit may be charged a fee for such
services.
Redemption.
Shares may be redeemed only in Creation Units at their NAV next determined after receipt of a redemption request in
proper form by the Distributor and the Fund and only on a Business Day. The Trust will not redeem Shares in amounts less than Creation
Units. Beneficial Owners must accumulate enough Shares in the secondary market to constitute a Creation Unit in order to have such
Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading
market at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection
with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
With respect to the Fund, the Trust, through
NSCC, makes available immediately prior to the opening of business on the Exchange (currently 9:30 a.m., Eastern time) on each
Business Day, the Deposit Securities that will be applicable (subject to possible amendment or correction) to redemption requests
received in proper form (as defined below) on that day. Deposit Securities received on redemption may not be identical to Deposit
Securities that are applicable to creations of Creation Units.
Unless cash redemptions are available or specified
for the Fund, the redemption proceeds for a Creation Unit generally consist of Deposit Securities, as announced by the Trust on
the Business Day of the request for redemption received in proper form, plus cash in an amount equal to the difference between
the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, and the value of the Deposit
Securities (the “
Cash Redemption Amount
”), less a redemption transaction fee described below in the section
entitled “Redemption Transaction Fee”. In the event that the Deposit Securities have a value greater than the NAV of
the Shares, a compensating cash payment equal to the differential is required to be made by or through an Authorized Participant
by the redeeming shareholder.
Placement of Redemption Orders Using Clearing
Process.
Orders to redeem Creation Units through the Clearing Process must be delivered through a Participating Party that
has executed the Participant Agreement. An order to redeem Creation Units using the Clearing Process is deemed received on the
Transmittal Date if (i) such order is received by the Trust not later than 3:00 p.m., Eastern time, on such Transmittal Date; and
(ii) all other procedures set forth in the Participant Agreement are properly followed; such order will be effected based on the
NAV of the Fund as next determined. An order to redeem Creation Units using the Clearing Process made in proper form but received
by the Fund after 3:00 p.m., Eastern time, will be deemed received on the next Business Day immediately following the Transmittal
Date and will be effected at the NAV next determined on such Business Day. The requisite Deposit Securities and the Cash Redemption
Amount will be transferred by the third Business Day following the date on which such request for redemption is deemed received.
Placement of Redemption Orders Outside Clearing
Process.
Orders to redeem Creation Units outside the Clearing Process must be delivered through a DTC Participant that has
executed the Participant Agreement. A DTC Participant that wishes to place an order for redemption of Creation Units to be effected
outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using
the Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through
DTC. An order to redeem Creation Units outside the Clearing Process is deemed received by the Trust on the Transmittal Date if
(i) such order is received by the Trust not later than 3:00 p.m., Eastern time, if transmitted by mail, or by 2:00 p.m. Eastern
time, if transmitted by other means, on such Transmittal Date; (ii) such order is accompanied or proceeded by the requisite number
of Shares of the Fund and the Cash Redemption Amount specified in such order, which delivery must be made through DTC to the Trust
not later than 11:00 a.m. and 2:00 p.m., respectively, Eastern time, on the next Business Day following such Transmittal Date (the
“
DTC Cut-Off-Time
”); and (iii) all other procedures set forth in the Participant Agreement are properly followed.
After the Trust has deemed an order for redemption
outside the Clearing Process received, the Trust will initiate procedures to transfer the requisite Deposit Securities, which are
expected to be delivered within three Business Days, and the Cash Redemption Amount to the Authorized Participant on behalf of
the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed
received by the Trust. The Trust may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio
of securities that differs from the exact composition of the Deposit Securities but does not differ in NAV.
The calculation of the value of the Deposit
Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Trust according to the procedures
set forth under “Determination of Net Asset Value” computed on the Business Day on which a redemption order is deemed
received by the Trust. Therefore, if a redemption order in proper form is submitted to the Trust by a DTC Participant not later
than the Closing Time on the Transmittal Date, and the requisite number of Shares of the Fund are delivered to the Custodian prior
to the DTC Cut-Off-Time, then the value of the Deposit Securities and the Cash Redemption Amount to be delivered will be determined
by the Trust on such Transmittal Date. If, however, a redemption order is submitted to the Trust by a DTC Participant not later
than the Closing Time on the Transmittal Date but either (1) the requisite number of Shares of the Fund are not delivered by the
DTC Cut-Off-Time as described above on the next Business Day following the Transmittal Date or (2) the redemption order is not
submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value
of the Deposit Securities and the Cash Redemption Amount to be delivered will be computed on the Business Day that such order is
deemed received by the Trust, i.e., the Business Day on which the Shares of the Fund are delivered through DTC to the Trust by
the DTC Cut-Off-Time on such Business Day pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries
of the Deposit Securities, the Trust may in its discretion exercise its option to redeem such shares in cash, and the redeeming
Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption
in cash which the Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the
NAV of its shares based on the NAV of shares of the Fund next determined after the redemption request is received in proper form
(minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Trust’s
brokerage and other transaction costs associated with the disposition of Deposit Securities). The Fund may also, in its sole discretion,
upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the
Deposit Securities but does not differ in NAV.
Redemptions of Shares for Deposit Securities
will be subject to compliance with applicable federal and state securities laws, and the Trust (whether or not it otherwise permits
cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Trust could not lawfully deliver
specific Deposit Securities upon redemptions or could not do so without first registering the offering and sale of the Deposit
Securities under such laws. An Authorized Participant or an investor for which it is acting that is subject to a legal restriction
with respect to a particular security included in the Deposit Securities applicable to the redemption of a Creation Unit may be
paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Shares to complete
an order form or to enter into agreements with respect to such matters as compensating cash payment, beneficial ownership of Shares
or delivery instructions.
The right of redemption may be suspended or
the date of payment postponed with respect to the Fund (1) for any period during which the Exchange is closed (other than customary
weekend and holiday closings); (2) for any period during which trading on the Exchange is suspended or restricted; (3) for any
period during which an emergency exists as a result of which disposal of the Shares of the Fund or determination of the Shares’
NAV is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
Redemption Transaction Fee.
To compensate
the Trust for transfer and other transaction costs involved in redemption transactions through the Clearing Process, investors
will be required to pay a minimum redemption transaction fee, assessed per transaction as follows:
|
Fund Name
|
Redemption Transaction Fee
|
|
InfraCap REIT Preferred ETF (Ticker: PFFR)
|
$500
|
Where Shares are redeemed for cash,
the redemption transaction fee will be deducted from such redemption proceeds. The Trust, subject to approval by the Board, may
adjust the fee from time to time based upon actual experience. Investors who use the services of a broker or other such intermediary
in addition to an Authorized Participant to effect a redemption of a Creation Unit may be charged a fee for such services.
SECURITIES SETTLEMENTS FOR CREATIONS AND
REDEMPTIONS
The Trust generally intends to effect deliveries
of Creation Units and Deposit Securities on a basis of “T” plus three business days. The Trust may effect deliveries
of Creation Units and Deposit Securities on a basis other than T plus three in order to accommodate holiday schedules, to account
for treatment by U.S. markets of dividend record dates and ex-dividend dates, or under certain other circumstances. In addition
to holidays, other unforeseeable closings in a market due to emergencies may also prevent the Trust from delivering securities
within the normal settlement period. In the event that a delay in a redemption settlement cycle will extend to more than 12 calendar
days, the Trust will effect a cash-in-lieu redemption to the extent necessary.
