AS
FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION ON AUGUST 17, 2011
File No. 333-156529
File No.: 811-22263
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
þ
PRE-EFFECTIVE AMENDMENT NO. __
o
POST-EFFECTIVE
AMENDMENT NO.
2
þ
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
þ
AMENDMENT NO. 5
þ
EXCHANGE TRADED CONCEPTS TRUST
(Exact Name of Registrant as Specified in Charter)
3555 Northwest 58th Street
Suite 410
Okalahoma City, Oklahoma 73112
(Address of Principal Executive Offices, Zip Code)
(405) 778-8377
(Registrants Telephone Number, including Area Code )
Thompson S. Phillips, Jr.
J. Garrett Stevens
Exchange Traded Concepts Trust
3555 Northwest 58th Street
Suite 410
Oklahoma City, Oklahoma 73112
(Name and Address of Agent for Service)
Copy to:
W. John McGuire
Morgan, Lewis & Bockius LLP
1111 Pennsylvania Ave, NW
Washington, DC 20004
It is proposed that this filing will become effective (check appropriate
box):
o
immediately upon filing pursuant to paragraph (b) of rule 485
o
on (date) pursuant to paragraph (b)(1)(v) of rule 485
o
60 days after filing pursuant to paragraph (a)(1) of rule 485
o
on (date) pursuant to paragraph (a)(1) of rule 485
þ
75 days after filing pursuant to paragraph (a)(2) of rule 485
o
on (date) pursuant to paragraph (a)(2) of rule 485
SUBJECT TO COMPLETION
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY NOT SELL THESE
SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE U.S. SECURITIES AND EXCHANGE COMMISSION
IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND IS NOT SOLICITING AN
OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Preliminary
Prospectus dated August 17, 2011
Exchange
Traded Concepts Trust
Prospectus
October __, 2011
KraneShares
China Consumer Luxury ETF [Ticker Symbol: ]
KraneShares China Alternative Energy ETF [Ticker Symbol: ]
KraneShares China Internet ETF [Ticker Symbol: ]
KraneShares China Consumer Staples ETF [Ticker Symbol: ]
KraneShares China Consumer Discretionary ETF [Ticker Symbol: ]
KraneShares China Urbanization ETF [Ticker Symbol: ]
KraneShares China Five Year Plan ETF [Ticker Symbol: ]
Exchanged Traded Concepts Trust (the Trust) is a registered investment company offering shares of
exchange traded funds (the Funds) that are listed on the NYSE Arca, Inc. (NYSE Arca). Fund
shares are not individually redeemable by the Funds but trade on the NYSE Arca in individual share
lots.
Neither the Securities and Exchange Commission nor any state securities commissions has approved or
disapproved of these securities or passed upon the accuracy or adequacy of this Prospectus. Any
representation to the contrary is a criminal offense.
About This Prospectus
This prospectus has been arranged into different sections so that you can easily review this
important information. For detailed information about each Fund, please see:
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Back Cover
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KraneShares China Consumer Luxury ETF
(the Luxury ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of The Dow Jones China Consumer Luxury Index
SM
(the Luxury
Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
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Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
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Management Fee
1
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XX%
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Distribution and Service (12b-1) Fees
2
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None
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Other Expenses
2
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XX%
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Total Annual Fund Operating Expenses
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XX%
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Less Fee Reductions and/or Expenses Reimbursements
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XX%
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Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
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XX%
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1
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The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
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2
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The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
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3
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Other Expenses are based on estimated amounts for the current fiscal year.
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4
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The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
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Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same.
1
This Example does not include the brokerage commissions that investors may pay on their purchases
and sales of Fund shares. Although your actual costs may be higher or lower, based on these
assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are
not reflected in annual fund operating expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Luxury ETF will normally invest at least 80% of its total assets in securities of the Luxury
Index or in depositary receipts representing securities of the Luxury Index. The Luxury Index is
designed to measure the performance of the investable universe of publicly traded companies that
provide high-end (luxury) consumer goods and services and that generate or expect to generate a
sizable portion of their sales in China (China Luxury Companies). Luxury goods and services
include, for example, apparel, accessories, cosmetics, premium alcohol brands, automobiles, jewelry
and hotels. Under normal circumstances, the Fund invests at least 80% of its net assets, plus the
amount of any borrowings for investment purposes, in securities of China Luxury Companies. This
investment policy may be changed without shareholder approval, upon 60 days prior notice to
shareholders.
The Luxury ETF employs a passive management investment strategy in seeking to achieve its
investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Luxury Index in proportion to the weightings in the
Luxury Index. However, the Fund may utilize a sampling methodology under various circumstances
where it may not be possible or practicable to purchase all of the securities in the Luxury Index.
The Luxury ETF will concentrate its investments (
i.e.,
hold 25% or more of its total assets) in a
particular industry or sector to approximately the same extent that the Luxury Index is so
concentrated. The Luxury ETF is non-diversified and, therefore, may invest a greater percentage of
its assets in a particular issuer in comparison to a diversified fund.
The Luxury Index is sponsored
by Dow Jones Indexes, which is independent of the Fund, its
investment adviser, Exchange Traded Concepts, LLC (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). Dow
Jones Indexes defines the sector and determines the components and the
2
relative weightings of the securities in the Luxury Index and publishes information regarding the
Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Luxury Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject
to different accounting, auditing, financial reporting and investor protection standards than U.S.
issuers.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Luxury Index. To the extent the Fund utilizes a sampling approach, and/or
invests in futures or other derivative positions, it may experience tracking error to a greater
extent than if the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
3
Luxury Goods and Services Sector Risk
: The success of companies that sell luxury goods and services
in the Chinese market depend heavily on the disposable household income and consumer spending of a
relatively small segment of Chinas population, rather than consumers as a whole. Changes in
consumer taste, consumer confidence and spending among this segment of the population may have an
adverse impact on the sale of luxury goods and services in the Chinese market.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, allocation of resources
and capital reinvestment, among others.
Hong Kong.
The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of the current political, economic, legal and social policies
of Hong Kong is dependent and subject to the control of the Chinese government.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Luxury Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Luxury Index.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
4
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as
the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
5
KraneShares China Alternative Energy ETF
(the Alternative Energy ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of The Dow Jones China Alternative Energy Index
SM
(the Alternative Energy Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
|
|
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same.
6
This Example does not include the brokerage commissions that investors may pay on their purchases
and sales of Fund shares. Although your actual costs may be higher or lower, based on these
assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when Fund shares are held in a taxable account. These costs, which are
not reflected in annual fund operating expenses or in the example, affect the Funds performance.
Principal Investment Strategies
The Alternative Energy ETF will normally invest at least 80% of its total assets in securities of
the Alternative Energy Index or in depositary receipts representing securities of the Alternative
Energy Index. The Alternative Energy Index is designed to measure the performance of the
investable universe of publicly traded China-based companies whose primary business line is in or
is related to the alternative energy sector (China Alternative Energy Companies), as defined by
the index sponsor, Dow Jones Indexes. A China-based company is a company that primarily operates
in mainland China or that generates or expects to generate a sizeable portion of its sales in
China. Index components include securities of companies whose primary business or businesses are
related to sources of alternative energy (e.g. solar power or wind), the manufacture and production
of electric cars, their components, or other conservation, or clean, technologies.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any
borrowings for investment purposes, in securities of China Alternative Energy Companies. This
investment policy may be changed without shareholder approval, upon 60 days prior notice to
shareholders.
