As filed with the Securities and Exchange Commission on August 19, 2008

 

1933 Act File No. 333-150525

1940 Act File No. 811-22201

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549


FORM N-1A

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

[ X ]


Pre-Effective Amendment No. 1

[ X ]


Post-Effective Amendment No. ____  

[     ]

and/or

REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940

[ X ]

 

Amendment No. 1

[ X ]

(Check appropriate box or boxes.)

DIREXION SHARES ETF TRUST

(Exact name of Registrant as Specified in Charter)


33 Whitehall Street, 10 th Floor

New York, New York 10004

(Address of Principal Executive Office) (Zip Code)


Registrant’s Telephone Number, including Area Code: (800) 851-0511


DANIEL D. O’NEILL, PRESIDENT

33 Whitehall Street, 10 th Floor

New York, New York 10004

(Name and Address of Agent for Service)

Copy to:

FRANCINE J. ROSENBERGER, ESQ.

K&L Gates LLP

1601 K Street, NW

Washington, D.C.  20006-1600

Approximate date of proposed public offering: As soon as practicable after the effective date of this Registration Statement


Pursuant to Rule 24f-2 under the Investment Company Act of 1940, as amended, an indefinite number of shares of beneficial interest, no par value, is being registered by this Registration Statement under the Securities Act of 1933, as amended.


Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.








DIREXION SHARES ETF TRUST


CONTENTS OF REGISTRATION STATEMENT



This registration document is comprised of the following:


Cover Sheet


Contents of Registration Statement


Combined Prospectus for Total Market Bull 3X Shares, Total Market Bear 3X Shares, Large Cap Bull 3X Shares, Large Cap Bear 3X Shares, Mid Cap Bull 3X Shares, Mid Cap Bear 3X Shares, Small Cap Bull 3X Shares, Small Cap Bear 3X Shares, Developed Markets Bull 3X Shares, Developed Markets Bear 3X Shares, Emerging Markets Bull 3X Shares, Emerging Markets Bear 3X Shares, BRIC Bull 3X Shares, BRIC Bear 3X Shares, China Bull 3X Shares, China Bear 3X Shares, India Bull 3X Shares, India Bear 3X Shares, Latin America Bull 3X Shares, Latin America Bear 3X Shares, Clean Energy Bull 3X Shares, Clean Energy Bear 3X Shares, Energy Bull 3X Shares, Energy Bear 3X Shares, Financial Bull 3X Shares, Financial Bear 3X Shares, Technology Bull 3X Shares, Technology Bear 3X Shares, Real Estate Bull 3X Shares, Real Estate Bear 3X Shares, Homebuilders Bull 3X Shares and Homebuilders Bear 3X Shares


Combined Statement of Additional Information for Total Market Bull 3X Shares, Total Market Bear 3X Shares, Large Cap Bull 3X Shares, Large Cap Bear 3X Shares, Mid Cap Bull 3X Shares, Mid Cap Bear 3X Shares, Small Cap Bull 3X Shares, Small Cap Bear 3X Shares, Developed Markets Bull 3X Shares, Developed Markets Bear 3X Shares, Emerging Markets Bull 3X Shares, Emerging Markets Bear 3X Shares, BRIC Bull 3X Shares, BRIC Bear 3X Shares, China Bull 3X Shares, China Bear 3X Shares, India Bull 3X Shares, India Bear 3X Shares, Latin America Bull 3X Shares, Latin America Bear 3X Shares, Clean Energy Bull 3X Shares, Clean Energy Bear 3X Shares, Energy Bull 3X Shares, Energy Bear 3X Shares, Financial Bull 3X Shares, Financial Bear 3X Shares, Technology Bull 3X Shares, Technology Bear 3X Shares, Real Estate Bull 3X Shares, Real Estate Bear 3X Shares, Homebuilders Bull 3X Shares and Homebuilders Bear 3X Shares  

Part C of Form N-1A


Signature Page


Exhibits








DIREXION SHARES ETF TRUST

PROSPECTUS


[DIREXION LOGO]


33 Whitehall Street, 10 th Floor

New York, New York 10004

(877) 437-9363


 

BULL FUNDS

BEAR FUNDS

  Domestic Equity Index Funds  

Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X Shares

International Funds

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X Shares

Latin America Bull 3X Shares

Latin America Bear 3X Shares

Specialty Funds

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X Shares

Financial Bull 3X Shares

Financial Bear 3X Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X Shares



The Securities and Exchange Commission has not approved or disapproved these securities or passed upon the adequacy of this prospectus.  Any representation to the contrary is a criminal offense.


September 2, 2008









TABLE OF CONTENTS

OVERVIEW OF THE DIREXION SHARES ETF TRUST

1

INVESTMENT TECHNIQUES AND POLICIES

2

PRINCIPAL RISKS

5

DOMESTIC EQUITY INDEX FUNDS

16

Total Market Bull 3X Shares

16

Total Market Bear 3X Shares

16

Large Cap Bull 3X Shares

17

Large Cap Bear 3X Shares

17

Mid Cap Bull 3X Shares

18

Mid Cap Bear 3X Shares

18

Small Cap Bull 3X Shares

19

Small Cap Bear 3X Shares

19

INTERNATIONAL FUNDS

21

Developed Markets Bull 3X Shares

21

Developed Markets Bear 3X Shares

21

Emerging Markets Bull 3X Shares

22

Emerging Markets Bear 3X Shares

22

BRIC Bull 3X Shares

24

BRIC Bear 3X Shares

24

China Bull 3X Shares

26

China Bear 3X Shares

26

India Bull 3X Shares

27

India Bear 3X Shares

27

Latin America Bull 3X Shares

28

Latin America Bear 3X Shares

28

SPECIALTY FUNDS

30

Clean Energy Bull 3X Shares

30

Clean Energy Bear 3X Shares

30

Energy Bull 3X Shares

32

Energy Bear 3X Shares

32

Financial Bull 3X Shares

33

Financial Bear 3X Shares

33

Technology Bull 3X Shares

34

Technology  Bear 3X Shares

34

Real Estate Bull 3X Shares

35

Real Estate Bear 3X Shares

35

Homebuilders Bull 3X Shares

37

Homebuilders Bear 3X Shares

37

UNDERLYING INDEX LICENSORS

38

HOW TO BUY AND SELL SHARES

40

ABOUT YOUR INVESTMENT

41

SHORT-TERM TRADING

42

CREATIONS, REDEMPTIONS AND TRANSACTION FEES

42

MANAGEMENT OF THE FUNDS

45

PORTFOLIO HOLDINGS

45

OTHER SERVICE PROVIDERS

45

DISTRIBUTIONS

45

TAXES

46

FINANCIAL HIGHLIGHTS

47

MORE INFORMATION

Back Cover

DireXion Shares ETF Trust

33 Whitehall Street, 10 th Floor, New York, New York 10004

(877) 437-9363

www.direxionshares.com


OVERVIEW OF THE DIREXION SHARES ETF TRUST

The Direxion Shares ETF Trust (“Trust”) is a registered investment company offering a number of separate exchange-traded funds (“Funds”).  Rafferty Asset Management LLC serves as the investment adviser to each Fund.  This Prospectus describes the exchange-traded funds noted below (which are sometimes referred to in this Prospectus as the “Funds”) of the Trust.


The Trust will file an application to list and trade the shares of the Funds (“Shares”) on the NYSE Arca (“Exchange”).  If the Shares are listed and trade on the Exchange, the market prices for the Shares may be different from the intraday value of the Shares disseminated by the Exchange and from their net asset value (“NAV”).  Unlike conventional mutual funds, Shares are not individually redeemable securities.  Rather, each Fund issues and redeems Shares on a continuous basis at NAV only in blocks of 100,000 Shares called “Creation Units.”  Creation Units of the Bull Funds are issued and redeemed principally in-kind for securities included in the relevant underlying index and an amount of cash.  Creation Units of the Bear Funds are purchased and redeemed for cash.


Shares may only be purchased from or redeemed with the Funds in Creation Units.  As a result, retail investors generally will not be able to purchase or redeem Shares directly from or with the Funds.  Most retail investors will purchase or sell Shares in the secondary market with the assistance of a broker.  Thus, some of the information contained in this prospectus, such as information about purchasing and redeeming Shares from or with a Fund and all references to the transaction fee imposed on purchases and redemptions, is not relevant to retail investors.


The Funds described in this Prospectus seek to provide daily investment results, before fees and expenses, that correspond to the performance of a particular index or benchmark.  The Funds with the word “Bull” in their name (collectively, the “Bull Funds”) attempt to provide investment results that correlate positively to the return of an index or benchmark, meaning the Bull Funds attempt to move in the same direction as the target index or benchmark.  The Funds with the word “Bear” in their name (collectively, the “Bear Funds”) attempt to provide investment results that correlate negatively to the return of an index or benchmark, meaning that the Bear Funds attempt to move in the opposite or inverse direction of the target index or benchmark.  The correlations sought by the Bull Funds and the Bear Funds are generally a multiple of the returns of the target index or benchmark.  The benchmark for the  Large Cap Bull 3X Shares is 300% of the daily price performance of the Russell 1000 ® Index, while the benchmark for the Large Cap Bear 3X Shares is 300% of the inverse, or opposite, of the daily price performance of the Russell 1000 ® Index.  If, on a given day, the Russell 1000 ® Index gains 1%, the Large Cap   Bull 3X Shares is designed to gain approximately 3% (which is equal to 300% of 1%), while the Large Cap Bear 3X Shares is designed to lose approximately 3%.  Conversely, if the Russell 1000 ® Index loses 1% on a given day, the Large Cap  Bull 3X Shares is designed to lose approximately 3%, while the Large Cap  Bear 3X Shares is designed to gain approximately 3%.


Fund

Index or Benchmark

Daily Target

Total Market Bull 3X Shares

 Russell 3000 ® Index

300%

Total Market Bear 3X Shares

-300%

Large Cap Bull 3X Shares

Russell 1000 ® Index

300%

Large Cap  Bear 3X Shares

-300%

Mid Cap Bull 3X Shares

Russell Midcap ® Index

300%

Mid Cap Bear 3X Shares

-300%

Small Cap Bull 3X Shares

Russell 2000 ® Index

300%

Small Cap Bear 3X Shares

-300%

Developed Markets Bull 3X Shares

MSCI EAFE ® Index

300%

Developed Markets Bear 3X Shares

-300%

Emerging Markets Bull 3X Shares

MSCI Emerging Markets Index SM

300%

Emerging Markets Bear 3X Shares

-300%

BRIC Bull 3X Shares

BNY BRIC Select ADR Index ®

300%

BRIC Bear 3X Shares

-300%

China Bull 3X Shares

BNY China Select ADR Index ®  

300%

China Bear 3X Shares

-300%

India Bull 3X Shares

Indus India Index

300%

India Bear 3X Shares

-300%

Latin America Bull 3X Shares

S&P Latin America 40 Index

300%

Latin America Bear 3X Shares

-300%

Clean Energy Bull 3X Shares

S&P Global Clean Energy Index TM

300%

Clean Energy Bear 3X Shares

-300%

Energy Bull 3X Shares

Russell 1000 ® Energy  Index

300%

Energy Bear 3X Shares

-300%

Financial Bull 3X Shares

Russell 1000 ® Financial Services Index

300%

Financial Bear 3X Shares

-300%

Technology Bull 3X Shares

Russell 1000 ® Technology Index

300%

Technology Bear 3X Shares

-300%

Real Estate Bull 3X Shares

Dow Jones Wilshire Real Estate Index SM

300%

Real Estate Bear 3X Shares

-300%

Homebuilders Bull 3X Shares

S&P Homebuilding Select Industry Index SM

300%

Homebuilders Bear 3X Shares

-300%



Changes in Investment Objective.  Each Fund’s investment objective is not a fundamental policy and may be changed by the Fund’s Board of Trustees without shareholder approval.

INVESTMENT TECHNIQUES AND POLICIES


Rafferty Asset Management, LLC (“Rafferty” or “Adviser”), the investment adviser to the Funds, uses a number of investment techniques in an effort to achieve the stated goal for each Fund.  For the Bull Funds, Rafferty attempts to magnify the returns of each Bull Fund’s index or benchmark for the relevant period. The Bear Funds are managed to provide returns inverse (or opposite) by a defined percentage to the return of each Bear Fund’s index or benchmark for the relevant period.  Rafferty creates net “long” positions for the Bull Funds and net “short” positions for the Bear Funds.  (Rafferty may create short positions in the Bull Funds and long positions in the Bear Funds even though the net exposure in the Bull Funds will be long and the net exposure in the Bear Funds will be short.)  Long positions move in the same direction as their index or benchmark, advancing when the index or benchmark advances and declining when the index or benchmark declines.  Short positions move in the opposite direction of the index or benchmark, advancing when the index or benchmark declines and declining when the index or benchmark advances.  Rafferty generally does not use fundamental securities analysis to accomplish such correlation.  Rather, Rafferty primarily uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs.  As a consequence, if a Fund is performing as designed, the return of the index or benchmark will dictate the return for that Fund.  Each Fund pursues its investment objective regardless of market conditions and does not take defensive positions.


A Fund generally will hold a representative sample of the securities in its benchmark index.  The sampling of securities that is held by a Fund is intended to maintain high correlation with, and similar aggregate characteristics (e.g., market capitalization and industry weightings) to, the benchmark index.  A Fund also may invest in securities that are not included in the index or may overweight or underweight certain components of the index.  


A Fund’s assets may be concentrated in an industry or group of industries to the extent that the Fund’s benchmark index concentrates in a particular industry or group of industries.  In addition, each Fund is non-diversified, which means that it may invest in the securities of a limited number of issuers.




Each Bull Fund and Bear Fund has a clearly articulated goal which requires the Fund to seek economic exposure in excess of its net assets.  To meet its objectives, each Fund invests in some combination of financial instruments so that it generates economic exposure consistent with the Fund’s investment objective.  


The impact of market movements determines whether a portfolio needs to be re-positioned.  If the target index has risen on a given day, a Bull Fund’s net assets should rise, meaning the Fund’s exposure may need to be increased.  Conversely, if the target index has fallen on a given day, a Bull Fund’s net assets should fall, meaning the Fund’s exposure may need to be reduced.  If the target index has risen on a given day, a Bear Fund’s net assets should fall, meaning the Fund’s exposure may need to be reduced.  If the target index has fallen on a given day, a Bear Fund’s net assets should rise, meaning the Fund’s exposure may need to be increased.  A Fund’s portfolio may also need to be changed to reflect changes in the composition of an index and corporate actions like stock splits and spin-offs. Rafferty increases the Fund’s exposure when its assets rise and reduces the Fund’s exposure when its assets fall.  To determine which instruments to purchase or sell, Rafferty identifies instruments it believes exhibit price anomalies among the relevant group of financial instruments to identify the more advantageous instrument.


Each Bull and Bear Fund is designed to provide daily investment returns, before fees and expenses, that are a multiple of the returns of its index or benchmark for the stated period.  While Rafferty attempts to minimize any “tracking error” (the statistical measure of the difference between the investment results of a Fund and the performance of its index or benchmark), certain factors will tend to cause a Fund’s investment results to vary from the stated objective.  A Fund may have difficulty in achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs and/or a temporary lack of liquidity in the markets for the securities held by the Fund.


 

Each Bull and Bear Fund invests significantly in swap agreements, forward contracts, reverse repurchase agreements, options, including futures contracts, options on futures contracts and financial instruments such as options on securities and stock indices options, and caps, floors and collars.  Rafferty uses these types of investments to produce economically “leveraged” investment results.  Leveraging allows Rafferty to generate a greater positive or negative return than what would be generated on the invested capital without leverage, thus changing small market movements into larger changes in the value of the investments of a Fund.  


Seeking daily leveraged investment results provides potential for greater gains and losses relative to benchmark performance.  For instance, the Large Cap Bull 3X Shares seeks to provide, before fees and expenses, 300% of the daily return of the Russell 1000 ® Index.  If the Russell 1000 ® Index gains 2% on a given day, the Large Cap Bull 3X Shares would be expected to gain about 6%.  Conversely, if the Russell 1000 ® Index declines 2% on a given day, the Large Cap Bull 3X Shares would be expected to about lose 6%.


The Projected Return of a Bull Fund.   A Bull Fund seeks to provide a daily return that is a multiple of the daily return of a target index or benchmark.  Doing so requires the use of leveraged investment techniques, which necessarily incur financing charges.  For instance, the Large Cap  Bull 3X Shares seeks exposure to its benchmark in an amount equal to 300% of its assets, meaning it uses leveraged investment techniques to seek exposure to the Russell 1000 ® Index in an amount equal to 300% of its net assets.  In light of the financing charges and a Bull Fund’s operating expenses, the expected return of a Bull Fund is equal to the gross expected return, which is the daily benchmark return multiplied by the Bull Fund’s target, minus (i) financing charges incurred by the portfolio and (ii) daily operating expenses.  For instance, if the Russell 1000 ® Index returns 2% on a given day, the gross expected return of the Large Cap Bull 3X Shares would be 6%, but the net expected return, which factors in the cost of financing the portfolio and the impact of operating expenses, would be lower.  


The Projected Return of a Bear Fund.   A Bear Fund seeks to provide a daily return which is a multiple of the inverse (or opposite) of the daily return of a target index or benchmark.  To create the necessary exposure, a Bear Fund engages in short selling – borrowing and selling securities it does not own.  The money that a Bear Fund receives from short sales – the short sale proceeds – is an asset of the Bear Fund that can generate income to help offset the Bear Fund’s operating expenses.  If the Russell 1000 ® Index declines 2% on a given day, the gross expected return for the Large Cap Bear 3X Shares would be 6% and the net expected return, which factors in interest income and the impact of operating expenses, which will be slightly higher under normal market conditions.


The Projected Returns of Leveraged Index Funds for Periods Longer Than the Target Period.    The Funds seek daily leveraged investment results which should not be equated with seeking a leveraged goal for longer than a day.  For instance, if the Russell 1000 ® Index gains 10% during a year, the Large Cap Bull 3X Shares should not be expected to provide a return of 30% for the year even if it meets its daily target throughout the year.  This is true because of the financing charges noted above but also because the pursuit of daily goals may result in daily leveraged compounding, which means that the return of an index over a period of time greater than one day multiplied by a Fund’s daily target or inverse daily target ( e.g. , 300% or -300%) will not generally equal a Fund’s performance over that same period. The following example illustrates this point




Mary is considering investments in two Funds, Fund A and Fund B.  Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index.  Fund B is a leveraged ETF and seeks daily investment results (before fees and expenses) that correspond to 300% of the daily performance of the XYZ index.


On Day 1, the XYZ index increases in value from $100 to $105, a gain of 5%.  On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.77%.  In the aggregate, the XYZ index has not moved.


An investment in Fund A would be expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value.  The following example assumes a $100 investment in Fund A when the index is also valued at $100:


Day

Index Value

Index Performance

Value of Investment

 

$100.00


$100.00

1

$105.00

5.00%

$105.00

2

$100.00

-4.76%

$100.00

 

The same $100 investment in Fund B, however, would be expected to gain 15% on Day 1 (300% of 5%) but decline 14.28% on Day 2.


Day

Index Performance

300% of Index Performance

Value of Investment

 


 

$100.00

1

5.00%

15.0%

$115.00

2

-4.76%

-14.28%

$98.57


Although the percentage decline is smaller on Day 2 than the percentage gain on Day 1, the loss is applied to a higher principal amount so the investment in Fund B has a loss even when the index value has not declined.  (These calculations do not include the charges for expense ratio and the financing charges.)


As you can see, an investment in Fund B has higher rewards and risks due to the effects of leverage and compounding.  


 



PRINCIPAL RISKS


An investment in any of the Funds entails risks.  The Funds could lose money, or their performance could trail that of other investment alternatives.  Rafferty cannot guarantee that any of the Funds will achieve their objective.  It is important that investors closely review and understand these risks before making an investment in the Funds.  The table below provides the principal risks of investing in the Funds.  Following the table, each risk is explained.




 

Adverse
Market
Conditions
Risk

Adviser’s
Invest-
ment
Strategy
Risk

Aggres-
sive
Invest
ment
Tech-
niques
Risk

Concen-
tration
Risk

Corre-
lation
Risk

Counter-
party
Risk

Credit
Risk and
Lower-
Quality
Debt
Securities
Risk

Currency
Exchange
Rate Risk

Deposi-
tary
Receipt
Risk

Emerging
Markets
Risk

Energy
Securities
Risk

Equity
Securities
Risk

Financial
Services
Companies
Risk

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Market
Bull 3X
Shares

X

X

X

 

X

X

X

 

 

 

 

X

 

Total Market
Bear 3X
Shares

X

X

X

 

 

X

X

 

 

 

 

X

 

Large Cap
Bull 3X
Shares

X

X

X

 

X

X

X

 

 

 

 

X

 

Large Cap
Bear 3X
Shares

X

X

X

 

 

X

X

 

 

 

 

X

 

Mid Cap
Bull 3X
Shares

X

X

X

 

X

X

X

 

 

 

 

X

 

Mid Cap
Bear 3X
Shares

X

X

X

 

 

X

X

 

 

 

 

X

 

Small Cap
Bull 3X
Shares

X

X

X

 

X

X

X

 

 

 

 

X

 

Small Cap
Bear 3X
Shares

X

X

X

 

 

X

X

 

 

 

 

X

 

Developed
Markets Bull
3X Shares

X

X

X

 

X

X

X

X

X

 

 

X

 

Developed
Markets Bear
3X Shares

X

X

X

 

 

X

X

X

 

 

 

X

 

Emerging
Markets Bull
3X Shares

X

X

X

 

X

X

X

X

X

X

 

X

 

Emerging
Market Bear 3X Shares

X

X

X

 

 

X

X

X

 

X

 

X

 

BRIC Bull
3X Shares

X

X

X

 

X

X

X

X

X

X

 

X

 

BRIC Bear
3X Shares

X

X

X

 

 

X

X

X

 

X

 

X

 

China Bull
3X Shares

X

X

X

 

X

X

X

X

X

X

 

X

 

China Bear
3X Shares

X

X

X

 

 

X

X

X

 

X

 

X

 

India Bull
3X Shares

X

X

X

 

X

X

X

X

X

X

 

X

 

India Bear
3X Shares

X

X

X

 

 

X

X

X

 

X

 

X

 

Latin America
Bull 3X
Shares

X

X

X

 

X

X

X

X

X

X

 

X

 

Latin America
Bear 3X
Shares

X

X

X

 

 

X

X

X

 

X

 

X

 

Clean Energy
Bull 3X
Shares

X

X

X

X

X

X

X

 

 

 

X

X

 

Clean Energy
Bear 3X
Shares

X

X

X

X

 

X

X

 

 

 

X

X

 

Energy Bull
3X Shares

X

X

X

X

X

X

X

 

 

 

X

 

X

 

Energy Bear
3X Shares

X

X

X

X

 

X

X

 

 

 

X

X

 

Financial Bull
3X Shares

X

X

X

X

X

X

X

 

 

 

 

X

X

Financial Bear
3X Shares

X

X

X

X

 

X

X

 

 

 

 

X

X

Techno-

logy
Bull 3X
Shares

X

X

X

X

X

X

X

 

 

 

 

X

 

Techno-
logy
Bear 3X
Shares

X

X

X

 

 

X

X

 

 

 

 

X

 

Real Estate
Bull 3X
Shares

X

X

X

 

X

X

X

 

 

 

 

X

 

Real Estate
Bear 3X
Shares

X

X

X

X

 

X

X

 

 

 

 

X

 

Home-
builders
Bull 3X
Shares

X

X

X

X

X

X

X

 

 

 

 

X

 

Home-
builders
Bear 3X
Shares

X

X

X

X

 

X

X

 

 

 

 

X

 


 

 

Foreign
Securi-
ties
Risk

Geogra-
phic
Concen-
tration
Risk

Home-
building
Industry
Risk

Interest
Rate
Risk

Inverse Correla-
tion
Risk

Leverage Risk

Market
Risk

Non-
Diversi-
fication
Risk

Real
Estate
Invest-
ment
Risk

Shorting
Risk

Small
and Mid
Capitali-
zation
Company Risk

Techno-
logy
Securities Risk

Tracking
Error
Risk

Valua-
tion
Time
Risk

Special
Risks of
Exchange-Traded Funds

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Market Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

 

X

 

X

Total Market Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

 

X

 

X

Large Cap Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

 

X

 

X

Large Cap Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

 

X

 

X

Mid Cap Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

X

 

X

 

X

Mid Cap Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

X

 

X

 

X

Small Cap Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

X

 

X

 

X

Small Cap Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

X

 

X

 

X

Developed Markets Bull 3X Shares

X

 

 

X

 

X

X

X

 

 

 

 

X

X

X

Developed Markets Bear 3X Shares

X

 

 

X

X

X

X

X

 

X

 

 

X

X

X

Emerging Markets Bull 3X Shares

X

 

 

X

 

X

X

X

 

 

 

 

X

X

X

Emerging Market Bear 3X Shares

X

 

 

X

X

X

X

X

 

X

 

 

X

X

X

BRIC Bull 3X Shares

X

X

 

X

 

X

X

X

 

 

 

 

X

X

X

BRIC Bear 3X Shares

X

X

 

X

X

X

X

X

 

X

 

 

X

X

X

China Bull 3X Shares

X

X

 

X

 

X

X

X

 

 

 

 

X

X

X

China Bear 3X Shares

X

X

 

X

X

X

X

X

 

X

 

 

X

X

X

India Bull 3X Shares

X

X

 

X

 

X

X

X

 

 

 

 

X

X

X

India Bear 3X Shares

X

X

 

X

X

X

X

X

 

X

 

 

X

X

X

Latin America Bull 3X Shares

X

X

 

X

 

X

X

X

 

 

 

X

X

X

Latin America Bear 3X Shares

X

X

 

X

X

X

X

X

 

X

 

 

X

X

X

Clean Energy Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

 

X

 

X

Clean Energy Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

 

X

 

X

Energy Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

 

X

 

X

Energy Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

 

X

 

X

Financial Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

 

X

 

X

Financial Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

 

X

 

X

Technology Bull 3X Shares

 

 

 

X

 

X

X

X

 

 

 

X

X

 

X

Technology Bear 3X Shares

 

 

 

X

X

X

X

X

 

X

 

X

X

 

X

Real Estate Bull 3X Shares

 

 

 

X

 

X

X

X

X

 

 

 

X

 

X

Real Estate Bear 3X Shares

 

 

 

X

X

X

X

X

X

X

 

 

X

 

X

Homebuilders Bull 3X  Shares

 

 

X

X

 

X

X

X

X

 

 

 

X

 

X

Homebuilders Bear 3X Shares

 

 

X

X

X

X

X

X

X

X

 

 

 

X

 

 

X













Adverse Market Conditions Risk

The performance of each Fund is designed to correlate to the performance of an index or benchmark.  As a consequence, a Fund’s performance will suffer during conditions which are adverse to the Fund’s investment goals.  For example, if the target index has risen on a given day, a Bear Fund’s performance should fall.  Conversely, if the target index has fallen on a given day, a Bull Fund’s performance also should fall.


Adviser’s Investment Strategy Risk

While the Adviser seeks to take advantage of investment opportunities for Funds that will maximize their investment returns, there is no guarantee that such opportunities will ultimately benefit the Funds.  The Adviser will aggressively change the Funds’ portfolios in response to market conditions that are unpredictable and may expose the Funds to greater market risk than other mutual funds.  There is no assurance that the Adviser’s investment strategy will enable the Funds to achieve their investment objectives.


Aggressive Investment Techniques Risk

The Funds use investment techniques, including investments in derivatives and other instruments that attempt to track the price movement of underlying securities or indices, which may be considered aggressive.  The derivative instruments that the Funds may invest in and how Rafferty uses derivatives to obtain leveraged investment results are described in “Investment Techniques and Policies.”  Investments in derivatives in general are subject to market risks that may cause their prices to fluctuate over time.  In addition, such instruments may experience potentially dramatic price changes (losses) and imperfect correlations between the price of the contract and the underlying security or index which will increase the volatility of the Funds and may involve a small investment of cash relative to the magnitude of the risk assumed.  The use of derivatives may expose the Funds to additional risks that they would not be subject to if they invested directly in the securities underlying those derivatives.  The use of derivatives may result in larger losses or smaller gains than otherwise would be the case.


Concentration Risk

Concentration risk results from focusing a Fund’s investments in a specific industry or group of industries.  The performance of a Fund that focuses its investments in a particular industry or sector may be more volatile than a fund that does not concentrate its investments.  A Fund that concentrates its investments in an industry or group of industries also may be more susceptible to any single economic market, political or regulatory occurrence affecting that industry or group of industries.  




Correlation Risk

A number of factors may affect a Fund’s ability to achieve a high degree of correlation with its benchmark, and there can be no guarantee that a Fund will achieve a high degree of correlation.  A failure to achieve a high degree of correlation may prevent a Fund from achieving its investment objective.  A number of factors may adversely affect a Fund’s correlation with its benchmark, including fees, expenses, transaction costs, costs associated with the use of leveraged investment techniques, income items and accounting standards.  A Fund may not have investment exposure to all securities in its underlying benchmark index, or its weighting of investment exposure to such stocks or industries may be different from that of the index.  In addition, a Fund may invest in securities or financial instruments not included in the index underlying its benchmark.  A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to its benchmark.  Activities surrounding annual index reconstitutions and other index rebalancing or reconstitution events may hinder the Funds’ ability to meet their daily investment objective on that day.  Each Fund seeks to rebalance its portfolio daily to keep leverage consistent with each Fund’s daily investment objective.


Certain Funds are “leveraged” funds in the sense that they have investment objectives to match a multiple of the performance of an index on a given day.  These Funds are subject to all of the correlation risks described above.  In addition, there is a special form of correlation risk that derives from these Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than or less than the index performance times the stated multiple in the fund objective, before accounting for fees and fund expenses.


Each of the three graphs below shows a simulated hypothetical one year performance of an index compared with the performance of a Fund that perfectly achieves its investment objective of three times (300%) the daily index returns.  The graphs demonstrate that, for periods greater than one day, a leveraged Fund is likely to underperform or over-perform (but not match) the index performance times the stated multiple in the Fund objective.




To isolate the impact of leverage, these graphs assume a) no dividends paid by the companies included on the index; b) no fund expenses; and c) borrowing/lending rates (to obtain required leverage) of zero percent.  If fund expenses were included, the Fund’s performance would be lower than that shown.  Each of the graphs also assumes a volatility rate of 15%, which is approximate for a major domestic index. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index. Other indexes to which the Funds are benchmarked have different historical volatility rates; certain of the Funds’ historical volatility rates are substantially in excess of 15%.




Flat Market

[PROSPECTUS002.GIF]


Upward Trending Market

 

[PROSPECTUS004.GIF]


 

Downward Trending Market

[PROSPECTUS006.GIF]




Counterparty Risk

The Funds may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure to a particular group of securities or asset class without actually purchasing those securities or investments, or to hedge a position.  Such financial instruments include, but are not limited to, total return, index, interest rate, and credit default swap agreements, and structured notes.  The Funds will use short-term counterparty agreements to exchange the returns (or differentials in rates of return) earned or realized in particular predetermined investments or instruments.  The Funds will not enter into any agreement involving a counterparty unless the Adviser believes that the other party to the transaction is creditworthy.  The use of swap agreements and structured notes involves risks that are different from those associated with ordinary portfolio securities transactions.  For example, the Funds bear the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.  In addition, the Funds may enter into swap agreements with a limited number of counterparties, and certain of the Funds may invest in commodity-linked structured notes issued by a limited number of issuers that will act as counterparties, which may increase the Fund’s exposure to counterparty credit risk.  Swap agreements also may be considered to be illiquid.


Credit Risk and Lower-Quality Debt Securities Risk

A Fund could lose money if the issuer of a debt security is unable to meet its financial obligations or goes bankrupt.  A Fund could lose money if the issuer of a debt security in which it has a short position is upgraded or generally improves its standing.  Credit risk usually applies to most debt securities, but generally is not a factor for U.S. government obligations.  


Currency Exchange Rate Risk

Changes in foreign currency exchange rates will affect the value of what a Fund owns and the Fund’s share price.  Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars.  Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency.  Currency markets generally are not as regulated as securities markets.


Depositary Receipt Risk

To the extent a Fund invests in stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers.  American Depositary Receipts (“ADRs”) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation.  European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement.  Global Depositary Receipts (“GDRs”) are receipts issued throughout the world that evidence a similar arrangement.  Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets.  GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.  Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.


Depositary receipts may be purchased through “sponsored” or “unsponsored” facilities.  A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the depositary security.  Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.


Fund investments in depositary receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.

Emerging Markets Risk

Indirect investments in emerging markets instruments involve greater risks than investing in foreign instruments in general.  Risks of investing in emerging market countries include political or social upheaval, nationalization of businesses, restrictions on foreign ownership and prohibitions on the repatriation of assets.   There may also be risks from an economy’s dependence on revenues from particular commodities or industries.  In addition, currency transfer restrictions, limited potential buyers for such instruments, delays and disruption in settlement procedures and illiquidity or low volumes of transactions may make exits difficult or impossible at times.


Energy Securities Risk

The Energy Bull 3X Shares and the Energy Bear 3X Shares (the “Energy Funds”) will concentrate their investments in securities issued by, and/or have exposure to, companies that engage in energy-related businesses, such as oil companies involved in the exploration, production, servicing, drilling and refining processes, and companies primarily involved in the production and mining of coal and other fuels used in the generation of consumable energy.  Also included are gas distribution, gas pipeline and related companies.  As a result, the Energy Funds are subject to legislative or regulatory changes, adverse market conditions and/or increased competition affecting the energy sector.  The prices of the securities of energy and energy services companies may fluctuate widely due to the supply and demand for both their specific products or services and energy products in general.  The prices of energy product securities may be affected by changes in value and dividend yield, which depend largely on the price and supply of energy fuels, international political events relating to oil producing countries, energy conservation, the success of exploration projects, and tax and other governmental regulatory policies.  


The Clean Energy Bull 3X Shares and the Clean Energy Beat 3X Shares (the “Clean Energy Funds”) will concentrate their investments in securities issued by, and/or have exposure to, companies engaged in the business of cleaner energy and conservation.  The clean energy industry can be significantly affected by obsolescence of existing technology, short product cycles, falling prices and profits, competition from new market entrants and general economic conditions.  Further, the clean energy industry can be significantly affected by intense competition and legislation resulting in more strict government regulations and enforcement policies and specific expenditures for cleanup efforts, and can be subject to risks associated with hazardous materials.  


The clean energy industry can be significantly affected by fluctuations in energy prices and supply and demand of alternative energy fuels, energy conservation, the success of exploration projects and tax and other government regulations.  The industry also can be significantly affected by the supply and demand for specific products or services, the supply of and demand for oil and gas, the price of oil and gas, production spending, government regulation, world events and economic conditions.  


Shares in the companies involved in the clean energy industry have been significantly more volatile than shares of companies operating in other more established industries.  Certain valuation methods currently used to value companies involved in the alternative power and power technology sectors, particularly those companies that have not yet traded profitably, have not been in widespread use for a significant period of time.  As a result, the use of these valuation methods may serve to increase further the volatility of certain alternative power and power technology company share prices.


The clean energy industry sector is relatively nascent and under-researched in comparison to more established and mature sectors, and should therefore be regarded as having greater investment risk.  Changes in U.S., European and other governments’ policies towards alternative power and power technology also may have an adverse effect on the Clean Energy Funds’ performance.


The Clean Energy Funds may invest in the shares of companies with a limited operating history, some of which may never have traded profitably.  Investment in young companies with a short operating history is generally riskier than investment in companies with a longer operating history.  


Equity Securities Risk

Investments in publicly issued equity securities, including common stocks, in general are subject to market risks that may cause their prices to fluctuate over time.  Fluctuations in the value of equity securities in which a Fund invests will cause the net asset value of the Fund to fluctuate.


Financial Services Companies Risk

The Financial Bull 3X Shares and the Financial Bear 3X Shares (the “Financial Funds”) will concentrate their investments in securities issued by, and/or have exposure to, financial services companies.  As a result, the Financial Funds are subject to legislative or regulatory changes, adverse market conditions and/or increased competition affecting the financial services companies.  Financial services companies are subject to extensive governmental regulation, which may limit both the amounts and types of loans and other financial commitments they can make, and the rates and fees that they can charge.  Profitability is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change.  Credit losses resulting from financial difficulties of borrowers also can  negatively impact the sector.  


Foreign Securities Risk

Indirectly investing in foreign instruments may involve greater risks than investing in domestic instruments.  As a result, a Fund’s returns and net asset values may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries.  The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.  




Geographic Concentration Risk

Investments in a particular country or geographic region may be particularly susceptible to political, diplomatic or economic conditions and regulatory requirements.  As a result, Funds that focus their investments in a particular country or geographic region may be more volatile than a more geographically diversified fund.




High Portfolio Turnover Risk

Frequent trading could increase the rate of creations and redemptions of Fund Shares and the Funds’ portfolio turnover, which could involve correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups/mark-downs and adverse tax consequences to a Fund’s shareholders.




Unlike traditional mutual funds, however, each Fund issues and redeems its Shares at NAV per share in Creation Units plus applicable transaction fees and each Fund’s Shares may be purchased and sold on the Exchange at prevailing market prices.  Given this structure, the risks of frequent trading may be less than in the case of a traditional mutual fund.  Nevertheless, to the extent that purchases and redemptions directly with the Funds are effected in cash rather than through a combination or redemption of portfolio securities, frequent purchases and redemptions could still increase the rate of portfolio turn-over.  


The costs associated with the Funds’ portfolio turnover will have a negative impact on longer-term investors.  Although the Funds reserve the right to reject any purchase orders or suspend the offering of Fund Shares, the Funds do not currently impose any trading restrictions on Fund shareholders nor actively monitor for trading abuses.




Homebuilding Industry Risk

The Homebuilders Funds will concentrate their investments in securities issued by, and/or have exposure to, companies in the homebuilding industry.  Homebuilding companies can be significantly affected by the national, regional and local real estate markets.  This industry is also sensitive to interest rate fluctuations which can cause changes in the availability of mortgage capital and directly affect the purchasing power of potential homebuyers.  The building industry can be significantly affected by changes in government spending, consumer confidence, demographic patterns and the level of new and existing home sales.  


Interest Rate Risk

Debt securities have varying levels of sensitivity to changes in interest rates.  In general, the price of a debt security may fall when interest rates rise and may rise when interest rates fall.  Securities with longer maturities and mortgage securities can be more sensitive to interest rate changes.  In other words, the longer the maturity of a security, the greater the impact a change in interest rates could have on the security’s price.  In addition, short-term and long-term interest rates do not necessarily move in the same amount or the same direction.  Short-term securities tend to react to changes in short-term interest rates, and long-term securities tend to react to changes in long-term interest rates. The impact of an interest rate changes may be significant for other asset classes as well, whether because of the impact of interest rates on economic activity or because of changes in the relative attractiveness of asset classes due to changes in interest rates.  For instance, higher interest rates may make investments in debt securities more attractive, thus reducing investments in equities.


Inverse Correlation Risk

Each Bear Fund is negatively correlated to its index or benchmark and should lose money when its index or benchmark rises – a result that is the opposite from traditional mutual funds.  Because each Bear Fund seeks daily returns inverse by a defined percentage to its index or benchmark, the difference between a Bear Fund’s daily return and the price performance of its index or benchmark may be negatively compounded during periods in which the markets decline.  


Leverage Risk

Use of leverage can magnify the effects of changes in the value of the Funds and make them more volatile.  The leveraged investment techniques that the Funds employ should cause investors in the Funds to lose more money in adverse environments.  The Funds’ use of leverage means that they will incur financing charges which will affect the performance of the Funds.  As interest rates rise, the cost of executing the Funds’ investment strategies will rise as well.


Market Risk

A Fund is subject to market risks that can affect the value of its shares.  These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.  A Bull Fund typically would lose value on a day when its underlying index declines.  A Bear Fund typically would lose value on a day when its underlying index increases.


Non-Diversification Risk

Each of the Funds is non-diversified.  A non-diversified fund invests a high percentage of its assets in a limited number of securities.  A non-diversified fund’s net asset values and total returns may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.


Real Estate Investment Risk

The Real Estate Bull 3X Shares and Real Estate Bear 3X Shares will concentrate their investments in securities issued by, and/or have exposure to, commercial and residential real estate companies.  Real estate securities are subject to risks similar to those associated with direct ownership of real estate, including changes in local and general economic conditions, vacancy rates, interest rates, zoning laws, rental income, property taxes, operating expenses and losses from casualty or condemnation.  An investment in a real estate investment trust (“REIT”) is subject to additional risks, including poor performance by the manager of the REIT, adverse tax consequences, and limited diversification resulting from being invested in a limited number or type of properties or a narrow geographic area.


Shorting Risk

A Fund may, from time to time, engage in short sales designed to earn the Fund a profit from the decline in the price of particular securities, baskets of securities or indices.  Short sales are transactions in which a Fund borrows securities from a broker and sells the borrowed securities.  The Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement.  If the market price of the underlying security goes down between the time the Fund sells the security and buys it back, the Fund will realize a gain on the transaction.  Conversely, if the underlying security goes up in price during the period, the Fund will realize a loss on the transaction.  Any such loss is increased by the amount of premium or interest the Fund must pay to the lender of the security.  Likewise, any gain will be decreased by the amount of premium or interest the Fund must pay to the lender of the security.  The Fund’s investment performance may also suffer if the Fund is required to close out a short position earlier than it had intended.  This would occur if the securities lender required the Fund to deliver the securities the Fund borrowed at the commencement of the short sale and the Fund was unable to borrow the securities from another securities lender or otherwise obtain the security by other means.  In addition, a Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Fund’s open short positions.  As the holder of a short position, a Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Fund that could cause the Fund to lose money on the short sale and may adversely affect its performance.


Small and Mid Capitalization Company Risk

Investing in the securities of small and mid capitalization companies involves greater risks and the possibility of greater price volatility than investing in more-established, larger capitalization companies.  Smaller companies may have limited operating history, product lines, and financial resources, and the securities of these companies may lack sufficient market liquidity.  Smaller companies often have narrower markets and more limited managerial and financial resources than larger, more established companies .


Technology Securities Risk

The Tech Bull 3X Shares and the Tech Bear 3X Shares will concentrate their investments in securities issued by, and/or have exposure to, companies that serve the electronics and computer industries or that manufacture products based on the latest applied science.  The market prices of technology-related securities tend to exhibit a greater degree of market risk and sharp price fluctuations than other types of securities.  These securities may fall in and out of favor with investors rapidly, which may cause sudden selling and dramatically lower market prices.  Technology securities also may be affected adversely by changes in technology, consumer and business purchasing patterns, government regulation and/or obsolete products or services.  In addition, a rising interest rate environment tends to negatively affect technology companies.  Technology companies having high market valuations may appear less attractive to investors, which may cause sharp decreases in their market prices.  Further, those technology companies seeking to finance expansion would have increased borrowing costs, which may negatively impact earnings.


Tracking Error Risk

Several factors may affect a Fund’s ability to achieve its daily target.  A Fund may have difficulty achieving its daily target due to fees and expenses, high portfolio turnover, transaction costs, and/or a temporary lack of liquidity in the markets for the securities held by a Fund.  A failure to achieve a daily target may cause a Fund to provide returns for a longer period that are worse than expected.  In addition, a Fund that meets its daily target over a period of time may not necessarily produce the returns that might be expected in light of the returns of its index or benchmark for that period.  Differences may result from the compounding effect of daily market fluctuations, the use of leverage and the Bear Funds’ inverse correlation.  


Valuation Time Risk

The Funds value their portfolio as of the close of regular trading on the New York Stock Exchange (“NYSE”) (generally 4:00 PM Eastern time).  In some cases, foreign market indices close before the NYSE opens or may not be open for business on the same calendar days as the Funds.  As a result, the daily performance of a Fund that tracks a foreign market index can vary from the performance of that index.




Special Risks of Exchange-Traded Funds


Not Individually Redeemable .   Shares are not individually redeemable and may be redeemed by a Fund at net asset value (“NAV”) only in large blocks known as Creation Units.  You may incur brokerage costs purchasing enough Shares to constitute a Creation Unit.  


Trading Issues .  Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility or other reasons.  There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to time.




Market Price Variance Risk .  Individual Shares of a Fund will be listed for trading on the Exchange and can be bought and sold in the secondary market at market prices.  The market prices of Shares will fluctuate in response to changes in NAV and supply and demand for Shares.  The Adviser can not predict whether Shares will trade above, below or at their NAV.  Differences between secondary market prices and NAV for Shares may be due largely to supply and demand forces in the secondary market, which forces may not be the same as those influencing prices for securities or instruments held by a Fund at a particular time.  Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained.  There may, however, be times when the market price and the NAV vary significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares.  The market price of Shares, like the price of any exchange-traded security, includes a “bid-ask spread” charged by the exchange specialists, market makers or other participants that trade the particular security.  In times of severe market disruption, the bid-ask spread often increases significantly.  This means that Shares may trade at a  discount to NAV and the discount is likely to be greatest when the price of Shares is falling fastest, which may be the time that you most want to sell your Shares  A Fund’s investment results are measured based upon the daily NAV of the Fund. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund.  There is no guarantee that an active secondary market will develop for shares of the Funds.  


 

A Precautionary Note to Retail Investors .  The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and broker-dealers, or its nominee will be the registered owner of all outstanding Shares of each Fund of the Trust.  Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares.  THE TRUST WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP.  Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information.  Your broker also will be responsible for ensuring that you receive shareholder reports and other communications from the Fund whose Shares you own.  Typically, you will receive other services (e.g., average cost information) only if your broker offers these services.


A Precautionary Note to Purchasers of Creation Units .  You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund.  Because new Shares may be issued on an ongoing basis, a “distribution” of Shares could be occurring at any time.  As a dealer, certain activities on your part could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended (“Securities Act”).  For example, you could be deemed a statutory underwriter if you purchase Creation Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary market demand for Shares.  Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a complete description of all the activities that could cause you to be deemed an underwriter.  Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an “unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.


A Precautionary Note to Investment Companies .  For purposes of the Investment Company Act of 1940, each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject to the restrictions of Section 12(d)(1) thereof.


The Trust and the Funds have obtained an exemptive order from the SEC allowing a registered investment company to invest in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment.  Any investment company considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.


A Precautionary Note Regarding Unusual Circumstances .  The Trust can postpone payment of redemption proceeds for any period during which (1) the NYSE is closed other than customary weekend and holiday closings, (2) trading on the NYSE is restricted, as determined by the U.S. Securities and Exchange Commission (the “SEC”), (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.






DOMESTIC EQUITY INDEX FUNDS


Total Market Bull 3X Shares

Total Market Bear 3X Shares

 



Investment Objective.  The Total Market Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 3000 ® Index (“Total Market Index”).  The Total Market Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Total Market Index.  (Collectively, the Total Market Bull 3X Shares and the Total Market Bear 3X Shares are referred to as the “Total Market Funds.”)




Principal Investment Strategy.  The Total Market Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Total Market Index.  The Fund will also invest in the following: futures contracts; options on securities, indices and futures contracts; equity caps, collars and floors; swap agreements; forward contracts; reverse repurchase agreements; and other financial instruments (collectively, “Financial Instruments”) that, in combination, provide leveraged and unleveraged exposure to the Total Market Index.  The Total Market Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Total Market Index, and the remainder in short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements (collectively, “Money Market Instruments”).  On a day-to-day basis, the Total Market Bull 3X Shares also holds Money Market Instruments.




Target Index.   The Russell 3000 ® Index measures the performance of the largest 3000 U.S. companies representing approximately 98% of the investable U.S. equity market.  The companies included in the index have an average market capitalization of $5.4 billion dollars and a median market capitalization of $1 billion as of April 30, 2008.




Performance.  The Total Market Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.




Fees and Expenses.  These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Total Market Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.


Annual Operating Expenses (2) (as a percentage of daily assets):


Total Market Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.25%

Total Annual Operating Expenses

1.00%

Expense Waiver/Reimbursement

0.05%

Net Annual Operating Expenses

0.95%


Total Market Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.27%

Total Annual Operating Expenses

1.02%

Expense Waiver/Reimbursement

0.07%

Net Annual Operating Expenses (7)

0.95%


 (1)

For the Total Market Bull 3X Shares, a fixed transaction fee of $3,500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Total Market Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Total Market Funds for Other Expenses through March 1, 2009, for the Total Market Bull 3X Shares and the Total Market Bear 3X Shares to the extent that each Total Market Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Total Market Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Total Market Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Total Market Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Total Market Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.  


Expense Example

The table below is intended to help you compare the cost of investing in the Total Market Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Total Market Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Total Market Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Total Market Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Total Market Funds operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Total Market Bull 3X Shares




1 Year

3 Years

$97

$313


Total Market Bear 3X Shares

1 Year

3 Years

$97

$318


Risks. The principal risks of investing in the Total Market Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Correlation Risk (Total Market Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.

Additional risks of investing in the Total Market Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Total Market Funds, including a description of each risk, please refer to the “Principal Risks” section above.

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

 

Investment Objective.  The Large Cap Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000 ® Index (“Large Cap Index”).  The Large Cap Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Large Cap Index.  (Collectively, the Large Cap Bull 3X Shares and the Large Cap Bear 3X Shares are referred to as the “Large Cap Funds.”)


Principal Investment Strategy.  The Large Cap Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Large Cap Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Large Cap Index.  The Large Cap Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Large Cap  Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Large Cap Bull 3X Shares also holds Money Market Instruments.


Target Index.     The Russell 1000® Index measures the performance of the large-cap segment of the U.S. equity universe. It is a subset of the Russell 3000® Index and includes approximately 1000 of the largest securities based on a combination of their market cap and current index membership. The Russell 1000 represents approximately 92% of the U.S. market and has an average market capitalization of $14.3 billion dollars and a median market capitalization of $5 billion dollars as of April 30, 2008.  


Performance.  The Large Cap Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.


Fees and Expenses.  These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Large Cap Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.


Annual Operating Expenses (2) (as a percentage of daily assets):


Large Cap Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.25%

Total Annual Operating Expenses

1.00%

Expense Waiver/Reimbursement

0.05%

Net Annual Operating Expenses (7)

0.95%


Large Cap Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.27%

Total Annual Operating Expenses

1.02%

Expense Waiver/Reimbursement

0.07%

Net Annual Operating Expenses (7)

0.95%


11)

For the Large Cap Bull 3X Shares, a fixed transaction fee of $2,500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Large Cap Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Large Cap Funds for Other Expenses through March 1, 2009, for the Large Cap Bull 3X Shares and the Large Cap Bear 3X Shares to the extent that each Large Cap Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Large Cap Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Large Cap  Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Large Cap Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Large Cap Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example



The table below is intended to help you compare the cost of investing in the Large Cap Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Large Cap 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Large Cap Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Large Cap Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Large Cap  Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Large Cap Bull 3X Shares


1 Year

3 Years

$97

$313


Large Cap Bear 3X Shares


1 Year

3 Years

$97

$318


Risks. The principal risks of investing in the Large Cap Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Correlation Risk (Large Cap Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Large Cap Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Large CapFunds, including a description of each risk, please refer to the “Principal Risks” section above.

 




Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

 



Investment Objective.  The Mid Cap Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell MidCap ® Index (the “Mid Cap Index”).  The Mid Cap Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Mid Cap Index.  (Collectively, the Mid Cap Bull 3X Shares and the Mid Cap Bear 3X Shares are referred to as the “Mid Cap Funds.”)




Principal Investment Strategy.  The Mid Cap Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Mid Cap Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Mid Cap Index.  The Mid Cap Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Mid Cap Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Mid Cap Bull 3X Shares also holds Money Market Instruments.




Target Index.    The Russell Midcap ® Index measures the performance of the mid-cap segment of the U.S. equity universe. The Russell Midcap ® Index is a subset of the Russell 1000® Index. It includes approximately 800 of the smallest securities based on a combination of their market cap and current index membership. The Russell Midcap ® Index represents approximately 31% of the total market capitalization of the Russell 1000 companies and has an average market capitalization of $5.5 billion dollars and a median market capitalization of $3.8 billion dollars as of April 30, 2008.




Performance.  The Mid Cap Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.




Fees and Expenses.  These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Mid Cap Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.


Annual Operating Expenses (2) (as a percentage of daily assets):


Mid Cap Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.27%

Total Annual Operating Expenses

1.02%

Expense Waiver/Reimbursement

0.07%

Net Annual Operating Expenses

0.95%


Mid Cap Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.30%

Total Annual Operating Expenses

1.05%

Expense Waiver/Reimbursement

0.10%

Net Annual Operating Expenses

0.95%


 12)

For the Mid Cap Bull 3X Shares, a fixed transaction fee of $2,500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Mid Cap Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Mid Cap Funds for Other Expenses through March 1, 2009, for the Mid Cap Bull 3X Shares and the Mid Cap Bear 3X Shares to the extent that each Mid Cap Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Mid Cap Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Mid Cap Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Mid Cap Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Mid Cap Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.  




Expense Example

The table below is intended to help you compare the cost of investing in the Mid Cap Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Mid Cap Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Mid Cap Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Mid Cap Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Mid Cap Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Mid Cap Bull 3X Shares




1 Year

3 Years

$97

$318


Mid Cap Bear 3X Shares


1 Year

3 Years

$97

$324


Risks. The principal risks of investing in the Mid Cap Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Correlation Risk (Mid Cap Bull 3X Shares only), Risk of Investing in Small and Mid Capitalization Companies and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Mid Cap Bear 3X Shares are Shorting Risk and inverse Correlation Risk. For more information on the risks of the Mid Cap Funds, including a description of each risk, please refer to the “Principal Risks” section above.

Small Cap Bull 3X Shares

Small Cap Bear 3X Shares


Investment Objective.  The Small Cap Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 2000 ® Index (“Small Cap Index”).  The Small Cap Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Small Cap Index.  (Collectively, the Small Cap Bull 3X Shares and the Small Cap Bear 3X Shares are referred to as the “Small Cap Funds.”)


Principal Investment Strategy.  The Small Cap Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Small Cap Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Small Cap Index.  The Small Cap Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Small Cap Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Small Cap Bull 3X Shares also holds Money Market Instruments.


Target Index.   The Russell 2000 ® Index measures the performance of the small-cap segment of the U.S. equity universe and is comprised of the smallest 2000 companies in the Russell 3000 ® Index, representing approximately 10% of the total market capitalization of that index. It includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership.  The companies included in the index have an average market capitalization of more than $700 million dollars and a median market capitalization of $500 million dollars as of April 30, 2008.


The companies included in the index have an average market capitalization of more than $700 million dollars and a median market capitalization of $500 million dollars as of April 30, 2008.


Performance.  The Small Cap Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.


Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Small Cap Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Small Cap Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.26%

Total Annual Operating Expenses

1.01%

Expense Waiver/Reimbursement

0.06%

Net Annual Operating Expenses

0.95%


Small Cap Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4)(5)

0.27%

Total Annual Operating Expenses

1.02%

Expense Waiver/Reimbursement

0.07%

Net Annual Operating Expenses

0.95%


 (1)

For the Small Cap Bull 3X Shares, a fixed transaction fee of $3,500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Small Cap Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Small Cap Funds for Other Expenses through March 1, 2009, for the Small Cap Bull 3X Shares and the Small Cap Bear 3X Shares to the extent that each Small Cap Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Small Cap Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Small Cap Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Small Cap Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Small Cap Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.  




Expense Example



The table below is intended to help you compare the cost of investing in the Small Cap Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Small Cap Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Small Cap Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Small Cap Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Small Cap Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Small Cap Bull 3X Shares



1 Year

3 Years

$97

$316


Small Cap Bear 3X Shares


1 Year

3 Years

$97

$318


Risks. The principal risks of investing in the Small Cap Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Small and Mid Capitalization Risk, Correlation Risk (Small Cap Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Small Cap Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Small Cap Funds, including a description of each risk, please refer to the “Principal Risks” section above.



INTERNATIONAL FUNDS


Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares




Investment Objective.  The Developed Markets Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the MSCI EAFE ® Index (the “Developed Market Index”).  The Developed Markets Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Developed Market Index.  (Collectively, the Developed Markets Bull 3X Shares and the Developed Markets Bear 3X Shares are referred to as the “Developed Markets Funds.”)


Principal Investment Strategy.  The Developed Markets Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Developed Market Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Developed Market Index.  The Developed Markets Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Developed Market Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Developed Markets Bull 3X Shares also holds Money Market Instruments.


Target Index. The MSCI EAFE ® Index is a free float-adjusted market capitalization index that is designed to measure developed market equity performance, excluding the U.S. and Canada.  As of September 30, 2007, the MSCI EAFE ® Index consisted of the following 20 developed market country indices: Australia, Austria, Belgium, Denmark, Finland, France, Germany, Greece, Hong Kong, Ireland, Italy, Japan, the Netherlands, Norway, Portugal, Singapore, Spain, Sweden, Switzerland and the United Kingdom.




Performance.  The Developed Markets Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.




Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Developed Markets Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):



Developed Markets Bull 3X Shares



Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


Developed Markets Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


(1)

For the Developed Markets Bull 3X Shares, a fixed transaction fee of $1,000 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Developed Markets Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Developed Markets Funds for Other Expenses through March 1, 2009, for the Developed Markets Bull 3X Shares and the Developed Markets Bear 3X Shares to the extent that each Developed Markets Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Developed Markets Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Developed Markets Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Developed Markets Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Developed Markets Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Developed Markets Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Developed Markets Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Developed Markets Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Developed Markets Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Developed Markets Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Developed Markets Bull 3X Shares




1 Year

3 Years

$97

$305


Developed Markets Bear 3X Shares


1 Year

3 Years

$97

$305


Risks. The principal risks of investing in the Developed Markets Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Correlation Risk (Developed Markets Bull 3X Shares only), Depositary Receipt Risk (Developed Markets Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Developed Markets Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Developed Markets Funds, including a description of each risk, please refer to the “Principal Risks” section above.


 

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X Shares


Investment Objective.  The Emerging Markets Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the MSCI Emerging Markets Index SM (the “EM Index”).  The Emerging Markets Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the EM Index.  (Collectively, the Emerging Markets Bull 3X Shares and the Emerging Markets Bear 3X Shares are referred to as the “Emerging Funds.”)


The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.  Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.


Principal Investment Strategy.  The Emerging Markets Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the EM Index, including Depositary Receipts.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the EM Index.  The Emerging Markets Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the EM Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Emerging Markets Bull 3X Shares also holds Money Market Instruments.




Target Index. The MSCI Emerging Markets Index SM is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets. As of September 30, 2007, the MSCI Emerging Markets Index SM consisted of the following 21 emerging market country indices: Argentina, Brazil, Chile, China, Czech Republic, Egypt, Hong Kong, Hungary, India, Indonesia, Israel, Malaysia, Mexico, Peru, Philippines, Russia, South Africa, South Korea, Taiwan, Thailand and Turkey.




Performance.  The Emerging Markets Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.




Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Emerging Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):



Emerging Markets Bull 3X Shares



Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


Emerging Markets Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


 (1)

For the Emerging Markets Bull 3X Shares, a fixed transaction fee of $1,000 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Emerging Markets Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Emerging Funds for Other Expenses through March 1, 2009, for the Emerging Markets Bull 3X Shares and the Emerging Markets Bear 3X Shares to the extent that each Emerging Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Emerging Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Emerging Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Emerging Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Emerging Markets Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Emerging Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Emerging Markets Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Emerging Markets Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Emerging Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Emerging Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Emerging Markets Bull 3X Shares


1 Year

3 Years

$96

$300


Emerging Markets Bear 3X Shares




1 Year

3 Years

$97

$305


Risks. The principal risks of investing in the Emerging Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Emerging Markets Risk, Correlation Risk (Emerging Markets Bull 3X Shares only), Depositary Receipt Risk (Emerging Markets Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Emerging Markets Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Emerging Funds, including a description of each risk, please refer to the “Principal Risks” section above.

BRIC Bull 3X Shares

BRIC Bear 3X Shares




Investment Objective.  The BRIC Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the BNY BRIC Select ADR Index ® .  The BRIC Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the BNY BRIC Select ADR Index ® . (Collectively, the BRIC Bull 3X Shares and the BRIC Bear 3X Shares are referred to as the “BRIC Funds”).


Each of the four countries included in the BNY BRIC Select ADR Index ® – Brazil, Russia, India and China - is considered an “emerging market.”  The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.  Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.


Principal Investment Strategy.  The BRIC Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the BNY BRIC Select ADR Index ® , including Depositary Receipts.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the BNY BRIC Select ADR Index ® .  The BRIC Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the BNY BRIC Select ADR Index ® , and the remainder in Money Market Instruments.  On a day-to-day basis, the BRIC Bull 3X Shares also holds Money Market Instruments.


Target Index.   The Bank of New York BRIC Select ADR Index SM is a free float-adjusted capitalization-weighted index designed by the Bank of New York to track the performance of a basket of companies who have their primary equity listing on a stock exchange of an emerging market country and which also have depositary receipts that trade on a U.S. exchange or on the NASDAQ.  Decisions regarding additions to and deletions form the Index are guided by conditions established by the bank of New York with the intention of creating and maintaining a benchmark for emerging market equity performance.  The index currently includes securities from issuers in the following countries, among others: Argentina, Brazil, China, India, Indonesia, Israel, Korea, Russia, Taiwan, South Africa and Taiwan.  As of April 30, 2008, the index had 50 components with an average market capitalization of over $35.8 billion dollars and a median market capitalization of $19.9 billion dollars.




Performance.   The BRIC Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the BRIC Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):



BRIC Bull 3X Shares



Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


BRIC Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.25%

Total Annual Operating Expenses

1.00%

Expense Waiver/Reimbursement

0.05%

Net Annual Operating Expenses

0.95%


 (1)

For the BRIC Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the BRIC Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the BRIC Funds for Other Expenses through March 1, 2009, for the BRIC Bull 3X Shares and the BRIC Bear 3X Shares to the extent that each BRIC Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each BRIC Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The BRIC Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the BRIC Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The BRIC Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the BRIC Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The BRIC Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The BRIC Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the BRIC Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the BRIC Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


BRIC Bull 3X Shares




1 Year

3 Years

$97

$305


BRIC Bear 3X Shares


1 Year

3 Years

$97

$313


Risks. The principal risks of investing in the BRIC Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Emerging Markets Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Geographic Concentration Risk, Correlation Risk (BRIC Bull 3X Shares only), Depositary Receipt Risk (BRIC Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the BRIC Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the BRIC Funds, including a description of each risk, please refer to the “Principal Risks” section above.



Also, it is important to understand the risks in each of the four countries comprising the BRIC Index.  

Brazil has experienced substantial economic instability resulting from, among other things, periods of very high inflation, persistent structural public sector deficits and significant devaluations of the currency of Brazil.  These factors have led to a high degree of price volatility in both the Brazilian equity and foreign currency markets. Brazilian companies may also be adversely affected by high interest and unemployment rates, and are particularly sensitive to fluctuations in commodity prices.


China is a totalitarian country and the central government has historically exercised substantial control over virtually every sector of the Chinese economy.  Government power raises the risk of nationalization, expropriation, or confiscation of property. The legal system is still developing and the ability to obtain or enforce judgments is uncertain.  China’s relationship with Taiwan is poor and the possibility of military action exists.  China differs, often unfavorably, from more developed countries in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others.


India has substantial governmental involvement in the economy, higher rates of inflation and greater political, economic and social uncertainty.  Furthermore, future actions of the Indian Government or religious and ethnic unrest could have a significant impact on the economy.  Finally, the relationship between Pakistan and India remains delicate and a cause for concern.


Russia is undergoing dramatic economic, political and social changes and investments in Russian securities may be affected unfavorably by political developments, social instability, changes in government policies, and other political and economic developments.  The absence of developed legal structures governing private or foreign investments and private property makes expropriation of property or loss of property through fraud or negligence possible. The Russia central government retains considerable control, directly and indirectly, over the private sector and government action may negatively impact the Fund’s investment portfolio through a range of possible actions. Russia remains a commodity-based economy, and declines in the prices of commodities will cause declines in the value of Russian securities.


China Bull 3X Shares

China Bear 3X Shares




Investment Objective.  The China Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the BNY China Select ADR Index (the “China Index’). The China Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the  China  Index. (Collectively, the China Bull 3X Shares and China Bear 3X Shares are referred to as the “China Funds”).




China is considered an “emerging market.”  The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.  Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.




Principal Investment Strategy.  The China Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the China  Index, including Depositary Receipts.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the China  Index.  The China Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the China  Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the China Bull 3X Shares also holds Money Market Instruments.


Target Index.    The BNY China Select ADR Index is a free float-adjusted capitalization-weighted index designed by the Bank of New York to track the performance of a basket of companies who have their primary equity listing on a stock exchange in China and which also have depositary receipts that trade on a U.S. exchange or on the NASDAQ.  Decisions regarding additions to and deletions form the Index are guided by conditions established by the bank of New York with the intention of creating and maintaining a benchmark for emerging market equity performance.   As of April 30, 2008, the index  comprised of ADRs of 40 companies with an average market capitalization of over $14.3 billion dollars and a median market capitalization of $2.4 billion dollars.




Performance.  The China Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the China Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


China Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)(

0.19%

Total Annual Operating Expenses

0.94%


China Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (63

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


(1)

For the China Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the China Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the China Funds for Other Expenses through March 1, 2009, for the China Bull 3X Shares and the China Bear 3X Shares to the extent that each China Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each China Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The China Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the China Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  transfer agency, fund accounting and other customary fund expenses.  

(5)

The China Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the China Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The China Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The China Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the China Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the China Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


China Bull 3X Shares




1 Year

3 Years

$96

$300


China Bear 3X Shares

1 Year

3 Years

$97

$305


Risks. The principal risks of investing in the China Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Emerging Markets Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Geographic Concentration Risk, Correlation Risk (China Bull 3X Shares only), Depositary Receipt Risk (China Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the China Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the China Funds, including a description of each risk, please refer to the “Principal Risks” section above.

Also, it is important to note that China is a totalitarian country and the central government has historically exercised substantial control over virtually every sector of the Chinese economy.  Government power raises the risk of nationalization, expropriation, or confiscation of property. The legal system is still developing and the ability to obtain or enforce judgments is uncertain.  China’s relationship with Taiwan is poor and the possibility of military action exists.  China differs, often unfavorably, from more developed countries in such respects as structure, general development, government involvement, wealth distribution, rate of inflation, growth rate, allocation of resources and capital reinvestment, among others.


India Bull 3X Shares

India Bear 3X Shares


Investment Objective.  The India Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Indus India Index (“India Index”). The India Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the India Index. (Collectively, the India Bull 3X Shares and India Bear 3X Shares are referred to as the “India Funds”).


India is considered an “emerging market.”  The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.  Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.


Principal Investment Strategy.  The India Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the India Index, including Depositary Receipts.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the India Index.  The India Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the India Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the India Bull 3X Shares also holds Money Market Instruments.


Target Index. The Indus India Index, which is designed to replicate the Indian equity markets as a whole, through a group of 50 Indian stocks selected from a universe of the largest companies listed on two major Indian exchanges. The India Index has 50 constituents, spread among the following sectors: Information Technology, Health Services, Financial Services, Heavy Industry, Consumer Products and Other. The India Index is supervised by an index committee, comprised of representatives of the Index Provider and members of academia specializing in emerging markets.


Performance.  The India Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the India Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


India Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


India Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4)  (5)

0.25%

Total Annual Operating Expenses

1.00%

Expense Waiver/Reimbursement

0.05%

Net Annual Operating Expenses

0.95%


(1)

For the India Bull 3X Shares, a fixed transaction fee of $2,500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the India Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the India Funds for Other Expenses through March 1, 2009, for the India Bull 3X Shares and the India Bear 3X Shares to the extent that each India Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each India Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The India Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the India Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  .  

(5)

The India Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the India Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The India Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The India Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the India Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the India Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


India Bull 3X Shares




1 Year

3 Years

$97

$305


India Bear 3X Shares

1 Year

3 Years

$97

$313


Risks. The principal risks of investing in the India Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Emerging Markets Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Geographic Concentration Risk, Correlation Risk (India Bull 3X Shares only), Depositary Receipt Risk (India Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the India Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the India Funds, including a description of each risk, please refer to the “Principal Risks” section above.



Also, in is important to note that India has substantial governmental involvement in the economy, higher rates of inflation and greater political, economic and social uncertainty.  Furthermore, future actions of the Indian Government or religious and ethnic unrest could have a significant impact on the economy. Finally, the relationship between Pakistan and India remains delicate and a cause for concern.


Latin America Bull 3X Shares

Latin America Bear 3X Shares




Investment Objective.  The Latin America Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the S&P Latin America 40 Index (“Latin America Index”). The Latin America Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Latin America Index. (Collectively, the Latin America Bull 3X Shares and Latin America Bear 3X Shares are referred to as the “Latin America Funds”).




Latin America is considered an “emerging market.”  The term “emerging market” refers to an economy that is in the initial stages of industrialization and has been historically marked by low per capita income and lack of capital market transparency, but appears to be implementing political and/or market reforms resulting in greater capital market transparency, increased access for foreign investors and generally improved economic conditions.  Emerging markets have the potential for significantly higher or lower rates of return and carry greater risks than more developed economies.


Principal Investment Strategy.  The Latin America Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Latin America Index, including Depositary Receipts.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Latin America Index.  The Latin America Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Latin America Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Latin America Bull 3X Shares also holds Money Market Instruments.




Target Index.

The S&P Latin America 40 Index is an equity index drawn from four major Latin American markets: Argentina, Brazil, Chile and Mexico. The index constituents are leading, large liquid companies from the Latin American markets with a total market capitalization of $505 billion and a median market capitalization of $5 billion, each as of December 31, 2007. Brazil, Mexico, Chile and Argentina provide 18, 10, 10 and 2 companies, respectively. The Brazilian companies provide 63% of the market capitalization of the index, with Mexican, Chilean and Argentinean companies accounting for 27%, 7% and 3%, respectively.

Performance.  The Latin America Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Latin America Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Latin America Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


Latin America Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


(1)

For the Latin America Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Latin America Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Latin America Funds for Other Expenses through March 1, 2009, for the Latin America Bull 3X Shares and the Latin America Bear 3X Shares to the extent that each Latin America Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Latin America Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Latin America Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Latin America Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Latin America Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Latin America Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Latin America Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Latin America Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Latin America Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Latin America Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Latin America Bull 3X Shares


1 Year

3 Years

$96

$300

Latin America Bear 3X Shares

 


1 Year

3 Years

$97

$305


Risks. The principal risks of investing in the Latin America Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Foreign Securities Risk, Currency Exchange Rate Risk, Emerging Markets Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Valuation Time Risk, Geographic Concentration Risk, Correlation Risk (Latin America Bull 3X Shares only), Depositary Receipt Risk (Latin America Bull 3X Shares only), and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Latin America Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Latin America Funds, including a description of each risk, please refer to the “Principal Risks” section above.


Also, it is important to note that Latin America has generally been characterized by substantial economic instability resulting from, among other things, political unrest, high interest and inflation rates, currency devaluations and government deficits.  The economies of Latin America are heavily dependent on the health of the U.S. economy and, because commodities such as oil and gas, minerals, and metals, represent a significant percentage of the region’s exports, the economies of Latin American countries are sensitive to fluctuations in commodity prices.  The economies of the countries in the region may be impacted by the policies or economic problems of other Latin American countries.  As a result of these factors, an investment in the Latin America Funds may experience significant volatility.


SPECIALTY FUNDS


 

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares


Investment Objective.  The Clean Energy Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the S&P Global Clean Energy Index TM (“Clean Energy Index”). The Clean Energy Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Clean Energy Index. (Collectively, the Clean Energy Bull 3X Shares and Clean Energy Bear 3X Shares are referred to as the “Clean Energy Funds”).


Principal Investment Strategy.  The Clean Energy Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Clean Energy Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Clean Energy Index.  The Clean Energy Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Clean Energy Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Clean Energy Bull 3X Shares also holds Money Market Instruments.


Target Index.  The S&P Global Clean Energy Index TM is designed to provide liquid and tradable exposure to 30 companies from around the world that are involved in clean energy related businesses.  The index is comprised of a diversified mix of clean energy production, clean energy technology and equipment provider companies.


Performance.  The Clean Energy Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 

Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Clean Energy Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Clean Energy Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.25%

Total Annual Operating Expenses

1.00%

Expense Waiver/Reimbursement

0.05%

Net Annual Operating Expenses

0.95%


Clean Energy Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.27%

Total Annual Operating Expenses

1.02%

Expense Waiver/Reimbursement

0.07%

Net Annual Operating Expenses

0.95%


(1)

For the Clean Energy Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Clean Energy Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Clean Energy Funds for Other Expenses through March 1, 2009, for the Clean Energy Bull 3X Shares and the Clean Energy Bear 3X Shares to the extent that each Clean Energy Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Clean Energy Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The

Clean Energy Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Clean Energy Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Clean Energy Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.


Expense Example

The table below is intended to help you compare the cost of investing in the Clean Energy Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Clean Energy Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Clean Energy Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Clean Energy Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Clean Energy Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Clean Energy Bull 3X Shares


1 Year

3 Years

$97

$313


Clean Energy Bear 3X Shares


1 Year

3 Years

$97

$318


Risks. The principal risks of investing in the Clean Energy Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Concentration Risk, Equity Securities Risk, Energy Securities Risk, Correlation Risk (Clean Energy Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Clean Energy Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Clean Energy Funds, including a description of each risk, please refer to the “Principal Risks” section above.