The proclamation of new holidays, the treatment
by market participants of certain days as “informal holidays” (e.g., days on which no or limited securities transactions
occur, as a result of substantially shortened trading hours), the elimination of existing holidays, or changes in securities delivery
practices, could affect the information set forth herein at some time in the future and longer (worse) redemption periods are possible.
CONTINUOUS OFFERING
The method by which Creation Units are created
and traded may raise certain issues under applicable securities laws. Because new Creation Units are issued and sold by the Trust
on an ongoing basis, at any point a “distribution,” as such term is used in the Securities Act, may occur. Broker-dealers
and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed
participants in a distribution in a manner which could render them statutory underwriters and subject them to the prospectus delivery
and liability provisions of the Securities Act.
For example, a broker-dealer firm or its client
may be deemed a statutory underwriter if it takes Creation Units after placing an order with the Distributor, breaks them down
into constituent Shares, and sells such Shares directly to customers, or if it chooses to couple the creation of a supply of new
Shares with an active selling effort involving solicitation of secondary market demand for Shares. A determination of whether one
is an underwriter for purposes of the Securities Act must take into account all the facts and circumstances pertaining to the activities
of the broker-dealer or its client in the particular case, and the examples mentioned above should not be considered a complete
description of all the activities that could lead to a categorization as an underwriter.
Broker-dealers who are not “underwriters”
but are participating in a distribution (as contrasted to ordinary secondary trading transactions), and thus dealing with Shares
that are part of an “unsold allotment” within the meaning of Section 4(a)(3)(C) of the Securities Act, would be unable
to take advantage of the prospectus-delivery exemption provided by Section 4(a)(3) of the Securities Act. This is because the prospectus
delivery exemption in Section 4(a)(3) of the Securities Act is not available in respect of such transactions as a result of Section
24(d) of the 1940 Act. As a result, broker-dealer firms should note that dealers who are not underwriters but are participating
in a distribution (as contrasted with ordinary secondary market transactions) and thus dealing with the Shares that are part of
an unsold allotment within the meaning of Section 4(a)(3)(C) of the Securities Act would be unable to take advantage of the prospectus
delivery exemption provided by Section 4(a)(3) of the Securities Act. Firms that incur a prospectus delivery obligation with respect
to Shares are reminded that, under Rule 153 of the Securities Act, a prospectus delivery obligation under Section 5(b)(2) of the
Securities Act owed to an exchange member in connection with a sale on the Exchange is satisfied by the fact that the prospectus
is available at the Exchange upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect
to transactions on a national securities exchange.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should
be read in conjunction with the section in the Prospectus entitled “Investing in the Fund – Determination of Net Asset
Value”.
The NAV per Share for the Fund is computed
by dividing the value of the net assets of the Fund (i.e., the value of its total assets less total liabilities) by the total number
of Shares outstanding, rounded to the nearest cent. Expenses and fees, including management fees, are accrued daily and taken into
account for purposes of determining NAV. The NAV of the Fund is determined as of the close of the regular trading session on the
Exchange (ordinarily 4:00 p.m., Eastern time) on each day that the Exchange is open. Any assets or liabilities denominated in currencies
other than the U.S. dollar are converted into U.S. dollars at the current market rates on the date of valuation as quoted by one
or more sources.
The pricing and valuation of portfolio securities
is determined in good faith in accordance with procedures approved by, and under the direction of, the Board. In determining the
value of the Fund’s assets, equity securities are generally valued at market using quotations from the primary market in
which they are traded. Debt securities (other than short-term investments) are valued on the basis of broker quotes or valuations
provided by a pricing service, which in determining value utilizes information regarding recent sales, market transactions in comparable
securities, quotations from dealers, and various relationships between securities. Other assets, such as accrued interest, accrued
dividends and cash are also included in determining the NAV. The Fund normally uses third party pricing services to obtain portfolio
security prices.
Securities and assets
for which market quotations are not readily available or which cannot be accurately valued using the Fund’s normal pricing
procedures are valued by the Trust’s Fair Value Pricing Committee at fair value as determined in good faith under policies
approved by the Board. The Trust may use fair value pricing in a variety of circumstances, including but not limited to, situations
when the value of the Fund’s portfolio security has been materially affected by events occurring after the close of the
market on which such security is principally traded (such as a corporate action or other news that may materially affect the price
of such security) or trading in such security has been suspended or halted. In addition, the Trust may fair value foreign equity
portfolio securities each day the Trust calculates the Fund’s NAV. Accordingly, the Fund’s NAV may reflect certain
portfolio securities’ fair values rather than their market prices. Fair value pricing involves subjective judgments, and
it is possible that a fair value determination for a portfolio security will be materially different than the value that could
be realized upon the sale of such security. With respect to securities that are primarily listed on foreign exchanges, the value
of the Fund’s portfolio securities may change on days when you will not be able to purchase or sell your Shares.
DIVIDENDS AND DISTRIBUTIONS
General
Policies
.
Dividends from net investment income are declared and paid at least monthly by the Fund. Distributions
of net realized capital gains, if any, generally are declared and paid once a year, but the Trust may make distributions on a more
frequent basis for the Fund to comply with the distribution requirements of the Internal Revenue Code of 1986 (the “
Code
”),
in all events in a manner consistent with the provisions of the 1940 Act. In addition, the Trust may distribute at least annually
amounts representing the full dividend yield on the underlying portfolio securities of the Fund, net of expenses of the Fund, as
if the Fund owned such underlying portfolio securities for the entire dividend period in which case some portion of each distribution
may result in a return of capital for tax purposes for certain shareholders.
Dividends and other distributions on Shares
are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through
DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust. The Trust
makes additional distributions to the minimum extent necessary (i) to distribute the entire annual taxable income of the Trust,
plus any net capital gains and (ii) to avoid imposition of the excise tax imposed by Section 4982 of the Code. Management of the
Trust reserves the right to declare special dividends if, in its reasonable discretion, such action is necessary or advisable to
preserve the status of the Fund as a “regulated investment company” (a “
RIC
”) or to avoid imposition
of income or excise taxes on undistributed income.
Dividend
Reinvestment Service.
No reinvestment service is provided by the Trust. Broker-dealers may make available the DTC book-entry
Dividend Reinvestment Service for use by Beneficial Owners of Shares through DTC Participants for reinvestment of their dividend
distributions. If this service is used, dividend distributions of both income and realized gains will be automatically reinvested
in additional whole Shares of the Fund. Beneficial Owners should contact their broker to determine the availability and costs of
the service and the details of participation therein. Brokers may require Beneficial Owners to adhere to specific procedures and
timetables.
TAXATION
The following is a summary of certain
additional tax considerations generally affecting the Fund and its shareholders that are not described in the Prospectus. No attempt
is made to present a detailed explanation of the tax treatment of the Fund or its shareholders, and the discussion here and in
the Prospectus is not intended as a substitute for careful tax planning.
This “Taxes” section is
based on the Internal Revenue Code and applicable regulations in effect on the date of this SAI. Future legislative, regulatory
or administrative changes, including provisions of current law that sunset and thereafter no longer apply, or court decisions may
significantly change the tax rules applicable to the Fund and its shareholders. Any of these changes or court decisions may have
a retroactive effect.
This is for general information
only and not tax advice. All investors should consult their own tax advisors as to the federal, state, local and foreign tax provisions
applicable to them.
Taxation of the Fund
The Fund is a Separate Corporation
.
The Fund is treated as a separate corporation for federal income tax purposes. Losses in one Fund do not offset gains in another
Fund and the requirements (other than certain organizational
requirements) for qualifying for regulated
investment company status as described below are determined at the Fund level rather than the Trust level.