The Alternative Energy ETF employs a passive management investment strategy in seeking to achieve
its investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Alternative Energy Index in proportion to the
weightings in the Alternative Energy Index. However, the Fund may utilize a sampling methodology
under various circumstances where it may not be possible or practicable to purchase all of the
securities in the Alternative Energy Index.
The Alternative Energy ETF will concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the Alternative
Energy Index is so concentrated. The Alternative Energy ETF is non-diversified and, therefore, may
invest a greater percentage of its assets in a particular issuer in comparison to a diversified
fund.
7
Dow Jones Indexes is independent of
the Fund, its investment adviser, Exchange Traded Concepts,
LLC, (the Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). Dow Jones Indexes defines the sector and determines the
components and the relative weightings of the securities in the Alternative Energy Index and
publishes information regarding the Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Alternative Energy Sector Risk
: The alternative energy sector can be adversely affected by adverse
market conditions, increased competition, fluctuations in energy prices and supply and demand of
alternative energy resources, energy conservation and the success of exploration projects. Legal
or regulatory changes, as well as changes in governments policies towards alternative energy,
could also adversely impact the alternative energy sector and therefore Fund performance.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Alternative Energy Index concentrates in a particular industry or
group of industries, the Alternative Energy Fund is subject to loss due to adverse occurrences that
may affect that industry or group of industries.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a
8
non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject to different accounting,
auditing, financial reporting and investor protection standards than U.S. issuers.
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, allocation of resources
and capital reinvestment, among others.
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
9
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
10
KraneShares China Internet ETF
(the Internet ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of the CSI Overseas China Internet Index (the Internet Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
|
|
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same.
11
This Example does not include the brokerage commissions that investors may pay on their purchases
and sales of Fund shares. Although your actual costs may be higher or lower, based on these
assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when the Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect the Funds
performance.
Principal Investment Strategies
The Internet ETF will normally invest at least 80% of its total assets in securities of the
Internet Index or in depositary receipts representing securities of the Internet Index. The
Internet Index is designed to measure the performance of the investable universe of publicly traded
China-based companies whose primary business or businesses are in the Internet and Internet-related
sectors (China Internet Companies), as defined by the index sponsor, China Securities Index Co.,
Ltd. (CSI). A China-based company is a company that: (i) is incorporated in mainland China; (ii)
has its headquarters in mainland China or (iii) derives at least 50% of its revenue from goods
produced or sold, or services performed, in mainland China. Index components include securities of
companies whose primary business or businesses involve internet software and services, internet
retail services and internet entertainment software. Under normal circumstances, the Fund invests
at least 80% of its net assets, plus the amount of any borrowings for investment purposes, in
securities of China Internet Companies. This investment policy may be changed without shareholder
approval, upon 60 days prior notice to shareholders.
The Internet ETF employs a passive management investment strategy in seeking to achieve its
investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Internet Index in proportion to the weightings in
the Internet Index. However, the Fund may utilize a sampling methodology under various
circumstances where it may not be possible or practicable to purchase all of the securities in the
Internet Index.
The Internet ETF will concentrate its investments (
i.e.,
hold 25% or more of its total assets) in a
particular industry or sector to approximately the same extent that the Internet Index is so
concentrated. The Internet ETF is non-diversified and, therefore, may invest a greater percentage
of its assets in a particular issuer in comparison to a diversified fund.
CSI is independent of the Fund, its investment adviser, Exchange Traded Concepts, LLC, (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser).
12
CSI defines the sector and determines the components
and the relative weightings of the securities in the Internet Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject
to different accounting, auditing, financial reporting and investor protection standards than U.S.
issuers.
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development,
13
government involvement, wealth distribution, rate of inflation, growth rate, allocation of
resources and capital reinvestment, among others.
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the sought to replicate the Index.
Internet Companies Sector Risk
: Internet companies are subject to rapid changes in technology,
worldwide competition, rapid obsolescence of products and services, loss of patent protections,
evolving industry standards and frequent new product productions. Such changes may have an adverse
impact on the companies in the Index and therefore the performance of the Fund.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
14
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
15
KraneShares China Consumer Staples ETF
(the Consumer Staples ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of the CSI Overseas China Consumer Staples Index (the Consumer
Staples Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
|
|
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your
16
investment has a 5% return each year and that the Funds operating expenses remain the same. This
Example does not include the brokerage commissions that investors may pay on their purchases and
sales of Fund shares. Although your actual costs may be higher or lower, based on these
assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when the Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect the Funds
performance.
Principal Investment Strategies
The Consumer Staples ETF will normally invest at least 80% of its total assets in securities of the
Consumer Staples Index or in depositary receipts representing securities of the Consumer Staples
Index. The Consumer Staples Index is designed to measure the performance of the investable
universe of publicly traded China-based companies whose primary business or businesses are in the
consumer staples sector (China Consumer Staples Companies), as defined by the index sponsor,
China Securities Index, Co., Ltd (CSI). A China-based company is a company that: (i) is
incorporated in mainland China; (ii) has its headquarters in mainland China or (iii) derives at
least 50% of its revenue from goods produced or sold, or services performed, in mainland China.
Index components include securities of companies whose primary business or businesses involve food
and staples retailing; beverage and tobacco products; or household and personal products. Under
normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any
borrowings for investment purposes, in securities of China Consumer Staples Companies. This
investment policy may be changed without shareholder approval, upon 60 days prior notice to
shareholders.
The Consumer Staples ETF employs a passive management investment strategy in seeking to achieve
its investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Consumer Staples Index in proportion to the
weightings in the Consumer Staples Index. However, the Fund may utilize a sampling methodology
under various circumstances where it may not be possible or practicable to purchase all of the
securities in the Consumer Staples Index.
The Consumer Staples ETF will concentrate its investments (
i.e.,
hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the Consumer
Staples Index is so concentrated. The Consumer Staples ETF is non-diversified and, therefore, may
invest a greater percentage of its assets in a particular issuer in comparison to a diversified
fund.
17
CSI is independent of the Fund, its investment adviser, Exchange Traded Concepts, LLC, (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). CSI defines the sector and determines the components and the
relative weightings of the securities in the Consumer Staples Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Consumer Staples Sector Risk
: Companies in the consumer staples sector are subject to government
regulation affecting the permissibility of using various food additives and production methods,
which regulations could affect company profitability. Tobacco companies may be adversely affected
by the adoption of proposed legislation and/or by litigation. Also, the success of food and soft
drink may be strongly affected by fads, marketing campaigns and other factors affecting supply and
demand.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject
to different accounting, auditing, financial reporting and investor protection standards than U.S.
issuers.
18
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, allocation of resources
and capital reinvestment, among others.