Energy Bull 3X Shares

Energy Bear 3X Shares




Investment Objective.  The Energy Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000 ® Energy Index (“Energy Index”). The Energy Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Energy Index. (Collectively, the Energy Bull 3X Shares and Energy Bear 3X Shares are referred to as the “Energy Funds”).




Principal Investment Strategy.  The Energy Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Energy Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Energy Index.  The Energy Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Energy Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Energy Bull 3X Shares also holds Money Market Instruments.




Target Index. The Russell 1000 ® Energy Index is a capitalization-weighted index of companies engaged in energy-related businesses, such as oil companies involved in the exploration, production, servicing, drilling and refining processes, and companies primarily involved in the production and mining of coal and other fuels used in the generation of consumable energy.  Also included are gas distribution, gas pipeline and related companies.  These companies span a broad range of industries including: domestic, international and crude oil producers, offshore drilling, oil well equipment and service, machinery and energy equipment, coal, utilities, gas pipelines and miscellaneous energy services.




Performance.  The Energy Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Energy Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Energy Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


Energy Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


(1)

For the Energy Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Energy Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Energy Funds for Other Expenses through March 1, 2009, for the Energy Bull 3X Shares and the Energy Bear 3X Shares to the extent that each Energy Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Energy Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The

Energy Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Energy Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.    

(5)

The Energy Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Energy Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Energy Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Energy Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Energy Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Energy Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Energy Bull 3X Shares




1 Year

3 Years

$96

$300

Energy Bear 3X Shares


1 Year

3 Years

$97

$305


Risks. The principal risks of investing in the Energy Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Concentration Risk, Equity Securities Risk, Energy Securities Risk, Correlation Risk (Energy Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Energy Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Energy Funds, including a description of each risk, please refer to the “Principal Risks” section above.


 

Financial Bull 3X Shares

Financial Bear 3X Shares




Investment Objective.  The Financial Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000 ® Financial Services Index (“Financial Index”). The Financial Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Financial Index. (Collectively, the Financial Bull 3X Shares and Financial Bear 3X Shares are referred to as the “Financial Funds”).

Principal Investment Strategy.  The Financial Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Financial Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Financial Index.  The Financial Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Financial Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Financial Bull 3X Shares also holds Money Market Instruments.




Target Index. The Russell 1000 ® Financial Services Index is a capitalization-weighted index of companies that provide financial services.  As of April 30, 2008, the index had 227 components, derived from the Russell 1000 Index with an average market capitalization of over $11 billion dollars and a median market capitalization of $4.4 billion dollars.




Performance.  The Financial Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Financial Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Financial Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


Financial Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


(1)

For the Financial Bull 3X Shares, a fixed transaction fee of $1,250 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Financial Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(23

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Financial Funds for Other Expenses through March 1, 2009, for the Financial Bull 3X Shares and the Financial Bear 3X Shares to the extent that each Financial Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Financial Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The

Financial Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Financial Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Financial Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Financial Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Financial Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Financial Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Financial Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Financial Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Financial Bull 3X Shares




1 Year

3 Years

$96

$300


Financial Bear 3X Shares


1 Year

3 Years

$96

$300


Risks. The principal risks of investing in the Financial Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Concentration Risk, Equity Securities Risk, Financial Services Companies Risk, Correlation Risk (Financial Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Financial Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Financial Funds, including a description of each risk, please refer to the “Principal Risks” section above.

 

Technology Bull 3X Shares

Technology  Bear 3X Shares


Investment Objective.  The Technology Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the  Russell 1000 ® Technology Index (the “Technology Index”).  The Technology Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Technology Index.  (Collectively, Technology Bull 3X Shares and the Technology Bear 3X Shares are referred to as the “Technology Funds.”)


Principal Investment Strategy.  The Technology Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Technology Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Technology Index.  The Technology Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Technology Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Technology Bull 3X Shares also holds Money Market Instruments.


Target Index.   The Russell 1000 ® Technology is a capitalization-weighted index of companies that serve the electronics and computer industries or that manufacture products based on the latest applied science.  The index currently has 105 components, derived from the Russell 1000, with an average market cap of over $19 billion dollars and a median market capitalization of $6.1 billion dollars as of April 30, 2008.


Performance.   The Technology Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.


Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Technology  Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.


Annual Operating Expenses (2) (as a percentage of daily assets):


Technology Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.19%

Total Annual Operating Expenses

0.94%


Technology Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


 (1)

For the Technology Bull 3X Shares, a fixed transaction fee of $1,000 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Technology Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Technology  Funds for Other Expenses through March 1, 2009, for the Technology Bull 3X Shares and the Technology  Bear 3X Shares to the extent that each Technology  Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Technology Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The Technology Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Technology Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.    

(5)

The Technology Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.  


Expense Example

The table below is intended to help you compare the cost of investing in the Technology Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Technology Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Technology Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Technology Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Technology Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Technology Bull 3X Shares


1 Year

3 Years

$96

$300


Technology  Bear 3X Shares


1 Year

3 Years

$97

$305


Risks. The principal risks of investing in Technology Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Equity Securities Risk, Technology Securities Risk, Market Risk, Concentration Risk, Credit Risk and Lower-Quality Debt Securities Risk, Correlation Risk (Technology Bull 3X Shares only) and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Technology Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the risks of the Technology Funds, including a description of each risk, please refer to the “Principal Risks” section above.



Real Estate Bull 3X Shares

Real Estate Bear 3X Shares




Investment Objective.  The Real Estate Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the Dow Jones Wilshire REIT Index (“Real Estate Index”). The Real Estate Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Real Estate Index. (Collectively, the Real Estate Bull 3X Shares and Real Estate Bear 3X Shares are referred to as the “Real Estate Funds”).




Principal Investment Strategy.  The Real Estate Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Real Estate Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Real Estate Index.  The Real Estate Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Real Estate Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Real Estate Bull 3X Shares also holds Money Market Instruments.




Target Index.   The Real Estate Index is a float-adjusted market capitalization weighted index that is comprised of REITs that are components of the Dow Jones Real Estate Securities Index.  This index is constructed to provide measures of real estate securities that serve as proxies for direct real estate investing.  This index does not include securities that are not directly tied to the value of underlying real estate.  Each component of the index must be both an equity owner and operator of commercial and or residential real estate and have a minimum market capitalization of more than $200 million dollars.  As of April 30, 2008, the components in the index had an average market capitalization of $3.2 billion dollars and a median market capitalization of $1.6 billion dollars.




Performance.  The Real Estate Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.




Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Real Estate Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.


Annual Operating Expenses (2) (as a percentage of daily assets):


Real Estate Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


Real Estate Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.21%

Total Annual Operating Expenses

0.96%

Expense Waiver/Reimbursement

0.01%

Net Annual Operating Expenses

0.95%


(1)

For the Real Estate Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Real Estate Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Real Estate Funds for Other Expenses through March 1, 2009, for the Real Estate Bull 3X Shares and the Real Estate Bear 3X Shares to the extent that each Real Estate Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Real Estate Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The

Real Estate Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Real Estate Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Real Estate Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Real Estate Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Real Estate Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Real Estate Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Real Estate Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Real Estate Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Real Estate Bull 3X Shares



1 Year

3 Years

$97

$305


 

Real Estate Bear 3X Shares

 

1 Year

3 Years

$97

$305



Risks. The principal risks of investing in the Real Estate Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Concentration Risk, Equity Securities Risk, Correlation Risk (Real Estate Bull 3X Shares only), Real Estate Investment Risk and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Real Estate Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Real Estate Funds, including a description of each risk, please refer to the “Principal Risks” section above.



Homebuilders Bull 3X Shares

Homebuilders Bear 3X Shares


Investment Objective.  The Homebuilders Bull 3X Shares seeks daily investment results, before fees and expenses, of 300% of the price performance of the S&P Homebuilding Select Industry Index (“Homebuilders Index”). The Homebuilders Bear 3X Shares seeks daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of the Homebuilders Index. (Collectively, the Homebuilders Bull 3X Shares and Homebuilders Bear 3X Shares are referred to as the “Homebuilders Funds”).


Principal Investment Strategy.  The Homebuilders Bull 3X Shares, under normal circumstances, creates long positions by investing at least 80% of its net assets in the equity securities that comprise the Homebuilders Index.  The Fund will also invest in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Homebuilders Index.  The Homebuilders Bear 3X Shares does not invest in equity securities.  Under normal circumstances, it creates short positions by investing at least 80% of its net assets in Financial Instruments that, in combination, provide leveraged and unleveraged exposure to the Homebuilders Index, and the remainder in Money Market Instruments.  On a day-to-day basis, the Homebuilders Bull 3X Shares also holds Money Market Instruments.




Target Index.  The S&P Homebuilding Select Industry Index TM is an equal weighted index that draws constituents from companies involved in homebuilding, directly and indirectly through furnishings, retailing, manufacturing, textiles and chemicals keyed to homebuilding.  The median market cap of the 24 holdings as of April 30, 2008 was $2.08 billion and the average weighted market cap was $5.86 billion.




Performance.  The Homebuilders Funds are newly organized and have not yet commenced operations; therefore, performance information is not yet available.

 



Fees and Expenses.   These tables describe the estimated fees and expenses that you may pay if you buy, hold or sell Creation Units of the Homebuilders Funds.  Annual fund operating expenses are estimates.  Investors purchasing Shares in the secondary market will not directly pay the transaction fees paid by Authorized Participants, (1) but may be subject to costs (including customary brokerage commissions) charged by their broker.

 

Annual Operating Expenses (2) (as a percentage of daily assets):


Homebuilders Bull 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.20%

Total Annual Operating Expenses

0.95%


Homebuilders Bear 3X Shares


Management Fees

0.75%

Distribution and/or Service

(12b-1) Fees (3)

0.00%

Other Expenses (4) (5)

0.20%

Total Annual Operating Expenses

0.95%


(1)

For the Homebuilders Bull 3X Shares, a fixed transaction fee of $500 will be charged when you create or redeem Creation Units regardless of the number of Shares redeemed on the date of the transaction.  For the Homebuilders Funds, a variable transaction fee of up to 0.15% of the value of each Creation Unit will be charged to offset costs associated with processing the order.  An additional fee of up to 3 times the fixed per order transaction fee plus up to 0.15% of the value of each Creation Unit may be charged if you do not create or redeem Shares through the Continuous Net Settlement System of the NSCC, or in circumstances in which cash is substituted for certain securities.  Such transactions are allowed at the sole discretion of a Fund.

(2)

Rafferty has contractually agreed to waive all or a portion of its management fee and/or reimburse the Homebuilders Funds for Other Expenses through March 1, 2009, for the Homebuilders Bull 3X Shares and the Homebuilders Bear 3X Shares to the extent that each Homebuilders Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by each Homebuilders Fund, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

(3)

The

Homebuilders Funds have adopted a Rule 12b-1 Plan pursuant to which the Funds may be subject to an annual Rule 12b-1 fee of up to 0.25%.  No Rule 12b-1 fee is currently being charged to the Homebuilders Funds.

(4)

Other Expenses include organizational costs, fees paid for legal services and audit fees, printing costs, registration fees, administration, custodial, transfer agency, fund accounting and other customary fund expenses.  

(5)

The Homebuilders Bear 3X Shares may take short positions in securities.  Estimated additional expenses associated with these investments are included in the calculation above.




Expense Example

The table below is intended to help you compare the cost of investing in the Homebuilders Funds with the cost of investing in other funds.  Investors should note that the following examples are for illustration purposes only and are not meant to suggest actual or expected fees and expenses or returns, all of which may vary.  The Homebuilders Bull 3X Shares issues and redeems Shares in Creation Units principally on an in-kind basis.  The Homebuilders Bear 3X Shares issues and redeems Shares in Creation Units for cash.  Shares are issued and redeemed in Creation Unit aggregations only.  The example does not include the brokerage commissions that secondary market investors may incur to buy and sell Shares.


The table assumes that you invest $10,000 in Creation Units of the Homebuilders Funds for the periods shown and then redeem all of your Shares at the end of the periods, but does not include transaction fees on purchases and redemptions of Shares.  It also assumes that your investment has a 5% return each year and that the Homebuilders Funds’ operating expenses remain the same through each year.  Although your actual costs may be higher or lower, based on these assumptions your costs would be:


Homebuilders Bull 3X Shares




1 Year

3 Years

$97

$303


Homebuilders Bear 3X Shares


1 Year

3 Years

$97

$303


Risks. The principal risks of investing in the Homebuilders Funds are Tracking Error Risk, Aggressive Investment Techniques Risk, Leverage Risk, Counterparty Risk, Non-Diversification Risk, Interest Rate Risk, Adverse Market Conditions Risk, Adviser’s Investment Strategy Risk, Market Risk, Credit Risk and Lower-Quality Debt Securities Risk, Concentration Risk, Equity Securities Risk, Correlation Risk (Homebuilders Bull 3X Shares only), Real Estate Investment Risk, Homebuilding Industry Risk and Special Risks of Exchange-Traded Funds.
 
Additional risks of investing in the Homebuilders Bear 3X Shares are Shorting Risk and Inverse Correlation Risk. For more information on the Homebuilders Funds, including a description of each risk, please refer to the “Principal Risks” section above.

 


UNDERLYING INDEX LICENSORS


Bank of New York Indices.  “BNY,” “BNY BRIC Select ADR Index,” and “BNY China Select ADR Index”  (collectively, the “BNY Indices”) are service marks of The Bank of New York and have been licensed for use for certain purposes by the Trust.  Products based on the BNY Indices named above are not sponsored, endorsed, sold, recommended or promoted by The Bank of New York or any of its subsidiaries or affiliates, and none of The Bank of New York or any of its subsidiaries or affiliates makes any representation or warranty, express or implied, to the purchasers or owners of the products or any member of the public regarding the advisability of investing in financial products generally or in these products particularly, the ability of a BNY Index to track market performance or the suitability or appropriateness of the products for such purchasers, owners or such member of the public.  The relationship between The Bank of New York, on one hand, and the Trust, on the other, is limited to the licensing of certain trademarks and trade names of The Bank of New York and the BNY Indices, which indexes are determined, composed and calculated by The Bank of New York without regard to the Trust or its products.  Neither The Bank of New York nor any of its subsidiaries or affiliates has any obligation to take the needs of the Trust or the purchasers or owners of its products into consideration in determining, composing or calculating the BNY Indices named above.  Neither The Bank of New York nor any of its subsidiaries or affiliates is responsible for, or has participated in, the determination of the timing of, prices at, or quantities of the products to be issued or in the determination or calculation of the equation by which the products are to be converted into cash.  Neither The Bank of New York nor any of its subsidiaries or affiliates has any obligation or liability in connection with the administration, marketing or trading of the products.


NEITHER THE BANK OF NEW YORK NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES GUARANTEES THE ACCURACY OR COMPLETENESS OF THE BNY INDICES OR ANY DATA INCLUDED THEREIN, AND NEITHER THE BANK OF NEW YORK NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES SHALL HAVE ANY LIABILITY FOR ANY ERRORS, OMISSIONS OR INTERRUPTIONS THEREIN.  NEITHER THE BANK OF NEW YORK NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES MAKES ANY WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, PURCHASERS OR OWNERS OF ITS PRODUCTS OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE BNY INDICES OR ANY DATA INCLUDED THEREIN.  NEITHER THE BANK OF NEW YORK NOR ANY OF ITS SUBSIDIARIES OR AFFILIATES MAKES ANY EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE BNY INDICES OR ANY DATA INCLUDED THEREIN.  WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL THE BANK OF NEW YORK OR ANY OF ITS SUBSIDIARIES OR AFFILIATES HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT OR CONSEQUENTIAL DAMAGES (INCLUDING, WITHOUT LIMITATION, LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.


Dow Jones ® Index.   The benchmark for the Real Estate Funds is the Dow Jones Wilshire Real Estate Investment Trust (“REIT”) Index SM. Dow Jones®, Dow Jones Industrial Average®, DJIA®, and Dow 30SM are trademarks of Dow Jones & Company, Inc. and Wilshire Associates Incorporated. Neither Dow Jones nor Wilshire has any relationship to the Direxion Shares, other than the licensing of the Dow Jones Wilshire REIT Index and its service marks for use in connection with the DowSM Fund’s materials. Dow Jones and Wilshire do not: sponsor, endorse, sell or promote the Funds; recommend that any person invest in the Funds or any other securities; have any responsibility or liability for or make any decisions about the timing, amount or pricing of the Funds; have any responsibility or liability for the administration, management or marketing of the Funds; or consider the needs of the Funds or the owners of the Funds in determining, composing or calculating the Dow Jones Wilshire REIT Index or have any obligation to do so. Neither Dow Jones nor Wilshire will have any liability in connection with the Funds. Specifically, neither Dow Jones nor Wilshire makes any warranty, express or implied, and Dow Jones and Wilshire disclaim any warranty about: the results to be obtained by the Funds, the owner of the Funds or any other person in connection with the use of the Dow Jones Wilshire REIT Index and any related data; the merchantability and the fitness for a particular purpose or use of the Dow Jones Wilshire REIT Index and/or its related data. Neither Dow Jones nor Wilshire will have any liability for any errors, omissions or interruptions in the Dow Jones REIT Index or related data. Under no circumstances will Dow Jones or Wilshire be liable for any lost profits or indirect, punitive, special or consequential damages or losses, even if Dow Jones or Wilshire knows that they might occur. The licensing agreement between the Direxion Shares and Dow Jones and Wilshire is solely for their benefit and not for the benefit of the owners of the Funds or any other third parties.


MSCI Indices.  The benchmark for the Developed Market Funds is the MSCI EAFE Index and the Emerging Markets Funds is the MSCI Emerging Markets Index.  The Funds are not sponsored, endorsed, sold or promoted by Morgan Stanley Capital International Inc. (“MSCI”), any of its affiliates, any of its information providers or any other third party involved in, or related to, compiling, computing or creating any MSCI Index (collectively, the “MSCI Parties”).  The MSCI Indexes are the exclusive property of MSCI. MSCI and the MSCI Index names are service marks of MSCI or its affiliates and have been licensed for use for certain purposes by the Trust. None of the MSCI Parties makes any representation or warranty, express or implied, to the issuer or shareholders of these Funds or any other person or entity regarding the advisability of investing in Funds generally or in these Funds particularly or the ability of any MSCI Index to track corresponding stock market performance. MSCI or its affiliates are the licensors of certain trademarks, service marks and trade names and of the MSCI Indexes which are determined, composed and calculated by MSCI without regard to the Funds or the issuer or shareholders of the Funds or any other person or entity into consideration in determining, composing or calculating the MSCI Indexes. None of the MSCI Parties is responsible for or has participated in the determination of the timing of, prices at, or quantities of these Funds to be issued or in the determination or calculation of the equation by or the consideration into which these Funds are redeemable. Further, none of the MSCI Parties has any obligation or liability to the issuer or owners of these Funds or any other person or entity in connection with the administration, marketing or offering of these Funds.


Although MSCI shall obtain information for inclusion in or for use in the calculation of the MSCI Indexes from sources that MSCI considers reliable, none of the MSCI Parties warrants or guarantees the originality, accuracy and/or the completeness of any MSCI Index or any data included therein. None of the MSCI Parties makes any warranty, express or implied, as to results to be obtained by the issuer of the Funds, shareholders of the Funds, or any other person or entity, from the use of any MSCI Index or any data included therein. None of the MSCI Parties shall have any liability for any errors, omissions or interruptions of or in connection with any MSCI Index or any data included therein. Further, none of the MSCI Index or any data included therein. Further, none of the MSCI Parties makes any express or implied warranties of any kind, and the MSCI Parties hereby expressly disclaim all warranties of merchantability and fitness for a particular purpose, with respect to each MSCI Index and any data included therein. Without limiting any of the foregoing, in no event shall any of the MSCI Parties have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.  No purchaser, seller or holder of this security, product or fund, or any other person or entity, should use or refer to any MSCI trade name, trademark or service mark to sponsor, endorse, market or promote this security without first contacting MSCI to determine whether MSCI’s permission is required. Under no circumstances may any person or entity claim any affiliation with MSCI without the prior written permission of MSCI.


Russell Indices.  The Russell 1000 ® Energy Index, Russell 1000 ® Financial Services Index), Russell 1000 ® Index, Russell Midcap ® Index, Russell 2000 ® Index, Russell 1000 ® Technology Index and Russell 3000 ® Index (collectively, the Russell Indices”) are trademarks of Frank Russell Company (“Russell”) and have been licensed for use by the Trust.  None of the Funds in the Trust are sponsored, endorsed, sold or promoted by Russell.  Russell makes no representation or warranty, express or implied, to the owners of the Trust or any member of the public regarding the advisability of investing in securities generally or in the Trust particularly or the ability of the Russell Indices to track general stock market performance or a segment of the same.  Russell’s publication of the Russell Indices in no way suggests or implies an opinion by Russell as to the advisability of investment in any or all of the securities upon which the Russell Indices are based.  Russell’s only relationship to the Trust is the licensing of certain trademarks and trade names of Russell and of the Russell Indices which is determined, composed and calculated by Russell without regard to the Trust or any of its Funds.  Russell is not responsible for and has not reviewed the Trust or any of its Funds nor any associated literature or publications and Russell makes no representation or warranty express or implied as to their accuracy or completeness, or otherwise.  Russell reserves the right, at any time and without notice, to alter, amend, terminate or in any way change the Russell Indices.  Russell has no obligation or liability in connection with the administration, marketing or trading of the Funds.  


RUSSELL DOES NOT GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE RUSSELL INDICES OR ANY DATA INCLUDED THEREIN AND RUSSELL SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.  RUSSELL MAKES NO WARRANTY, EXPRESS OF IMPLIED, AS TO RESULTS TO BE OBTAINED BY THE TRUST, INVESTORS, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE RUSSELL INDICES OR ANY DATA INCLUDED THEREIN.  RUSSELL MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE RUSSELL INDICES OR ANY DATA INCLUDED THEREIN.  WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL RUSSELL HAVE ANY LIABILITY FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES.


Standard and Poor Index.  The S&P Homebuilding Select Industry Index TM ,  S&P Global Clean Energy Index TM , and S&P Latin American 40 Index (collectively, the “S&P Indices”) are trademarks of The McGraw-Hill Companies, Inc., and have been licensed for use by the Trust.  The Funds are not sponsored, endorsed, sold or promoted by Standard & Poor's, a division of The McGraw-Hill Companies, Inc. (“S&P”) or its third party licensors.  Neither S&P nor its third party licensors makes any representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the S&P Indices to track general stock market performance. S&P's only relationship to the Funds is the licensing of certain trademarks and trade names of S&P and the third party licensors and of the S&P Indices which are determined, composed and calculated by S&P or its third party licensors without regard to the Funds. S&P has no obligation to take the needs of the Funds or the owners of the Funds into consideration in determining, composing or calculating the S&P Indices. S&P is not responsible for and has not participated in the determination of the prices and amount of the Funds or the timing of the issuance or sale of the Funds or in the determination the net asset value of the Funds. S&P has no obligation or liability in connection with the administration, marketing or trading of the Funds.


NEITHER S&P, ITS AFFILIATES NOR THEIR THIRD PARTY LICENSORS GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS OR COMPLETENESS OF THE S&P INDICES OR ANY DATA INCLUDED THEREIN OR ANY COMMUNICATIONS, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATIONS (INCLUDING ELECTRONIC COMMUNICATIONS) WITH RESPECT THERETO.  S&P, ITS AFFILIATES AND THEIR THIRD PARTY LICENSORS SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS OR DELAYS THEREIN. S&P MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE MARKS, THE S&P INDICES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P, ITS AFFILIATES OR THEIR THIRD PARTY LICENSORS BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE OR CONSEQUENTIAL DAMAGES, INCLUDING BUT NOT LIMITED TO, LOSS OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY OR OTHERWISE.




HOW TO BUY AND SELL SHARES


Each Fund issues and redeems Shares only in large blocks of Shares called “Creation Units.”




Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers.  Shares of each Fund will be listed for trading on the secondary market on the Exchange.  Shares can be bought and sold throughout the trading day like other publicly traded shares.  There is no minimum investment.  Although Shares are generally purchased and sold in “round lots” of 100,000 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “oddlots,” at no per-share price differential.  




When buying or selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale) transaction.  In addition, because secondary market transactions occur at market prices, you may pay more than net asset value (“NAV”) when you buy Shares, and receive less than NAV when you sell those Shares.


The Shares of the Funds trade under the following symbols:




Fund

Symbol

Emerging Markets Bull 3X Shares

EDC

Emerging Markets Bear 3X Shares

EDZ

Energy Bull 3X Shares

ERX

Energy Bear 3X Shares

ERY

Financial Bull 3X Shares

FAS

Financial Bear 3X Shares

FAZ

Homebuilders Bull 3X Shares

HBG

Homebuilders Bear 3X Shares

HBQ

Large Cap Bull 3X Shares

BGU

Large Cap Bear 3X Shares

BGZ

Small Cap Bull 3X Shares

TNA

Small Cap Bear 3X Shares

TZA

Technology Bull 3X Shares

TYH

Technology Bear 3X Shares

TYP

Total Market Bull 3X Shares

TMD

Total Market Bear 3X Shares

TMZ




Share price are reported in dollars and cents per Share.

Investors may acquire Shares directly from each Fund, and shareholder may tender their Shares for redemption directly to each Fund, only in Creation Units of 100,000 Shares, as discussed in the “Creations, Redemptions and Transaction Fees” section below.


For information about acquiring Shares through a secondary market purchase, please contact your broker.  If you wish to sell Shares of a Fund on the secondary market, you must do so through your broker.


Book Entry.  Shares are held in book-entry form, which means that no stock certificates are issued.  The Depository Trust Company (“DTC”) or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for all purposes.


Investors owning Shares are beneficial owners as shown on the records of the DTC or its participants.  DTC serves as the securities depository for all Shares.  Participants in the DTC include securities brokers and dealers, banks, trust companies, clearing corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC.  As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your name, and you are not considered a registered owner of Shares.  Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants.  These procedures are the same as those that apply to any other stocks that you hold in book entry or “street name” through your brokerage account.


ABOUT YOUR INVESTMENT


Share Price of the Funds.  A Fund’s share price is known as its NAV.  Each Fund’s NAV is calculated as of the close of regular trading, usually as of 4:00 p.m. Eastern time, each day the New York Stock Exchange (“NYSE”) is open for business.  The NYSE is open every week, Monday through Friday, except when the following holidays are celebrated: New Year’s Day, Martin Luther King, Jr. Day (the third Monday in January), President’s Day (the third Monday in February), Good Friday, Memorial Day (the last Monday in May), July 4 th , Labor Day (the first Monday in September), Thanksgiving Day (the fourth Thursday in November) and Christmas Day.  The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day.  Exchange holiday schedules are subject to change without notice.  If the exchange or market on which a Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time.  Creation/redemption transaction order time cutoffs would also be accelerated.  The value of a Fund’s assets that trade in markets outside the United States or in currencies other than the U.S. dollar may fluctuate when foreign markets are open but the Funds are not open for business.


NAV is calculated by dividing a Fund’s net assets by its Shares outstanding.  The Funds use the following methods to price securities held in their portfolios:


Equity securities, OTC securities, swap agreements, closed-end investment companies, options, futures and options on futures are valued at their last sales price, or if not available, the average of the last bid and ask prices;

Securities primarily traded in the Nasdaq Global Market ® are valued using the Nasdaq ® Official Closing Price (“NOCP”);

Short-term debt securities with a maturity of 60 days or less and money market securities are valued using the “amortized” cost method;

Other debt securities are valued by using the closing bid and ask prices provided by the Funds’ pricing service or, if such prices are unavailable, by a pricing matrix method; and

Securities and other assets for which market quotations are unavailable or unreliable are valued at fair value estimates by the Adviser under the oversight of the Board of Trustees.


Fair Value Pricing.   Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds’ pricing service does not provide a valuation for such securities, the Funds’ pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value of an instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which the Funds calculate their NAVs.  Examples of Significant Events may include:  (1) events that relate to a single issuer or to an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions.  If such Significant Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV.  Fair value determinations are made in good faith in accordance with procedures adopted by the Board of Trustees.  In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.


Attempts to determine the fair value of securities introduce an element of subjectivity to the pricing of securities.  As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately reflect the market value of the security when trading resumes.  If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to evaluate the effectiveness of the Funds’ fair valuation procedures and will use that market value in the next calculation of NAV.  


Rule 12b-1 Fees .  The Board of Trustees of the Trust has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the Investment Company Act of 1940.  In accordance with the Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain distribution-related activities and shareholder services.


No 12b-1 fees are currently paid by any Fund, and there are no plans to impose these fees.  However, in the event 12b-1 fees are charted in the future, because there fees are paid out of each Fund’s assets, over time these fees will increase the cost of your investment and may cost you more than certain other types of sales charges.


SHORT-TERM TRADING




Rafferty expects a significant portion of the Funds’ assets to come from professional money managers and investors who use the Funds as part of “asset allocation” and “market timing” investment strategies.  These strategies often call for frequent trading to take advantage of anticipated changes in market conditions.  Frequent trading could increase the rate of creations and redemptions of Fund Shares and the Funds’ portfolio turnover, which could involve correspondingly adverse tax consequences to a Fund’s shareholders.  Although the Funds reserve the right to reject any purchase orders or suspend the offering of Shares, the Funds do not currently impose any trading restrictions on frequent trading nor actively monitor for trading abuses.



CREATIONS, REDEMPTIONS AND TRANSACTION FEES


Creation Units.  Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement with the principal underwriter and the transfer agent, or purchase through a dealer that has entered into such an agreement.  These investors are known as “Authorized Participants.”  Set forth below is a brief description of the procedures applicable to the purchase and redemption of Creation Units.




Purchase of Bull Funds.  To purchase Creation Units directly from a Bull Fund, you must deposit with the Fund a basket of securities and/or cash.  Each business day, prior to the opening of trading on the Exchange, an agent of the Fund (“Index Receipt Agent”) will make available through the NSCC a list of the names and number of shares of each security, if any, to be included in that day’s creation basket (“Deposit Securities”).  The identity and number of shares of the Deposit Securities required for a Creation Unit will change from time to time.  The Fund 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 Balancing Amount (defined below) to replace any Deposit Security that may not be available in sufficient quantity for delivery, eligible for transfer through the Clearing Process (discussed below) or eligible for trading by an Authorized Participant or the investor for which it is acting.  For such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below).  The Balancing Amount and any “cash in lieu” must be paid to the Trust on the third Business Day following the Transmittal Date.  You must also pay a Transaction Fee, described below, in cash.  




In addition to the in-kind deposit of securities, Authorized Participants will either pay to, or receive from, a Bull Fund an amount of cash referred to as the “Balancing Amount.”  The Balancing Amount is the amount equal to the differential, if any, between the market value of the Deposit Securities and the NAV of a Creation Unit.  The Fund will publish, on a daily basis, information about the previous day’s Balancing Amount.  The Balancing Amount may, at times, represent a significant portion of the aggregate purchase price (or, in the case of redemptions, the redemption proceeds).  This is because the mark-to-market value of the financial instruments held by the Funds will be included in the Balancing Amount (not in the Deposit Basket or Redemption Basket).  The Balancing Amount may fluctuate significantly due to the leveraged nature of the Bull Funds.




All purchase orders for Creation Units must be placed by or through an Authorized Participant.  Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”).  Authorized Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below).  A purchase order must be received by the Distributor by 4:00 p.m. Eastern time, if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s NAV per Share.   All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.




Shares may be issued in advance of receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities.  Any such transaction effected with the Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.


Purchase of Bear Funds.  The Bear Funds only accept cash to purchase Creation Units.  The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee.  All purchase orders will be processed through the Manual Clearing Process.  The Trust will deliver Shares of the Bear Funds upon payment of cash to the Trust on the third Business Day following the Transmittal Date consistent with the terms of the Authorized Participant Agreement.


Redemption from Bull Funds.  Redemption proceeds will be paid in-kind with a basket of securities (“Redemption Securities”).  In most cases, Redemption Securities will be the same as Deposit Securities on a given day.  There will be times, however, when the Deposit and Redemption Securities differ.  The composition of the Redemption Securities will be available through the NSCC.  Each Fund reserves the right to honor a redemption request with a non-conforming redemption basket.


If the value of a Creation Unit is higher than the value of the Redemption Securities, you will receive from the Fund a Balancing Amount in cash.  If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be required to pay to the Fund a Balancing Amount in cash.  If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.




As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process.  A redemption order must be received by the Distributor by 4:00 p.m. Eastern time, if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s Authorized NAV per Share.  All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.




An investor may request a redemption in cash, which a Bull Fund may in its sole discretion permit.  Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge.  Redemptions of Creation Units for cash (when available) and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.  




Redemption from Bear Funds.  Redemption proceeds will be paid in cash.  As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process.  A redemption order must be received by the Distributor by 4:00 p.m. Eastern time, if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Participant Agreement in order to receive that day’s Authorized NAV per Share.  All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.




Transaction Fees on Creation and Redemption Transactions .  Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units.  There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units.  A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted.  A variable Transaction Fee based upon the value of each Creation Unit also is applicable to each creation and redemption transaction.  Purchasers and redeemers of Creation Units of the Funds effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other expenses.  In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust.  Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust.  Investors who use the services of a broker or other such intermediary may pay additional fees for such services.  


The following table summarizes the components of the Transaction Fees.












Direxion Shares ETF Trust

Fixed Transaction Fee

Maximum Additional Charge for Purchases and Redemptions*

In-Kind

Cash

NSCC

Outside NSCC

Outside NSCC

Total Market Bull 3X Shares

$3,500

Up to 300% of NSCC Amount

$3,500

Up to 0.15%

Total Market Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Large Cap  Bull 3X Shares

$2,500

Up to 300% of NSCC Amount

$2,500

Up to 0.15%

Large Cap  Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Mid Cap Bull 3X Shares

$2,500

Up to 300% of NSCC Amount

$2,500

Up to 0.15%

Mid Cap Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Small Cap ® Bull 3X Shares

$3,500

Up to 300% of NSCC Amount

$3,500

Up to 0.15%

Small Cap ® Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Developed Markets Bull 3X Shares

$1000

Up to 300% of NSCC Amount

$1,000

Up to 0.15%

Developed Markets Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Emerging Markets Bull 3X Shares

$1000

Up to 300% of NSCC Amount

$1,000

Up to 0.15%

Emerging Market Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

BRIC Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

BRIC Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

China Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

China Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

India Bull 3X Shares

$2,500

Up to 300% of NSCC Amount

$2,500

Up to 0.15%

India Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Latin America Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

Latin America Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Clean Energy Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

Clean Energy Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Energy Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

Energy Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Financial Bull 3X Shares

$1,250

Up to 300% of NSCC Amount

$1,250

Up to 0.15%

Financial Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Technology Bull 3X Shares

$1,000

Up to 300% of NSCC Amount

$1,000

Up to 0.15%

Technology Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Real Estate Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

Real Estate Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%

Homebuilders Bull 3X Shares

$500

Up to 300% of NSCC Amount

$500

Up to 0.15%

Homebuilders Bear 3X Shares

N/A

N/A

N/A

Up to 0.15%




*  As a percentage of the amount invested.

 


MANAGEMENT OF THE FUNDS


Rafferty provides investment management services to the Funds.  Rafferty has been managing investment companies since 1997.  Rafferty is located at 33 Whitehall Street, 10 th Floor, New York, New York 10004.  As of April 30, 2008, the Adviser had approximately $1.55 billion in assets under management.


Under an investment advisory agreement between the Trust and Rafferty, the Funds pay Rafferty the following fees at an annualized rate based on a percentage of the Funds’ daily net assets.  




 

Advisory Fees Charged

All Funds

0.75%




A discussion regarding the basis on which the Board of Trustees approved the investment advisory agreements for the Funds will be available in the Trust’s first annual report to shareholders.


An investment committee of Rafferty employees has the day-to-day responsibility for managing the Funds.  The investment committee generally decides the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio manager executes transactions for the Funds consistent with the target allocation.  The portfolio managers rotate among the Funds periodically so that no single portfolio manager is responsible for a specific Fund for extended periods of time.  The members of the investment committee responsible for managing the Funds are Paul Brigandi, Tony Ng, Michael Eschmann and Adam Gould.  


Mr. Brigandi has been a Portfolio Manager at Rafferty since June 2004.  Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004.  Mr. Brigandi is a 2002 graduate of Fordham University.  




Mr. Gould has been a Portfolio Manager at Rafferty Asset Management since January of 2007.  Prior to joining Rafferty, Mr. Gould was an Index Fund Portfolio Manager at the Bank of New York, responsible for managing ten domestic Index funds, and 20 separately managed accounts.  Before joining the Bank of New York in May of 2005, Mr. Gould received an MBA from Georgetown University.  Prior to attending graduate school, Mr. Gould was a Nasdaq Market Maker at Deutsche Bank from 1999 through 2002.  He completed his undergraduate studies at the University of Wisconsin in 1999, graduating with a Bachelor of Science.   




Mr. Ng is a Portfolio Manager and joined Rafferty in April 2006.  Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006.  He was employed with Deutsche Asset Management from 1998 to 2004.  Mr. Ng graduated from State University at Buffalo in 1998.  


Mr. Norton is a Vice President and Portfolio Manager at Rafferty.  Prior to joining Rafferty in May 2006, Mr. Norton was a Vice President and Credit Derivatives Trader at Credit Suisse from 2003 to 2005.  He also was an Associate and Credit Derivatives Trader at Morgan Stanley from 2001 to 2002.  As a Credit Derivatives Trader, he was responsible for buying and selling high yield, crossover and investment grade sector single name credit derivatives.  He has a BBA in Finance from the University of Massachusetts and MBA from Columbia Business School.




The Funds’ SAI provides additional information about the investment committee members’ compensation, other accounts they manage and their ownership of securities in the Funds.


PORTFOLIO HOLDINGS


A description of the Funds’ policies and procedures with respect to the disclosure of the Funds’ portfolio securities is available in the Funds’ SAI.  


OTHER SERVICE PROVIDERS



 Foreside Fund Services, LLC serves as the Funds’ distributor.  Bank of New York Mellon serves as the Funds’ transfer agent, administrator, custodian and index receipt agent.




DISTRIBUTIONS


Fund Distributions.  Each Fund pays out dividends from its net investment income, and distributes any net capital gains, to its shareholders at least annually.  Each Fund is authorized to declare and pay capital gain distributions in additional Shares thereof or in cash; if a Fund declares such a distribution, a holder of Shares will receive additional Shares thereof unless it elects to receive cash.


Dividend Reinvestment Service.  Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund.  If the Reinvestment Service is used with respect to a Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market.  Without the Reinvestment Service, investors will receive Fund distributions in cash, except as noted above under “Fund Distributions.”  To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker.  Fund shareholders should be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.


TAXES


As with any investment, you should consider the tax consequences of buying, holding, and disposing of Shares.  The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting the Funds and their shareholders.  No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a substitute for careful tax planning.  Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.


Fund distributions to you and your sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account or 401(k) plan.


Taxes on Distributions.  Dividends from a Fund’s investment company taxable income -- generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains from certain foreign currency transactions, if any, all determined without regard to any deduction for dividends paid -- will be taxable to you as ordinary income to the extent of its earnings and profits, whether they are paid in cash or reinvested in additional Shares .  However, dividends a Fund pays to you through 2010 that are attributable to its “qualified dividend income” ( i.e., dividends it receives on stock of most domestic and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be subject to federal income tax at a maximum of 15% if you are an individual, trust, or estate and satisfy those restrictions with respect to your Shares.  A portion of a Fund’s dividends also may be eligible for the dividends-received deduction allowed to corporations -- the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign corporations -- subject to similar restrictions.  However, dividends a corporate shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax.


Distributions of a Fund’s net capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets through its last taxable year beginning before January 1, 2011, will be taxable to you as long-term capital gains, at a maximum rate of 15% if you are an individual, trust, or estate, regardless of your holding period for the Shares on which they are paid and regardless of whether they are paid in cash or reinvested in additional Shares.  A Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests.


Distributions in excess of a Fund’s current and accumulated earnings and profits first will reduce your adjusted tax basis in your Shares and, after that basis is reduced to zero, will constitute capital gain.  That capital gain will be long-term capital gain, and thus will be taxed at a maximum rate of 15% (if you are an individual, trust, or estate) through 2010, if the distributions are attributable to Shares you held for more than one year.


In general, distributions are subject to federal income tax for the year when they are paid.  However, certain distributions paid in January may be treated as paid on December 31 of the prior year.


Taxes When Shares are Sold.  Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares.  Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for more than one year, taxable at the maximum 15% rate mentioned above if you are an individual, trust, or estate; otherwise, it will be treated as short-term capital gain.  However, any capital loss arising from the disposition of Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions received with respect to those Shares.  In addition, all or a portion of any loss recognized on a sale or exchange of Shares will be disallowed to the extent other Shares are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.


Holders of Creation Units.  A person who purchases Shares of a Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received.  A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described above under “Taxes When Shares Are Sold.”

Miscellaneous.  A Fund must withhold and remit to the U.S. Treasury 28% of dividends and capital gain distributions otherwise payable to any individual or certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next sentence, “backup withholding”).  Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.  Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder's federal income tax liability or refunded.


You may also be subject to state and local taxes on Fund distributions and dispositions of Shares.  Shareholders such as non-resident aliens, foreign trusts or estates, or foreign corporations or partnerships, may be subject to different federal income tax treatment than that described above.  More information about taxes is in the Funds’ SAI.



FINANCIAL HIGHLIGHTS


The Funds are newly organized and therefore have not yet had any operations as of the date of this prospectus.









PROSPECTUS

September 2, 2008


[DIREXION LOGO]

33 Whitehall Street, 10 th Floor

New York, New York 10004


(877) 437-9363



MORE INFORMATION ON THE DIREXION SHARES ETF TRUST


Statement of Additional Information (“SAI”):

The Funds’ SAI contains more information on the Funds and their investment policies.  The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus).  A current SAI is on file with the Securities and Exchange Commission (“SEC”).


Annual and Semi-Annual Reports to Shareholders:

The Funds’ reports will provide additional information on the Funds’ investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds’ performance during that period.


To Obtain the SAI or Fund Reports Free of Charge:


Write to:

Direxion Shares ETF Trust

 

33 Whitehall Street, 10th Floor

 

New York, New York  10004

 

 

Call:

(877) 437-9363

 

 

By Internet:

www.direxionshares.com

 

These documents and other information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C.  Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090.  Reports and other information about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s Internet web site at http://www.sec.gov.  Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.







SEC File Number: [ ]







DIREXION SHARES ETF TRUST

STATEMENT OF ADDITIONAL INFORMATION

33 Whitehall Street, 10 th Floor

New York, New York 10004

(877) 437-9363


The DireXion Shares ETF Trust (the “Trust”) is an investment company that offers shares of a variety of exchange-traded funds (each, a “Fund” and together the “Funds”) to the public.   This Statement of Additional Information (“SAI”) relates to the Funds listed below.   The Trust intends to file an application to list the shares of the Funds (“Shares”) on the NYSE Arca, Inc. (“Exchange”).


The Funds attempt to provide daily investment results that correspond to a specific index or benchmark on a given day.  The Funds with the word “Bull” in their name (the “Bull Funds”) attempt to provide investment results that correlate positively to an index or benchmark.  The Funds with the word “Bear” in their name (the “Bear Funds”) attempt to provide investment results that correlate negatively to the return of an index or benchmark.  

BULL FUNDS

BEAR FUNDS

Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X Shares

Latin America Bull 3X Shares

Latin America Bear 3X Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X Shares

Financial Bull 3X Shares

Financial Bear 3X Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X Shares

 

This SAI, dated September 2, 2008 is not a prospectus.  It should be read in conjunction with the Funds’ Prospectus dated September 2, 2008.  This SAI is incorporated herein by reference into the Funds’ Prospectus.  In other words, it is legally part of the Funds’ Prospectus.  To receive a copy of the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.

 

 

 

 

 

 

 

 

 

 

 

Dated: September 2, 2008




TABLE OF CONTENTS

Page

THE DIREXION SHARES ETF TRUST

1

CLASSIFICATION OF THE FUNDS

1

Exchange Listing and Trading

1

INVESTMENT POLICIES AND TECHNIQUES

2

Asset-Backed Securities

3

Bank Obligations

3

Caps, Floors and Collars

4

Corporate Debt Securities

4

Depositary Receipts

5

Equity Securities

5

Foreign Currencies

6

Foreign Securities

9

Hybrid Instruments

11

Illiquid Investments and Restricted Securities

12

Indexed Securities

13

Interest Rate Swaps

13

Junk Bonds

13

Mortgage-Backed Securities

14

Municipal Obligations

15

Options, Futures and Other Strategies

15

Other Investment Companies

20

Zero-Coupon Securities

20

Payment-In-Kind Securities and Strips

21

Real Estate Companies

21

Real Estate Investment Trusts

21

Repurchase Agreements

21

Reverse Repurchase Agreements

22

Short Sales

22

Swap Agreements

22

Unrated Debt Securities

23

U.S. Government Securities

23

When-Issued Securities

24

Other Investment Risks and Practices

24

Risk of Tracking Error

25

Leverage

26

INVESTMENT RESTRICTIONS

31

PORTFOLIO TRANSACTIONS AND BROKERAGE

31

PORTFOLIO HOLDINGS INFORMATION

32

MANAGEMENT OF THE TRUST

33

Trustees and Officers

33

Principal Shareholders, Control Persons and Management Ownership

36

Investment Adviser

36

Portfolio Manager

37

Proxy Voting Policies and Procedures

38

Fund Administrator, Index Receipt Agent, Fund Accounting Agent, Transfer Agent and Custodian

38

Distributor

38

Distribution and Service Plan

39

Independent Registered Public Accounting Firm

39

Legal Counsel

39

DETERMINATION OF NET ASSET VALUE

39

ADDITIONAL INFORMATION CONCERNING SHARES

40

Organization and Description of Shares of Beneficial Interest

40

Book Entry Only System

41

PURCHASES AND REDEMPTIONS

42

Purchase and Issuance of Creation Units

42

Purchases through the Clearing Process (Bull Funds)

43

Purchases Through the Manual Clearing Process

44

Rejection of Purchase Orders

44

Redemption of Creation Units

45

Placement of Redemption Orders Using Enhanced Clearing Process (Bull Funds)

45

Placement of Redemption Orders Outside Clearing Process (Bull and Bear Funds)

45

Transaction Fees

56

Continuous Offering

56

DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES

57

Dividends and Other Distributions

57

Taxes

57

FINANCIAL STATEMENTS

61

APPENDIX A:  DESCRIPTION OF CORPORATE BOND RATINGS

A-1

APPENDIX B:  PROXY VOTING POLICIES AND PROCEDURES

B-1








THE DIREXION SHARES ETF TRUST

The Trust is a Delaware statutory trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940 Act”).  The Trust currently consists of 36 separate series or “Funds.”

This SAI relates to all of the Funds.  The Funds described in this SAI seek to provide daily investment results, before fees and expenses, which correspond to the performance of a particular index or benchmark.  The Funds with the word “Bull” in their name (collectively, the “Bull Funds”) attempt to provide investment results that correlate positively to the return of an index or benchmark, meaning the Bull Funds attempt to move in the same direction as the target index or benchmark.  The Funds with the word “Bear” in their name (collectively, the “Bear Funds”) attempt to provide investment results that correlate negatively to the return of an index or benchmark, meaning that the Bear Funds attempt to move in the opposite or inverse direction of the target index or benchmark.  

The correlations sought by the Bull Funds and the Bear Funds are a multiple of the returns of the target index or benchmark.  The benchmark for the Large Cap Bull 3X Shares is 300% of the daily price performance of the Russell 1000® Index, while the benchmark for the Large Cap Bear 3X Shares is 300% of the inverse, or opposite, of the daily price performance of the Russell 1000® Index.  If, on a given day, the Russell 1000® Index gains 1%, the Large Cap Bull 3X Shares is designed to gain approximately 3% (which is equal to 300% of 1%), while the Large Cap Bear 3X Shares is designed to lose approximately 3%.  Conversely, if the Russell 1000® Index loses 1% on a given day, the Large Cap Bull 3X Shares is designed to lose approximately 3%, while the Large Cap Bear 3X Shares is designed to gain approximately 3%.  


Each Fund issues and redeems Shares only in large blocks of Shares called “Creation Units.”  Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers.  Shares of each Fund will be listed for trading on the secondary market on the Exchange.  Shares can be bought and sold throughout the trading day like other publicly traded shares.  There is no minimum investment.  Although Shares are generally purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “oddlots,” at no per-share price differential.  Investors may acquire Shares directly from each Fund, and shareholder may tender their Shares for redemption directly to each Fund, only in Creation Units of 100,000 Shares, as discussed in the “Purchases and Redemptions” section below.

CLASSIFICATION OF THE FUNDS

Each Fund is a “non-diversified” series of the Trust pursuant to the 1940 Act.  A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers.  To the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s net asset value (“NAV”) may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.

Each Fund’s classification as a “non-diversified” series means that the proportion of its assets that may be invested in the securities of a single issuer is not limited by the 1940 Act.  Each Fund, however, intends to meet certain diversification standards at the end of each quarter of its taxable year.

EXCHANGE LISTING AND TRADING

An application will be filed to list the Shares on the Exchange.  If the Shares are listed and traded on the Exchange, the Shares (which are redeemable only when aggregated in Creation Units) will trade on the Exchange at prices that may differ to some degree from their net asset value.  There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of each Fund will continue to be met.  The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the Shares of the Fund for 30 or more consecutive trading days; (ii) the value of the Underlying Index is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on the Exchange inadvisable.  The Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.


As is 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 help 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 a Fund.  


The trading prices of each Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. The Trust’s investment adviser, Rafferty Asset Management, LLC ("Rafferty" or the "Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares.  Information regarding the intraday value of shares of each Fund, also known as the “indicative optimized portfolio value” (“IOPV”), is disseminated every 15 seconds throughout the trading day by the national securities exchange on which a Fund is listed or by market data vendors or other information providers. The IOPV is based on the current market value of the securities and cash required to be deposited in exchange for a Creation Unit.  The IOPV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund as a particular point in time, nor the best possible valuation of the current portfolio.  Therefore, the IOPV should not be viewed as a “real-time” update of the NAV, which is computed only once a day.  The IOPV is generally determined by using both current market quotations and/or price quotations obtained from broker-dealers that may trade in the portfolio securities held by the Funds.  The quotations of certain Fund holdings may not be updated during U.S. trading hours is such holdings do not trade in the U.S.  The Funds are not involved in, nor responsible for, the calculation or dissemination of the IOPV and make no representations or warranty as to its accuracy.

INVESTMENT POLICIES AND TECHNIQUES

In general, each Bull Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in the securities of an index.  Each Bear Fund invests at least 80% of its net assets (plus any borrowings for investment purposes) in financial instruments, including futures contracts, options on securities, indices and futures contracts, equity caps, collars and floors, swap agreements, forward contracts, reverse repurchase agreements, that, in combination, provide leveraged and unleveraged exposure to an index and in money market instruments.  In particular, the Funds below seek the following investment results as compared to their indices or benchmarks:

Fund

Index or Benchmark

Daily Target

Total Market Bull 3X Shares

 Russell 3000 ® Index

300%

Total Market Bear 3X Shares

-300%

Large Cap Bull 3X Shares

Russell 1000 ® Index

300%

Large Cap  Bear 3X Shares

-300%

Mid Cap Bull 3X Shares

Russell Midcap ® Index

300%

Mid Cap Bear 3X Shares

-300%

Small Cap Bull 3X Shares

Russell 2000 ® Index

300%

Small Cap Bear 3X Shares

-300%

Developed Markets Bull 3X Shares

MSCI EAFE ® Index

300%

Developed Markets Bear 3X Shares

-300%

Emerging Markets Bull 3X Shares

MSCI Emerging Markets Index SM

300%

Emerging Markets Bear 3X Shares

-300%

BRIC Bull 3X Shares

BNY BRIC Select ADR Index ®

300%

BRIC Bear 3X Shares

-300%

China Bull 3X Shares

BNY China Select ADR Index ®  

300%

China Bear 3X Shares

-300%

India Bull 3X Shares

Indus India Index

300%

India Bear 3X Shares

-300%

Latin America Bull 3X Shares

S&P Latin America 40  Index

300%

Latin America Bear 3X Shares

-300%

Clean Energy Bull 3X Shares

S&P Global Clean Energy Index TM

300%

Clean Energy Bear 3X Shares

-300%

Energy Bull 3X Shares

Russell 1000 ® Energy  Index

300%

Energy Bear 3X Shares

-300%

Financial Bull 3X Shares

Russell 1000 ® Financial Services Index

300%

Financial Bear 3X Shares

-300%

Technology Bull 3X Shares

Russell 1000 ® Technology Index

300%

Technology Bear 3X Shares

-300%

Real Estate Bull 3X Shares

Dow Jones Wilshire Real Estate Index SM

300%

Real Estate Bear 3X Shares

-300%

Homebuilders Bull 3X Shares

S&P Homebuilding Select Industry Index SM

300%

Homebuilders Bear 3X Shares

-300%

 

 

 

With the exception of limitations described in the “Investment Restrictions” section below, each Fund may engage in the investment strategies discussed below.  There is no assurance that any of these strategies or any other strategies and methods of investment available to a Fund will result in the achievement of the Fund’s objective.

Asset-Backed Securities


A Fund may invest in asset-backed securities of any rating or maturity.  Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement).  Typically, the originator of the loan or accounts receivable paper transfers it to a specially created trust, which repackages it as securities with a minimum denomination and a specific term.  The securities are then privately placed or publicly offered.  Examples include certificates for automobile receivables and so-called plastic bonds, backed by credit card receivables.


The value of an asset-backed security is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any credit enhancement.  Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or by having a priority to certain of the borrower’s other assets.  The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value.  Value is also affected if any credit enhancement has been exhausted.


Bank Obligations

Money Market Instruments .  The Funds may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”).  The Funds also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having a maturity of one year or less.  Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.

A Fund may invest in foreign money market instruments, which typically involve more risk that investing in U.S. money market instruments.  See “Foreign Securities” below.  These risks include, among others, higher brokerage commissions, less public information, and less liquid markets in which to sell and meet large shareholder redemption requests.  


Bankers’ Acceptances .  Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage of goods.  They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.”  The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument on its maturity date.  The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.  

Certificates of Deposit (“CDs”) .  The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to $100,000 per deposit.  The interest on such deposits may not be insured to the extent this limit is exceeded.  Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $100,000 or more without regard to the interest rate ceilings on other deposits.  To remain fully insured, these investments must be limited to $100,000 per insured bank or savings and loan association.

Commercial Paper .  Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months, exclusive of days of grace or any renewal thereof.  A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s ® (“S&P ® ”) or Prime-1 or Prime-2 by Moody’s Investors Services ® , Inc. (“Moody’s”), and in other lower quality commercial paper.

Caps, Floors and Collars

The Funds may enter into caps, floors and collars relating to securities, interest rates or currencies.  In a cap or floor, the buyer pays a premium (which is generally, but not always a single up-front amount) for the right to receive payments from the other party if, on specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount.  A collar is a combination instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially or entirely offset each other.  The notional amount of a cap, collar or floor is used to calculate payments, but is not itself exchanged. The Funds may be both buyers and sellers of these instruments.  In addition, the Funds may engage in combinations of put and call options on securities (also commonly known as collars), which may involve physical delivery of securities.  Like swaps, caps, floors and collars are very flexible products.  The terms of the transactions entered by the Funds may vary from the typical examples described here.  

Corporate Debt Securities


A Fund may invest in investment grade corporate debt securities of any rating or maturity.  Investment grade corporate bonds are those rated BBB or better by Standard & Poor’s ® Ratings Group or Baa or better by Moody’s. Securities rated BBB by S&P ® are considered investment grade, but Moody’s considers securities rated Baa to have speculative characteristics.  See Appendix A for a description of corporate bond ratings.  A Fund may also invest in unrated securities.


Corporate debt securities are fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies.  Notes, bonds, debentures and commercial paper are the most common types of corporate debt securities, with the primary difference being their maturities and secured or un-secured status.  Commercial paper has the shortest term and is usually unsecured.


The broad category of corporate debt securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations.  Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating rates of interest.


Because of the wide range of types, and maturities, of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles.  For example, commercial paper issued by a large established domestic corporation that is rated investment-grade may have a modest return on principal, but carries relatively limited risk.  On the other hand, a long-term corporate note issued by a small foreign corporation from an emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.


Corporate debt securities carry both credit risk and interest rate risk.  Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due.  Some corporate debt securities that are rated below investment-grade are generally considered speculative because they present a greater risk of loss, including default, than higher quality debt securities.  The credit risk of a particular issuer’s debt security may vary based on its priority for repayment.  For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities.  This means that the issuer might not make payments on subordinated securities while continuing to make payments on senior securities.  In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities.  Interest rate risk is the risk that the value of certain corporate debt securities will tend to fall when interest rates rise.  In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.


Depositary Receipts

To the extent a Fund invests in stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers.  Depositary receipts may not necessarily be denominated in the same currency as the underlying securities into which they may be converted. American Depositary Receipts (“ADRs”) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued by a foreign corporation.  European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement.  Global Depositary Receipts (“GDRs”) are receipts issued throughout the world that evidence a similar arrangement.  Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets.  GDRs are tradable both in the United States and in Europe and are designed for use throughout the world.  Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.


Depositary receipts may be purchased through “sponsored” or “unsponsored” facilities.  A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without participation by the issuer of the depositary security.  Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.


Fund investments in depositary receipts, which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.


Equity Securities

Common Stocks .  A Fund may invest in common stocks.  Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the value of the assets and business of the entity after all of its obligations and preferred stock are satisfied.  Common stocks generally have voting rights.  Common stocks fluctuate in price in response to many factors including historical and prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.

Convertible Securities .  A Fund may invest in convertible securities that may be considered high yield securities.  Convertible securities include corporate bonds, notes and preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula.  A convertible security entitles the holder to receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged.  While no securities investment is without some risk, investments in convertible securities generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security.  The market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline.  While convertible securities generally offer lower interest or dividend yields than nonconvertible debt securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock.  When investing in convertible securities, a Fund may invest in the lowest credit rating category.


Preferred Stock .  A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock.  It can offer the higher yield of a bond and has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited.  Preferred stock has preference over common stock in the receipt of dividends and in any residual assets after payment to creditors if the issuer is dissolved.  Although the dividend is set at a fixed annual rate, in some circumstances it can be changed or omitted by the issuer.  When investing in preferred stocks, a Fund may invest in the lowest credit rating category.


Warrants and Rights .  A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a set price, regardless of the market price for such stock.  Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends.  The market price of warrants is usually significantly less than the current price of the underlying stock.  Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.


Foreign Currencies

A Fund may invest directly and indirectly in foreign currencies.  Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. dollar. Exchange rates fluctuate for a number of reasons.


Inflation .  Exchange rates change to reflect changes in a currency’s buying power.  Different countries experience different inflation rates due to different monetary and fiscal policies, different product and labor market conditions, and a host of other factors.


Trade Deficits.  Countries with trade deficits tend to experience a depreciating currency.  Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so reducing demand for its currency.


Interest Rates.  High interest rates may raise currency values in the short term by making such currencies more attractive to investors.  However, since high interest rates are often the result of high inflation, long-term results may be the opposite.


Budget Deficits and Low Savings Rates.  Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation.  Budget deficits also can indirectly contribute to currency depreciation if a government chooses inflationary measure to cope with its deficits and debt.


Political Factors.  Political instability in a country can cause a currency to depreciate.  Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do business.


Government Control.  Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements.  In addition, governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.


The value of a Fund’s investments is calculated in U.S. dollars each day that the New York Stock Exchange is open for business.  As a result, to the extent that the a Fund’s assets are invested in instruments denominated in foreign currencies and the currencies appreciate relative to the U.S. dollar, a Fund’s NAV per share as expressed in U.S. dollars (and, therefore, the value of your investment) should increase.  If the U.S. dollar appreciates relative to the other currencies, the opposite should occur.


The currency-related gains and losses experienced by the a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. dollars.  Gains or losses on shares of the a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. dollars, in relation to the original U.S. dollar purchase price of the shares.  The amount of appreciation or depreciation in the a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency exchange rates.


A Fund may incur currency exchange costs when it sells instruments denominated in one currency and buy instruments denominated in another.


Currency Transactions.  A Fund conducts currency exchange transactions on a spot basis.  Currency transactions made on a spot basis are for cash at the spot rate prevailing in the currency exchange market for buying or selling currency.  A Fund also enters into forward currency contracts.  See “Options, Futures and Other Strategies” below. A forward currency contract is an obligation to buy or sell a specific 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 set at the time of the contract.  These contracts are entered into on the interbank market conducted directly between currency traders (usually large commercial banks) and their customers.


A Fund may invest in a combination of forward currency contracts and U.S. dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument.  This investment technique creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate.  For example, the combination of U.S. dollar-denominated instruments with “long” forward currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself.  Such combined positions are sometimes necessary when the money market in a particular foreign currency is small or relatively illiquid.


A Fund may invest in forward currency contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging).  Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of a Fund in connection with the purchase and sale of portfolio securities.  Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.


A Fund may use forward currency contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies.  A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a Fund may not be able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain circumstances, that a Fund may have to limit its currency transactions to qualify as a “regulated investment company” under the Internal Revenue Code of 1986, as amended (“Code”).


A Fund currently does not intend to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.


At or before the maturity of a forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract obligating it to buy, on the same maturity date, the same amount of the currency.  If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.


If a Fund engages in an offsetting transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices.  If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy.  If forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.


Since a Fund invests in money market instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. dollars.  Although a Fund values its assets daily in U.S. dollars, it does not convert its holdings of foreign currencies into U.S. dollars on a daily basis.  A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion.  Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference between the prices at which they buy and sell various currencies.  Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.


Foreign Currency Options.  A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies.  A Fund may buy or sell put and call options on foreign currencies either on exchanges or in the over-the-counter market.  A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price until the option expires.  A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to position limits which may limit the ability of a Fund to reduce foreign currency risk using such options. Over-the-counter options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and generally do not have as much market liquidity as exchange-traded options.


Foreign Currency Exchange-Related Securities.


Foreign currency warrants .  Foreign currency warrants such as Currency Exchange Warrants SM (“CEWs SM ”) are warrants which entitle the holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency and the U.S. dollar as of the exercise date of the warrant.  Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time.  Foreign currency warrants have been issued in connection with U.S. dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income marketplace.  Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. dollar depreciates against the value of a major foreign currency such as the Japanese yen or the euro.  The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a particular direction ( e.g., unless the U.S. dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in certain minimum amounts, and an investor wishing to exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs.  In the case of any exercise of warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby affecting both the market and cash settlement values of the warrants being exercised.  The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently, which would result in the loss of any remaining “time value” of the warrants ( i.e., the difference between the current market value and the exercise value of the warrants), and, in the case the warrants were “out-of-the-money,” in a total loss of the purchase price of the warrants.


Warrants are generally unsecured obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”).  Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets.  The initial public offering price of foreign currency warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.


Principal exchange rate linked securities .  Principal exchange rate linked securities (“PERLs SM ”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. dollar and a particular foreign currency at or about that time.  The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. dollar, and is adversely affected by increases in the foreign exchange value of the U.S. dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in the value of the U.S. dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. dollars at rates that reflect the degree of foreign currency risk assumed or given up by the purchaser of the notes ( i.e., at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the foreign exchange risk, based on the expectations of the current market).  Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities), which may have an adverse impact on the value of the principal payment to be made at maturity.


Performance indexed paper .  Performance indexed paper (“PIPs SM ”) is U.S. dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements.  The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the U.S. dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity).  The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to the minimum and maximum values of the spot exchange rate two business days prior to maturity.


Foreign Securities

A Fund may have both direct and indirect exposure through investments in stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign securities.  In most cases, the best available market for foreign securities will be on exchanges or in over-the-counter (“OTC”) markets located outside the United States.  

Investing in foreign securities carries political and economic risks distinct from those associated with investing in the United States.  Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation or confiscatory taxation, limitation on or delays in the removal of funds or other assets of a fund, political or financial instability or diplomatic and other developments that could affect such investments.  Foreign investments may be affected by actions of foreign governments adverse to the interests of U.S. investors, including the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or to convert currency into U.S. dollars. There may be a greater possibility of default by foreign governments or foreign-government sponsored enterprises. Investments in foreign countries also involve a risk of local political, economic or social instability, military action or unrest or adverse diplomatic developments.

Brazil.  Investing in Brazil involves certain considerations not typically associated with investing in the United States.  Additional considerations include: (i) investment and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to regulated investment companies for U.S. Federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian Real and the U.S. dollar;  (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic stability and the Brazilian government's economic policy; (v) potentially high rates of inflation; (vi) governmental involvement in and influence on the private sector; (vii) Brazilian accounting, auditing and financial standards and requirements, which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix) restrictions on investments by foreigners.  While the economy of Brazil has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue.

China .  Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii)greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii) controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international trade; (vi) currency exchange rate fluctuations; and (vii) the risk that certain companies in which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors of terrorism. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market.  The government's actions in this respect may not be transparent or predictable. As a result, the value of the Yuan, and the value of securities designed to provide exposure to the Yuan, can change quickly and arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue. These and other factors may decrease the value and liquidity of a Fund's investments.

Developing and Emerging Markets.  Emerging and developing markets abroad may offer special opportunities for investing but may have greater risks than more developed foreign markets, such as those in Europe, Canada, Australia, New Zealand and Japan.  There may be even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to additional delays.  They are subject to greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments.  Those countries may also be subject to the risk of greater political and economic instability, which can greatly affect the volatility of prices of securities in those countries.


Investing in emerging market securities imposes risks different from, or greater than, risks of investing in foreign developed countries.  These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant price volatility; restrictions on foreign investment; possible repatriation of investment income and capital.  In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to price controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies.  The currencies of emerging market countries may experience significant declines against the U.S. dollar.  Inflation and rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries.  Additional risks of emerging markets securities may include: greater social, economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly organized and small; differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems.  In addition, emerging securities markets may have different clearance and settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.  

India .  Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets. Political and economic conditions and changes in regulatory, tax, or economic policy in India could significantly affect the market in that country and in surrounding or related countries and have a negative impact on a Fund's performance. Agriculture occupies a prominent position in the Indian economy and the Indian economy therefore may be negatively affected by adverse weather conditions. The Indian government has exercised and continues to exercise significant influence over many aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objective of liberalizing India's exchange and trade policies, reducing the fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that these policies will continue or that the economic recovery will be sustained. While the government of India is moving to a more liberal approach, it still places restrictions on the capability and capacity of foreign investors to access and trade Rupee directly.  Foreign investors in India still face burdensome taxes on investments in income producing securities. While the economy of India has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue. These and other factors may decrease the value and liquidity of a Fund's investments.

Latin America.  Investments in Latin American countries involve special considerations not typically associated with investing in the United States.  Most Latin American countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a generally debilitating effect on economic growth.  Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels.  In addition, the political history of certain Latin American countries has been characterized by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption.  Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and removal of trade barriers, and result in significant disruption in securities markets.  Certain Latin American countries may also have managed currencies which are maintained at artificial levels to the U.S. dollar rather than at levels determined by the market.  This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors.  For example, in late 1994 the value of the Mexican peso lost more than one-third of its value relative to the dollar.  Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. dollar.  There is no significant foreign exchange market for many currencies and it would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies.  Finally, a number of Latin American countries are among the largest debtors of developing countries.  There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in the imposition of onerous conditions on their economies.


Russia.  Investing in Russia involves risks and special considerations not typically associated with investing in United States.  Since the breakup of the Soviet Union at the end of 1991, Russia has experienced dramatic political and social change.  The political system in Russia is emerging from a long history of extensive state involvement in economic affairs.  The country is undergoing a rapid transition from a centrally-controlled command system to a market-oriented, democratic model.  As a result, relative to companies operating in Western economies, companies in Russian are characterized by a lack of: (i) management with experience of operating in a market economy; (ii) modern technology; and, (iii) a sufficient capital base with which to develop and expand their operations.  It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move toward a more market-oriented economy.  Russia’s economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment, declining gross domestic product, deficit government spending, and a devaluing currency.  The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by growing liquidity problems.  Further, Russia presently receives significant financial assistance from a number of countries through various programs.  To the extent these programs are reduced or eliminated in the future, Russian economic development may be adversely impacted.  The laws and regulations in Russia affecting Western investment business continue to evolve in an unpredictable manner.  Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to the Fund’s activities are relatively new and can change quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies.  Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying interpretation, and may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Fund.  

Hybrid Instruments

A Fund may invest in hybrid instruments.  A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”).  The interest rate or (unlike most fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark.  A hybrid could be, for example, a bond issued by an oil company that pays a small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level.  Such a hybrid instrument would be a combination of a bond and a call option on oil.


Hybrids can be used as an efficient means of pursuing a variety of investment goals, including currency hedging, and increased total return.  Hybrids may not bear interest or pay dividends.  The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result, may be leveraged and move (up or down) more steeply and rapidly than the benchmark.  These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero.  Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S. dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest.  The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids.  These risks may cause significant fluctuations in the NAV of a Fund.


Certain issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act.  As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment companies and may be subject to restrictions contained in the 1940 Act.


Illiquid Investments and Restricted Securities

Each Fund may purchase and hold illiquid investments.  No Fund will purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid by virtue of the absence of a readily available market or legal or contractual restrictions on resale.  This policy does not include restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (“1933 Act”), which the Board of Trustees (“Board” or “Trustees”) or Rafferty, the Funds’ investment adviser, has determined under Board-approved guidelines are liquid.  No Fund, however, currently anticipates investing in such restricted securities.

The term “illiquid investments” for this purpose means investments that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the investments.  Investments currently considered to be illiquid include:  (1) repurchase agreements not terminable within seven days; (2) securities for which market quotations are not readily available; (3) over-the-counter (“OTC”) options and their underlying collateral; (4) bank deposits, unless they are payable at principal amount plus accrued interest on demand or within seven days after demand; and (5) restricted securities not determined to be liquid pursuant to guidelines established by the Board; and (6) in certain circumstances, securities involved in swap, cap, floor or collar transactions.  The assets used as cover for OTC options written by a Fund will be considered illiquid unless the OTC options are sold to qualified dealers who agree that a Fund may repurchase any OTC option it writes at a maximum price to be calculated by a formula set forth in the option agreement.  The cover for an OTC option written subject to this procedure would be considered illiquid only to the extent that the maximum repurchase price under the formula exceeds the intrinsic value of the option.

A Fund may not be able to sell illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid.  In addition, the sale of illiquid investments may require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid.  Illiquid investments also may be more difficult to value due to the unavailability of reliable market quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.

Rule 144A establishes a “safe harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers.  Institutional markets for restricted securities that have developed as a result of Rule 144A provide both readily ascertainable values for certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders.  An insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible securities held by a Fund, however, could affect adversely the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.

Indexed Securities

A Fund may purchase indexed securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective.  Indexed securities may be debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic.  Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.  

The performance of indexed securities depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad.  At the same time, indexed securities are subject to the credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates.  Indexed securities may be more volatile than the underlying instruments.  Certain indexed securities that are not traded on an established market may be deemed illiquid.  See “Illiquid Investments and Restricted Securities” above.

Interest Rate Swaps


A Fund may enter into interest rate swaps for hedging purposes and non-hedging purposes.  Since swaps are entered into for good faith hedging purposes or are offset by a segregated account maintained by an approved custodian, Rafferty believes that swaps do not constitute senior securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to a Fund’s borrowing restrictions.  The net amount of the excess, if any, of a Fund’s obligations over its entitlement with respect to each interest rate swap will be accrued on a daily basis and an amount of cash or other liquid securities having an aggregate NAV at least equal to such accrued excess will be maintained in a segregated account by each Fund’s custodian.  A Fund will not enter into any interest rate swap unless Rafferty believes that the other party to the transaction is creditworthy.  If there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreement.  The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation.  As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market.


Junk Bonds

A Fund may invest in lower-rated debt securities, including securities in the lowest credit rating category, of any maturity, often called “junk bonds.”  


Junk bonds generally offer a higher current yield than that available for higher-grade issues.  However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates.  During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a long economic expansion.  At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties.  As a result, the yields on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion of their value as a result of the issuers’ financial restructuring or default.  There can be no assurance that such declines will not recur.


The market for lower-rated debt issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets.  Adverse publicity and investor perceptions, whether based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market.  Changes by recognized rating services in their rating of a fixed-income security may affect the value of these investments.  A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase.  However, Rafferty will monitor the investment to determine whether continued investment in the security will assist in meeting a Fund’s investment objective.