Election to be Taxed as a Regulated
Investment Company.
The Fund has elected and intends to qualify, or, if newly organized, intends to elect and qualify, each
year as a regulated investment company (sometimes referred to as a “regulated investment company,” “RIC”
or “fund”) under Subchapter M of the Internal Revenue Code. If the Fund so qualifies, the Fund will not be subject
to federal income tax on the portion of its investment company taxable income (that is, generally, taxable interest, dividends,
net short-term capital gains, and other taxable ordinary income, net of expenses, without regard to the deduction for dividends
paid) and net capital gain (that is, the excess of net long-term capital gains over net short-term capital losses) that it distributes
to shareholders.
In order to qualify for treatment as
a regulated investment company, the Fund must satisfy the following requirements:
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•
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Distribution Requirement —the Fund must distribute
an amount equal to the sum of at least 90% of its investment company taxable income and 90% of its net tax-exempt income, if any,
for the tax year (including, for purposes of satisfying this distribution requirement, certain distributions made by the Fund
after the close of its taxable year that are treated as made during such taxable year).
|
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•
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Income Requirement —the Fund must derive at least
90% of its gross income from dividends, interest, certain payments with respect to securities loans, and gains from the sale or
other disposition of stock, securities or foreign currencies, or other income (including, but not limited to, gains from options,
futures or forward contracts) derived from its business of investing in such stock, securities or currencies and net income derived
from qualified publicly traded partnerships (“QPTPs”).
|
|
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•
|
Asset Diversification Test —the Fund must satisfy
the following asset diversification test at the close of each quarter of the Fund’s tax year: (1) at least 50% of the value
of the Fund’s assets must consist of cash and cash items, U.S. government securities, securities of other regulated investment
companies, and securities of other issuers (as to which the Fund has not invested more than 5% of the value of the Fund’s
total assets in securities of an issuer and as to which the Fund does not hold more than 10% of the outstanding voting securities
of the issuer); and (2) no more than 25% of the value of the Fund’s total assets may be invested in the securities of any
one issuer (other than U.S. government securities or securities of other regulated investment companies) or of two or more issuers
which the Fund controls and which are engaged in the same or similar trades or businesses, or, in the securities of one or more
QPTPs.
|
In some circumstances, the character
and timing of income realized by the Fund for purposes of the Income Requirement or the identification of the issuer for purposes
of the Asset Diversification Test is uncertain under current law with respect to a particular investment, and an adverse determination
or future guidance by the Internal Revenue Service (“IRS”) with respect to such type of investment may adversely affect
the Fund’s ability to satisfy these requirements. See, “Tax Treatment of Portfolio Transactions” below with respect
to the application of these requirements to certain types of investments. In other circumstances, the Fund may be required to sell
portfolio holdings in order to meet the Income Requirement, Distribution Requirement, or Asset Diversification Test, which may
have a negative impact on the Fund’s income and performance.
If for any taxable year the Fund does
not qualify as a regulated investment company, all of its taxable income (including its net capital gain) would be subject to tax
at regular corporate rates without any deduction for dividends paid to shareholders, and the dividends would be taxable to the
shareholders as ordinary income (or possibly as qualified dividend income) to the extent of the Fund’s current and accumulated
earnings and profits. Failure to qualify as a regulated investment company would thus have a negative impact on the Fund’s
income and performance. Subject to savings provisions for certain failures to satisfy the Income Requirement or Asset Diversification
Test, which, in general, are limited to those due to reasonable cause and not willful neglect, it is possible that the Fund will
not qualify as a regulated investment company in any given tax year. Even if such savings provisions apply, the Fund may be subject
to a monetary sanction of $50,000 or more. Moreover, the Board reserves the right not to maintain the qualification of the Fund
as a regulated investment company if it determines such a course of action to be beneficial to shareholders.
Portfolio Turnover.
For investors
that hold their Fund Shares in a taxable account, a high portfolio turnover rate may result in higher taxes. This is because the
Fund with a high turnover rate is likely to accelerate the recognition of capital gains and more of such gains are likely to be
taxable as short-term rather than long-term capital gains in contrast to a comparable fund with a low turnover rate. Any such higher
taxes would reduce the Fund’s after-tax performance. See, “Taxation of Fund Distributions - Distributions of Capital
Gains” below. For non-U.S. investors, any such acceleration of the recognition of capital gains that results in more short-term
and less long-term capital gains being recognized by the Fund may cause such investors to be subject to increased U.S. withholding
taxes. See, “Non-U.S. Investors – Capital Gain Dividends” and “–Interest-Related Dividends and Short-Term
Capital Gain Dividends” below.
Capital Loss Carryovers.
The
capital losses of the Fund, if any, do not flow through to shareholders. Rather, the Fund may use its capital losses, subject to
applicable limitations, to offset its capital gains without being required to pay taxes on or distribute to shareholders such gains
that are offset by the losses. Rules similar to those that apply to capital loss carryovers of individuals apply to RICs. Thus,
if the Fund has a “net capital loss” (that is, capital losses in excess of capital gains), the excess (if any) of the
Fund’s net short-term capital losses over its net long-term capital gains is treated as a short-term capital loss arising
on the first day of the Fund’s next taxable year, and the excess (if any) of the Fund’s net long-term capital losses
over its net short-term capital gains is treated as a long-term capital loss arising on the first day of the Fund’s next
taxable year. Any such net capital losses of the Fund that are not used to offset capital gains may be carried forward indefinitely
to reduce any future capital gains realized by the Fund in succeeding taxable years. The amount of capital losses that can be carried
forward and used in any single year is subject to an annual limitation if there is a more than 50% “change in ownership”
of the Fund. An ownership change generally results when shareholders owning 5% or more of the Fund increase their aggregate holdings
by more than 50% over a three-year lookback period. An ownership change could result in capital loss carryovers being used at a
slower rate, thereby reducing the Fund’s ability to offset capital gains with those losses. An increase in the amount of
taxable gains distributed to the Fund’s shareholders could result from an ownership change. The Fund undertake no obligation
to avoid or prevent an ownership change, which can occur in the normal course of shareholder purchases and redemptions or as a
result of engaging in a tax-free reorganization with another fund. Moreover, because of circumstances beyond the Fund’s control,
there can be no assurance that the Fund will not experience, or has not already experienced, an ownership change. Additionally,
if the Fund engages in a tax-free reorganization with another fund, the effect of these and other rules not discussed herein may
be to disallow or postpone the use by the Fund of its capital loss carryovers (including any current year losses and built-in losses
when realized) to offset its own gains or those of the other fund, or vice versa, thereby reducing the tax benefits Fund shareholders
would otherwise have enjoyed from use of such capital loss carryovers.
Deferral of Late Year Losses.
The
Fund may elect to treat part or all of any “qualified late year loss” as if it had been incurred in the succeeding
taxable year in determining the Fund’s taxable income, net capital gain, net short-term capital gain, and earnings and profits.
The effect of this election is to treat any such “qualified late year loss” as if it had been incurred in the succeeding
taxable year in characterizing Fund distributions for any calendar year (see, “Taxation of Fund Distributions—Distributions
of capital gains” below). A “qualified late year loss” includes:
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(i)
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any net capital loss incurred after October 31 of the current taxable
year, or, if there is no such loss, any net long-term capital loss or any net short-term capital loss incurred after October 31
of the current taxable year (“post-October capital losses”), and
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(ii)
|
the sum of (1) the excess, if any, of (a) specified losses incurred
after October 31 of the current taxable year, over (b) specified gains incurred after October 31 of the current taxable year and
(2) the excess, if any, of (a) ordinary losses incurred after December 31 of the current taxable year, over (b) the ordinary income
incurred after December 31 of the current taxable year.