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
19
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
20
KraneShares China Consumer Discretionary ETF
(the Consumer Discretionary ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of the CSI Overseas China Consumer Discretionary Index (the
Consumer Discretionary Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
|
|
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
21
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their purchases and sales of
Fund shares. Although your actual costs may be higher or lower, based on these assumptions your
cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when the Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect the Funds
performance.
Principal Investment Strategies
The Consumer Discretionary ETF will normally invest at least 80% of its total assets in securities
of the Consumer Discretionary Index or in depositary receipts representing securities of the
Consumer Discretionary Index. The Consumer Discretionary Index is designed to measure the
performance of the investable universe of publicly traded China-based companies whose primary
business or businesses are in the consumer discretionary sector (China Consumer Discretionary
Companies), as defined by the index sponsor, China Securities Index Co., Ltd. (CSI). A
China-based company is a company that: (i) is incorporated in mainland China; (ii) has its
headquarters in mainland China or (iii) derives at least 50% of its revenue from goods produced or
sold, or services performed, in mainland China. Index components include securities of companies
whose primary business or businesses involve automobiles and components; consumer durables and
apparel; consumer services, media or retail. Under normal circumstances, the Fund invests at least
80% of its net assets, plus the amount of any borrowings for investment purposes, in securities of
China Consumer Discretionary Companies. This investment policy may be changed without shareholder
approval, upon 60 days prior notice to shareholders.
The Consumer Discretionary ETF employs a passive management investment strategy in seeking to
achieve its investment objective. The Fund generally will use a replication methodology, meaning
it will invest in all of the securities comprising the Consumer Discretionary Index in proportion
to the weightings in the Consumer Discretionary Index. However, the Fund may utilize a sampling
methodology under various circumstances where it may not be possible or practicable to purchase all
of the securities in the Consumer Discretionary Index.
The Consumer Discretionary ETF will concentrate its investments (i.e., hold 25% or more of its
total assets) in a particular industry or sector to approximately the same extent that the Internet
22
Index is so concentrated. The Consumer Discretionary ETF is non-diversified and, therefore, may
invest a greater percentage of its assets in a particular issuer in comparison to a diversified
fund.
CSI is independent of the Fund, its investment adviser, Exchange Traded Concepts, LLC, (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). CSI defines the sector and determines the components and the
relative weightings of the securities in the Consumer Discretionary Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Consumer Discretionary Sector Risk
: The success of consumer product manufacturers and retailers is
tied closely to the performance of the overall domestic and international economy, interest rates,
competitive and consumer confidence. Success depends heavily on disposable household income and
consumer spending. Changes in demographics and consumer tastes can also affect the demand for, and
success of, consumer products in the marketplace.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a
23
non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject to different accounting,
auditing, financial reporting and investor protection standards than U.S. issuers.
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, allocation of resources
and capital reinvestment, among others.
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
24
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
25
KraneShares China Urbanization ETF
(the Urbanization ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of the CSI Overseas China Urbanization Index (the Urbanization
Index).
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
|
|
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same.
26
This Example does not include the brokerage commissions that investors may pay on their purchases
and sales of Fund shares. Although your actual costs may be higher or lower, based on these
assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when the Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect the Funds
performance.
Principal Investment Strategies
The Urbanization ETF will normally invest at least 80% of its total assets in securities of the
Urbanization Index or in depositary receipts representing securities of the Urbanization Index.
The Urbanization ETF may also invest in real estate investment trusts (REITs) that may be
included in the Urbanization Index. The Urbanization Index is designed to measure the performance
of the investable universe of publicly traded China-based companies whose primary business or
businesses relate to the growth and development of urban areas in China, as determined by the index
sponsor, China Securities Index Co., Ltd (CSI). A China-based company is a company that: (i) is
incorporated in mainland China; (ii) has its headquarters in mainland China or (iii) derives at
least 50% of its revenue from goods produced or sold, or services performed, in mainland China.
Index components include securities of companies engaged in the raw materials, property and real
estate, industrials, information technology/hardware and retail sectors, among other sectors. Under
normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any
borrowings for investment purposes, in securities of China-based companies. This investment policy
may be changed without shareholder approval, upon 60 days prior notice to shareholders.
The Urbanization ETF employs a passive management investment strategy in seeking to achieve its
investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Urbanization Index in proportion to the weightings
in the Urbanization Index. However, the Fund may utilize a sampling methodology under various
circumstances where it may not be possible or practicable to purchase all of the securities in the
Urbanization Index.
The Urbanization ETF will concentrate its investments (i.e., hold 25% or more of its total assets)
in a particular industry or sector to approximately the same extent that the Urbanization Index is
so concentrated. The Urbanization ETF is non-diversified and, therefore, may invest a greater
percentage of its assets in a particular issuer in comparison to a diversified fund.
27
CSI is independent of the Fund, its investment adviser, Exchange Traded Concepts, LLC, (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). CSI determines the components and the relative weightings of the
securities in the Urbanization Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject
to different accounting, auditing, financial reporting and investor protection standards than U.S.
issuers.
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly
28
different from those that characterize the U.S., including structure, general development,
government involvement, wealth distribution, rate of inflation, growth rate, allocation of
resources and capital reinvestment, among others.
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
REIT Risk:
REITs are pooled investment vehicles that own, and usually operate, income-producing
real estate. REITs are susceptible to the risks associated with direct ownership of real estate,
such as the following: declines in property values; increases in property taxes, operating
expenses, rising interest rates or competition overbuilding; zoning changes; and losses from
casualty or condemnation. REITs typically incur fees that are separate from those of the Fund.
Accordingly, the Funds investments in REITs will result in the layering of expenses such that
29
shareholders will indirectly bear a proportionate share of the REITs operating expenses, in
addition to paying Fund expenses.
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the
Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
30
KraneShares China Five Year Plan ETF
(the Five Year Plan ETF or Fund)
Investment Objective
The Fund seeks to provide investment results that, before fees and expenses, correspond generally
to the price and yield performance of the CSI Overseas China Five Year Plan Index.
Fees and Expenses
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
|
|
|
|
|
Annual Fund Operating Expenses (expenses that you pay each year as a
percentage of the value of your investment)
|
|
|
|
|
Management Fee
1
|
|
XX%
|
Distribution and Service (12b-1) Fees
2
|
|
None
|
Other Expenses
2
|
|
XX%
|
Total Annual Fund Operating Expenses
|
|
XX%
|
Less Fee Reductions and/or Expenses Reimbursements
|
|
XX%
|
Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements
4
|
|
XX%
|
1
|
|
The Management Fee consists of the advisory fee paid to Exchange Traded Concepts, LLC
(ETC or the Adviser) and the sub-advisory fee paid to Krane Funds Adviser LLC (Krane or
the Sub-Adviser).
|
|
2
|
|
The Fund has adopted a Distribution and Service (12b-1) Plan pursuant to which payments of up
to 0.25% of average daily net assets may be made, however, the Board has determined that no
such payments will be made during the first 12 months of operation. Thereafter, 12b-1 fees
may only be imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during
the first 12 months will not be recoverable during any subsequent period.
|
|
3
|
|
Other Expenses are based on estimated amounts for the current fiscal year.
|
|
4
|
|
The Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to
the extent necessary to keep Total Annual Fund Operating Expenses After Fee Reductions and/or
Expense Reimbursements (excluding distribution fees and expenses, if any, paid pursuant to a
Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX%
of the Funds average daily net assets. This agreement shall continue in effect with respect
to the Fund until the termination of the Sub-Advisory Agreement with respect to the Fund,
provided that the agreement may be terminated, without payment of penalty, with respect to the
Fund by the Trust, for any reason and at any time.
|
Example
This Example is intended to help you compare the cost of investing in the Fund with the cost of
investing in other funds.