Mortgage-Backed Securities

A Fund may invest in mortgage-backed securities.  A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of mortgage-backed securities, the ownership interest is in a pool of mortgage loans.


Mortgage-backed securities are most commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae ® ” or “GNMA”), Federal National Mortgage Association (“Fannie Mae ® ” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac ® ” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an agency of the U.S. Department of Housing and Urban Development.  It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities.  FNMA is a publicly owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment of principal and interest only by FNMA. The FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provide certain guarantees.  The corporation’s stock is owned by savings institutions across the United States and is held in trust by the Federal Home Loan Bank System. Pass-through securities issued by the FHLMC are guaranteed as to timely payment of principal and interest only by the FHLMC.


Mortgage-backed securities issued by private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly or indirectly guaranteed by the U.S. government.  The average life of a mortgage-backed security is likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested far in advance of the maturity of the mortgages in the pool.


Collateralized mortgage obligations (“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”).  Multi-class pass-through securities are interests in a trust composed of Mortgage Assets and all references in this section to CMOs include multi-class pass-through securities.  Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting in a loss of all or part of the premium if any has been paid.  Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis.  The principal and interest payments on the Mortgage Assets may be allocated among the various classes of CMOs in several ways.  Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.


Stripped mortgage-backed securities (“SMBS”) are derivative multi-class mortgage securities.  A Fund will only invest in SMBS that are obligations backed by the full faith and credit of the U.S. government.  SMBS are usually structured with two classes that receive different proportions of the interest and principal distributions from a pool of mortgage assets.  A Fund will only invest in SMBS whose mortgage assets are U.S. government obligations.  A common type of SMBS will be structured so that one class receives some of the interest and most of the principal from the mortgage assets, while the other class receives most of the interest and the remainder of the principal.  If the underlying mortgage assets experience greater than anticipated prepayments of principal, each Fund may fail to fully recoup its initial investment in these securities.  The market value of any class which consists primarily or entirely of principal payments generally is unusually volatile in response to changes in interest rates.


Investment in mortgage-backed securities poses several risks, including among others, prepayment, market and credit risk.  Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s average life and perhaps its yield.  Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower.  Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally prepaying mortgages as interest rates fall, and slowing payments as interest rates rise.  Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of the refinancing process and local economic conditions.  Market risk reflects the risk that the price of a security may fluctuate over time.  The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length of time the security is expected to be outstanding, and the liquidity of the issue.  In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold.  Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has defaulted on its obligations.  Obligations issued by U.S. government-related entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government.  The performance of private label mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions.  With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the “pass-through” payments may, at times, be difficult.


Municipal Obligations

A Fund may invest in municipal obligations.  In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors:  a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security.  Because municipal obligations are generally traded over the counter, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security.  The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to demand payment from the issuer or a financial intermediary on short notice.  


Options, Futures and Other Strategies

General .  A Fund may use certain options (traded on an exchange and OTC, or otherwise), futures contracts (sometimes referred to as “futures”) and options on futures contracts (collectively, “Financial Instruments”) as a substitute for a comparable market position in the underlying security, to attempt to hedge or limit the exposure of a Fund’s position, to create a synthetic money market position, for certain tax-related purposes and to effect closing transactions.

The use of Financial Instruments is subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the “CFTC”).  In addition, a Fund’s ability to use Financial Instruments will be limited by tax considerations.  See “Dividends, Other Distributions and Taxes.”  Pursuant to a claim for exemption filed with the National Futures Association on behalf of each Fund, each Fund is not deemed to be a commodity pool operator or a commodity pool under the Commodity Exchange Act and is not subject to registration or regulation as such under the Commodity Exchange Act.  

In addition to the instruments, strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with Financial Instruments and other similar or related techniques.  These new opportunities may become available as Rafferty develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed.  Rafferty may utilize these opportunities to the extent that they are consistent with a Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities.  A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or techniques involve materially different risks than those described below or in the Prospectus.

Special Risks .  The use of Financial Instruments involves special considerations and risks, certain of which are described below.  Risks pertaining to particular Financial Instruments are described in the sections that follow.

(1)

Successful use of most Financial Instruments depends upon Rafferty’s ability to predict movements of the overall securities markets, which requires different skills than predicting changes in the prices of individual securities.  The ordinary spreads between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to distortion.  Due to the possibility of distortion, a correct forecast of stock market trends by Rafferty may still not result in a successful transaction.  Rafferty may be incorrect in its expectations as to the extent of market movements or the time span within which the movements take place, which, thus, may result in the strategy being unsuccessful.

(2)

Options and futures prices can diverge from the prices of their underlying instruments.  Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until expiration of the contract, which may not affect security prices the same way.  Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.

(3)

As described below, a Fund might be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties ( e.g. , Financial Instruments other than purchased options).  If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position expired or matured.  These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time.  A Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the transaction (the “counterparty”) to enter into a transaction closing out the position.  Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.

(4)

Losses may arise due to unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.

Cover .  Transactions using Financial Instruments, other than purchased options, expose a Fund to an obligation to another party.  A Fund will not enter into any such transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential obligations to the extent not covered as provided in (1) above.  Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian, the Bank of New York Mellon (“BNY”), in the prescribed amount as determined daily.

Assets used as cover or held in an account cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets.  As a result, the commitment of a large portion of a Fund’s assets to cover or accounts could impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.

Options .  The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the relationship of the exercise price to the market price of the underlying investment and general market conditions.  Options that expire unexercised have no value.  Options currently are traded on the Chicago Board Options Exchange ® (“CBOE ® ”), the Exchange and other exchanges, as well as the OTC markets.

By buying a call option on a security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price.  By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to deliver securities underlying the option at the exercise price if the option is exercised.  By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price.  By writing a put option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.  

Because options premiums paid or received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.

A Fund may effectively terminate its right or obligation under an option by entering into a closing transaction.  For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing purchase transaction.  Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction.  Closing transactions permit a Fund to realize profits or limit losses on an option position prior to its exercise or expiration.

Risks of Options on Securities .  Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction.  In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee.  Thus, when a Fund purchases an OTC option, it relies on the counterparty from whom it purchased the option to make or take delivery of the underlying investment upon exercise of the option.  Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of any expected benefit of the transaction.

A Fund’s ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market.  However, there can be no assurance that such a market will exist at any particular time.  Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists.  There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration.  In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.

If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit.  The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.

Risks of Options on Currencies and Securities .  Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the option is listed that, in effect, guarantees completion of every exchange-traded option transaction.  In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization guarantee.  Thus, when a Fund purchases an OTC option, it relies on the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option.  Failure by the counterparty to do so would result in the loss of any premium paid by a Fund as well as the loss of any expected benefit of the transaction.


A Fund’s ability to establish and close out positions in exchange-traded options depends on the existence of a liquid market.  However, there can be no assurance that such a market will exist at any particular time.  Closing transactions can be made for OTC options only by negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists.  There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to expiration.  In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.


If a Fund were unable to effect a closing transaction for an option it had purchased, it would have to exercise the option to realize any profit.  The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.


Options on Indices .  An index fluctuates with changes in the market values of the securities included in the index.  Options on indices give the holder the right to receive an amount of cash upon exercise of the option.  Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of the option.  Some stock index options are based on a broad market index such as the S&P 500® Index, the NYSE Composite Index or the AMEX ® Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.

Each of the exchanges has established limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or different exchanges or are held or written on one or more accounts or through one or more brokers).  Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits.  Pursuant to these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions.  These positions limits may restrict the number of listed options that a Fund may buy or sell.

Puts and calls on indices are similar to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts.  When a Fund writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is based is greater than the exercise price of the call.  The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the total value for each point of such difference.  When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above.  When a Fund buys a put on an index, it pays a premium and has the right, prior to the expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount of cash is determined by the multiplier, as described above for calls.  When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to deliver to it an amount of cash equal to the difference between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.

Risks of Options on Indices .  If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the level of the underlying index may subsequently change.  If such a change causes the exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the applicable multiplier) to the assigned writer.

OTC Options . Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract.  While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.

Forward Contracts .  The Funds may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of securities without actually purchasing these securities, or to hedge a position.  Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities or the securities index, at an agreed upon date.  Because they are two-party contracts and because they may have terms greater than seven days, forward contracts may be considered to be illiquid for the Fund’s illiquid investment limitations.  A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy.  A Fund bears the risk of loss of the amount expected to be received under a forward contract in the event of the default or bankruptcy of a counterparty.  If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency laws which could affect the Fund’s rights as a creditor.  

Futures Contracts and Options on Futures Contracts .  A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified security on the expiration date of the contract.  An index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific index at the close of the last trading day of the contract and the price at which the agreement is made.  No physical delivery of the underlying securities in the index is made.

When a Fund writes an option on a futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures contract at a specified exercise price at any time during the term of the option.  If a Fund writes a call, it assumes a short futures position.  If it writes a put, it assumes a long futures position.  When a Fund purchases an option on a futures contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the option is a call and a short position if the option is a put).

Whether a Fund realizes a gain or loss from futures activities depends upon movements in the underlying security or index.  The extent of a Fund’s loss from an unhedged short position in futures contracts or from writing unhedged call options on futures contracts is potentially unlimited.  A Fund only purchase and sell futures contracts and options on futures contracts that are traded on a U.S. exchange or board of trade.

No price is paid upon entering into a futures contract.  Instead, at the inception of a futures contract a Fund is required to deposit “initial margin” in an amount generally equal to 10% or less of the contract value.  Margin also must be deposited when writing a call or put option on a futures contract, in accordance with applicable exchange rules.  Unlike margin in securities transactions, initial margin does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is returned to a Fund at the termination of the transaction if all contractual obligations have been satisfied.  Under certain circumstances, such as periods of high volatility, a Fund may be required by an exchange to increase the level of its initial margin payment, and initial margin requirements might be increased generally in the future by regulatory action.

Subsequent “variation margin” payments are made to and from the futures commission merchant daily as the value of the futures position varies, a process known as “marking-to-market.”  Variation margin does not involve borrowing, but rather represents a daily settlement of a Fund’s obligations to or from a futures commission merchant.  When a Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk.  In contrast, when a Fund purchases or sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements.  If a Fund has insufficient cash to meet daily variation margin requirements, it might need to sell securities at a time when such sales are disadvantageous.

Purchasers and sellers of futures contracts and options on futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold.  Positions in futures and options on futures contracts may be closed only on an exchange or board of trade that provides a secondary market.  However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time.  In such event, it may not be possible to close a futures contract or options position.

Under certain circumstances, futures exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades may be made that day at a price beyond the limit.  Daily price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.

If a Fund were unable to liquidate a futures contract or an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses.  A Fund would continue to be subject to market risk with respect to the position.  In addition, except in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.

Risks of Futures Contracts and Options Thereon .  The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to differences in the natures of those markets, are subject to the following factors, which may create distortions.  First, all participants in the futures market are subject to margin deposit and maintenance requirements.  Rather than meeting additional margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationships between the cash and futures markets.  Second, the liquidity of the futures market depends on participants entering into offsetting transactions rather than making or taking delivery.  To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion.  Third, from the point of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market.  Therefore, increased participation by speculators in the futures market may cause temporary price distortions.

Risks Associated with Commodity Futures Contracts.  There are several additional risks associated with transactions in commodity futures contracts .


Storage. Unlike the financial futures markets, in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity.  The price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the physical commodity.  To the extent that the storage costs for an underlying commodity change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.


Reinvestment.  In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures contracts today to lock in the price of the commodity at delivery tomorrow.  In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price than the expected future spot price of the commodity.  The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant implications for a Fund.  If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures prices, or choose to pursue other investments.


Other Economic Factors.  The commodities which underlie commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods, weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments.  These factors may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors.  Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials and the instability of supplies of other materials.  These additional variables may create additional investment risks which subject a Fund’s investments to greater volatility than investments in traditional securities.


Combined Positions .  A Fund may purchase and write options in combination with each other.  For example, a Fund may purchase a put option and write a call option on the same underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract.  Another possible combined position would involve writing a call option at one strike price and buying a call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase.  Because combined options positions involve multiple trades, they result in higher transaction costs and may be more difficult to open and close out.

Other Investment Companies

A Fund may invest in the securities of other investment companies.  Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses.  By investing in another investment company, a Fund becomes a shareholder of that investment company.  As a result, Fund shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses paid by shareholders of the other investment company, in addition to the fees and expenses Fund shareholders directly bear in connection with a Fund’s own operations.  A Fund intends to limit investments in securities issued by other investment companies in accordance with the 1940 Act.

Zero-Coupon Securities

A Fund may invest in zero-coupon securities of any rating or maturity.  Zero-coupon securities make no periodic interest payment, but are sold at a deep discount from their face value (“original issue discount”).  The buyer recognizes a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date.  The original issue discount varies depending on the time remaining until maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality.  If the issuer defaults, a Fund may not receive any return on its investment.  Because zero-coupon securities bear no interest and compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities.  Since zero-coupon security holders do not receive interest payments, when interest rates rise, zero-coupon securities fall more dramatically in value than securities paying interest on a current basis.  When interest rates fall, zero-coupon securities rise more rapidly in value because the securities reflect a fixed rate of return.  An investment in zero-coupon and delayed interest securities may cause a Fund to recognize income and to be required to make distributions thereof to shareholders before it receives any cash payments on its investment.  See “Dividends, Other Distributions and Taxes – Income from Zero-Coupon and Payment-in-Kind Securities.”


Payment-In-Kind Securities and Strips

A Fund may invest in payment-in-kind securities and strips of any rating or maturity.  Payment-in-kind securities allow the issuer, at its option, to make current interest payments on the bonds either in cash or in bonds.  Both zero-coupon securities and payment-in-kind securities allow an issuer to avoid the need to generate cash to meet current interest payments.  Even though such securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to shareholders. Thus, a Fund could be required at times to liquidate other investments to satisfy distribution requirements.  A Fund may also invest in strips, which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities.  Like zero-coupon securities and payment-in-kind securities, strips are generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.


Real Estate Companies

A Fund may make investments in the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust (“REIT”) shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.


Real Estate Investment Trusts

A Fund may make investments in REITs.  REITs include equity, mortgage and hybrid REITs.  Equity REITs own real estate properties, and their revenue comes principally from rent.  Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned on their mortgage loans.  Hybrid REITs combine characteristics of both equity and mortgage REITs.  The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of the credit extended.  The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow.  The risks associated with REITs include defaults by borrowers, self-liquidation, failure to qualify as a pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.


Repurchase Agreements

A Fund may enter into repurchase agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities.  Repurchase agreements generally are for a short period of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few days later.  The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period.  While the maturities of the underlying securities in repurchase agreement transactions may be more than one year, the term of each repurchase agreement always will be less than one year.  Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments.  No Fund may enter into such a repurchase agreement if, as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments.  See “Illiquid Investments and Restricted Securities” above.

A Fund will always receive, as collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement.  In the event of default or bankruptcy by the seller, a Fund will liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s obligation to repurchase the security.  If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral.  In addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.

Reverse Repurchase Agreements

A Fund may borrow by entering into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements.  Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price.  At the time a Fund enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including accrued interest).  Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase.  If the buyer of securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.  During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted.  Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a Fund’s limitation on borrowing.

Short Sales

A Fund may engage in short sale transactions under which a Fund sells a security it does not own.  To complete such a transaction, a Fund must borrow the security to make delivery to the buyer.  A Fund then is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement.  The price at such time may be more or less than the price at which the security was sold by a Fund.  Until the security is replaced, a Fund is required to pay to the lender amounts equal to any dividends that accrue during the period of the loan.  The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out.

Until a Fund closes its short position or replaces the borrowed stock, a Fund will:  (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise cover a Fund’s short position.

Swap Agreements

A Fund may enter into swap agreements.  Swap agreements are two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year.  In a standard “swap” transaction, two parties agree to exchange the returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments.  The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional amount,” i.e., the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index.


Most swap agreements entered into by a Fund calculate the obligations of the parties to the agreement on a “net basis.”  Consequently, a Fund’s current obligations (or rights) under a swap agreement generally will be equal to the net amount to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”).  Payments may be made at the conclusion of a swap agreement or periodically during its term.


Swap agreements do not involve the delivery of securities or other underlying assets.  Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss consists of the net amount of payments that such Fund is contractually entitled to receive, if any.


The net amount of the excess, if any, of a Fund’s obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be maintained in an account with the Custodian that satisfies the 1940 Act.  A Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis.  Obligations under swap agreements so covered will not be construed to be “senior securities” for purposes of a Fund’s investment restriction concerning senior securities.


Because they are two-party contracts and because they may have terms of greater than seven days, swap agreements may be considered to be illiquid for a Fund illiquid investment limitations.  A Fund will not enter into any swap agreement unless Rafferty believes that the other party to the transaction is creditworthy.  A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.


A Fund may enter into a swap agreement with respect to an equity market index in circumstances where Rafferty believes that it may be more cost effective or practical than buying the securities represented by such index or a futures contract or an option on such index.  The counterparty to any swap agreement will typically be a bank, investment banking firm or broker-dealer.  The counterparty will generally agree to pay a Fund the amount, if any, by which the notional amount of the swap agreement would have increased in value had it been invested in the particular stocks represented in the index, plus the dividends that would have been received on those stocks.  A Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Fund on any swap agreement should be the gain or loss on the notional amount plus dividends on the stocks less the interest paid by a Fund on the notional amount.


The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation.  As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments that are traded in the OTC market.  Rafferty, under the supervision of the Board, is responsible for determining and monitoring the liquidity of Fund transactions in swap agreements.


The use of equity swaps is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.

Unrated Debt Securities

A Fund may also invest in unrated debt securities.  Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market.  Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost of getting a rating for their bonds.  The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.  


U.S. Government Securities

A Fund may invest in securities issued or guaranteed by the U.S. government or its agencies or instrumentalities.  

U.S. government securities are high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury or by an agency or instrumentality of the U.S. government.  Not all U.S. government securities are backed by the full faith and credit of the United States.  Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others are supported only by the credit of the instrumentality.  In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate repayment.

U.S. government securities include Treasury Bills (which mature within one year of the date they are issued), Treasury Notes (which have maturities of one to ten years) and Treasury Bonds (which generally have maturities of more than 10 years).  All such Treasury securities are backed by the full faith and credit of the United States.


U.S. government agencies and instrumentalities that issue or guarantee securities include the Federal Housing Administration, the Federal National Mortgage Association (“Fannie Mae © ”), the Farmers Home Administration, the Export-Import Bank of the United States, the Small Business Administration, the Government National Mortgage Association (“Ginnie Mae ® ”), the General Services Administration, the Central Bank for Cooperatives, the Federal Home Loan Banks the Federal Home Loan Mortgage Corporation (“Freddie Mac © ”), the Farm Credit Banks, the Maritime Administration, the Tennessee Valley Authority, the Resolution Funding Corporation and the Student Loan Marketing Association (“Sallie Mae © ”).

Yields on short-, intermediate- and long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation.  Debt securities with longer maturities tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields.  The market value of U.S. government securities generally varies inversely with changes in the market interest rates.  An increase in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a Fund’s portfolio investments in these securities.


When-Issued Securities

A Fund may enter into firm commitment agreements for the purchase of securities on a specified future date.  A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on the instruments may not be fixed at the time of transaction.  A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested.  If a Fund enters into a firm commitment agreement, liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date.  Accordingly, if the market price of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment.  During the time a Fund is obligated to purchase such a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.


Other Investment Risks and Practices

Borrowing .  A Fund may borrow money for investment purposes, which is a form of leveraging.  Leveraging investments, by purchasing securities with borrowed money, is a speculative technique that increases investment risk while increasing investment opportunity.  Leverage will magnify changes in a Fund’s NAV and on a Fund’s investments.  Although the principal of such borrowings will be fixed, a Fund’s assets may change in value during the time the borrowing is outstanding.  Leverage also creates interest expenses for a Fund.  To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will have to pay, that Fund’s net income will be greater than it would be if leverage were not used.  Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund will be less than it would be if leverage were not used, and therefore the amount available for distribution to shareholders as dividends will be reduced.  The use of derivatives in connection with leverage creates the potential for significant loss.

A Fund may borrow money to facilitate management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous.  Such borrowing is not for investment purposes and will be repaid by the borrowing Fund promptly.

As required by the 1940 Act, a Fund must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed.  If at any time the value of the required asset coverage declines as a result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from an investment standpoint to sell portfolio instruments at that time.

Lending Portfolio Securities .  Each Fund may lend portfolio securities with a value not exceeding 33 1/3% of its total assets to brokers, dealers, and financial institutions.  Borrowers are required continuously to secure their obligations to return securities on loan from a Fund by depositing any combination of short-term government securities and cash as collateral with a Fund.  The collateral must be equal to at least 100% of the market value of the loaned securities, which will be marked to market daily.  While a Fund’s portfolio securities are on loan, a Fund continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the collateral or fee income if the loan is otherwise collateralized.  A Fund may invest the interest received and the collateral, thereby earning additional income.  Loans would be subject to termination by the lending Fund on a four-business days notice or by the borrower on a one-day notice.  Borrowed securities must be returned when the loan is terminated.  Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders.  A lending Fund may pay reasonable finders, borrowers, administrative and custodial fees in connection with a loan.  Each Fund currently has no intention of lending its portfolio securities.

Portfolio Turnover .  The Trust anticipates that each Fund’s annual portfolio turnover will vary.  A Fund’s portfolio turnover rate is calculated by the value of the securities purchased or securities sold, excluding all securities whose maturities at the time of acquisition were one year or less, divided by the average monthly value of such securities owned during the year.  Based on this calculation, instruments with remaining maturities of less than one year are excluded from the portfolio turnover rate.  Such instruments generally would include futures contracts and options, since such contracts generally have a remaining maturity of less than one year.  In any given period, all of a Fund’s investments may have a remaining maturity of less than one year; in that case, the portfolio turnover rate for that period would be equal to zero.  However, each Fund’s portfolio turnover rate calculated with all securities whose maturities were one year or less is anticipated to be unusually high.  

High portfolio turnover involves correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities.  Such sales also may result in adverse tax consequences to a Fund’s shareholders resulting from its distributions of the increased capital gains recognized as a result of that trading.  The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s performance.

Risk of Tracking Error

Several factors may affect a Fund’s ability to track the performance of its applicable index.  Among these factors are: (1) Fund expenses, including brokerage expenses and commissions (which may be increased by high portfolio turnover); (2) less than all of the securities in the target index being held by a Fund and securities not included in the target index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market for which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with that Fund’s investment restrictions or policies, or regulatory or tax law requirements; and (7) market movements that run counter to a Bull Fund’s investments (which will cause divergence between a Fund and its target index over time due to the mathematical effects of leveraging).

While index futures and options contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments.  As a result, a Fund’s short-term performance will reflect such deviation from its target index.

In the case of Bear ETFs whose NAVs are intended to move inversely from their target indices, the factor of compounding also may lead to tracking error.  Even if there is a perfect inverse correlation between a Fund and the return of its applicable target index on a daily basis, the symmetry between the changes in the benchmark and the changes in a Fund’s NAV can be altered significantly over time by a compounding effect.  For example, if a Fund achieved a perfect inverse correlation with its target index on every trading day over an extended period and the level of returns of that index significantly decreased during that period, a compounding effect for that period would result, causing an increase in a Fund’s NAV by a percentage that is somewhat greater than the percentage that the index’s returns decreased.  Conversely, if a Fund maintained a perfect inverse correlation with its target index over an extended period and if the level of returns of that index significantly increased over that period, a compounding effect would result, causing a decrease of a Fund’s NAV by a percentage that would be somewhat less than the percentage that the index returns increased.

Leverage

Each Fund intends regularly to use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative.  Leverage exists when a Fund achieves the right to a return on a capital base that exceeds the amount the Fund has invested.  Leverage creates the potential for greater gains to shareholders of these Funds during favorable market conditions and the risk of magnified losses during adverse market conditions.  Leverage is likely to cause higher volatility of the net asset values of these Funds’ Shares.  Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that requires the Fund to pay interest which would decrease the Fund’s total return to shareholders.  If these Funds achieve their investment objectives, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had these Funds not been leveraged.

Special Note Regarding the Correlation Risks of Bull Funds .  As discussed in the Prospectus, each of the Funds is a “leveraged,” or Bull Fund, in the sense that each has an investment objective to match a multiple of the performance of an index on a given day.  The Funds are subject to all of the correlation risks described in the Prospectus.  In addition, there is a special form of correlation risk that derives from the Funds’ use of leverage, which is that for periods greater than one day, the use of leverage tends to cause the performance of a Fund to be either greater than, or less than, the index performance times the stated multiple in the fund objective.

A Bull Fund’s return for periods longer than one day is primarily a function of the following:


a)

index performance;

 

 

b)

index volatility;

 

 

c)

financing rates associated with leverage;

 

 

d)

other fund expenses;

 

 

e)

dividends paid by companies in the index; and

 

 

f)

period of time.


The fund performance for a Bull Fund can be estimated given any set of assumptions for the factors described above. The tables below illustrate the impact of two factors, index volatility and index performance, on a Bull Fund. Index volatility is a statistical measure of the magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed to be 252). The tables show estimated fund returns for a number of combinations of index performance and index volatility over a one year period. Assumptions used in the tables include: a) no dividends paid by the companies included in the index; b) no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, the fund’s performance would be lower than shown.

The first table below shows an example in which a Bull Fund that has an investment objective to correspond to three times (300% of) the daily performance of an index. The Bull Fund could be expected to achieve a 30% return on a yearly basis if the index performance was 10%, absent any costs or the correlation risk or other factors described above and in the Prospectus under “Correlation Risk.” However, as the table shows, with an index volatility of 20%, such a fund would return 18.02%, again absent any costs or other factors described above and in the Prospectus under “Correlation Risk.” In the charts below, areas shaded green represent those scenarios where a Bull Fund with the investment objective described will outperform (i.e., return more than) the index performance times the stated multiple in the Fund’s investment objective; conversely areas shaded red represent those scenarios where the Fund will underperform (i.e., return less than) the index performance times the stated multiple in the Fund’s investment objective.







Estimated Fund Return Over One Year of Bull Funds.


 

300%

Index Volatility

One Year Index

One Year Index

 

 

 

 

 

 

 

 

 

 

 

Performance

Performance

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

-50%

-150%

-87.67%

-87.94%

-88.39%

-88.98%

-89.71%

-90.53%

-91.43%

-92.36%

-93.29%

-94.21%

-95.08%

-45%

-135%

-83.56%

-83.92%

-84.52%

-85.31%

-86.27%

-87.38%

-88.56%

-89.81%

-91.05%

-92.27%

-93.44%

-40%

-120%

-78.63%

-79.10%

-79.88%

-80.91%

-82.17%

-83.59%

-85.13%

-86.75%

-88.38%

-89.96%

-91.49%

-35%

-105%

-72.80%

-73.41%

-74.39%

-75.70%

-77.29%

-79.11%

-81.08%

-83.14%

-85.19%

-87.21%

-89.15%

-30%

-90%

-66.01%

-66.76%

-67.98%

-69.63%

-71.62%

-73.88%

-76.34%

-78.90%

-81.48%

-84.01%

-86.44%

-25%

-75%

-58.17%

-59.10%

-60.60%

-62.63%

-65.07%

-67.86%

-70.90%

-74.02%

-77.20%

-80.34%

-83.32%

-20%

-60%

-49.21%

-50.34%

-52.17%

-54.62%

-57.59%

-60.98%

-64.63%

-68.47%

-72.33%

-76.09%

-79.67%

-15%

-45%

-39.06%

-40.42%

-42.61%

-45.56%

-49.12%

-53.17%

-57.57%

-62.16%

-66.84%

-71.30%

-75.66%

-10%

-30%

-27.65%

-29.26%

-31.86%

-35.35%

-39.58%

-44.42%

-49.65%

-55.11%

-60.60%

-65.93%

-71.06%

-5%

-15%

-14.91%

-16.79%

-19.86%

-23.96%

-28.97%

-34.61%

-40.78%

-47.16%

-53.63%

-59.98%

-66.02%

0%

0%

-0.75%

-2.95%

-6.52%

-11.31%

-17.12%

-23.75%

-30.92%

-38.42%

-45.95%

-53.24%

-60.35%

5%

15%

14.90%

12.34%

8.20%

2.65%

-4.09%

-11.77%

-20.06%

-28.70%

-37.39%

-45.96%

-54.10%

10%

30%

32.09%

29.16%

24.40%

18.02%

10.25%

1.45%

-8.06%

-18.00%

-28.04%

-37.85%

-47.21%

15%

45%

50.92%

47.56%

42.11%

34.84%

25.97%

15.91%

5.06%

-6.42%

-17.76%

-29.04%

-39.69%

20%

60%

71.44%

67.62%

61.46%

53.15%

43.06%

31.57%

19.18%

6.28%

-6.71%

-19.58%

-31.70%

25%

75%

93.74%

89.42%

82.41%

73.05%

61.64%

48.66%

34.70%

20.00%

5.29%

-9.26%

-22.80%

30%

90%

117.88%

113.01%

105.10%

94.55%

81.66%

67.19%

51.37%

34.80%

18.38%

2.23%

-13.59%

35%

105%

143.92%

138.47%

129.64%

117.79%

103.43%

87.06%

69.28%

50.99%

32.37%

13.84%

-3.24%

40%

120%

171.97%

165.85%

155.99%

142.72%

126.67%

108.36%

88.66%

67.88%

47.33%

26.79%

7.60%

45%

135%

202.06%

195.26%

184.25%

169.50%

151.56%

131.38%

109.44%

86.00%

63.14%

40.68%

19.26%

50%

150%

234.28%

226.74%

214.51%

198.08%

178.22%

155.74%

131.23%

105.78%

80.18%

55.12%

31.98%









Estimated Fund Return Over One Year of 1X Bear Funds.


 

Inverse of

Index Volatility

One Year Index

One Year Index

 

 

 

 

 

 

 

 

 

 

 

Performance

Performance

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

-50%

50%

99.1%

97.7%

95.3%

91.9%

87.7%

82.8%

77.2%

70.5%

63.7%

56.1%

48.1%

-45%

45%

81.1%

79.8%

77.6%

74.5%

70.8%

66.2%

60.8%

55.4%

49.1%

42.1%

34.5%

-40%

40%

66.1%

64.9%

62.8%

60.1%

56.5%

52.5%

47.6%

42.2%

36.4%

30.3%

23.5%

-35%

35%

53.4%

52.2%

50.4%

47.8%

44.6%

40.6%

36.3%

31.4%

26.0%

20.2%

13.9%

-30%

30%

42.4%

41.4%

39.6%

37.2%

34.3%

30.6%

26.4%

22.0%

16.7%

11.7%

5.8%

-25%

25%

33.0%

32.0%

30.4%

28.1%

25.4%

21.9%

18.1%

13.7%

9.1%

4.1%

-1.4%

-20%

20%

24.7%

23.7%

22.2%

20.1%

17.5%

14.2%

10.7%

6.5%

2.3%

-2.5%

-7.1%

-15%

15%

17.3%

16.5%

15.0%

13.1%

10.5%

7.6%

4.1%

0.4%

-3.9%

-8.2%

-13.2%

-10%

10%

10.8%

10.0%

8.6%

6.8%

4.4%

1.6%

-1.7%

-5.3%

-9.1%

-13.2%

-17.6%

-5%

5%

5.0%

4.2%

2.9%

1.2%

-1.1%

-3.7%

-6.7%

-10.3%

-13.9%

-18.0%

-21.9%

0%

0%

-0.2%

-1.0%

-2.2%

-3.9%

-6.1%

-8.6%

-11.5%

-14.9%

-18.2%

-22.0%

-26.0%

5%

-5%

-5.0%

-5.7%

-6.9%

-8.5%

-10.5%

-13.0%

-15.7%

-18.9%

-22.2%

-25.9%

-29.4%

10%

-10%

-9.3%

-10.0%

-11.1%

-12.7%

-14.6%

-16.9%

-19.5%

-22.5%

-25.6%

-29.3%

-32.8%

15%

-15%

-13.3%

-13.9%

-15.0%

-16.5%

-18.3%

-20.6%

-23.1%

-25.9%

-28.9%

-32.3%

-35.9%

20%

-20%

-16.9%

-17.5%

-18.5%

-20.0%

-21.8%

-23.9%

-26.3%

-29.1%

-32.1%

-35.5%

-38.5%

25%

-25%

-20.2%

-20.8%

-21.8%

-23.2%

-24.9%

-27.0%

-29.3%

-31.8%

-34.8%

-37.8%

-41.2%

30%

-30%

-23.3%

-23.9%

-24.8%

-26.2%

-27.8%

-29.8%

-32.1%

-34.5%

-37.2%

-40.2%

-43.2%

35%

-35%

-26.1%

-26.7%

-27.6%

-28.9%

-30.5%

-32.5%

-34.5%

-37.1%

-39.7%

-42.5%

-45.7%

40%

-40%

-28.8%

-29.3%

-30.2%

-31.5%

-33.1%

-34.9%

-37.1%

-39.4%

-41.8%

-44.9%

-47.4%

45%

-45%

-31.2%

-31.8%

-32.6%

-33.9%

-35.4%

-37.2%

-39.1%

-41.3%

-44.0%

-46.7%

-49.7%

50%

-50%

-33.5%

-34.1%

-34.9%

-36.1%

-37.4%

-39.2%

-41.3%

-43.4%

-45.8%

-48.4%

-51.1%







Estimated Fund Return Over One Year of 3X Bear ETFs.


 

300% Inverse of

Index Volatility

One Year Index

One Year Index

 

 

 

 

 

 

 

 

 

 

 

Performance

Performance

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

55%

-50%

150%

679.4%

646.2%

593.9%

526.6%

449.6%

367.9%

287.1%

210.0%

141.3%

82.1%

33.3%

-45%

135%

487.3%

462.2%

422.6%

371.6%

313.4%

251.9%

190.6%

132.9%

80.9%

36.5%

-0.1%

-40%

120%

353.4%

333.9%

303.2%

264.0%

219.0%

171.1%

123.9%

79.2%

39.4%

4.7%

-23.4%

-35%

105%

257.2%

241.8%

217.7%

186.6%

150.9%

113.3%

75.9%

40.7%

9.3%

-17.9%

-40.0%

-30%

90%

186.4%

174.0%

154.5%

129.5%

101.1%

70.8%

40.8%

12.6%

-12.7%

-34.2%

-52.2%

-25%

75%

133.1%

123.0%

107.2%

86.7%

63.4%

38.7%

14.3%

-8.6%

-29.3%

-46.8%

-61.4%

-20%

60%

92.2%

83.9%

70.7%

53.9%

34.6%

14.2%

-5.9%

-24.9%

-41.9%

-56.3%

-68.3%

-15%

45%

60.3%

53.4%

42.4%

28.2%

12.2%

-4.9%

-21.7%

-37.5%

-51.7%

-63.8%

-73.7%

-10%

30%

35.1%

29.2%

19.9%

8.0%

-5.6%

-19.9%

-34.1%

-47.5%

-59.5%

-69.6%

-77.9%

-5%

15%

14.9%

9.9%

1.9%

-8.2%

-19.8%

-32.0%

-44.1%

-55.5%

-65.5%

-74.3%

-81.3%

0%

0%

-1.5%

-5.8%

-12.6%

-21.3%

-31.3%

-41.8%

-52.1%

-61.9%

-70.6%

-78.0%

-84.1%

5%

-15%

-14.9%

-18.7%

-24.6%

-32.1%

-40.7%

-49.8%

-58.8%

-67.2%

-74.7%

-81.1%

-86.3%

10%

-30%

-26.0%

-29.3%

-34.4%

-41.0%

-48.5%

-56.4%

-64.2%

-71.5%

-78.1%

-83.6%

-88.2%

15%

-45%

-35.3%

-38.1%

-42.6%

-48.4%

-55.1%

-61.9%

-68.8%

-75.1%

-80.9%

-85.7%

-89.7%

20%

-60%

-43.0%

-45.6%

-49.5%

-54.6%

-60.4%

-66.5%

-72.6%

-78.3%

-83.2%

-87.5%

-91.0%

25%

-75%

-49.6%

-51.9%

-55.4%

-59.9%

-65.0%

-70.5%

-75.8%

-80.8%

-85.2%

-89.0%

-92.1%

30%

-90%

-55.2%

-57.2%

-60.4%

-64.4%

-69.0%

-73.8%

-78.6%

-83.0%

-87.0%

-90.3%

-93.0%

35%

-105%

-60.1%

-61.9%

-64.7%

-68.3%

-72.4%

-76.7%

-80.9%

-84.9%

-88.4%

-91.4%

-93.8%

40%

-120%

-64.2%

-65.8%

-68.4%

-71.6%

-75.3%

-79.1%

-83.0%

-86.5%

-89.7%

-92.3%

-94.5%

45%

-135%

-67.8%

-69.3%

-71.5%

-74.5%

-77.8%

-81.3%

-84.8%

-87.9%

-90.8%

-93.2%

-95.1%

50%

-150%

-70.9%

-72.3%

-74.3%

-77.0%

-80.0%

-83.2%

-86.3%

-89.2%

-91.7%

-93.9%

-95.6%


The foregoing tables are intended to isolate the effect of index volatility and index performance on the return of a Bull Fund. The fund’s actual returns may be significantly greater or less than the returns shown above as a result of any of factors discussed above or under “Correlation Risk” in the Prospectus.







INVESTMENT RESTRICTIONS

The Trust, on behalf of each Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund, as defined by the Investment Company Act of 1940, as amended (the “1940 Act”).  As defined by the 1940 Act, a “vote of a majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a meeting, if more than 50% of the outstanding shares are represented at the meeting in person or by proxy.

Each Fund’s investment objective is a non-fundamental policy of the Fund.  Non-fundamental policies may be changed by the Board of Trustees (“Board”) without shareholder approval.  

For purposes of the following limitations, all percentage limitations apply immediately after a purchase or initial investment.  Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the percentage resulting from any change in value or net assets will not result in a violation of such restrictions.  If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced promptly to the extent necessary to comply with the limitation.

Each Fund may not:

1.

Borrow money, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.

 

 

2.

Issue senior securities, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.

 

 

3.

Make loans, except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.

 

 

4.

 

Except for any Fund that is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. Government or any of its agencies or instrumentalities) if, as a result, 25% or more of the Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry.

 

5.

Purchase or sell real estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real estate.

 

 

6.

Purchase or sell commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.

 

 

7.

Underwrite securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the Securities Act of 1933, as amended (“1933 Act”) in the disposition of restricted securities or other investment company securities.

PORTFOLIO TRANSACTIONS AND BROKERAGE

Subject to the general supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any.  Rafferty expects that a Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.  

When selecting a broker or dealer to execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security, operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.  

In effecting portfolio transactions for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in the applicable index and seeks to execute trades of such securities at the lowest commission rate reasonably available.  With respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following: information as to the availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities.  Each Fund believes that the requirement always to seek the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services.  In seeking to determine the reasonableness of brokerage commissions paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the transaction.

Rafferty may use research and services provided to it by brokers in servicing all Funds; however, not all such services may be used by Rafferty in connection with a Fund.  While the receipt of such information and services is useful in varying degrees and generally would reduce the amount of research or services otherwise performed by Rafferty, this information and these services are of indeterminable value and would not reduce Rafferty’s investment advisory fee to be paid by a Fund.

Purchases and sales of U.S. government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals.  Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.

PORTFOLIO HOLDINGS INFORMATION

The Trust maintains portfolio holdings disclosure policies that govern the timing and circumstances of disclosure to shareholders and third parties of information regarding a Fund’s portfolio investments to ensure that such disclosure is in the best interests of a Fund’s shareholders.  In adopting the policies, the Board considered actual and potential material conflicts that could arise between the interest of Fund shareholders, the Adviser, distributor, or any other affiliated person of a Fund.  Disclosure of a Fund’s complete holdings is required to be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q.  These reports are available, free of charge, on the EDGAR database on the SEC’s website at www.sec.gov.  In addition, each Fund’s portfolio holdings will be made available on the Funds’ website at www.direxionshares.com each day the Funds are open for business.


The portfolio composition file (“PCF”) and the IOPV, which contain portfolio holdings information, will be made available daily, including to the Funds’ service providers to facilitate the provision of services to the Funds and to certain other entities as necessary for transactions in Creation Units.  Such entities may be limited to National Securities Clearing Corporation (“NSCC”) member, subscribers to various fee-based services, investors that have entered into an authorized participant agreement with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized Participants”), and other institutional market participants that provide information services.  Each business day, Fund portfolio holdings information will be provided to the Distributor or other agent for dissemination through the facilities of the NSCC and/or through other fee-based services to NSCC members and/or subscribers to the fee-based services, including Authorized Participants, and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market.


Daily access to the PCF file and IOPV is permitted to: (i) certain personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management; (ii) Authorized Participants through NSCC, and (iii) other personnel of the Adviser and the Funds’ distributor, administrator, custodian and fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.

From time to time, rating and ranking organizations such as Standard & Poor’s ® and Morningstar ® , Inc. may request complete portfolio holdings information in connection with rating a Fund.  To prevent such parties from potentially misusing the complete portfolio holdings information, a Fund will generally only disclose such information no earlier than one business day following the date of the information.  Portfolio holdings information made available in connection with the creation/redemption process may be provided to other entities that provide additional services to the Funds in the ordinary course of business after it has been disseminated to the NSCC.  


In addition, the Funds’ President may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic information.  The Chief Compliance Officer shall report any disclosures made pursuant to this exception to the Board.


MANAGEMENT OF THE TRUST

Trustees and Officers

The business affairs of each Fund are managed by or under the direction of a Board of Trustees (“Board” or “Trustees”).  The Trustees are responsible for managing a Fund’s business affairs and for exercising all of a Fund’s powers except those reserved to the shareholders.  A Trustee may be removed by a written instrument, signed by at least two-thirds of the other Trustees or by a two-thirds vote of the outstanding Trust shares.

The following table is a list of the Trustees and officers of the Trust, their age, business address and principal occupation during the past five years, including any affiliation with Rafferty, length of service to the Trust, and the position, if any, that they hold on the board of directors of companies other than the Trust.  Each of the non-interested Trustees also serves on the Boards of the Direxion Funds and the Direxion Insurance Trust, the other registered investment companies in the Direxion mutual fund complex which are collectively comprised of 145 series, including the Funds.  Unless otherwise noted, the business address of each Trustee and Officer of the Trust is 33 Whitehall Street, 10 th Floor, New York, New York 10004.  

Interested Trustee

Name, Address and Age

Position(s) Held with Fund

Term of Office and Length of Time Served

Principal Occupation(s) During Past Five Years

# of Portfolios in Direxion Complex Overseen by Trustee (2)

Other Trusteeships/ Directorships Held by Trustee

Daniel D. O’Neill (1)

Age:  40

President and Chairman of the Board of Trustees

Since 2008

Managing Director of Rafferty, 1995-present.  

32

None




Non-Interested Trustees   

Name, Address and Age

Position(s) Held with Fund

Term of Office and Length of Time Served

Principal Occupation(s) During Past Five Years

# of Portfolios in Direxion Complex Overseen by Trustee (2)

Other Trusteeships/ Directorships Held by Trustee

Daniel J. Byrne

Age: 63

Trustee

Lifetime of Trust until removal or resignation; Since 1997

President and Chief Executive Officer of Byrne Securities Inc., 1992-present.

145

Trustee, The Opening Word Program, Wyandanch, NY

Gerald E. Shanley III

Age:  64

Trustee

Lifetime of Trust until removal or resignation; Since 1997

Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.

145

None

John Weisser

Age: 65

Trustee

Lifetime of Trust until removal or resignation; Since 2007

Retired, Since 1995; Salomon Brothers, Inc, 1971-1995, most recently as Managing Director.

145

MainStay Group of Funds

Officers     

Name, Address and Age

Position(s) Held with Fund

Term of Office and Length of Time Served

Principal Occupation(s) During Past Five Years

# of Portfolios in Direxion Complex Overseen by Trustee (2)

Other Trusteeships/ Directorships Held by Trustee

Daniel D. O’Neill (1)

Age:  40

President and Chairman of the Board of Trustees

Since 2008

Managing Director of Rafferty, 1999-present.

N/A

None

William Franca

Age:  50

Executive Vice President – Head of Distribution

Since 2008

Senior Vice President – Rafferty since 2006; Massachusetts Financial Services/SunLife Financial Distributors, 2002-2004; Executive Vice President, Distribution, SunLife, 2001-2002.

N/A

None

Todd Warren

Age: 40

Chief Compliance Officer

Since 2008

Chief Legal Officer, Alaric Compliance Services, LLC 2006 to present; CCO and General Counsel, Oracle Evolution LLC 10/04 – 2/06.

N/A

None

Todd Kellerman

Age:  34

Chief Financial Officer and Treasurer

Since 2008

Senior Vice President, Rafferty since 2006; Vice President of Corporate Development. Raven Holdings, Inc., 2003-2005; Business Consultant, 2002-2003; Senior Consultant – Business Consulting, Arthur Andersen, 1999-2000.

N/A

None

(1)

Mr. O’Neill is affiliated with Rafferty.  Mr. O’Neill is the Managing Director of Rafferty and owns a beneficial interest in Rafferty .

(2)

The “Fund Complex” consists of the Direxion Shares ETF Trust which currently offers for sale to the public 8 of the 32 Funds registered with the SEC, the Direxion Funds which currently offers for sale to the public 40 portfolios of the 68 currently registered with the SEC and the Direxion Insurance Trust which currently offers for sale 3 portfolios of the 45 currently registered with the SEC.

The Trust has an Audit Committee, consisting of Messrs. Byrne, Shanley and Weisser.  The members of the Audit Committee are not “interested” persons of the Trust (as defined in the 1940 Act).  The primary responsibilities of the Trust’s Audit Committee are, as set forth in its charter, to make recommendations to the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the accounting firm); the supervision of investigations into matters relating to audit matters; the review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits.

The Trust also has a Nominating Committee, consisting of Messrs. Byrne, Shanley and Weisser, each of whom is a disinterested member of the Board.  The primary responsibilities of the nominating committee are to make recommendations to the Board on issues related to the composition and operation of the Board, and communicate with management on those issues. The nominating committee also evaluates and nominates Board member candidates.  The Nominating Committee will consider nominees recommended by shareholders.  Such recommendations should be in writing and addressed to a Fund with attention to the Nominating Committee Chair.  The recommendations must include the following Preliminary Information regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior experience; and (7) any knowledge and experience relating to investment companies and investment company governance.

The Trust has a Qualified Legal Compliance Committee, consisting of Messrs. Byrne, Shanley and Weisser.  The members of the Qualified Legal Compliance Committee are not “interested” persons of the Trust (as defined in the 1940 Act).  The primary responsibility of the Trust’s Qualified Legal Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust.  

As of the date of this SAI, no Trustee owns Shares of any Fund.  The following table shows the amount of equity securities owned in the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2007:  


Dollar Range of Equity Securities Owned:

Interested Trustee:

Non-Interested Trustees:

 

Daniel D. O’Neill

Daniel J. Byrne

Gerald E. Shanley III

John Weisser

Aggregate Dollar Range of Equity Securities in the Direxion Family of Investment Companies (1)

$10,000 - $50,000

$10,000 - $50,000

$0

$0


 (1)

The “Direxion Family of Investment Companies” consists of the Direxion Shares ETF Trust which currently offers for sale to the public 8 of the 32 Funds currently registered with the SEC, the Direxion Funds which currently offers for sale to the public 40 portfolios of the 68 currently registered with the SEC and the Direxion Insurance Trust which currently offers for sale 3 portfolios of the 45 currently registered with the SEC.

The Trust’s Trust Instrument provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law.  However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of their office.

Prior to the Trust’s commencement of operations, no Trustee was compensated for his service as a Trustee.  For the Funds’ Fiscal Year ended October 31, 2009, it is estimated that Messrs. Byrne and Weisser each will receive aggregate compensation of $16,000 and Mr. Shanley will receive aggregate compensation of $19,200 from the Trust, which will be paid equally by the operational Funds.  

Principal Shareholders, Control Persons and Management Ownership

A principal shareholder is any person who owns of record or beneficially 5% or more of the outstanding shares of a Fund.  A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges the existence of control.  Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.  As of August 18, 2008, Rafferty Asset Management, LLC (“Rafferty” or the “Adviser”), was the sole shareholder and a control person of the Large Cap Bull, Large Cap Bear, Financial Bull and Financial Bear Funds.  As of August 18, 2008, none of the other Funds had any outstanding shares.

Investment Adviser

Rafferty Asset Management, LLC (“Rafferty” or “Adviser”), 33 Whitehall Street, 10 th Floor, New York, New York 10004, provides investment advice to the Funds.  Rafferty was organized as a New York limited liability corporation in June 1997.  Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty Holdings, LLC.

Under an Investment Advisory Agreement (“Advisory Agreement”) between the Trust, on behalf of each Fund, and Rafferty dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives, policies and limitations, and oversees the day-to-day operations of a Fund, subject to the supervision of the Trustees.  Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated with or interested persons of Rafferty.  The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus.  The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be a party.  The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.

Pursuant to the Advisory Agreement, each Fund pays Rafferty 0.75% at an annual rate based on its average daily net assets.  

Each Fund is responsible for its own operating expenses.  Rafferty has contractually agreed to waive its fees and/or reimburse the Funds’ operating expenses (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation) through March 1, 2009, to the extent that they exceed 0.95% of daily net assets.  This agreement may be terminated at any time at the discretion of the Board of Trustees upon notice to the Adviser and without the approval of Fund shareholders.  The agreement may be terminated by the Adviser only with the consent of the Board of Trustees.


The Advisory Agreement was initially approved by the Trustees (including all non-interested Trustees) and Rafferty, as sole shareholder of each Fund on August 13, 2008, in compliance with the 1940 Act.  The Advisory Agreement with respect to each Fund will continue in force for an initial period of two years after the date of its approval. Thereafter, the Advisory Agreement will be renewable from year to year with respect to each Fund, so long as its continuance is approved at least annually (1) by the vote, cast in person at a meeting called for that purpose, of a majority of those Trustees who are not “interested persons” of Rafferty or the Trust; and (2) by the majority vote of either the full Board or the vote of a majority of the outstanding shares of a Fund.  The Advisory Agreement automatically terminates on assignment and is terminable on a 60-day written notice either by the Trust or Rafferty.

Rafferty shall not be liable to the Trust or any shareholder for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any losses that may be sustained in the purchase, holding or sale of any security.

Pursuant to Section 17(j) of the 1940 Act and Rule 17j-1 thereunder, the Trust, Rafferty and the distributor have adopted Codes of Ethics (“Codes”).  These Codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to certain restrictions.


Portfolio Manager  

Each Fund is managed by an investment committee consisting of Paul Brigandi, Adam Gould, Tony Ng, Adam Kelly and Loren Norton.  In addition to the Funds, the committee manages the following other accounts as of August 8, 2008:


Accounts

Total Number of Accounts

Total Assets

(in millions)

Total Number of Accounts with Performance Based Fees

Total Assets of Accounts with Performance Based Fees

Registered Investment Companies

43

$1,080,000,000

0

$0

Other Pooled Investment Vehicles

1

$110,000,000

0

$0

Other Accounts

0

$0

0

$0

Rafferty manages other accounts with investment objectives similar to that of the Funds.  In addition, two or more Funds may invest in the same securities but the nature of each investment (long or short) may be opposite and in different proportions.  Rafferty ordinarily executes transactions for a Fund “market-on-close,” in which Funds purchasing or selling the same security receive the same closing price.  


Rafferty has not identified any additional material conflicts between a Fund and other accounts managed by the investment committee.  However, the portfolio managers' management of "other accounts" may give rise to potential conflicts of interest in connection with their management of a Fund's investments, on the one hand, and the investments of other accounts, on the other.  The other accounts may have the same investment objective as the Funds.  Therefore, a potential conflict of interest may arise as a result of the identical investment objectives, whereby the portfolio managers could favor one account over and devote unequal time and attention to a Fund and other accounts.  Another potential conflict could include the portfolio managers knowledge about size, timing and possible market impact of Fund trades, whereby a portfolio manager could use this information to the advantage of other accounts and to the disadvantage of a Fund.  This could create potential conflicts of interest resulting in a Fund paying higher fees or one investment vehicle out performing another.  The Adviser has established policies ad procedures to ensure that the purchase and sale of securities among all accounts it manages are fairly and equitably allocated.


The investment committee’s compensation is paid by Rafferty.  Their compensation primarily consists of a fixed base salary and a bonus.  The investment committee’s salary is reviewed annually and increases are determined by factors such as performance and seniority.  Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm.  The investment committee’s salary and bonus are not based on a Fund’s performance and as a result, no benchmarks are used.  Along with all other employees of Rafferty, the investment committee may participate in the firm’s 401(k) retirement plan where Rafferty may make matching contributions up to a defined percentage of their salary.

The members of the investment committee do not own any shares of the Funds as of August 15, 2008.

Proxy Voting Policies and Procedures

The Board has adopted proxy voting policies and procedures (“Proxy Policies”) wherein the Trust has delegated to Rafferty the responsibility for voting proxies relating to portfolio securities held by a Fund as part of their investment advisory services, subject to the supervision and oversight of the Board.  The Proxy Voting Policies of Rafferty are attached as Appendix B.  Notwithstanding this delegation of responsibilities, however, each Fund retains the right to vote proxies relating to its portfolio securities.  The fundamental purpose of the Proxy Policies is to ensure that each vote will be in a manner that reflects the best interest of a Fund and their shareholders, taking into account the value of a Fund’s investments.  


More Information.  The actual voting records relating to portfolio securities for future 12-month periods ending June 30 will be available without charge, upon request by calling toll-free, 1-877-437-9363 or by accessing the SEC’s website at www.sec.gov.

Fund Administrator, Index Receipt Agent, Fund Accounting Agent, Transfer Agent and Custodian

BNY, located at One Wall Street, New York, New York 10286, serves as the Funds’ transfer agent, administrator, custodian and index receipt agent.  Rafferty also performs certain administrative services for the Funds.

Pursuant to a Fund Administration and Accounting Agreement between the Trust and BNY, BNY provides the Trust with administrative and management services (other than investment advisory services) and accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports.  As compensation for the administration and management services, the Trust pays BNY a fee based on the Trust’s total average daily net assets of 0.04% on net assets, with a minimum annual complex fee of approximately $200,000.  For the accounting services, the Trust pays BNY a fee based on the Trust’s total average daily net assets of 0.03% and a minimum annual complex fee of approximately $160,000.  BNY also is entitled to certain out-of-pocket expenses for the services mentioned above, including pricing expenses.

Pursuant to a Custodian Agreement, BNY serves as the custodian of a Fund’s assets.  The custodian holds and administers the assets in a Fund’s portfolios.  Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s total average daily net assets of 0.0075% and certain settlement charges.  The custodian also is entitled to certain out-of-pocket expenses.  

Distributor

Foreside Fund Services, LLC, located at Two Portland Square, First Floor, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares.  The Distributor is a broker-dealer registered with the SEC under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority.  The Trust offers Shares of the Funds for sale through the Distributor in Creation Units, as described below.  The Distributor will not sell or redeem Shares in quantities less than Creation Units.  The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of Creation Unit orders placed and confirmations furnished by it.  

Distribution and Service Plan

Rule 12b-1 under the 1940 Act provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule.  The Trustees have adopted a Rule 12b-1 Distribution and Service Plan (“Rule 12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts.  The Distributor, as the Funds’ principal underwriter, and Rafferty may have a direct or indirect financial interest in the Plan or any related agreement.  Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to [0.25]% of the Fund’s average daily net assets.  No Rule 12b-1 fee is currently being charged to any of the Funds.

The Plan was approved by the Board, including a majority of the non-interested Trustees of the Funds.  In approving each Plan, the Trustees determined that there is a reasonable likelihood that the Plans will benefit the Funds and their shareholders.  The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Plans and the purpose for which such expenditures were made.  


The Plan permits payments to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services.  The distributor or other third parties are authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund.  In addition, the Plan authorizes payments by each Fund to the Distributor or other third parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.

Independent Registered Public Accounting Firm

Ernst & Young LLP, located at 233 S. Wacker Drive, Chicago, Illinois 60606, is the independent registered public accounting firm for the Trust.  

Legal Counsel

The Trust has selected K&L Gates LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.

DETERMINATION OF NET ASSET VALUE

The NAV per share of each Fund is determined separately daily, Monday through Friday, as of the close of regular trading on the New York Stock Exchange (“NYSE”) (normally at 4:00 p.m. Eastern time), each day the NYSE, and Bond Market for the 10 Year Note Funds, is open for business.  The NYSE is not open on New Year’s Day, Presidents’ Day, Martin Luther King’s Birthday, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.

A security listed or traded on an exchange, domestic or foreign, is valued at its last sales price on the principal exchange on which it is traded prior to the time when assets are valued.  If no sale is reported at that time, the mean of the last bid and asked prices is used.  Securities primarily traded on the NASDAQ Global Market ® (“NASDAQ ® ”) for which market quotations are readily available shall be valued using the NASDAQ ® Official Closing Price (“NOCP”) provided by NASDAQ ® each business day.  The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern time, unless that price is outside the range of the “inside” bid and asked prices’ in that case, NASDAQ ® will adjust the price to equal the inside bid or asked price, whichever is closer.  If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.

When market quotations for options and futures positions held by a Fund are readily available, those positions will be valued based upon such quotations.  Securities and other assets for which market quotations are not readily available, or for which Rafferty has reason to question the validity of quotations received, are valued at fair value by procedures as adopted by the Board.  

For purposes of determining NAV per share of a Fund, options and futures contracts are valued at the last sales prices of the exchanges on which they trade.  The value of a futures contract equals the unrealized gain or loss on the contract that is determined by marking the contract to the last sale price for a like contract acquired on the day on which the futures contract is being valued.  The value of options on futures contracts is determined based upon the last sale price for a like option acquired on the day on which the option is being valued.  A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.

For valuation purposes, quotations of foreign securities or other assets denominated in foreign currencies are translated to U.S. dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued.  Short-term debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value.  If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the investment will be valued at fair value as determined by procedures as adopted by the Board.  U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service (“Pricing Service”).

OTC securities held by a Fund will be valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used.  The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no sales price is reported, the mean of the last bid and asked price is used.  Dividend income and other distributions are recorded on the ex-distribution date.

Illiquid securities, securities for which reliable quotations or pricing services are not readily available, and all other assets not valued in accordance with the foregoing principles will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of certain responsibilities regarding valuation to Rafferty or the officers of the Trust.  The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations.  The Trustees, from time to time, will review these methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.


ADDITIONAL INFORMATION CONCERNING SHARES

Organization and Description of Shares of Beneficial Interest

The Trust is a Delaware statutory trust and registered investment company.  The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series.  Currently, the Trust consists of multiple separately managed series.  The Board may designate additional series of beneficial interest. and classify Shares of a particular series into one or more classes of that series.


All Shares of the Trust are freely transferable.  The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature.  Shares have equal voting rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter.  Trust shareholders are entitled to require the Trust to redeem Creation Units of their Shares.  The Trust Instrument confers upon the Broad of Trustees 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 stock prices of Shares of the Trust to maintain convenient trading ranges for investors.  Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the applicable Fund.


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. Trust shareholders may remove Trustees from office by votes cast at a meeting of Trust shareholders or by written consent.  If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of Funds’ shareholders for the purpose of voting upon the question of removal of a Trustee of the Trust and will assist in communications with other Trust shareholders.


The Trust Instrument disclaims liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust.  The Trust Instrument provides for indemnification from the Trust’s property for all loss and expense of any Fund shareholder held personally liable for the obligations of the Trust.  The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not be able to meet the Trust’s obligations and this risk, thus, should be considered remote.


If a Fund does not grow to a size to permit it to be economically viable, the Fund may cease operations.  In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.


Book Entry Only System

The Depository Trust Company (“DTC”) acts as securities depositary for the Shares.  The Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC.  Except as provided below, certificates will not be issued for Shares.


DTC has advised the Trust as follows:  it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing agency” registered pursuant to the provisions of Section 17A of the Exchange Act.  DTC was created to hold securities of its participants (“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 whom (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, Inc., the AMEX and the Financial Industry Regulatory Authority.  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 (“Indirect Participants”).  DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law.  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. The laws of some jurisdictions may require that certain purchasers of securities take physical delivery of such securities in definitive form.  Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.


Beneficial owners of Shares are not entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares.  The Trust understands that under existing industry practice, in the event the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them.  As described above, the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes.  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 Share holdings of each DTC Participant.  The Trust shall inquire of each such DTC Participant as to the number of Beneficial owners holding Shares, directly or indirectly, through such DTC Participant.  The Trust shall provide each such 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 such DTC Participant, directly or indirectly, to such Beneficial owners.  In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.


Distributions of Shares shall 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, shall credit immediately DTC Participants’ accounts with payments in amounts proportionate to their respective beneficial interests in Shares as shown on the records of DTC or its nominee.  Payments by DTC Participants to Indirect Participants and Beneficial owners of 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 aspects 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 such DTC Participants an the Indirect Participants and Beneficial owners owning through such DTC Participants.


DTC may determine 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 shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service available to their clients.  Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate.  Investors interested in such a service should contact their broker for availability and other necessary details.

PURCHASES AND REDEMPTIONS

The Trust issues and redeems Shares of each Fund only in aggregations of Creation Units.  The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 100,000 and [$6,000,000], respectively.

See “Purchase and Issuance of Shares in Creation Units” and “Redemption in Creation Units” below.  The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other reason.


Purchase and Issuance of Creation Units

The Trust issues and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day (as defined herein), of an order in proper form.


A “Business Day” with respect to each Fund is any day on which the NYSE is open for business.


Creation Units of Shares may be purchased only by or through a an Authorized Participant.  Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the transaction fee described below.  The Authorized Participant may require the investor to enter into an agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount.  Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant.  Investors should be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker through an Authorized Participant.  As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor.  The Trust only expects to enter into an Authorized Participant Agreement with a few Authorized Participants.


Creation Units also will be sold only for cash (“Cash Purchase Amount”) for Bear Funds.  Creation Units are sold at their net asset value, plus a transaction fee, as described below.


Purchases through the Clearing Process (Bull Funds)

An Authorized Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes being referred to herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual Clearing Process.  To purchase or redeem through the Enhanced Clearing Process, an Authorized Participant must be a member of National Securities Clearing Corporation (“NSCC”) that is eligible to use the Continuous Net Settlement system.  For purchase orders placed through the Enhanced Clearing Process, the Authorized Participant Agreement authorizes the Distributor to transmit through the Transfer Agent to NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order.  Pursuant to such trade instructions to NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit and such additional information as may be required by the Distributor.  A purchase order must be received by the Distributor by 4:00 p.m. Eastern time  if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Authorized Participant Agreement  in order to receive that day’s Closing NAV per Share.


The consideration for purchase of a Creation Unit of Shares of a Bull Fund generally consists of the Deposit Securities that is a representative sample of the securities in the Fund’s underlying index, the Balancing Amount, and the appropriate Transaction Fee (collectively, the “Portfolio Deposit”).  The Balancing Amount will be the amount equal to the differential, if any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from, the Trust after the NAV has been calculated.


BNY makes available through the NSCC one each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each Deposit Security to be included in the current Portfolio Deposit (based on information at the end of the previous Business Day) for each Bull Fund.  Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of a given Bull Fund until such time as the next-announced Portfolio Deposit made available.

The identity and number of shares of the Deposit Securities required for each Bull Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of the Bull Fund.  The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index.  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 Balancing Amount to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons.  The adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by the relevant Bull Fund, or resulting from stock splits and other corporate actions.


In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on each Business Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of each Bull Fund, will be made available.

Shares may be issued 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 greater value than the NAV of the Shares on the date the order is placed in proper form since, in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional Cash Deposit”).  An additional amount of cash shall 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.  The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time.  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 Custodian Bank or purchased by the Trust and deposited into the Trust.  In addition, a transaction fee, as listed below, will be charged in all cases.  The delivery of Shares so purchased will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor.  Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than three Business Days following the day on which the purchase order is received.  In such cases, the local market settlement procedures will not commence until the end of local holiday periods.  A list of local holidays in the foreign countries or markets  relevant to the international funds is set forth under “Regular Foreign Holidays” below.

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 shall be determined by the Trust, and the Trust’s determination shall be final and binding.


Purchases Through the Manual Clearing Process

An Authorized Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of securities and cash directly through DTC.  All Creation Unit purchases of the Bear Funds will be settled outside the Enhanced Clearing Process for cash equal to the Creation Unit’s NAV (“Cash Purchase Amount”).  Purchases (and redemptions) of Creation Units of the Bull Funds settled outside the Enhanced Clearing Process will be subject to a higher Transaction Fee than those settled through the Enhanced Clearing Process.  Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Enhanced Clearing Process.  Those persons placing orders outside the Enhanced 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 such transfer of the Portfolio Deposit (for the Bull Funds), or of the Cash Purchase Amount (for the Bear Funds).


Rejection of Purchase Orders

The Trust reserves the absolute right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b) the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c)  acceptance of the purchase transaction order would have certain adverse tax consequences to the Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances outside the control of the Trust, the Distributor and Rafferty  make it impractical to process purchase orders.  The Trust shall notify a prospective purchaser of its rejection of the order of such person.  The Trust and the Distributor are under no duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.

Redemption of Creation Units

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 on any Business Day.  The Trust will not redeem Shares in amounts less than Creation Units.  Beneficial owners also may sell Shares in the secondary market, but must accumulate enough Shares 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 of Shares.  Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.


Placement of Redemption Orders Using Enhanced Clearing Process (Bull Funds)

Orders to redeem Creation Units of Funds through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System.  A redemption order must be received by the Distributor by 4:00 p.m. Eastern time  if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Authorized Participant Agreement  in order to receive that day’s closing NAV per share.  All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.  

With respect to each Bull Fund, Rafferty makes available through the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio Securities that will be applicable (subject to possible amendment or correction) to redemption requests received in proper form (as defined below) on that day (“Redemption Securities”).  These securities may, at times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units.  


The redemption proceeds for a Creation Unit generally consist of Redemption Securities, as announced by Rafferty through the NSCC on any Business Day, plus the Balancing Amount.  The redemption transaction fee described below is deducted from such redemption proceeds.

Placement of Redemption Orders Outside Clearing Process (Bull and Bear Funds)

Orders to redeem Creation Units of Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement.  A DTC Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected outside the Clearing Process need not be an Authorized Participant, 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.  A redemption order must be received by the Distributor by 4:00 p.m. Eastern time  if transmitted by mail or through the transfer agent’s automated system, or by 3:00 p.m. Eastern time if transmitted by telephone, facsimile or other electronic means permitted under the Authorized Participant Agreement  in order to receive that day’s closing NAV per share.  All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.  The order must be accompanied or preceded by the requisite number of Shares of Funds specified in such order, which delivery must be made through DTC to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set forth in the Authorized Participant Agreement must be properly followed.

For the Bull Funds, if it is not possible to effect deliveries of the Redemption Securities, the Fund may in its discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder 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.  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 Fund Securities but does not differ in net asset value.

After the Transfer Agent has deemed an order for redemption of a Bull Fund’s shares outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within three Business Days, and the Balancing Amount minus the Transaction Fee.  In addition, with respect to Bull Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent.  Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business Days following the Transmittal Date.  In such cases, the local market settlement procedures will not commence until the end of local holiday periods.  See below for a list of local holidays in the foreign country relevant to the international funds.

The redemption proceeds for a Creation Unit of a Bear Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash Redemption Amount”).  

In certain instances, Authorized Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date.  In this instance, the Trust reserves the right to settle these transactions on a net basis.

The right of redemption may be suspended or the date of payment postponed with respect to any Fund (1) for any period during which the New York Stock Exchange is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the New York Stock 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’s portfolio securities or determination of its net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.  

Regular Foreign Holidays

The Funds generally intend to effect deliveries of Creation Units and portfolio securities on a basis of “T” plus three Business Days (i.e., days on which the national securities exchange is open).  The Funds may effect deliveries of Creation Units and portfolio securities on a basis other than T plus three in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under certain other circumstances.  The ability of the Trust to effect in-kind creations and redemptions within three Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market.  For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays.  In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust from delivering securities within normal settlement periods.  The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require a delivery process longer than seven calendar days for the international funds, in certain circumstances.  The holidays applicable to the international funds during such periods are listed below, as are instances where more than seven days will be needed to deliver redemption proceeds.  Although certain holidays may occur on different dates in subsequent years, the number of days required to deliver redemption proceeds in any given year is not expected to exceed the maximum number of days listed below for the funds.  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 local securities delivery practices could affect the information set forth herein at some time in the future.