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The terms “specified losses”
and “specified gains” mean ordinary losses and gains from the sale, exchange, or other disposition of property (including
the termination of a position with respect to such property), foreign currency losses and gains, and losses and gains resulting
from holding stock in a passive foreign investment company (“PFIC”) for which a mark-to-market election is in effect.
The terms “ordinary losses” and “ordinary income” mean other ordinary losses and income that are not described
in the preceding sentence.
Undistributed Capital Gains
.
The Fund may retain or distribute to shareholders its net capital gain for each taxable year. The Fund currently intend to distribute
net capital gains. If the Fund elects to retain its net capital gain, the
Fund will be taxed thereon (except to
the extent of any available capital loss carryovers) at the highest corporate tax rate (currently 35%). If the Fund elects to retain
its net capital gain, it is expected that the Fund also will elect to have shareholders treated as if each received a distribution
of its pro rata share of such gain, with the result that each shareholder will be required to report its pro rata share of such
gain on its tax return as long-term capital gain, will receive a refundable tax credit for its pro rata share of tax paid by the
Fund on the gain, and will increase the tax basis for its Shares by an amount equal to the deemed distribution less the tax credit.
Federal Excise Tax
. To avoid
a 4% non-deductible excise tax, the Fund must distribute by December 31 of each year an amount equal to at least: (1) 98% of its
ordinary income for the calendar year, (2) 98.2% of capital gain net income (that is, the excess of the gains from sales or exchanges
of capital assets over the losses from such sales or exchanges) for the one-year period ended on October 31 of such calendar year,
and (3) any prior year undistributed ordinary income and capital gain net income. The Fund may elect to defer to the following
year any net ordinary loss incurred for the portion of the calendar year which is after the beginning of the Fund’s taxable
year. Also, the Fund will defer any “specified gain” or “specified loss” which would be properly taken
into account for the portion of the calendar year after October 31. Any net ordinary loss, specified gain, or specified loss deferred
shall be treated as arising on January 1 of the following calendar year. Generally, The Fund intends to make sufficient distributions
prior to the end of each calendar year to avoid any material liability for federal income and excise tax, but can give no assurances
that all or a portion of such liability will be avoided. In addition, under certain circumstances, temporary timing or permanent
differences in the realization of income and expense for book and tax purposes can result in the Fund having to pay an excise tax.
Purchase of Shares.
As a result
of tax requirements, the Trust on behalf of The Fund has the right to reject an order to purchase Shares if the purchaser (or group
of purchasers acting in concert with each other) would, upon obtaining the Shares so ordered, own 80% or more of the outstanding
Shares of the Fund and if, pursuant to Sections 351 and 362 of the Internal Revenue 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 Trust also has the right to require information
necessary to determine beneficial Share ownership for purposes of the 80% determination.
Taxation of Fund Distributions
The Fund anticipates distributing substantially
all of its investment company taxable income and net capital gain for each taxable year. Distributions by the Fund will be treated
in the manner described below regardless of whether such distributions are paid in cash or reinvested in additional Shares of the
Fund (or of another fund). You will receive information annually as to the federal income tax consequences of distributions made
(or deemed made) during the year.
Distributions of Net Investment Income.
The Fund receives ordinary income generally in the form of dividends and/or interest on its investments. The Fund may also
recognize ordinary income from other sources, including, but not limited to, certain gains on foreign currency-related transactions.
This income, less expenses incurred in the operation of the Fund, constitutes the Fund’s net investment income from which
dividends may be paid to you. If you are a taxable investor, distributions of net investment income generally are taxable as ordinary
income to the extent of the Fund’s earnings and profits. See the discussion below under the headings, “–Qualified
Dividend Income for Individuals” and “– Dividends-Received Deduction for Corporations”
Distributions of Capital Gains.
The
Fund may derive capital gain and loss in connection with sales or other dispositions of its portfolio securities. Distributions
derived from the excess of net short-term capital gain over net long-term capital loss will be taxable to you as ordinary income.
Distributions paid from the excess of net long-term capital gain over net short-term capital loss will be taxable to you as long-term
capital gain, regardless of how long you have held your Shares in the Fund. Any net short-term or long-term capital gain realized
by the Fund (net of any capital loss carryovers) generally will be distributed once each year and may be distributed more frequently,
if necessary, in order to reduce or eliminate federal excise or income taxes on the Fund.
Returns of Capital.
Distributions
by the Fund that are not paid from earnings and profits will be treated as a return of capital to the extent of (and in reduction
of) the shareholder’s tax basis in his Shares; any excess will be treated as gain from the sale of his Shares. Thus, the
portion of a distribution that constitutes a return of capital will decrease the shareholder’s tax basis in his Fund Shares
(but not below zero), and will result in an increase in the amount of gain (or decrease in the amount of loss) that will be recognized
by the shareholder for tax purposes on the later sale
of such Fund Shares. Return of capital
distributions can occur for a number of reasons including, among others, the Fund over-estimates the income to be received from
certain investments such as those classified as partnerships or equity real estate investment trusts (“REITs”).
Qualified Dividend Income for Individuals.
Ordinary income dividends reported by the Fund as derived from qualified dividend income will be taxed in the hands of individuals
and other noncorporate shareholders at the rates applicable to long-term capital gain. “Qualified dividend income”
means dividends paid to the Fund (a) by domestic corporations, (b) by foreign corporations that are either (i) incorporated in
a possession of the United States, or (ii) are eligible for benefits under certain income tax treaties with the United States that
include an exchange of information program, or (c) with respect to stock of a foreign corporation that is readily tradable on an
established securities market in the United States. Both the Fund and the investor must meet certain holding period requirements
to qualify Fund dividends for this treatment. Specifically, the Fund must hold the stock for at least 61 days during the 121-day
period beginning 60 days before the stock becomes ex-dividend. Similarly, investors must hold their Fund Shares for at least 61
days during the 121-day period beginning 60 days before the Fund distribution goes ex-dividend. Income derived from investments
in derivatives, fixed-income securities, U.S. REITs, PFICs, and income received “in lieu of” dividends in a securities
lending transaction generally is not eligible for treatment as qualified dividend income. If the qualifying dividend income received
by the Fund is equal to or greater than 95% of the Fund’s gross income (exclusive of net capital gain) in any taxable year,
all of the ordinary income dividends paid by the Fund will be qualifying dividend income.
Dividends-Received Deduction for
Corporations
. For corporate shareholders, a portion of the dividends paid by the Fund may qualify for the 70% corporate dividends-received
deduction. The portion of dividends paid by the Fund that so qualifies will be reported by the Fund each year and cannot exceed
the gross amount of dividends received by the Fund from domestic (U.S.) corporations. The availability of the dividends-received
deduction is subject to certain holding period and debt financing restrictions that apply to both the Fund and the investor. Specifically,
the amount that the Fund may report as eligible for the dividends-received deduction will be reduced or eliminated if the Shares
on which the dividends earned by the Fund were debt-financed or held by the Fund for less than a minimum period of time, generally
46 days during a 91-day period beginning 45 days before the stock becomes ex-dividend. Similarly, if your Fund Shares are debt-financed
or held by you for less than a 46-day period then the dividends-received deduction for Fund dividends on your Shares may also be
reduced or eliminated. Even if reported as dividends eligible for the dividends-received deduction, all dividends (including any
deducted portion) must be included in your alternative minimum taxable income calculation
.