The Example assumes that you invest $10,000 in the Fund for the time periods indicated and then
sell all of your shares at the end of those periods. The Example also assumes that your investment
has a 5% return each year and that the Funds operating expenses remain the same. This Example
does not include the brokerage commissions that investors may pay on their
31
purchases and sales of Fund shares. Although your actual costs may be higher or lower, based on
these assumptions your cost would be:
Portfolio Turnover
The Fund pays transaction costs, such as commissions, when it buys and sells securities (or turns
over its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and
may result in higher taxes when the Fund shares are held in a taxable account. These costs, which
are not reflected in annual fund operating expenses or in the example, affect the Funds
performance.
Principal Investment Strategies
The Five Year Plan ETF will normally invest at least 80% of its total assets in securities of the
Five Year Plan Index or in depositary receipts representing securities of the Five Year Plan Index.
The Five Year Plan Index is designed to measure the performance of the investable universe of
publicly traded China-based companies whose primary business or businesses the index sponsor, China
Securities Index Co., Ltd (CSI), has determined will be important in the Five-Year Plan of the
Chinese government. A China-based company is a company that: (i) is incorporated in mainland
China; (ii) has its headquarters in mainland China or (iii) derives at least 50% of its revenue
from goods produced or sold, or services performed, in mainland China. The Five-Year Plan (the
Plan) is a series of development initiatives that have been released by the Chinese government
every five years since 1953. The Plan outlines the governments goals for, among other things,
social and economic growth and industrial planning in key sectors and regions. For example, the
most recently released Plan, the Twelfth Five Year Plan (2011-2015), has proposed a focus on
several areas including, but not limited to, increasing domestic consumption; modernizing
agriculture through mechanization and improvement of agricultural service businesses; encouraging
stable urbanization; promoting energy saving and environmental protection; and encouraging domestic
technological innovation. In creating the Five Year Plan Index, CSI seeks to identify component
securities of companies that it believes will benefit from the areas of focus in the Plan. Index
components include securities of companies in various sectors including, but not limited to, the
consumer staples, retail, technology and Internet, health care and alternative energy sectors.
Under normal circumstances, the Fund invests at least 80% of its net assets, plus the amount of any
borrowings for investment purposes, in securities of China-based companies. This 80% investment
policy may be changed without shareholder approval, upon 60 days prior notice to shareholders.
The Five Year Plan ETF employs a passive management investment strategy in seeking to achieve its
investment objective. The Fund generally will use a replication methodology, meaning it will
invest in all of the securities comprising the Five Year Plan Index in proportion to the weightings
in the Five Year Plan Index. However, the Fund may utilize a sampling methodology under various
circumstances where it may not be possible or practicable to purchase all of the securities in the
Five Year Plan Index.
32
The Five Year Plan ETF will concentrate its investments (i.e., hold 25% or more of its total
assets) in a particular industry or sector to approximately the same extent that the Five Year Plan
Index is so concentrated. The Five Year Plan ETF is non-diversified and, therefore, may invest a
greater percentage of its assets in a particular issuer in comparison to a diversified fund.
CSI is independent of the Fund, its investment adviser, Exchange Traded Concepts, LLC, (the
Adviser) and Krane Funds Adviser LLC (the Sub-Adviser). CSI determines the components and the relative weightings of the
securities in the Five Year Plan Index.
Principal Risks
As with all funds, a shareholder is subject to the risk that his or her investment could lose
money. The principal risks affecting shareholders investments in the Fund are set forth below.
An investment in the Fund is not a bank deposit and is not insured or guaranteed by the FDIC or any
government agency.
Concentration Risk
: Because the Funds assets will be concentrated in an industry or group of
industries to the extent that the Index concentrates in a particular industry or group of
industries, the Fund is subject to loss due to adverse occurrences that may affect that industry or
group of industries.
Currency Risk
: Indirect and direct exposure to foreign currencies subjects the Fund to the risk
that currencies will decline in value relative to the U.S. dollar. Currency rates in foreign
countries may fluctuate significantly over short periods of time for a number of reasons, including
changes in interest rates and the imposition of currency controls or other political developments
in the U.S. or abroad.
Emerging Markets Securities Risk
: The Funds investments will expose the Funds portfolio to the
risks of investing in emerging markets. Investments in emerging markets are subject to greater risk
of loss than investments in developed markets. This is due to, among other things, greater market
volatility, lower trading volume, political and economic instability, greater risk of market
shutdown and more governmental limitations on foreign investments than typically found in developed
markets.
Foreign Securities Risk
: The Fund invests a significant portion of its assets directly in
securities of issuers based outside of the U.S., or in depositary receipts that represent such
securities. Investments in securities of non-U.S. issuers involve certain risks that may not be
present with investments in securities of U.S. issuers, such as risk of loss due to foreign
currency fluctuations or to political or economic instability. There may be less information
publicly available about a non-U.S. issuer than a U.S. issuer. Non-U.S. issuers may also be subject
to different accounting, auditing, financial reporting and investor protection standards than U.S.
issuers.
33
Geographic Concentration Risk
: The Funds investments are concentrated in China and Hong Kong, and
therefore the Fund will be susceptible to adverse market, political, regulatory, and geographic
events affecting those regions.
|
|
China
. The Chinese economy is generally considered an emerging market and can be
significantly affected by economic and political conditions and policy in China and
surrounding Asian countries. Many attributes of the Chinese economy are markedly different
from those that characterize the U.S., including structure, general development, government
involvement, wealth distribution, rate of inflation, growth rate, allocation of resources
and capital reinvestment, among others.
|
|
|
Hong Kong
. The economy of Hong Kong has few natural resources and any fluctuation or
shortage in the commodity markets could have a significant adverse effect on the Hong Kong
economy. Hong Kong is also heavily dependent on international trade and finance.
Additionally, the continuation of current political, economic, legal and social policies of
Hong Kong is dependent on and subject to the control of the Chinese government.
|
Index Tracking Risk
: The Funds return may not match or achieve a high degree of correlation with
the return of the Index. To the extent the Fund utilizes a sampling approach, and/or invests in
futures or other derivative positions, it may experience tracking error to a greater extent than if
the Fund sought to replicate the Index.
Large Capitalization Risk
: Returns on investments in securities of large companies could trail the
returns on investments in securities of smaller and mid-sized companies.