The remaining dates in calendar year 2008 and all dates in calendar year 2009 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:

2008 Holidays

Argentina

 

 

 

 

Nov 6

Dec 31

 

 

 

Dec 8

 

 

 

 

Dec 24

 

 

 

 

Dec 25

 

 

 

 

Australia

 

 

 

 

Oct. 6

 

 

 

 

Nov. 4

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Austria

 

 

 

 

Dec. 8

Dec. 26

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

 

 

 

 

 

Belgium

 

 

 

 

Nov. 11

Dec. 31

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Brazil

 

 

 

 

 

 

 

 

 

Nov 20

Dec 31

 

 

 

Dec 24

 

 

 

 

Dec 25

 

 

 

 

 

 

 

 

 

Chile

 

 

 

 

Sep 18

Dec 25

 

 

 

Sep 19

Dec 31

 

 

 

Dec 8

 

 

 

 

 

 

 

 

 


China

 

 

 

 

Sep 1

Nov 11

 

 

 

Oct 1-3

Nov 27

 

 

 

Oct 6-7

Dec 25

 

 

 

Oct 13

 

 

 

 


Colombia

 

 

 

 

Oct 13

Dec 25

 

 

 

Nov 3

Dec 31

 

 

 

Nov 17

 

 

 

 

Dec 8

 

 

 

 

 

 

 

 

 

Denmark

 

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Finland

 

 

 

 

 

 

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 


France

 

 

 

 

 

 

 

 

 

Nov. 11

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 


Germany

 

 

 

 

 

 

 

 

 

Oct. 3

Dec. 26

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

 

 

 

 

 


Greece

 

 

 

 

 

 

 

 

 

Oct. 28

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Hong Kong

 

 

 

 

 

 

 

 

 

Oct. 1

Dec. 25

 

 

 

Oct. 7

Dec. 26

 

 

 

Dec. 24

Dec. 31

 

 

 

 

 

 

 

 

India

 

 

 

 

 

 

 

 

 

Aug 19

Sept 30

Oct 28

Nov 13

 

Aug 22

Oct 2

Oct 30

Dec 9

 

Sept 3

Oct 9

Nov 12

Dec 25

 

 

 

 

 

 

Indonesia

 

 

 

 

 

 

 

 

 

Sept 29

Oct 3

Dec 25

Dec 31

 

Oct 1

Dec 8

Dec 26

 

 

Oct 2

Dec 24

Dec 29

 

 

 

 

 

 

 

Ireland

 

 

 

 

 

 

 

 

 

Oct. 27

Dec. 26

 

 

 

Dec. 24

Dec. 29

 

 

 

Dec. 25

 

 

 

 

 

 

 

 

 

Israel

 

 

 

 

 

 

 

 

 

Sept 29

Oct 8

Oct 14

 

 

Sept 30

Oct 9

Oct 20

 

 

Oct 1

Oct 13

Oct 21

 

 

 

 

 

 

 

Italy

 

 

 

 

 

 

 

 

 

Dec. 8

Dec. 26

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

 

 

 

 

 

Japan

 

 

 

 

 

 

 

 

 

Sept 23

Nov 24

 

 

 

Oct 13

Dec 23

 

 

 

Nov 3

Dec 31

 

 

 

 

 

 

 

 

Mexico

 

 

 

 

 

 

 

 

 

Nov 20

Dec 12

 

 

 

Nov 17

Dec 25

 

 

 

 

 

 

 

 

Netherlands

 

 

 

 

 

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Norway

 

 

 

 

 

 

 

 

 

Dec. 24

Dec. 31

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Peru

 

 

 

 

 

 

 

 

 

Oct 8

Dec 25

 

 

 

Dec 8

Dec 31

 

 

 

Dec 24

 

 

 

 

 

 

 

 

 

Russia

 

 

 

 

 

 

 

 

 

Nov 3-4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

South Africa

 

 

 

 

 

 

 

 

 

Sept 24

Dec 26

 

 

 

Dec 16

 

 

 

 

Dec 25

 

 

 

 

 

 

 

 

 

South Korea

 

 

 

 

 

 

 

 

 

Sept 5

 

 

 

 

Oct 3

 

 

 

 

Dec 25

 

 

 

 

Dec 31

 

 

 

 

 

 

 

 

 

Spain

 

 

 

 

 

 

 

 

 

Dec. 8

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

Switzerland

 

 

 

 

 

 

 

 

 

Sept. 11

Dec. 25

 

 

 

Dec. 8

Dec. 26

 

 

 

Dec. 24

Dec. 31

 

 

 

 

 

 

 

 

 

 

 

 

 

Taiwan

 

 

 

 

 

 

 

 

 

Oct 10

 

 

 

 

 

 

 

 

 

United Kingdom

 

 

 

 

 

 

 

 

 

Aug. 25

 

 

 

 

Dec. 25

 

 

 

 

Dec. 26

 

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Sept. 1

Nov. 27

 

 

 

Oct. 13 2009

Dec. 25

 

 

 

Nov. 11

 

 

 

 

 

 

 

 

 

2009 Holidays

 

 

 

 

 

 

 

 

 

Argentina

 

 

 

 

 

 

 

 

 

Jan. 1

May 1

Aug. 17

Dec. 24

 

April 6

May 25

Oct. 12

Dec. 25

 

April 9

June 15

Nov. 6

Dec. 31

 

April 10

July 9

Dec. 8

 

 

 

 

 

 

 

Australia

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

June 8

Nov. 3

 

Jan. 26

April 27

Aug. 3

Dec. 25

 

March 2

May 5

Aug. 12

Dec. 28

 

March 9

May 18

Sept. 28

 

 

April 10

June 1

Oct. 5

 

 

 

 

 

 

 

Austria

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

June 1

Dec. 8

 

Jan. 6

May 1

June 11

Dec. 24

 

April 10

May 21

Oct. 26

Dec. 25

 

 

 

 

 

 

Belgium

 

 

 

 

 

 

 

 

 

Jan. 1

May 1

June 1

Nov. 11

 

April 10

May 21

July 21

Dec. 25

 

April 13

May 22

Nov. 2

 

 

 

 

 

 

 

Brazil

 

 

 

 

 

 

 

 

 

Jan. 1

April 10

July 9

Nov. 20

 

Jan. 20

April 21

Sept. 7

Dec. 24

 

Feb. 23

May 1

Oct. 12

Dec. 25

 

Feb. 24

June 11

Nov. 2

Dec. 31

 

 

 

 

 

 

Chile

 

 

 

 

 

 

 

 

 

Jan. 1

May 21

Sept. 18

Dec. 25

 

April 10

June 8

Oct. 12

Dec. 31

 

May 1

June 29

Dec. 8

 

 

 

 

 

 

 

China

 

 

 

 

 

 

 

 

 

Jan. 1

Feb. 3

Sept. 7

Nov. 26

 

Jan. 19

Feb. 16

Oct. 1-7

Dec. 25

 

Jan. 26-30

May 1-7

Oct. 12

 

 

Feb. 2

May 25

Nov. 11

 

 

 

 

 

 

 

Colombia

 

 

 

 

 

 

 

 

 

Jan. 1

May 1

July 20

Nov. 16

 

Jan. 12

May 25

Aug 7

Dec. 8

 

March 23

June 15

Aug 17

Dec. 25

 

April 9

June 22

Oct. 12

Dec. 31

 

April 10

June 29

Nov. 2

 

 

 

 

 

 

 

Denmark

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

June 1

Dec. 25

 

April 9

May 8

June 5

Dec. 31

 

April 10

May 21

Dec. 24

 

 

 

 

 

 

 

Finland

 

 

 

 

 

 

 

 

 

Jan. 1

April 10

June 19

Dec. 26

 

Jan. 6

May 1

Dec. 24

Dec. 31

 

April 13

May 21

Dec. 25

 

 

 

 

 

 

 

France

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

May 8

July 14

Dec. 25

April 10

May 1

May 21

Nov. 11

 

 

 

 

 

 

Germany

 

 

 

 

 

 

 

 

 

Jan. 1

April 10

May 21

Dec. 24

 

Jan. 6

April 13

June 1

Dec. 25

 

Feb. 23

May 1

June 11

Dec. 31

 

 

 

 

 

 

Greece

 

 

 

 

 

 

 

 

 

Jan. 1

March 25

April 17

June 8

 

Jan. 6

April 10

April 20

Oct. 28

 

March 2

April 13

May 1

Dec. 25

 

 

 

 

 

 

Hong Kong

 

 

 

 

 

 

 

 

 

Jan. 1

April 10

July 1

Dec. 24

 

Jan. 26

April 13

Oct. 1

Dec. 31

 

Jan. 27

May 1

Oct. 26

 

 

Jan. 28

May 28

Dec. 25

 

 

 

 

 

 

 

India

 

 

 

 

 

 

 

 

 

Jan. 8

April 3

July 1

Oct. 2

 

Jan. 26

April 7

Aug. 15

Oct. 17

 

Feb. 23

April 10

Aug. 19

Oct. 19

 

March 10

April 14

Aug. 22

Nov. 2

 

March 11

May 1

Sept. 21

Nov. 28

 

March 27

May 9

Sept. 28

Dec. 25

 

April 1

June 30

Sept. 30

Dec. 28

 

 

 

 

 

 

Indonesia

 

 

 

 

 

 

 

 

 

Jan. 1

May 21

Sept. 22

Nov. 27

Dec. 31

Jan. 26

July 20

Sept. 23

Dec. 18

 

March 26

Aug. 17

Sept. 24

Dec. 24

 

March 27

Sept. 21

Sept. 25

Dec. 25

 

 

 

 

 

 

Ireland

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

June 1

Dec. 24

Dec. 29

March 17

May 1

Aug. 3

Dec. 25

 

April 10

May 4

Oct. 26

Dec. 28

 

 

 

 

 

 

Israel

 

 

 

 

 

 

 

 

 

March 10

April 14

May 28

Sept. 20

 

April 8

April 28

May 29

Sept. 27

 

April 9

April 29

July 30

Sept. 28

 

 

 

 

 

 

Italy

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

June 29

Dec. 25

 

Jan. 6

May 1

Dec. 8

Dec. 31

 

April 10

June 2

Dec. 24

 

 

 

 

 

 

 

Japan

 

 

 

 

 

 

 

 

 

Jan. 1

Mar. 20

July 20

Oct. 12

Dec. 31

Jan. 2

April 29

Sept. 21

Nov. 3

 

Jan. 12

May 4

Sept. 22

Nov. 23

 

Feb. 11

May 5

Sept. 23

Dec. 23

 

 

 

 

 

 

Mexico

 

 

 

 

 

 

 

 

 

Jan. 1

March 16

Sept. 16

Nov. 20

 

Feb. 2

April 9-10

Nov. 2

Dec. 25

 

Feb. 5

May 1

Nov. 16

 

 

 

 

 

 

 

Netherlands

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

May 1

June 1

 

April 10

April 30

May 21

Dec. 25

 

 

 

 

 

 

Norway

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

May 21

Dec. 24-25

 

April 9-10

May 1

June 1

Dec. 31

 

 

 

 

 

 

Peru

 

 

 

 

 

 

 

 

 

Jan. 1

May 5

July 28-29

Dec. 24-25

 

April 9-10

June 29

Oct. 8

Dec. 31

 

 

 

 

 

 

Russia

 

 

 

 

 

 

 

 

 

Jan. 1

Feb. 23

May 11

Nov. 6

 

Jan. 2

March 9

June 12

 

 

Jan. 5-8

May 1

Nov. 4

 

 

 

 

 

 

 

South Africa

 

 

 

 

 

 

 

 

 

Jan. 1

April 27

Aug. 10

 

 

April 10

May 1

Dec. 16

 

 

April 13

June 16

Dec. 25

 

 

 

 

 

 

 

South Korea

 

 

 

 

 

 

 

 

 

Jan. 1

Jan. 27

May 5

Oct. 2

Dec. 31

Jan. 26

May 1

July 17

Dec. 25

 

 

 

 

 

 

Spain

 

 

 

 

 

 

 

 

 

Jan. 1

April 9-10

May 15

Nov. 9

 

Jan. 6

April 13

Oct. 12

Dec. 8

 

March 19

May 1

Nov. 2

Dec. 25

 

 

 

 

 

 

Switzerland

 

 

 

 

 

 

 

 

 

Jan. 1-2

April 10

May 21

Sept. 10

 

Jan. 6

April 13

June 29

Dec. 24-25

 

March 19

May 1

June 11

Dec. 31

 

June 1

Dec. 8

 

 

 

 

 

 

 

 

Taiwan

 

 

 

 

 

 

 

 

 

Jan. 1

Jan. 23

Jan. 27

Jan. 29

May 28

Jan. 22

Jan. 26

Jan. 28

May 1

 

 

 

 

 

 

United Kingdom

 

 

 

 

 

 

 

 

 

Jan. 1

April 13

May 25

Dec. 25

 

April 10

May 4

Aug. 31

Dec. 28

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

 

Jan. 1

April 10

Sept. 7

Nov. 26

 

Jan. 19

May 25

Oct. 12

Dec. 25

 

Feb. 16

July 3-4

Nov. 11

 

 


Redemption


The longest redemption cycle for the international funds is a function of the longest redemption cycles among the countries whose stocks comprise the international funds.  In the calendar years 2008 and 2009*, the dates of the regular holidays affecting the following securities markets present the worst-case redemption cycle for the international funds is as follows:


Country

Redemption Request Date

Redemption Settlement Date

Settlement Period

Argentina

 

 

 

 

March 17, 2008

March 25, 2008

8

 

March 18, 2008

March 26, 2008

8

 

March 19, 2008

March 27, 2008

8

 

 

 

 

China

 

 

 

 

 

 

 

 

Feb. 4, 2008

Feb. 14, 2008

10

 

Feb. 5, 2008

Feb. 15, 2008

10

 

Feb. 6, 2008

Feb. 18, 2008

12

 

April 28, 2008

May 8, 2008

10

 

April 29, 2008

May 9, 2008

10

 

April 30, 2008

May 12, 2008

12

 

Sept. 26, 2008

October 8, 2008

12

 

Sept. 29, 2008

October 9, 2008

10

 

Sept. 30, 2008

October 10, 2008

10

 

 

 

 

Denmark

 

 

 

 

 

 

 

 

March 17, 2008

March 25, 2008

8

 

March 18, 2008

March 26, 2008

8

 

March 19, 2008

March 27, 2008

8

 

 

 

 

Finland

 

 

 

 

 

 

 

 

March 17, 2008

March 25, 2008

8

 

March 18, 2008

March 26, 2008

8

 

March 19, 2008

March 27, 2008

8

 

 

 

 

Indonesia

 

 

 

 

 

 

 

 

Sept. 26, 2008

October 6, 2008

10

 

Sept. 29, 2008

October 7, 2008

8

 

Sept. 30, 2008

October 8, 2008

8

 

 

 

 

Japan

 

 

 

 

 

 

 

 

Dec. 26, 2008

Jan. 5, 2009

10

 

Dec. 29, 2008

Jan. 6, 2009

8

 

Dec. 30, 2008

Jan. 7, 2009

8

 

 

 

 

Mexico

 

 

 

 

 

 

 

 

March 14, 2008

March 24, 2008

10

 

 

 

 

Norway

 

 

 

 

 

 

 

 

March 17, 2008

March 25, 2008

8

 

March 18, 2008

March 26, 2008

8

 

March 19, 2008

March 27, 2008

8

 

 

 

 

Russia*

 

 

 

 

 

 

 

 

Dec. 26, 2008

Jan. 8, 2008

13

 

Dec. 27, 2008

Jan. 9, 2008

13

 

Dec. 28, 2008

Jan. 10, 2008

13

 

 

 

 

2009

 

 

 

Country

Redemption Request Date

Redemption Settlement Date

Settlement Period

Argentina

 

 

 

 

 

 

 

 

April 3, 2009

April 11, 2009

8

 

April 4, 2009

April 12, 2009

8

 

April 5, 2009

April 13, 2009

8

 

 

 

 

China

 

 

 

 

 

 

 

 

January, 21, 2009

Feb. 4, 2009

14

 

January 22, 2009

Feb. 5, 2009

14

 

January 23, 2009

Feb. 6, 2009

14

 

April 28, 2009

May 8, 2009

10

 

April 29, 2009

May 11, 2009

10

 

April 30, 2009

May 12, 2009

12

 

Sept. 28, 2009

October 8, 2009

12

 

Sept. 29, 2009

October 9, 2009

10

 

Sept. 30, 2009

October 13, 2009

13

 

 

 

 

Denmark

 

 

 

 

 

 

 

 

April 6, 2009

April 14, 2009

8

 

April 7, 2009

April 15, 2009

8

 

April 8, 2009

April 16, 2009

8

 

 

 

 

Indonesia

 

 

 

 

 

 

 

 

Sept. 16, 2009

Sept. 24, 2009

12

 

Sept. 17, 2009

Sept. 25, 2009

12

 

Sept. 18, 2009

Sept. 28, 2009

12

 

 

 

 

Japan

 

 

 

 

 

 

 

 

Sept. 16, 2009

Sept. 24, 2009

8

 

Sept. 17, 2009

Sept. 25, 2009

8

 

Sept. 18, 2009

Sept. 26, 2009

8

 

 

 

 

Norway

 

 

 

 

 

 

 

 

April 6, 2009

April 14, 2009

8

 

April 7, 2009

April 15, 2009

8

 

April 8, 2009

April 16, 2009

8

 

 

 

 

Russia**

 

 

 

 

 

 

 

 

Dec. 29, 2009

Jan. 11, 2010

13

 

Dec. 30, 2009

Jan. 12, 2010

13

 

Dec. 31, 2009

Jan. 10, 2010

13


* Settlement dates in the table above have been confirmed as of 6/18/08. Holidays are subject to change without further notice.


** Assume likely 2010 holiday based on prior year. Settlement cycle in Russia is negotiated on a deal by deal basis. Above data reflects a hypothetical T+3 cycle.

Transaction Fees

Transaction fees are imposed as set forth in the table in the Prospectus.  Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares.  There is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed.  In addition, a variable Transaction Fee equal to a percentage of the value of each Creation Unit purchased or redeemed is applicable to each creation or redemption transaction.

Purchasers of Creation Units of Bull Funds for cash are required to pay an additional charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios securities.  Where the Trust permits an in-kind purchaser to substitute cash in lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed an additional charge for cash purchases.

Purchasers of Shares in Creation Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust.  The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table below.  Investors will also bear the costs of transferring securities from the Fund to their account or on their order.  Investors who use the services of a broker or other such intermediary may be charged a fee for such services.

Continuous Offering

The method by which Creation Units of Shares are created and traded may raise certain issues under applicable securities laws.  Because new Creation Units of Shares are issued and sold by the 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 some or all of the Shares comprising such Creation Units directly to its 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 a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s activities.  Thus, 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- dealer firms should also note that dealers who are effecting transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus.  This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect of such transactions as a result of Section 24(d) of the 1940 Act.  The Trust has been granted an exemption by the SEC from this prospectus delivery obligation in ordinary secondary market transactions involving Shares under certain circumstances, on the condition that purchasers of Shares are provided with a product description of the Shares.  Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction), and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the Securities Act.  Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request.  The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.

DIVIDENDS, OTHER DISTRIBUTIONS AND TAXES

Dividends and Other Distributions

As stated in the Prospectus, each Fund pays out dividends to its shareholders from its net investment income at least annually.  A Fund also distributes its net short-term capital gain, if any, annually but may make more frequent distributions thereof if necessary to avoid income or excise taxes.  Each Fund may realize net capital gain ( i.e. , the excess of net long-term capital gain over net short-term capital loss) and thus anticipates annual distributions thereof.  The Trustees may revise this dividend policy, or postpone the payment of dividends, if a Fund has or anticipates any large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.

Investors should be aware that if shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax consequences described in the Prospectus).

Taxes

Regulated Investment Company Status .  Each Fund is treated as a separate corporation for federal tax purposes and intends to qualify as a regulated investment company under Subchapter M of Chapter 1 of the Code (“RIC”).  If a Fund so qualifies and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income -- generally consisting of net investment income, the excess of net short-term capital gain over net long-term capital loss (“short-term capital gain”), and net gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid -- and net capital gain it distributes to its shareholders for that year.

To qualify for treatment as a RIC, a Fund must distribute to its shareholders for each taxable year at least 90% of its investment company taxable income (“Distribution Requirement”) and must meet several additional requirements.  For each Fund, these requirements include the following:  (1) the Fund must derive at least 90% of its gross income each taxable year from (a) dividends, interest, payments with respect to securities loans and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its business of investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of the Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities of other RICs and other securities, with those other securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of QPTPs being considered voting securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer, (ii) securities (other than securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively, “Diversification Requirements”).  The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not qualifying income for purposes of the Income Requirement.

Although each Fund intends to satisfy all the foregoing requirements, there is no assurance that a Fund will be able to do so.  The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy the Diversification Requirements.  There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation the Funds use, pursuant to which each of them would expect to be treated as satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more of the Funds.

If a Fund failed to qualify for treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 35%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3) the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the Prospectus) (“QDI”), which is subject to a maximum federal income tax rate of 15%) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under certain circumstances.  In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment.

Excise Tax .  Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.

Income from Foreign Securities .  Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities.  Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign countries do not impose taxes on capital gains in respect of investments by foreign investors.


Gains or losses (1) from the disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss.  These gains or losses will increase or decrease the amount of a Fund’s investment company taxable income to be distributed to its shareholders.


Each Fund may invest in the stock of “passive foreign investment companies” (“PFICs”).  A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests: (1) at least 75% of its gross income for the taxable year is passive; or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income.  Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders.  The balance of the PFIC income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders.  Fund distributions thereof will not be eligible for the 15% maximum federal income tax rate on individuals’ QDI.


If a Fund invests in a PFIC and elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each year its pro rata share of the QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain from the QEF.  In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.


Each Fund may elect to “mark to market” its stock in any PFIC.  “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s stock over a Fund’s adjusted basis therein as of the end of that year.  Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end, but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election.  A Fund’s adjusted basis in each PFIC’s stock with respect to which it makes this election would be adjusted to reflect the amounts of income included and deductions taken thereunder.  


Derivatives Strategies .  The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts, involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith.  Gains from the disposition of foreign currencies (except certain gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as qualifying income under the Income Requirement.  Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the effect of these rules, prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.

Some futures contracts (other than “securities futures contracts,” as defined in Code section 1234B(c)), foreign currency contracts, and “nonequity” options ( i.e. , certain listed options, such as those on a “broad-based” securities index) in which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”).  Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized.  Sixty percent of any net gain or loss recognized on these deemed sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss.  These rules may operate to increase the amount that a Fund must distribute to satisfy the Distribution Requirement ( i.e. , with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it.  A Fund may elect not to have the foregoing rules apply to any “mixed straddle” (that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute.  Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.

Code section 1092 (dealing with straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest.  That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for these purposes, options, futures, and forward contracts are positions in personal property.  Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrealized gain on the offsetting position(s) of the straddle.  In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above.  The regulations under section 1092 also provide certain “wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles.  If a Fund makes certain elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made.  Because only a few of the regulations implementing the straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.

If a call option written by a Fund lapses ( i.e. , terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain.  If a Fund enters into a closing purchase transaction with respect to a written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys.  If such an option is exercised and a Fund thus sells the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale.  If a call option purchased by a Fund lapses, it will realize short-term or long-term capital loss, depending on its holding period for the security or futures contract subject thereto.  If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.

If a Fund has an “appreciated financial position” -- generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the fair market value of which exceeds its adjusted basis -- and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time.  A constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property.  In addition, if the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale.  The foregoing will not apply, however, to any Fund’s transaction during any taxable year that otherwise would be treated as a constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that closing ( i.e ., at no time during that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).

Income from Zero-Coupon and Payment-in-Kind Securities .  A Fund may acquire zero-coupon or other securities (such as strips) issued with original issue discount (“OID”).  As a holder of those securities, a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year.  Similarly, a Fund must include in its gross income securities it receives as “interest” on payment-in-kind securities.  Because each Fund annually must distribute substantially all of its investment company taxable income, including any accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it actually receives.  Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary.  A Fund may realize capital gains or losses from those sales, which would increase or decrease its investment company taxable income and/or net capital gain.

Income from REITs .  A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP.  A portion of the net income allocable to REMIC residual interest holders may be an “excess inclusion.”  The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries, that are TMPs.  Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.

The Notice provides that a REIT must (1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” ( i.e. , governmental units and tax-exempt entities that are not subject to the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocated to its disqualified organization shareholders, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate.  Excess inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.

A RIC with excess inclusion income is subject to rules identical to those in clauses (2) through (5) (substituting “that are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record shareholders that are” after “its” in clause (4)).  The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that, (1) a RIC with excess inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from REITs the excess inclusion income of which exceeded 3% of its dividends.  No Fund will invest directly in REMIC residual interests, and no Fund intends to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.

The foregoing is only a general summary of some of the important federal income tax considerations generally affecting the Funds.  No attempt is made to present a complete explanation of the federal tax treatment of the Funds’ activities, and this discussion is not intended as a substitute for careful tax planning.  Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to distributions therefrom.

 

FINANCIAL STATEMENTS

 

DIREXION SHARES ETF TRUST

STATEMENT OF ASSETS AND LIABILITIES

AUGUST 14, 2008


 

Large Cap

Bull 3x Shares

Large Cap

Bear 3X Shares

Financial

Bull 3X Shares

Financial

Bear 3X Shares

ASSETS

 

 

 

 

Cash

$  25,013

$  25,012

$  25,013

$  25,012

Receivable from Adviser

$  75,034

$  75,035

$  75,034

$  75,034

TOTAL ASSETS

$100,047

$100,047

$100,047

$100,046

LIABILITIES





Payable for Organization Costs

$  75,034

$  75,035

$  75,034

$  75,034

TOTAL LIABILITIES

$  75,034

$  75,035

$  75,034

$  75,034

Net Assets

$  25,013

$  25,012

$  25,013

$  25,012

Analysis of Net Assets:





Paid-in Capital on shares of capital stock

$  25,013

$  25,012

$  25,013

$  25,012

Shares Outstanding

416.88

416.87

416.88

416.87

Net asset value per share

$    60.00

$   60.00

$    60.00

$   60.00


See accompanying notes to financial statements.


DIREXION SHARES ETF TRUST

STATEMENT OF OPERATIONS

FOR THE PERIOD ENDED AUGUST 14, 2008



 

Large Cap

Bull 3x

Shares

Large Cap

   Bear 3X

Shares

Financial

   Bull 3X

Shares

Financial

 Bear 3X

 Shares

INVESTMENT INCOME

$          -

$          -

$           -

$           ­

EXPENSES





Organization Costs

$ 75,034

$ 75,035

$ 75,034

$ 75,034

Less : Reimbursement of Organization Costs by Adviser

$ 75,034

$ 75,035

$ 75,034

$ 75,034

NET EXPENSES

$           -

$           -

$         -  ­

$          -­

NET INVESTMENT INCOME

$           -

$           -

$         -  ­

$          - ­

 





The Funds were organized on April 23, 2008.





 






See accompanying notes to financial statements.


______________________________________________________________________


DIREXION SHARES ETF TRUST

NOTES TO FINANCIAL STATEMENTS

 

1.

Organization

The Direxion Shares ETF Trust (“Trust”) is a registered investment company offering a number of separate exchange-traded funds (the “Funds”).  Rafferty Asset Management LLC (the “Adviser”) serves as the investment adviser to each Fund.  The Trust is a Delaware statutory trust and a registered investment company.  The Trust was organized on April 23, 2008, and has authorized capital of unlimited shares of beneficial interest of no par value. The Trust has had no operations to date other than matters relating to its organization and registration as a non-diversified, open-end management investment company under the Investment Company Act of 1940, as amended, and the sale and issuance to the Adviser of shares of beneficial interest for the Large Cap Bull 3X Shares, Large Cap Bear 3X Shares, Financial Bull 3X Shares and Financial Bear 3X Shares at an aggregate purchase price of $100,050. The Trust currently comprises of thirty six portfolios.  

The investment objective of the Large Cap Bull 3X Shares Fund is to seek daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000® Index (“Large Cap Index”).  The investment objective of the Large Cap Bear 3X Shares Fund is to seek daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of Large Cap Index.  The investment objective of the Financial Bull 3X Shares Fund is to seek daily investment results, before fees and expenses, of 300% of the price performance of the Russell 1000® Financial Services Index (“Financial Index”). The investment objective of the Financial Bear 3X Shares Fund is to seek daily investment results, before fees and expenses, of 300% of the inverse (or opposite) of the price performance of Financial Index.

 

2.

Summary of Significant Account Policies

Use of Estimates & Indemnifications:

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts and disclosures in these financial statements. Actual results could differ from those estimates.

In the normal course of business the Trust enters into contracts that contain a variety of representations which provide general indemnifications. The Trust’s maximum exposure under these arrangements cannot be known; however, the Trust expects any risk of loss to be remote.

Federal Income Tax:


The Funds intend to comply with the requirements of Subchapter M of the Internal Revenue Code necessary to qualify as a regulated investment company and to make the requisite distributions of income and capital gains to its shareholders sufficient to relieve it from all or substantially all federal income and excise taxes.

 

3.

Agreements

Investment Advisory and Management Services Agreements:

The Adviser serves as the Trust’s investment adviser pursuant to an Investment Advisory Agreement.  The Adviser is responsible for developing, implementing and supervising each Funds’ investment program. The Adviser manages the investment and the reinvestment of the assets of the Funds, in accordance with the investment objectives, policies, and limitations of the Funds, subject to the general supervision and control of the trustees and officers of the Trust.  For these and other services, the Funds will pay the Adviser advisory fees at an annualized rate based upon each Fund’s average daily net assets of 0.75%.  Fees will be computed daily and paid monthly.

Expense Limitation Agreement:


The Adviser has contractually agreed to waive all or a portion of its management fees and/or reimburse the Funds for other expenses through March 1, 2009 to the extent that each Fund’s Net Annual Operating Expenses exceed 0.95% (excluding, as applicable, among other expenses, taxes, leverage interest, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation).  Any expense waiver is subject to reimbursement by the Funds, as applicable, within the following three years if overall expenses fall below these percentage limitations.  This agreement may be terminated or revised at any time with the consent of the Board of Trustees.

Distribution and Service (12b-1) Plan:

The Board of Trustees of the Trust has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the Investment Company Act of 1940.  In accordance with the Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain distribution-related activities and shareholder services.  No 12b-1 fees are currently paid by any Funds, and there are no plans to impose these fees.


Service Providers:

Bank of New York Mellon serves as the Fund’s Administrator, Custodian, Fund Accounting Agent and Transfer Agent.  

Foreside Fund Services, LLC serves as the Fund’s Distributor.


4.

Organizational Costs

Total organization costs incurred by the Trust amount to $300,137.  The Adviser has agreed to reimburse the Trust’s organization costs .  These amounts may be recoverable by the Adviser from the Trust at a later date, subject to the Expense Limitation Agreement.


5.

Capital

The Funds issue and redeem shares on a continuous basis at net asset value in groups of 100,000 shares called “Creation Units.”

Except when aggregated in Creation Units, shares are not redeemable securities of the Funds.  Retail investors, therefore, generally will not be able to purchase or redeem shares directly from or with a Fund.  Rather, most retail investors will purchase or sell shares in the secondary market with the assistance of a broker. Thus, some of the information contained in these Notes to Financial Statements—such as references to the Transaction Fees (the “Transaction Fees”) imposed on purchases and redemptions—is not relevant to retail investors.

Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units.  There is a fixed and a variable component to the total Transaction Fee on transactions in Creation Units.  

 


6.

Related Parties

At August 14, 2008, certain officers of the Trust were also employees of the Adviser.




Report of Independent Registered Public Accounting Firm


To the Shareholders and

Board of Trustees of the Direxion Shares ETF Trust

We have audited the accompanying statement of assets and liabilities of the Large Cap Bull 3X Shares, Large Cap Bear 3X Shares, Financial Bull 3X Shares, and Financial Bear 3X Shares (the “Funds”) (each a series of the Direxion Shares ETF Trust), as of August 14, 2008 and the related statement of operations for the period from April 23, 2008 (date of organization) to August 14, 2008. These financial statements are the responsibility of the Funds’ management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Funds’ internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Funds’ internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Funds at August 14, 2008 and the results of its operations for the period from April 23, 2008 (date of organization) to August 14, 2008 in conformity with U.S. generally accepted accounting principles.

 

/s/ Ernst & Young LLP

Chicago, Illinois

August 15, 2008




Appendix A


Description of Corporate Bond Ratings


Moody’s Investors Service and Standard and Poor’s Corporation are two prominent independent rating agencies that rate the quality of bonds.  Following are expanded explanations of the ratings shown in the Prospectus and this SAI.


Moody’s Investors Service Ratings


Aaa: Bonds with this rating are judged to be of the best quality.  They carry the smallest degree of investment risk.  Interest payments are protected by a large or exceptionally stable margin and principal is secure.


Aa: Bonds with this rating are judged to be of high quality by all standards.  Together with the Aaa group they comprise what are generally known as high grade bonds.  They are rated lower than the best bonds because margins of protection may not be as large as in Aaa securities or fluctuation of protective elements may be of greater amplitude.


A: Bonds with this rating possess many favorable investment attributes and are to be considered as upper medium grade obligations.  Factors giving security to principal and interest are considered adequate, but elements may be present which suggest a susceptibility to impairment sometime in the future.


Baa: Bonds with this rating are considered as medium grade obligations, i.e.; they are neither highly protected nor poorly secured.  Interest payments and principal security appear adequate for the present but certain protective elements may be lacking or may be characteristically unreliable over any great

length of time.  Such bonds lack outstanding investment characteristics and in fact have speculative characteristics as well.


Ba: Bonds with this rating are judged to have speculative elements; their future cannot be considered as well-assured.  Often the protection of interest and principal payments may be very moderate and thereby not well safeguarded during both good and bad times over the future.  Uncertainty of position characterizes bonds in this class.


B: Bonds with this rating generally lack characteristics of desirable investments.  Assurance of interest and principal payments or of maintenance of other terms of the contract over any long period of time may be small.


Caa: Bonds with this rating are of poor standing.  Such issues may be in default or there may be present elements of danger with respect to principal or interest.


Ca: Bonds with this rating represent obligations which are speculative to a high degree.  Such issues are often in default or have other marked shortcomings.


C: Bonds with this rating are the lowest rated class of bonds.  Issues so rated can be regarded as having extremely poor prospects of ever attaining any real investment standing.


Moody’s applies numerical modifiers 1, 2 and 3 in each generic rating classification from Aa through B in its corporate bond rating system.  The modifier 1 indicates that the security ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3 indicates that the issue ranks in the lower end of its generic rating category.


Generally, investment-grade debt securities are those rated Baa3 or better by Moody’s.


Standard & Poor’s Corporation Ratings


AAA: This rating is the highest rating assigned by Standard & Poor’s and is indicative of a very strong  capacity to pay interest and repay principal.


AA: This rating indicates a very strong capacity to pay interest and repay principal and differs from the higher rated issues only by a small degree.


A: This rating indicates a strong capacity to pay interest and repay principal, although it is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than debt in higher rated categories.


BBB: This rating indicates an adequate capacity to pay interest and repay principal.  Whereas it normally exhibits adequate protection parameters, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity to pay interest and repay principal for debt in this category

than in higher rated categories.


BB, B, CCC, CC: These ratings indicate, on balance, a predominantly speculative capacity of the issuer to pay interest and repay principal in accordance with the terms of the obligation. BB indicates the lowest degree of speculation and CC the highest degree of speculation.  While such debt will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major risk exposures to adverse conditions.


C: This rating is reserved for income bonds on which no interest is being paid.


D: This rating indicates debt in default, and payment of interest and/or repayment of principal are in arrears.


The ratings from AA to B may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories, for example A or B+.


Generally, investment-grade debt securities are those rated BBB or better by Standard & Poor’s.







 

 

APPENDIX B


DIREXION SHARES ETF TRUST


PROXY VOTING POLICIES AND PROCEDURES



The Direxion Shares ETF Trust has adopted the following guidelines (the “Guidelines”) pursuant to which a Fund’s investment adviser, Rafferty Asset Management (“RAM”), in the absence of special circumstances, generally shall vote proxies.  These Guidelines are designed to reasonably ensure that proxies are voted in the best interest of the shareholders of a Fund.


I.

Duty to Vote Proxies


RAM views seriously its responsibility to exercise voting authority over securities that are owned by a Fund.   


A.

It is the policy of RAM to review each proxy statement on an individual basis and to vote exclusively with the goal to best serve the financial interests of a Fund’s shareholders.


B.

To document that proxies are being voted, RAM will keep a record reflecting when and how each proxy is voted. RAM will keep and maintain such records consistent with the requirements of Rule 206(4)-6 under the Investment Advisers Act of 1940, as amended (“Advisers Act”), and other applicable regulations. RAM will make its proxy voting history and policies and procedures available to shareholders upon request.  If requested in written form, the proxy voting history and policies and procedures shall be sent to a shareholder within three business days of such a request.  To request a written copy, shareholders, or their agents, may contact RAM at (877) 437-9363 or by writing to a Fund at 33 Whitehall Street, 10th Floor, New York, New York  10004. 


II.

Guidelines for Voting Proxies


RAM will generally vote proxies so as to promote the long-term economic value of the underlying securities, and generally will follow the Guidelines provided below.  Each proxy proposal should be considered on its own merits, and an independent determination will be made whether to support or oppose management’s position.  RAM believes that the recommendation of management should be given substantial weight, but RAM will not support management proposals that may be detrimental to the underlying financial value of a stock.


The RAM's portfolio management department will be responsible for administrating and overseeing the proxy voting process.


The Guidelines set forth below deal with the two basic categories of proxy proposals.  While they are not exhaustive, they do provide a good indication of RAM’s general approach to a wide range of issues.     


RAM usually will oppose proposals that dilute the economic interest of shareholders, reduce shareholders’ voting rights, or otherwise limit their authority. Proxies will be voted in what is believed to be in a Fund shareholders’ best interest and not necessarily always with management.  Each situation is considered individually within the general guidelines.  Routine proposals normally are voted based on the recommendation of the issuer’s management.  Non-routine proposals that could meaningfully impact the position of existing shareholders are given special consideration and voted in a manner that is believed to support the interests of a Fund’s shareholders.


1.

Routine Proposals


Routine proposals are those that do not propose to change the structure, bylaws, or operations of the corporation to the detriment of the shareholders.  Given the routine nature of these proposals, proxies will nearly always be voted with management. Traditionally, routine proposals include:


Approval of auditors

Election of directors and officers of the corporation

Indemnification provisions for directors

Liability limitations of directors

Name changes

Declaring stock splits

Elimination of preemptive rights

Incentive compensation plans

Changing the date and/or the location of the annual meetings

Minor amendments to the articles of incorporation

Employment contracts between the company and its executives and remuneration for directors

Automatic dividend reinvestment plans

Retirement plans, pensions plans and profit sharing plans, creation of and amendments thereto


2.

Non-Routine Proposals


These proposals are more likely to affect the structure and operations of the corporation and, therefore, will have a greater impact on the value of the stock.  The portfolio voting the proxy will review each issue in this category on a case-by-case basis.  RAM will be especially critical of lavish executive compensation and highly priced merger acquisition proposals, which would tend to lower future corporate earnings potential.  



Non-routine proposals typically include:


Mergers and acquisitions

Restructuring

Re-incorporation or formation

Changes in capitalization

Increase or decrease in number of directors

Increase or decrease in preferred stock

Increase or decrease in common stock

Stock option plans or other compensation plans

Social issues

Poison pills

Golden parachutes

Greenmail

Supermajority voting

Board classification without cumulative voting

Confidential voting


RAM will typically accept management’s recommendations on shareholder proposed social issues, since it does not have the means to either evaluate the economic impact of such proposals, or determine a consensus among shareholders’ social and political viewpoints.   



III.

Conflicts of Interests


RAM and affiliated companies’ business lines, limited to that of investment advisor to mutual funds and retail broker/dealer, preclude any potential material conflicts of interests between RAM and Direxion Funds’ shareholders. Neither RAM, nor its affiliates underwrite securities or own stock shares.



IV.

Recordkeeping and Reporting


RAM is required to maintain records of proxies voted pursuant to Section 204(2) of the Advisers Act and Rule 204-2(c) thereunder.  RAM will maintain and make available to fund shareholders for review a copy of its proxy voting policies and procedures, a record of each vote cast, and each written and verbal shareholder request for proxy voting records.  In addition, RAM will maintain appropriate proxy voting records for a Fund in compliance with applicable regulations under the Investment Company Act of 1940, as amended.

Proxy voting books and records are maintained by RAM for five years, the first two years can be accessed via a Fund’s website, www.direxionfunds.com, or requested in written form.  If requested in written form, the proxy voting history and policies and procedures shall be sent to a shareholder within three business days of such a request.  To request a written copy, shareholders, or their agents, may contact RAM at (877) 437-9363 or by writing to a Fund at 33 Whitehall Street, 10th Floor, New York, New York  10004.  A copy of the twelve-month voting history of a Fund will be made available on the SEC’s website at http://www.sec.gov.in accordance with applicable regulations under the 1940 Act.





DIREXION SHARES ETF TRUST


PART C   OTHER INFORMATION


Item 23.

Exhibits

 

(a)

(i)

Certificate of Trust 1

 

(ii)

Trust Instrument – Filed herewith.

(b)

 

By-laws – Filed herewith.

(c)

 

Shareholders' rights are contained in Articles IV, V, VI, IX, and X of the Registrant’s Trust Instrument and Articles V, VI, VII, VIII and IX of the Registrant’s By-laws.

(d)

 

Form of Investment Advisory Agreement between Registrant and Rafferty Asset Management, LLC (“Rafferty”) – Filed herewith.

(e)

(i)

Form of Distribution Agreement between Registrant and Foreside Fund Services, LLC (“Foreside”) – Filed herewith.

 

(ii)

Form of Authorized Participant Agreement – Filed herewith.

(f)

 

Bonus or Profit Sharing Contracts – None.

(g)

 

Form of Custody Agreement between Registrant and The Bank of New York (“BONY”) – Filed herewith.

(h)

(i)

Form of Transfer Agency and Service Agreement between Registrant and BONY – Filed herewith.

 

(ii)

Form of Fund Administration and Accounting Agreement between the Registrant and BONY – Filed herewith.

(i)

 

Opinion and Consent of Counsel – Filed herewith.

(j)

 

Consent of Independent Registered Certified Public Accounting Firm – Filed herewith.

(k)

 

Omitted Financial Statements –  None.

(l)

 

Initial Capital Agreement – Filed herewith.

(m)

 

Rule 12b-1 Distribution Plan – Filed herewith.

(n)

 

Rule 18f-3 Multiple Class Plan – None.

(p)

Form of Code of Ethics for Registrant and Rafferty – Filed herewith.

Other Exhibits

 

Powers of Attorney – Filed herewith.

 

 

 

1

Incorporated by reference to the corresponding exhibit of the Registrant’s initial Registration Statement on Form N-1A (File Nos. 333-150525 and 811-22201) filed with the SEC via EDGAR on April 30, 2008.


Item 24 .

Persons Controlled by or under Common Control with Registrant

Immediately prior to the contemplated public offering of the Registrant’s shares, the following persons may be deemed individually to control the Funds or the Trust:

Rafferty Asset Management, LLC will be the sole shareholder immediately prior to the contemplated public offering of each Fund.

Item 25 .

Indemnification

Article IX of the Trust Instrument of the Registrant provides as follows:

Section 1.

LIMITATION OF LIABILITY.  All persons contracting with or having any claim against the Trust or a particular Series shall look only to the assets of the Trust or Assets belonging to such Series, respectively, for payment under such contract or claim; and neither the Trustees nor any of the Trust’s officers or employees, whether past, present or future, shall be personally liable therefor. Every written instrument or obligation on behalf of the Trust or any Series may contain a statement to the foregoing effect, but the absence of such statement shall not operate to make any Trustee or officer of the Trust liable thereunder. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees and officers of the Trust shall not be responsible or liable for any act or omission or for neglect or wr ongdoing of them or any officer, agent, employee, investment adviser, principal underwriter or independent contractor of the Trust, but nothing contained in this Trust Instrument or in the Delaware Act shall protect any Trustee or officer of the Trust against liability to the Trust or to Shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

Section 2.

INDEMNIFICATION.

(a)

Subject to the exceptions and limitations contained in subsection (b) below:

(i)

every person who is, or has been, a Trustee or an officer, employee or agent of the Trust, including persons who act at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (“Covered Person”) shall be indemnified by the Trust or the appropriate Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been a Covered Person and against amounts paid or incurred by him or her in the settlement thereof.  

(ii)

as used herein, the words “claim,” “action,” “suit” or “proceeding” shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened, and the words “liability” and “expenses” shall include, without limitation, counsel fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.

(b)

No indemnification shall be provided hereunder to a Covered Person:

(i)

who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office or (B) not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Trust; or

(ii)

in the event of a settlement, if there has been a determination that such Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office:  (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry).

(c)

The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person.  Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.

(d)

To the maximum extent permitted by applicable law, expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section shall be paid by the Trust or applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him or her to the Trust or applicable Series if it is ultimately determined that he or she is not entitled to indemnification under this Section.  

(e)

Any repeal or modification of this Article IX by the Shareholders, or adoption or modification of any other provision of this Trust Instrument or the By-laws inconsistent with this Article, shall be prospective only, to the extent that such, repeal or modification would, if applied retrospectively, adversely affect any limitation on the liability of any Covered Person or indemnification available to any Covered Person with respect to any act or omission which occurred prior to such repeal, modification or adoption.

Section 3.

INDEMNIFICATION OF SHAREHOLDERS.  If any Shareholder or former Shareholder of any Series is held personally liable solely by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or, in the case of any entity, its general successor) shall be entitled out of the Assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability.  The Trust, on behalf of the affected Series, shall, upon request by such Shareholder or former Shareholder, assume the defense of any claim made against him or her for any act or obligation of the Series and satisfy any judgment thereon from the Assets belonging to the Series.

Article IX, Section 3 of the By-laws of the Registrant provides as follows:

Section 3.

Advance Payment of Indemnifiable Expenses.  Expenses incurred by an agent in connection with the preparation and presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be paid over by him or her to the Trust if it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a) such agent shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall have determined, based upon a review of the readily available facts (as opposed to a trial- type inquiry or full investigation), that there is reason to believe that such agent will be found entitled to indemnification.

The general effect of this Indemnification will be to indemnify the officers, trustees, employees and agents of the Registrant from costs and expenses arising from any action, suit or proceeding to which they may be made a party by reason of their being or having been a trustee, officer, employee or agent of the Registrant, except where such action is determined to have arisen out of the willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the trustee’s, officer's, employee’s or agent’s office.

Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable.  In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit t o a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

Item 26.  

I.

Business and Other Connections of Investment Adviser

Rafferty Asset Management, LLC (“Rafferty”) provides investment advisory services to all Funds of the Trust.  Rafferty was organized as a New York limited liability corporation in June 1997.  Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty Holdings, LLC.  Rafferty’s offices are located at 33 Whitehall Street, 10 th Floor, New York, New York 10004.  Information as to the directors and officers of Rafferty is included in its current Form ADV filed with the SEC (File No. 801-54679).

Item 27.

Principal Underwriter

(a)

Foreside Fund Services, LLC (“Foreside”), the Registrant’s principal underwriter, also serves as principal underwriter for the following investment companies registered under the Investment Company Act of 1940, as amended:

American Beacon Funds

American Beacon Mileage Funds

American Beacon Select Funds

Bridgeway Funds, Inc.

Central Park Group Multi-Event Fund

Century Capital Management Trust

FocusShares Trust

Forum Funds

Henderson Global Funds

Hirtle Callahan Trust

Ironwood Series Trust

Monarch Funds

Nets Trust

PMC Funds, Series of the Trust for Professional Managers

RevenueShares ETF Trust

Sound Shore Fund, Inc.

SPA ETF Trust

The CNL Funds

The Japan Fund, Inc.

Wintergreen Fund, Inc.


(b)

The following table identifies the officers of Foreside and their positions, if any, with the Registrant. The business address of each of these individuals is Two Portland Square, First Floor, Portland, Maine 04101.

Name

Position with Underwriter

Position with Registrant

 

 

 

Mark S. Redman

President

None

 

 

 

Richard J. Berthy

Vice President and Treasurer

None

 

 

 

Nanette K. Chern

Chief Compliance Officer, Secretary

and Vice President

None

 

 

 

Mark A. Fairbanks

Deputy Chief Compliance Officer,

Vice President and Assistant Secretary

None

 

 

 

 

 

 

(c)

Not applicable.

Item 28 .

Location of Accounts and Records

The books, accounts and records required to be maintained by Section 31(a) of the Investment Company Act of 1940 are maintained in the physical possession of Rafferty Asset Management, LLC at 33 Whitehall Street, 10 th Floor, New York, New York 10004 and The Bank of New York at One Wall Street, New York, New York 10286.

Item 29 .

Management Services

Not applicable.

Item 30 .

Undertakings

None.








SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant has duly caused this Pre-Effective Amendment No. 1 to its Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York, on the day of August 18, 2008.  

 

 

DIREXION SHARES ETF TRUST

 

 

 

 

 

 

 

By:

/s/  Daniel D. O’Neill

 

 

Daniel D. O’Neill

President



Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons in the capacities and on the date(s) indicated.

Signature

 

Title

Date

 

 

 

 

/s/ Daniel D. O’Neill

 

President and Trustee

August 18, 2008

Daniel D. O’Neill

 

 

 

 

 

 

 

/s/ Todd Kellerman

 

Treasurer and Controller

August 18, 2008

Todd Kellerman

 

 

 

 

 

 

 

/s/ Daniel J. Byrne*

 

Trustee

August 18, 2008

Daniel J. Byrne

 

 

 

 

 

 

 

/s/ Gerald E. Shanley III*

 

Trustee

August 18, 2008

Gerald E. Shanley III

 

 

 

 

 

 

 

/s/ John Weisser*

 

Trustee

August 18, 2008

John Weisser

 

 

 

 

 

 

 

 

 

 

 

*By: /s/ Daniel D. O’Neill    

 

 

 

Daniel D. O’Neill

Attorney-In Fact

 

 

 








INDEX TO EXHIBITS



Exhibit

Description

EX-99.a

Trust Instrument

EX.99.b

By-laws

EX-99.d

Form of Investment Advisory Agreement between Registrant and Rafferty

EX-99.e

Form of Distribution Agreement between Registrant and Foreside

EX-99.e

Form of Authorized Participant Agreement

EX-99.g

Form of Custody Agreement between Registrant and BONY

EX-99.h

Form of Transfer Agency and Service Agreement between Registrant and BONY

EX-99.h

Form of Fund Administration and Accounting Agreement between the Registrant and BONY

EX-99.i

Opinion and Consent of Counsel

EX-99.j

Consent of Independent Registered Certified Public Accounting Firm

EX-99.l

Initial Capital Agreement

EX-99.m

Rule 12b-1 Distribution Plan

EX-99.p

Form of Code of Ethics for Registrant and Rafferty

EX-99

Powers of Attorney




DIREXION SHARES ETF TRUST

33 Whitehall Street, 10 th Floor
New York, NY 10004


TRUST INSTRUMENT




April 23, 2008





Table of Contents

ARTICLE I  DEFINITIONS

1

ARTICLE II  THE TRUSTEES

2

Section 1.

MANAGEMENT OF THE TRUST.

2

Section 2.

INITIAL TRUSTEES; ELECTION AND NUMBER OF TRUSTEES.

3

Section 3.

TERM OF OFFICE OF TRUSTEES.

3

Section 4.

VACANCIES; APPOINTMENT OF TRUSTEES.

3

Section 5.

TEMPORARY VACANCY OR ABSENCE.

3

Section 6.

CHAIRPERSON.

4

Section 7.

ACTION BY THE TRUSTEES.

4

Section 8.

OWNERSHIP OF TRUST PROPERTY.

4

Section 9.

EFFECT OF TRUSTEES NOT SERVING.

4

Section 10.

TRUSTEES AND OTHERS AS SHAREHOLDERS.

4

ARTICLE III  POWERS OF THE TRUSTEES

4

Section 1.

POWERS.

4

Section 2.

CERTAIN TRANSACTIONS.

8

ARTICLE IV  SERIES; CLASSES; SHARES

9

Section 1.

ESTABLISHMENT OF SERIES AND CLASSES.

9

Section 2.

SHARES.

9

Section 3.

PREEMPTIVE AND APPRAISAL RIGHTS.

10

Section 4.

INVESTMENTS IN THE TRUST.

10

Section 5.

ASSETS AND LIABILITIES OF SERIES AND CLASSES.

10

Section 6.

OWNERSHIP AND TRANSFER OF SHARES.

11

Section 7.

STATUS OF SHARES; LIMITATION OF SHAREHOLDER LIABILITY.

12

ARTICLE V  DISTRIBUTIONS, REDEMPTIONS AND NET ASSET VALUE

12

Section 1.

DISTRIBUTIONS.

12

Section 2.

REDEMPTIONS.

13

Section 3

REDEMPTION BY TRUST.

13

Section 4.

PREVENTION OF PERSONAL HOLDING COMPANY STATUS.

13

Section 5.

DETERMINATION OF NET ASSET VALUE PER SHARE.

14

Section 6.

SUSPENSION OF RIGHT OF REDEMPTION.

14

ARTICLE VI  SHAREHOLDERS’ VOTING POWERS AND MEETINGS

14

Section 1.

VOTING POWERS.

14

Section 2.

MEETINGS OF SHAREHOLDERS.

15

Section 3.

QUORUM; REQUIRED VOTE.

15

Section 4.

INSPECTION OF RECORDS

15

Section 5.

ADDITIONAL PROVISIONS.

15

ARTICLE VII  CONTRACTS WITH SERVICE PROVIDERS

16

Section 1.

INVESTMENT ADVISER.

16

Section 2.

PRINCIPAL UNDERWRITER/DISTRIBUTOR.

16

Section 3.

CUSTODIAN.

16

Section 4.

TRANSFER AGENCY, SHAREHOLDER SERVICES AND ADMINISTRATION
 AGREEMENTS.

16

Section 5.

PARTIES TO CONTRACTS WITH SERVICE PROVIDERS.

16

ARTICLE VIII  EXPENSES OF THE TRUST, SERIES AND CLASSES

17

ARTICLE IX  LIMITATION OF LIABILITY AND INDEMNIFICATION

17

Section 1.

LIMITATION OF LIABILITY.

17

Section 2.

INDEMNIFICATION.

18

Section 3.

INDEMNIFICATION OF SHAREHOLDERS.

19

ARTICLE X  MISCELLANEOUS

19

Section 1.

TRUST NOT A PARTNERSHIP.

19

Section 2.

TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY.

19

Section 3.

TERMINATION OR REORGANIZATION OF THE TRUST.

20

Section 4.

TRUST INSTRUMENT.

21

Section 5.

APPLICABLE LAW.

21

Section 6.

AMENDMENTS.

22

Section 7.

FISCAL YEAR.

22

Section 8.

SEVERABILITY.

22

Section 9.

INTERPRETATION.

22






DIREXION SHARES ETF TRUST

TRUST INSTRUMENT

This TRUST INSTRUMENT is made as of April 23, 2008 by the Trustees to establish a statutory trust for the investment and reinvestment of funds contributed to the Trust by investors.  The Trustees declare that all money and property contributed to the Trust shall be held and managed in trust pursuant to this Trust Instrument.  The name of the Trust created by this Trust Instrument is “Direxion Shares ETF Trust.”

ARTICLE I

DEFINITIONS

Unless otherwise provided or required by the context:

(a)

“Assets belonging to” a Series has the meaning set forth in Article IV, Section 4;

(b)

“By-laws” means the By-laws of the Trust adopted by the Trustees, as amended from time to time;

(c)

“Class” means a class of Shares of a Series established pursuant to Article IV;

(d)

“Commission,” “Interested Person” and “Principal Underwriter” have the meanings provided in the 1940 Act;

(e)

“Covered Person” means a person so defined in Article IX, Section 2;

(f)

“Delaware Act” means Chapter 38 of Title 12 of the Delaware Code, entitled “Treatment of Delaware Statutory Trusts,” as amended from time to time;

(g)

“Exchange” means a national securities exchange, including as defined in Section 2(a)(26) of the 1940 Act or in Section 6 of the Securities Exchange Act of 1934;

(h)

“IIV” means the intraday indicative value of a Series as calculated by a national securities exchange or agent of the Trust or Series;

(i)

“Liabilities” means liabilities, debts, obligations, expenses, costs, charges and reserves;

(j)

“Majority Shareholder Vote” means “the vote of a majority of the outstanding voting securities” as defined in the 1940 Act;

(k)

“Net Asset Value per Share” means the net asset value of each Series or Class, determined as provided in Article V, Section 3;

(l)

“Outstanding Shares” means Shares shown in the books of the Trust or its transfer agent as then issued and outstanding but does not include Shares that have been repurchased or redeemed by the Trust and that are held in the treasury of the Trust;

(m)

“Series” means a series of Shares established pursuant to Article IV;

(n)

“Shareholder” means the record owner of Shares on the books of the Trust or its transfer or other agent, including National Securities Clearing Corp. and the Depository Trust Company (and any of their subsidiaries); provided, however, with respect to Shares of Series that trade on an Exchange, the beneficial owner of the Shares, if different than the record owner, shall be deemed to be the Shareholder;

(o)

“Shares” means the equal proportionate transferable units of interest into which the beneficial interest of each Series or Class is divided from time to time (including whole Shares and fractions of Shares);

(p)

“Tax Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations thereunder, all as amended from time to time;

(q)

“Trust” means “Direxion Shares ETF Trust,” the Delaware statutory trust established under the Delaware Act by this Trust Instrument and the filing of the certificate of trust in the Office of the Secretary of State of Delaware;

(r)

“Trust Property” means any and all property, real or personal, tangible or intangible, that is from time to time owned or held by or for the account of the Trust or any Series or the Trustees on behalf of the Trust or any Series;

(s)

“Trustees” means the persons who have signed this Trust Instrument and all other persons who may from time to time be duly qualified, elected or appointed, and serving as Trustees in accordance with Article II, in each case so long as such persons continue in office in accordance with the terms hereof, and reference herein to a Trustee or the Trustees refers to such person or persons in his or her capacity as Trustees hereunder; and

(t)

“1940 Act” means the Investment Company Act of 1940 and the rules and regulations thereunder, all as amended from time to time.

ARTICLE II

THE TRUSTEES

Section 1.

MANAGEMENT OF THE TRUST.  The business and affairs of the Trust shall be managed by or under the direction of the Trustees.  The purpose of the Trust is to conduct, operate and carry on the business of a management investment company registered under the 1940 Act through one or more Series and to carry on such other business as the Trustees may from time to time determine pursuant to their authority under this Trust Instrument.  In furtherance of the foregoing, it shall be the purpose of the Trust to do everything necessary, suitable, convenient or proper for the conduct, promotion and attainment of any businesses and purposes which at any time may be incidental or may appear conducive or expedient for the accomplishment of the business of an investment company registered under the 1940 Act and which may be engaged in or carried on by a trust organized under the Delaware Act, and in connection therewith the Trust shall have and may exercise all of the powers conferred by the laws of the State of Delaware upon a Delaware statutory trust.  The Trustees may execute all instruments and take all action they deem necessary, proper or desirable to promote the interests of the Trust.  Any determination made by the Trustees in good faith as to what is in the interests of the Trust shall be conclusive.

Section 2.

INITIAL TRUSTEES; ELECTION AND NUMBER OF TRUSTEES.  The initial Trustee(s) shall be the person(s) initially signing this Trust Instrument.  The number of Trustees (other than the initial Trustee(s)) shall be fixed from time to time by a majority of the Trustees; provided, however, that there shall be at least two (2) Trustees.  Shareholders shall not be entitled to elect Trustees except as required by the 1940 Act or under this Trust Instrument.

Section 3.

TERM OF OFFICE OF TRUSTEES.  Subject to any limitations on the term of service imposed by the By-laws and any retirement policy adopted by the Trustees, each Trustee shall hold office until his or her successor is elected, his or her death, or the Trust terminates, whichever is sooner; except that (a) any Trustee may resign by delivering to the other Trustees or to any Trust officer a written resignation effective upon such delivery or a later date specified therein, (b) any Trustee may be removed with or without cause at any time by a written instrument signed by at least two-thirds of the other Trustees, specifying the effective date of removal, (c) who has become physically or mentally incapacitated or is otherwise unable to serve, may be retired by a written instrument signed by a majority of the other Trustees, specifying the effective date of retirement, and (d)  any Trustee may be removed at any meeting of the Shareholders by a vote of at least two-thirds of the Outstanding Shares.

Section 4.

VACANCIES; APPOINTMENT OF TRUSTEES.  Whenever a vacancy exists in the Board of Trustees, regardless of the reason for such vacancy, the remaining Trustees shall appoint any person as they determine in their sole discretion to fill that vacancy, consistent with the limitations under the 1940 Act, including Section 10 thereunder.  No appointment of any Trustee shall take effect if such appointment would cause the number of Trustees who are Interested Persons to exceed the number permitted by Section 10 of the 1940 Act.  Any such appointment shall be made by a written instrument signed by a majority of the Trustees or by a resolution of the Trustees, duly adopted and recorded in the records of the Trust, specifying the effective date of the appointment.  The Trustees may appoint a new Trustee as provided above in anticipation of a vacancy expected to occur because of the retirement, resignation or removal of a Trustee, or an increase in number of Trustees, provided that such appointment shall become effective only at or after the expected vacancy occurs.  As soon as any such Trustee has accepted his or her appointment in writing, the trust estate shall vest in the new Trustee, together with the continuing Trustees, without any further act or conveyance, and he or she shall be deemed a Trustee hereunder.  The Trustees’ power of appointment is subject to Section 16(a) of the 1940 Act.

Section 5.

TEMPORARY VACANCY OR ABSENCE.  Whenever a vacancy in the Board of Trustees occurs, until such vacancy is filled or otherwise eliminated, or while any Trustee is absent from his or her domicile (unless that Trustee has made arrangements to be informed about, and to participate in, the affairs of the Trust during such absence), or is physically or mentally incapacitated, the remaining Trustees shall have all the powers hereunder and their determination as to such vacancy, absence or incapacity shall be conclusive.  

Section 6.

CHAIRPERSON.  The Trustees shall appoint one of their members to be Chairperson of the Board of Trustees.  The Chairperson shall preside at all meetings of the Trustees and shall assume such other duties as the Board of Trustees may assign to the Chairperson from time to time.

Section 7.

ACTION BY THE TRUSTEES.  Unless otherwise specified herein or in the By-laws or required by law, any action by the Trustees shall be deemed effective if approved or taken by a majority of the Trustees present at a duly called meeting of Trustees (including a meeting by telephonic or other electronic means, unless the 1940 Act requires that a particular action be taken only at a meeting of the Trustees in person) at which a quorum is present or by written consent of a majority of Trustees (or such greater number as may be required by applicable law) without a meeting. To the extent permitted by the Delaware Act, the lesser of a majority of the Trustees then in office or two (2) Trustees shall constitute a quorum at any meeting.  Subject to the requirements of the 1940 Act, the Trustees by majority vote may delegate to any Trustee or Trustees authority to approve particular matters or take particular actions on behalf of the Trust.  

Section 8.

OWNERSHIP OF TRUST PROPERTY.  Title to the Trust Property shall at all times be considered as vested in the Trust, except that the Trustees shall have power to cause legal title to any Trust Property to be held by or in the name of one or more of the Trustees, or in the name of the Trust, or in the name of any other person as nominee, on such terms as the Trustees may determine. The right, title and interest of the Trustees in the Trust Property shall vest automatically in each Person who may hereafter become a Trustee.  Upon the resignation, removal or death of a Trustee, he or she shall automatically cease to have any right, title or interest in any of the Trust Property, and the right, title and interest of such Trustee in the Trust Property shall vest automatically in the remaining Trustees.  Such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered.

Section 9.

EFFECT OF TRUSTEES NOT SERVING.  The death, resignation, retirement, removal, incapacity or inability or refusal to serve of the Trustees, or any one of them, shall not operate to annul the Trust or to revoke any existing agency created pursuant to the terms of this Trust Instrument.

Section 10.

TRUSTEES AND OTHERS AS SHAREHOLDERS.  Subject to any restrictions in the law and/or By-laws, any Trustee, officer, agent or independent contractor of the Trust may acquire, own and dispose of Shares to the same extent as any other Shareholder; the Trustees may issue and sell Shares to and redeem Shares from any such person or any firm or company in which such person is interested, subject only to any general limitations herein or in the By-laws relating to the sale and redemption of such Shares.

ARTICLE III

POWERS OF THE TRUSTEES

Section 1.

POWERS.  The Trustees in all instances shall act as principals, free of the control of the Shareholders.  The Trustees shall have full power and authority to take or refrain from taking any action and to execute any contracts and instruments that they may consider necessary, proper or desirable in the management of the Trust.  The Trustees shall not in any way be bound or limited by current or future laws or customs applicable to trust investments, but shall have full power and authority to make any investments which they, in their sole discretion, deem proper to accomplish the purposes of the Trust.  The Trustees may exercise all of their powers without recourse to any court or other authority.  No one dealing with the Trustees shall be under any obligation to make any inquiry concerning the authority of the Trustees or to see to the application of any payments made or property transferred to the Trust or the Trustees or upon their order.  Subject to any applicable express limitation herein or in the By-laws or resolutions of the Trust, the Trustees shall have power and authority, without limitation:

(a)

To operate as and carry on the business of an investment company registered under the 1940 Act, and exercise all the powers necessary and proper to conduct such a business;

(b)

Subject to the limits of applicable law (including the provisions of the 1940 Act) to subscribe for, invest in, reinvest in, purchase, or otherwise acquire, hold, lend, pledge, mortgage, hypothecate, write options on, lease, sell, assign, transfer, exchange, distribute, or otherwise deal in or dispose of any form of property, including, but not limited to, cash (U.S. currency), foreign currencies and related instruments, and securities of any kind that are permissible investments for registered investment companies under applicable law (including, but not limited to, common and preferred stocks, warrants, bonds, debentures, time notes, and all other evidences of indebtedness, negotiable or non-negotiable instruments, obligations, certificates of deposit or indebtedness, commercial paper, repurchase agreements, reverse repurchase agreements, dollar rolls, convertible securities, forward contracts, options, futures contracts, swaps, other financial contracts or derivative instruments, securities issued by an investment company or any series thereof (whether registered under the 1940 Act or unregistered), securities of any issuer that would be an investment company but for Section 3(c)(1) or 3(c)(7) of the 1940 Act, and other securities of any kind issued, created, guaranteed or sponsored by any and all persons, including the United States, individual states or the District of Columbia, territories and possessions of the United States, any political subdivision, agency or instrumentality of the United States and any foreign government or subdivision thereof, without regard to whether any such instruments securities mature before or after the possible termination of the Trust or one or more of its Series; to exercise any and all rights, powers, and privileges of ownership or interest in respect of any and all such investments of every kind and description; and to hold cash or other property uninvested, without in any event being bound or limited by any current or future law or custom concerning investments by trustees;

(c)

To adopt By-laws not inconsistent with this Trust Instrument providing for the conduct of the business of the Trust and to amend and repeal them to the extent such right is not reserved to the Shareholders;

(d)

To elect and remove such officers and appoint and terminate such agents as the Trustees deem appropriate;

(e)

To employ one or more investment advisers, administrators, depositories, custodians and other persons;

(f)

To employ as custodian of any assets of the Trust, subject to any provisions herein or in the By-laws, one or more banks, trust companies or companies that are members of an Exchange or other entities permitted by the Commission to serve as such and authorize any depository or custodian to employ sub-custodians or agents and to deposit all or any part of the Trust’s assets in a system or systems for the central handling of securities and debt instruments;

(g)

To retain one or more transfer, dividend, accounting or Shareholder servicing agents and registrars and, with respect to Series whose Shares trade on an Exchange, one or more market makers, Exchange specialists, listing and IIV agents;

(h)

To provide for the distribution of Shares through a Distributor, Principal Underwriter, by the Trust itself, or by any other method, including pursuant to a distribution plan of any kind, and to arrange for the listing and trading of shares on one or more Exchanges, as appropriate;

(i)

To pay or cause to paid all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or any Series or Class or in connection with the management thereof, including, but not limited to, the Trustees’ compensation and such expenses and charges for the Trust’s officers, employees, investment advisers, administrator, distributor, principal underwriter, auditor, counsel, depository, custodian, transfer agent, registrar, dividend disbursing agent, accounting agent, shareholder servicing agent, and such other agents.

(j)

To set record dates in the manner provided for herein or in the By-laws;

(k)

To establish a registered office and have a registered agent in the State of Delaware;

(l)

To delegate such authority as the Trustees consider desirable to any officers of the Trust and to any agent, independent contractor, manager, investment adviser, subadvisers, custodian, administrator, underwriter or other service provider;

(m)

To sell, exchange or otherwise dispose of any or all of the assets of the Trust or any Series;

(n)

To vote or give assent, or exercise any rights of ownership, with respect to securities or other property, and to execute and deliver proxies or powers of attorney delegating such power to such persons as the Trustees deem proper;

(o)

To exercise powers and rights of subscription or otherwise which in any manner arise out of ownership of securities;

(p)

To hold any security or other property (i) in a form not indicating any trust, whether in bearer, book entry, unregistered or other negotiable form or (ii) either in the Trust’s or Trustee’s own name or in the name of a custodian or a nominee or nominees, subject to safeguards according to the usual practice of statutory trusts or investment companies;

(q)

To establish separate and distinct Series with separately defined investment objectives and policies, distinct investment purposes and separate Shares representing beneficial interests in such Series, and to establish separate Classes, all in accordance with the provisions of Article IV;

(r)

To interpret the investment policies, practices, or limitations of any Series or Class;

(s)

To the full extent permitted by Section 3804 of the Delaware Act, to allocate assets and Liabilities of the Trust to a particular Series, and Liabilities to a particular Class, or to apportion the same between or among two or more Series or Classes, provided that any Liabilities incurred by a particular Series or Class shall be payable solely out of the Assets belonging to that Series or Class, respectively, as provided for in Article IV, Section 4;

(t)

To consent to or participate in any plan for the reorganization, consolidation or merger of any corporation or issuer whose securities are held by the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust;

(u)

To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including, but not limited to, claims for taxes;

(v)

To declare and make distributions of income and of capital gains to Shareholders;

(w)

To borrow money or otherwise obtain credit and to secure the same by mortgaging, pledging, or otherwise subjecting as security any assets of the Trust, including the lending of portfolio securities, and to endorse, guarantee or undertake the performance of any obligation, contract, or engagement of any other person, firm, association, or corporation;

(x)

To establish, from time to time, a minimum total investment for Shareholders in the Trust or in one or more Series or Classes, and to require the redemption of the Shares of any Shareholders whose investment is less than such minimum or take such other action as the Trustees in their discretion shall determine;

(y)

To establish committees for such purposes, with such membership, and with such responsibilities as the Trustees may consider proper, including a committee consisting of fewer than all of the Trustees then in office, which may act for and bind the Trustees and the Trust with respect to the institution, prosecution, dismissal, settlement, review or investigation of any legal action, suit or proceeding, pending or threatened to be brought before any court, administrative agency, or other adjudicatory body;

(z)

To issue, sell, repurchase, redeem, cancel, retire, acquire, hold, resell, reissue, dispose of and otherwise deal in Shares; to suspend or terminate the sales or trading of Shares of any Series or Class for any period of time; to establish terms and conditions, including any fees or expenses, regarding the issuance, sale, repurchase, redemption, cancellation, retirement, acquisition, holding, resale, reissuance, disposition of or dealing in Shares; and, subject to Articles IV and V, to apply to any such repurchase, redemption, retirement, cancellation or acquisition of Shares any funds or property of the Trust or of the particular Series with respect to which such Shares are issued;

(aa)

To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans and trusts, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust;

(bb)

To purchase, and pay for, out of Trust Property or the assets belonging to any appropriate Series, such insurance as the Trustees may deem necessary or appropriate for the conduct of business, including insurance policies insuring the assets of the Trust and payment of distributions and principal on its portfolio investments, the Shareholders, Trustees, officers, employees, agents, and/or independent contractors of the Trust (including the investment adviser of any Series) against all claims arising by reason of holding any such position or by reason of any action taken or omitted by any such person in such capacity, whether or not the Trust would have the power to indemnify such person against such claim, or to otherwise indemnify such persons, out of Trust Property or the assets belonging to any appropriate Series, to the fullest extent permitted by this Trust Instrument;

(cc)

To enter into contracts or carry on any other business in connection with or incidental to any of the foregoing powers, to do everything necessary or desirable to accomplish any purpose or to further any of the foregoing powers, and to take every other action incidental to the foregoing business or purposes, objects or powers;

(dd)

To enter into joint ventures, general or limited partnerships and any other combinations or associations;

(ee)

To endorse or guarantee the payment of any notes or other obligations of any person; to make contracts or guaranty or suretyship, or otherwise assume liability for payment thereof; and to mortgage and pledge the Trust property (or Series property) or any part thereof to secure any or all such obligations; and

(ff)

Subject to the 1940 Act, to engage in any other lawful act or activity in which a statutory trust organized under the Delaware Act may engage.

The powers and authorities enumerated in the preceding clauses shall be construed as objects and powers, and the enumeration of specific powers shall not limit in any way the general powers of the Trustees. Any action by one or more of the Trustees in their capacity as such hereunder shall be deemed an action on behalf of the Trust or the applicable Series and not an action in an individual capacity.  In construing this Trust Instrument, the presumption shall be in favor of a grant of power to the Trustees.

Section 2.

CERTAIN TRANSACTIONS.  Except as prohibited by applicable law, the Trustees may, on behalf of the Trust, buy any securities from or sell any securities to, or lend any assets of the Trust to, any Trustee or officer of the Trust or any firm of which any such Trustee or officer is a member acting as principal, or have any such dealings with any investment adviser, administrator, distributor or transfer agent for the Trust or with any Interested Person of such person.  The Trust may employ any such person or entity in which such person is an Interested Person, as broker, legal counsel, registrar, investment adviser, administrator, distributor, transfer agent, dividend disbursing agent, custodian or in any other capacity upon customary terms.

ARTICLE IV

SERIES; CLASSES; SHARES

Section 1.

ESTABLISHMENT OF SERIES AND CLASSES.  The Trust shall consist of one or more separate and distinct Series created and maintained in accordance with Article III, Section 1(q), and this Article IV.  The Trustees may designate the rights, privileges, voting powers and preferences of the Shares of each Series relative to the Shares of any other Series.  The Trustees may divide the Shares of any Series into any number of Classes representing interests in the Assets belonging to that Series, each Share of each such Class having an equal beneficial interest in such assets and identical voting, dividend, liquidation and other rights and subject to the same terms and conditions, except that (a) expenses allocated to a Class may be borne solely by that Class as determined by the Trustees and (b) a Class may have exclusive voting rights with respect to matters affecting only that Class.  The establishment and designation of each additional Series or Class of Shares of the Trust shall be effective upon the adoption by a majority of the then Trustees of a resolution that sets forth such establishment and designation and the relative rights and preferences of such Series or Class of the Trust, whether directly in such resolution or by reference to another document including, without limitation, any registration statement of the Trust, or as otherwise provided in such resolution.  The Trust shall maintain separate and distinct records for each Series and shall hold and account for the Assets belonging thereto separately from the other assets of the Trust or Assets belonging to any other Series.  A Series may issue any number of Shares and need not issue Shares.  Each holder of Shares of a Series shall be entitled to receive his or her pro rata share of all distributions made with respect to such Series.  Upon redemption of Shares of a Series, the redeeming Shareholder shall be paid solely out of the Assets belonging to that Series.  The Trustees may change the name of any Series or Class in their sole discretion.

Section 2.