Income derived by the Fund from
investments in derivatives, fixed-income and foreign securities generally is not eligible for this treatment.
Impact of Realized but Undistributed
Income and Gains, and Net Unrealized Appreciation of Portfolio Securities
. At the time of your purchase of Shares, the price
of Shares may reflect undistributed income, undistributed capital gains, or net unrealized appreciation of portfolio securities
held by the Fund. A subsequent distribution to you of such amounts, although constituting a return of your investment, would be
taxable, and would be taxed as ordinary income (some portion of which may be taxed as qualified dividend income), capital gains,
or some combination of both, unless you are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual
retirement account. The Fund may be able to reduce the amount of such distributions from capital gains by utilizing its capital
loss carryovers, if any.
U.S. Government Securities.
Income
earned on certain U.S. government obligations is exempt from state and local personal income taxes if earned directly by you. States
also grant tax-free status to dividends paid to you from interest earned on direct obligations of the U.S. government, subject
in some states to minimum investment or reporting requirements that must be met by the Fund. Income on investments by the Fund
in certain other obligations, such as repurchase agreements collateralized by U.S. government obligations, commercial paper and
federal agency-backed obligations (e.g., GNMA or FNMA obligations), generally does not qualify for tax-free treatment. The rules
on exclusion of this income are different for corporations.
Dividends Declared in December and
Paid in January
. Ordinarily, shareholders are required to take distributions by the Fund into account in the year in which
the distributions are made. However, dividends declared in October, November or December of any year and payable to shareholders
of record on a specified date in such a month will be deemed to have been received by the shareholders (and made by the Fund) on
December 31 of such calendar year if such dividends are actually paid in January of the following year. Shareholders will be advised
annually as to the
U.S. federal income tax consequences
of distributions made (or deemed made) during the year in accordance with the guidance that has been provided by the IRS.
Medicare Tax
. A 3.8% Medicare
tax is imposed on net investment income earned by certain individuals, estates and trusts. “Net investment income,”
for these purposes, means investment income, including ordinary dividends and capital gain distributions received from the Fund
and net gains from redemptions or other taxable dispositions of Fund Shares, reduced by the deductions properly allocable to such
income. In the case of an individual, the tax will be imposed on the lesser of (1) the shareholder’s net investment income
or (2) the amount by which the shareholder’s modified adjusted gross income exceeds $250,000 (if the shareholder is married
and filing jointly or a surviving spouse), $125,000 (if the shareholder is married and filing separately) or $200,000 (in any other
case). This Medicare tax, if applicable, is reported by you on, and paid with, your federal income tax return.
Sales, Exchanges and Redemptions
of Fund Shares
Sales, exchanges and redemptions (including
redemptions in kind) of Fund Shares are taxable transactions for federal and state income tax purposes. If you redeem your Fund
Shares, the IRS requires you to report any gain or loss on your redemption. If you held your Shares as a capital asset, the gain
or loss that you realize will be a capital gain or loss and will be long-term or short-term, generally depending on how long you
have held your Shares. Any redemption fees you incur on Shares redeemed will decrease the amount of any capital gain (or increase
any capital loss) you realize on the sale. Capital losses in any year are deductible only to the extent of capital gains plus,
in the case of a noncorporate taxpayer, $3,000 of ordinary income.
Taxes on Purchase and Redemption
of Creation Units.
An Authorized Participant who exchanges equity securities for Creation Units generally will recognize a
gain or a loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time of
purchase and the exchanger’s aggregate basis in the securities surrendered and the Cash Component paid. A person who exchanges
Creation Units for equity securities will generally recognize a gain or loss equal to the difference between the exchanger’s
basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. The IRS,
however, may assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted currently under the
rules governing “wash sales,” or on the basis that there has been no significant change in economic position. Persons
exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might
be deductible.
Under current federal tax laws, any
capital gain or loss realized upon redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares
have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.
If the Fund redeems Creation Units in
cash, it may recognize more capital gains than it will if it redeems Creation Units in-kind.
Tax Basis Information
. A shareholder’s
cost basis information will be provided on the redemption of any of the shareholder’s Shares, subject to certain exceptions
for exempt recipients. Please contact the broker (or other nominee) that holds your Shares with respect to reporting of cost basis
and available elections for your account.
Wash Sales
. All or a portion
of any loss that you realize on a redemption of your Fund Shares will be disallowed to the extent that you buy other Shares in
the Fund (through reinvestment of dividends or otherwise) within 30 days before or after your Share redemption. Any loss disallowed
under these rules will be added to your tax basis in the new Shares.
Redemptions at a Loss Within Six
Months of Purchase
. Any loss incurred on a redemption or exchange of Shares held for six months or less will be treated as
long-term capital loss to the extent of any long-term capital gain distributed to you by the Fund on those Shares.
Reportable Transactions.
Under
Treasury regulations, if a shareholder recognizes a loss with respect to the Fund’s Shares of $2 million or more for an individual
shareholder or $10 million or more for a corporate shareholder (or certain greater amounts over a combination of years), the shareholder
must file with the IRS a disclosure statement on Form 8886. The fact that a loss is reportable under these regulations does not
affect the legal determination of
whether the taxpayer’s treatment
of the loss is proper. Shareholders should consult their tax advisors to determine the applicability of these regulations in light
of their individual circumstances.
Tax Treatment of Portfolio Transactions
Set forth below is a general description
of the tax treatment of certain types of securities, investment techniques and transactions that may apply to the Fund and, in
turn, affect the amount, character and timing of dividends and distributions payable by the fund to its shareholders. This section
should be read in conjunction with the discussion above under “Investment Strategies” for a detailed description of
the various types of securities and investment techniques that apply to the Fund.
In General
. In general, gain
or loss recognized by the Fund on the sale or other disposition of portfolio investments will be a capital gain or loss. Such capital
gain and loss may be long-term or short-term depending, in general, upon the length of time a particular investment position is
maintained and, in some cases, upon the nature of the transaction. Property held for more than one year generally will be eligible
for long-term capital gain or loss treatment. The application of certain rules described below may serve to alter the manner in
which the holding period for a security is determined or may otherwise affect the characterization as long-term or short-term,
and also the timing of the realization and/or character, of certain gains or losses.
Options, Futures, Forward Contracts,
Swap Agreements and Hedging Transactions
. In general, option premiums received by the Fund are not immediately included in
the income of the fund. Instead, the premiums are recognized when the option contract expires, the option is exercised by the holder,
or the fund transfers or otherwise terminates the option (e.g., through a closing transaction). If an option written by the Fund
is exercised and the fund sells or delivers the underlying stock, the fund generally will recognize capital gain or loss equal
to (a) the sum of the strike price and the option premium received by the fund minus (b) the fund’s basis in the stock. Such
gain or loss generally will be short-term or long-term depending upon the holding period of the underlying stock. If securities
are purchased by the Fund pursuant to the exercise of a put option written by it, the fund generally will subtract the premium
received from its cost basis in the securities purchased. The gain or loss with respect to any termination of the Fund’s
obligation under an option other than through the exercise of the option and related sale or delivery of the underlying stock generally
will be short-term gain or loss depending on whether the premium income received by the fund is greater or less than the amount
paid by the fund (if any) in terminating the transaction. Thus, for example, if an option written by the Fund expires unexercised,
the fund generally will recognize short-term gain equal to the premium received.