Management Risk
: Because the Fund may not fully replicate its Index and may hold less than the
total number of securities in its Index, the Fund is subject to management risk. This is the risk
that the Sub-Advisers security selection process, which is subject to a number of
constraints, may not produce the intended results. Moreover, the Sub-Adviser is a newly
formed investment adviser with no prior investment management experience.
Market Risk
: The values of equity securities in the Index could decline generally or could
underperform other investments.
Non-Diversification Risk
: The Fund is non-diversified, meaning that, as compared to a diversified
fund, it can invest a greater percentage of its assets in securities issued by or representing a
small number of issuers. As a result, the performance of these issuers can have a substantial
impact on the Funds performance.
Passive Investment Risk
: The Fund is not actively managed and therefore would not sell an equity
security due to current or projected underperformance of a security, industry or sector, unless
that security is removed from the Index.
Privatization Risk
: China has begun a process of privatizing certain entities and industries.
Privatized entities may lose money or be re-nationalized.
34
Reliance on Trading Partners Risk
: The Fund invests in an economy that is heavily dependent upon
trading with key partners. Any reduction in this trading may cause an adverse impact on the
economy in which the Fund invests.
Small and Mid Capitalization Risk
: The small- and mid-capitalization companies in which the Fund
may invest may be more vulnerable to adverse business or economic events than larger, more
established companies, and may underperform other segments of the market or the equity market as a
whole.
Performance Information
The Fund is new, and therefore has no performance history. Once the Fund has completed a full
calendar year of operations, a bar chart and table will be included that will provide some
indication of the risks of investing in the Fund by showing the variability of the Funds return
based on net assets and comparing the variability of the Funds return to a board measure of market
performance.
Investment Advisers
Exchange Traded Concepts, LLC serves as the investment adviser to the Fund. Krane Funds Adviser
LLC serves as the sub-adviser to the Fund.
The Trust, on behalf of the Fund, and the Adviser have retained the Sub-Adviser to be
responsible for the day to day management of the Fund, subject to the supervision of the Adviser and
the Board of Trustees.
Portfolio Manager
Jonathan Krane, CEO and Managing Member of Krane Funds Adviser LLC founded the Sub-Adviser in 2011 and has served as portfolio manager of the Fund since its inception.
For important information about the purchase and sale of Fund shares, tax information and financial
intermediary compensation, please turn to Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation on page XX of the prospectus.
35
Summary Information about Purchasing and Selling Shares,
Taxes and Financial Intermediary Compensation
Purchase and Sale of Fund Shares
Individual shares may only be purchased and sold on a national securities exchange through a
broker-dealer. You can purchase and sell individual shares of the Funds throughout the trading day
like any publicly traded security. Each Funds shares are listed on the NYSE Arca. The price of a
Funds shares is based on market price, and because exchange-traded fund shares trade at market
prices rather than net asset value (NAV), shares may trade at a price greater than NAV (premium)
or less than NAV (discount). Each Fund issues and redeems shares on a continuous basis, at NAV,
only in blocks of 50,000 shares (Creation Units), principally in-kind for securities included in
the relevant Index
. Except when aggregated in Creation Units, the Funds shares are not redeemable
securities.
Tax Information
The distributions made by the Funds are taxable, and will be taxed as ordinary income or capital
gains, unless you are investing through a tax-deferred arrangement, such as 401(k) plan or
individual retirement account.
Payments to Broker-Dealers and Other Financial Intermediaries
If you purchase shares of the Funds through a broker-dealer or other financial intermediary (such
as a bank), the Funds and their related companies may pay the intermediary for the sale of Fund
shares and related services. These payments may create a conflict of interest by influencing the
broker-dealer or other intermediary and your salesperson to recommend the Fund over another
investment. Ask your salesperson or visit your financial intermediarys web site for more
information.
36
Index/Trademark Licenses/Disclaimers
Dow Jones Indexes and CSI (the Index Providers) are not affiliated with the Trust, the Adviser,
the Sub-Adviser, the Funds administrator, custodian, transfer
agent or distributor, or any of their respective affiliates. The Sub-Adviser has
entered into license agreements with the index providers pursuant to which the Sub-Adviser pays a fee to use their respective Indexes. The Sub-Adviser is
sub-licensing rights to the Indexes to the Funds at no charge.
Dow Jones Index Licenses:
The Dow Jones China Consumer Luxury Index
SM
and the Dow Jones
China Alternative Energy Index
SM
(the Indexes) are products of Dow Jones Indexes, the
marketing name and a licensed trademark of CME Group Index Services LLC (CME Indexes), and has
been licensed for use. Dow Jones(r), Dow Jones China Consumer Luxury Index
SM
and Dow Jones
China Alternative Energy Index
SM
and Dow Jones Indexes are service marks of Dow Jones
Trademark Holdings, LLC (Dow Jones), have been licensed to CME Indexes and sublicensed for use
for certain purposes by Krane Funds Adviser LLC (the Licensee). The Funds are not sponsored,
endorsed, sold or promoted by Dow Jones, CME Indexes or their respective affiliates. Dow Jones,
CME Indexes and their respective affiliates make no representation or warranty, express or implied,
to the owners of the Funds or any member of the public regarding the advisability of trading in the
Funds. Dow Jones, CME Indexes and their respective affiliates only relationship to the Licensee
is the licensing of certain trademarks and trade names of Dow Jones and of the Indexes which are
determined, composed and calculated by CME Indexes without regard to the Licensee or the Funds.
Dow Jones and CME Index have no obligation to take the needs of the Licensee or the owners of the
Funds into consideration in determining, composing or calculating the Indexes. Dow Jones, CME
Indexes and their respective affiliates are not responsible for and have not participated in the
determination of the timing of, prices at, or quantities of the Funds to be sold or in the
determination or calculation of the equation by which the Funds are to be converted into cash. Dow
Jones, CME Indexes and their respective affiliates have no obligation or liability in connection
with the administration, marketing or trading of the Funds. Notwithstanding the foregoing, CME
Group Inc. and its affiliates may independently issue and/or sponsor financial products unrelated
to the Funds currently being issued by the Licensee, but which may be similar to and competitive
with the Funds. In addition, CME Group Inc. and its affiliates may trade financial products which
are linked to the performance of the Indexes. It is possible that this trading activity will
affect the value of the Indexes and the Funds.
DOW JONES, CME INDEXES AND THEIR RESPECTIVE AFFILIATES DO NOT GUARANTEE THE ACCURACY AND/OR THE
COMPLETENESS OF THE INDEXES OR ANY DATA INCLUDED THEREIN AND DOW JONES, CME INDEXES AND THEIR
RESPECTIVE AFFILIATES SHALL HAVE NO LIABILITY FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN.