SHARES.  The beneficial interest in each Series shall be divided into Shares of one or more Classes.  The number of Shares of each Series and Class shall be unlimited, and each Share shall have no par value.  All Shares issued hereunder, including Shares issued in connection with a dividend or other distribution of Shares or a split or reverse split of Shares, shall be fully paid and nonassessable.  The Trustees shall have full power and authority, in their sole discretion and without obtaining Shareholder approval, (1) to issue original or additional Shares at such times and on such terms and conditions as they deem appropriate, (2) to issue fractional Shares and Shares held in the Trust’s treasury, (3) to establish and to change in any manner Shares of any Series or Classes with such preferences, terms of conversion, voting powers, rights and privileges as the Trustees may determine (but the Trustees may not change Outstanding Shares in a manner materially adverse to the Shareholders of such Shares), (4) to divide or combine the Shares of any Series or Classes into a greater or lesser number, (5) to classify or reclassify any unissued Shares of any Series or Classes into one or more Series or Classes, (6) to abolish any one or more Series or Classes, (7) to issue Shares to acquire other assets (including assets subject to, and in connection with, the assumption of liabilities) and businesses and (8) to take such other action with respect to the Shares as the Trustees may deem desirable.  Shares held in the Trust’s treasury shall not confer any voting rights on the Trustees and shall not be entitled to any dividends or other distributions declared with respect to the Shares.

Section 3.

PREEMPTIVE AND APPRAISAL RIGHTS.  Shareholders shall have no preemptive or other right to acquire, purchase or subscribe to any additional Shares or other securities issued by the Trust other than such right, if any as the Trustees in their discretion may determine.  Shareholders shall have no appraisal rights with respect to their Shares.  Further, except as otherwise determined by action of the Trustees in their sole discretion, Shareholders shall have no exchange or conversion rights with respect to their Shares.  No action may be brought by a Shareholder on behalf of the Trust unless Shareholders owning no less than a majority of the then-outstanding Shares, or Series or Class thereof, join in the bringing of such action.  A Shareholder of Shares in a particular Series or Class of the Trust shall not be entitled to participate in a derivative or class action lawsuit on behalf of any other Series or Class, as appropriate, or on behalf of the Shareholders in any such other Series or Class of the Trust.

Section 4.

INVESTMENTS IN THE TRUST.  The Trustees shall accept investments in any Series from such persons, on such terms, and for such consideration, which may consist of tangible or intangible property or a combination thereof, as they may from time to time authorize.  At the Trustees’ sole discretion, such investments in a Series, subject to applicable law, may be in the form of cash or securities in which that Series is authorized to invest, valued as provided in Article V, Section 3.  Investment in a Series shall be credited to the investing Shareholder’s account in the form of full Shares at the Net Asset Value per Share next determined after the investment is received or accepted as may be determined by the Trustees; provided, however, that the Trustees may, in their sole discretion, (a) impose a sales charge upon investments in any Series or Class, (b) issue fractional Shares or (c) determine the Net Asset Value per Share of the initial capital contribution for any Series.  The Trustees shall have the right to refuse to accept investments in any Series or by any person at any time without any cause or reason therefor whatsoever.

Section 5.

ASSETS AND LIABILITIES OF SERIES AND CLASSES.  All consideration received by the Trust for the issue or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested and all income, earnings, profits and proceeds thereof (including any proceeds derived from the sale, exchange or liquidation of such assets and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be) (collectively “Assets belonging to” that Series), shall be recorded, held and accounted for separately from the other assets of the Trust and Assets belonging to every other Series.  The Assets belonging to a Series shall belong only to that Series for all purposes and to no other Series, subject only to the rights of creditors of that Series.  Any assets, income, earnings, profits and proceeds thereof, funds and/or payments that are not readily identifiable as belonging to any particular Series shall be allocated by the Trustees between or among one or more Series as the Trustees, in their sole discretion, deem fair and equitable.  Each such allocation shall be conclusive and binding upon the Shareholders of all Series for all purposes, and the assets, income, earnings, profits, proceeds, funds and payments so allocated to a Series shall be treated for all purposes as Assets belonging to that Series.  The Assets belonging to a Series shall be charged with all Liabilities of the Trust with respect to that Series and/or attributable to that Series, except that Liabilities allocated solely to a particular Class shall be borne by that Class.  Any Liabilities of the Trust that are not readily identifiable as chargeable to any particular Series or Class shall be allocated and charged by the Trustees between or among any one or more Series or Classes in such manner as the Trustees, in their sole discretion, deem fair and equitable.  Each such allocation shall be conclusive and binding upon the Shareholders of all Series and Classes for all purposes.

Without limiting the foregoing, but subject to the right of the Trustees to allocate Liabilities as herein provided, the Liabilities incurred, contracted for or otherwise existing with respect to a particular Series shall be enforceable only against the Assets belonging to that Series and not against the assets of the Trust generally or the Assets belonging to any other Series.  Notice of this contractual limitation on Liabilities among Series may, in the Trustees’ sole discretion, be set forth in the Trust’s certificate of trust (whether originally or by amendment) as filed or to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the Delaware Act, and upon the giving of such notice in the certificate of trust, the provisions of Section 3804(a) of the Delaware Act relating to limitations on Liabilities among Series (and the statutory effect under Section 3804 of setting forth such notice in the certificate of trust) shall become applicable to the Trust and each Series.  Any person extending credit to, contracting with or having any claim against any Series may look only to the Assets belonging to that Series to satisfy or enforce any Liability with respect to that Series.  No Shareholder or former Shareholder of any Series shall have a claim on or any right to any Assets belonging to any other Series.

Section 6.

OWNERSHIP AND TRANSFER OF SHARES.  The ownership of Shares shall be recorded on the books of the Trust or those of a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of each Series or Class of the Trust.  No certificates certifying the ownership of Shares shall be issued except as the Trustees may otherwise determine from time to time.  The Trustees may make such rules as they consider appropriate for the issuance of Share certificates of each Series or Class of the Trust and any other similar matters.  The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to the identity of the Shareholders of each Series or Class of the Trust and as to the number of Shares of each Series or Class of the Trust held from time to time by each Shareholder.  The Trustees may from time to time close the transfer books or establish record dates and times for the purpose of  determining the Shareholders entitled to be treated as such to vote or act at any meeting or to participate in any dividend or distribution or for any other reason.

Shares shall be transferable only on, and as evidenced by, the records of the Trust or its agent in accordance with such rules as the Trust may establish from time to time.  Except as provided in the following paragraph of this Section 5, Shares are transferable only by the Shareholder of record or by its agent thereto.  Upon receipt by the Trust or its transfer or similar agent of a request from a Shareholder of record to transfer Shares held by such Shareholder to another person, accompanied by such information as may be required by the Trust or its transfer or similar agent, the transfer shall be recorded on the applicable register of the Trust or its agent.  Until such transfer is recorded, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof, and neither the Trustees, any transfer or similar agent for the Trust nor any officer, employee or agent of the Trust shall be affected by any notice of the proposed transfer.  

Any person entitled to any Shares in consequence of the death, bankruptcy, or incompetence of any Shareholder, or otherwise by operation of law, shall be recorded on the applicable register of Shares as the holder of such Shares upon production of such evidence thereof as the Trust or its transfer or similar agent may require, but until such transfer is recorded, the Shareholder of record shall be deemed to be the holder of such Shares for all purposes hereof, and neither the Trustees, any transfer or similar agent nor any officer or agent of the Trust shall be affected by any notice of such death, bankruptcy or incompetence, or other operation of law.  The Trustees may make such additional rules as they consider appropriate for the transfer of shares of each Series or Class of the Trust and any other similar matters.


Section 7.

STATUS OF SHARES; LIMITATION OF SHAREHOLDER LIABILITY.  Shares shall be deemed to be personal property giving Shareholders only the rights provided in this Trust Instrument.  Every Shareholder, by virtue of having acquired a Share, shall be held expressly to have assented to and agreed to be bound by the terms of this Trust Instrument and to have become a party hereto.  The death, incapacity, dissolution, termination, or bankruptcy of a Shareholder during the existence of the Trust shall not operate to terminate the Trust, nor entitle the representative of any such Shareholder to an accounting or to take any action in court or elsewhere against the Trust or the Trustees, but entitles such representative only to the rights of such Shareholder under this Trust.  Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a participation or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners.  No Shareholder shall be personally liable for the Liabilities incurred by, contracted for or otherwise existing with respect to the Trust or any Series or Class thereof.  Neither the Trust nor the Trustees, nor any officer, employee, or agent of the Trust shall have any power to bind any Shareholder personally or to demand payment from any Shareholder for anything, other than as agreed by the Shareholder.  Shareholders shall have the same limitation of personal liability as is extended to shareholders of a private corporation for profit incorporated in the State of Delaware.  Any note, bond, contract or other written obligation of the Trust or any Series may contain a statement to the effect that such obligation may be enforced only against the assets of the Trust or Assets belonging to one or more Series; however, the omission of such statement shall not operate to bind, or create personal liability for, any Shareholder or Trustee.


ARTICLE V

DISTRIBUTIONS, REDEMPTIONS AND NET ASSET VALUE

Section 1.

DISTRIBUTIONS.  The Trustees may declare and pay dividends and other distributions, including dividends on Shares of a particular Series and other distributions from the Assets belonging to that Series.  The amount and payment of dividends or distributions and their form, whether they are in cash, Shares or other Trust Property, shall be determined by the Trustees.  Dividends and other distributions may be paid pursuant to a standing resolution adopted once or more often as the Trustees determine.  All dividends and other distributions on Shares of a particular Series shall be distributed pro rata to the Shareholders of that Series in proportion to the number of Shares of that Series they held on the record date established for such payment, except that such dividends and distributions shall appropriately reflect expenses allocated to a particular Class of such Series.  The Trustees may adopt and offer to Shareholders such dividend reinvestment plans, cash dividend payout plans or similar plans as the Trustees deem appropriate.

Section 2.

REDEMPTIONS.  Each Shareholder of a Series or Class thereof shall have the right, on any business day to require the Trust to redeem all or any part of the Shareholder’s Shares of a Series or Class, upon and subject to the terms and condition provided in this Article V, Section 2, in accordance with and pursuant to procedures or methods prescribed or approved by the Trustees; provided, however, if so determined by the Trustees, any Series or Class now or hereafter authorized shall be redeemable only in aggregations of such number of Shares (“Creation Units”) and at such times as may be determined by or pursuant to procedures or methods prescribed or approved by the Trustees.  The Trustees shall have the unrestricted power to determine from time to time the number of Shares constituting a Creation Unit for each Series or Class by written consent or by resolutions adopted at any regular or special meeting of the Trustees.  Each Shareholder of a Series or Class, upon request to the Trust in accordance with such procedures as may from time to time be in effect, accompanied by surrender of any certificated Shares in proper form, shall be entitled to require the Trust to redeem all or any number of such Shareholder’s Shares standing in the name of such holder on the books of the Trust; provided, however, in the case of Shares of any Series or Class as to which the Trustees have determined that such Shares shall be redeemable only in Creation Units, in such Creation Units.  The Trust shall, upon application of any Shareholder or pursuant to authorization from any Shareholder, redeem from such Shareholder outstanding Shares or Creation Units, as applicable, for an amount per share determined by the Trustees in accordance with any applicable laws and regulations; provided that (i) such amount per Share shall not exceed the cash equivalent of the proportionate interest of each Share or of any Class or Series of Shares in the assets of the Trust at the time of the redemption; and (ii) if so authorized by the Trustees, the Trust may, at any time and from time to time, charge fees for effecting such redemption at such rates as the Trustees may establish, as and to the extent permitted under the 1940 Act and the rules and regulations promulgated thereunder.  The procedures for effecting and suspending redemption shall be as set forth in the Trust’s registration statement on Form N-1A.  Payment may be in cash, securities or a combination thereof, as determined by or pursuant to the direction of the Trustees from time to time, less any applicable sales charges and/or fees.  Notwithstanding the foregoing, the Trustees may postpone payment of the redemption price and may suspend the right of the Shareholders to require any Series to redeem Shares during any period of time when and to the extent permissible under the 1940 Act or any exemptive relief therefrom.

Section 3

REDEMPTION BY TRUST.  The Trustees may cause the Trust to redeem the Shares of any Series or Class held by a Shareholder at the redemption price that would be applicable if such Shares were then being redeemed by the Shareholder pursuant to Article V, Section 2 above, upon such conditions as may from time to time be determined by the Trustees.  Upon redemption of Shares pursuant to this Article V, Section 3, the Trust shall promptly cause payment of the full redemption price to be made to such Shareholder for Shares so redeemed.

Section 4.

PREVENTION OF PERSONAL HOLDING COMPANY STATUS.  The Trust may reject any purchase order, refuse to transfer any Shares, and compel the redemption of Shares if, (a) at the time thereof the Shareholder affected owns Shares equal to or in excess of a maximum percentage of the Shares of such Series or Trust determined from time to time by the Trustees, or (b) in the Trustees’ opinion, any such rejection, refusal, or redemption would prevent the Trust from becoming a personal holding company as defined by the Tax Code.

Section 5.

DETERMINATION OF NET ASSET VALUE PER SHARE.  The term “Net Asset Value per Share” of any Series or Class shall be determined in accordance with the methods and procedures established by the Trustees from time to time and, to the extent required by applicable law, as disclosed in the then current prospectus or statement of additional information for the Series.  In the absence of action by the Trustees, the term “Net Asset Value per Share” of any Series or Class shall mean that amount by which the assets belonging to that Series or Class exceed its liabilities divided by the number of relevant Outstanding Shares.  The Trustees may delegate the power and duty to determine the Net Asset Value per Share to one or more Trustees or officers of the Trust or to a manager, investment adviser, administrator, custodian, depository or other agent appointed for such purpose.  The Net Asset Value per Share shall be determined separately for each Series and Class at times prescribed by the Trustees or, in the absence of action by the Trustees, as of the close of regular trading on the New York Stock Exchange on each day for all or part of which such exchange is open for regular trading.  At any time the Trustees may cause the Net Asset Value per Share last determined to be determined again in a similar manner and may fix the time when such redetermined values shall become effective.  

Section 6.

SUSPENSION OF RIGHT OF REDEMPTION.  If, as referred to in Section 2 of this Article, the Trustees suspend the right of Shareholders to redeem their Shares, such suspension shall take effect at the time the Trustees shall specify, but not later than the close of business on the business day next following the declaration of suspension.  Thereafter Shareholders shall have no right of redemption or payment until the Trustees declare the end of the suspension.  If the right of redemption is suspended, a Shareholder may either withdraw his request for redemption or receive payment based on the Net Asset Value per Share next determined after the suspension terminates.

ARTICLE VI

SHAREHOLDERS’ VOTING POWERS AND MEETINGS

Section 1.

VOTING POWERS.  The Shareholders shall have power to vote only with respect to (a) the election of Trustees as provided in Article II, Section 2, (b) the removal of Trustees as provided in Article II, Section 3(d), (c) any investment advisory or management contract as provided in Article VII, Section 1, (d) the amendment of this Trust Instrument to the extent and as provided in Article X, Section 6, and (e) such additional matters relating to the Trust to the extent required by law, this Trust Instrument or the By-laws or any registration of the Trust with the Commission or any state, or as the Trustees may consider desirable.

Notwithstanding any other provision of this Trust Instrument, on any matters submitted to a vote of the Shareholders, all Shares of the Trust then entitled to vote shall be voted in aggregate, except: (a) when required by the 1940 Act, Shares shall be voted by individual Series or Class; (b) when the matter involves any action that the Trustees have determined will affect only the interests of one or more Series, then only Shareholders of such Series shall be entitled to vote thereon; and (c) when the matter involves any action that the Trustees have determined will affect only the interests of one or more Classes, then only the Shareholders of such Class or Classes shall be entitled to vote thereon.  A Shareholder of each Series or Class thereof shall be entitled to one vote for each dollar of net asset value (number of Shares owned times net asset value per share) of such Series or Class thereof on any matter on which such Shareholder is entitled to vote, and each fractional dollar amount shall be entitled to a proportionate fractional vote.  There shall be no cumulative voting in the election of Trustees. Shares may be voted in person or by proxy or in any manner provided for in the By-Laws, which may provide that proxies may be given in writing or by any electronic or telecommunications device or in any other manner described in the By-Laws, or in a resolution of the Trustees.  Until Shares of a Series are issued, as to that Series the Trustees may exercise all rights of Shareholders and may take any action required or permitted to be taken by Shareholders by law, this Trust Instrument or the By-laws.

Section 2.

MEETINGS OF SHAREHOLDERS.  The Trust shall not be required to hold annual meetings, unless required by law.  Special meetings of the Shareholders of any Series or Class may be called by the Secretary whenever ordered by the Trustees, the Chairperson or the President and shall be called by the Secretary upon the written request of Shareholders owning at least twenty-five percent (25%) (or 10% to the extent required by Section 16(a) of the 1940 Act) of the Outstanding Shares of such Series or Class entitled to vote. Meetings of the Shareholders shall be called and notice thereof and record dates therefor shall be given and set as provided in the By-laws.

Section 3.

QUORUM; REQUIRED VOTE.  Except when a larger quorum is required by law, this Trust Instrument or the By-laws, one-third of the Outstanding Shares of each Series or Class, or one-third of the Outstanding Shares of the Trust, as applicable, entitled to vote in person or by proxy shall be a quorum for the transaction of business at a Shareholders’ meeting with respect to such Series or Class, or with respect to the entire Trust, respectively.  Any lesser number shall be sufficient for adjournments.  Any adjourned session of a Shareholders’ meeting may be held within a reasonable time without further notice for the purpose of taking action upon any matter that would have been acted upon at the original meeting bur for its adjournment.  Except when a larger vote is required by law, this Trust Instrument or the By-laws, a majority of the Outstanding Shares voted in pers on or by proxy shall decide any matters to be voted upon with respect to the entire Trust and a plurality of such Outstanding Shares shall elect a Trustee; provided, that if this Trust Instrument or applicable law permits or requires that Shares be voted on any matter by individual Series or Classes, then a majority of the Outstanding Shares of that Series or Class (or, if required by law, a Majority Shareholder Vote of that Series or Class) voted in person or by proxy on the matter shall decide that matter insofar as that Series or Class is concerned.  Shareholders may act as to the Trust or any Series or Class by written consent as provided in the By-laws.

Section 4.

INSPECTION OF RECORDS.  The records of the Trust shall be open to inspection by Shareholders to the same extent as is required for stockholders of a Delaware business corporation under the Delaware General Corporation Law.

Section 5.

ADDITIONAL PROVISIONS.  By-Laws may include further provisiosn for Shareholders’ votes and meetings and related matters not inconsistent with the provisions hereof.

ARTICLE VII

CONTRACTS WITH SERVICE PROVIDERS

Section 1.

INVESTMENT ADVISER.  Subject to a Majority Shareholder Vote when required by law, the Trustees may enter into one or more investment advisory or management contracts on behalf of the Trust or any Series, providing for investment advisory services, statistical and research facilities and services, and other facilities and services to be furnished to the Trust or Series on terms and conditions acceptable to the Trustees.  Any such contract may provide for the investment adviser to effect purchases, sales or exchanges of portfolio securities or other Trust Property on behalf of the Trustees or may authorize any officer or agent of the Trust to effect such purchases, sales or exchanges pursuant to recommendations of the investment adviser. The Trustees may authorize the investment adviser to employ one or more sub-advisers to perform such of the acts and services of the investment adviser as agreed upon between the investment adviser and sub-adviser, and any reference herein to the investment advisers shall be construed to include any sub-adviser, unless the context requires otherwise.

Section 2.

PRINCIPAL UNDERWRITER/DISTRIBUTOR.  The Trustees may enter into contracts on behalf of the Trust or any Series or Class, providing for the distribution and sale of Shares by the other party, either directly or as sales agent, on terms and conditions acceptable to the Trustees.  The Trustees may adopt a plan or plans of distribution with respect to Shares of any Series or Class and enter into any related agreements, whereby the Series or Class finances directly or indirectly any activity that is primarily intended to result in sales of its Shares, subject to applicable rules and regulations.  Such contract may also provide for the repurchase or sale of Shares by such other party as principal or agent of the Trust.

Section 3.

CUSTODIAN.  The Trustees shall at all times place and maintain the securities and similar investments of the Trust and of each Series and Class with a custodian meeting the requirements of Section 17(f) of the 1940 Act and the rules thereunder or as otherwise permitted by the Commission or its staff.  The Trustees, on behalf of the Trust or any Series, may enter into an agreement with a custodian on terms and conditions acceptable to the Trustees, providing for the custodian, among other things, (a) to hold the securities owned by the Trust or any Series or Class and deliver the same upon written order or oral order confirmed in writing, (b) to receive and give a receipt for money paid for any moneys due to the Trust or any Series or Class and on behalf of the Trust or any Series or Class, and deposit the same in its own banking department or elsewhere, (c) to disburse such funds upon orders or vouchers, (d) to keep such books and accounts of the Trust and Series or Class as necessary or appropriate, and (e) to employ one or more sub-custodians.

Section 4.

TRANSFER AGENCY, SHAREHOLDER SERVICES AND ADMINISTRATION AGREEMENTS.  The Trustees, on behalf of the Trust or any Series or Class, may enter into transfer agency agreements, shareholder service agreements, administration agreements and any other agreements with any party or parties on terms and conditions acceptable to the Trustees.

Section 5.

PARTIES TO CONTRACTS WITH SERVICE PROVIDERS.   The Trustees may enter into any contract referred to in this Article with any entity, including the investment adviser, any sub-adviser or any affiliated person of the investment adviser or a sub-adviser, although one or more of the Trustees or officers of the Trust may be an officer, director, trustee, partner, shareholder, or member of such entity, and no such contract shall be invalidated or rendered void or voidable because of such relationship.  No person having such a relationship shall be disqualified from voting on or executing a contract in his or her capacity as Trustee and/or Shareholder, or be liable merely by reason of such relationship for any loss or expense to the Trust with respect to such a contract or accountable for any profit realized directly or indirectly therefrom; provided, that the contract was reasonable and fair and not inconsistent with this Trust Instrument or the By-laws.  

ARTICLE VIII

EXPENSES OF THE TRUST, SERIES AND CLASSES

The Trustees are authorized to pay or cause to be paid out of the principal or income of the Trust or a particular Series or Class, or partly out of the principal and partly out of income, as they deem fair, all expenses, fees, charges, taxes and liabilities incurred or arising in connection with the Trust or a particular Series or Class, or in connection with the management thereof, including, but not limited to, the Trustees’ compensation and such expenses and charges for the services of the Trust’s officers, employees, investment adviser(s), principal underwriter, auditors, counsel, administrator, custodian, transfer agent, securities lending agent, shareholder servicing agent, accounting services agent and such other agents or independent contractors and such other expenses and charges as the Trustees may deem necessary or proper to incur.

ARTICLE IX

LIMITATION OF LIABILITY AND INDEMNIFICATION

Section 1.

LIMITATION OF LIABILITY.  All persons contracting with or having any claim against the Trust or a particular Series shall look only to the assets of the Trust or Assets belonging to such Series, respectively, for payment under such contract or claim; and neither the Trustees nor any of the Trust’s officers or employees, whether past, present or future, shall be personally liable therefor. Every written instrument or obligation on behalf of the Trust or any Series may contain a statement to the foregoing effect, but the absence of such statement shall not operate to make any Trustee or officer of the Trust liable thereunder. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees and officers of the Trust shall not be responsible or liable for any act or omission or for neglect or wrongdoing of them or any officer, agent, employee, investment adviser, principal underwriter or independent contractor of the Trust, but nothing contained in this Trust Instrument or in the Delaware Act shall protect any Trustee or officer of the Trust against liability to the Trust or to Shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office.

Section 2.

INDEMNIFICATION.

(a)

Subject to the exceptions and limitations contained in subsection (b) below:

(i)

every person who is, or has been, a Trustee or an officer, employee or agent of the Trust, including persons who act at the request of the Trust as directors, trustees, officers, employees or agents of another organization in which the Trust has an interest as a shareholder, creditor or otherwise (“Covered Person”) shall be indemnified by the Trust or the appropriate Series to the fullest extent permitted by law against liability and against all expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been a Covered Person and against amounts paid or incurred by him or her in the settlement thereof.  

(ii)

as used herein, the words “claim,” “action,” “suit” or “proceeding” shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual or threatened, and the words “liability” and “expenses” shall include, without limitation, counsel fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.

(b)

No indemnification shall be provided hereunder to a Covered Person:

(i)

who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office or (B) not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Trust; or

(ii)

in the event of a settlement, if there has been a determination that such Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or her office:  (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of the Trust nor are parties to the matter based upon a review of readily available facts (as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry).

(c)

The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person.  Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be entitled by contract or otherwise under law.

(d)

To the maximum extent permitted by applicable law, expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of this Section shall be paid by the Trust or applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him or her to the Trust or applicable Series if it is ultimately determined that he or she is not entitled to indemnification under this Section.  

(e)

Any repeal or modification of this Article IX by the Shareholders, or adoption or modification of any other provision of this Trust Instrument or the By-laws inconsistent with this Article, shall be prospective only, to the extent that such, repeal or modification would, if applied retrospectively, adversely affect any limitation on the liability of any Covered Person or indemnification available to any Covered Person with respect to any act or omission which occurred prior to such repeal, modification or adoption.

Section 3.

INDEMNIFICATION OF SHAREHOLDERS.  If any Shareholder or former Shareholder of any Series is held personally liable solely by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his or her heirs, executors, administrators or other legal representatives or, in the case of any entity, its general successor) shall be entitled out of the Assets belonging to the applicable Series to be held harmless from and indemnified against all loss and expense arising from such liability.  The Trust, on behalf of the affected Series, shall, upon request by such Shareholder or former Shareholder, assume the defense of any claim made against him or her for any act or obligation of the Series and satisfy any judgment thereon from the Assets belonging to the Series.

ARTICLE X

MISCELLANEOUS

Section 1.

TRUST NOT A PARTNERSHIP.  This Trust Instrument creates a statutory trust pursuant to the Delaware Act and not a general partnership, limited partnership, joint stock association, corporation, bailment, or any form of legal relationship.  No Trustee shall have any power to bind personally either the Trust’s officers, other Trustees or any Shareholder.  Nothing in this Trust Instrument shall be construed to make the Shareholders, either by themselves or with the Trustees, partners, or members of a joint stock association.  

Section 2.

TRUSTEE ACTION; EXPERT ADVICE; NO BOND OR SURETY.  The exercise by the Trustees of their powers and discretion hereunder in good faith and with reasonable care under the circumstances then prevailing shall be binding upon everyone interested.  Subject to the provisions of Article IX, the Trustees shall not be liable for errors of judgment or mistakes of fact or law.  The Trustees may take advice of counsel or other experts with respect to the meaning and operation of this Trust Instrument, and subject to the provisions of Article IX, shall not be liable for any act or omission in accordance with such advice or for failing to follow such advice.  The Trustees shall not be required to give any bond as such, nor any surety if a bond is obtained.

Section 3.

TERMINATION OR REORGANIZATION OF THE TRUST.

(a)

This Trust and each Series or Class designated and established hereunder shall have perpetual existence.  Notwithstanding anything else contained herein but subject to applicable federal and state law, the Trustees may, without any Shareholder vote or approval:

(i)

sell, convey, merge and/or transfer all or substantially all of the assets of the Trust or Assets belonging to any affected Series to another Series or to another entity that is an open-end investment company as defined in the 1940 Act, or is a series thereof, for adequate consideration, which may include the assumption of all outstanding taxes and other Liabilities, accrued or contingent, of the Trust or any affected Series, and which may include shares of or interests in such Series, entity or series thereof;

(ii)

at any time sell and convert into cash all or substantially all of the assets of the Trust or Assets belonging to any affected Series;

(iii)

 cause the Trust to merge or consolidate with or into, or be reorganized as, another trust, or a corporation, partnership, limited liability company, association or other organization, organized under the laws of Delaware or any other jurisdiction or a segregated portfolio of assets (“series”) of any of the foregoing (each, an “Entity”);

(iv)

cause any Series to merge or consolidate with or into, or be reorganized as, a newly organized Entity in a transaction or series of transactions intended to qualify as a reorganization under Section 368(a)(1)(F) of the Tax Code or a successor provision;

(v)

cause the Trust to incorporate under the laws of Delaware or any other jurisdiction; and/or

(vi)

cause to be organized, or assist in organizing, an Entity to acquire all or part of the Trust Property or of the Assets belonging to a Series or to carry on any business in which the Trust directly or indirectly has any interest and to sell, convey and transfer all or part of the Trust Property or of the Assets belonging to a Series to any such Entity in exchange for shares or other equity securities thereof or otherwise and to lend money to, subscribe for the shares or other equity securities of and enter into any contracts with any such Entity.

The Trustees or Trust or Series shall provide written notice to affected Shareholders of any transaction described in this Section 3. The transactions described in this Section 3 may be effected through share-for-share exchanges, transfers or sale of assets, shareholder in-kind redemptions and purchases, exchange offers or any other method the Trustees approve.

(b)

Upon making reasonable provision for the payment of all known Liabilities of the Trust or any affected Series in either subsection (a)(i) or (ii) above, by such assumption or otherwise, the Trustees shall distribute the remaining proceeds or assets (as the case may be) ratably among the Shareholders of the Trust or any affected Series; however, the payment to any particular Class of such Series may be reduced by any fees, expenses or charges allocated to that Class.  Upon completion of the distribution of the remaining proceeds or assets pursuant to subsection (a)(i) or (ii) above, the Trust or affected Series shall terminate and the Trustees and the Trust shall be discharged of any and all further liabilities and duties hereunder with respect thereto and the right, title and interest of all parties therein shall be canceled and discharged.  Upon termination of the Trust, following completion of winding up of its business, the Trustees shall cause a certificate of cancellation of the Trust’s certificate of trust to be filed in accordance with the Delaware Act, which certificate of cancellation may be signed by any one Trustee.

(c)

Any agreement of merger or consolidation or certificate of merger may be signed by a majority of Trustees, and facsimile signatures conveyed by electronic or telecommunication means shall be valid.  Pursuant to and in accordance with the provisions of Section 3815(f) of the Delaware Act, an agreement of merger or consolidation approved by the Trustees in accordance with this Section 3 may effect any amendment to the Trust Instrument or effect the adoption of a new trust instrument of the Trust if it is the surviving or resulting trust in the merger or consolidation.

Section 4.

TRUST INSTRUMENT.  The original or a copy of this Trust Instrument and of each amendment and/or restatement hereto or Trust Instrument supplemental shall be kept at the office of the Trust where it may be inspected by any Shareholder.  Anyone dealing with the Trust may rely on a certificate by a Trustee or an officer of the Trust as to the authenticity of the Trust Instrument or any such amendments, restatements or supplements and as to any matters in connection with the Trust. This Trust Instrument may be executed in any number of counterparts, each of which shall be deemed an original.

Section 5.

APPLICABLE LAW.  This Trust Instrument and the Trust created hereunder are governed by and construed and administered according to the Delaware Act and the applicable laws of the State of Delaware; provided, however, that there shall not be applicable to the Trust, the Trustees or this Trust Instrument (a) the provisions of Section 3540 of Title 12 of the Delaware Code or (b) any provisions of the laws (statutory or common) of the State of Delaware (other than the Delaware Act) pertaining to trusts that relate to or regulate (i) the filing with any court or governmental body or agency of trustee accounts or schedules of trustee fees and charges, (ii) affirmative requirements to post bonds for trustees, officers, agents or employees of a trust, (iii) the necessity for obtaining court or other governmental approval concerning the acquisition, holding or disposition of real or personal property, (iv) fees or other sums payable to trustees, officers, agents or employees of a trust, (v) the allocation of receipts and expenditures to income or principal, (vi) restrictions or limitations on the permissible nature, amount or concentration of trust investments or requirements relating to the titling, storage or other manner of holding of trust assets or (vii) the establishment of fiduciary or other standards of responsibilities or limitations on the acts or powers of trustees that are inconsistent with the limitations or liabilities or authorities and powers of the Trustees set forth or referenced in this Trust Instrument.  The Trust shall be of the type commonly called a Delaware statutory trust, and, without limiting the provisions hereof, the Trust may exercise all powers that are ordinarily exercised by such a trust under Delaware law.  The Trust specifically reserves the right to exercise any of the powers or privileges afforded to trusts or actions that may be engaged in by trusts under the Delaware Act, and the absence of a specific reference herein to any such power, privilege or action shall not imply that the Trust may not exercise such power or privilege or take such actions.

Section 6.

AMENDMENTS.   The Trustees may, without any Shareholder vote, amend or otherwise supplement this Trust Instrument by making an amendment, a trust instrument supplemental hereto or an amended and restated trust instrument; provided, that Shareholders shall have the right to vote on any amendment that is required to be approved by Shareholders by law or by the Trust’s registration statement(s) filed with the Commission or that is submitted to them by the Trustees in their sole discretion.  Any amendment that is submitted to Shareholders, which the Trustees determine would affect the Shareholders of a particular Series or Class, shall be authorized by vote of the Shareholders of such Series or Class, and no vote shall be required of Shareholders of any Series or Class not affected.  

Section 7.

FISCAL YEAR.   The fiscal year of each Series of the Trust shall end on a specified date as set forth in the By-laws or by resolution.  The Trustees may change the fiscal year of the Trust or any Series without Shareholder approval.  Different Series may have different fiscal years.

Section 8.

SEVERABILITY.   The provisions of this Trust Instrument are severable.  If the Trustees determine, with the advice of counsel, that any provision hereof conflicts with the 1940 Act, the regulated investment company provisions of the Tax Code or other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of this Trust Instrument; provided, however, that such determination shall not affect any of the remaining provisions of this Trust Instrument or render invalid or improper any action taken or omitted prior to such determination.  If any provision hereof is held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision only in such jurisdiction and shall not affect any other provision of this Trust Instrument.

Section 9.

INTERPRETATION.  As used herein, the singular includes the plural and vice versa.  The Trustees may construe any of the provisions of this Trust Instrument insofar as the same may appear to be ambiguous or inconsistent with any other provisions hereof, and any such construction hereof by the Trustees in good faith shall be conclusive as to the meaning to be given to such provisions.  Headings herein are for convenience only and shall not affect the construction of this Trust Instrument.  

IN WITNESS WHEREOF, the undersigned, being the sole initial Trustee, has executed this Trust Instrument.


 

/s/ Daniel D. O’Neill

 

Daniel D. O’Neill, as Trustee and not individually

 

c/o Rafferty Asset Management, LLC.

 

33 Whitehall Street, 10 th Floor

 

New York, NY 10004



















DIREXION SHARES ETF TRUST

BY-LAWS

April 23, 2008




TABLE OF CONTENTS

Page

ARTICLE I PRINCIPAL OFFICE AND SEAL

1

Section 1.

Principal Office

1

Section 2.

Delaware Office

1

Section 3.

Seal

1

ARTICLE II TRUSTEES

1

Section 1.

Powers

1

Section 2.

Compensation of Trustees

1

Section 3.

Place of Meetings and Meetings by Telephone

1

Section 4.

Regular Meetings

2

Section 5.

Special Meetings

2

Section 6.

Quorum; Action by Trustees

2

Section 7.

Notice

2

Section 8.

Adjournment

2

Section 9.

Action Without a Meeting

2

ARTICLE III COMMITTEES

2

Section 1.

Establishment

2

Section 2.

Proceedings; Quorum; Action

3

Section 3.

Audit Committee

3

Section 4.

Nominating Committee

3

ARTICLE IV BOARD CHAIR AND TRUST OFFICERS

3

Section 1.

Chairperson of the Board

3

Section 2.

Trust Officers

3

Section 3.

Election, Tenure and Qualifications of Officers

3

Section 4.

Vacancies and Newly Created Offices

4

Section 5.

Removal and Resignation

4

Section 6.

President

4

Section 7.

Vice President(s)

4

Section 8.

Treasurer and Assistant Treasurer(s)

4

Section 9.

Secretary and Assistant Secretaries

5

Section 10.

Chief Compliance Officer

5

Section 11.

Subordinate Officers

5

Section 12.

Compensation of Officers

5

Section 13.

Surety Bond

5

ARTICLE V MEETINGS OF SHAREHOLDERS

6

Section 1.

Annual Meetings

6

Section 2.

Special Meetings

6

Section 3.

Notice of Meeting

6

Section 4.

Manner of Giving Notice; Waiver of Notice

6

Section 5.

Adjourned Meetings

7

Section 6.

Validity of Proxies

7

Section 7.

Organization of Meetings

8

Section 8.

Record Date

8

Section 9.

Action Without a Meeting

8

ARTICLE VI SHARES OF BENEFICIAL INTEREST

9

Section 1.

No Share Certificates

9

Section 2.

Register

9

Section 3.

Transfer of Shares

9

ARTICLE VII INSPECTION OF RECORDS AND REPORTS

9

ARTICLE VIII AMENDMENTS

9

ARTICLE IX GENERAL MATTERS

9

Section 1.

Checks, Drafts, Evidence of Indebtedness

9

Section 2.

Contracts and Instruments; How Executed

10

Section 3.

Advance Payment of Indemnifiable Expenses

10

Section 4.

Severability

10

Section 5.

Headings

10






BY-LAWS

OF

DIREXION SHARES ETF TRUST

These By-laws of Direxion Shares ETF Trust (the “Trust”), a Delaware statutory trust, are subject to the Trust Instrument of the Trust dated April 30, 2008, as from time to time amended, supplemented or restated (the “Trust Instrument”).  Capitalized terms used herein and not herein defined have the same meanings as in the Trust Instrument.  In the event of any inconsistency between the terms hereof and the terms of the Trust Instrument, the terms of the Trust Instrument shall control.

ARTICLE I
PRINCIPAL OFFICE AND SEAL

Section 1.

Principal Office .  The principal executive office of the Trust shall be located in the State of New York or such other location as the Trustees determine.  The Trust may establish and maintain other branch of subordinate offices and places of business as the Trustees determine.

Section 2.

Delaware Office .  The registered office of the Trust in the State of Delaware is located at 2711 Centerville Road, Suite 400, Wilmington, New Castle County, Delaware 19808.  The name of the registered agent of the Trust for service of process at such location is Corporation Service Company.

Section 3.

Seal .  The Trustees may adopt a seal for the Trust in such form and with such inscription as the Trustees determine.  Any Trustee or officer of the Trust shall have authority to affix the seal to any document.

ARTICLE II
TRUSTEES

Section 1.

Powers .  Subject to the applicable provisions of the 1940 Act, the Delaware Act, the Trust Instrument and these By-laws relating to action required to be approved by Shareholders, the business and affairs of the Trust shall be managed and all powers shall be exercised by or under the direction of the Trustees.

Section 2.

Compensation of Trustees .  Trustees and members of committees may receive for their services as such, compensation and reimbursement of expenses as may be fixed or determined by resolution of the Trustees.  This Section 2 shall not be construed to preclude any Trustee from serving the Trust in any other capacity as an officer, agent, employee, or otherwise and receiving compensation for those services.

Section 3.

Place of Meetings and Meetings by Telephone .  All meetings of the Trustees may be held at any place that has been selected from time to time by the Trustees.  Subject to any applicable requirements of the 1940 Act, any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all Trustees participating in the meeting can hear one another and all such Trustees shall be deemed to be present in person at the meeting.

Section 4.

Regular Meetings .  Regular meetings of the Trustees shall be at such time and place as shall be fixed by the Trustees.  Such regular meetings may be held without notice.

Section 5.

Special Meetings .  Special meetings of the Trustees or any Committee for any purpose or purposes may be called at any time by the Chairperson of the Board of Trustees or any two (2) Trustees, the President, any Vice President or the Secretary.  

Section 6.

Quorum; Action by Trustees .  The lesser of a majority or two Trustees shall constitute a quorum at any meeting.  Unless otherwise specified herein or in the Trust Instrument or required by law, any action by the Trustees shall be deemed effective if approved or taken by a majority of the Trustees present at a duly called meeting of Trustees at which a quorum is present or by written consent of a majority of Trustees (or such greater number as may be required by applicable law) without a meeting.  A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Trustees if any action taken is approved by at least a majority of the required quorum for that meeting.

Section 7.

Notice .  Notice of the time, date and place of all Trustees meetings shall be given to each Trustee by telephone, facsimile or other electronic means sent to his or her home or business address at least twenty-four hours in advance of the meeting.  Notice need not be given to any Trustee who attends the meeting without objecting to the lack of notice or who signs a waiver of notice either before or after the meeting.  Any written consent or waiver may be provided and delivered to the Trust by facsimile or other electronic means.  

Section 8.

Adjournment .  A majority of the Trustees present, whether or not constituting a quorum, may adjourn any meeting to another time and place.

Section 9.

Action Without a Meeting .  Unless the 1940 Act requires that a particular action be taken only at a meeting at which the Trustees are present in person, any action to be taken by the Trustees at a meeting may be taken without such meeting by the written consent of a majority of the Trustees then in office.  Any such written consent may be executed and given by telecopy or similar electronic means.  Such written consents shall be filed with the minutes of the proceedings of the Trustees.  If any action is so taken by the Trustees by the written consent of less than all of the Trustees, prompt notice of the taking of such action shall be furnished to each Trustee who did not execute such written consent, provided that the effectiveness of such action shall not be impaired by any delay or failure to furnish such notice.

ARTICLE III
COMMITTEES

Section 1.

Establishment .  The Trustees may designate one or more committees of the Trustees, which shall include a Nominating and Compensation Committee and an Audit Committee (together, the “Established Committees”).  The Trustees shall determine the number of members of each committee and its powers and shall appoint its members.  The Trustees may designate one or more Trustees as alternate members of any committee, who may replace any absent or recused member at any meeting of such committee.  Each committee member shall serve at the pleasure of the Trustees.  The Trustees may abolish any committee, other than the Established Committees, at any time.  Each committee shall maintain records of its meetings and report its actions to the Trustees when required.  The Trustees may rescind any action of any committee, but such rescission shall not have retr oactive effect.  The Trustees may delegate to any committee any of its powers, subject to the limitations of applicable law.

Section 2.

Proceedings; Quorum; Action .  In the absence of an appropriate resolution of the Trustees, each committee may adopt such rules governing its proceedings, quorum and manner of acting as it shall deem proper and desirable.  In the absence of such rules, a majority of any committee shall constitute a quorum, and a committee shall act by the vote of a majority of a quorum.

Section 3.

Audit Committee .  The Trustees shall elect from their own number an Audit Committee composed entirely of trustees who are not “interested persons” of the Trust, as defined in the 1940 Act (“Disinterested Trustees”).  The Audit Committee shall have the power to review and evaluate the Trust’s audit function, including recommending an independent registered public accounting firm and shall have such other powers and perform such other duties as may be assigned to it from time to time by the Trustees.  One member of the committee may be designated as chairperson to serve for a term to be determined by such committee, or as provided for in any charter adopted by the Audit Committee, and until a successor is elected .  

Section 4.

Nominating Committee .  The Trustees shall elect from their own number a Nominating Committee composed entirely of Disinterested Trustees.  The Nominating Committee shall have the power to select and nominate Disinterested Trustees, and shall have such other powers and perform such other duties as may be assigned to it from time to time by the Trustees.  One member of the Committee may be designated as chairperson to serve for a term to be determined by such Committee, or as provided for in any charter adopted by the Nominating Committee, and until a successor is elected.  

ARTICLE IV
BOARD CHAIR AND TRUST OFFICERS

Section 1.

Chairperson of the Board .  The Board of Trustees shall be required to elect a Chairperson of the Board.  Any Chairperson of the Board shall be elected from among the Trustees of the Trust and may hold such office only so long as he or she continues to be a Trustee.  The Chairperson shall preside at meetings of the Board of Trustees.  The Chairperson shall have such additional powers and perform such additional duties as may be assigned to him or her from time to time by the Board of Trustees.  

Section 2.

Trust Officers .  The officers of the Trust shall be a President, one or more Vice Presidents, a Treasurer, a Secretary and a Chief Compliance Officer, and may include one or more Assistant Treasurers or Assistant Secretaries and such other officers (“Other Officers”) as the Trustees may determine.

Section 3.

Election, Tenure and Qualifications of Officers .  The Trustees shall elect the officers of the Trust.  Each officer elected by the Trustees shall hold office until his or her successor shall have been elected and qualified or until his or her earlier death, inability to serve, removal or resignation.  Any person may hold one or more offices, except that the President and the Secretary may not be the same individual.  No officer need be a Shareholder.

Section 4.

Vacancies and Newly Created Offices .  Whenever a vacancy shall occur in any office or if any new office is created, the Trustees may fill such vacancy or new office.

Section 5.

Removal and Resignation .  Officers serve at the pleasure of the Trustees and may be removed at any time with or without cause.  The Trustees may delegate this power to the President with respect to any Other Officer.  Such removal shall be without prejudice to the contract rights, if any, of the person so removed.  Any officer may resign from office at any time by delivering a written resignation to the Trustees, or the President.  Unless otherwise specified therein, such resignation shall take effect upon delivery.  Any resignation is without prejudice to the rights, if any, of the Trust under any contract to which the officer is a party.

Section 6.

President .  The President shall be the Principal Executive Officer of the Trust.  Subject to the direction of the Trustees, the President shall have general charge, supervision and control over the Trust's business affairs and shall be responsible for the management thereof and the execution of policies established by the Trustees.  In the absence of the Chairperson, the President shall preside at any Shareholders' meetings.  Except as the Trustees may otherwise order, the President shall have the power to grant, issue, execute or sign such powers of attorney, proxies, agreements or other documents on the Trust’s behalf.  The President also shall have the power to employ attorneys, accountants and other advisers and agents for the Trust, except as the Board of Trustees may otherwise direct.  The President shall have such other powers and perform such ot her duties as the Trustees may determine.  

Section 7.

Vice President(s) .  The Vice President(s) shall have such powers and perform such duties as the Trustees or the President may determine.  At the request or in the absence or disability of the President, the Vice President (or, if there are two or more Vice Presidents, then the senior of the Vice Presidents present and able to act) shall perform all the duties of the President and, when so acting, shall have all the powers of the President.  The Trustees may designate a Vice President as the Principal Financial Officer of the Trust or to serve one or more other functions.  If a Vice President is designated as Principal Financial Officer of the Trust, he or she shall have general charge of the finances and books of the Trust and shall report to the Trustees annually regarding the financial condition of each Series as soon as possible after the close of such Series' fisc al year.  The Trustees also may designate one or more of the Vice Presidents as Executive Vice President.

Section 8.

Treasurer and Assistant Treasurer(s) .  The Treasurer may be designated as the Principal Financial Officer or as the principal accounting officer of the Trust.  If designated as Principal Financial Officer, the Treasurer shall have general charge of the finances and books of the Trust, and shall report to the Trustees annually regarding the financial condition of each Series as soon as possible after the close of such Series' fiscal year.  The Treasurer shall be responsible for the delivery of all funds and securities of the Trust to such company as the Trustees shall retain as custodian.  The Treasurer shall furnish such reports concerning the financial condition of the Trust as the Trustees may request.  The Treasurer shall perform all acts incidental to the office of Treasurer, subject to the Trustees' supervision, and shall perform such additional duties as th e Trustees may designate.

Any Assistant Treasurer may perform such duties of the Treasurer as the Trustees or the Treasurer may assign, and, in the absence of the Treasurer, may perform all the duties of the Treasurer.  

Section 9.

Secretary and Assistant Secretaries .  The Secretary shall record all votes and proceedings of the meetings of Trustees and Shareholders in books to be kept for that purpose.  The Secretary shall be responsible for giving and serving notices of the Trust.  The Secretary shall have custody of any seal of the Trust and shall be responsible for the records of the Trust, including the Share register and such other books and documents as may be required by the Trustees or by law.  The Secretary shall perform all acts incidental to the office of Secretary, subject to the supervision of the Trustees, and shall perform such additional duties as the Trustees may designate.

Any Assistant Secretary may perform such duties of the Secretary as the Trustees or the Secretary may assign, and, in the absence of the Secretary, may perform all the duties of the Secretary.  

Section 10.

Chief Compliance Officer .  The Chief Compliance Officer shall be responsible for administering the Trust’s compliance policies and procedures that are reasonably designed to prevent violation of the federal securities laws by the Trust, its investment adviser, principal underwriter, administrator and transfer agent.  The election, compensation and removal of the Chief Compliance Officer shall be approved by the Board of Trustees, including a majority of the Disinterested Trustees.

Section 11.

Subordinate Officers .  The Trustees may appoint from time to time such other officers and agents as they may deem advisable, each of whom shall have such title, hold office for such period, have such authority and perform such duties as the Trustees may determine.  The Trustees may delegate from time to time to one or more officers or committees of Trustees the power to appoint any such subordinate officers or agents and to prescribe their respective rights, terms of office, authorities and duties.  Any officer or agent appointed in accordance with the provisions of this Section 11 may be removed, either with or without cause, by any officer upon whom such power of removal shall have been conferred by the Trustees.

Section 12 .

Compensation of Officers .  Each officer may receive such compensation from the Trust for services and reimbursement for expenses as the Trustees may determine.

Section 13.

Surety Bond .  The Trustees may require any officer or agent of the Trust to execute a bond (including, without limitation, any bond required by the 1940 Act and the rules and regulations of the Securities and Exchange Commission ("Commission")) to the Trust in such sum and with such surety or sureties as the Trustees may determine, conditioned upon the faithful performance of his or her duties to the Trust, including responsibility for negligence and for the accounting of any of the Trust's property, funds or securities that may come into his or her hands.

ARTICLE V
MEETINGS OF SHAREHOLDERS

Annual Meetings

Section 1.

Annual Meetings .  The Trust shall not hold annual meetings, unless required by law.  

Section 2.

Special Meetings .  The Secretary shall call a special meeting of Shareholders of any Series or Class whenever ordered by the Trustees or by the President for the purpose of taking action upon any matter requiring the vote or authority of the Shareholders as herein provided or provided in the Trust Instrument or upon any other matter as to which such vote or authority is deemed by the Trustees or the President to be necessary or desirable.

The Secretary also shall call a special meeting of Shareholders of any Series or Class upon the written request of Shareholders owning at least twenty-five percent (25%) (or 10% to the extent required by Section 16 of the 1940 Act) of the Outstanding Shares of such Series or Class entitled to vote at such meeting; provided, that (1) such request shall state the purposes of such meeting and the matters proposed to be acted on, and (2) the Shareholders requesting such meeting shall have paid to the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which the Secretary shall determine and specify to such Shareholders.  If the Secretary fails for more than thirty days to call a special meeting when required to do so, the Trustees or the Shareholders requesting such a meeting may, in the name of the Secretary, call the meeting by giving the required notice.  T he Secretary shall not call a special meeting upon the request of Shareholders of any Series or Class to consider any matter that is substantially the same as a matter voted upon at any special meeting of Shareholders of such Series or Class held during the preceding twelve months, unless requested by the holders of a majority of the Outstanding Shares of such Series or Class entitled to be voted at such meeting.

A special meeting of Shareholders of any Series or Class shall be held at such time and place as is determined by the Trustees and stated in the notice of that meeting.

Section 3.

Notice of Meeting .  The Secretary shall call a meeting of Shareholders by giving written notice of the place, date, time and general nature of the business to be transacted at that meeting at least ten (10) days before the date of such meeting.

Section 4.

Manner of Giving Notice; Waiver of Notice .  Notice of any meeting of Shareholders shall be (i) given either by hand delivery, telephone, overnight courier, facsimile, telex, telecopier, electronic mail or other electronic means or by mail, postage prepaid, and (ii) addressed to the Shareholder at the address of that Shareholder appearing on the books of the Trust or its transfer agent or given by the Shareholder to the Trust for the purpose of notice.  If no such address appears on the Trust’s books or is not given to the Trust, notice shall be deemed to have been given if sent to that Shareholder to the Trust’s principal executive office, or if published at least once in a newspaper of general circulation in the county where that office is located.  Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent b y telegram or other means of written communication or electronic submission or, where notice is given by publication, on the date of publication.  Whenever any notice of any meeting of Shareholders is required to be given, a written waiver or a waiver by electronic transmission, signed by the person or persons entitled to such notice and filed with the records of the meeting, whether before or after the meeting is held, or attendance at the meeting in person or by proxy shall be deemed equivalent to the giving of such notice to such persons.

Section 5.

Adjourned Meetings .  A Shareholders' meeting may be adjourned one or more times for any reason, including the failure of a quorum to attend the meeting.  No notice of adjournment of a meeting to another time or place need be given to Shareholders if such time and place are announced at the meeting at which the adjournment is taken or reasonable notice is given to persons present at the meeting, and if the adjourned meeting is held within a reasonable time after the date set for the original meeting.  Any business that might have been transacted at the original meeting may be transacted at any adjourned meeting.  If after the adjournment a new record date is fixed for the adjourned meeting, the Secretary shall give notice of the adjourned meeting to Shareholders of record entitled to vote at such meeting.  Any irregularities in the notice of any meeting or the non receipt of any such notice by any of the Shareholders shall not invalidate any action otherwise properly taken at any such meeting.

Section 6.

Validity of Proxies .  Subject to the provisions of the Trust Instrument, Shareholders entitled to vote may vote either in person or by proxy; provided, that either the Shareholder or his or her duly authorized agent or attorney-in-fact has (i) signed and dated a written instrument authorizing such proxy to act, or (ii) transmitted by electronic, telephonic, computerized, facsimile, telecommunication, telex, oral communication or other alternative to execution of a written instrument authorizing such proxy to act.  Every such transmission shall contain, or be accompanied by, information that can be used to reasonably determine that the Shareholder transmitted or authorized such transmission.  Acceptable methods of authorizing a proxy to act shall be set forth in the proxy statement soliciting such proxy.  Any person charged with determining whether a Shareholder transm itted or authorized the transmission of any communication authorizing a proxy to act per clause (ii) of the first sentence of this Section 6, shall specify the information upon which the determination is to be made.  Notwithstanding the foregoing, if a proposal is submitted to a vote by anyone other than the officers or Trustees is submitted to a vote of the Shareholders of any Series or Class, or if there is a proxy contest or proxy solicitation or proposal in opposition to any proposal by the officers or Trustees, Shares may be voted only in person or by written proxy.  Unless the proxy provides otherwise, it shall not be valid for more than eleven (11) months before the date of the meeting.  All proxies shall be delivered to the Secretary or other person responsible for recording the proceedings before being voted.  A valid proxy which does not state that it is irrevocable shall continue in full force and effect unless (i) revoked by the person executing it before the vote pursuant to that proxy is taken (a) by a writing delivered to the Trust stating that the proxy is revoked, or (b) by a subsequent proxy executed by such person, or (c) attendance at the meeting and voting in person by the Person executing that proxy, or (d) revocation by such person using any electronic, telephonic, computerized or other alternative means authorized by the Trustees for authorizing the proxy to act; or (ii) written notice of the death or incapacity of the maker of that proxy is received by the Trust before the vote pursuant to that proxy is counted.  A proxy with respect to Shares held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of such proxy the Trust receives a specific written notice to the contrary from any one of them.  Unless otherwise specifically limited by their terms, proxies shall entitle the Shareholder to vote at any adjournment of a Shareholders' meeting.  A proxy purporting to be executed by or on behalf of a Sh areholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger.  Subject to the provisions of the Delaware Code entitled “Treatment of Delaware Statutory Trusts”, the Trust Instrument, or these By-laws, the General Corporation Law of the State of Delaware relating to proxies, and judicial interpretations thereunder shall govern all matters concerning the giving, voting or validity of proxies, as if the Trust were a Delaware corporation and the Shareholders were shareholders of a Delaware corporation.

Section 7.

Organization of Meetings .  The Chairperson of the Board of Trustees shall preside at each meeting of Shareholders.  In the absence of the Chairperson of the Board, the meeting shall be chaired by the President, or if the President shall not be present, by a Vice President.  In the absence of all such officers, the meeting shall be chaired by a person elected for such purpose at the meeting.  The Secretary of the Trust, if present, shall act as Secretary of such meetings, or if the Secretary is not present, an Assistant Secretary of the Trust shall so act, and if no Assistant Secretary is present, then a person designated by the Secretary of the Trust shall so act, and if the Secretary has not designated a person, then the meeting shall elect a secretary for the meeting.

The Board of Trustees of the Trust shall be entitled to make such rules and regulations for the conduct of meetings of Shareholders as it shall deem necessary, appropriate or convenient.  Subject to such rules and regulations of the Board of Trustees, if any, the chairperson of any meeting of the Shareholders shall determine the order of business and the procedures for conduct of business at the meeting, including regulation of the manner of voting, the conduct of discussion, the appointment of inspectors and the determination of all questions relating to the qualifications of voters, the validity of proxies, and the acceptance or rejection of votes.

Section 8.

Record Date .  For the purpose of determining the Shareholders who are entitled to vote or act at any meeting, or who are entitled to participate in any dividend or distribution, or for the purpose of any other action, the Trustees may from time to time close the transfer books for such period, not exceeding thirty days (except at or in connection with the termination of the Trust), as the Trustees may determine; or without closing the transfer books the Trustees may fix a date and time, as permitted by applicable law, prior to the date of any meeting of Shareholders or other action as the date and time of record for the determination of Shareholders entitled to vote at such meeting or to be treated as Shareholders of record for purposes of such other action.  Any Shareholder who was a Shareholder at the date and time so fixed shall be entitled to vote at such meeting or to be t reated as a Shareholder of record for purposes of such other action, even though such Shareholder has since that date and time disposed of its Shares, and no Shareholder becoming such after that date and time shall be so entitled to vote at such meeting or to be treated as a Shareholder of record for purposes of such other action.

Section 9.

Action Without a Meeting .  Shareholders may take any action without a meeting if a majority (or such greater amount as may be required by law) of the Outstanding Shares entitled to vote on the matter consent to the action in writing and such written consents are filed with the records of Shareholders’ meetings.  Such written consent shall be treated for all purposes as a vote at a meeting of the Shareholders.






ARTICLE VI
SHARES OF BENEFICIAL INTEREST

Section 1.

No Share Certificates .  Neither the Trust nor any Series or Class shall issue certificates certifying the ownership of Shares, unless the Trustees may otherwise specifically authorize such certificates.

Section 2.

Register .  A register shall be kept by the Trust or by the transfer agent, registrar or other agent of the Trust or Series, under the direction of the Trustees, which shall contain the names and addresses of the Shareholders and interests held by each Shareholder.  Each such register shall be conclusive as to the identity of the Shareholders of the Trust and the persons who shall be entitled to payments of distributions or otherwise to exercise or enjoy the rights of Shareholders.  No Shareholder shall be entitled to receive payment of any distribution, nor to have notice given to it as herein provided, until it has given its address to such officer or agent of the Trustees as shall keep the said register for entry thereon.  

Section 3.

Transfer of Shares .  Shares in the Trust shall not be transferable unless the prospective transferor obtains the prior unanimous consent of the Shareholders to the transfer.  The Trust shall be entitled to treat the holder of record of any Share or Shares as the absolute owner for all purposes, and shall not be bound to recognize any legal, equitable or other claim or interest in such Share or Shares on the part of any other person except as otherwise expressly provided by law.  

ARTICLE VII
INSPECTION OF RECORDS AND REPORTS

Every Trustee shall have the absolute right at any reasonable time to inspect all books, records, and documents of every kind and the physical properties of the Trust.  This inspection by a Trustee may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents.  No Shareholder shall have any right to inspect any account or book or document of the Trust except as conferred by law or otherwise by the Trustees.

ARTICLE VIII
AMENDMENTS

These By-laws may be amended by the Trustees of the Trust without any Shareholder vote.

ARTICLE IX
GENERAL MATTERS

Section 1.

Checks, Drafts, Evidence of Indebtedness .  All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Trust shall be signed or endorsed in such manner and by such person or persons as shall be designated from time to time in accordance with the resolution of the Board of Trustees.

Contracts and Instruments; How Executed

Section 2.

Transfer of Shares .  The Trustees, except as otherwise provided in these By-laws, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Trust and this authority may be general or confined to specific instances; and unless so authorized or ratified by the Trustees or within the agency power of an officer, no officer, agent, or employee shall have any power or authority to bind the Trust by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount.

Section 3.

Advance Payment of Indemnifiable Expenses .  Expenses incurred by an agent in connection with the preparation and presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be paid over by him or her to the Trust if it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a) such agent shall have provided appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall have determined, based upon a review of the readily available facts (as opposed to a trial-t ype inquiry or full investigation), that there is reason to believe that such agent will be found entitled to indemnification.

Section 4.

Severability .  The provisions of these By-laws are severable.  If the Board of Trustees determines, with the advice of counsel, that any provision hereof conflicts with the 1940 Act, the regulated investment company provisions of the Internal Revenue Code of 1986, as amended, or other applicable laws and regulations, the conflicting provision shall be deemed never to have constituted a part of these By-laws; provided, however, that such determination shall not affect any of the remaining provisions of these By-laws or render invalid or improper any action taken or omitted prior to such determination.  If any provision hereof shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision only in such jurisdiction and shall not affect any other provision of these By-laws.

Section 4.

Headings .  Headings are placed in these By-laws for convenience of reference only and in case of any conflict, the text of these By-laws rather than the headings shall control.





DIREXION SHARES ETF TRUST

INVESTMENT ADVISORY AGREEMENT


This Investment Advisory Agreement is made as of August __, 2008, between Direxion Shares ETF Trust (the “Trust”), a Delaware statutory trust, and Rafferty Asset Management, LLC, a New York limited liability corporation (the “Adviser”).


WHEREAS, the Trust is registered under the Investment Company Act of 1940, as amended (the “Act”), as an open-end management investment company consisting of one or more investment series of shares, each having its own assets and investment policies;


WHEREAS, the Adviser provides investment advice and is registered with the Securities and Exchange Commission (the “SEC”) as an investment adviser under the Investment Advisers Act of 1940, as amended (the “Advisers Act”); and


WHEREAS, the Trust desires to retain the Adviser to perform investment advisory services for each series of the Trust listed in one or more Schedules attached hereto (collectively, the "Funds"), and the Adviser is willing to perform such services on the terms and conditions set forth in this Agreement;


NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is agreed between the parties hereto as follows:  


1.   APPOINTMENT .  The Trust hereby appoints the Adviser, subject to the direction and control of the Trust’s Board of Trustees (the “Board”), to manage the investment and reinvestment of the assets of each Fund listed on Schedule A of this Agreement (as such schedule may be amended from time to time) for the period and on the terms set forth in this Agreement.  The Adviser accepts such appointment and agrees to render the services herein set forth for the compensation as set forth on Schedule A.   In the performance of its duties, the Adviser will act in the best interests of the Trust and each Fund and will comply with (a) applicable laws and regulations, including, but not limited to, the 1940 Act, (b) the terms of this Agreement, (c) the Trust's Declaration of Trust, By-Laws and currently effective registration statement under the Securities Act of 1933, as amended, and the 1940 Act, and any amendments thereto, (d) the stated investment objective, policies and restrictions of each applicable Fund, and (e) such other guidelines as the Board reasonably may establish.


2.   DUTIES AS INVESTMENT ADVISER .


(a)

Subject to the supervision of the Board, the Adviser will provide a continuous investment program for each Fund, including investment research and management with respect to all securities, investments and cash equivalents in each Fund.  The Adviser will determine from time to time what securities and other investments will be purchased, retained or sold by each Fund.  To carry out such decisions, the Adviser hereby is authorized, as agent and attorney-in-fact for the Trust, for the account of, at the risk of and in the name of the Trust, to place orders and issue instructions with respect to those transactions of the Funds.  The Adviser will exercise full discretion and act for each Fund in the same manner and with the same force and effect as such Fund itself might or could do with respect to purchases, sales, or other transactions, as well as with respect to all other things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions.  The Adviser will be responsible for preserving the confidentiality of information concerning the holdings, transactions, and business activities of each Trust and each Fund in conformity with the requirements of the 1940 Act, other applicable laws and regulations, and any policies that are approved by the Board.  


(b)

The Adviser will place orders pursuant to its investment determinations for each Fund either directly with the issuer or through other brokers.  In the selection of brokers and the placement of orders for the purchase and sale of Fund investments for the Funds, the Adviser shall use its best efforts to obtain for the Funds the most favorable price and execution available, except to the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below.  In using its best efforts to obtain the most favorable price and execution available, the Adviser, bearing in mind the Trust's best interests at all times, shall consider all factors it deems relevant, including by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions.  Subject to such policies as the Board may determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused a Fund to pay a broker that provides brokerage and research services to the Adviser an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction if the Adviser determines in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Adviser’s overall responsibilities with respect to the Trust and to other clients of the Adviser as to which the Adviser exercises investment discretion.  In no instance will portfolio securities of any Fund be purchased from or sold to the Adviser or any affiliated person of the Adviser.  The Trust agrees that any entity or person associated with the Adviser that is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Trust which is permitted by Section 11(a) of the Securities Exchange Act of 1934, as amended, and the rules thereunder, and the Trust has consented to the retention of compensation for such transactions.


(c)

The Adviser will report to the Board at each meeting thereof all changes in the Funds since the prior report, and also will keep the Board informed of important developments affecting the Trust, Funds and the Adviser, and on its own initiative, will provide the Board from time to time such information as the Adviser may believe appropriate for this purpose, whether concerning the individual companies whose securities are included in a Fund’s holdings, the industries in which they engage, or the economic, social or political conditions prevailing in each country in which the Fund maintains investments.  The Adviser also make available to the Board upon request any economic, statistical and investment services normally available to institutional or other customers of the Adviser.


(d)

The Adviser will from time to time employ or associate with such persons as the Adviser believes to be particularly fitted to assist in the execution of the Adviser’s duties hereunder, the cost of performance of such duties to be borne and paid by the Adviser.  No obligation may be incurred on the Trust’s behalf in any such respect.


(e) The Adviser, unless and until otherwise directed by the Board, will exercise all rights of security holders with respect to securities held by each Fund, including, but not limited to: voting proxies, converting, tendering, exchanging or redeeming securities; acting as a claimant in class action litigation (including litigation with respect to securities previously held), and exercising rights in the context of a bankruptcy or other reorganization .


(f)

Any of the foregoing functions with respect to any or all Funds may be delegated by the Adviser, at the Adviser’s expense, to another appropriate party (including an affiliated party), subject to such approval by the Board and shareholders of each affected Fund as may be required by the 1940 Act.  The Adviser shall oversee the performance of delegated functions by any such party and shall furnish to the Trust with quarterly evaluations and analyses concerning the performance of delegated responsibilities by those parties.


3.   COMPLIANCE WITH RULE 38a-1 .  The Adviser shall maintain policies and procedures that are reasonably designed to prevent violations of the federal securities laws, and shall employ personnel to administer the policies and procedures who have the requisite level of skill and competence required to effectively discharge its responsibilities.  The Adviser shall also provide the Trust’s chief compliance officer with periodic reports regarding its compliance with the federal securities laws, and shall promptly provide special reports in the event of any material violation of the federal securities laws.


4.   SERVICES NOT EXCLUSIVE .   The services furnished by the Adviser hereunder are not to be deemed exclusive and the Adviser shall be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby.


5.   BOOKS AND RECORDS .


(a)

The Adviser shall maintain records for each Fund relating to portfolio transactions and the placing and allocation of brokerage orders as are required to be maintained by the Trust under Rule 31a-1 of the Act.  The Adviser shall prepare and maintain, or cause to be prepared and maintained, in such form and in such locations as may be required by applicable law, all documents and records relating to the services provided by the Adviser pursuant to this Agreement required to be prepared and maintained by the Trust pursuant to the rules and regulations of any national, state or local government entity with jurisdiction over the Trust, including the Internal Revenue Service.


(b)

In compliance with the requirements of Rule 31a-3 under the 1940 Act, the Adviser hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon the Trust's request. The Adviser further agrees to preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 3la-1 under the 1940 Act.


6.   EXPENSES .   During the term of this Agreement, the Trust will bear all expenses not specifically assumed by the Adviser incurred in its operations and the offering of its shares. Expenses borne by the Trust will include, the following (or each Fund's proportionate share of the following): (a) brokerage commissions relating to securities purchased or sold by the Trust or any losses incurred in connection therewith; (b) fees payable to and expenses incurred on behalf of the Trust by the Adviser; (c) expenses of organizing the Trust and the Funds; (d) filing fees and expenses relating to the registration and qualification of the Trust's shares and the Trust under federal or state securities laws and maintaining such registrations and qualifications; (e) distribution fees; (f) fees and salaries payable to the members of the Board and officers who are not officers or employees of the Adviser or interested persons (as defined in the 1940 Act) of any investment adviser or distributor of the Trust; (g) taxes (including any income or franchise taxes) and governmental fees; (h) costs of any liability, uncollectible items of deposit and other insurance or fidelity bonds; (i) any costs, expenses or losses arising out of any liability of or claim for damage or other relief asserted against the Trust for violation of any law; (j) legal, accounting and auditing expenses, including legal fees of special counsel for the independent trustees; (k) charges of custodians, transfer agents, registrars and other agents; (l) expenses associated with the Trust’s compliance program pursuant to Rule 38a-1 under the 1940 Act, including the costs associated with the staff necessary to manage the program; (m) expenses of setting in type and printing prospectuses and supplements thereto for existing shareholders, reports and statements to shareholders and proxy material; (n) any extraordinary expenses (including fees and disbursements of counsel) incurred by the Trust; and (o) fees and other expenses incurred in connection with membership in investment company organizations.


The Trust may pay directly any expense incurred by it in its normal operations and, if any such payment is consented to by the Adviser and acknowledged as otherwise payable by the Adviser pursuant to this Agreement, the Trust may reduce the fee payable to the Adviser pursuant to paragraph 7 hereof by such amount.  To the extent that such deductions exceed the fee payable to the Adviser on any monthly payment date, such excess shall be carried forward and deducted in the same manner from the fee payable on succeeding monthly payment dates.


7.   LIMITATION OF LIABILITY OF THE ADVISER .  The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by the Trust or any Fund in connection with the matters to which this Agreement relate except a loss resulting from the willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement.  Any person, even though also an officer, partner, employee, or agent of the Adviser, who may be or become an officer, trustee, employee or agent of the Trust shall be deemed, when rendering services to the Trust or acting in any business of the Trust, to be rendering such services to or acting solely for the Trust and not as an officer, partner, employee, or agent or one under the control or direction of the Adviser even though paid by it.


8.   LIMITATION OF LIABILITY OF THE TRUST AND THE FUNDS .  The Adviser is hereby expressly put on notice of the limitation of liability as set forth in the Trust Instrument and agrees that obligations assumed by the Trust hereunder shall be limited in all cases to the Trust and its assets, and if the liability relates to one or more Funds, the obligations hereunder shall be limited to the respective assets of that Fund.  The Adviser further agrees that it shall not seek satisfaction of any obligation from the shareholders or any individual shareholder of a Fund, nor from the Trustees or any individual Trustee of the Trust.


9.   NON-BINDING AGREEMENT .  This Agreement is executed by the Trustees and/or officers of the Trust in their capacities as Trustees and/or officers and the obligations of this Agreement are not binding upon any of them or the shareholder individually; rather, they are binding only on the assets and the property of the Trust.


10.   COMPENSATION .  For the services provided and the expenses assumed pursuant to this Agreement with respect to each Fund, the Trust will pay the Adviser, effective from the date of this Agreement, a fee that is computed daily and paid monthly from each Fund's assets at the annual rates as percentages of that Fund's average daily net assets as set forth in the attached Schedule A, which schedule can be modified from time to time to reflect changes in annual rates or the addition or deletion of a Fund from the terms of this Agreement, subject to appropriate approvals required by the 1940 Act.  If this Agreement becomes effective or terminates with respect to any Fund before the end of any month, the fee for the period from the effective date to the end of the month or from the beginning of such month to the date of termination, as the case may be, shall be prorated according to the proportion that such period bears to the full month in which such effectiveness or termination occurs.


11.   DURATION AND TERMINATION .  This Agreement shall become effective upon its execution; provided, that with respect to any Fund now existing or hereafter created, this Agreement shall not take effect unless it first has been approved (i) by a vote of the majority of those trustees of the Trust who are not parties to this Agreement or interested persons of such party, cast in person at a meeting called for the purpose of voting on such approval, and (ii) if required by the 1940 Act or applicable staff interpretations therof, by vote of a majority of that Fund's outstanding voting securities.  This Agreement shall remain in full force and effect continuously thereafter until terminated without the payment of any penalty as follows:


(a)

By vote of a majority of its trustees, or by the affirmative vote of a majority of the outstanding shares of such Fund, the Trust may at any time terminate this Agreement with respect to any or all Funds by providing not more than 60 days' written notice delivered or mailed by registered mail, postage prepaid, to the Adviser at its principal offices; or


(b)

With respect to any Fund, this Agreement shall be approved for an initial period of two year and at least annually thereafter by (i) the Trustees or the shareholders of that Fund by the affirmative vote of a majority of the outstanding shares of such Fund, and (ii) a majority of the Trustees who are not interested persons of the Trust or of the Adviser or of any subadviser, by vote cast in person at a meeting called for the purpose of voting on such approval.  If the continuance of this Agreement is not approved at least annually after the initial two-year period, then this Agreement shall automatically terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement is submitted to the shareholders of a Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder in a manner consistent with the 1940 Act and the rules and regulations thereunder with respect to that Fund; or


(c)

The Adviser may at any time terminate this Agreement with respect to any or all Funds by not less than 60 days' written notice delivered or mailed by registered mail, postage prepaid to the Trust.