The tax treatment of certain futures
contracts entered into by the Fund as well as listed non-equity options written or purchased by the fund on U.S. exchanges (including
options on futures contracts, broad-based equity indices and debt securities) may be governed by section 1256 of the Internal Revenue
Code (“section 1256 contracts”). Gains or losses on section 1256 contracts generally are considered 60% long-term and
40% short-term capital gains or losses (“60/40”), although certain foreign currency gains and losses from such contracts
may be treated as ordinary in character. Also, any section 1256 contracts held by the Fund at the end of each taxable year (and,
for purposes of the 4% excise tax, on certain other dates as prescribed under the Internal Revenue Code) are “marked to market”
with the result that unrealized gains or losses are treated as though they were realized and the resulting gain or loss is treated
as ordinary or 60/40 gain or loss, as applicable. Section 1256 contracts do not include any interest rate swap, currency swap,
basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar
agreement.
In addition to the special rules described
above in respect of options and futures transactions, the Fund’s transactions in other derivative instruments (including
options, forward contracts and swap agreements) as well as its other hedging, short sale, or similar transactions, may be subject
to one or more special tax rules (including the constructive sale, notional principal contract, straddle, wash sale and short sale
rules). These rules may affect whether gains and losses recognized by the Fund are treated as ordinary or capital or as short-term
or long-term, accelerate the recognition of income or gains to the fund, defer losses to the fund, and cause adjustments in the
holding periods of the fund’s securities. These rules, therefore, could affect the amount, timing and/or character of distributions
to shareholders. Moreover, because the tax rules applicable to derivative financial instruments are in some cases uncertain under
current law, an adverse determination or future guidance by the IRS with respect to these rules (which determination or guidance
could be retroactive) may affect whether the Fund has made sufficient
distributions, and otherwise satisfied
the relevant requirements, to maintain its qualification as a regulated investment company and avoid the Fund-level tax.
Certain of the Fund’s investments
in derivatives and foreign currency-denominated instruments, and the fund’s transactions in foreign currencies and hedging
activities, may produce a difference between its book income and its taxable income. If the Fund’s book income is less than
the sum of its taxable income and net tax-exempt income (if any), the fund could be required to make distributions exceeding book
income to qualify as a regulated investment company. If the Fund’s book income exceeds the sum of its taxable income and
net tax-exempt income (if any), the distribution of any such excess will be treated as (i) a dividend to the extent of the fund’s
remaining earnings and profits (including current earnings and profits arising from tax-exempt income, reduced by related deductions),
(ii) thereafter, as a return of capital to the extent of the recipient’s basis in the Shares, and (iii) thereafter, as gain
from the sale or exchange of a capital asset.
Investments
in U.S. REITs.
A U.S. REIT is not subject to
federal income tax on the income and gains
it distributes to shareholders. Dividends paid by a U.S. REIT, other than capital gain distributions, will be taxable as ordinary
income up to the amount of the U.S. REIT’s current and accumulated earnings and profits. Capital gain dividends paid by a
U.S. REIT to the Fund will be treated as long-term capital gains by the Fund and, in turn, may be distributed by the Fund to its
shareholders as a capital gain distribution. Because of certain noncash expenses, such as property depreciation, an equity U.S.
REIT’s cash flow may exceed its taxable income. The equity U.S. REIT, and in turn the Fund, may distribute this excess cash
to shareholders in the form of a return of capital distribution. However, if a U.S. REIT is operated in a manner that fails to
qualify as a REIT, an investment in the U.S. REIT would become subject to double taxation, meaning the taxable income of the U.S.
REIT would be subject to federal income tax at regular corporate rates without any deduction for dividends paid to shareholders
and the dividends would be taxable to shareholders as ordinary income (or possibly as qualified dividend income) to the extent
of the U.S. REIT’s current and accumulated earnings and profits. Also, see, “Tax Treatment of Portfolio Transactions
– Investment in taxable mortgage pools (excess inclusion income)” and “Non-U.S. Investors – Investment
in U.S. real property” below with respect to certain other tax aspects of investing in U.S. REITs.
Investment in non-U.S. REITs.
While non-U.S. REITs often use complex acquisition structures that seek to minimize taxation in the source country, an investment
by the Fund in a non-U.S. REIT may subject the Fund, directly or indirectly, to corporate taxes, withholding taxes, transfer taxes
and other indirect taxes in the country in which the real estate acquired by the non-U.S. REIT is located. The Fund’s pro
rata share of any such taxes will reduce the Fund’s return on its investment. The Fund’s investment in a non-U.S. REIT
may be considered an investment in a PFIC, as discussed above in “PFIC investments.” Additionally, foreign withholding
taxes on distributions from the non-U.S. REIT may be reduced or eliminated under certain tax treaties, as discussed above in “Taxation
of the Fund — Foreign income tax.” Also, the Fund in certain limited circumstances may be required to file an income
tax return in the source country and pay tax on any gain realized from its investment in the non-U.S. REIT under rules similar
to those in the U.S., which tax foreign persons on gain realized from dispositions of interests in U.S. real estate.
Investment in taxable mortgage pools
(excess inclusion income).
Under a Notice issued by the IRS, the Internal Revenue Code and Treasury regulations to be issued,
a portion of the Fund’s income from a U.S. REIT that is attributable to the REIT’s residual interest in a real estate
mortgage investment conduit (“REMIC”) or equity interests in a “taxable mortgage pool” (referred to in
the Internal Revenue Code as an excess inclusion) will be subject to federal income tax in all events. The excess inclusion income
of a regulated investment company, such as the Fund, will be allocated to shareholders of the regulated investment company in proportion
to the dividends received by such shareholders, with the same consequences as if the shareholders held the related REMIC residual
interest or, if applicable, taxable mortgage pool directly. In general, excess inclusion income allocated to shareholders (i) cannot
be offset by net operating losses (subject to a limited exception for certain thrift institutions), (ii) will constitute unrelated
business taxable income (“UBTI”) to entities (including qualified pension plans, individual retirement accounts, 401(k)
plans, Keogh plans or other tax-exempt entities) subject to tax on UBTI, thereby potentially requiring such an entity that is allocated
excess inclusion income, and otherwise might not be required to file a tax return, to file a tax return and pay tax on such income,
and (iii) in the case of a foreign stockholder, will not qualify for any reduction in U.S. federal withholding tax. In addition,
if at any time during any taxable year a “disqualified organization” (which generally includes certain cooperatives,
governmental entities, and tax-exempt organizations not subject to UBTI) is a record holder of a share in a regulated investment
company, then
the regulated investment company will
be subject to a tax equal to that portion of its excess inclusion income for the taxable year that is allocable to the disqualified
organization, multiplied by the highest federal income tax rate imposed on corporations. The Notice imposes certain reporting requirements
upon regulated investment companies that have excess inclusion income. There can be no assurance that the Fund will not allocate
to shareholders excess inclusion income.
Securities Lending
. While securities
are loaned out by the Fund, the fund generally will receive from the borrower amounts equal to any dividends or interest paid on
the borrowed securities. For federal income tax purposes, payments made “in lieu of” dividends are not considered dividend
income. These distributions will neither qualify for the reduced rate of taxation for individuals on qualified dividends nor the
70% dividends-received deduction for corporations. Also, any foreign tax withheld on payments made “in lieu of” dividends
or interest will not qualify for the pass-through of foreign tax credits to shareholders.
Investments in Convertible Securities.