DOW JONES, CME INDEXES AND THEIR RESPECTIVE AFFILIATES MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO
RESULTS TO BE OBTAINED BY THE LICENSEE, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE
USE OF THE INDEXES OR ANY DATA INCLUDED THEREIN. DOW JONES, CME INDEXES AND THEIR RESPECTIVE
AFFILIATES MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY
37
DISCLAIM ALL WARRANTIES, OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT
TO THE INDEXES OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT
SHALL DOW JONES, CME INDEXES OR THEIR RESPECTIVE AFFILIATES HAVE ANY LIABILITY FOR ANY LOST PROFITS
OR INDIRECT, PUNITIVE, SPECIAL OR CONSEQUENTIAL DAMAGES OR LOSSES, EVEN IF NOTIFIED OF THE
POSSIBILITY OF SUCH DAMAGES. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR
ARRANGEMENTS BETWEEN CME INDEXES AND THE LICENSEE, OTHER THAN THE LICENSORS OF CME INDEXES.
CSI Indexes
: The CSI Overseas China Internet Index, the CSI Overseas China Consumer
Staples Index, the CSI Overseas China Consumer Discretionary Index, the CSI Overseas China
Urbanization Index and the CSI China Overseas Five Year Plan Index (collectively, the CSI Overseas
China Indexes) are licensed trademarks of CSI (the Index Trademark). The Sub-Adviser
is licensed to use the Index Trademark for the purpose of promoting and marketing the Funds.
The Funds are neither sponsored nor promoted, distributed or in any other manner supported by CSI.
The CSI Overseas China Indexes are compiled and calculated by CSI. CSI will apply all necessary
means to ensure the accuracy of the CSI Overseas China Indexes. However, neither CSI nor the
Shanghai Stock Exchange nor the Shenzhen Stock Exchange shall be liable (whether in negligence or
otherwise) to any person for any error in the CSI Overseas China Indexes and neither CSI nor the
Shanghai Stock Exchange nor the Shenzhen Stock Exchange shall be under any obligation to advise any
person of any error therein. All copyrights in the CSI Overseas China Index values and constituent
lists vest in CSI. Neither the publication of CSI Overseas China Indexes by CSI nor the granting of
a license of rights relating to CSI Overseas China Indexes or to the Index Trademark for the
utilization in connection with the Funds, represents a recommendation by CSI for a capital
investment or contains in any manner a warranty or opinion by CSI with respect to the
attractiveness of an investment in the Funds.
Shares of the Trust are not sponsored, endorsed, or promoted by the NYSE Arca. The NYSE Arca makes
no representation or warranty, express or implied, to the owners of the shares of any Fund. The
NYSE Arca is not responsible for, nor has it participated in, the determination of the timing of,
prices of, or quantities of the shares of any Fund to be issued, or in the determination or
calculation of the equation by which the shares are redeemable. The NYSE Arca has no obligation or
liability to owners of the shares of any Fund in connection with the administration, marketing, or
trading of the shares of the Fund. Without limiting any of the foregoing, in no event shall the
NYSE Arca have any liability for any lost profits or indirect, punitive, special, or consequential
damages even if notified of the possibility thereof.
The Adviser, the Sub-Adviser and the Funds make no
representation or warranty, express or implied, to the owners of shares of the Funds or any members
of the public regarding the advisability of investing in securities generally or in the Funds
particularly.
38
Additional Risk Information
The following section provides additional information regarding certain of the principal risks
identified under Principal Risks in each Funds summary along with additional risk information.
Risk information is applicable to all Funds unless otherwise noted.
Principal Risks
Market Capitalization Risk
: Each Funds Underlying Index may be composed primarily of, or have
significant exposure to, securities in a particular capitalization range, for example, large-, mid-
or small-cap securities. As a result, a Fund may be subject to the risk that the pre-dominate
capitalization range represented in the Underlying Index may underperform other segments of the
equity market or the equity market as a whole. In addition, in comparison to securities of
companies with larger capitalizations, securities of small and medium-capitalization companies may
experience more price volatility, greater spreads between their bid and ask prices, significantly
lower trading volumes, and cyclical or static growth prospects. Small and medium-capitalization
companies often have limited product lines, markets or financial resources, and may therefore be
more vulnerable to adverse developments than larger capitalization companies. These securities may
or may not pay dividends.
Foreign Investment Risk
: Returns on investments in foreign stocks could be more volatile than, or
trail the returns on, investments in U.S. stocks.
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Foreign Securities
. Each Fund invests in foreign securities, including non-U.S.
dollar-denominated securities traded outside of the United States and U.S.
dollar-denominated securities of foreign issuers traded in the United States. Investment in
foreign securities may involve higher costs than investment in U.S. securities, including
higher transaction and custody costs as well as the imposition of additional taxes by
foreign governments. Foreign investments may also involve risks associated with the level of
currency exchange rates, less complete financial information about the issuers, less market
liquidity, more market volatility and political instability. Future political and economic
developments, the possible imposition of withholding taxes on dividend income, the possible
seizure or nationalization of foreign holdings, the possible establishment of exchange
controls or freezes on the convertibility of currency, or the adoption of other governmental
restrictions might adversely affect an investment in foreign securities. Additionally,
foreign issuers may be subject to less stringent regulation, and to different accounting,
auditing and recordkeeping requirements.
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Depositary Receipts.
The Fund may invest in depositary receipts. Depositary receipts
include American Depositary Receipts (ADRs) which are U.S. dollar-denominated receipts
representing shares of foreign-based corporations. ADRs are issued by U.S. banks or trust
companies, and entitle the holder to all dividends and capital gains that are paid out on
the underlying foreign shares. Global Depositary Receipts (GDRs) are depositary receipts
which are similar to ADRs, but are shares of foreign-based corporations generally issued by
international banks in one or more markets around the world. Investment in ADRs and GDRs may
be less liquid than the underlying shares in their primary trading market and GDRs, many of
which are issued by companies in
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emerging markets, may be more volatile and less liquid than depositary receipts issued by
companies in more developed markets.
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Depositary receipts may be sponsored or unsponsored. Sponsored depositary receipts are
established jointly by a depositary and the underlying issuer, whereas unsponsored
depositary receipts may be established by a depositary without participation by the
underlying issuer. Holders of an unsponsored depositary receipt generally bear all the costs
associated with establishing the unsponsored depositary receipt. In addition, the issuers of
the securities underlying unsponsored depositary receipts are not obligated to disclose
material information in the United States and, therefore, there may be less information
available regarding such issuers and there may not be a correlation between such information
and the market value of the depositary receipts.
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Depositary receipts may be unregistered and unlisted. A Funds investments may also include
ADRs and GDRs that are not purchased in the public markets and are restricted securities
that can be offered and sold only to qualified institutional buyers under Rule 144A of the
Securities Act of 1933, as amended. The Adviser will determine the liquidity of such
investments pursuant to guidelines established by the Board. If a particular investment in
such ADRs or GDRs is deemed illiquid, that investment will be included within a Funds
limitation on investment in illiquid securities. Moreover, if adverse market conditions were
to develop during the period between a Funds decision to sell these types of ADRs or GDRs
and the point at which the Fund is permitted or able to sell such security, the Fund might
obtain a price less favorable than the price that prevailed when it decided to sell.
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Currency Risk
. Each Funds NAV is determined on the basis of U.S. dollars, therefore, a Fund
may lose value if the local currency of a foreign market depreciates against the U.S.
dollar, even if the local currency value of a Funds holdings goes up.