(d)

This Agreement automatically and immediately will terminate in the event of its assignment.


12.   AMENDMENT OF THIS AGREEMENT .  No provision of this Agreement may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought.  No material amendment of this Agreement with respect to any Fund shall be effective except, if required by law, by vote of the holders of a majority of that Fund's outstanding voting securities.


13.   GOVERNING LAW .   This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect to the conflicts of laws principles thereof, and in accordance with the 1940 Act.  To the extent that the applicable laws of the Commonwealth of Massachusetts conflict with the applicable provisions of the 1940 Act, the latter shall control.


14.   FORCE MAJEURE .  The Adviser shall not be liable for delays or errors occurring by reason of circumstances beyond its control, including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns beyond its control, the Adviser shall take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.


15.   DEFINITIONS .  As used in this Agreement, the terms "majority of the outstanding voting securities," "interested person," and "assignment" shall have the same meanings as such terms have in the 1940 Act.


16.   SEVERABILITY .  If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.  This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors.


17.   MISCELLANEOUS .  The captions in this Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.


IN WITNESS WHEREOF , the parties hereto have caused this instrument to be executed by their officers designated below as of the day and year first above written.

 

 

Attest: DIREXION SHARES ETF TRUST

 

By:  __________________

By:                                                                      

 

Attest: RAFFERTY ASSET MANAGEMENT, LLC

 

By:  __________________ 

By:                                                                      

                                                             




Schedule A

to the Investment Advisory Agreement

between Direxion Shares ETF Trust and Rafferty Asset Management, LLC


Pursuant to section 1 of the Investment Advisory Agreement between Direxion Shares ETF Trust (the “Trust”) and Rafferty Asset Management, LLC (the “Rafferty”), the Trust hereby appoints Rafferty to manage the investment and reinvestment of the Funds of the Trust listed below.  As compensation for such, the Trust shall pay to Rafferty pursuant to section 7 of the Investment Advisory Agreement a fee, computed daily and paid monthly, at the following annual rates as percentages of each Fund's average daily net assets:



Total Market Bull 3X  Shares

0.75%

Total Market Bear 3X Shares

0.75%

Large Cap Bull 3X Shares

0.75%

Large Cap Bear 3X  Shares

0.75%

Mid Cap Bull 3X Shares

0.75%

Mid Cap Bear 3X Shares

0.75%

Small Cap Bull 3X Shares

0.75%

Small Cap Bear 3X Shares

0.75%

Developed Markets Bull 3X Shares

0.75%

Developed Markets Bear 3X Shares

0.75%

Emerging Markets Bull 3X Shares

0.75%

Emerging Markets Bear 3X  Shares

0.75%

BRIC Bull 3X Shares

0.75%

BRIC Bear 3X  Shares

0.75%

China Bull 3X Shares

0.75%

China Bear 3X Shares

0.75%

India Bull 3X Shares

0.75%

India Bear 3X Shares

0.75%

Latin America Bull 3X Shares

0.75%

Latin America Bear 3X  Shares

0.75%

Clean Energy Bull 3X Shares

0.75%

Clean Energy Bear 3X Shares

0.75%

Energy Bull 3X Shares

0.75%

Energy Bear 3X  Shares

0.75%

Financial Bull 3X Shares

0.75%

Financial Bear 3X Shares

0.75%

Technology Bull 3X  Shares

0.75%

Technology Bear 3X Shares

0.75%

Real Estate Bull 3X Shares

0.75%

Real Estate Bear 3X Shares

0.75%

Homebuilders Bull 3X Shares

0.75%

Homebuilders Bear 3X Shares

0.75%


















Dated:

August __, 2008






DISTRIBUTION AGREEMENT


This Distribution Agreement (the “Agreement”) is made this 13 th day of August 2008, by and between Direxion Shares ETF Trust, a Delaware statutory trust (the “Trust”) having its principal place of business at 33 Whitehall Street, 10 th Floor, New York, New York 10004, and Foreside Fund Services, LLC, a Delaware limited liability company (the “Distributor”) having its principal place of business at Two Portland Square, Portland, ME  04101.


WHEREAS , the Trust is, or will be, a registered open-end management investment company organized as a series trust offering a number of portfolios of securities (each a “Fund” and collectively the “Funds”), having filed with the Securities and Exchange Commission (the “Commission”) a registration statement on Form N-1A under the Securities Act of 1933, as amended (the “1933 Act”), and the Investment Company Act of 1940, as amended (the “1940 Act”);


WHEREAS , the Trust intends to create and redeem shares of beneficial interest, no par value per Share (the “Shares”) of each Fund on a continuous basis at their net asset value only in aggregations constituting a Creation Unit, as such term is defined in the Registration Statement;


WHEREAS , the Shares of each Fund will be listed on one or more national securities exchanges (together, the “Listing Exchanges”);


WHEREAS , the Trust desires to retain the Distributor to act as the distributor with respect to the issuance and distribution of Creation Units of Shares of each Fund, hold itself available to receive and process orders for such Creation Units in the manner set forth in the Trust's Prospectus, and to enter into arrangements with broker-dealers who may solicit purchases of Shares and with broker-dealers and others to provide for servicing of shareholder accounts and for distribution assistance, including broker-dealer and shareholder support;


WHEREAS , the Distributor is a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the “1934 Act”) and a member of the Financial Industry Regulatory Authority (“FINRA”) (the successor organization to the National Association of Securities Dealers, Inc.); and


WHEREAS , the Distributor desires to provide the services described herein to the Trust.


NOW, THEREFORE , in consideration of the mutual promises and undertakings herein contained, the parties agree as follows:


1.

Appointment .


The Trust hereby appoints the Distributor as the exclusive distributor for Creation Unit aggregations of Shares of each Fund listed in Exhibit A hereto, as may be amended by the Trust from time to time on written notice to the Distributor, on the terms and for the period set forth in this Agreement and subject to the registration requirements of the federal securities laws and of the laws governing the sale of securities in the various states, and the Distributor hereby accepts such appointment and agrees to act in such capacity hereunder.


2.

Definitions .


Wherever they are used herein, the following terms have the following respective meanings:


(a)

“Prospectus” means the Prospectus and Statement of Additional Information constituting parts of the Registration Statement of the Trust under the 1933 Act and the 1940 Act as such Prospectus and Statement of Additional Information may be amended or supplemented and filed with the Commission from time to time;


(b)

“Registration Statement” means the registration statement most recently filed from time to time by the Trust with the Commission and effective under the 1933 Act and the 1940 Act, as such registration statement is amended by any amendments thereto at the time in effect;


(c)

All capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Registration Statement and the Prospectus.


3.

Duties of the Distributor


(a)

The Distributor agrees to act as agent of the Trust in connection with the receipt and processing of all orders for purchases and redemptions of Creation Units of each Fund from DTC Participants or participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (the “NSCC Participants”) that have executed a Participant Agreement (the “Authorized Participants”), as defined in paragraph 3(b) hereof, with the Distributor and Transfer Agent and to transmit such orders to the Trust in accordance with the Registration Statement and Prospectus; provided, however, that nothing herein shall affect or limit the right and ability of the Trust to accept Deposit Securities and related Cash Components through or outside the Clearing Process, and as provided in and in accordance with the Registration Statement and Prospectus.  The Trust acknowledges that the Distributor shall not be obligated to accept any certain number of orders for Creation Units; provided, however, that the Distributor shall accept all orders submitted in proper form unless the Adviser has notified the Distributor that it is in the best interests of a Fund to suspend sales or redemptions of Creation Units. Nothing herein shall prevent the Distributor from entering into like distribution arrangements with other investment companies.


(b)

The Distributor agrees to act as agent of the Trust with respect to the continuous distribution of Creation Units of each Fund as set forth in the Registration Statement and in accordance with the provisions thereof.  The Distributor further agrees as follows: (i) the Distributor shall enter into selected or soliciting dealer participant agreements (“Participant Agreements”) with DTC or NSCC Participants between and among Authorized Participants, the Distributor and the Transfer Agent, such Participant Agreements to be in the forms as approved by the Board of Trustees of the Trust for the purchase of Creation Units of the Funds, in accordance with the Registration Statement and Prospectus; (ii) the Distributor shall generate, transmit and maintain copies of confirmations of Creation Unit purchase and redemption order acceptances to the purchaser or redeemer (such confirmations will indicate the time such orders were accepted and will be made available to the Trust promptly upon request); (iii) the Distributor shall deliver copies of the Prospectus, included in the Registration Statement, to purchasers of such Creation Units and upon request the Statement of Additional Information; and (iv) the Distributor shall maintain telephonic, facsimile and/or access to direct computer communications links with the Transfer Agent.


(c)

The Distributor agrees to use all reasonable efforts, consistent with its other business, to secure purchasers of Creation Units through Authorized Participants in accordance with the procedures set forth in the Prospectus and the Participant Agreement and to perform the services contemplated herein on a continuous basis.


(d)

All activities by the Distributor and its agents and employees, which are primarily intended to result in the sale of Creation Units, shall comply with the Registration Statement and Prospectus, any and all exemptive orders issued to the Trust in connection with the offering of Fund Shares and Creation Units under this Agreement of which the Distributor has received advanced notice, the instructions of the Adviser and the Board of Trustees of the Trust, the Trust Instrument, and all applicable laws, rules and regulations including, without limitation, all rules and regulations made or adopted pursuant to the 1940 Act by the Commission or any securities association registered under the 1934 Act, including the FINRA and the Listing Exchanges.


(e)

Except as otherwise noted in the Registration Statement and Prospectus, the offering price for all Creation Units of Shares will be the aggregate net asset value of the Shares per Creation Unit of the relevant Fund, as determined in the manner described in the Registration Statement and Prospectus.


(f)

If and whenever the determination of net asset value is suspended and until such suspension is terminated, no further orders for Creation Units will be processed by the Distributor except such unconditional orders as may have been placed with the Distributor before it had knowledge of the suspension.  In addition, the Trust reserves the right to suspend sales and Distributor's authority to process orders for Creation Units on behalf of the Trust, upon due notice to the Distributor, if, in the judgment of the Trust, it is in the best interests of the Trust to do so. Suspension will continue for such period as may be determined by the Trust.


(g)

The Distributor is not authorized by the Trust to give any information or to make any representations other than those contained in the Registration Statement or Prospectus or contained in shareholder reports or other material that may be prepared by or on behalf of the Trust for the Distributor's use.  The Distributor shall be entitled to rely on and shall not be responsible in any way for information provided to it by the Trust and its respective service providers and shall not be liable or responsible for the errors and omissions of such service providers, provided that the foregoing shall not be construed to protect the Distributor against any liability to the Trust or the Trust's shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard in the performance of its obligations and duties under this Agreement.


(h)

The Distributor shall ensure that all direct requests for Prospectuses, Statements of Additional Information, Product Descriptions and periodic fund reports, as applicable, are fulfilled.  In addition, the Distributor shall arrange to provide the Listing Exchange with copies of Prospectuses and Statements of Additional Information and Product Descriptions to be provided to purchasers in the secondary market.  The Distributor will generally make it known in the brokerage community that Prospectuses and Statements of Additional Information and Product Descriptions are available, including by (i) advising the Listing Exchanges on behalf of its member firms of the same, (ii) making such disclosure in all marketing and advertising materials prepared and/or filed by the Distributor with the FINRA, and (iii) as may otherwise be required by the Commission.  The Distributor shall consult with the Adviser and the Trust with respect to the production and printing of Prospectuses to be used in connection with creations by Authorized Participants of Creation Units.  The Distributor shall not bear any costs associated with printing Prospectuses, Statements of Additional Information and all other such materials.


(i)

The Distributor agrees to make available, at the Trust’s request, one or more members of its staff to attend Board meetings of the Trust in order to provide information with regard to the ongoing distribution process and for such other purposes as may be requested by the Board of Trustees of the Trust.


(j)

The Distributor shall review and approve all sales and marketing materials for compliance with applicable laws and conditions of any applicable exemptive order, and file such materials with the FINRA when necessary or appropriate.  All such sales and marketing materials must be approved, in writing, by the Distributor prior to use, such approval not to be unreasonably withheld.


(k)

The Distributor shall not offer any Shares and shall not accept any orders for the purchase or sale of Shares hereunder if and so long as the effectiveness of the Registration Statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1933 Act or if and so long as a current prospectus as required by Section 10 of the 1933 Act is not on file with the Commission; provided, however, that nothing contained in this paragraph shall in any way restrict or have any application to or bearing upon the Trust’s obligation to redeem or repurchase any Shares from any shareholder in accordance with provisions of the Prospectus or Registration Statement.


(l)

If the Trust adopts any distribution and/or shareholder servicing plan(s) pursuant to Rule 12b-1 under the 1940 Act (the “Plan”), the Distributor shall enter into selling and/or investor servicing agreements (“Sales and Investor Services Agreements”) with various broker-dealers and any other financial institution exempt under federal or state securities laws from registration as a broker or dealer authorized by the Investment Adviser, consistent with applicable law and the Registration Statement and Prospectus, to sell Shares and provide services to shareholders.  The Distributor further agrees as follows: (i) the Distributor shall administer on behalf of the Trust any Plan(s) adopted by the Trust under rule 12b-1; (ii) the Distributor shall, at its own expense, set up and maintain a system of recording payments of fees and reimbursement of expenses disseminated pursuant to this Agreement and other agreements related to any such Plan(s) and, pursuant to the 1940 Act, report such payment activity to the Trust at least quarterly; (iii) the Distributor shall receive from the Trust all distribution and shareholder servicing fees, as applicable, at the rate and to the extent payable under the terms and conditions set forth in any Plan(s) adopted by the Trust, applicable to the appropriate class of shares of each Portfolio, as such Plan(s) may be amended from time to time, and subject to any further limitations on such fees as the Board of Trustees of the Trust may impose; and (iv) the Distributor shall pay, from the fees received from the Trust pursuant to any such Plan(s), all fees and make reimbursement of all expenses, pursuant to and in accordance with such Plan(s) and any and all Sales and Investor Services Agreements.  In no event shall Distributor (i) pay any fees pursuant to any such Plan(s) until it has received payment of such fees from the Trust or the Adviser or (ii) be entitled to retain for its own account any amount accrued pursuant to any such Plan(s).


(n)

The Distributor has as of the date hereof, and shall at all times have and maintain, net capital of not less than that required by Rule 15c3-1 under the 1934 Act, or any successor provision thereto. In the event that the net capital of the Distributor shall fall below that required by Rule 15c3-1, or any successor provision thereto, the Distributor shall promptly provide notice to the Trust and the Investment Adviser of such event.


(o)

The Distributor agrees to maintain, and preserve for the periods prescribed by Rule 31a-2 under the 1940 Act, such records as are required to be maintained by Rule 31a-1(d) under the 1940 Act.


(p)

The Distributor agrees to maintain compliance policies and procedures (a “Compliance Program”) that is reasonably designed to prevent violations of the Federal Securities Laws (as defined in Rule 38a-1 of the 1940 Act) with respect to the Distributor’s services under this Agreement, and to provide any and all information with respect to the Compliance Program, including without limitation, information and certifications with respect to material violations of the Compliance Program and any material deficiencies or changes therein, as may be reasonably requested by the Trust’s Chief Compliance Officer or Board of Trustees.


4.

Duties of the Trust.


(a)

The Trust agrees to issue Creation Units of each Fund and to request DTC to record on its books the ownership of the Shares constituting such Creation Units in accordance with the book-entry system procedures described in the Prospectus in such amounts as the Distributor has requested through the Transfer Agent in writing or other means of data transmission, as promptly as practicable after receipt by the Trust of the requisite Deposit Securities and Cash Component (together with any fees) and acceptance of such order, upon the terms described in the Registration Statement.  The Trust may reject any order for Creation Units or stop all receipts of such orders at any time upon reasonable notice to the Distributor, in accordance with the provisions of the Prospectus and Statement of Additional Information.


(b)

The Trust agrees that it will take all action necessary to register an indefinite number of Shares under the 1933 Act.  The Trust will make available to the Distributor such number of copies of its then currently effective Prospectus and Statement of Additional Information and Product Description as the Distributor may reasonably request.  The Trust will furnish to the Distributor copies of semi-annual reports and annual audited reports of the Trust's books and accounts made by independent public accountants regularly retained by the Trust and such other publicly available information that the Distributor may reasonably request for use in connection with the distribution of Creation Units.  The Trust shall keep the Distributor informed of the jurisdictions in which the Trust has filed notice filings for Shares for sale under the securities laws thereof and shall promptly notify the Distributor of any change in this information.  The Distributor shall not be liable for damages resulting from the sale of Shares in authorized jurisdictions where the Distributor had no information from the Trust that such sale or sales were unauthorized at the time of such sale or sales.


5.

Fees and Expenses.


(a)

The Distributor shall be entitled to no compensation or reimbursement of expenses from the Trust for the services provided by the Distributor pursuant to this Agreement.  The Distributor may receive compensation from the Adviser related to its services hereunder or for additional services as may be agreed to between the Adviser and Distributor.  


(b)

The Trust shall bear the cost and expenses of: (i) the registration of the Shares for sale under the Securities Act; and (ii) the registration or qualification of the Shares for sale under the securities laws of the various States;


(c)

The Distributor shall pay (i) all expenses relating to Distributor’s broker-dealer qualification and registration under the 1934 Act; (ii) the expenses incurred by the Distributor in connection with routine FINRA filing fees; and (iii) all other standard overhead expenses incurred by Distributor in connection with its business that are not normally charged to clients, such as office space, equipment, and salaries.


 

(d)

Notwithstanding anything in this Agreement to the contrary, the Distributor and its affiliates may receive compensation or reimbursement from the Trust and the Adviser with respect to any services not included under this Agreement, as may be agreed upon by the parties from time to time.


6.

Indemnification.


(a)

The Trust agrees to indemnify and hold harmless the Distributor, its affiliates and each of their directors, officers and employees and agents and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act (any of the Distributor, its officers, employees, agents and directors or such control persons, for purposes of this paragraph, a “Distributor Indemnitee”) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon (i) any claim that the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports, sales literature and advertisements specifically approved by the Trust and Investment Adviser or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein (and in the case of the Prospectus, Statement of Additional Information and Product Description, in light of the circumstances under which they were made) not misleading under the 1933 Act, or any other statute or the common law, (ii) the breach by the Trust of any obligation, representation or warranty contained in this Agreement or (iii) the Trust's failure to comply in any material respect with applicable securities laws.


The Trust does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Distributor Indemnitee with respect to any untrue statement or omission made in the Registration Statement, Prospectus, Statement of Additional Information or Product Description that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy of the Prospectus (or such amendment or supplement) was not sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation to such person in any case where such delivery is required by the 1933 Act and the Trust had notified the Distributor of the amendment or supplement prior to the sending of the confirmation. In no case (i) is the indemnity of the Trust in favor of any Distributor Indemnitee to be deemed to protect the Distributor Indemnitee against any liability to the Trust or its shareholders to which the Distributor Indemnitee would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations under this Agreement, or (ii) is the Trust to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Distributor Indemnitee unless the Distributor Indemnitee shall have notified the Trust in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon Distributor Indemnitee (or after Distributor Indemnitee shall have received notice of service on any designated agent).


Failure to notify the Trust of any claim shall not relieve the Trust from any liability that it may have to any Distributor Indemnitee against whom such action is brought unless failure or delay to so notify the Trust prejudices the Trust’s ability to defend against such claim. The Trust shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to Distributor Indemnitee, defendant or defendants in the suit. In the event the Trust elects to assume the defense of any suit and retain counsel, Distributor Indemnitee, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Trust does not elect to assume the defense of any suit, it will reimburse the Distributor Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to notify the Distributor promptly of the commencement of any litigation or proceedings against it or any of its officers or Trustees in connection with the issuance or sale of any of the Creation Units or the Shares.


(b)

The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and officers and any person who controls the Trust within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the “Trust Affiliates”) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon (i) the allegation of any wrongful act of the Distributor or any of its directors, officers, employees, (ii) the breach of any obligation, representation or warranty pursuant to this Agreement by the Distributor, (iii) the Distributor's failure to comply in any material respect with applicable securities laws, including applicable FINRA regulations, or (iv) any allegation that the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports, any information or materials relating to the Funds (as described in section 3(g)) or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with information furnished to the Trust by or on behalf of the Distributor, it being understood that the Trust will rely upon certain information provided by the Distributor for use in the preparation of the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports or other information relating to the Funds or made public by the Trust.


In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be deemed to protect any Trust Affiliate against any liability to the Trust or its security holders to which such Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the Distributor to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Trust Affiliate unless the Trust Affiliate shall have notified the Distributor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Trust Affiliate (or after the Trust Affiliate shall have received notice of service on any designated agent).


Failure to notify the Distributor of any claim shall not relieve the Distributor from any liability that it may have to the Trust Affiliate against whom such action is brought unless failure or delay to so notify the Distributor prejudices the Distributor’s ability to defend against such claim. The Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Trust, its officers and Board and to any controlling person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the defense of any suit and retain counsel, the Trust or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any suit, it will reimburse the Trust, its officers and Trustees or controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify the Trust promptly of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of any of the Creation Units or the Shares.


(c)

No indemnified party shall settle any claim against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior written notice to and consent from the indemnifying party, which consent shall not be unreasonably withheld.  No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. This section 6 shall survive the termination of this Agreement.


7.

Representations.


(a)

The Distributor represents and warrants that (i) it is duly organized as a Delaware limited liability company and is and at all times will remain duly authorized and licensed under applicable law to carry out its services as contemplated herein; (ii) the execution, delivery and performance of this Agreement are within its power and have been duly authorized by all necessary action; (iii) its entering into this Agreement or providing the services contemplated hereby does not conflict with or constitute a default or require a consent under or breach of any provision of any agreement or document to which the Distributor is a party or by which it is bound, including but not limited to any agreement with any Listing Exchange; (iv) it is registered as a broker-dealer under the 1934 Act and is a member of the FINRA; and (v) it has in place compliance policies and procedures reasonably designed to prevent violations of the Federal Securities Laws as that term is defined in Rule 38a-1 under the 1940 Act.  


(b)

To the extent applicable, the Distributor will comply with any requirements set forth in (i) the 1934 Act Rule 19b-4 relief provided to the Listing Exchanges in connection with the offering of Fund Shares and Creation Units under this Agreement and with respect to which the Distributor receives adequate advance notice; (ii) any and all exemptive orders issued to the Trust in connection with the offering of Fund Shares and Creation Units under this Agreement under the 1940 Act or 1934 Act with respect to which the Distributor receives adequate advance notice; and (iii) the Registration Statement and Prospectus.


(c)

The Distributor and the Trust represent and warrant that: (i) it understands that pursuant to various U.S. regulations, it is required to establish an anti-money laundering program, which satisfies the requirements of Title III of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the "USA Patriot Act"); (ii) it has developed, implemented, and will maintain such an anti-money laundering program and will comply with all applicable laws and regulations designed to guard against money laundering activities set out in such program; and (iii) it will allow for appropriate regulators to examine its anti-money laundering books and records.


(d)

The Distributor and the Trust represent and warrant that: (i) it has procedures in place reasonably designed to protect the privacy of non-public personal consumer/customer financial information to the extent required by applicable law, rule and regulation; (ii) it will comply with all of the applicable terms and provisions of the 1934 Act; and (iii) it will provide certifications to the Trust in order to assist the Trust in complying with certain rules under the 1940 Act (by way of example only, Rules 30a-2, 30a-3 and 38a-1) and in connection with the filing of certain Forms (by way of example only, Form N-CSR).


(e)

The Trust represents and warrants that (i) it is duly organized as a Delaware statutory trust and is and at all times will remain duly authorized to carry out its obligations as contemplated herein; (ii) it is, or will be within a reasonable date, registered as an investment company under the 1940 Act; (iii) the execution, delivery and performance of this Agreement are within its power and have been duly authorized by all necessary action; (iv) its entering into this Agreement does not conflict with or constitute a default or require a consent under or breach of any provision of any agreement or document to which the Trust is a party or by which it is bound; (v) the Registration Statement and each Fund’s Prospectus have been prepared, and all sales literature and advertisements specifically approved by the Trust and the Investment Adviser in writing or other materials prepared by or on behalf of the Trust for the Distributor’s use (“Sales Literature and Advertisements”) shall be prepared, in all materials respects, in conformity with applicable requirements under the 1933 Act, the 1940 Act and the rules and regulations of the Commission (the "Rules and Regulations"); and (vi) the Registration Statement and each Fund's Prospectus contain, and all Sales Literature and Advertisements shall contain, all material statements required to be stated therein in accordance with the 1933 Act, the 1940 Act and the Rules and Regulations; and (vii) all statements of fact contained therein, or to be contained in all Sales Literature and Advertisements, are or will be true and correct in all material respects at the time indicated or on the effective date, as the case may be, and (viii) the Registration Statement, and Sales Literature and Advertisements, when it shall become effective or be authorized for use, will not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading to a purchaser of Shares; and (viii) it shall not file any amendment to the Registration Statement or Prospectus without giving the Distributor reasonable notice thereof in advance, provided however, that nothing contained in this Agreement shall in any way limit the Trust's right to file at any time such amendments to any Registration Statement and/or supplements to any Prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional.  The Trust and the Adviser shall not be responsible in any way for any information, statements or representations given or made by the Distributor or its representatives or agents other than such information, statements or representations as are contained in such Prospectus or Registration Statement or financial reports filed on behalf of the Trust or in any Sales Literature and Advertisements.


8.

Duration, Termination and Amendment.


(a)

This Agreement shall be effective on August 13, 2008, and unless terminated as provided herein, shall continue for two years from its effective date, and thereafter from year to year, provided such continuance is approved annually (i) by vote of a majority of the Trustees or by the vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, as to each Fund (i) by vote of a majority of those Trustees who are not parties to this Agreement or interested persons of any such party or (ii) by vote of a majority of the outstanding voting securities of the Fund, on at least sixty (60) days prior written notice to the Distributor. This Agreement shall automatically terminate without the payment of any penalty in the event of its assignment.  As used in this paragraph, the terms “vote of a majority of the outstanding voting securities,” “assignment,” “affiliated person” and “interested person” shall have the respective meanings specified in the 1940 Act.


(b)

The Distributor agrees to notify the Adviser immediately in the event of its expulsion or suspension by FINRA. Expulsion of the Distributor by FINRA will automatically terminate this Agreement immediately without notice. Suspension of the Distributor by FINRA will terminate this Agreement effective immediately upon written notice of termination to the Distributor from the Adviser.


(c)

No provision of this Agreement may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought.


9.

Notice.


Any notice or other communication authorized or required by this Agreement to be given to either party shall be in writing and deemed to have been given when delivered in person or by confirmed facsimile, or posted by certified mail, return receipt requested, to the following address (or such other address as a party may specify by written notice to the other):


If to the Distributor :


Foreside Fund Services, LLC

ATTN:  Chief Compliance Officer

Two Portland Square, First Floor

Portland, ME  04101

Telephone:  (207) 553-7111

Facsimile:  (207) 553-7151



If to the Trust :


Direxion Shares ETF Trust

c/o Rafferty Asset Management LLC

ATTN:  Daniel O'Neill

33 Whitehall Street, 10 th Floor

New York, New York  10004

Telephone:  (646) 572-3465

Facsimile:  (646) 572-3496


  

10.

Choice of Law.


This Agreement shall be governed by, and construed in accordance with, the laws of the state of Delaware, without giving effect to the choice of laws provisions thereof.


11.

Counterparts.


This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.


12.

Severability.


If any provisions of this Agreement shall be held or made invalid, in whole or in part, then the other provisions of this Agreement shall remain in force. Invalid provisions shall, in accordance with this Agreement's intent and purpose, be amended, to the extent legally possible, in order to effectuate the intended results of such invalid provisions.


13.

Insurance.


The Distributor will maintain at its expense an errors and omissions insurance policy adequate to cover services provided by the Distributor hereunder.


14.

Confidentiality.


During the term of this Agreement, the Distributor and the Trust may have access to confidential information relating to such matters as either party's business, trade secrets, systems, procedures, manuals, products, contracts, personnel, and clients. As used in this Agreement, “Confidential Information” means information belonging to one of the parties that is of value to such party and the disclosure of which could result in a competitive or other disadvantage to such party. Confidential Information includes, without limitation, financial information, proposal and presentations, reports, forecasts, inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists; and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities). Confidential Information includes information developed by either party in the course of engaging in the activities provided for in this Agreement, unless: (i) the information is or becomes publicly known through lawful means; (ii) the information is disclosed to the other party without a confidential restriction by a third party who rightfully possesses the information and did not obtain it, either directly or indirectly, from one of the parties, as the case may be, or any of their respective principals, employees, affiliated persons, or affiliated entities. The parties understand and agree that all Confidential Information shall be kept confidential by the other both during and after the term of this Agreement. Each party shall maintain commercially reasonable information security policies and procedures for protecting Confidential Information. The parties further agree that they will not, without the prior written approval by the other party, disclose such Confidential Information, or use such Confidential Information in any way, either during the term of this Agreement or at any time thereafter, except as required in the course of this Agreement and as provided by the other party or as required by law. Upon termination of this Agreement for any reason, or as otherwise requested by the Trust, all Confidential Information held by or on behalf of Trust shall be promptly returned to the Trust, or an authorized officer of the Distributor will certify to the Trust in writing that all such Confidential Information has been destroyed.  This section 14 shall survive the termination of this Agreement.  Notwithstanding the foregoing, a party may disclose the other’s Confidential Information if (i) required by law, regulation or legal process or if requested by the Commission or other governmental regulatory agency with jurisdiction over the parties hereto or (ii) requested to do so by the other party; provided that in the event of (i), the disclosing party shall give the other party reasonable prior notice of such disclosure to the extent reasonably practicable and shall reasonably cooperate with the other party (at such other party’s expense) in any efforts to prevent such disclosure.


15.

Limitation of Liability.


This Agreement is executed by or on behalf of the Trust with respect to each of the Funds and the obligations hereunder are not binding upon any of the trustees, officers or shareholders of the Trust individually but are binding only upon the Fund to which such obligations pertain and the assets and property of such Fund.  Separate and distinct records are maintained for each Fund and the assets associated with any such Fund are held and accounted for separately from the other assets of the Trust, or any other Fund of the Trust. The debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular Fund of the Trust shall be enforceable against the assets of that Fund only, and not against the assets of the Trust generally or any other Fund, and none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the Trust generally or any other Fund shall be enforceable against the assets of that Fund.  The Trust’s Trust Instrument is on file with the Trust.






IN WITNESS WHEREOF , the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first set forth above.


DIREXION SHARES ETF TRUST




By:                                           

Name: Daniel D. O’Neill

Title: President



FORESIDE FUND SERVICES, LLC




By:                                          

Name:  Richard J. Berthy

Title:    Vice President




EXHIBIT A


Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X Shares

Latin America Bull 3X Shares

Latin America Bear 3X Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X Shares

Financial Bull 3X Shares

Financial Bear 3X Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X Shares






DIREXION ETF SHARES TRUST

FORM OF AUTHORIZED PARTICIPANT AGREEMENT


This Authorized Participant Agreement (the “Agreement”) is entered into by and between Foreside Fund Services, LLC (the “Distributor”) and [           ] (the “Participant”) and is subject to acceptance by The Bank of New York (the “Index Receipt Agent”) as index receipt agent for Direxion ETF Shares Trust (the “Trust”).

 

The Index Receipt Agent serves as the index receipt agent for the Trust and all of its designated series as set forth in Annex I (each a “Fund” and collectively, the “Funds”), and is an Index Receipt Agent as that term is defined in the rules of the National Securities Clearing Corporation (“NSCC”). The Distributor provides services as principal underwriter of the Funds acting on an agency basis in connection with the sale and distribution of the class of shares issued by the Funds known as “Fund Shares.”

 

The process by which an investor purchases and redeems Fund Shares from a Fund is described in detail in the Trust's current prospectus and statement of additional information, as each may be supplemented or amended from time to time (the “Prospectus”) that comprise part of the Trust’s registration statement, as amended, on Form N-1A (Securities Act of 1933 Registration No. 333-150525; Investment Company Act of 1940 Registration No. 811-22201) and AP the Authorized Participant Procedures Handbook (“AP Handbook”) (hereinafter collectively, “Fund Documents”). The discussion of the purchase and redemption process in this Agreement is modified as necessary by reference to the more complete discussions in the Fund Documents. References to the Fund Documents are to the then current Prospectuses and AP Handbook as each may be supplemented or amended from time to time. Capitalized terms used herein but not otherwise defined herein shall have the meanings set forth in the Fund Documents. In the event of a conflict between this Agreement and the Fund Documents, the Fund Documents shall control.  In the event of a conflict between the Prospectuses and AP Handbook, the Prospectuses shall control.  Each party to this Agreement agrees to comply with the provisions of the Fund Documents to the extent applicable to it.

 

Fund Shares may be purchased or redeemed directly from the Fund only in aggregations of a specified number, known as a “Creation Unit.” The number of Fund Shares presently constituting a Creation Unit of each Fund is set forth in Annex I.  Creation Units of Fund Shares may be purchased only by or through an entity that has entered into an Authorized Participant Agreement with the Distributor and is either a participant in The Depository Trust Company (“DTC”) or a broker-dealer or other participant in the Continuous Net Settlement System (the “CNSS”) of NSCC.

 

To purchase a Creation Unit, an authorized DTC participant or CNSS participant, whether acting for its own account or on behalf of another party (“Participant Client”), generally must deliver to the Fund a designated basket of equity securities (the “Deposit Securities”) and an amount of cash computed as described in the Fund Documents (the “Balancing Amount”), plus a purchase transaction fee as described in the Fund Documents (the “Transaction Fee”). The Deposit Securities and the Balancing Amount together constitute the “Fund Deposit.” The amount of such Transaction Fee shall be determined by the Trust or investment adviser to the Trust in its sole discretion and may be changed from time to time.

 

This Agreement is intended to set forth the procedures by which the Participant may purchase and/or redeem Creation Units of Fund Shares (i) through the CNSS clearing processes of NSCC as such processes have been enhanced to effect purchases and redemptions of Creation Units, such processes being referred to herein as the “Clearing Process,” or (ii) outside the Clearing Process through the DTC systems. The procedures for processing an order to purchase Fund Shares (a “Purchase Order”) and an order to redeem Fund Shares (a “Redemption Order”) are described in the Fund Documents. All Purchase and Redemption Orders must be made pursuant to the procedures set forth in the Fund Documents.  The Participant may not cancel a Purchase Order or a Redemption Order after it is placed.

 

The parties hereto, in consideration of the premises and of the mutual agreements contained herein, agree as follows:

 

1.

STATUS OF PARTICIPANT

 

(a)

The Participant hereby represents, covenants, and warrants that it is and will continue to be a participant in DTC (“DTC Participant”) so long as this Agreement is in full force and effect and that, with respect to Purchase Orders or Redemption Orders placed through the Clearing Process, it is and will continue to be a member of NSCC and a participant in the CNSS so long as this Agreement is in full force and effect. The Participant may place Purchase Orders or Redemption Orders either through the Clearing Process or outside the Clearing Process through the DTC, subject to the procedures for purchase and redemption referred to in paragraph 2 and AP Handbook. If a Participant loses its status as a DTC Participant or NSCC member, or its eligibility to participate in the CNSS, the Participant shall promptly notify the Distributor in writing of the change in status or eligibility.  Upon such notice, the Dis tributor, in its sole discretion, may terminate this Agreement.

 

(b)

The Participant hereby represents and warrants that it is registered as a broker-dealer under the Securities Exchange Act of 1934, as amended, is qualified to act as a broker or dealer in the states or other jurisdictions where it transacts business, and is a member in good standing of the Financial Industry Regulatory Authority (the “FINRA”). The Participant agrees that it will maintain such registrations, qualifications, and membership in good standing and in full force and effect throughout the term of this Agreement. The Participant agrees to comply with all applicable federal laws, the laws of the states or other jurisdictions concerned, and the rules and regulations promulgated thereunder, and with the Constitution, By-Laws and Conduct Rules of the FINRA, and that it will not offer or sell Fund Shares of any Fund in any state or jurisdiction where such shares may not lawfully be offered and/or sold.


(c)

If the Participant is offering and selling Fund Shares of any Fund in jurisdictions outside the several states, territories and possessions of the United States and is not otherwise required to be registered or qualified as a broker or dealer, or to be a member of the FINRA, as set forth above, the Participant nevertheless agrees to observe the applicable laws of the jurisdiction in which such offer and/or sale is made, to comply with the full disclosure requirements of the Securities Act of 1933 as amended (the “1933 Act”) and the regulations promulgated thereunder, and to conduct its business in accordance with the spirit of the FINRA Conduct Rules.

 

(d)

The Participant understands and acknowledges that the proposed method by which Creation Units will be created and traded may raise certain issues under applicable securities laws.  For example, because new Creation Units may be issued and sold by the Fund on an ongoing basis, at any point a “distribution,” as such term is used in the 1933 Act, may occur. The Participant understands and acknowledges that some activities on its part, depending on the circumstances, may result in its being deemed a participant in the distribution in a manner that could render it a statutory underwriter and subject it to the prospectus delivery and liability provisions of the 1933 Act. (A fuller discussion of these risks appears in the Prospectuses.) Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and you should consult legal counsel if you are uncertain of your status. Neither the Distributor nor the Index Receipt Agent will indemnify the Participant for any violations of the federal securities laws committed by the Participant.

 

2.

PURCHASE AND REDEMPTION ORDERS

 

All Purchase Orders and Redemption Orders shall be made in accordance with the terms of the Fund Documents and the procedures as described in AP Handbook. Each party hereto agrees to comply with the provisions of such documents to the extent applicable to it. It is contemplated that the phone lines used in connection with the purchase and redemption of Creation Units, which includes use by representatives of the Distributor, Index Receipt Agent or the Trust and any affiliates thereof, will be recorded, and the Participant hereby consents to the recording of all calls in connection with the purchase and redemption of Creation Units.  In addition, the Participant acknowledges and agrees to the terms and conditions as required by the Distributor, the Index Receipt Agent and/or the Funds’ transfer agent in connection with all Purchase and Redemption Orders through an electronic order entry system made available to the Participant (“Order System”) in connection with the purchase and redemption of Creation Units.  The Funds reserve the right to issue additional or other procedures relating to the manner of purchasing or redeeming Creation Units, and the Participant agrees to comply with such procedures as may be issued from time to time, including but not limited to the Fund Shares cash collateral settlement procedures that are referenced in AP Handbook. The Participant acknowledges and agrees on behalf of itself and any party for which it is acting that a Purchase Order or Redemption Order shall be irrevocable, and that the Funds (or the Distributor on behalf of the Funds) reserve the right to reject any Purchase Order or Redemption Order in accordance with the terms of the Fund Documents. The Participant agrees that the Distributor and the Trust have and reserve the right, in their sole discretion without notice, to reject a Purchase Order or Redemption Order or suspend sales of Fund Shares, in accordance with the ter ms of the Fund Documents.

 

3.

EXECUTION OF PURCHASE ORDERS


(a)

To effect the purchase of a Creation Unit of a particular Fund that attempts to provide investment results that correlate positively to the return of a benchmark or index (each, a “Bull Fund”), the Participant agrees on behalf of itself, and any Participant Client, to deliver to a Fund a Fund Deposit plus a purchase transaction fee as described in Fund Documents.  The amount of such purchase transaction fee shall be determined by the Trust, or the investment advisor to the Trust (the “Advisor”), in its sole discretion and may be changed from time to time.  The Fund Deposit shall consist of the requisite Deposit Securities plus or minus a Balancing Amount.  The Balancing Amount will be payable to or receivable by the Fund depending on the net asset value of Fund Shares of the Fund next determined after the Purchase Order has been placed.  A Fund may permit or require the substitu tion of an amount of cash to be added to the Balancing Amount to replace any Deposit Securities (i.e. “cash in lieu”).  A Fund may, in its sole discretion, accept collateral up to [115%/125%] of the value of the Deposit Securities in anticipation of delivery of all or a portion of the requisite Deposit Securities, as disclosed in the Prospectus from time to time, and the Fund may use such cash or collateral to purchase Deposit Securities.    An additional amount of cash shall be required to be deposited with the Fund pending delivery of the missing Deposit Securities to the extent necessary to maintain cash collateral in an amount at least equal to [115%/125%] of the daily marked to market value of the missing Deposit Securities.  The Participant shall be responsible for any and all expenses and costs incurred by the Fund in connection with Purchase Orders, including expenses arising from the use of “cash in lieu” or collateral.


(b)

To effect the purchase of a Creation Unit of a particular Fund that attempts to provide investment results that correlate negatively to a benchmark or index (each, a “Bear Fund”), the Participant agrees on behalf of itself, and any Participant Client, to deliver to the Fund an amount in cash equal to the net asset value per Share of a Bear Fund multiplied by the number of Fund Shares constituting a Creation Unit of such Fund multiplied by the number of Creation Units of such Bear Fund being purchased or redeemed in a particular Order (an “All-Cash Payment”) plus a purchase transaction fee, as described in the Fund Documents.  The amount of such purchase transaction fee shall be determined by the Trust, or the investment advisor to the Trust, in its sole discretion and may be changed from time to time.

(c)

With respect to any Purchase Order, each Fund acknowledges and agrees to return to the Participant or any party for which it is acting any dividend, distribution, or other corporate action paid to the Fund in respect of any Deposit Security that is transferred to the Fund that, based on the valuation of such Deposit Security at the time of transfer, should have been paid to the Participant or any party for which it is acting.

(d)

The Participant hereby agrees that it will make available or transfer funds for each purchase of Fund Shares of a Bull Fund an amount sufficient to pay the Balancing Amount plus the purchase transaction fee and the additional variable charge for cash purchases (when, in the sole discretion of the Fund, cash purchases are available or specified, other than with respect to Purchase Orders for the Bear Funds) (the “Cash Amount”). Computation of the Cash Amount shall exclude any taxes, duties or other fees and expenses payable upon the transfer of beneficial ownership of the Deposit Securities, which shall be the sole responsibility of the Participant.  Computation of the Cash Amount shall exclude any stamp duty and other similar fees and expenses payable upon the transfer of beneficial ownership of the Deposit Securities, which shall be the sole responsibility of the Participant and not of the Fund.  The Participant hereby agrees to ensure that the Cash Amount is provided in accordance with the procedures set forth in AP Handbook.

(e)

The Participant hereby agrees that it will make available or transfer for each purchase of Fund Shares of a Bear Fund an amount sufficient to pay the All-Cash Payment plus a purchase transaction fee.  The Participant hereby agrees to ensure that the Cash Amount is provided in accordance with the procedures set forth in AP Handbook.

(f)

Trust or Distributor may reject any Purchase Order that is not submitted in proper form by 3:00 p.m., Eastern Time (or 4:00 p.m. through the Order System or via the U.S. Postal Service), as applicable. In addition, the Distributor on behalf of each Fund may reject any Purchase Order (based on information provided by the Index Receipt Agent, the Advisor or the Trust or obtained by the Distributor, as the case may be), if:

(1)

the purchaser or purchasers, upon obtaining the Creation Units so ordered, would own eighty percent (80%) or more of the outstanding Fund Shares of such particular Fund;

(2)

the Fund Deposit delivered does not contain the securities that the Advisor specified and the Advisor has not consented to acceptance of an in-kind deposit that varies from the designated portfolio;

(3)

the acceptance of the Fund Deposit would have certain adverse tax consequences, such as causing the particular Fund to no longer meet RIC status under the Code for federal tax purposes;

(4)

the acceptance of the Fund Deposit would, in the opinion of counsel, be unlawful, as in the case of a purchaser who was banned from trading in securities;

(5)

the acceptance of the Fund Deposit would otherwise, in the discretion of the Trust or the Advisor, have an adverse effect on the Trust or the particular Fund or on the rights of the shareholders, including but not limited to the beneficial owner as that term is defined in Rule 16a-1(a)(2) of the Securities Exchange Act of 1934 (“Beneficial Owner”) of the Fund Shares;

(6)

the value of the Creation Units to be created for an All-Cash Payment, or the amount of the Balancing Amount to accompany an in-kind payment of Deposit Securities, exceeds a purchase authorization limit afforded to the Participant by the Custodian and the Participant has not deposited an amount in excess of such purchase authorization with the Custodian prior to 3:00 p.m., Eastern Time, on the transmittal date; or

(7)

there exist circumstances outside the control of the Trust or the Distributor that make it impossible to process purchases of Fund Shares for all practical purposes. 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, telecopy and computer failures, market conditions or activities causing trading halts, systems failures involving computer or other information systems affecting the Trust, the Advisor, any sub-Advisor(s), the Index Receipt Agent, the Custodian, the Distributor, DTC, NSCC or any other participant in the purchase process, and similar extraordinary events.

4.

EXECUTION OF REDEMPTION ORDERS


(a)

The Participant understands and agrees that Redemption Orders may be submitted only on days that the Trust is open for business, as required by Section 22(e) of the Investment Company Act of 1940, as amended (“1940 Act”).


(b)

The Participant understands that Fund Shares of any Fund may be redeemed only when one or more Creation Units are held in the account of a single Participant.


(c)

To effect the redemption of a Creation Unit of a particular Bull Fund, the Participant agrees on behalf of itself and any Participant Client to deliver to the Index Receipt Agent the requisite number of Fund Shares comprising the number of Creation Units being redeemed as described in the Fund Documents.  Proceeds of the redemption of a Creation Unit shall consist of Fund Securities plus or minus the Balancing Amount.  The Balancing Amount will be payable to or receivable from the Fund depending on the net asset value of Fund Shares of the Fund next determined after the Redemption Order has been received.  Participant shall be responsible for paying any redemption transaction fee and/or additional variable charge assessed by the Fund.  The amount of such redemption transaction fee and/or additional variable charge shall be determined by the Trust, or the Advisor, in its sole discretion and may be changed from time to time. The Fund may permit the Participant to redeem a Creation Unit when the Participant is unable to deliver all or part of a Creation Unit upon the delivery of collateral up to [115%/125%] of the value of the requisite Fund Shares, marked to market on a daily basis, in anticipation of delivery of all or a portion of the requisite Fund Shares, and the Fund may use such cash or collateral to purchase Fund Shares. In addition, the Participant shall be responsible for any and all expenses and costs incurred in connection with any Redemption Requests, including expenses arising out of the use of collateral.

(d)

To effect the redemption of a Creation Unit of a particular Bear Fund, the Participant agrees on behalf of itself and any Participant Client to deliver to the Index Receipt Agent the requisite number of Fund Shares comprising the number of Creation Units being redeemed.  The Fund may permit the Participant to redeem a Creation Unit when the Participant is unable to deliver all or part of a Creation Unit upon the delivery of collateral up to [115%/125%] of the value of the requisite Fund Shares, marked to market on a daily basis in anticipation of delivery of all or a portion of the requisite Fund Shares, and the Fund may use such cash or collateral to purchase Fund Shares.  Proceeds of the redemption of a Creation Unit shall consist of an All-Cash Payment.

(e)

When making a Redemption Order, the Participant understands and agrees that in the event Fund Shares are not transferred to the Fund in accordance with the terms of the Fund Documents, such Redemption Order may be rejected by the Fund and the Participant will be solely responsible for all costs and losses and fees incurred by the Fund, the Index Receipt Agent or the Distributor related to such rejected Redemption Order.


(f)

The Participant represents, covenants and warrants that it will not attempt to place a Redemption Order for the purpose of redeeming any Creation Units unless it first ascertains that it or its customer, as the case may be, owns outright or has full legal authority and legal and beneficial right to tender for redemption the requisite number of Fund Shares, and that such Fund Shares have not been loaned or pledged to another party and are not the subject of a repurchase agreement, securities lending agreement, or any other agreement that would preclude the delivery of such Fund Shares to the Fund.


(g)

With respect to any Redemption Order, the Participant acknowledges and agrees on behalf of itself and any party for which it is acting to return to a Fund any dividend, distribution, or other corporate action paid to it or to the party for which it is acting in respect of any Deposit Security that is transferred to the Participant or any party for which it is acting that, based on the valuation of such Deposit Security at the time of transfer, should have been paid to the Fund. With respect to any Redemption Order, the Participant also acknowledges and agrees on behalf of itself and any party for which it is acting that a Fund is entitled to reduce the amount of money or other proceeds due to the Participant or any party for which it is acting by an amount equal to any dividend, distribution, or other corporate action to be paid to it or to the party for which it is acting in respect of any Deposit Security that is tr ansferred to the Participant or any party for which it is acting that, based on the valuation of such Deposit Security at the time of transfer, should be paid to the Fund.


(h)

Notwithstanding anything to the contrary in this Agreement or the Prospectus, the Participant understands and agrees that residents of certain countries are entitled to receive only cash upon redemption of a Creation Unit. Accordingly, the Participant is required to confirm that any request it submits for an in-kind redemption has not been submitted on behalf of a Beneficial Owner who is a resident of a country requiring that all redemptions be made in cash.


5.

AUTHORIZATION OF INDEX RECEIPT AGENT

 

With respect to Purchase Orders or Redemption Orders processed through the Clearing Process, the Participant hereby authorizes the Index Receipt Agent to transmit to the NSCC on behalf of the Participant such instructions, including amounts of the Deposit Securities and Balancing Amounts as are necessary, consistent with the instructions issued by the Participant to the Distributor. The Participant agrees to be bound by the terms of such instructions issued by the Index Receipt Agent and reported to NSCC as though such instructions were issued by the Participant directly to NSCC.

 

6.

MARKETING MATERIALS AND REPRESENTATIONS.

 

The Participant represents, warrants, and agrees that it will not make any representations concerning Fund Shares, the Trust or the Funds, other than those contained in the Funds’ then current Prospectuses or in any promotional materials or sales literature furnished to the Participant by the Distributor. The Participant agrees not to furnish or cause to be furnished to any person or display or publish any information or materials relating to Fund Shares (including, without limitation, promotional materials and sales literature, advertisements, press releases, announcements, statements, posters, signs, or other similar materials), except such information and materials as may be furnished to the Participant by the Distributor and such other information and materials as may be approved in writing by the Distributor. The Participant understands that the Fund will not be advertised or marketed as an open-end investment company, i.e., as a mutual fund, and that any advertising materials will prominently disclose that the Fund Shares are not individually redeemable. In addition, the Participant understands that any advertising material that addresses redemption of Fund Shares will disclose that Fund Shares may be tendered for redemption to the issuing Fund only in Creation Units. Notwithstanding the foregoing, the Participant may without the written approval of the Distributor prepare and circulate in the regular course of its business research reports that include information, opinions, or recommendations relating to Fund Shares (i) for public dissemination, provided that such research reports compare the relative merits and benefits of Fund Shares with other products and are not used for purposes of marketing Fund Shares and (ii) for internal use by the Participant.

 

7.

TITLE TO SECURITIES; RESTRICTED SHARES

 

The Participant represents on behalf of itself and any party for which it acts that upon delivery of Deposit Securities to the Custodian, the Fund will acquire good and unencumbered title to such securities, free and clear of all liens, restrictions, charges, and encumbrances, and not subject to any adverse claims, including without limitation any restrictions upon the sale or transfer of such securities imposed by (i) any agreement or arrangement entered into by the Participant or any party for which it is acting in connection with a Purchase Order; or (ii) any provision of the 1933 Act, and any regulations thereunder (except that portfolio securities of issuers other than U.S. issuers shall not be required to have been registered under the 1933 Act if exempt from such registration), or of the applicable laws or regulations of any other applicable jurisdiction. In particular, the Participant represents on behalf of itself and any part y for which it acts that no such securities are “restricted securities” as such term is used in Rule 144(a)(3)(i) under the 1933 Act.

 

8.

BALANCING AMOUNT

 

The Participant hereby agrees that, in connection with a Purchase Order, whether for itself or any party for which it acts, it will make available on or before the contractual settlement date (the “Contractual Settlement Date”), by means satisfactory to the Trust, and in accordance with the provisions of the Fund Documents, immediately available or same day funds estimated by the Trust to be sufficient to pay the Balancing Amount next determined after acceptance of the Purchase Order, together with the applicable purchase transaction fee.  Any excess funds will be returned following settlement of the Purchase Order.  The Participant should ascertain the applicable deadline for cash transfers by contacting the operations department of the broker or depositary institution effectuating the transfer of the Balancing Amount. The Participant hereby agrees to ensure that the Balancing Amount will be received by the issuing Fund in accordance with the terms of the Fund Documents, but in any event on or before the Contractual Settlement Date, and in the event payment of such Balancing Amount has not been made in accordance with the provisions of the Fund Documents or by such Contractual Settlement Date, the Participant agrees on behalf of itself or any party for which it acts in connection with a Purchase Order to pay the amount of the Balancing Amount, plus interest, computed at such reasonable rate as may be specified by the Fund from time to time. The Participant shall be liable to the Custodian, any sub-custodian or the Trust for any amounts advanced by the Custodian or any sub-custodian in its sole discretion to the Participant for payment of the amounts due and owing for the Balancing Amount. Computation of the Balancing Amount shall exclude any taxes, duties or other fees and expenses payable upon the transfer of beneficial ownership of the Deposit Securities, which shall be the sole responsibility of the Participant and not the Trust.

 

9.

ROLE OF PARTICIPANT

 

(a)

The Participant acknowledges and agrees that, for all purposes of this Agreement, the Participant will be deemed to be an independent contractor, and will have no authority to act as agent for the Funds or the Distributor in any matter or in any respect. The Participant agrees to make itself and its employees available, upon request, during normal business hours to consult with the Funds or the Distributor or their designees concerning the performance of the Participant’s responsibilities under this Agreement.

  

(b)

The Participant agrees as a DTC Participant and in connection with any purchase or redemption transactions in which it acts on behalf of a third party, that it shall extend to such party all of the rights, and shall be bound by all of the obligations, of a DTC Participant in addition to any obligations that it undertakes hereunder or in accordance with the Fund Documents.

 

(c)

The Participant agrees to maintain all books and records of all sales of Fund Shares made by or through it pursuant to its obligations under the federal securities laws and to furnish copies of such records to the Fund or the Distributor upon the request of the Fund or the Distributor.

 

(d)

The Participant represents that from time to time it may be a Beneficial Owner (as that term is defined Rule 16a-1(a)(2) of the Securities Exchange Act of 1934) of Fund Shares. To the extent that it is a Beneficial Owner of Fund Shares, the Participant agrees to irrevocably appoint Distributor as its attorney and proxy with full authorization and power to vote (or abstain from voting) its beneficially owned shares. The Distributor intends to vote (or abstain from voting) the Participant’s beneficially owned shares in the same proportion as the votes (or abstentions) of all other shareholders of the Fund on any matter submitted to the vote of shareholders of the Fund or Trust. The Distributor, as attorney and proxy for Participant under this Paragraph, (i) is hereby given full power of substitution and revocation; (ii) may act through such agents, nominees, or attorneys as it may appoint from time to time; and (ii i) may provide voting instructions to such agents, nominees, or substitute attorneys. Distributor may terminate this irrevocable proxy within sixty (60) days written notice to the Participant.

 

(e)

The Participant further represents that its anti-money laundering program (“AML Program”) is maintained consistent with all applicable federal laws, rules and regulations, including the USA Patriot Act and rules promulgated by the SEC, and that its AML Program, at a minimum, (i) designates a compliance officer to administer and oversee the AML Program, (ii) provides ongoing employee training, (iii) includes an independent audit function to test the effectiveness of the AML Program, (iv) establishes internal policies, procedures, and controls that are tailored to its particular business, (v) includes a customer identification program consistent with the rules under section 326 of the USA Patriot Act, (vi) provides for the filing of all necessary anti-money laundering reports including, but not limited to, currency transaction reports and suspicious activity reports, (vii) provides for screening all new and ex isting customers against reports and suspicious activity reports, (viii) provides for screening all new and existing customers against the Office of Foreign Asset Control list and any other government list that is or becomes required under the USA Patriot Act, and (ix) allows for appropriate regulators to examine its anti-money laundering books and records. The Distributor shall verify the identity of each Authorized Participant and maintain identification verification and transactional records in accordance with the requirements of applicable laws and regulations aimed at the prevention and detection of money laundering and/or terrorism activities.

 

10.

AUTHORIZED PERSONS OF THE PARTICIPANT

 

(a)

Concurrently with the execution of this Agreement and from time to time thereafter as may be requested by the Funds, the Participant shall deliver to the Funds, with copies to the Index Receipt Agent, a certificate in a form approved by the Funds (see Annex II hereto), duly certified as appropriate by the Participant’s Secretary or other duly authorized official, setting forth the names and signatures of all persons authorized to give instructions relating to any activity contemplated hereby or any other notice, request, or instruction on behalf of the Participant (each an “Authorized Person”). Such certificate may be accepted and relied upon by the Distributor and the Funds as conclusive evidence of the facts set forth therein and shall be considered to be in full force and effect until delivery to the Funds of a superseding certificate. Upon the termination or revocation of authority of such Authorize d Person by the Participant, the Participant shall give immediate written notice of such fact to the Funds with copy to the Index Receipt Agent and such notice shall be effective upon receipt by the Funds.


(b)

The Distributor shall issue to the Participant a unique personal identification number (“PIN Number”) by which the Participant shall be identified and instructions issued by the Participant hereunder shall be authenticated. The PIN Number shall be kept confidential and provided to Authorized Persons only. If the Participant’s PIN Number is changed, the new PIN Number will become effective on a date mutually agreed upon by the Participant and the Distributor. If for some reason, the Participant’s PIN number is compromised, the Participant shall contact the Distributor immediately in order for a new one to be issued.

 

(c)

The Distributor shall assume that all instructions issued to it using the Participant’s PIN Number have been properly placed, unless the Distributor has actual knowledge to the contrary or the Participant has revoked its PIN Number. The Distributor shall not verify that an Order is being placed by or on behalf of the Participant. The Participant agrees that the Distributor, the Index Receipt Agent and the Trust shall not be liable, absent fraud or willful misconduct, for losses incurred by the Participant as a result of unauthorized use of the Participant’s PIN Number, unless the Participant previously submitted written notice to revoke its PIN Number.

 

11.

COMPLIANCE WITH INTERNAL REVENUE CODE SECTION 351

 

(a)

The Participant represents, covenants and warrants that, based upon the number of outstanding Fund Shares of any particular Fund, it does not, and will not in the future, hold for the account of any single Beneficial Owner, or group of related Beneficial Owners, 80 percent or more of the currently outstanding Fund Shares of such Fund, so as to cause the Fund to have a basis in the portfolio securities deposited with the Fund different from the market value of such portfolio securities on the date of such deposit, pursuant to section 351 of the Internal Revenue Code of 1986, as amended.

 

(b)

The Participant agrees that the confirmation relating to any order for one or more Creation Units shall state as follows: “Purchaser represents and warrants that, after giving effect to the purchase of Fund Shares to which this confirmation relates, it will not hold 80% or more of the outstanding Fund Shares of the issuing Fund and will not treat such purchase as eligible for tax-free treatment under Section 351 of the Internal Revenue Code of 1986, as amended. If purchaser is a dealer, it agrees to deliver similar written confirmations to any person purchasing from it any of the Fund Shares to which this confirmation relates.”

 

(c)

A Fund and its Index Receipt Agent and Distributor shall have the right to require, as a condition to the acceptance of a deposit of Deposit Securities, information from the Participant regarding ownership of the Fund Shares by such Participant and its customers, and to rely thereon to the extent necessary to make a determination regarding ownership of 80 percent or more of the Fund’s currently outstanding Fund Shares by a Beneficial Owner.

 

12.

OBLIGATIONS OF PARTICIPANT

 

(a)

The Participant agrees to maintain records of all sales of Fund Shares made by or through it and to furnish copies of such records to the Trust or the Distributor upon their reasonable request.

 

(b)

The Participant affirms that it has procedures in place reasonably designed to protect the privacy of non-public personal consumer/customer financial information to the extent required by applicable law, rule and regulation.

 

(c)

The Participant represents, covenants and warrants that, during the term of this Agreement, it will not be an affiliated person of a Fund, a promoter or a principal underwriter of a Fund or an affiliated person of such persons, except under 2(a)(3)(A) or 2(a)(3)(C) of the 1940 Act due to ownership of Fund Shares.

 

(d)

The Participant agrees that it will meet Distributor’s written creditworthiness standards at all times at which it performs activities pursuant to this Agreement and will inform the Distributor immediately should Participant not meet such standards. Participant agrees that it will be subject to various tests performed by Distributor to determine if the Participant is in compliance with the Distributor’s written creditworthiness standards and agrees to comply with all requests for information in order to permit the Distributor to perform such tests.

 

13.

INDEMNIFICATION


Section 12 shall survive the termination of this Agreement.

 

(a)

The Participant hereby agrees to indemnify and hold harmless the Distributor, the Funds, the Index Receipt Agent,   their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an “Indemnified Party”), from and against any loss, liability, cost, or expense (including attorneys’ fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this Agreement; (ii) any failure on the part of the Participant to perform any of its obligations set forth in this Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such Indemnified Party in reliance upon any instructions issued in accordance with the Fund Documents, AP H andbook or Annex II (as each may be amended from time to time) reasonably believed by the Distributor and/or the Index Receipt Agent to be genuine and to have been given by the Participant; or (v) the Participant’s failure to complete a Purchase Order or Redemption Order that has been accepted. The Participant understands and agrees that the Funds as third party beneficiaries to this Agreement are entitled to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations under this Agreement that benefit the Fund. The Distributor shall not be liable to the Participant for any damages arising out of mistakes or errors in data provided to the Distributor, or out of interruptions or delays of communications with the Indemnified Parties who are service providers to the Fund, nor is the Distributor liable for any action, representation, or solicitation made by the wholesalers of the Fund.

  

(b)

The Distributor hereby agrees to indemnify and hold harmless the Participant and the Index Receipt Agent, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an “Indemnified Party”), from and against any loss, liability, cost, or expense (including attorneys’ fees) incurred by such Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement; (ii) any failure on the part of the Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations; or (iv) actions of such Indemnified Party in reliance upon any representations made in accordance with the Fund Documents and AP Handbook (as e ach may be amended from time to time) reasonably believed by the Participant to be genuine and to have been given by the Distributor. The Participant shall not be liable to the Distributor for any damages arising out of mistakes or errors in data provided to the Participant, or out of interruptions or delays of communications with the Indemnified Parties who are service providers to the Fund, nor is the Participant liable for any action, representation, or solicitation made by the wholesalers of the Fund.

 

(c)

The Funds, the Distributor, the Index Receipt Agent, or any person who controls such persons within the meaning of Section 15 of the 1933 Act, shall not be liable to the Participant for any damages arising from any differences in performance between the Deposit Securities in a Fund Deposit and the Fund’s benchmark index.

 

14.

INFORMATION ABOUT DEPOSIT SECURITIES

 

The Trust’s investment adviser, [                       ] (the “Advisor”) will make available on each day that the Trust is open for business, through the facilities of the NSCC, the names and amounts of Deposit Securities to be included in the current Fund Deposit for each Fund.

 

15.

RECEIPT OF PROSPECTUS BY PARTICIPANT

 

The Participant acknowledges receipt of the Prospectus and represents that it has reviewed that document (including the Statement of Additional Information incorporated therein) and understands the terms thereof.

  

16.

CONSENT TO ELECTRONIC DELIVERY OF PROSPECTUS

 

The Distributor may deliver electronically a single prospectus, annual or semi-annual report or other shareholder information (each, a “Shareholder Document”) to persons who have effectively consented to such electronic delivery. The Distributor will deliver Shareholder Documents electronically by sending consenting persons an e-mail message informing them that the applicable Shareholder Document has been posted and is available on the Fund’s website, [_________], and providing a hypertext link to the document. The electronic versions of the Shareholder Documents will be in PDF format and can be downloaded and printed using Adobe Acrobat.

 

By signing this Agreement, the Participant hereby consents to the foregoing electronic delivery of all Shareholder Documents to the e-mail address set forth on the signature page attached to this Agreement. The Participant further understands and agrees that unless such consent is revoked, the Participant can obtain access to the Shareholder Documents from the Distributor only electronically. The Participant can revoke the consent to electronic delivery of Shareholder Documents at anytime by providing written notice to the Distributor. The Participant agrees to maintain the e-mail address set forth on the signature page to this Agreement and further agrees to promptly notify the Distributor if its e-mail address changes. The Participant understands that it must have continuous Internet access to access all Shareholder Documents.

 

17.

CONSENT TO RECORDING OF CONVERSATIONS

 

By signing this Agreement, the Participant acknowledges that certain telephone conversations between the Distributor, Index Receipt Agent, or the transfer agent and the Participant in connection with the placing of orders may be recorded, and the Participant hereby grants its consent to such recordings.

 

18.

NOTICES

 

Except as otherwise specifically provided in this Agreement, all notices required or permitted to be given pursuant to this Agreement shall be given in writing and delivered by personal delivery; by Federal Express or other similar delivery service; by registered or certified United States first class mail, return receipt requested; or by telex, telegram, facsimile, or similar means of same day delivery (with a confirming copy by mail). Unless otherwise notified in writing, all notices to the Fund shall be at the address or telephone, facsimile, or telex numbers indicated below the signature of the Distributor. All notices to the Participant, the Distributor, and the Index Receipt Agent shall be directed to the address or telephone, facsimile or telex numbers indicated below the signature line of such party.

 

19.

EFFECTIVENESS, TERMINATION, AND AMENDMENT OF AGREEMENT

 

(a)

This Agreement shall become effective five Business Days after execution and delivery to the Distributor upon notice by the Distributor to the Authorized Participant. A “Business Day” shall mean each day the Listing Exchange is open for business.

 

(b)

This Agreement may be terminated at any time by any party upon sixty days’ prior written notice to the other parties, and may be terminated earlier by the Fund or the Distributor at any time in the event of a breach by the Participant of any provision of this Agreement or the procedures described or incorporated herein. This Agreement will be binding on each party’s successors and assigns, but the parties agree that neither party can assign its rights and obligations under this Agreement without the prior written consent of the other party.

 

(c)

This Agreement may be amended by the Distributor from time to time without the consent of the Participant or Index Receipt Agent by the following procedure. The Distributor will deliver a copy of the amendment to the Participant and the Index Receipt Agent in accordance with paragraph 17 above. If neither the Participant nor the Index Receipt Agent objects in writing to the amendment within five days after its receipt, the amendment will become part of this Agreement in accordance with its terms.

 

20.

TRUST AS THIRD PARTY BENEFICIARY

 

The Participant and the Distributor understand and agree that the Trust as a third party beneficiary to this Agreement is entitled and intends to proceed directly against the Participant in the event that the Participant fails to honor any of its obligations pursuant to this Agreement that benefit the Trust.

 

21.

INCORPORATION BY REFERENCE

 

The Participant acknowledges receipt of the Prospectuses and AP Handbook, represents that it has reviewed such documents and understands the terms thereof, and further acknowledges that the procedures contained therein pertaining to the creation and redemption of Creation Units are incorporated herein by reference.

 

22.

GOVERNING LAW

 

This Agreement shall be governed by and interpreted in accordance with the laws of the State of Delaware.

 

23.

COUNTERPARTS

 

This Agreement may be executed in several counterparts, each of which shall be an original and all of which shall constitute but one and the same instrument.

 



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IN WITNESS WHEREOF, the parties have caused this Agreement to be executed and delivered as of the day and year written below.

 

 

DATED:__________________________________



Foreside Fund Services, LLC

 

 

 

By:  ________________________________

 

Name: ________________________________________

Title: _________________________________________

Address: Two Portland Square

Portland, Maine 04101

Telephone: ____________________________________

Facsimile: _____________________________________

Email: ________________________________________

 

[Name of Participant]

 

 

 

By: __________________________________ 

 

Name: ________________________________________

Title: _________________________________________

Address: ______________________________________

Telephone: ____________________________________

Facsimile: _____________________________________

Telex: ________________________________________

E-mail: ________________________________________

 

ACCEPTED BY:

 

 

The Bank of New York, as Index Receipt Agent

 

 

 

By:  ___________________________________


Name: ________________________________________

Title: _________________________________________

Address: ______________________________________

Telephone: ____________________________________

Facsimile: _____________________________________

Telex: ________________________________________

E-mail: ________________________________________






ANNEX I


CREATION UNIT SIZE FOR FUND SHARES


Shares per Creation Unit



[NAME OF TRUST]

Shares per Creation Unit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 







ANNEX II


FORM OF CERTIFIED AUTHORIZED PERSONS OF PARTICIPANT


The following are the names, titles and signatures of all persons (each an "Authorized Person") authorized to give instructions relating to any activity contemplated by this Authorized Participant Agreement, or any other notices, request or instruction on behalf of Participant pursuant to this Authorized Participant Agreement.


For each Authorized Person:

Name:  

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

Name:  

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

 

 

Name:

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

Name:  

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

 

 

Name:  

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

Name:

Title:

Signature:

E-Mail Address:

Telephone:

Facsimile:

 

 

The undersigned [name], [title], [company] does hereby certify that the persons listed above have been duly elected to the offices set forth beneath their names, that they presently hold such offices, that they have been duly authorized to act as Authorized Persons pursuant to the Authorized Participant Agreement by and among Foreside Fund Services, LLC and [Participant] dated [date] and that their signatures set forth above are their own true and genuine signatures.


By: ___________________________

Name:

Title: [Participant's] Secretary or Other Duly Authorized Officer 

Date: 


[CUSTODYAGREEMENT002.GIF]


CUSTODY AGREEMENT

AGREEMENT, dated as of ________________, 200__ between Direxion Shares ETF Trust (the "Trust"), a Delaware statutory trust organized and existing under the laws of the State of Delaware, having its principal office and place of business at 33 Whitehall Street, 10th Floor, New York, New York 10004, (the “Trust”) and The Bank of New York, a New York corporation authorized to do a banking business having its principal office and place of business at One Wall Street, New York, New York 10286 (“Custodian”).

W I T N E S S E T H:

that for and in consideration of the mutual promises hereinafter set forth the Trust and Custodian agree as follows:

ARTICLE I
DEFINITIONS

Whenever used in this Agreement, the following words shall have the meanings set forth below:

1.

“Authorized Person” shall be any person, whether or not an officer or employee of the Trust, duly authorized by the Trust’s board to execute any Certificate or to give any Oral Instruction with respect to one or more Accounts, such persons to be designated in a Certificate annexed hereto as Schedule I hereto or such other Certificate as may be received by Custodian from time to time.

2.

“Custodian Affiliate” shall mean any office, branch or subsidiary of The Bank of New York Mellon Corporation.

3.

“Book-Entry System” shall mean the Federal Reserve/Treasury book-entry system for receiving and delivering securities, its successors and nominees.

4.

“Business Day” shall mean any day on which Custodian and relevant Depositories are open for business.

5.

“Certificate” shall mean any notice, instruction, or other instrument in writing, authorized or required by this Agreement to be given to Custodian, which is actually received by Custodian by letter, facsimile or electronic transmission and signed on behalf of the Trust by an Authorized Person or a person reasonably believed by Custodian to be an Authorized Person.

6.

“Composite Currency Unit” shall mean the Euro or any other composite currency unit consisting of the aggregate of specified amounts of specified currencies, as such unit may be constituted from time to time.

7.

“Depository” shall include (a) the Book-Entry System, (b) the Depository Trust Company, (c) any other clearing agency or securities depository registered with the Securities and Exchange Commission identified to the Trust from time to time, and (d) the respective successors and nominees of the foregoing.

8.

“Foreign Depository” shall mean (a) Euroclear, (b) Clearstream Banking, societe anonyme, (c) each Eligible Securities Depository as defined in Rule 17f-7 under the Investment Company Act of 1940, as amended, identified to the Trust from time to time, and (d) the respective successors and nominees of the foregoing.

9.

“Instructions” shall mean communications actually received by Custodian by S.W.I.F.T., tested telex, letter, facsimile transmission, or other method or system specified by Custodian as available for use in connection with the services hereunder.

10.

“Oral Instructions” shall mean verbal instructions received by Custodian from an Authorized Person or from a person reasonably believed by Custodian to be an Authorized Person.

11.

“Series” shall mean the various portfolios, if any, of the Trust listed on Schedule II hereto, as amended from time to time, and if none are listed references to Series shall be references to the Trust.

12.