Convertible debt is ordinarily treated as a “single property” consisting of a pure debt interest until conversion,
after which the investment becomes an equity interest. If the security is issued at a premium (i.e., for cash in excess of the
face amount payable on retirement), the creditor-holder may amortize the premium over the life of the bond. If the security is
issued for cash at a price below its face amount, the creditor-holder must accrue original issue discount in income over the life
of the debt. The creditor-holder’s exercise of the conversion privilege is treated as a nontaxable event. Mandatorily convertible
debt (e.g., an exchange traded note or ETN issued in the form of an unsecured obligation that pays a return based on the performance
of a specified market index, exchange currency, or commodity) is often, but not always, treated as a contract to buy or sell the
reference property rather than debt. Similarly, convertible preferred stock with a mandatory conversion feature is ordinarily,
but not always, treated as equity rather than debt. Dividends received generally are qualified dividend income and eligible for
the corporate dividends received deduction. In general, conversion of preferred stock for common stock of the same corporation
is tax-free. Conversion of preferred stock for cash is a taxable redemption. Any redemption premium for preferred stock that is
redeemable by the issuing company might be required to be amortized under original issue discount principles.
Investments in Securities of Uncertain
Tax Character.
The Fund may invest in securities the U.S. federal income tax treatment of which may not be clear or may be
subject to recharacterization by the IRS. To the extent the tax treatment of such securities or the income from such securities
differs from the tax treatment expected by the Fund, it could affect the timing or character of income recognized by the fund,
requiring the fund to purchase or sell securities, or otherwise change its portfolio, in order to comply with the tax rules applicable
to regulated investment companies under the Internal Revenue Code.
Backup Withholding
By law, a portion of your taxable dividends
and sales proceeds may be withheld unless you:
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provide your correct social security or taxpayer identification
number,
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certify that this number is correct,
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certify that you are not subject to backup withholding,
and
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certify that you are a U.S. person (including a U.S. resident
alien).
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Withholding is also imposed if the IRS
requires it. When withholding is required, the amount will be 28% of any distributions or proceeds paid. Backup withholding is
not an additional tax. Any amounts withheld may be credited against the shareholder’s U.S. federal income tax liability,
provided the appropriate information is furnished to the IRS. Certain payees and payments are exempt from backup withholding and
information reporting. The special U.S. tax certification requirements applicable to non-U.S. investors to avoid backup withholding
are described under the “Non-U.S. Investors” heading below.
Non-U.S. Investors
Non-U.S. investors (shareholders who,
as to the United States, are nonresident alien individuals, foreign trusts or estates, foreign corporations, or foreign partnerships)
may be subject to U.S. withholding and estate tax and are subject to special U.S. tax certification requirements. Non-U.S. investors
should consult their tax advisors about the applicability of U.S. tax withholding and the use of the appropriate forms to certify
their status.
In General
. The United States
imposes a flat 30% withholding tax (or a withholding tax at a lower treaty rate) on U.S. source dividends, including on income
dividends paid to you by the Fund, subject to certain exemptions described below. However, notwithstanding such exemptions from
U.S. withholding at the source, any dividends and distributions of income and capital gains, including the proceeds from the sale
of your Fund Shares, will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a
U.S. person.
Capital Gain Dividends
. In general,
capital gain dividends reported by the Fund as paid from its net long-term capital gains, other than long-term capital gains realized
on disposition of U.S. real property interests (see the discussion below), are not subject to U.S. withholding tax unless you are
a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the calendar
year.
Interest-related dividends and short-term
capital gain dividends.
Generally, dividends reported by the Fund as interest-related dividends and paid from its qualified
net interest income from U.S. sources are not subject to U.S. withholding tax. “Qualified interest income” includes,
in general, U.S. source (1) bank deposit interest, (2) short-term original discount, (3) interest (including original issue discount,
market discount, or acquisition discount) on an obligation that is in registered form, unless it is earned on an obligation issued
by a corporation or partnership in which the Fund is a 10-percent shareholder or is contingent interest, and (4) any interest-related
dividend from another regulated investment company. Similarly, short-term capital gain dividends reported by the Fund as paid from
its net short-term capital gains, other than short-term capital gains realized on disposition of U.S. real property interests (see
discussion below), are not subject to U.S. withholding tax unless you were a nonresident alien individual present in the United
States for a period or periods aggregating 183 days or more during the calendar year. The Fund reserves the right to not
report interest-related dividends or short-term capital gain dividends. Additionally, the Fund’s reporting of interest-related
dividends or short-term capital gain dividends may not be passed through to shareholders by intermediaries who have assumed tax
reporting responsibilities for this income in managed or omnibus accounts due to systems limitations or operational constraints.
Net Investment Income from Dividends
on Stock and Foreign Source Interest Income Continue to be Subject to Withholding Tax; Foreign Tax Credits.
Ordinary dividends
paid by the Fund to non-U.S. investors on the income earned on portfolio investments in (i) the stock of domestic and foreign corporations
and (ii) the debt of foreign issuers continue to be subject to U.S. withholding tax.
Foreign shareholders may be subject
to U.S. withholding tax at a rate of 30% on the income resulting from an election to pass-through foreign tax credits to shareholders,
but may not be able to claim a credit or deduction with respect to the withholding tax for the foreign tax treated as having been
paid by them.
Income Effectively Connected with
a U.S. Trade or Business
. If the income from the Fund is effectively connected with a U.S. trade or business carried on by
a foreign shareholder, then ordinary income dividends, capital gain dividends and any gains realized upon the sale or redemption
of Shares of the Fund will be subject to U.S. federal income tax at the rates applicable to U.S. citizens or domestic corporations
and require the filing of a nonresident U.S. income tax return.
Investment
in U.S. real property
. The Foreign Investment in Real Property Tax Act of 1980 (“FIRPTA”) makes non-U.S. persons
subject to U.S. tax on disposition of a U.S. real property interest (“USRPI”) as if he or she were a U.S. person. Such
gain is sometimes referred to as FIRPTA gain. The
Fund may invest in equity securities
of corporations that invest in USRPI, including U.S. REITs, which may trigger FIRPTA gain to the
Fund’s non-U.S. shareholders.
The Code provides a look-through
rule for distributions of FIRPTA gain when a RIC is classified as a qualified investment entity. A RIC will be classified as
a qualified investment entity if, in general, 50% or more of the RIC’s assets consist of interests in U.S. REITs and
other U.S. real property holding corporations (“USRPHC”). If a RIC is a qualified investment entity and the
non-U.S. shareholder owns more than 5% of a class of Fund Shares at any time during the one-year period ending on the date of
the FIRPTA distribution, the FIRPTA distribution to the non-U.S.
shareholder is treated as gain from
the disposition of a USRPI, causing the distribution to be subject to U.S. withholding tax at a rate of 35% (unless reduced by
future regulations), and requiring the non-U.S. shareholder to file a nonresident U.S. income tax return. In addition, even if
the non-U.S. shareholder does not own more than 5% of a class of Fund Shares, but the Fund is a qualified investment entity, the
FIRPTA distribution will be taxable as ordinary dividends (rather than as a capital gain or short-term capital gain dividend) subject
to withholding at 30% or lower treaty rate.
FIRPTA “wash sale” rule.
If the Fund is a qualified investment entity that is domestically controlled (i.e. less than 50% in value of the Fund has been
owned directly or indirectly by non-U.S. shareholders during the 5-year period ending on the date of disposition) and a non-U.S.
shareholder of the Fund (i) disposes of his interest in the Fund during the 30-day period preceding a FIRPTA distribution, (ii)
acquires an identical stock interest during the 61-day period beginning the first day of such 30-day period preceding the FIRPTA
distribution, and (iii) does not in fact receive the FIRPTA distribution in a manner that subjects the non-U.S. shareholder to
tax under FIRPTA, then the non-U.S. shareholder is required to pay U.S. tax on an amount equal to the amount of the distribution
that was not taxed under FIRPTA as a result of the disposition. These rules also apply to substitute dividend payments and other
similar arrangements; the portion of the substitute dividend or similar payment treated as FIRPTA gain equals the portion of the
RIC distribution such payment is in lieu of that otherwise would have been treated as FIRPTA gain.