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Political and Economic Risk
. The Funds are subject to foreign political and economic risk
not associated with U.S. investments, meaning that political events (civil unrest, national
elections, changes in political conditions and foreign relations, imposition of exchange
controls and repatriation restrictions), social and economic events (labor strikes, rising
inflation) and natural disasters occurring in a country where a Fund invests could cause a
Funds investments in that country to experience gains or losses. A Fund also could be
unable to enforce its ownership rights or pursue legal remedies in countries where it
invests.
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Foreign Market and Trading Risk
. The trading markets for many foreign securities are not as
active as U.S. markets and may have less governmental regulation and oversight. Foreign
markets also may have clearance and settlement procedures that make it difficult for a Fund
to buy and sell securities. These factors could result in a loss to a Fund by causing the
Fund to be unable to dispose of an investment or to miss an attractive investment
opportunity, or by causing Fund assets to be uninvested for some period of time.
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Geographic/China Investment Risk
: Funds that are less diversified across countries or geographic
regions are generally riskier than more geographically diversified funds and risks associated with
such countries or geographic regions may negatively affect a Fund.
The economy of China differs, often unfavorably, from the U.S. economy in such respects as
structure, general development, government involvement, wealth distribution, rate of inflation,
growth rate, allocation of resources and capital reinvestment, among others. Under Chinas
political and economic system, the central government has historically exercised substantial
control over virtually every sector of the Chinese economy through administrative regulation and/or
state ownership. Since 1978, the Chinese government has been, and is expected to continue,
reforming its economic policies, which has resulted in less direct central and local government
control over the business and production activities of Chinese enterprises and companies.
Notwithstanding the economic reforms instituted by the Chinese government and the Chinese Communist
Party, actions of the Chinese central and local government authorities continue to have a
substantial effect on economic conditions in China, which could affect the public and private
sector companies in which a Fund invests. In the past, the Chinese government has from time to time
taken actions that influence the prices at which certain goods may be sold, encourage companies to
invest or concentrate in particular industries, induce mergers between companies in certain
industries and induce private companies to publicly offer their securities to increase or continue
the rate of economic growth, control the rate of inflation or otherwise regulate economic
expansion. It may do so in the future as well. Such actions and a variety of other centrally
planned or determined activities by the Chinese government could have a significant adverse effect
on economic conditions in China, the economic prospects for, and the market prices and liquidity
of, the securities of Chinese companies and the payments of dividends and interest by Chinese
companies. In addition, expropriation, including nationalization, confiscatory taxation, political,
economic or social instability or other developments could adversely affect and significantly
diminish the values of the Chinese companies in which a Fund invests.
Market Risk
: An investment in a Fund involves risks similar to those of investing in any fund of
equity securities, such as market fluctuations caused by such factors as economic and political
developments, changes in interest rates and perceived trends in securities prices. The values of
equity securities could decline generally or could underperform other investments. Different types
of equity securities tend to go through cycles of out-performance and under-performance in
comparison to the general securities markets. In addition, securities may decline in value due to
factors affecting a specific issuer, market or securities markets generally.
Passive Investment Risk
: The Funds are not actively managed. Therefore, unless a specific security
is removed from a Funds Underlying Index, the Fund generally would not sell a security because the
securitys issuer was in financial trouble. If a specific security is removed from a Funds
Underlying Index, the Fund may be forced to sell such security at an inopportune time or for a
price other than the securitys current market value. An investment in a Fund involves risks
similar to those of investing in any equity securities traded on an exchange, such as market
fluctuations caused by such factors as economic and political developments, changes in interest
rates and perceived trends in security prices. It is anticipated that the value of Fund shares will
decline, more or less, in correspondence with any decline in value of the Funds Underlying
41
Index. An Underlying Index may not contain the appropriate mix of securities for any particular
economic cycle, and the timing of movements from one type of security to another in seeking to
replicate the Underlying Index could have a negative effect on a Fund. Unlike with an actively
managed fund, the Sub-Adviser does not use techniques or defensive strategies designed
to lessen the effects of market volatility or to reduce the impact of periods of market decline.
This means that, based on market and economic conditions, a Funds performance could be lower than
other types of mutual funds that may actively shift their portfolio assets to take advantage of
market opportunities or to lessen the impact of a market decline.
Tracking Error Risk
: Tracking error refers to the risk that the Sub-Adviser may not be
able to cause a Funds performance to match or correlate to that of a Funds Underlying Index,
either on a daily or aggregate basis. There are a number of factors that may contribute to a Funds
tracking error, such as Fund expenses, imperfect correlation between the Funds investments and
those of its Underlying Index, rounding of share prices, changes to the composition of the
Underlying Index, regulatory policies, and high portfolio turnover rate. In addition, mathematical
compounding may prevent the Fund from correlating with the monthly, quarterly, annual or other
period performance of its benchmark. Tracking error may cause the Funds performance to be less
than expected.
Additional Investment Strategies
Each Fund, using an indexing investment approach, seeks to provide investment results that,
before fees and expenses, correspond generally to the price and yield performance of its respective
Index. A number of factors may affect a Funds ability to achieve a high correlation with its
Index, including the degree to which a Fund utilizes a sampling methodology. There can be no
guarantee that a Fund will achieve a high degree of correlation.
The Sub-Adviser may sell securities
that are represented in an Index or purchase securities not yet represented in an Index, in
anticipation of their removal from or addition to an Index. There may also be instances in which
the Sub-Adviser may choose to overweight securities in an Index, thus causing the
Sub-Adviser to purchase or sell securities not in an Index which the Sub-Adviser
believes are appropriate to substitute for certain securities in that Funds Index or utilize
various combinations of other available investment techniques in seeking to track an Index. Each
Fund may invest in stock index futures contracts and other derivatives in order to track an Index.
Each Fund will not take defensive positions.
Each Fund may change its investment objective and underlying index without shareholder approval.
Additional Risks
Trading Issues.
Although Fund shares are listed for trading on the NYSE Arca, there can be no
assurance that an active trading market for such shares will develop or be maintained. Trading in
Fund shares may be halted due to market conditions or for reasons that, in the view of the NYSE
Arca, make trading in shares inadvisable. In addition, trading in shares is subject to trading
halts
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caused by extraordinary market volatility pursuant to NYSE Arca circuit breaker rules. There can
be no assurance that the requirements of the NYSE Arca necessary to maintain the listing of any
Fund will continue to be met or will remain unchanged or that the shares will trade with any
volume, or at all.
Fluctuation of NAV.
The NAV of the Fund shares will generally fluctuate with changes in the market
value of a Funds securities holdings. The market prices of shares will generally fluctuate in
accordance with changes in a Funds NAV and supply and demand of shares on the NYSE Arca. It cannot
be predicted whether Fund shares will trade below, at or above their NAV. Price differences may be
due, in large part, to the fact that supply and demand forces at work in the secondary trading
market for shares will be closely related to, but not identical to, the same forces influencing the
prices of the securities of an Index trading individually or in the aggregate at any point in time.