“Securities” shall include, without limitation, any common stock and other equity securities, bonds, debentures and other debt securities, notes, mortgages or other obligations, and any instruments representing rights to receive, purchase, or subscribe for the same, or representing any other rights or interests therein (whether represented by a certificate or held in a Depository or by a Subcustodian).

13.

“Subcustodian” shall mean a bank (including any branch thereof) or other financial institution (other than a Foreign Depository) located outside the U.S. which is utilized by Custodian in connection with the purchase, sale or custody of Securities hereunder and identified to the Trust from time to time, and their respective successors and nominees.

14.

“Transfer Agent” shall mean The Bank of New York, subject to a separate Transfer Agency and Service Agreement entered into between the parties, or any successor transfer agent identified to Custodian in a Certificate.

ARTICLE II
APPOINTMENT OF CUSTODIAN; ACCOUNTS;
REPRESENTATIONS, WARRANTIES, AND COVENANTS

1.

(a) The Trust hereby appoints Custodian as custodian of all Securities and cash at any time delivered to Custodian during the term of this Agreement, and authorizes Custodian to hold Securities in registered form in its name or the name of its nominees.  Custodian hereby accepts such appointment and agrees to establish and maintain one or more securities accounts and cash accounts for each Series in which Custodian will hold Securities and cash as provided herein.  Custodian shall maintain books and records segregating the assets of each Series from the assets of any other Series.  Such accounts (each, an “Account”; collectively, the “Accounts”) shall be in the name of the Trust.

(b) Custodian may from time to time establish on its books and records such sub-accounts within each Account as the Trust and Custodian may agree upon (each a “Special Account”), and Custodian shall reflect therein such assets as the Trust may specify in a Certificate or Instructions.

(c) Custodian may from time to time establish pursuant to a written agreement with and for the benefit of a broker, dealer, futures commission merchant or other third party identified in a Certificate or Instructions such accounts on such terms and conditions as the Trust and Custodian shall agree, and Custodian shall transfer to such account such Securities and money as the Trust may specify in a Certificate or Instructions.

2.

The Trust hereby represents and warrants, which representations and warranties shall be continuing and shall be deemed to be reaffirmed upon each delivery of a Certificate or each giving of Oral Instructions or Instructions by the Trust, that:

(a)

It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement, and to perform its obligations hereunder;

(b)

This Agreement has been duly authorized, executed and delivered by the Trust, approved by a resolution of its board, constitutes a valid and legally binding obligation of the Trust, enforceable in accordance with its terms, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement;

(c)

It is conducting its business in substantial compliance with all applicable laws and requirements, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted;

(d)

It will not use the services provided by Custodian hereunder in any manner that is, or will result in, a violation of any law, rule or regulation applicable to the Trust;

(e)

Its board or its foreign custody manager, as defined in Rule 17f-5 under the Investment Company Act of 1940, as amended (the “1940 Act”), has determined that use of each Subcustodian (including any Replacement Custodian) which Custodian is authorized to utilize in accordance with Section 1(a) of Article III hereof satisfies the applicable requirements of the ‘40 Act and Rule 17f-5 thereunder;

(f)

The Trust or its investment adviser has determined that the custody arrangements of each Foreign Depository provide reasonable safeguards against the custody risks associated with maintaining assets with such Foreign Depository within the meaning of Rule 17f-7 under the 1940 Act;

(g)

It is fully informed of the protections and risks associated with various methods of transmitting Instructions and Oral Instructions and delivering Certificates to Custodian, shall, and shall cause each Authorized Person, to safeguard and treat with extreme care any user and authorization codes, passwords and/or authentication keys, understands that there may be more secure methods of transmitting or delivering the same than the methods selected by it, agrees that the security procedures (if any) to be followed in connection therewith provide a commercially reasonable degree of protection in light of its particular needs and circumstances, and acknowledges and agrees that Instructions need not be reviewed by Custodian, may conclusively be presumed by Custodian to have been given by person(s) duly authorized,  and may be acted upon as given;

(h)

It shall manage its borrowings, including, without limitation, any advance or overdraft (including any day-light overdraft) in the Accounts, so that the aggregate of its total borrowings for each Series does not exceed the amount such Series is permitted to borrow under the 1940 Act;

(i)

Its transmission or giving of, and Custodian acting upon and in reliance on, Certificates, Instructions, or Oral Instructions pursuant to this Agreement shall at all times comply with the ‘40 Act;

(j)

It shall impose and maintain restrictions on the destinations to which cash may be disbursed by Instructions to ensure that each disbursement is for a proper purpose; and

(k)

It has the right to make the pledge and grant the security interest and security entitlement to Custodian contained in Section 1 of Article V hereof, free of any right of redemption or prior claim of any other person or entity, such pledge and such grants shall have a first priority subject to no setoffs, counterclaims, or other liens or grants prior to or on a parity therewith, and it shall take such additional steps as Custodian may require to assure such priority.

3.

The Trust hereby covenants that it shall from time to time complete and execute and deliver to Custodian upon Custodian’s request a Form FR U-1 (or successor form) whenever the Trust borrows from Custodian any money to be used for the purchase or carrying of margin stock as defined in Federal Reserve Regulation U.

4.

Custodian hereby represents and warrants, which representations and warranties shall be continuing that:

(a)

It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted to enter into this Agreement, and to perform its obligations hereunder; and

(b)

This Agreement has been duly authorized, executed and delivered by Custodian, constitutes a valid and legally binding obligation of Custodian, enforceable in accordance with its terms, and there is no statute, regulation, rule, order or judgment binding on it, and no provision of its charter or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property, which would prohibit its execution or performance of this Agreement.

ARTICLE III
CUSTODY AND RELATED SERVICES

1.

 (a) Subject to the terms hereof, the Trust hereby authorizes Custodian to hold any Securities received by it from time to time for the Trust’s account.  Custodian shall be entitled to utilize, subject to subsection (c) of this Section 1, Depositories, Subcustodians, and, subject to subsection (d) of this Section 1, Foreign Depositories, to the extent possible in connection with its performance hereunder.  Securities and cash held in a Depository or Foreign Depository will be held subject to the rules, terms and conditions of such entity.  Securities and cash held through Subcustodians shall be held subject to the terms and conditions of Custodian’s agreements with such Subcustodians.  Subcustodians may be authorized to hold Securities in Foreign Depositories in which such Subcustodians participate.  Unless otherwise required by local law or practice or a particular subcustodian agreement, Securities deposited with a Subcustodian, a Depositary or a Foreign Depository will be held in a commingled account, in the name of Custodian, holding only  Securities held by Custodian as custodian for its customers.  Custodian shall identify on its books and records the Securities and cash belonging to the Trust, whether held directly or indirectly through Depositories, Foreign Depositories, or Subcustodians.  Custodian shall, directly or indirectly through Subcustodians, Depositories, or Foreign Depositories, endeavor, to the extent feasible, to hold Securities in the country or other jurisdiction in which the principal trading market for such Securities is located, where such Securities are to be presented for cancellation and/or payment and/or registration, or where such Securities are acquired.  Custodian at any time may cease utilizing any Subcustodian and/or may replace a Subcustodian with a different Subcustodian (the “Replacement Subcustodian”).  In the event Custodian selects a Replacement Subcustodian, Custodian shall not utilize such Replacement Subcustodian until after the Trust’s board or foreign custody manager has determined that utilization of such Replacement Subcustodian satisfies the requirements of the ‘40 Act and Rule 17f-5 thereunder.  

(b) Unless Custodian has received a Certificate or Instructions to the contrary, Custodian shall hold Securities indirectly through a Subcustodian only if (i) the Securities are not subject to any right, charge, security interest, lien or claim of any kind in favor of such Subcustodian or its creditors or operators, including a receiver or trustee in bankruptcy or similar authority, except for a claim of payment for the safe custody or administration of Securities on behalf of the Trust by such Subcustodian, and (ii) beneficial ownership of the Securities is freely transferable without the payment of money or value other than for safe custody or administration.

(c) With respect to each Depository, Custodian (i) shall exercise due care in accordance with reasonable commercial standards in discharging its duties as a securities intermediary to obtain and thereafter maintain Securities or financial assets deposited or held in such Depository, and (ii) will provide, promptly upon request by the Trust, such reports as are available concerning the internal accounting controls and financial strength of Custodian.

(d) With respect to each Foreign Depository, Custodian shall exercise reasonable care, prudence, and diligence (i) to provide the Trust with an analysis of the custody risks associated with maintaining assets with the Foreign Depository, and (ii) to monitor such custody risks on a continuing basis and promptly notify the Trust of any material change in such risks.  The Trust acknowledges and agrees that such analysis and monitoring shall be made on the basis of, and limited by, information gathered from Subcustodians or through publicly available information otherwise obtained by Custodian, and shall not include any evaluation of Country Risks.  As used herein the term “Country Risks” shall mean with respect to any Foreign Depository:  (a) the financial infrastructure of the country in which it is organized, (b) such country’s prevailing custody and settlement practices, (c) nationalization, expropriation or other governmental actions, (d) such country’s regulation of the banking or securities industry, (e) currency controls, restrictions, devaluations or fluctuations, and (f) market conditions which affect the order execution of securities transactions or affect the value of securities.

2.

Custodian shall furnish the Trust with an advice of daily transactions (including a confirmation of each transfer of Securities) and a monthly summary of all transfers to or from the Accounts.

3.

With respect to all Securities held hereunder, Custodian shall, unless otherwise instructed to the contrary:

(a)

Receive all income and other payments and advise the Trust as promptly as practicable of any such amounts due but not paid;

(b)

Present for payment and receive the amount paid upon all Securities which may mature and advise the Trust as promptly as practicable of any such amounts due but not paid;

(c)

As promptly as practical under the circumstances forward to the Trust copies of all information or documents that it may actually receive from an issuer of Securities which, in the opinion of Custodian, are intended for the beneficial owner of Securities;

(d)

Execute, as custodian, any certificates of ownership, affidavits, declarations or other certificates under any tax laws now or hereafter in effect in connection with the collection of bond and note coupons;

(e)

Hold directly or through a Depository, a Foreign Depository, or a Subcustodian all rights and similar Securities issued with respect to any Securities credited to an Account hereunder; and

(f)

Endorse for collection checks, drafts or other negotiable instruments.

4.

(a) Custodian shall as promptly as practical under the circumstances notify the Trust of rights or discretionary actions with respect to Securities held hereunder, and of the date or dates by when such rights must be exercised or such action must be taken, and shall as promptly as promptly as practical under the circumstances thereafter, forward to the Fund any notices, information statements or other materials received in connection with such rights or discretionary actions provided that Custodian has actually received, from the issuer or the relevant Depository (with respect to Securities issued in the United States) or from the relevant Subcustodian, Foreign Depository, or a nationally or internationally recognized bond or corporate action service to which Custodian subscribes, timely notice of such rights or discretionary corporate action or of the date or dates such rights must be exercised or such action must be taken.  Absent actual receipt of such notice, Custodian shall have no liability for failing to so notify the Trust.

(b) Whenever Securities (including, but not limited to, warrants, options, tenders, options to tender or non-mandatory puts or calls) confer discretionary rights on the Trust or provide for discretionary action or alternative courses of action by the Trust, the Trust shall be responsible for making any decisions relating thereto and for directing Custodian to act.  In order for Custodian to act, it must receive the Trust’s Certificate or Instructions at Custodian’s offices, addressed as Custodian may from time to time request, not later than noon (New York time) at least two (2) Business Days prior to the last scheduled date to act with respect to such Securities (or such earlier date or time as Custodian may specify to the Trust).  Absent Custodian’s timely receipt of such Certificate or Instructions, Custodian shall not be liable for failure to take any action relating to or to exercise any rights conferred by such Securities.

5.

All voting rights with respect to Securities, however registered, shall be exercised by the Trust or its designee.  Custodian will make available to the Trust proxy voting services upon the request of, and for the jurisdictions selected by, the Trust in accordance with terms and conditions to be mutually agreed upon by Custodian and the Trust.

6.

Custodian shall promptly advise the Trust upon Custodian’s actual receipt of notification of the partial redemption, partial payment or other action affecting less than all Securities of the relevant class.  If Custodian, any Subcustodian, any Depository, or any Foreign Depository holds any Securities in which the Trust has an interest as part of a fungible mass, Custodian, such Subcustodian, Depository, or Foreign Depository may select the Securities to participate in such partial redemption, partial payment or other action in any non-discriminatory manner that it customarily uses to make such selection.

7.

Custodian shall not under any circumstances accept bearer interest coupons which have been stripped from United States federal, state or local government or agency securities unless explicitly agreed to by Custodian in writing.

8.

The Trust shall be liable for all taxes, assessments, duties and other governmental charges, including any interest or penalty with respect thereto (“Taxes”), with respect to any cash or Securities held on behalf of the Trust or any transaction related thereto.  The Trust shall indemnify Custodian and each Subcustodian for the amount of any Tax that Custodian, any such Subcustodian or any other withholding agent is required under applicable laws (whether by assessment or otherwise) to pay on behalf of, or in respect of income earned by or payments or distributions made to or for the account of the Trust (including any payment of Tax required by reason of an earlier failure to withhold).  Custodian shall, or shall instruct the applicable Subcustodian or other withholding agent to, withhold the amount of any Tax which is required to be withheld under applicable law upon collection of any dividend, interest or other distribution made with respect to any Security and any proceeds or income from the sale, loan or other transfer of any Security.  In the event that Custodian or any Subcustodian is required under applicable law to pay any Tax on behalf of the Trust, Custodian is hereby authorized to withdraw cash from any cash account in the amount required to pay such Tax and to use such cash, or to remit such cash to the appropriate Subcustodian or other withholding agent, for the timely payment of such Tax in the manner required by applicable law.  If the aggregate amount of cash in all cash accounts is not sufficient to pay such Tax, Custodian shall promptly notify the Trust in writing of the additional amount of cash (in the appropriate currency) required, and the Trust shall directly deposit such additional amount in the appropriate cash account promptly after receipt of such notice, for use by Custodian as specified herein.  In the event that Custodian reasonably believes that Trust is eligible, pursuant to applicable law or to the provisions of any tax treaty, for a reduced rate of, or exemption from, any Tax which is otherwise required to be withheld or paid on behalf of the Trust under any applicable law, Custodian shall, or shall instruct the applicable Subcustodian or withholding agent to, either withhold or pay such Tax at such reduced rate or refrain from withholding or paying such Tax, as appropriate; provided that Custodian shall have received from the Trust all documentary evidence of residence or other qualification for such reduced rate or exemption required to be received under such applicable law or treaty.  In the event that Custodian reasonably believes that a reduced rate of, or exemption from, any Tax is obtainable only by means of an application for refund, Custodian and the applicable Subcustodian shall have no responsibility for the accuracy or validity of any forms or documentation provided by the Trust to Custodian hereunder.   The Trust hereby agrees to indemnify and hold harmless Custodian and each Subcustodian in respect of any liability arising from any underwithholding or underpayment of any Tax which results from the inaccuracy or invalidity of any such forms or other documentation, and such obligation to indemnify shall be a continuing obligation of the Trust, its successors and assigns notwithstanding the termination of this Agreement.

9.

(a) For the purpose of settling Securities and foreign exchange transactions, the Trust shall provide Custodian with sufficient immediately available funds for all transactions by such time and date as conditions in the relevant market dictate. As used herein, “sufficient immediately available funds” shall mean either (i) sufficient cash denominated in U.S. dollars to purchase the necessary foreign currency, or (ii) sufficient applicable foreign currency, to settle the transaction.  Custodian shall provide the Trust with immediately available funds each day which result from the actual settlement of all sale transactions, based upon advices received by Custodian from Subcustodians, Depositories, and Foreign Depositories.  Such funds shall be in U.S. dollars or such other currency as the Trust may specify to Custodian.

(b) Any foreign exchange transaction effected by Custodian in connection with this Agreement may be entered with Custodian or a Custodian Affiliate acting as principal or otherwise through customary banking channels.  The Trust may issue a standing Certificate or Instructions with respect to foreign exchange transactions, but Custodian may establish rules or limitations concerning any foreign exchange facility made available to the Trust.  The Trust shall bear all risks of investing in Securities or holding cash denominated in a foreign currency.

(c) To the extent that Custodian has agreed to provide pricing or other information services in connection with this Agreement, Custodian is authorized to utilize any vendor (including brokers and dealers of Securities) reasonably believed by Custodian to be reliable to provide such information.  The Trust understands that certain pricing information with respect to complex financial instruments ( e.g. , derivatives) may be based on calculated amounts rather than actual market transactions and may not reflect actual market values, and that the variance between such calculated amounts and actual market values may or may not be material. Where vendors do not provide information for particular Securities or other property, an Authorized Person may advise Custodian in a Certificate regarding the fair market value of, or provide other information with respect to, such Securities or property as determined by it in good faith.  Custodian shall not be liable for any loss, damage or expense incurred as a result of errors or omissions with respect to any pricing or other information utilized by Custodian hereunder.

10.

Until such time as Custodian receives a certificate to the contrary with respect to a particular Security, Custodian may release the identity of the Trust to an issuer which requests such information pursuant to the Shareholder Communications Act of 1985 for the specific purpose of direct communications between such issuer and shareholder.

11.

Custodian shall have, and will maintain, such backup, contingency and disaster recovery procedures as are required by its regulators.

ARTICLE IV
PURCHASE AND SALE OF SECURITIES;
CREDITS TO ACCOUNT

1.

Promptly after each purchase or sale of Securities by the Trust, the Trust shall deliver to Custodian a Certificate or Instructions, or with respect to a purchase or sale of a Security generally required to be settled on the same day the purchase or sale is made, Oral Instructions specifying all information Custodian may reasonably request to settle such purchase or sale.  Custodian shall account for all purchases and sales of Securities on the actual settlement date unless otherwise agreed by Custodian.

2.

The Trust understands that when Custodian is instructed to deliver Securities against payment, delivery of such Securities and receipt of payment therefor may not be completed simultaneously.  Notwithstanding any provision in this Agreement to the contrary, settlements, payments and deliveries of Securities may be effected by Custodian or any Subcustodian in accordance with the customary or established securities trading or securities processing practices and procedures in the jurisdiction in which the transaction occurs, including, without limitation, delivery to a purchaser or dealer therefor (or agent) against receipt with the expectation of receiving later payment for such Securities.  The Trust assumes full responsibility for all risks, including, without limitation, credit risks, involved in connection with such deliveries of Securities.

3.

Custodian may, as a matter of bookkeeping convenience or by separate agreement with the Trust, credit the Account with the proceeds from the sale, redemption or other disposition of Securities or interest, dividends or other distributions payable on Securities prior to its actual receipt of final payment therefor.  All such credits shall be conditional until Custodian’s actual receipt of final payment and may be reversed by Custodian to the extent that final payment is not received.  Payment with respect to a transaction will not be “final” until Custodian shall have received immediately available funds which under applicable local law, rule and/or practice are irreversible and not subject to any security interest, levy or other encumbrance, and which are specifically applicable to such transaction.

ARTICLE V
OVERDRAFTS OR INDEBTEDNESS

1.

If Custodian should in its sole discretion advance funds on behalf of any Series which results in an overdraft (including, without limitation, any day-light overdraft) because the money held by Custodian in an Account for such Series shall be insufficient to pay the total amount payable upon a purchase of Securities specifically allocated to such Series, as set forth in a Certificate, Instructions or Oral Instructions, or if an overdraft arises in the separate account of a Series for some other reason, including, without limitation, because of a reversal of a conditional credit or the purchase of any currency, or if the Trust is for any other reason indebted to Custodian with respect to a Series, including any indebtedness to The Bank of New York under the Trust’s Cash Management and Related Services Agreement (except a borrowing for investment or for temporary or emergency purposes using Securities as collateral pursuant to a separate agreement and subject to the provisions of Section 2 of this Article), such overdraft or indebtedness shall be deemed to be a loan made by Custodian to the Trust for such Series payable on demand and shall bear interest from the date incurred at a rate per annum ordinarily charged by Custodian to its institutional customers, as such rate may be adjusted from time to time.  In addition, the Trust hereby agrees that Custodian shall to the maximum extent permitted by law have a continuing lien, security interest, and security entitlement in and to any property, including, without limitation, any investment property or any financial asset, of such Series at any time held by Custodian for the benefit of such Series or in which such Series may have an interest which is then in Custodian’s possession or control or in possession or control of any third party acting in Custodian’s behalf.  The Trust authorizes Custodian, in its sole discretion, at any time to charge any such overdraft or indebtedness together with interest due thereon against any balance of account standing to such Series’ credit on Custodian’s books.

2.

If the Trust borrows money from any bank (including Custodian if the borrowing is pursuant to a separate agreement) for investment or for temporary or emergency purposes using Securities held by Custodian hereunder as collateral for such borrowings, the Trust shall deliver to Custodian a Certificate specifying with respect to each such borrowing:  (a) the Series to which such borrowing relates; (b) the name of the bank, (c) the amount of the borrowing, (d) the time and date, if known, on which the loan is to be entered into, (e) the total amount payable to the Trust on the borrowing date, (f) the Securities to be delivered or segregated as collateral for such loan, including the name of the issuer, the title and the number of shares or the principal amount of any particular Securities, and (g) a statement specifying whether such loan is for investment purposes or for temporary or emergency purposes and that such loan is in conformance with the 1940 Act and the Trust’s prospectus.  Custodian shall deliver on the borrowing date specified in a Certificate the specified collateral against payment by the lending bank of the total amount of the loan payable, provided that the same conforms to the total amount payable as set forth in the Certificate.  Custodian may, at the option of the lending bank, keep such collateral in its possession, but such collateral shall be subject to all rights therein given the lending bank by virtue of any promissory note or loan agreement.  Custodian shall deliver such Securities as additional collateral as may be specified in a Certificate to collateralize further any transaction described in this Section.  The Trust shall cause all Securities released from collateral status to be returned directly to Custodian, and Custodian shall receive from time to time such return of collateral as may be tendered to it.   In the event that the Trust fails to specify in a Certificate the Series, the name of the issuer, the title and number of shares or the principal amount of any particular Securities to be delivered as collateral by Custodian, Custodian shall not be under any obligation to deliver any Securities.

ARTICLE VI
SALE AND REDEMPTION OF SHARES

1.

Whenever the Trust shall sell any shares issued by the Trust (“Shares”) it shall deliver to Custodian a Certificate or Instructions, or cause the Trust’s Transfer Agent to provide instructions, specifying the amount of money, if any, and the particular Securities and the amount of each Security to be received by Custodian for the sale of such Shares and specifically allocated to an Account for such Series. Upon receipt of such money, if any, and such Securities, Custodian shall credit the same to an Account in the name of the Series for which such money, if any, and such Securities are received.

2.

Whenever the Trust desires Custodian to make a payment, if any, and a delivery of Securities out of the money and Securities held by Custodian hereunder in connection with a redemption of any Shares, it shall furnish to Custodian a Certificate or Instructions, or cause the Trust’s Transfer Agent to provide instructions specifying the total amount of money, if any, to be paid, and the particular Securities and amount of each Security to be delivered, for the redemption of such Shares. Custodian shall make any such payment and such delivery of Shares, as directed by a  Certificate or Instructions or instructions of the Trust’s transfer agent, out of the money and Securities held in an Account of the appropriate Series.

ARTICLE VII
PAYMENT OF DIVIDENDS OR DISTRIBUTIONS

1.

Whenever the Trust shall determine to pay a dividend or distribution on Shares it shall furnish to Custodian Instructions or a Certificate setting forth with respect to the Series specified therein the date of the declaration of such dividend or distribution, the total amount payable, and the payment date.

2.

Upon the payment date specified in such Instructions or Certificate, Custodian shall pay out of the money held for the account of such Series the total amount payable to the dividend agent of the Trust specified therein.

ARTICLE VIII
CONCERNING CUSTODIAN

1.

 (a)

Except as otherwise expressly provided herein, Custodian shall not be liable for any costs, expenses, damages, liabilities or claims, including attorneys’ and accountants’ fees (collectively, “Losses”), incurred by or asserted against the Trust, except those Losses arising out of Custodian’s own negligence or willful misconduct or breach of any representation or warranty contained in this Agreement.  Custodian shall have no liability whatsoever for the action or inaction of any Depositories or of any Foreign Depositories, except in each case to the extent such action or inaction is a direct result of the Custodian’s failure to fulfill its duties hereunder.  With respect to any Losses incurred by the Trust as a result of the acts or any failures to act by any Subcustodian (other than a Custodian Affiliate), Custodian shall take appropriate action to recover such Losses from such Subcustodian; and Custodian’s sole responsibility and liability to the Trust shall be limited to amounts so received from such Subcustodian (exclusive of costs and expenses incurred by Custodian).  In no event shall Custodian be liable to the Trust or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising in connection with this Agreement, nor shall Custodian or any Subcustodian be liable:  ( i ) for acting in accordance with any Certificate or Oral Instructions  actually received by Custodian and reasonably believed by Custodian to be given by an Authorized Person; ( ii ) for acting in accordance with Instructions without reviewing the same; ( iii ) for conclusively presuming that all Instructions are given only by person(s) duly authorized; ( iv ) for conclusively presuming that all disbursements of cash directed by the Trust, whether by a Certificate, an Oral Instruction, or an Instruction, are in accordance with Section 2(i) of Article II hereof; ( v ) for holding property in any particular country, including, but not limited to, Losses resulting from nationalization, expropriation or other governmental actions; regulation of the banking or securities industry; exchange or currency controls or restrictions, devaluations or fluctuations; availability of cash or Securities or market conditions which prevent the transfer of property or execution of Securities transactions or affect the value of property; ( vi ) for any Losses due to forces beyond the control of Custodian, including without limitation strikes, work stoppages, acts of war or terrorism, insurrection, revolution, nuclear or natural catastrophes or acts of God, or interruptions, loss or malfunctions of utilities, communications or computer (software and hardware) services; (vii) for the insolvency of any Subcustodian (other than a Custodian Affiliate), any Depository, or, except to the extent such action or inaction is a direct result of the Custodian’s failure to fulfill its duties hereunder, any Foreign Depository; or ( viii ) for any Losses arising from the applicability of any law or regulation now or hereafter in effect, or from the occurrence of any event, including, without limitation, implementation or adoption of any rules or procedures of a Foreign Depository, which may affect, limit, prevent or impose costs or burdens on, the transferability, convertibility, or availability of any currency or Composite Currency Unit in any country or on the transfer of any Securities, and in no event shall Custodian be obligated to substitute another currency for a currency (including a currency that is a component of a Composite Currency Unit) whose transferability, convertibility or availability has been affected, limited, or prevented by such law, regulation or event, and to the extent that any such law, regulation or event imposes a cost or charge upon Custodian in relation to the transferability, convertibility, or availability of any cash currency or Composite Currency Unit, such cost or charge shall be for the account of the Trust, and Custodian may treat any account denominated in an affected currency as a group of separate accounts denominated in the relevant component currencies.

(b) Custodian may enter into subcontracts, agreements and understandings with any Custodian Affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder.  No such subcontract, agreement or understanding shall discharge Custodian from its obligations hereunder.

(c) The Trust agrees to indemnify Custodian and hold Custodian harmless from and against any and all Losses sustained or incurred by or asserted against Custodian by reason of or as a result of any action or inaction, or arising out of Custodian’s performance hereunder, including reasonable fees and expenses of counsel incurred by Custodian in a successful defense of claims by the Trust; provided however, that the Trust shall not indemnify Custodian for those Losses arising out of Custodian’s own negligence or willful misconduct or breach of any representation or warranty of Custodian contained in this Agreement.  This indemnity shall be a continuing obligation of the Trust, its successors and assigns, notwithstanding the termination of this Agreement.

2.

Without limiting the generality of the foregoing, Custodian shall be under no obligation to inquire into, and shall not be liable for:

(a)

Any Losses incurred by the Trust or any other person as a result of the receipt or acceptance of fraudulent, forged or invalid Securities, or Securities which are otherwise not freely transferable or deliverable without encumbrance in any relevant market;

(b)

The validity of the issue of any Securities purchased, sold, or written by or for the Trust, the legality of the purchase, sale or writing thereof, or the propriety of the amount paid or received therefor;

(c)

The legality of the sale or redemption of any Shares, or the propriety of the amount to be received or paid therefor;

(d)

The legality of the declaration or payment of any dividend or distribution by the Trust;

(e)

The legality of any borrowing by the Trust;

(f)

The legality of any loan of portfolio Securities, nor shall Custodian be under any duty or obligation to see to it that any cash or collateral delivered to it by a broker, dealer or financial institution or held by it at any time as a result of such loan of portfolio Securities is adequate security for the Trust against any loss it might sustain as a result of such loan, which duty or obligation shall be the sole responsibility of the Trust.  In addition, Custodian shall be under no duty or obligation to see that any broker, dealer or financial institution to which portfolio Securities of the Trust are lent makes payment to it of any dividends or interest which are payable to or for the account of the Trust during the period of such loan or at the termination of such loan, provided, however that Custodian shall promptly notify the Trust in the event that such dividends or interest are not paid and received when due;

(g)

The sufficiency or value of any amounts of money and/or Securities held in any Special Account in connection with transactions by the Trust; whether any broker, dealer, futures commission merchant or clearing member makes payment to the Trust of any variation margin payment or similar payment which the Trust may be entitled to receive from such broker, dealer, futures commission merchant or clearing member, or whether any payment received by Custodian from any broker, dealer, futures commission merchant or clearing member is the amount the Trust is entitled to receive, or to notify the Trust of Custodian’s receipt or non-receipt of any such payment; or

(h)

Whether any Securities at any time delivered to, or held by it or by any Subcustodian, for the account of the Trust and specifically allocated to a Series are such as properly may be held by the Trust or such Series under the provisions of its then current prospectus and statement of additional information, or to ascertain whether any transactions by the Trust, whether or not involving Custodian, are such transactions as may properly be engaged in by the Trust.

3.

Custodian may, with respect to questions of law specifically regarding an Account, obtain the advice of counsel and shall be fully protected with respect to anything done or omitted by it in good faith in conformity with such advice, provided such advice or opinion is not inconsistent with generally accepted industry legal standards.  Custodian shall promptly advise the Fund of the advice or opinion of such counsel.

4.

Custodian shall be under no obligation to take action to collect any amount payable on Securities in default, or if payment is refused after due demand and presentment.

5.

Custodian shall have no duty or responsibility to inquire into, make recommendations, supervise, or determine the suitability of any transactions affecting any Account.

6.

The Trust shall pay to Custodian the fees and charges as may be specifically agreed upon from time to time and such other fees and charges at Custodian’s standard rates for such services as may be applicable.  The Trust shall reimburse Custodian for all costs associated with the conversion of the Trust’s Securities hereunder and the transfer of Securities and records kept in connection with this Agreement.  The Trust shall also reimburse and the Custodian’s actual out-of-pocket expenses which are a normal incident of the services provided hereunder.

7.

Custodian has the right to debit any cash account for any amount payable by a Series of the Trust in connection with any and all obligations of the Trust to Custodian.  In addition to the rights of Custodian under applicable law and other agreements, at any time when a Series shall not have honored any of its obligations to Custodian, Custodian shall have the right without notice to the Series to retain or set-off, against such obligations of such Series, any Securities or cash Custodian or a Custodian Affiliate may directly or indirectly hold for the account of such Series, and any obligations (whether matured or unmatured) that Custodian or a Custodian Affiliate may have to such Series in any currency or Composite Currency Unit.  Any such asset of, or obligation to, a Series may be transferred to Custodian and any Custodian Affiliate in order to effect the above rights.

8.

The Trust agrees to forward to Custodian a Certificate or Instructions confirming Oral Instructions by the close of business of the same day that such Oral Instructions are given to Custodian.  The Trust agrees that the fact that such confirming Certificate or Instructions are not received or that a contrary Certificate or contrary Instructions are received by Custodian shall in no way affect the validity or enforceability of transactions authorized by such Oral Instructions and effected by Custodian.  If the Trust elects to transmit Instructions through an on-line communications system offered by Custodian, the Trust’s use thereof shall be subject to the Terms and Conditions attached as Appendix I hereto, and Custodian shall provide user and authorization codes, passwords and authentication keys only to an Authorized Person.  If Custodian receives Instructions which appear on their face to have been transmitted by an Authorized Person via (i) computer facsimile, email, the Internet or other insecure electronic method, or (ii) secure electronic transmission containing applicable authorization codes, passwords and/or authentication keys, the Trust understands and agrees that Custodian cannot determine the identity of the actual sender of such Instructions and that Custodian shall conclusively presume that such Written Instructions have been sent by an Authorized Person, and the Trust shall be responsible for ensuring that only Authorized Persons transmit such Instructions to Custodian.  If the Trust elects (with Custodian’s prior consent) to transmit Instructions through an on-line communications service owned or operated by a third party, the Trust agrees that Custodian shall not be responsible or liable for the reliability or availability of any such service.

9.

The books and records pertaining to the Trust which are in possession of Custodian shall be the property of the Trust.  Such books and records shall be prepared and maintained as required by the 1940 Act and the rules thereunder. The Trust, or its authorized representatives, shall have access to such books and records during Custodian’s normal business hours.  Upon the reasonable request of the Trust, copies of any such books and records shall be provided by Custodian to the Trust or its authorized representative.  Upon the reasonable request of the Trust, Custodian shall provide in hard copy or on computer disc any records included in any such delivery which are maintained by Custodian on a computer disc, or are similarly maintained.

10.

It is understood that Custodian is authorized to supply any information regarding the Accounts which is required by any law, regulation or rule now or hereafter in effect.  The Custodian shall provide the Trust with any report obtained by the Custodian on the system of internal accounting control of a Depository, and with such reports on its own system of internal accounting control and SAS 70 Reports as the Trust may reasonably request from time to time.

11.

Custodian shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement, and no covenant or obligation, except those specifically set forth herein, shall be implied against Custodian in connection with this Agreement.

ARTICLE IX
TERMINATION

1.

Either of the parties hereto may terminate this Agreement by giving to the other party a notice in writing specifying the date of such termination, which shall be not less than ninety (90) days after the date of giving of such notice.  In the event such notice is given by the Trust, it shall be accompanied by a copy of a resolution of the board of the Trust, certified by the Secretary or any Assistant Secretary, electing to terminate this Agreement and designating a successor custodian or custodians, each of which shall be a bank or trust company meeting the requirements of the 1940 Act.  In the event such notice is given by Custodian, the Trust shall, on or before the termination date, deliver to Custodian a copy of a resolution of the board of the Trust, certified by the Secretary or any Assistant Secretary, designating a successor custodian or custodians.  In the absence of such designation by the Trust, Custodian may designate a successor custodian which shall be a bank or trust company having not less than $2,000,000 aggregate capital, surplus and undivided profits.  Upon the date set forth in such notice this Agreement shall terminate, and Custodian shall upon receipt of a notice of acceptance by the successor custodian on that date deliver directly to the successor custodian all Securities and money then owned by the Trust and held by it as Custodian, after deducting all fees, expenses and other amounts for the payment or reimbursement of which it shall then be entitled.

2.

If a successor custodian is not designated by the Trust or Custodian in accordance with the preceding Section, the Trust shall upon the date specified in the notice of termination of this Agreement and upon the delivery by Custodian of all Securities (other than Securities which cannot be delivered to the Trust) and money then owned by the Trust be deemed to be its own custodian and Custodian shall thereby be relieved of all duties and responsibilities pursuant to this Agreement, other than the duty with respect to Securities which cannot be delivered to the Trust to hold such Securities hereunder in accordance with this Agreement.

ARTICLE X
MISCELLANEOUS

1.

The Trust agrees to furnish to Custodian a new Certificate of Authorized Persons in the event of any change in the then present Authorized Persons.  Until such new Certificate is received, Custodian shall be fully protected in acting upon Certificates or Oral Instructions of such present Authorized Persons.

2.

Any notice or other instrument in writing, authorized or required by this Agreement to be given to Custodian, shall be sufficiently given if addressed to Custodian and received by it at its offices at One Wall Street, New York, New York 10286, or at such other place as Custodian may from time to time designate in writing.

3.

Any notice or other instrument in writing, authorized or required by this Agreement to be given to the Trust shall be sufficiently given if addressed to the Trust and received by it at its offices at _____________________, or at such other place as the Trust may from time to time designate in writing.

4.

Each and every right granted to either party hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time.  No failure on the part of either party to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by either party of any right preclude any other or future exercise thereof or the exercise of any other right.

5.

In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any exclusive jurisdiction, the validity, legality and enforceability of the remaining provisions shall not in any way be affected thereby.  This Agreement may not be amended or modified in any manner except by a written agreement executed by both parties, except that any amendment to the Schedule I hereto need be signed only by the Trust and any amendment to Appendix I hereto need be signed only by Custodian.  This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by either party without the written consent of the other.

6.

This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof.  The Trust and Custodian hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder.  The Trust hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum.  The Trust and Custodian each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.

7.

The Trust hereby acknowledges that Custodian is subject to federal laws, including the Customer Identification Program (CIP) requirements under the USA PATRIOT Act and its implementing regulations, pursuant to which Custodian must obtain, verify and record information that allows Custodian to identify the Trust.  Accordingly, prior to opening an Account hereunder Custodian will ask the Trust to provide certain information including, but not limited to, the Trust’s name, physical address, tax identification number and other information that will help Custodian to identify and verify the Trust’s identity such as organizational documents, certificate of good standing, license to do business, or other pertinent identifying information.  The Trust agrees that Custodian cannot open an Account hereunder unless and until Custodian verifies the Trust’s identity in accordance with its CIP.

8.

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original, but such counterparts shall, together, constitute only one instrument.





IN WITNESS WHEREOF , the Trust and Custodian have caused this Agreement to be executed by their respective officers, thereunto duly authorized, as of the day and year first above written.

DIREXION SHARES ETF TRUST

By:

___________________________________

Title:

Tax Identification No:

THE BANK OF NEW YORK

By:

___________________________________

Title:





SCHEDULE I
CERTIFICATE OF AUTHORIZED PERSONS

(The Trust - Oral and Written Instructions)

The undersigned hereby certifies that he/she is the duly elected and acting ________________________ of * (the “Trust”), and further certifies that the following officers or employees of the Trust have been duly authorized in conformity with the Trust’s Declaration of Trust and By-Laws to deliver Certificates and Oral Instructions to The Bank of New York (“Custodian”) pursuant to the Custody Agreement between the Trust and Custodian dated _______________, and that the signatures appearing opposite their names are true and correct:

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature

____________________

Name

____________________

Title

____________________

Signature


This certificate supersedes any certificate of Authorized Persons you may currently have on file.

[seal]

By:_________________________________

Title:

Date:





SCHEDULE II

SERIES


Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X  Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X  Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X  Shares

Latin America Bull 3X Shares

Latin America Bear 3X  Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X  Shares

Financial Bull 3X Shares

Financial Bear 3X  Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X  Shares







APPENDIX I

ELECTRONIC SERVICES TERMS AND CONDITIONS

1.

License; Use . (a) This Appendix I shall govern the Trust’s use of electronic communications, information delivery, portfolio management and banking services, that The Bank of New York and its affiliates (“Custodian”) may provide to the Trust, such as The Bank of New York Inform ™ and The Bank of New York CA$H-Register Plus ® , and any computer software, proprietary data and documentation provided by Custodian to the Trust in connection therewith (collectively, the “Electronic Services” ). In the event of any conflict between the terms of this Appendix I and the main body of this Agreement with respect to the Trust’s use of the Electronic Services, the terms of this Appendix I shall control.

(b) Custodian grants to the Trust a personal, nontransferable and nonexclusive license to use the Electronic Services to which the Trust subscribes solely for the purpose of transmitting instructions and information (“Written Instructions”), obtaining reports, analyses and statements and other information and data, making inquiries and otherwise communicating with Custodian in connection with the Trust’s relationship with Custodian.  The Trust shall use the Electronic Services solely for its own internal and proper business purposes and not in the operation of a service bureau.  Except as set forth herein, no license or right of any kind is granted to with respect to the Electronic Services.  The Trust acknowledges that Custodian and its suppliers retain and have title and exclusive proprietary rights to the Electronic Services, including any trade secrets or other ideas, concepts, know-how, methodologies, and information incorporated therein and the exclusive rights to any copyrights, trade dress, look and feel, trademarks and patents (including registrations and applications for registration of either), and other legal protections available in respect thereof.  The Trust further acknowledges that all or a part of the Electronic Services may be copyrighted or trademarked (or a registration or claim made therefor) by Custodian or its suppliers.  The Trust shall not take any action with respect to the Electronic Services inconsistent with the foregoing acknowledgments, nor shall the Trust attempt to decompile, reverse engineer or modify the Electronic Services.  The Trust may not copy, distribute, sell, lease or provide, directly or indirectly, the Electronic Services or any portion thereof to any other person or entity without Custodian’s prior written consent.  The Trust may not remove any statutory copyright notice or other notice included in the Electronic Services.  The Trust shall reproduce any such notice on any reproduction of any portion of the Electronic Services and shall add any statutory copyright notice or other notice upon Custodian’s request.

(c) Portions of the Electronic Services may contain, deliver or rely on data supplied by third parties (“Third Party Data”), such as pricing data and indicative data, and services supplied by third parties (“Third Party Services”) such as analytic and accounting services.  Third Party Data and Third Party Services supplied hereunder are obtained from sources that Custodian believes to be reliable but are provided without any independent investigation by Custodian.  Custodian and its suppliers do not represent or warrant that the Third Party Data or Third Party Services are correct, complete or current.  Third Party Data and Third Party Services are proprietary to their suppliers, are provided solely for the Trust’s internal use, and may not be reused, disseminated or redistributed in any form.  The Trust shall not use any Third Party Data in any manner that would act as a substitute for obtaining a license for the data directly from the supplier.  Third Party Data and Third Party Services should not be used in making any investment decision.  CUSTODIAN AND ITS SUPPLIERS ARE NOT RESPONSIBLE FOR ANY RESULTS OBTAINED FROM THE USE OF OR RELIANCE UPON THIRD PARTY DATA OR THIRD PARTY SERVICES.  Custodian’s suppliers of Third Party Data and Services are intended third party beneficiaries of this Section 1(c) and Section 5 below.  

(d) The Trust understands and agrees that any links in the Electronic Services to Internet sites may be to sites sponsored and maintained by third parties.  Custodian make no guarantees, representations or warranties concerning the information contained in any third party site (including without limitation that such information is correct, current, complete or free of viruses or other contamination), or any products or services sold through third party sites.  All such links to third party Internet sites are provided solely as a convenience to the Trust and the Trust accesses and uses such sites at its own risk.  A link in the Electronic Services to a third party site does not constitute Custodian’s endorsement, authorisation or sponsorship of such site or any products and services available from such site.

2.

Equipment .  The Trust shall obtain and maintain at its own cost and expense all equipment and services, including but not limited to communications services, necessary for it to utilize and obtain access to the Electronic Services, and Custodian shall not be responsible for the reliability or availability of any such equipment or services.

3.

Proprietary Information .  The Electronic Services, and any proprietary data (including Third Party Data), processes, software, information and documentation made available to the Trust (other than which are or become part of the public domain or are legally required to be made available to the public) (collectively, the "Information"), are the exclusive and confidential property of Custodian or its suppliers.  However, for the avoidance of doubt, reports generated by the Trust containing information relating to its account(s) (except for Third Party Data contained therein) are not deemed to be within the meaning of the term “Information.”  the Trust shall keep the Information confidential by using the same care and discretion that the Trust uses with respect to its own confidential property and trade secrets, but not less than reasonable care.  Upon termination of the Agreement or the licenses granted herein for any reason, the Trust shall return to Custodian any and all copies of the Information which are in its possession or under its control (except that the Trust may retain reports containing Third Party Data, provided that such Third Party Data remains subject to the provisions of this Appendix).  The provisions of this Section 3 shall not affect the copyright status of any of the Information which may be copyrighted and shall apply to all information whether or not copyrighted.

4.

Modifications .  Custodian reserves the right to modify the Electronic Services from time to time.  The Trust agrees not to modify or attempt to modify the Electronic Services without Custodian's prior written consent.  The Trust acknowledges that any modifications to the Electronic Services, whether by the Trust or Custodian and whether with or without Custodian's consent, shall become the property of Custodian.

5.

NO REPRESENTATIONS OR WARRANTIES; LIMITATION OF LIABILITY .  CUSTODIAN AND ITS MANUFACTURERS AND SUPPLIERS MAKE NO WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE ELECTRONIC SERVICES OR ANY THIRD PARTY DATA OR THIRD PARTY SERVICES, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT NOT LIMITED TO WARRANTIES OF MERCHANTABILITY, NON-INFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE.  THE TRUST ACKNOWLEDGES THAT THE ELECTRONIC SERVICES, THIRD PARTY DATA AND THIRD PARTY SERVICES ARE PROVIDED “AS IS.”  TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ANY DAMAGES, WHETHER DIRECT, INDIRECT SPECIAL, OR CONSEQUENTIAL, WHICH CUSTOMER MAY INCUR IN CONNECTION WITH THE ELECTRONIC SERVICES, THIRD PARTY DATA OR THIRD PARTY SERVICES, EVEN IF CUSTODIAN OR SUCH SUPPLIER KNEW OF THE POSSIBILITY OF SUCH DAMAGES.  IN NO EVENT SHALL CUSTODIAN OR ANY SUPPLIER BE LIABLE FOR ACTS OF GOD, MACHINE OR COMPUTER BREAKDOWN OR MALFUNCTION, INTERRUPTION OR MALFUNCTION OF COMMUNICATION FACILITIES, LABOR DIFFICULTIES OR ANY OTHER SIMILAR OR DISSIMILAR CAUSE BEYOND THEIR REASONABLE CONTROL.

6.

Security; Reliance; Unauthorized Use; Trusts Transfers .  Custodian will establish security procedures to be followed in connection with the use of the Electronic Services, and the Trust agrees to comply with the security procedures.  The Trust understands and agrees that the security procedures are intended to determine whether instructions received by Custodian through the Electronic Services are authorized but are not (unless otherwise specified in writing) intended to detect any errors contained in such instructions.  The Trust will cause all persons utilizing the Electronic Services to treat any user and authorization codes, passwords, authentication keys and other security devices with the highest degree of care and confidentiality.  Upon termination of the Trust’s use of the Electronic Services, the Trust shall return to Custodian any security devices (e.g. , token cards) provided by Custodian.  Custodian is hereby irrevocably authorized to comply with and rely upon on Written Instructions and other communications, whether or not authorized, received by it through the Electronic Services.  The Trust acknowledges that it has sole responsibility for ensuring that only Authorized Persons use the Electronic Services and that to the fullest extent permitted by applicable law Custodian shall not be responsible nor liable for any unauthorized use thereof or for any losses sustained by the Trust arising from or in connection with the use of the Electronic Services or Custodian’s reliance upon and compliance with Written Instructions and other communications received through the Electronic Services.  With respect to instructions for a transfer of Trusts issued through the Electronic Services, when instructed to credit or pay a party by both name and a unique numeric or alpha-numeric identifier (e.g. ABA number or account number), the Custodian, its affiliates, and any other bank participating in the funds transfer, may rely solely on the unique identifier, even if it identifies a party different than the party named.  Such reliance on a unique identifier shall apply to beneficiaries named in such instructions as well as any financial institution which is designated in such instructions to act as an intermediary in a Trusts transfer.  It is understood and agreed that unless otherwise specifically provided herein, and to the extent permitted by applicable law, the parties hereto shall be bound by the rules of any funds transfer system utilized to effect a funds transfer hereunder.

7.

Acknowledgments .  Custodian shall acknowledge through the Electronic Services its receipt of each Written Instruction communicated through the Electronic Services, and in the absence of such acknowledgment Custodian shall not be liable for any failure to act in accordance with such Written Instruction and the Trust may not claim that such Written Instruction was received by Custodian.  Custodian may in its discretion decline to act upon any instructions or communications that are insufficient or incomplete or are not received by Custodian in sufficient time for Custodian to act upon, or in accordance with such instructions or communications.

8.

Viruses .  The Trust agrees to use reasonable efforts to prevent the transmission through the Electronic Services of any software or file which contains any viruses, worms, harmful component or corrupted data and agrees not to use any device, software, or routine to interfere or attempt to interfere with the proper working of the Electronic Services.   

9.

Encryption .  The Trust acknowledges and agrees that encryption may not be available for every communication through the Electronic Services, or for all data.  The Trust agrees that Custodian may deactivate any encryption features at any time, without notice or liability to the Trust, for the purpose of maintaining, repairing or troubleshooting its systems.

10.

On-Line Inquiry and Modification of Records . In connection with the Trust’s use of the Electronic Services, Custodian may, at the Trust’s request, permit the Trust to enter data directly into a Custodian database for the purpose of modifying certain information maintained by Custodian’s systems, including, but not limited to, change of address information.  To the extent that the Trust is granted such access, the Trust agrees to indemnify and hold Custodian harmless from all loss, liability, cost, damage and expense (including attorney’s fees and expenses) to which Custodian may be subjected or which may be incurred in connection with any claim which may arise out of or as a result of changes to Custodian database records initiated by the Trust.

11.

Agents.   the Trust may, on advance written notice to the Custodian, permit its agents and contractors (“Agents”) to access and use the Electronic Services on the Trust’s behalf, except that the Custodian reserves the right to prohibit the Trust’s use of any particular Agent for any reason.  The Trust shall require its Agent(s) to agree in writing to be bound by the terms of the Agreement, and the Trust shall be liable and responsible for any act or omission of such Agent in the same manner, and to the same extent, as though such act or omission were that of the Trust.  Each submission of a Written Instruction or other communication by the Agent through the Electronic Services shall constitute a representation and warranty by the Trust that the Agent continues to be duly authorized by the Trust to so act on its behalf and the Custodian may rely on the representations and warranties made herein in complying with such Written Instruction or communication.  Any Written Instruction or other communication through the Electronic Services by an Agent shall be deemed that of the Trust, and the Trust shall be bound thereby whether or not authorized. The Trust may, subject to the terms of this Agreement and upon advance written notice to the Bank, provide a copy of the Electronic Service user manuals to its Agent if the Agent requires such copies to use the Electronic Services on the Trust’s behalf.  Upon cessation of any such Agent's services, the Trust shall promptly terminate such Agent’s access to the Electronic Services, retrieve from the Agent any copies of the manuals and destroy them, and retrieve from the Agent any token cards or other security devices provided by Custodian and return them to Custodian.



[MELLON.GIF]



TRANSFER AGENCY AND SERVICE AGREEMENT


AGREEMENT made as of the ______ day of August, 2008, by and between Direxion Shares ETF Trust (hereinafter the “Trust”) each Series of the Trust (each, a “Fund”) listed on Appendix I hereto (as such Appendix be amended from time to time), and THE BANK OF NEW YORK, a New York banking company having its principal office and place of business at One Wall Street, New York, New York 10286 (the “Bank”).


WHEREAS, the Trust is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and


WHEREAS, each Fund will ordinarily issue for purchase and redeem shares of the Fund (the “Shares) only in aggregations of Shares known as “Creation Units” (currently 50,000 shares) (each a “Creation Unit”) principally in kind;


WHEREAS, The Depository Trust Company, a limited purpose trust company organized under the laws of the State of New York (“DTC”), or its nominee (Cede & Co.), will be the  registered owner (the “Shareholder”) of all Shares; and


WHEREAS, the Trust desires to appoint the Bank as its transfer agent, dividend disbursing agent, and agent in connection with certain other activities, and the Bank desires to accept such appointment;


NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows:


1.

Terms of Appointment; Duties of the Bank


1.1

Subject to the terms and conditions set forth in this Agreement, the Trust on behalf of each Fund hereby employs and appoints the Bank to act as, and the Bank agrees to act as, its transfer agent for the authorized and issued Shares, and as the Trust’s dividend disbursing agent.


1.2

The Bank agrees that it will perform the following services:


(a)

In accordance with the terms and conditions of the form of Participant Agreement prepared by the Distributor, a copy of which is attached hereto as Exhibit A, the Bank shall:


(i)

Perform and facilitate the performance of purchases and redemption of Creation Units;


(ii)

Prepare and transmit by means of DTC’s book-entry system payments for dividends and distributions on or with respect to the Shares declared by the Trust on behalf of the applicable Fund;


(iii)

Maintain the record of the name and address of the Shareholder and the number of Shares issued by the Fund and held by the Shareholder;


(iv)

Record the issuance of Shares of the Fund and maintain a record of the total number of Shares of the Fund which are outstanding, and, based upon data provided to it by the Fund, the total number of authorized Shares. The Bank shall have no obligation, when recording the issuance of Shares, to monitor the issuance of such Shares or to take cognizance of any laws relating to the issue or sale of such Shares, which functions shall be the sole responsibility of the Fund.


(v)

Prepare and transmit to the Trust and the Trust’s administrator and to any applicable securities exchange (as specified to the Bank by the Trust or its administrator) information with respect to purchases and redemptions of Shares;


(vi)

On days that the Trust may accept orders for purchases or redemptions, calculate and transmit to Bank and the Trust’s administrator the number of outstanding Shares for each Fund;


(vii)

On days that the Trust may accept orders for purchases or redemptions (pursuant to the Participant Agreement), transmit to the Bank, the Trust and DTC the amount of Shares purchased on such day;


(viii)

Confirm to DTC the number of Shares issued to the Shareholder, as DTC may reasonably request;


(ix)

Prepare and deliver other reports, information and documents to DTC as DTC may reasonably request;


(x)

Extend the voting rights of the Shareholder for extension by DTC to DTC participants and the beneficial owners of Shares in accordance with policies and procedures of DTC for book-entry only securities;


(xi)

Create and maintain those books and records of the Trust specified by the Trust in Schedule A attached hereto;


(xii)

Prepare a monthly report of all purchases and redemptions of Shares during such month on a gross transaction basis, and identify on a daily basis the net number of Shares either redeemed or purchased on such Business Day and with respect to each Authorized Participant purchasing or redeeming Shares, the amount of Shares purchased or redeemed;


(xiii)

Receive from the Distributor (as defined in the Participant Agreement) or from its agent purchase orders from Authorized Participants (as defined in the Participant Agreement) for Creation Unit Aggregations of Shares received in good form and accepted by or on behalf of the Trust by the Distributor, transmit appropriate trade instructions to the National Securities Clearance Corporation or DTC, if applicable, and pursuant to such orders issue the appropriate number of Shares of the applicable Fund and hold such Shares in the account of the Shareholder for each of the respective Funds;


(xiv)

Receive from the Authorized Participants redemption requests, deliver the appropriate documentation thereof to The Bank of New York as custodian for the Trust, generate and transmit or cause to be generated and transmitted confirmation of receipt of such redemption requests to the Authorized Participants submitting the same; transmit appropriate trade instructions to the National Securities Clearance Corporation or DTC, if applicable, and redeem the appropriate number of Creation Unit Aggregations of Shares held in the account of the Shareholder;


(xv)

Confirm the name, U.S taxpayer identification number and principle place of business of each Authorized Participant; and


(xvi)

Implement the Trust’s Anti-Money Laundering (“AML) program.


(b)

In addition to the services set forth in the above sub-section 1.2(a), the Bank shall: perform the customary services of a transfer agent and dividend disbursing agent including, but not limited to, maintaining the account of the Shareholder, obtaining at the request of the Trust from the Shareholder a list of DTC participants holding interests in the Global Certificate, and those services set forth on Schedule A attached hereto.


(c)

The following shall be delivered by the Bank to DTC as the Shareholder for delivery to DTC participants and beneficial owners in accordance with the procedures for book-entry only securities of DTC:


(i)

Annual and semi-annual reports of the Trust;


(ii)

Fund proxies, proxy statements and other proxy soliciting materials;


(iii)

Fund prospectus and amendments and supplements thereto, including stickers; and


(iv)

Other communications as the Trust may from time to time identify as required by law or as the Trust may reasonably request


(v)

The Bank shall provide additional services, if any, as may be agreed upon in writing by the Trust and the Bank.


(d)

The Bank shall keep records relating to the services to be performed hereunder, in the form and manner required by applicable laws, rules, and regulations under the 1940 Act and to the extent required by Section 31 of the 1940 Act and the rules thereunder (the “Rules”), all such books and records shall be the property of the Trust, will be preserved, maintained and made available in accordance with such Section and Rules, and will be surrendered promptly to the Trust on and in accordance with its request.


2.

Fees and Expenses


2.1

The Bank shall receive from the Trust such compensation for the Transfer Agent’s services provided pursuant to this Agreement as may be agreed to from time to time in a written fee schedule approved by the parties.  The fees are accrued daily and billed monthly and shall be due and payable upon receipt of the invoice. Upon the termination of this Agreement before the end of any month, the fee for the part of the month before such termination shall be prorated according to the proportion which such part bears to the full monthly period and shall be payable upon the date of termination of this Agreement.


2.2

In addition to the fee paid under Section 2.1 above, the Trust agrees to reimburse the Bank for reasonable out-of-pocket expenses, including but not limited to confirmation production, postage, forms, telephone, microfilm, microfiche, tabulating proxies, records storage, or advances incurred by the Bank for the items set out in the fee schedule attached hereto or relating to dividend distributions and reports (whereas all expenses related to creations and redemptions of Trust Shares shall be borne by the relevant authorized participant in such creations and redemptions). In addition, any other expenses incurred by the Bank at the request or with the consent of the Trust, will be reimbursed by the Trust on behalf of the applicable Fund.


2.3

The Trust agrees to pay all fees and reimbursable expenses within thirty (30) business days following the receipt of the respective billing notice accompanied by supporting documentation, as appropriate. Postage for mailing of dividends, proxies, Trust reports and other mailings to all shareholder accounts shall be advanced to the Bank by the Trust at least seven (7) days prior to the mailing date of such materials.


3.

Representations and Warranties of the Bank


The Bank represents and warrants to the Trust that:


(a)

It is a banking company duly organized and existing and in good standing under the laws of the State of New York.


(b)

It is duly qualified to carry on its business in the State of New York.


(c)

It is empowered under applicable laws and by its Charter and By-Laws to act as transfer agent and dividend disbursing agent and to enter into, and perform its obligations under, this Agreement.


(d)

All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement.


(e)

It has and will continue to have access to the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement.


(f)

It is registered with the U.S. Securities and Exchange Commission as a transfer agent under Section 17A of the Securities Exchange Act of 1934, as amended, or is exempt from registration thereunder in accordance with the terms thereof.


4.

Representations and Warranties of the Trust


The Trust represents and warrants to the Bank that:


(a)

It is duly organized and existing and in good standing under the laws of Delaware.


(b)

It is empowered under applicable laws and by its Trust Instrument and By-Laws to enter into and perform this Agreement.


(c)

It is an open-end management investment company registered under the 1940 Act.


(d)  A registration statement under the Securities Act of 1933, as amended, has been filed on behalf of each of the Funds and will be effective as of this date that the Bank begins to provide services hereunder, and appropriate state securities law filings have been made and will continue to be made, with respect to all Shares of the Trust being offered for sale.


5.

Indemnification


5.1

The Bank shall not be responsible for, and the Trust shall indemnify and hold the Bank harmless from and against, any and all losses, damages, costs, charges, counsel fees, including, without limitation, those incurred by the Bank in a successful defense of any claims by the Trust, payments, expenses and liability (“Losses”) which the Bank may sustain or incur or which may be asserted against the Bank in connection with or relating to this Agreement or the Bank’s actions or omissions with respect to this Agreement, except for any Losses for which the Bank has accepted liability pursuant to Article 6 of this Agreement.


5.2

This indemnification provision shall apply to actions taken pursuant to this Agreement or the Participant Agreement.


6.

Standard of Care and Limitation of Liability


The Bank shall have no responsibility and shall not be liable for any Losses, except that the Bank shall be liable to the Trust for direct money damages caused by its own bad faith, negligence, willful misconduct or reckless disregard of its or their duties hereunder or that of its employees, or its breach of any of its representations and warranties.  In no event shall the Bank be liable for special, indirect or consequential damages, regardless of the form of action and even if the same were foreseeable.  For purposes of this Agreement, none of the following shall be or be deemed bad faith, negligence, willful misconduct or reckless disregard:


(a)

The conclusive reliance on or use by the Bank or its agents or subcontractors of information, records, documents or services which (i) are received by the Bank or its agents or subcontractors, and (ii) have been prepared, maintained or performed by the Trust or any other person or firm on behalf of the Trust including but not limited to any previous transfer agent or registrar.


(b)

The conclusive reliance on, or the carrying out by the Bank or its agents or subcontractors of, any instructions or requests of the Trust or instructions or requests on behalf of the Trust.


(c)

The offer or sale of Shares by or for the Trust in violation of any requirement under the federal securities laws or regulations, or the securities laws or regulations of any state that such Shares be registered in such state, or any violation of any stop order or other determination or ruling by any federal agency, or by any state with respect to the offer or sale of  Shares in such state.


7.

Concerning the Bank


7.1


(a)

The Bank may employ agents or attorneys-in-fact which are not affiliates of the Bank with the prior written consent of the Trust (which consent shall not be unreasonably withheld), and shall not be liable for any loss or expense arising out of, or in connection with, the actions or omissions to act of such agents or attorneys-in-fact, provided that the Bank acts in good faith and with reasonable care in the selection and retention of such agents or attorneys-in-fact.


(b)

The Bank may, without the prior consent of the Trust, enter into subcontracts, agreements and understandings with any Bank affiliate, whenever and on such terms and conditions as it deems necessary or appropriate to perform its services hereunder.  No such subcontract, agreement or understanding shall discharge Bank from its obligations hereunder.


7.2

The Bank shall be entitled to conclusively rely upon any written or oral instruction actually received by the Bank and reasonably believed by the Bank to be duly authorized and delivered.  The Trust agrees to forward to the Bank written instructions confirming oral instructions by the close of business of the same day that such oral instructions are given to the Bank. The Trust agrees that the fact that such confirming written instructions are not received or that contrary written instructions are received by the Bank shall in no way affect the validity or enforceability of transactions authorized by such oral instructions and effected by the Bank.  If the Trust elects to transmit written instructions through an on-line communication system offered by the Bank, Trust’s use thereof shall be subject to the terms and conditions attached hereto as Appendix A.


7.3

 The Bank shall establish and maintain a disaster recovery plan and back-up system satisfying the requirements of its regulators (the “Disaster Recovery Plan and Back-Up System”).  The Bank shall not be responsible or liable for any failure or delay in the performance of its obligations under this Agreement arising out of or caused, directly or indirectly, by circumstances beyond its control which are not a result of its negligence, including without limitation, acts of God; earthquakes; fires; floods; wars; civil or military disturbances; sabotage; epidemics; riots; interruption, loss or malfunctions of transportation, computer (hardware or software) or communication services; labor disputes; acts of civil or military authority; governmental actions; or inability to obtain labor, material, equipment or transportation, provided that the Bank has established and is maintaining the Disaster Recovery Plan and Back-Up System, or if not, that such delay or failure would have occurred even if the Bank had established and was maintaining the Disaster Recovery Plan and Back-Up System.  Upon the occurrence of any such delay or failure the Bank shall use commercially reasonable best efforts to resume performance as soon as practicable under the circumstances.


7.4

The Bank shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement and the Participation Agreement, and no covenant or obligation shall be implied against the Bank in connection with this Agreement, except as set forth in this Agreement and the Participation Agreement.


7.5

At any time the Bank may apply to an officer of the Trust for written instructions with respect to any matter arising in connection with the Bank’s duties and obligations under this Agreement, and the Bank, its agents, and subcontractors shall not be liable for any action taken or omitted to be taken in good faith in accordance with such instructions.  Such application by the Bank for instructions from an officer of the Trust may, at the option of the Bank, set forth in writing any action proposed to be taken or omitted to be taken by the Bank with respect to its duties or obligations under this Agreement and the date on and/or after which such action shall be taken, and the Bank shall not be liable for any action taken or omitted to be taken in accordance with a proposal included in any such application on or after the date specified therein unless, prior to taking or omitting to take any such action, the Bank has received written or oral instructions in response to such application specifying the action to be taken or omitted.


7.6

The Bank, its agents and subcontractors may act upon any paper or document, reasonably believed to be genuine and to have been signed by the proper person or persons, or upon any instruction, information, data, records or documents provided to the Bank or its agents or subcontractors by or on behalf of the Trust by machine readable input, telex, CRT data entry or other similar means authorized by the Trust, and shall not be held to have notice of any change of authority of any person, until receipt of written notice thereof from the Trust.


7.7

Notwithstanding any provisions of this Agreement to the contrary, the Bank shall be under no duty or obligation to inquire into, and shall not be liable for:


(a)

The legality of the issue, sale or transfer of any Shares, the sufficiency of the amount to be received in connection therewith, or the authority of the Trust to request such issuance, sale or transfer;


(b)

The legality of the purchase of any Shares, the sufficiency of the amount to be paid in connection therewith, or the authority of the Trust to request such purchase;


(c)

The legality of the declaration of any dividend by the Trust, or the legality of the issue of any Shares in payment of any stock dividend; or


(d)

The legality of any recapitalization or readjustment of the Shares.


8.

Providing of Documents by the Trust and Transfers of Shares


8.1

The Trust shall promptly furnish to the Bank with a copy of its Trust Instrument and all amendments thereto.


8.2

In the event that DTC ceases to be the Shareholder, the Bank shall re-register the Shares in the name of the successor to DTC as Shareholder upon receipt by the Bank of such documentation and assurances as it may reasonably require.


8.3

The Bank shall have no responsibility whatsoever with respect to of any beneficial interest in any of the Shares owned by the Shareholder.


8.4

The Trust shall deliver to the Bank the following documents on or before the effective date of any increase, decrease or other change in the total number of Shares authorized to be issued:


(a)

An opinion of counsel for the Trust, in a form satisfactory to the Bank, with respect to (i) the validity of the Shares, the obtaining of all necessary governmental consents, whether such Shares are fully paid and non-assessable and the status of such Shares under the Securities Act of 1933, as amended, and any other applicable federal law or regulations ( i.e. , if subject to registration, that they have been registered and that the Registration Statement has become effective or, if exempt, the specific grounds therefore), (ii) the status of the Fund with regard to the 1940 Act, and (iii) the due and proper listing of the Shares on all applicable securities exchanges.


8.5

[Reserved]


8.6

The Bank agrees that all records prepared or maintained by the Bank relating to the services to be performed by the Bank hereunder are the property of the Trust and will be preserved, maintained and made available upon reasonable request, and will be surrendered promptly to the Trust on and in accordance with its request.  The Bank and the Trust agree that all books, records, confidential, non-public, or proprietary information and data pertaining to the business of the other party which are exchanged or received pursuant to the negotiation or the carrying out of this Agreement shall remain confidential, and shall not be voluntarily disclosed to any person other than its auditors, accountants, regulators, employees or counsel, except as may be, or may become required by law, by administrative or judicial order or by rule.


8.7

In case of any requests or demands for the inspection of the Shareholder records of the Trust, the Bank will promptly employ reasonable commercial efforts to notify the Trust and secure instructions from an authorized officer of the Trust as to such inspection. The Bank reserves the right, however, to exhibit the Shareholder records to any person whenever it is advised by its counsel that it may be held liable for the failure to exhibit the Shareholder records to such person.


9.

Termination of Agreement


9.1

The term of this Agreement shall be one year commencing upon the date hereof (the "Initial Term") and shall automatically renew for additional one-year terms (each a “Subsequent Term”)unless either party provides written notice of termination at least ninety (90) days prior to the end of any one year term or, unless earlier terminated as provided below:


(a)

Either party hereto may terminate this Agreement prior to the expiration of the Initial Term in the event the other party breaches any material provision of this Agreement, including, without limitation in the case of the Trust, its obligations under Section 2.1, provided that the non-breaching party gives written notice of such breach to the breaching party and the breaching party does not cure such violation within 90 days of receipt of such notice.


(b)

The Trust may terminate this Agreement at any time upon ninety (90) days' prior written notice.


9.2

Should the Trust exercise its right to terminate, all out-of-pocket expenses associated with the movement of records and material will be borne by the Trust.


9.3

The terms of Article 2 (with respect to fees and expenses incurred prior to termination), and of Article 5 shall survive any termination of this Agreement.


10.

Additional Series


In the event that the Trust establishes one or more additional series of Shares with respect to which it desires to have the Bank render services as transfer agent under the terms hereof, it shall so notify the Bank in writing, and if the Bank agrees in writing to provide such services, such additional issuance shall become Shares hereunder.


11.

Assignment


11.1

Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the written consent of the other party.


11.2

This Agreement shall inure to the benefit of and be binding upon the parties and their respective permitted successors and assigns.


12.

Severability and Beneficiaries


12.1

In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, the legality and enforceability of the remaining provisions shall not in any way be affected thereby provided that the obligation of the Trust to pay fees and expenses hereunder is conditioned upon provision of services to it by the Bank.  


12.2

This Agreement is solely for the benefit of the Bank and the Trust, and none of any Participant (as defined in the Participation Agreement), the Distributor, any Shareholder or beneficial owner of any Shares shall be or be deemed a third party beneficiary of this Agreement.


13.

Amendment


This Agreement may be amended or modified by a written agreement executed by both parties.


14.

New York Law to Apply


This Agreement shall be construed in accordance with the substantive laws of the State of New York, without regard to conflicts of laws principles thereof.  The Trust and the Bank hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder.  The Trust hereby irrevocably waives, to the fullest extent permitted by applicable law, any objection which it may now or hereafter have to the laying of venue of any such proceeding brought in such a court and any claim that such proceeding brought in such a court has been brought in an inconvenient forum.  The Trust and the Bank each hereby irrevocably waives any and all rights to trial by jury in any legal proceeding arising out of or relating to this Agreement.


15.

Merger of Agreement


This Agreement constitutes the entire agreement between the parties hereto and supersedes any prior agreement with respect to the subject matter hereof whether oral or written.


16.

Counterparts


This Agreement may be executed by the parties hereto in any number of counterparts, each of which shall be deemed an original and all of said counterparts taken together shall be deemed to constitute one and the same instrument.




IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers, as of the day and year first above written.


 

DIREXION SHARES ETF TRUST

 

 

 

 

 

 

 

 

 By:

 

 

 

Name:

Title:

 

 

 

 

 

 

 

 

 

 

THE BANK OF NEW YORK

 

 

 

 

 

 

 

 

 By:

 

 

 

Name:

Title:



SCHEDULE A


BOOKS AND RECORDS TO BE MAINTAINED BY THE BANK


Source Documents requesting Creations and Redemptions


Correspondence/AP Inquiries


Reconciliations, bank statements, copies of canceled checks, cash proofs


Daily/Monthly reconciliation of outstanding Shares between the Trust and DTC


Dividend Records


Year-end Statements and Tax Forms





APPENDIX I


SERIES



Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X  Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X  Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X  Shares

Latin America Bull 3X Shares

Latin America Bear 3X  Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X  Shares

Financial Bull 3X Shares

Financial Bear 3X  Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X  Shares







 

 

 

FUND ADMINISTRATION AND ACCOUNTING AGREEMENT

AGREEMENT made as of _____________________, by and between Direxion Shares ETF Trust the “Trust”), and The Bank of New York Mellon, a New York banking organization (“BNY”).

W I T N E S S E T H :

WHEREAS, the Trust is an investment company registered under the Investment Company Act of 1940, as amended (the “1940 Act”); and

WHEREAS, the Trust desires to retain BNY to provide for the series identified on Exhibit A hereto (each, a “Fund”) the services described herein, and BNY is willing to provide such services, all as more fully set forth below;

NOW, THEREFORE, in consideration of the mutual promises and agreements contained herein, the parties hereby agree as follows:

1.      Appointment .

The Trust hereby appoints BNY as its agent for the term of this Agreement to perform the services described herein. BNY hereby accepts such appointment and agrees to perform the duties hereinafter set forth.

2.      Representations and Warranties .

The Trust hereby represents and warrants to BNY, which representations and warranties shall be deemed to be continuing, that:

(a)     It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder;

(b)     This Agreement has been duly authorized, executed and delivered by the Trust in accordance with all requisite action and constitutes a valid and legally binding obligation of the Fund, enforceable in accordance with its terms;

(c)     It is conducting its business in compliance with all applicable laws and regulations, both state and federal, and has obtained all regulatory licenses, approvals and consents necessary to carry on its business as now conducted; there is no statute, regulation, rule, order or judgment binding on it and no provision of its Trust Instrument or by-laws, nor of any mortgage, indenture, credit agreement or other contract binding on it or affecting its property which would prohibit its execution or performance of this Agreement;

(d)     To the extent the performance of any services described in Schedule II attached hereto by BNY in accordance with the then effective Prospectus (as hereinafter defined) for the Fund would violate any applicable laws or regulations, the Fund shall immediately so notify BNY in writing and thereafter shall either furnish BNY with the appropriate values of securities, net asset value or other computation, as the case may be, or, subject to the prior approval of BNY, instruct BNY in writing to value securities and/or compute net asset value or other computations in a manner the Fund specifies in writing, and either the furnishing of such values or the giving of such instructions shall constitute a representation by the Fund that the same is consistent with all applicable laws and regulations and with its Prospectus; and

(e)     It has implemented, and is acting in accordance with, procedures reasonably designed to ensure that it will disseminate to all market participants, other than Authorized Participants (as defined in its Prospectus and Statement of Additional Information), each calculation of net asset value provided by BNY hereunder to Authorized Participants at the time BNY provides such calculation to Authorized Participants.