Gain on sale of Fund Shares as FIRPTA
gain.
In addition, a sale or redemption of Fund Shares will be FIRPTA gain to a non-U.S. shareholder if the non-U.S. shareholder
owns more than 5% of a class of Shares in the Fund and the Fund is otherwise considered a USRPHC, i.e. 50% or more of the Fund’s
assets consist of (1) more than 5% interests in publicly traded companies that are USRPHC, (2) interests in non-publicly traded
companies that are USRPHC, and (3) interests in U.S. REITs that are not controlled by U.S. shareholders where the REIT shares are
either not publicly traded or are publicly traded and the Fund owns more than 10%.
In the unlikely event that the Fund
meets the requirements described above, the gain will be taxed as income “effectively connected with a U.S. trade or business.”
As a result, the non-U.S. shareholder will be required to pay U.S. income tax on such gain and file a nonresident U.S. income tax
return.
Because the Fund expects to invest less
than 50% of its assets at all times, directly or indirectly, in U.S. real property interests, the Fund expects that neither gain
on the sale or redemption of Fund Shares nor Fund dividends and distributions would be subject to FIRPTA reporting and tax withholding.
U.S. Estate Tax.
Transfers by
gift of Shares of the Fund by a foreign shareholder who is a nonresident alien individual will not be subject to U.S. federal gift
tax. An individual who, at the time of death, is a non-U.S. shareholder will nevertheless be subject to U.S. federal estate tax
with respect to Fund Shares at the graduated rates applicable to U.S. citizens and residents, unless a treaty exemption applies.
If a treaty exemption is available, a decedent’s estate may nonetheless need to file a U.S. estate tax return to claim the
exemption in order to obtain a U.S. federal transfer certificate, which permits the decedent’s property to be transferred
without federal estate tax liability. The transfer certificate will identify the property (i.e., Fund Shares) as to which the U.S.
federal estate tax lien has been released. In the absence of a treaty, there is a $13,000 statutory estate tax credit (equivalent
to U.S. situs assets with a value of $60,000). For estates with U.S. situs assets of not more than $60,000, an affidavit from an
appropriate individual that states that the decedent’s U.S. situs assets are below this threshold amount may be sufficient
to transfer the Fund shares.
U.S. Tax Certification Rules
.
Special U.S. tax certification requirements may apply to non-U.S. shareholders both to avoid U.S. backup withholding imposed at
a rate of 28% and to obtain the benefits of any treaty between the United States and the shareholder’s country of residence.
In general, if you are a non-U.S. shareholder, you must provide a Form W-8 BEN (or other applicable Form W-8) to establish that
you are not a U.S. person, to claim that you are the beneficial owner of the income and, if applicable, to claim a reduced rate
of, or exemption from, withholding as a resident of a country with which the United States has an income tax treaty. A Form W-8
BEN provided without a U.S. taxpayer identification number will remain in effect for a period beginning on the date signed and
ending on the last day of the third succeeding calendar year unless an earlier change of circumstances makes the information on
the form incorrect. Certain payees and payments are exempt from backup withholding.
The tax consequences to a non-U.S. shareholder
entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
are urged to consult their own tax advisors with
respect to the particular tax consequences
to them of an investment in the Fund, including the applicability of foreign tax.
Foreign Account Tax Compliance Act
(“FATCA”).
Under FATCA, a 30% withholding tax is imposed on payments or distributions made by the Fund to certain
foreign entities, referred to as foreign financial institutions (“FFI”) or non-financial foreign entities (“NFFE”):
(a) income dividends and (b) after December 31, 2018, certain capital gain distributions, return of capital distributions and the
proceeds arising from the sale of Fund Shares. The FATCA withholding tax generally can be avoided: (a) by an FFI, if it reports
certain direct and indirect ownership of foreign financial accounts held by U.S. persons with the FFI and (b) by an NFFE, if it:
(i) certifies that it has no substantial U.S. persons as owners or (ii) if it does have such owners, reporting information relating
to them. The U.S. Treasury has negotiated intergovernmental agreements (“IGA”) with certain countries and is in various
stages of negotiations with a number of other foreign countries with respect to one or more alternative approaches to implement
FATCA; an entity in one of those countries may be required to comply with the terms of an IGA instead of U.S. Treasury regulations.
An FFI can avoid FATCA withholding if
it is deemed compliant or by becoming a “participating FFI,” which requires the FFI to enter into a U.S. tax compliance
agreement with the IRS under section 1471(b) of the Internal Revenue Code (“FFI agreement”) under which it agrees to
verify, report and disclose certain of its U.S. accountholders and meet certain other specified requirements. The FFI will either
report the specified information about the U.S. accounts to the IRS, or, to the government of the FFI’s country of residence
(pursuant to the terms and conditions of applicable law and an applicable IGA entered into between the United States and the FFI’s
country of residence), which will, in turn, report the specified information to the IRS. An FFI that is resident in a country that
has entered into an IGA with the U.S. to implement FATCA will be exempt from FATCA withholding provided that the FFI shareholder
and the applicable foreign government comply with the terms of such agreement.
An NFFE that is the beneficial owner
of a payment from the Fund can avoid the FATCA withholding tax generally by certifying that it does not have any substantial U.S.
owners or by providing the name, address and taxpayer identification number of each substantial U.S. owner. The NFFE will report
the information to the applicable withholding agent, which will, in turn, report information to the IRS.
Such foreign shareholders also may fall
into certain exempt, excepted or deemed compliant categories as established by U.S. Treasury regulations, IGAs, and other guidance
regarding FATCA. An FFI or NFFE that invests in the Fund will need to provide documentation properly certifying the entity’s
status under FATCA in order to avoid FATCA withholding. Non-U.S. investors should consult their own tax advisors regarding the
impact of these requirements on their investment in the Fund. The requirements imposed by FATCA are different from, and in addition
to, the U.S. tax certification rules to avoid backup withholding described above. Shareholders are urged to consult their tax advisors
regarding the application of these requirements to their own situation.
Effect of Future Legislation; Local
Tax Considerations
The foregoing general discussion of
U.S. federal income tax consequences is based on the Internal Revenue Code and the regulations issued thereunder as in effect on
the date of this SAI. Future legislative or administrative changes, including provisions of current law that sunset and thereafter
no longer apply, or court decisions may significantly change the conclusions expressed herein, and any such changes or decisions
may have a retroactive effect with respect to the transactions contemplated herein. Rules of state and local taxation of ordinary
income, qualified dividend income and capital gain dividends may differ from the rules for U.S. federal income taxation described
above. Distributions may also be subject to additional state, local and foreign taxes depending on each shareholder’s particular
situation. Non-U.S. shareholders may be subject to U.S. tax rules that differ significantly from those summarized above. Shareholders
are urged to consult their tax advisors as to the consequences of these and other state and local tax rules affecting investment
in the Fund.
OTHER INFORMATION
Shareholder inquiries may be made by writing
to the Trust, c/o Virtus ETF Advisers LLC, 1540 Broadway, New York, NY 10036.
FINANCIAL STATEMENTS
The Fund is newly organized and therefore has not yet had any operations
as of the date of this SAI.
Stradley
Ronon Stevens & Young, LLP