3.      Representations and Warranties of BNY .

BNY hereby represents and warrants to the Trust, which representations and warranties shall be deemed to be continuing, that:

(a)     It is duly organized and existing under the laws of the jurisdiction of its organization, with full power to carry on its business as now conducted, to enter into this Agreement and to perform its obligations hereunder ; and

(b)     This Agreement has been duly authorized, executed and delivered by BNY in accordance with all requisite action and constitutes a valid and legally binding obligation of BNY, enforceable in accordance with its terms, except as the same may be limited by bankruptcy, insolvency, creditors' rights or equitable principles.

4.      Delivery of Documents .

(a)     The Trust will promptly deliver to BNY true and correct copies of each of the following documents as currently in effect and will promptly deliver to it all future amendments and supplements thereto, if any:

(i)     The Trust's Trust instrument or other organizational document and all amendments thereto (the “Trust Instrument”);

(ii)     The Trust's bylaws (the “Bylaws”);

(iii)     Resolutions of the Trust's board of trustees (the “Board”) authorizing the execution, delivery and performance of this Agreement by the Trust;

(iv)     The Trust's registration statement most recently filed with the Securities and Exchange Commission (the “SEC”) relating to the shares of the Trust (the “Registration Statement”);

(v)     The Trust's Notification of Registration under the 1940 Act on Form N-8A filed with the SEC;

(vi)     The Trust's Prospectus and Statement of Additional Information pertaining to each Fund (collectively, the “Prospectus”); and

(vii)     A copy of any and all SEC exemptive orders issued to the Fund.

(b)     Each copy of the Trust's Certificate of Trust shall be certified by the Secretary of State (or other appropriate official) of the State of Delaware. Each copy of the Trust instrument, Bylaws, Registration Statement and Prospectus, and all amendments thereto, and copies of Board resolutions, shall be certified by the Secretary or an Assistant Secretary of the Trust.

(c)     It shall be the sole responsibility of the Trust to deliver to BNY its currently effective Prospectus and BNY shall not be deemed to have notice of any information contained in such Prospectus until it is actually received by BNY.

5.      Duties and Obligations of BNY .

(a)     Subject to the direction and control of the Trust’s Board and the provisions of this Agreement, BNY shall provide to the Trust (i) the administrative services set forth on Schedule I attached hereto and (ii) the valuation and computation services listed on Schedule II attached hereto.

(b)     In performing hereunder, BNY shall provide, at its expense, office space, facilities, equipment and personnel.

(c)     BNY may, pursuant to a separate agreement, provide certain sub-advisory services, but shall not provide any services relating to the management, investment advisory or sub-advisory functions of the Trust pursuant to this agreement or its terms or, as related to the maintenance of the Trust's shareholder records. BNY shall in no event provide services relating to the distribution of shares of the Trust or other services normally performed by the Trust's respective distributor, counsel or independent auditors.

(d)     Upon receipt of the Trust's prior written consent, BNY may delegate any of its duties and obligations hereunder to any delegee or agent whenever and on such terms and conditions as it deems necessary or appropriate provided, however, that no such delegation of its duties or obligations hereunder shall discharge BNY from its obligations to provide or secure the provision of services hereunder. Notwithstanding the foregoing, no Trust consent shall be required for any such delegation to any other subsidiary of The Bank of New York Mellon Corporation, and BNY shall remain liable for the acts or omissions of such affiliate as if performed directly by BNY as contemplated hereunder. BNY shall not be liable to any Fund for any loss or damage arising out of, or in connection with, the actions or omissions to act of any permitted delegee or agent utilized hereunder so long as BNY acts in good faith and without negligence or willful misconduct in the selection of such delegee or agent.

The Trust shall cause its officers, advisors, sponsor, distributor, legal counsel, (subject to applicable privilege) independent accountants, current administrator (if any), transfer agent, and any other service provider to cooperate with the BNY and to provide the BNY, upon request, with such information, documents and advice relating to the Trust as is within the possession or knowledge of such persons, and which, in the reasonable opinion of the BNY, is necessary in order to enable it to perform its duties hereunder. In connection with its duties hereunder, BNY shall be entitled to rely in good faith, and shall be held harmless by the Trust when acting in good faith reliance, upon the foregoing, upon any Proper Instructions, as that term is defined herein in Section 6, or open advice or any documents relating to the Trust provided to BNY by any of the individuals listed on Exhibit B attached hereto or any individual believed in good faith by BNY to be an Authorized Person (each an "Authorized Person").

(e)     The BNY shall not be responsible for, under any duty to inquire into, or be deemed to make any assurances with respect to the accuracy, validity or propriety of any information, documents or advice provided to the BNY by any of the aforementioned persons. The BNY shall not be liable for any loss, damage or expense resulting from or arising out of the failure of the Fund to cause any information, documents or advice to be provided to the BNY as provided herein and shall be held harmless by each Fund when acting in reliance upon such information, documents or advice relating to such Fund. All fees or costs charged by such persons shall be borne by the Trust. In the event that any services performed by the BNY hereunder rely, in whole or in part, upon information obtained from a third party service utilized or subscribed to by the BNY which the BNY in its reasonable judgment deems reliable, the BNY shall not have any responsibility or liability for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information.

(f)     Nothing in this Agreement shall limit or restrict BNY, any affiliate of BNY or any officer or employee thereof from acting for or with any third parties, and providing services similar or identical to same or all of the services provided hereunder.

Subject to the provisions of this Agreement, BNY shall compute the net asset value per share of the Fund and shall value the securities held by the Fund at such times and dates and in the manner specified in the then effective Prospectus of the Trust and in accordance with the Trust's valuation procedures actually provided to BNY, except that notwithstanding any language in the Prospectus, in no event shall BNY be required to determine, or have any obligations with respect to, whether a market price represents any fair or true value, nor to adjust any price to reflect any events or announcements, including, without limitation, those with respect to the issuer thereof, it being agreed that all such determinations and considerations shall be solely the responsibility of the Trust. BNY shall provide a report of such net asset value to the Trust and Authorized Participants at the respective times set forth in Schedule II, as amended from time to time. To the extent valuation of securities or computation of a net asset value as specified in the Trust's then effective Prospectus and valuation procedures actually provided to BNY are at any time inconsistent with any applicable laws or regulations, the Trust shall immediately so notify BNY in writing and thereafter shall either furnish BNY at all appropriate times with the values of such securities and the Fund’s net asset value, or subject to the prior approval of BNY, instruct BNY in writing to value securities and compute net asset value in a manner which the Fund then represents in writing to be consistent with all applicable laws and regulations. The Fund may also from time to time, subject to the prior approval of BNY, instruct BNY in writing to compute the value of the securities or net asset value in a manner other than as specified in this paragraph.

By giving such instruction, the Fund shall be deemed to have represented that such instruction is consistent with all applicable laws and regulations and the then currently effective Prospectus and valuation procedures of the Trust. The Trust shall have sole authority responsibility for determining the method of valuation of securities and the method of computing net asset value.

(g)     The Fund shall furnish BNY with Proper Instructions as that term is defined herein in section 6, containing any and all instructions, explanations, information, specifications and documentation deemed reasonably necessary by BNY in the performance of its duties hereunder, including, without limitation, valuation procedures describing the amounts or written formula for calculating the amounts and times of accrual of Fund liabilities and expenses. BNY shall not be required to include as Fund liabilities and expenses, nor as a reduction of net asset value, any accrual for any federal, state, or foreign income taxes unless the Fund shall have specified to BNY the precise amount of the same to be included in liabilities and expenses or used to reduce net asset value. Each Fund shall also furnish BNY with bid, offer, or market values of Securities if BNY notifies such Fund that same are not available to BNY from a security pricing or similar service utilized, or subscribed to, by BNY which BNY in its judgment deems reliable at the time such information is required for calculations hereunder. At any time and from time to time, the Fund also may furnish BNY with bid, offer, or market values of Securities and instruct BNY to use such information in its calculations hereunder. BNY shall at no time be required or obligated to commence or maintain any utilization of, or subscriptions to, any particular securities pricing or similar service.

(h)     (i)BNY may apply to an officer of the Trust for written Proper Instructions with respect to any matter arising in connection with BNY’s performance hereunder for such Fund, and BNY shall not be liable for any action taken or omitted to be taken by it in good faith in accordance with such Proper Instructions. Such application may, at the option of BNY, set forth in writing any action proposed to be taken or omitted to be taken by BNY with respect to its duties or obligations under this Agreement and the date on and/or after which such action shall be taken, and BNY shall not be liable for any action taken or omitted to be taken in accordance with a proposal included in any such application on or after the date specified therein unless, prior to taking or omitting to take any such action, BNY has received written instructions in response to such application specifying the action to be taken or omitted.

(i)     BNY may consult with counsel to the appropriate Fund or its own counsel, at such Fund’s expense, and shall be fully protected with respect to anything done or omitted by it in good faith and in accordance with the advice or opinion of Trust counsel.

(j)     Notwithstanding any other provision contained in this Agreement or Schedule I or II attached hereto, BNY shall have no duty or obligation to with respect to, including, without limitation, any duty or obligation to determine, or advise or notify any Fund of: (i) the taxable nature of any distribution or amount received or deemed received by, or payable to, a Fund, (ii) the taxable nature or effect on a Fund or its shareholders of any corporate actions, class actions, tax reclaims, tax refunds or similar events, (iii) the taxable nature or taxable amount of any distribution or dividend paid, payable or deemed paid, by a Fund to its shareholders; or (iv) the effect under any federal, state, or foreign income tax laws of a Fund making or not making any distribution or dividend payment, or any election with respect thereto.

(k)     BNY shall have no duties or responsibilities whatsoever except such duties and responsibilities as are specifically set forth in this Agreement and Schedules I and II attached hereto, and no covenant or obligation except those set forth herein shall be implied against BNY in connection with this Agreement.

BNY shall have no duty or obligation to review the accuracy , validity or propriety of Proper Instructions, explanations, information, specifications or documentation furnished by Authorized Persons , including, without limitation, evaluations of securities; valuation procedures describing the amounts or formula for calculating the amounts and times of accrual of Series’ liabilities and expenses; the amounts receivable and the amounts payable on the sale or purchase of Securities; and amounts receivable or amounts payable for the sale or redemption of Fund shares effected by or on behalf of a Fund and may rely on the same absolutely.  In the event BNY’s computations hereunder rely, in whole or in part, upon information, including, without limitation, bid, offer or market values of securities or other assets, or accruals of interest or earnings thereon, from a pricing or similar service utilized, or subscribed to, by BNY which BNY in good faith deems reliable, BNY shall not be responsible for, under any duty to inquire into, or deemed to make any assurances with respect to, the accuracy or completeness of such information. Without limiting the generality of the foregoing, BNY shall not be required to inquire into any valuation of securities or other assets by a Fund or any third party described in this (m) even though BNY in performing services similar to the services provided pursuant to this Agreement for others may receive different valuations of the same or different securities of the same issuers.

(l)     BNY, in performing the services required of it under the terms of this Agreement, shall not be responsible for determining whether any interest accruable to a Fund is or will be actually paid, but will accrue such interest until otherwise instructed by such Fund.

BNY shall not be responsible for delays or errors which occur by reason of circumstances beyond its control in the performance of its duties under this Agreement, including, without limitation, labor difficulties within or without BNY, mechanical breakdowns, flood or catastrophe, acts of God, failures of transportation, interruptions, loss, or malfunctions of utilities, communications or computer (hardware or software) services.  BNY shall not be responsible for delays or failures to supply the information or services specified in this Agreement where such delays or failures are caused by the failure of any person(s) other than BNY to supply any instructions, explanations, information, specifications or documentation deemed necessary by BNY in the performance of its duties under this Agreement. Upon the occurrence of any such delay or failure, BNY shall use commercially reasonable efforts to resume performance as soon as practicable under the circumstances. BNY further represents that it has developed and implemented commercially reasonable business continuity and disaster recovery policies, procedures and facilities.

6.      Proper Instructions .

Proper Instructions shall mean: (i) instructions given by an Authorized Person(s), such instructions to be given in such form and manner as BNY and the Trust shall agree upon in writing from time to time; (ii) instructions (which may be continuing instructions) signed or initialed by an Authorized Person; and (iii) instructions transmitted by any electro-mechanical or electronic device agreed to by the Trust and BNY and requiring the use of user and authorization codes, passwords and/or authentication keys. Oral instructions will be considered Proper Instructions if BNY believes them in good faith to have been given by an Authorized Person. BNY shall act upon and comply with any subsequent Proper Instruction which modifies a prior instruction. The Trust shall protect with extreme care the user and authorization codes, passwords and/or authentication keys used for electronic or electro-mechanical Proper Instructions, and agrees Proper Instructions communicated through such secured media may be conclusively presumed by BNY to be given by Authorized Persons. BNY shall not be held to have notice of any change of authority of any Authorized Person until receipt of appropriate written notice thereof has been actually received by BNY from the Trust.

7.      Allocation of Expenses .

Except as otherwise provided herein, all costs and expenses arising or incurred in connection with the performance of this Agreement shall be paid by the Trust or appropriate Fund, including but not limited to, organizational costs and costs of maintaining corporate existence, taxes, interest, brokerage fees and commissions, insurance premiums, compensation and expenses of such Fund’s trustees, directors, officers or employees, legal, accounting and audit expenses, management, advisory, sub-advisory, administration and shareholder servicing fees, charges of custodians, transfer and dividend disbursing agents, expenses (including clerical expenses) incident to the issuance, redemption or repurchase of Fund shares, fees and expenses incident to the registration or qualification under federal or state securities laws of the Fund or its shares, costs (including printing and mailing costs) of preparing and distributing Prospectuses, reports, notices and proxy material to such Fund’s shareholders, all expenses incidental to holding meetings of such Fund’s trustees, directors and shareholders, and extraordinary expenses as may arise, including litigation affecting such Fund and legal obligations relating thereto for which the Fund may have to indemnify its trustees, directors and officers.

8.      Compliance Services .

(a)     As contained in Schedule I BNY shall to provide to each Fund compliance services, pursuant to the terms of this Section 8 (the “Compliance Services”). The precise compliance review and testing services to be provided shall be as mutually agreed between the BNY and each Fund, and the results of the BNY’s Compliance Services shall be detailed in a compliance summary report (the “Compliance Summary Report”) prepared on a periodic basis as mutually agreed. Each Compliance Summary Report shall be subject to review and approval by the Fund. The BNY shall have no responsibility or obligation to provide Compliance Services other that those services specifically listed in Schedule I.

(b)     The Fund will examine each Compliance Summary Report delivered to it by the BNY and notify the BNY of any error, omission or discrepancy within twenty (20) days of its receipt. The Fund agrees to notify the BNY as soon as reasonably practicable if it fails to receive any such Compliance Summary Report.  In addition, if the Fund learns of any out-of-compliance condition before receiving a Compliance Summary Report reflecting such condition, the Fund will notify the BNY of such condition within five business days after discovery thereof.

(c)     While the BNY will endeavor to identify out-of-compliance conditions, the BNY does not and could not for the fees charged, make any guarantees, representations or warranties with respect to its ability to identify all such conditions. In the event of any errors or omissions in the performance of Compliance Services, the Fund’s sole and exclusive remedy and the BNY’s sole liability shall be limited to re-performance by the BNY of the Compliance Services affected and in connection therewith the correction of any error or omission, if practicable and the preparation of a corrected report, at no cost to the Fund.

9.      Standard of Care; Indemnification .

(a)     Except as otherwise provided herein, BNY shall not be liable for any costs, expenses, damages, liabilities or claims (including attorneys’ and accountants’ fees) incurred by a Fund, except those costs, expenses, damages, liabilities or claims arising out of BNY’s own bad faith, gross negligence or willful misconduct or reckless disregard of its duties hereunder. In no event shall BNY be liable to any Fund or any third party for special, indirect or consequential damages, or lost profits or loss of business, arising under or in connection with this Agreement, even if previously informed of the possibility of such damages and regardless of the form of action. BNY shall not be liable for any loss, damage or expense, including counsel fees and other costs and expenses of a defense against any claim or liability, resulting from, arising out of, or in connection with its performance hereunder, including its actions or omissions, the incompleteness or inaccuracy of any specifications or other information furnished by the Fund, or for delays caused by circumstances beyond BNY’s control, unless such loss, damage or expense arises out of BNY's bad faith, gross negligence or willful misconduct or reckless disregard of its duties.

(b)     Each Fund severally and not jointly shall indemnify and hold harmless BNY from and against any and all costs, expenses, damages, liabilities and claims (including claims asserted by a Fund), and reasonable attorneys’ and accountants’ fees relating thereto, which are sustained or incurred or which may be asserted against BNY, by reason of or as a result of any action taken or omitted to be taken by BNY in good faith hereunder or in reliance upon (i) any law, act, regulation or interpretation of the same even though the same may thereafter have been altered, changed, amended or repealed, (ii) such Fund’s Registration Statement or Prospectus, (iii) any Proper Instructions of an Authorized Person, or (iv) any opinion of legal counsel for such Fund or BNY, or arising out of transactions or other activities of such Fund which occurred prior to the commencement of this Agreement; provided , that no Fund shall indemnify BNY for costs, expenses, damages, liabilities or claims for which BNY is liable under preceding 6(a). This indemnity shall be a continuing obligation of each Fund, its successors and assigns, notwithstanding the termination of this Agreement. Without limiting the generality of the foregoing, each Fund severally and not jointly shall indemnify BNY against and save BNY harmless from any loss, damage or expense, including counsel fees and other costs and expenses of a defense against any claim or liability, arising from any one or more of the following without BNY’s bad faith, or willful misconduct:

(i)     Errors in records or instructions, explanations, information, specifications or documentation of any kind, as the case may be, supplied to BNY by any third party described above or by or on behalf of a Fund;

(ii)     Action or inaction taken or omitted to be taken by BNY pursuant to Proper Instructions by or on behalf of the Fund;

(iii)     Any action taken or omitted to be taken by BNY in good faith in accordance with the advice or opinion of counsel for the Trust or by or on behalf of a Fund or its own counsel;

(iv)     Any improper use by a Fund or its agents, distributor or investment advisor of any valuations or computations supplied by BNY pursuant to this Agreement;

(v)     The method of valuation of the Fund's portfolio securities and the method of computing a Fund's net asset value provided that such valuation or computation conforms to the Fund's then effective prospectus and valuation procedures actually provided to BNY; or

(vi)     Any valuations of the Fund's portfolio securities or net asset value provided to BNY by a Fund.

(c)     Actions taken or omitted in reliance on Proper Instructions, or upon any information, order, indenture, stock certificate, power of attorney, assignment, affidavit or other instrument believed by BNY in good faith to be genuine or bearing the signature of a person or persons believed to be authorized to sign, countersign or execute the same, or upon the opinion of legal counsel for the Trust or its own counsel, shall be conclusively presumed to have been taken or omitted in good faith.

(d)     The terms of this Section 9 shall survive the termination of this Agreement.

10.      Compensation .

For the services provided hereunder, each Fund agrees to pay BNY such compensation as is mutually agreed from time to time and such out-of-pocket expenses ( e.g. , telecommunication charges, postage and delivery charges, record retention costs, reproduction charges and transportation and lodging costs) as are incurred by BNY in performing its duties hereunder. Except as hereinafter set forth, compensation shall be calculated and accrued daily and paid monthly. . BNY shall deliver to each Fund invoices for services rendered hereunder, and each fund shall have a reasonable time period to review and approve the payment of such invoices, but upon failure to do so in such reasonable period of time each Fund authorizes BNY to debit such Fund’s custody account for all amounts due and payable and not disputed in good faith hereunder. Upon termination of this Agreement before the end of any month, the compensation for such part of a month shall be prorated according to the proportion which such period bears to the full monthly period and shall be payable upon the effective date of termination of this Agreement. For the purpose of determining compensation payable to BNY, each Fund’s net asset value shall be computed at the times and in the manner specified in the Trust's Prospectus.

11.      Term of Agreement .

(a)     This Agreement shall continue until terminated by either BNY giving to the Trust, or the Trust of behalf of a Fund giving to BNY, a notice in writing specifying the date of such termination, which date shall be not less than 90 days after the date of the giving of such notice. Upon termination hereof, the affected Fund(s) shall pay to BNY such compensation as may be due as of the date of such termination, and shall reimburse BNY for any disbursements and expenses made or incurred by BNY and payable or reimbursable hereunder.

 

(b)     Notwithstanding the foregoing, BNY may terminate this Agreement upon 30 days prior written notice to the Trust if the Trust shall terminate its custody agreement with The Bank of New York. Either party may terminate this Agreement on 60 days prior written notice to the other party if the other party fails to perform its obligations hereunder in a material respect after notice of such failure and a reasonable time to correct.

12.      Authorized Persons .

Attached hereto as Exhibit B is a list of Authorized persons who duly authorized by the board of to execute this Agreement and give any written or oral Proper Instructions, or written or oral specifications, by or on behalf of such Fund. From time to time the Trust may deliver a new Exhibit B to add or delete any Authorized person and BNY shall be entitled to rely on the last Exhibit B actually received by BNY.

13.      Records .

BNY agrees that all records listed on Schedule II that it maintains for each Fund shall at all times remain the property of such Fund, shall be readily accessible by the Trust on behalf of each Trust during normal business hours in a facility owned or accessible by BNY, and shall be promptly surrendered in the form and medium then maintained upon written request. BNY further agrees that all records listed on Schedule II that it maintains for each Fund pursuant to Rule 31a-1 under the 1940 Act will be preserved for the periods no less than those prescribed by Rule 31a-2 under the 1940 Act (generally, six (6) years) unless any such records are earlier surrendered as provided above, and will be surrendered in the form and medium then maintained.

14.      Confidentiality .

BNY has established and maintains policies and measures reasonably designed to protect the confidentiality of customer information, and will subject information hereunder to such policies and measures.

15.      Amendment .

(a)     This Agreement may not be amended or modified in any manner except by a written agreement executed by BNY and the Trust to be bound thereby, and authorized or approved by the Trust's Board.

(b)     Notwithsta nding any other provisions contained in this Agreement, the Trust may, without BNY's consent, amend Exhibit B to change Authorized Persons.

16.      Assignment .

This Agreement shall extend to and shall be binding upon the parties hereto, and their respective successors and assigns; provided, however, that this Agreement shall not be assignable by any Fund without the written consent of BNY, or by BNY without the written consent of the affected Fund accompanied by the authorization or approval of the Trust's Board.

17.      Governing Law; Consent to Jurisdiction .

This Agreement shall be construed in accordance with the laws of the State of New York, without regard to conflict of laws principles thereof. BNY and the Trust hereby consent to the jurisdiction of a state or federal court situated in New York City, New York in connection with any dispute arising hereunder, and waive to the fullest extent permitted by law their right to a trial by jury. To the extent that in any jurisdiction BNY and the Trust may now or hereafter be entitled to claim, for themselves or their assets, immunity from suit, execution, attachment (before or after judgment) or other legal process, BNY and the Trust irrevocably agree not to claim, and hereby waive, such immunity.

18.      Severability .

In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations shall not in any way be affected or impaired thereby, and if any provision is inapplicable to any person or circumstances, it shall nevertheless remain applicable to all other persons and circumstances.

19.      No Waiver .

Each and every right granted to BNY or the Trust hereunder or under any other document delivered hereunder or in connection herewith, or allowed it by law or equity, shall be cumulative and may be exercised from time to time. No failure on the part of BNY or the Trust to exercise, and no delay in exercising, any right will operate as a waiver thereof, nor will any single or partial exercise by BNY or the Trust of any right preclude any other or future exercise thereof or the exercise of any other right.

20.      Notices .

All notices, requests, consents and other communications pursuant to this Agreement in writing shall be sent as follows:

if to the Trust, at

  

Direxion Shares ETF Trust
33 Whitehall Street, 10th Floor
New York, NY 10004
Attention: Daniel D. O’Neill

Title: President

if to BNY, at

The Bank of New York
One Wall Street
New York, New York 10286
Attention:
Title:



or at such other place as may from time to time be designated in writing. Notices hereunder shall be effective upon receipt.

21.      Counterparts .

This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original; but such counterparts together shall constitute only one instrument.

22.      Several Obligations .

Notwithstanding anything in this Agreement to the contrary, the parties acknowledge that the obligations of the Trust hereunder are several and not joint and that no Fund shall be liable for any amount owing by another Fund and that the Funds have executed one instrument for convenience only.

     

IN WITNESS WHEREOF, the parties hereto have caused the foregoing instrument to be executed by their duly authorized officers and their seals to be hereunto affixed, all as of the day and year first above written.

 

Direxion Shares ETF Trust
 
 

By:

 

Title:

__________________________________

Daniel D. O'Neill

President

   
 

THE BANK OF NEW YORK MELLON
 

By:

 

Title:

 


EXHIBIT A

Name of Fund

EXHIBIT B

     I,                                      , of *, a (State) corporation (the “Fund”), do hereby certify that:

     The following individuals serve in the following positions with the Fund, and each has been duly elected or appointed to each such position and qualified therefor in conformity with the Fund’s organizational documents and by-laws, and the signatures set forth opposite their respective names are their true and correct signatures. Each such person is authorized to give written or oral instructions or written or oral specifications by or on behalf of the Fund to BNY.

Name

 

Position

 

Signature

         


SCHEDULE I

ADMINISTRATIVE SERVICES

1.

Prepare minutes of Board of Trustee meetings and assist the Secretary of the Trust in preparation for Board meetings. Such minutes, meeting agendas and other material prepared in preparation for each Board meeting are subject to the review and approval of Trust counsel.

   

2.

Perform for each Fund, the compliance tests as mutually agreed and which shall be specific to each Fund. The Compliance Summary Reports listing the results of such tests are subject to review and approval by each Fund.

   

3.

Participate in the periodic updating of the Trust's Registration Statement and Prospectus and, subject to approval by the Trust's Treasurer and legal counsel, coordinate the preparation, filing, printing and dissemination of periodic reports and other information to the SEC and the Fund’s shareholders, including annual and semi-annual reports to shareholders, Form N-SAR, Form N-CSR, Form N-Q, Form N-PX, and notices pursuant to Rule 24(f)-2.

   

4.

Prepare workpapers supporting the preparation of federal, state and local income tax returns for each Fund for review and approval by the Trust's independent auditors; perform ongoing wash sales review ( i.e. , purchases and sales of Fund investments within 30 days of each other); and prepare Form 1099s with respect to the Trust's trustees and file such forms upon the approval of the Trust's Treasurer.

   

5.

Prepare and, subject to approval of the Trust's Treasurer, disseminate to the Board quarterly unaudited financial statements and schedules of each Fund’s investments and make presentations to the Board, as appropriate.

   

6.

Subject to approval of the Board, assist the Trust in obtaining fidelity bond and E&O/D&O insurance coverage.

   

7.

Prepare statistical reports for outside information services ( e.g. , IBC/Donoghue, ICI, Lipper Analytical and Morningstar).

   

8.

Attend shareholder and Board meetings as requested from time to time.

   

9.

Subject to review and approval by the Treasurer of the Trust, establish appropriate expense accruals, maintain expense files and coordinate the payment of invoices for each Fund.



SCHEDULE II

VALUATION AND COMPUTATION SERVICES

I.

BNY shall maintain the following records on a daily basis for each Fund.

     
 

1.

Report of priced portfolio securities

     
 

2.

Statement of net asset value per share

     
   

Such reports and statements shall be provided to the Fund at _____ p.m. New York time and to Authorized Participants at _____ p.m. New York time, in each case by such means as BNY and the Fund may agree upon from time to time.

     

II.

BNY shall maintain the following records on a monthly basis for each Fund:

     
 

1.

General Ledger

     
 

2.

General Journal

     
 

3.

Cash Receipts Journal

     
 

4.

Cash Disbursements Journal

     
 

5.

Subscriptions Journal

     
 

6.

Redemptions Journal

     
 

7.

Accounts Receivable Reports

     
 

8.

Accounts Payable Reports

     
 

9.

Open Subscriptions/Redemption Reports

     
 

10.

Transaction (Securities) Journal

     
 

11.

Broker Net Trades Reports



III.     BNY shall prepare a Holdings Ledger on a quarterly basis, and a Buy-Sell Ledger (Broker’s Ledger) on a semiannual basis for each Series. Schedule D shall be produced on an annual basis for each Fund.

The above reports may be printed according to any other required frequency to meet the requirements of the Internal Revenue Service, The U.S. Securities and Exchange Commission and the Trust's Auditors.

IV.     For internal control purposes, BNY uses the Account Journals produced by The Bank of New York Custody System to record daily settlements of the following for each Fund:

1.

Securities bought

   

2.

Securities sold

   

3.

Interest received

   

4.

Dividends received

   

5.

Capital stock sold

   

6.

Capital stock redeemed

   

7.

Other income and expenses



All portfolio purchases for a Fund are recorded to reflect expected maturity value and total cost including any prepaid interest.

K&L|GATES

             K&L Gates LLP

1601 K Street NW

 Washington, DC 20006-1600


T 202.778.9000

www.klgates.com


 

August 15, 2008



Direxion Shares ETF Trust

33 Whitehall Street, 10th Floor

New York, NY 10004

Ladies and Gentlemen:

We have acted as counsel to Direxion Shares ETF Trust, a Delaware statutory trust (the “Trust”), in connection with the filing with the Securities and Exchange Commission (“SEC”) of Pre-Effective Amendment No. 1 to the Trust's Registration Statement on Form N-1A (File Nos. 333-150525; 811-22201) (the “Pre-Effective Amendment”), registering an indefinite number of shares of beneficial interest, without par value, of each series of the Trust listed in Schedule A attached hereto (the “Shares”) under the Securities Act of 1933, as amended (the “1933 Act”).

You have requested our opinion as to the matters set forth below in connection with the filing of the Pre-Effective Amendment.  For purposes of rendering that opinion, we have examined the Pre-Effective Amendment, the Trust Instrument and By-laws of the Trust, and the action of the Trust that provides for the issuance of the Shares, and we have made such other investigation as we have deemed appropriate.  We have examined and relied upon certificates of public officials and, as to certain matters of fact that are material to our opinions, we have also relied on a certificate of an officer of the Trust.  In rendering our opinion, we also have made the assumptions that are customary in opinion letters of this kind.  We have not verified any of those assumptions.

Our opinion, as set forth herein, is based on the facts in existence and the laws in effect on the date hereof and is limited to the federal laws of the United States of America and the laws of the State of Delaware that, in our experience, generally are applicable to the issuance of shares by entities such as the Trust.  We express no opinion with respect to any other laws.

Based upon and subject to the foregoing, we are of the opinion that:

1.

The Shares to be issued pursuant to the Pre-Effective Amendment have been duly authorized for issuance by the Trust; and

2.

When issued and paid for upon the terms provided in the Pre-Effective Amendment, the Shares to be issued pursuant to the Pre-Effective Amendment will be validly issued, fully paid, and nonassessable.

This opinion is rendered solely in connection with the filing of the Pre-Effective Amendment and supersedes any previous opinions of this firm in connection with the issuance of Shares.  We hereby consent to the filing of this opinion with the SEC in connection with the Pre-

 


 





Direxion Shares ETF Trust

August 15, 2008

Page 2



Effective Amendment and to the reference to this firm in the statement of additional information that is being filed as part of the Pre-Effective Amendment.  In giving our consent we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the 1933 Act or the rules and regulations of the SEC thereunder.

Very truly yours,

/s/ K&L Gates LLP






SCHEDULE A


Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X Shares

Latin America Bull 3X Shares

Latin America Bear 3X Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X Shares

Financial Bull 3X Shares

Financial Bear 3X Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X Shares




CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We consent to the reference to our firm under the caption “Independent Registered Public Accounting Firm” and to the use of our report dated August 15, 2008 on the seed money financial statements of Large Cap Bull 3X Shares, Large Cap Bear 3X Shares, Financial Bull 3X Shares, and Financial Bear 3X Shares in this Registration Statement (Form N-1A) of Direxion Shares ETF Trust, to be filed with the Securities and Exchange Commission in this Pre-Effective Amendment No. 1 to the Registration Statement under the Securities Act of 1933 (File No. 333-150525).
 

/s/ Ernst & Young LLP

Chicago, Illinois

August 18, 2008
 


RAFFERTY ASSET MANAGEMENT, LLC

33 Whitehall Street, 10 th Floor

New York, New York 10004





August 14, 2008


Direxion Shares ETF Trust

33 Whitehall Street, 10 th Floor

New York, New York 10004



Gentlemen:


Please be advised that the 416.88 shares of Large Cap Bull 3X Shares, 416.87 shares of  Large Cap Bear 3X Shares, 416.88 shares of Financial Bull 3X Shares and 416.87 shares of  Financial Bear 3X Shares which we have purchased from you in the aggregate amount of $100,050 were purchased as an investment with no present intention of redeeming or selling such shares and we do not now have any intention of redeeming or selling such shares.

 

 

Very truly yours,


RAFFERTY ASSET MANAGEMENT, LLC




By:   /s/ Todd Kellerman

Todd Kellerman

Senior Vice President








DIREXION SHARES ETF TRUST

DISTRIBUTION PLAN


WHEREAS, the Direxion Shares ETF Trust (the “Trust”) is engaged in business as an exchange-traded fund and is registered as an open-end management investment company under the Investment Company Act of 1940, as amended (the “1940 Act”); and


WHEREAS, the Trust, on behalf of its one or more designated series presently existing or hereafter established (hereinafter referred to as “Funds”), desires to adopt a Distribution Plan pursuant to Rule l2b-1 under the 1940 Act and the Board of Trustees of the Trust has determined that there is a reasonable likelihood that adoption of this Distribution Plan will benefit the Funds and their shareholders; and


WHEREAS, the Trust employs a registered broker-dealer as distributor of the securities of which it is the issuer (“Distributor”);


NOW, THEREFORE, the Trust, with respect to the shares of its Funds, hereby adopts this Distribution Plan (the “Plan”) in accordance with Rule l2b-1 under the 1940 Act on the following terms and conditions:


1.

Payment of Fees .  The Trust is authorized to pay to the Distributor and/or other parties (which need not be registered broker-dealers) distribution and/or service fees for each Fund listed on Schedule A of this Plan, as such schedule may be amended from time to time, on an annualized basis, at such rates as shall be determined from time to time by the Board of Trustees (“Board”) up to the maximum rates set forth in Schedule A, as such schedule may be amended from time to time.  Such fees shall be calculated and accrued daily and paid monthly or at such other intervals as shall be determined or ratified by the Board.  The distribution and service fees shall be payable by the Trust on behalf of a Fund regardless of whether those fees exceed or are less than the actual expenses incurred by the Distributor and/or other applicable parties with respect to such Fund in a particular year.


As of the end of a Fund’s fiscal year, the expenses incurred in connection with the sale and promotion of the Shares and the furnishing of services to Shareholders, as described above, may exceed the maximum annual rate determined by the Board.  Although the Fund is not permitted to pay any such excess expenses during that same fiscal year, such excess expenses may be reimbursed during any of the Fund’s subsequent three fiscal years, provided and to the extent that the current expenses plus the excess expenses do not exceed the applicable fee rate for that subsequent year.  All or any portion of such excess expenses may be reimbursed by the Fund during any one or more of the three subsequent fiscal years.


2.

Distribution and Service Expenses .  The fee authorized by Paragraph 1 of this Plan shall be paid pursuant to an appropriate agreement in payment for any activities or expenses intended to result in the sale and/or retention of Fund shares, including, but not limited to, (a) compensation paid to registered representatives of the Distributor and to participating dealers or to any other persons that have entered into agreements with the Distributor, (b) salaries and other expenses of the Distributor or other parties relating to selling or servicing efforts, including travel, communications and the provision of sales personnel, (c) expenses of organizing and conducting sales seminars, printing of prospectuses, statements of additional information and reports for other than existing shareholders, (d) preparation and distribution of advertising materials and sales literature and other marketing and sales promotion expenses, (e) distribution and/or shareholder service assistance through financial institutions and intermediaries such as banks, savings and loan associations, insurance companies and investment counselors, broker-dealers, and the affiliates and subsidiaries of the Trust’s service providers, and/or (f) ongoing services to shareholders which facilitate the continued retention of investors as shareholders of a Fund.

3.

Additional Compensation .  This Plan shall not be construed to prohibit or limit additional compensation derived from sales charges or other sources that may be paid to the Distributor pursuant to the aforementioned Distribution Agreement.


4.

Third Party Expenses .  Nothing in this Plan shall operate or be construed to limit the extent to which the Trust's investment adviser or any other person, other than the Trust, may incur costs and bear expenses associated with the distribution of Shares of beneficial interest in a Fund.  The Trust’s investment adviser and other parties may from time to time make payments to third parties out of their advisory or other fee, including payments for fees for shareholder servicing and transfer agency functions.  If such payments are deemed to be indirect financing of an activity primarily intended to result in the sale of shares issued by a Fund within the context of Rule 12b-1 under the 1940 Act, such payments shall be authorized by this Plan.

5.

Board Approval .  This Plan shall not take effect with respect to any Fund until it has been approved, together with any related agreements, by vote of a majority of both (a) the Board of Trustees and (b) those members of the Board who are not “interested persons” of the Trust, as defined in the 1940 Act, and have no direct or indirect financial interest in the operation of this Plan or any agreements related to it (the “Independent Trustees”), cast in person at a meeting or meetings called for the purpose of voting on this Plan and such related agreements.


6.

Renewal of Plan .  This Plan shall continue in full force and effect with respect to a Fund for successive periods of one year from its approval as set forth in Paragraphs 5 for so long as such continuance is specifically approved at least annually in the manner provided for approval of this Plan in Paragraph 5.


7.

Reports .  To the extent required by the reporting requirements of Rule 12b-1, the Distributor or other appropriate party shall provide to the Board of Trustees, and the Board shall review, at least quarterly, a written report of the amounts so expended and the purposes for which such expenditures were made.


8.

Termination .  This Plan may be terminated with respect to a Fund at any time by vote of a majority of the Independent Trustees or by a vote of a majority of the outstanding voting securities of such Fund, voting separately from any other Fund of the Trust.


9.

Amendments .  Any change to the Plan that would materially increase the distribution costs to a Fund may not be instituted unless such amendment is approved in the manner provided for Board approval in Paragraph 5 hereof and approved by a vote of at least a majority of such Fund’s outstanding voting securities, as defined in the 1940 Act, voting separately from any other Fund of the Trust.  Any other material change to the Plan may not be instituted unless such change is approved in the manner provided for initial approval in Paragraph 5 hereof.


10.

Fund Governance .   While this Plan is in effect, the Board of Trustees shall satisfy the fund governance standards as defined in Rule 0-1(a)(7) under the 1940 Act to the extent applicable.


11.

Records .  The Trust shall preserve copies of this Plan and any related agreements and all reports made pursuant to Paragraph 7 hereof for a period of not less than six years from the date of execution of this Plan, or of the agreements or of such reports, as the case may be, the first two years in an easily accessible place.



Dated:   August __, 2008




DIREXION SHARES ETF TRUST


The maximum annualized fee rate pursuant to Paragraph 1 of the Direxion Shares ETF Trust Distribution Plan shall be as follows:


Total Market Bull 3X Shares

Total Market Bear 3X Shares

Large Cap Bull 3X Shares

Large Cap Bear 3X Shares

Mid Cap Bull 3X Shares

Mid Cap Bear 3X Shares

Small Cap Bull 3X Shares

Small Cap Bear 3X  Shares

Developed Markets Bull 3X Shares

Developed Markets Bear 3X Shares

Emerging Markets Bull 3X Shares

Emerging Markets Bear 3X  Shares

BRIC Bull 3X Shares

BRIC Bear 3X Shares

China Bull 3X Shares

China Bear 3X Shares

India Bull 3X Shares

India Bear 3X  Shares

Latin America Bull 3X Shares

Latin America Bear 3X  Shares

Clean Energy Bull 3X Shares

Clean Energy Bear 3X Shares

Energy Bull 3X Shares

Energy Bear 3X  Shares

Financial Bull 3X Shares

Financial Bear 3X  Shares

Technology Bull 3X Shares

Technology Bear 3X Shares

Real Estate Bull 3X Shares

Real Estate Bear 3X Shares

Homebuilders Bull 3X Shares

Homebuilders Bear 3X  Shares


Up to 0.25% of average daily net assets.



Dated:  August __, 2008






FORM OF
CODE OF ETHICS


DIREXION SHARES ETF TRUST

and

RAFFERTY ASSET MANAGEMENT, LLC



I.   INTRODUCTION


A.

Fiduciary Duty .  This Code of Ethics has been adopted by the above named trust (“Trust”) and Rafferty Asset Management, LLC in compliance with Rule 17j-1 under the Investment Company Act of 1940 and Section 204A-1 under the Investment Advisers Act of 1940, as amended.  Capitalized terms used in this Code are defined in Appendix 1 to this Code.  All Appendices referred to herein are attached to and are a part of this Code.


This Code is based on the principle that the trustees, officers, and employees of Rafferty and the Trust have a fiduciary duty to place the interests of the Trust ahead of their own interests.  The Code applies to all Access Persons and focuses principally on reporting of personal transactions in securities.  Access Persons must avoid activities, interests and relationships that might interfere with making decisions in the best interests of the Trust.


As fiduciaries, Access Persons must at all times:


1.

Place the interests of the Trust first .  Access Persons must scrupulously avoid serving their own personal interests ahead of the interests of the Trust.  An Access Person may not induce or cause a Fund to take action, or not to take action, for personal benefit, rather than for the benefit of the Fund.  For example, an Access Person would violate this Code by causing a Fund to purchase a Security he or she owned for the purpose of increasing the price of that Security.


2.

Avoid taking inappropriate advantage of their positions .  Access Persons may not, for example, use their knowledge of portfolio transactions to profit by the market effect of such transactions.  Receipt of investment opportunities, prerequisites, or gifts from persons seeking business with the Trust or Rafferty could call into question the exercise of an Access Person's independent judgment.


3.

Conduct all Personal Securities Transactions in full compliance with this Code including the reporting requirements .  Doubtful situations should be resolved in favor of the Trust.  Technical compliance with the Code's procedures will not automatically insulate from scrutiny any trades that indicate an abuse of fiduciary duties.


B.

Appendices to the Code .  The appendices to this Code are attached to and are a part of the Code.  The appendices include the following:


1.

Definitions (Appendix 1),


2.

Contact Persons (Appendix 2),


3.

Certification of Compliance with Code of Ethics (Appendix 3 and 3-I),


a)

Personal Securities Holdings and Accounts Disclosure Form (Appendix 3-A)


4.

Form Letter to Broker, Dealer or Bank (Appendix 4).


5.

Report of Securities Transactions (Appendix 5)


6.

Initial Public Offering / Private Placement Clearance Form (Appendix 6)


C.

Application of the Code to Independent Fund Trustees .  Notwithstanding the definition of Access Persons, the following provisions do not apply to Independent Fund Trustees and their Immediate Families.


1.

Personal Securities Transactions (Section II)

2.

Initial, Quarterly and Annual Holdings Reporting Requirements (Section III.A.)

3.

Receipt and Giving of Gifts (Section IV.B.)

4.

Restrictions on Service as a Director of a Publicly-Traded Company (Section IV.E.)


II.   PERSONAL SECURITIES TRANSACTIONS


A.

Prohibited Transactions .


1.

Prohibited Securities Transactions .  The following Securities Transactions are prohibited and will not be authorized by the Compliance Officer (or a designee) absent exceptional circumstances.  The prohibitions apply only to the categories of Access Persons specified.


a.

Initial Public Offerings (Investment Personnel only) .  Any purchase of Securities by Investment Personnel in an initial public offering (other than a new offering of a registered open-end investment company).  However, if authorized, the Compliance Officer will maintain a record of the reasons for such authorization (see Appendix 6).


b.

Pending Buy or Sell Orders (Investment Personnel Only) .  Any purchase or sale of Securities by Investment Personnel on any day during which any Fund has a pending "buy" or "sell" order in the same Security (or Equivalent Security) until that order is executed or withdrawn.


c.

Intention to Buy or Sell for a Fund (all Investment Personnel) . Purchases or sales of Securities by an Investment Person at a time when that Investment Person intends, or knows of another's intention, to purchase or sell that Security (or an Equivalent Security) on behalf of a Fund.  This prohibition applies whether the Securities Transaction is in the same direction ( e.g. , two purchases) or the opposite direction (a purchase and sale) as the transaction of the Fund.


2.

Always Prohibited Securities Transactions .  The following Securities Transactions are prohibited and will not be authorized under any circumstances.


a.

Inside Information .  Any transaction in a Security while in possession of material nonpublic information regarding the Security or the issuer of the Security.


b.

Market Manipulation .  Transactions intended to raise, lower, or maintain the price of any Security or to create a false appearance of active trading.


c.

Others .  Any other transactions deemed by the Compliance Officer (or a designee) to involve a conflict of interest, possible diversions of a corporate opportunity, or an appearance of impropriety.


3.

Private Placements (Investment Personnel only) .  Acquisition of Beneficial Interests in Securities in a private placement by Investment Personnel is strongly discouraged.  The Compliance Officer (or a designee) will give permission only after considering, among other facts, whether the investment opportunity should be reserved for a Fund and whether the opportunity is being offered to the person by virtue of the person's position as an Investment Person.  If a private placement transaction is permitted, the Compliance Officer will maintain a record of the reasons for such approval (see Appendix 6).  Investment Personnel who have acquired securities in a private placement are required to disclose that investment to the Compliance Officer when they play a part in any subsequent consideration of an investment in the issuer by a Fund, and the decision to purchase securities of the issuer by a Fund must be independently authorized by a Portfolio Manager with no personal interest in the issuer.


B.

Exemptions.


1.

The following Securities Transactions are exempt from the restrictions set forth in Section II.A.


a.

Mutual Funds .  Securities issued by any registered open-end investment companies (including the Trust);


b.

No Knowledge .  Securities Transactions where neither the Access Person nor an Immediate Family member knows of the transaction before it is completed (for example, Securities Transactions effected for an Access Person by a trustee of a blind trust or discretionary trades involving an investment partnership or investment club in which the Access Person is neither consulted nor advised of the trade before it is executed);


c.

Certain Corporate Actions .  Any acquisition of Securities through stock dividends, dividend reinvestments, stock splits, reverse stock splits, mergers, consolidations, spin-offs, or other similar corporate reorganizations or distributions generally applicable to all holders of the same class of Securities;


d.

Rights .  Any acquisition of Securities through the exercise of rights issued by an issuer pro rata to all holders of a class of its Securities, to the extent the rights were acquired in the issue; and


e.

Miscellaneous .  Any transaction in the following:  (1) bankers’ acceptances, (2) bank certificates of deposit, (3) commercial paper, (4) high quality short-term debt, including repurchase agreements, (5) Securities that are direct obligations of the U.S. Government, and (6) other Securities as may from time to time be designated in writing by the Compliance Officer on the grounds that the risk of abuse is minimal or non-existent.


2.  

Personal Transactions in Securities that also are being purchased, sold or held by a Fund are exempt from the prohibitions of Sections II.A.1.b, and c, if the Access Person does not, in connection with his or her regular functions or duties, make, participate in, or obtain information regarding the purchase or sale of Securities by that Fund.  


The Securities Transactions listed in Section II in this subsection are not exempt from the reporting requirements of the Code.  


3.

Application to Commodities, Futures, Options on Futures and Options on Broad-Based Indices .  Commodities, futures (including currency futures and futures on securities comprising part of a broad-based, publicly traded market based index of stocks) and options on futures are subject to transaction reporting.


III.   REPORTING REQUIREMENTS


A.

Reporting Requirements for all Access Persons Except Independent Fund Trustees


1.

Initial Holdings and Accounts Report .  Any person who becomes an Access Person of Rafferty or the Trust must submit within 10 days of becoming an Access Person an Initial Holdings and Accounts Report (see Appendix 3-A) to the Compliance Officer listing all Securities accounts and securities that he or she holds in such accounts in which that Access Person (or Immediate Family member) has Beneficial Interest..


2.

Quarterly Reporting Requirements .  Every Access Person and members of his or her Immediate Family must arrange for the Compliance Officer to receive directly from any broker, dealer, or bank that effects any Securities Transaction, duplicate copies of each confirmation for each such transaction and periodic statements for each brokerage account in which such Access Person has a Beneficial Interest. Attached hereto as Appendix 4 is a form of letter that may be used to request such documents from such entities.  All copies must be received no later than 10 days after the end of the calendar quarter.  Each confirmation or statement must disclose the following information:


a)

the date of the transaction;

b)

the title (and interest rate and maturity date, if applicable);

c)

the number of shares and principal amount;

d)

the nature of the transaction (e.g., purchase, sale);

e)

the price of the Security; and

f)

the name of the broker, dealer or bank through which the trade was effected.


If an Access Person is not able to arrange for duplicate confirmations and periodic statements to be sent that contain the information required above, the Access Person must submit a Quarterly Transaction Report (see Appendix 5) within 10 days after the completion of each calendar quarter to the Compliance Officer.


3.

Every Access Person who establishes a Securities account during the quarter in which that Access Person (or Immediate Family member) has Beneficial Interest must submit an Account Report (see Appendix 5) to the Compliance Officer.  This report must be submitted to the Compliance Officer within 10 days after the completion of each calendar quarter.


4.

Annual Holdings and Accounts Report .  Every Access Person must submit an Annual Holdings and Accounts Report (see Appendix 3-A) listing all Securities accounts and securities in which that Access Person (or Immediate Family member) has Beneficial Interest.  The information in the Annual Holdings Report must be current as of a date no more than 30 days before the report is submitted.  The completed report should be submitted to the Compliance Officer by December 31 following the end of the calendar year.


B.

Reporting Requirements for Independent Fund Trustees


Each Independent Fund Trustee (and their Immediate Families) must report to the Compliance Officer any trade in a Security by any account in which the Independent Fund Trustee has any Beneficial Interest if the Independent Fund Trustee knew or, in the ordinary course of fulfilling his or her duty as a Trustee of the Trust, should have known that during the 15-day period immediately preceding or after the date of the transaction in a Security by the Trustee such Security (or an Equivalent Security) was or would be purchased or sold by the Fund or such purchase or sale by the Fund was or would be considered by the Fund or by Rafferty for the Fund.  Independent Fund Trustees who need to report such transactions should refer to the procedures outlined in Section III.A.2.


C.

Reporting Requirements for Investment Personnel


Each investment person must follow the requirements of Section III.A.2.



D.

Exemptions, Disclaimers and Availability of Reports


1.

A Securities Transaction involving the following circumstances or Securities are exempt from the Reporting Requirements discussed above:  (1) neither the Access Person nor an Immediate Family Member had any direct or indirect influence or control over the transaction; (2) Securities directly issued by the U.S. Government; (3) bankers’ acceptances; (4) bank certificates of deposit; (5) commercial paper; (6) high quality short-term debt instruments, including repurchase agreements; (7) shares issued by open-end mutual funds; and (7) other Securities as may from time to time be designated in writing by the Compliance Officer on the grounds that the risk of abuse is minimal or non-existent.


In addition, no Access Person of Rafferty shall be required to make a Quarterly Transaction Report where such report would duplicate information recorded by Heritage pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940.


2.

Disclaimers .  Any report of a Securities Transaction for the benefit of a person other than the individual in whose account the transaction is placed may contain a statement that the report should not be construed as an admission by the person making the report that he or she has any direct or indirect beneficial ownership in the Security to which the report relates.


3.

Availability of Reports .  All information supplied pursuant to this Code may be made available for inspection to the Board of Trustees of the Trust, the Board of Directors of Rafferty, the Compliance Officer, any party to which any investigation is referred by any of the foregoing, the SEC, any self-regulatory organization of which Rafferty is a member, any state securities commission, and any attorney or agent of the foregoing or of the Trust.


IV.   FIDUCIARY DUTIES


A.

Confidentiality .  Access Persons are prohibited from revealing information relating to the investment intentions, activities or portfolios of the Trust except to persons whose responsibilities require knowledge of the information.


B.

Gifts .  The following provisions on gifts apply to all Investment Personnel.


1.

Accepting Gifts .  On occasion, because of their position with the Trust, Investment Personnel may be offered, or may receive without notice, gifts from clients, brokers, vendors, or other persons not affiliated with such entities.  Acceptance of extraordinary or extravagant gifts is not permissible.  Any such gifts must be declined or returned in order to protect the reputation and integrity of the Trust and Rafferty.  Gifts of a nominal value ( i.e. , gifts whose reasonable value is no more than $100 a year), and customary business meals, entertainment ( e.g. , sporting events), and promotional items ( e.g. , pens, mugs, T-shirts) may be accepted.


If an Investment Person receives any gift that might be prohibited under this Code, the Investment Person must inform the Compliance Officer.


2.

Solicitation of Gifts .  Investment Personnel may not solicit gifts or gratuities.


3.

Giving Gifts .  Investment Personnel may not personally give any gift with a value in excess of $100 per year to persons associated with securities or financial organizations, including exchanges, other member organizations, commodity firms, news media, or clients of Rafferty.


C.

Corporate Opportunities .  Access Persons may not take personal advantage of any opportunity properly belonging to the Trust or Rafferty.  This includes, but is not limited to, acquiring Securities for one's own account that would otherwise be acquired for a Fund.


D.

Undue Influence .  Access Persons may not cause or attempt to cause any Fund to purchase, sell or hold any Security in a manner calculated to create any personal benefit to the Access Person.  If an Access Person or Immediate Family member stands to benefit materially from an investment decision for a Fund which the Access Person is recommending or participating in, the Access Person must disclose to those persons with authority to make investment decisions for the Fund (or, if the Access Person in question is a person with authority to make investment decisions for the Fund, to the Compliance Officer) any Beneficial Interest that the Access Person (or Immediate Family member) has in that Security or an Equivalent Security, or in the issuer thereof, where the decision could create a material benefit to the Access Person (or Immediate Family member) or the appearance of impropriety.  The person to whom the Access Person reports the interest, in consultation with the Compliance Officer, must determine whether or not the Access Person will be restricted in making investment decisions.


E.

Service as a Director .  No Investment Person may serve on the board of directors of a publicly-held company (other than the Trust) absent prior written authorization by the Compliance Officer.  This authorization will rarely, if ever, be granted and, if granted, normally will require that the affected Investment Person be isolated, through a "Chinese Wall" or other procedures, from those making investment decisions related to the issuer on whose board the person sits.


V.   COMPLIANCE WITH THIS CODE OF ETHICS


A.

Compliance Officer Review


1.

Investigating Violations of the Code .  The Compliance Officer is responsible for investigating any suspected violation of the Code and shall report the results of each investigation to the President of Rafferty.  The President of Rafferty together with the Compliance Officer are responsible for reviewing the results of any investigation of any reported or suspected violation of the Code.  Any violation of the Code by an Access Person will be reported to the Boards of Trustees of the Trust no less frequently than each regular quarterly meeting.


2.

Annual Reports .  The Compliance Officer will review the Code at least once a year, in light of legal and business developments and experience in implementing the Code, and will report to the Boards of Trustees of the Trust:


a.

Summarizing existing procedures concerning personal investing and any changes in the procedures made during the past year;


b.

Identifying any violation requiring significant remedial action during the past year; and


c.

Identifying any recommended changes in existing restrictions or procedures based on its experience under the Code, evolving industry practices, or developments in applicable laws or regulations.


B.

Remedies


1.

Sanctions .  If the Compliance Officer and the President of Rafferty determine that an Access Person has committed a violation of the Code following a report of the Compliance Officer, the Compliance Officer and the President of Rafferty may impose sanctions and take other actions as they deem appropriate, including a letter of caution or warning, suspension of personal trading rights, suspension of employment (with or without compensation), fine, civil referral to the SEC, criminal referral, and termination of the employment of the violator for cause.  The Compliance Officer and the President of Rafferty also may require the Access Person to reverse the trade(s) in question and forfeit any profit or absorb any loss derived therefrom.  The amount of profit shall be calculated by the Compliance Officer and the President of Rafferty and shall be forwarded to a charitable organization selected by the Compliance Officer and the President of Rafferty.  The Compliance Officer and the President of Rafferty may not review his or her own transaction.


2.

Sole Authority .  The Compliance Officer and the President of Rafferty have sole authority, subject to the review set forth in Section V.B.3 below, to determine the remedy for any violation of the Code, including appropriate disposition of any monies forfeited pursuant to this provision.  Failure to promptly abide by a directive to reverse a trade or forfeit profits may result in the imposition of additional sanctions.


3.

Review .  Whenever the Compliance Officer and the President of Rafferty determine that an Access Person has committed a violation of this Code that merits remedial action, they will report no less frequently than quarterly to the Boards of Trustees of the Trust, information relating to the investigation of the violation, including any sanctions imposed.  The Boards of Trustees of the Trust may modify such sanctions as it deems appropriate.  The Boards of Trustees of the Trust and the Compliance Officer and the President of Rafferty shall have access to all information considered by the Compliance Officer in relation to the case.  The Compliance Officer may determine whether or not to delay the imposition of any sanctions pending review by the applicable Board.


C.

Exceptions to the Code .  Although exceptions to the Code will rarely, if ever, be granted, the Compliance Officer may grant exceptions to the requirements of the Code on a case by case basis if the Compliance Officer finds that the proposed conduct involves negligible opportunity for abuse.  All such exceptions must be in writing and must be reported as soon as practicable to the Boards of Trustees of the Trust at its next regularly scheduled meeting after the exception is granted.


D.

Compliance Certification .  Each current Access Person and each newly-hired Access Person shall certify that he or she has received, read and understands the Code by executing the Certification of Compliance with the Code of Ethics form (see Appendix 3).  In addition, by December 31 following the end of the prior calendar year, all Access Persons will be required to re-certify on such form (see Appendix 3) that they have read and understand the Code, that they have complied with the requirements of the Code, and that they have reported all Securities Transactions required to be disclosed or reported pursuant to the requirements of this Code.  Independent Fund Trustees should complete Appendix 3-I only.


E.

Inquiries Regarding the Code .  The Compliance Officer will answer any questions about the Code or any other compliance-related matters.




                   , 2008


Appendix 1


DEFINITIONS


" Access Person " means any trustee, director, officer or Advisory Person of Rafferty or the Trust.


Advisory Person ” means (1) any employee of Rafferty and the Trust (or of any company in a control relationship with such companies) who, in connection with his or her regular functions or duties, makes, participates in, or obtains information regarding the purchase or sale of a security by the Trust, or whose functions relate to the making of any recommendation with respect to such purchases or sales, and (2) any natural person in a control relationship to such companies who obtains information concerning the recommendations made to the Trust with respect to the purchase and sale of securities by the Trust.


" Beneficial Interest " means the opportunity, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, to profit, or share in any profit derived from, a transaction in the subject Securities.  An Access Person is deemed to have a Beneficial Interest in Securities owned by members of his or her Immediate Family.  Common examples of Beneficial Interest include joint accounts, spousal accounts, UTMA accounts, partnerships, trusts and controlling interests in corporations.  Any uncertainty as to whether an Access Person has a Beneficial Interest in a Security should be brought to the attention of the Compliance Officer.  Such questions will be resolved in accordance with, and this definition shall be subject to, the definition of "beneficial owner" found in Rules 16a-1(a)(2) and (5) promulgated under the Securities Exchange Act of 1934.


" Code " means this Code of Ethics, as it may be amended from time to time.


" Compliance Officer " means the Compliance Officer of Rafferty and the persons designated in Appendix 2, as such Appendix shall be amended from time to time.  


" Equivalent Security " means any Security issued by the same entity as the issuer of a subject Security, including options, rights, stock appreciation rights, warrants, preferred stock, restricted stock, phantom stock, bonds, and other obligations of that company or security otherwise convertible into that security.  Options on securities are included even if, technically, they are issued by the Options Clearing Corporation or a similar entity.


" Fund " and “Trust” mean one or more of the portfolios of the Direxion Shares ETF Trust, an investment company registered under the 1940 Act for which Rafferty serves as investment adviser.


" Immediate Family " of an Access Person means any of the following persons who reside in the same household as the Access Person:


 

child

grandparent

son-in-law

 

stepchild

spouse

daughter-in-law

 

grandchild

sibling

brother-in-law

 

parent

mother-in-law

sister-in-law

 

stepparent

father-in-law

 


Immediate Family includes adoptive relationships and any other relationship (whether or not recognized by law) which the Compliance Officer determines could lead to the possible conflicts of interest, diversions of corporate opportunity, or appearances of impropriety which this Code is intended to prevent.


" Independent Fund Trustee " means a trustee of a Trust who is not an “interested person” as that term is defined in Section 2(a)(19) of the 1940 Act.


Initial Public Offering ” is an offering of securities registered under the Securities Act of 1933 by an issuer who immediately before the registration of such securities was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.


" Investment Personnel " and " Investment Person " mean (1) employees of Rafferty or the Trust (or of any company in a control relationship to such companies) who, in connection with his or her regular functions or duties, makes or participates in making recommendations regarding the purchase or sale of a security, or (2) any natural person who controls Rafferty or the Trust and who obtains information concerning recommendations made to the Trust regarding the purchase and sale of securities by the Trust.  References to Investment Personnel include Portfolio Managers.


1940 Act ” means the Investment Company Act of 1940, as amended.


Private Placement ” means a limited offering exempt from registration pursuant to Rules 504, 505 or 506 or under Section 4(2) or 4(6) of the Securities Act of 1933.


" Portfolio Manager " means a person who has or shares principal day-to-day responsibility for managing the portfolio of a Fund.


Rafferty ” means Rafferty Asset Management, LLC.


" SEC " means the Securities and Exchange Commission.


" Security " includes stock, notes, bonds, debentures, and other evidences of indebtedness (including loan participations and assignments), limited partnership interests, investment contracts, and all derivative instruments of the foregoing, such as options and warrants.  "Security" does not include futures and options on futures, but the purchase and sale of such instruments are nevertheless subject to the reporting requirements of the Code.


" Securities Transaction " means a purchase or sale of Securities in which an Access Person or a member of his or her Immediate Family has or acquires a Beneficial Interest.


Trust ” means the Direxion Shares ETF Trust, an investment company registered under the 1940 Act.







Appendix 2



CONTACT PERSONS


COMPLIANCE OFFICERS:


Adviser :

Todd K. Warren

Peter W. Wilson

 

Chief Compliance Officer

Assistant Compliance Officer

 

Rafferty Asset Management, LLC

Rafferty Asset Management, LLC

 

33 Whitehall Street, 10th Floor

33 Whitehall Street, 10th Floor

 

New York, NY 10004

New York, NY 10004

 

Phone 1: 646-230-0940

Phone 1: 646-230-0937

 

Phone 2: 646-572-3448

Phone 2: 646-572-3448

 

twarren@alariccompliance.com

pwilson@alariccompliance.com

 

warrent@direxionfunds.com

wilsonp@direxionfunds.com

 

 

 

 


 

Trusts :

Todd K. Warren

 

Chief Compliance Officer

 

Direxion Shares ETF Trust

 

33 Whitehall Street, 10th Floor

 

New York, NY 10004

 

Phone 1: 646-230-0940

 

Phone 2: 646-572-3448

 

twarren@alariccompliance.com

 

warrent@direxionfunds.com

 

 

 







Appendix 3


CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS




I acknowledge that I have received the Code of Ethics dated              , 2008 and certify that:


1.

I have read the Code of Ethics and I understand that it applies to me and to all accounts in which I or a member of my Immediate Family has any Beneficial Interest.


2.

In accordance with Section III.A. of the Code of Ethics, I will report or have reported all Securities Transactions in which I have, or a member of my Immediate Family has, a Beneficial Interest, except for transactions exempt from reporting under Section III.C.


3.

I have listed on Appendix 3-A of this form all accounts and securities in which I have, or any member of my Immediate Family has, any Beneficial Interest.


4.

I will comply or have complied with the Code of Ethics in all other respects.


5.

I agree to disgorge and forfeit any profits on prohibited transactions in accordance with the requirements of the Code of Ethics.




 

_____________________________________

Access Person's Signature


 

 

_____________________________________

Print Name


 

Date:____________________

 




SEE NEXT PAGE






Appendix 3-A


PERSONAL SECURITIES HOLDINGS and ACCOUNTS DISCLOSURE FORM

(for use as an Initial or Annual Holdings and Accounts Report)



Pursuant to Section III.A.1 or III.A.3 of the Code of Ethics, please list all Securities accounts and Securities holdings for each Securities account in which you or your Immediate Family member has beneficial interest.  You do not need to list those Securities that are exempt pursuant to Section III.C.



Is this an Initial or Annual Report?

_________________

 

 

Name of Access Person:

____________________________

 

 

Name of Account Holder:

____________________________

 

 

Relationship to Access Person:

____________________________


SECURITIES HOLDINGS:


Attach to this Report your most recent account statement and/or list Securities held below:


Name of Security

Quantity

Principal Amount

Name of Broker/Dealer/Bank

1.

 

 

 

2.

 

 

 

3.

 

 

 

(Attach separate sheets as necessary)


SECURITIES ACCOUNTS:


Account Name

Account Number

Date Account Opened

Name of Broker/Dealer/Bank

1.

 

 

 

2.

 

 

 

3.

 

 

 

4.

 

 

 

(Attach separate sheets as necessary)


I certify that this Report and the attached statements (if any) constitute all the Securities accounts and Securities that must be reported pursuant to this Code.


____________________________________

 

Access Person Signature

 


 

____________________________________

__________________________

Print Name

Date



Appendix 3-I


CERTIFICATION OF COMPLIANCE WITH CODE OF ETHICS

(Independent Fund Trustees)



I acknowledge that I have received the Code of Ethics dated              , 2008 and certify that:


1.

I have read the Code of Ethics and I understand that it applies to me and to all accounts in which I or a member of my Immediate Family has any Beneficial Interest.


2.

I will report or have reported all Securities Transactions required to be reported under Section III.B. of the Code in which I have, or a member of my Immediate Family has, a Beneficial Interest.


3.

I will comply or have complied with applicable provisions of the Code of Ethics in all other respects.




 

______________________________

Trustee's Signature


 

 

______________________________

Print Name


 


Date:_______________________

 









Appendix 4



Form of Letter to Broker, Dealer or Bank




<Date>



<Broker Name and Address>


Subject:

Account # _________________


Dear ________________:


Rafferty Asset Management, LLC (“Rafferty”), my employer, is a registered investment adviser.  In connection with the Code of Ethics adopted by Rafferty, I am required to request that you send duplicate confirmations of individual transactions as well as duplicate periodic statements for the referenced account to my employer.  Please note that the confirmations and/or periodic statements must disclose the following information:


1)

date of the transaction;

2)

the title of the security (including interest rate and maturity date) and price;

3)

the number of shares and principal amount;

4)

the nature of the transaction (e.g., purchase or sale); and

5)

the name of the firm effecting the trade.


If you are unable to provide this information, please let me know immediately.  Otherwise, please address the confirmations and statements directly to:


Chief Compliance Officer

Rafferty Asset Management, LLC

33 Whitehall Street, 10th Floor

New York, New York 10004


Your cooperation is most appreciated.  If you have any questions regarding these requests, please contact me at <phone number> .



 

 

 

 

 

 

Sincerely,


 

 

 

 

 

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

<Name of Access Person>







Appendix 5



REPORT OF SECURITY TRANSACTIONS

FOR QUARTER ENDED                                           


Access Persons other than Independent Fund Trustees:  You do not need to report transactions in 1) direct obligations of the U.S. Government, 2) bankers’ acceptances, bank CDs, commercial paper, high quality short-term debt instruments, 3) shares of an open-end investment company, and 4) transactions which you had no direct or indirect influence or control.


Independent Fund Trustees : If you are an Independent Fund Trustee, then you only need to report a transaction if you, at the time of that transaction, knew or, in the ordinary course of fulfilling your official duties as a Trustee to the Direxion Shares ETF Trust, should have known that, during the 15-day period immediately before or after your transaction in a security,


1)

the Trust purchased or sold such security or

2)

the Trust or their investment adviser considered purchasing or selling such security.



Disclose all securities transactions for the period covered by this Report:



Name/Description

of Security*

Number

Shares

Date of

Transaction

Price at

Which Effected

Principal

Amount

Bought or

Sold

Name of

Broker/Dealer/Bank


 

 

 

 

 

 


 

 

 

 

 

 


 

 

 

 

 

 


 

 

 

 

 

 


 

 

 

 

 

 


 

 

 

 

 

 


 

 

 

 

 

 

* Please disclose the interest rate or maturity date, if applicable.



Did you establish any securities accounts during the period covered by this Report?  ___ Yes  ___ No


If Yes, please complete the following:






Name of

Broker

Date of Account

Opening

Account Number


 

 


 

 


 

 




____

The above is a record of every transaction in a security or account opened which I had, or in which I acquired, any direct or indirect beneficial ownership during the period indicated above.  

 


____

I certify that the Compliance Officer has received confirmations or account statements pertaining to all transactions executed and that disclose the information required above, and notice of any accounts opened, during the period covered by this Report.

 


____

I have nothing to report for the period covered by this Report.




Date:                                                                       

Signature:                                                                      







Appendix 6


INITIAL PUBLIC OFFERING / PRIVATE PLACEMENT

CLEARANCE FORM

(for the use of the Compliance Officer only)


The Code of Ethics for Rafferty and the Direxion Shares ETF Trust prohibits any acquisition of securities in an initial public offering (other than shares of open-end investment companies) and private placement by any Investment Person.  In cases of exceptional circumstances, however, investments in such securities may be permitted.  In these instances, a record of the rationale supporting the approval of such transactions must be completed and retained for a period of 5 years after the end of the fiscal year in which approval is granted.  This form should be used for such record keeping purposes.




Name of Investment Person:

_________________________________

 

 

Date of Request:

_________________________________

 

 

Name of IPO / Private Placement:

_________________________________

 

 

Date of Offering:

_________________________________

 

 

Number of Shares/Interests

_________________________________

 

 

Price:

_________________________________

 

 

Name of Broker/Dealer/Bank

_________________________________



___

I have cleared the IPO / Private Placement transaction described above.


Reasons supporting the decision to approve the above transaction:








 

____________________________________

 

Name of Compliance Officer


 

 

 

 

____________________________________

 

Signature of Compliance Officer


 

 

____________________________________

 

Date








POWER OF ATTORNEY

DIREXION SHARES ETF TRUST

DIREXION SHARES ETF TRUST, a Delaware business trust (the “Trust”), and each of its undersigned officers and trustees hereby nominates, constitutes and appoints Daniel D. O’Neill and Francine J. Rosenberger (with full power to each of them to act alone) its/his/her true and lawful attorney-in-fact and agent, for it/him/her and on its/his/her behalf and in its/his/her name, place and stead in any and all capacities, to make, execute and sign the Trust’s registration statement on Form N-1A and any and all amendments to such registration statement of the Trust, and to file with the Securities and Exchange Commission, and any other regulatory authority having jurisdiction over the offer and sale of the shares of beneficial interest of the Trust, such registration statement and any such amendment, and any and all supplements thereto or to any prospectus or statement of additional information forming a part thereof, and any and all exhibits and other documents requisite in connection therewith, granting unto said attorneys, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises as fully to all intents and purposes as the Trust and the undersigned officers and trustees itself/themselves might or could do.

DIREXION SHARES ETF TRUST has caused this power of attorney to be executed in its name by its President, and attested by its Treasurer, and the undersigned officers and trustees have hereunto set their hands on this 13 th day of August 2008.

 

DIREXION SHARES ETF TRUST

 

 

 

By:   /s/ Daniel D. O’Neill                  

Daniel D. O’Neill

President


ATTEST:

 

 

 

/s/ Todd Kellerman           

Todd Kellerman

Treasurer

 

[Signatures Continued on Next Page]








Signature

    Title         


/s/ Daniel J. Byrne

Daniel J. Byrne


Trustee


/s/ Daniel D. O’Neill

Daniel D. O’Neill


Trustee and President


/s/ Gerald E. Shanley III        

Gerald E. Shanley III


Trustee


/s/ Todd Kellerman            

Todd Kellerman


Treasurer and Controller


/s/ John Weisser                       

John Weisser


Trustee