The market prices of Fund shares may deviate significantly from the NAV of the shares during
periods of market volatility. However, given that shares can be created and redeemed in Creation
Units (unlike shares of many closed-end funds, which frequently trade at appreciable discounts
from, and sometimes at premiums to, their NAV), the Sub-Adviser believes that large
discounts or premiums to the NAV of Shares should not be sustained. While the creation/redemption
feature is designed to make it likely that Fund shares normally will trade close to a Funds NAV,
disruptions to creations and redemptions may result in trading prices that differ significantly
from such Funds NAV. If an investor purchases Fund shares at a time when the market price is at a
premium to the NAV of the shares or sells at a time when the market price is at a discount to the
NAV of the shares, then the investor may sustain losses.
Costs of Buying or Selling Shares.
Investors buying or selling Fund shares in the secondary market
will pay brokerage commissions or other charges imposed by brokers as determined by that broker.
Brokerage commissions are often a fixed amount and may be a significant proportional cost for
investors seeking to buy or sell relatively small amounts of shares. In addition, secondary market
investors will also incur the cost of the difference between the price that an investor is willing
to pay for shares (the bid price) and the price at which an investor is willing to sell shares
(the ask price). This difference in bid and ask prices is often referred to as the spread or
bid/ask spread. The bid/ask spread varies over time for shares based on trading volume and market
liquidity, and is generally lower if a Funds shares have more trading volume and market liquidity
and higher if a Funds shares have little trading volume and market liquidity. Further, increased
market volatility may cause increased bid/ask spreads. Due to the costs of buying or selling
shares, including bid/ask spreads, frequent trading of shares may significantly reduce investment
results and an investment in shares may not be advisable for investors who anticipate regularly
making small investments.
Derivatives Risk
: A derivative is a financial contract, the value of which depends on, or is
derived from, the value of a financial asset (such as a stock, bond or currency), a physical asset
(such as gold) or a market index (such as the S&P 500 Index). Compared to conventional securities,
derivatives can be more sensitive to changes in interest rates or to sudden fluctuations in market
prices and thus each Funds losses may be greater if it invests in derivatives than if it invests
only in conventional securities.
43
Information Regarding the Indexes
The Dow Jones China Consumer Luxury Index
SM
The Dow Jones China Luxury Consumer Index
SM
is designed to measure the performance of the
investable universe of publicly traded companies that provide high-end (luxury) goods and
services and that generate a sizable portion of their sales from China or have publicly stated
expectations of achieving sales and revenue growth in China. Luxury goods and services include,
for example, apparel, accessories, cosmetics, premium alcohol brands, automobiles, jewelry and
hotels. Securities included in the index will generally be common stock issued by eligible
companies. Eligible securities are screened according to liquidity and market capitalization
requirements. Component securities are equally weighted and weightings are capped according to a
methodology applied on a quarterly basis. The index generally is comprised of [20-30] securities.
The Index was created and is maintained by Dow Jones Indexes.
The Dow Jones China Alternative Energy Index
SM
The Dow Jones Alternative Energy Index
SM
is designed to measure the performance of the
investable universe of publicly traded companies whose primary business line is in or related to
the alternative energy sector and that primarily operate in mainland China or generate a sizable
portion of their sales from China or have publicly stated expectations of achieving sales and
revenue growth in China. The index is comprised of companies whose primary business or businesses
is related to sources of alternative energy (e.g., solar power or wind), the manufacture and
production of electric cars, their components, or other conservation, or clean, technologies.
Securities included in the index will generally be common stock issued by eligible companies. To
be eligible for inclusion in the index, securities of Chinese companies must be tradeable to
foreign investors without restrictions, such as securities of companies that are incorporated in
China and are listed on the Hong Kong Exchange (H-Shares) and securities of companies with main
business operations in China that are listed on the Hong Kong Exchange (Red Chips). Securities
may also be listed on U.S. and other foreign exchanges, subject to the indexs other selection
criteria. Eligible securities are screened according to liquidity and market capitalization
requirements. Component securities are equally weighted and weightings are capped according to a
methodology applied on a quarterly basis. The index generally is comprised of [20-30] securities.
The index was created and is maintained by Dow Jones Indexes.
The CSI Overseas China Internet Index
The CSI Overseas China Internet Index is designed to measure the performance of the investable
universe of publicly traded China-based companies in the Internet and Internet-related sectors.
The index is comprised of companies whose primary business or business involve internet software
and services, internet retail services and internet entertainment software. Securities included in
the index will generally be common stock issued by eligible companies. To be eligible for
inclusion in the index, securities must be tradeable to foreign investors without restrictions,
such as securities of companies that are incorporated in China and are listed on the Hong Kong
Exchange (H-Shares) and securities of companies with main business operations in China that are
listed on the Hong Kong Exchange (Red Chips). Securities may also be
44
listed on U.S. exchanges and other foreign exchanges, subject to the indexs other selection
criteria. Eligible securities are screened according to liquidity and listing requirements.
Component securities are market capitalization weighted and weightings are capped at 15% levels on
a semi-annual basis. The index is generally comprised of [15-30] securities. The index was
created and is maintained by China Securities Index, Co.
The CSI Overseas China Consumer Staples Index
The CSI Overseas China Consumer Staples Index is designed to measure the performance of a universe
of publicly traded China-based companies in the consumer staples sector. The index is comprised of
companies whose primary business or businesses involve food and staples retailing; beverage and
tobacco products; and household or personal products. Securities included in the index will
generally be common stock issued by eligible companies. To be eligible for inclusion in the index,
securities must be tradeable to foreign investors without restrictions, such as securities of
companies that are incorporated in China and are listed on the Hong Kong Exchange (H-Shares) and
securities of companies with main business operations in China that are listed on the Hong Kong
Exchange (Red Chips). Securities may also be listed on U.S. exchanges other foreign exchanges,
subject to the indexs other selection criteria. Eligible securities are screened according to
liquidity and listing requirements. Component securities are market capitalization weighted and
weightings are capped at 15% on a semi-annual basis. The index is generally comprised of [25-35]
securities. The index was created and is maintained by China Securities Index, Co.
The CSI Overseas China Consumer Discretionary Index
The CSI Overseas China Discretionary Index is designed to measure the performance of a universe of
publicly traded China-based companies in the consumer discretionary sector. The index is comprised
of companies whose primary business or businesses involve automobiles and components, consumer
durables and apparel; consumer services, media and retail. Securities included in the index will
generally be common stock issued by eligible companies. To be eligible for inclusion in the index,
securities must be tradeable to foreign investors without restrictions, such as securities of
companies that are incorporated in China and are listed on the Hong Kong Exchange (H-Shares) and
securities of companies with main business operations in China that are listed on the Hong Kong
Exchange (Red Chips). Securities may also be listed on U.S. exchanges and other foreign
exchanges, subject to the indexs other selection criteria. Eligible securities are screened
according to liquidity and listing requirements. Component securities are market capitalization
weighted and weightings are capped at 15% level on a semi-annual basis. The index is generally
comprised of [50-70] securities. The index was created and is maintained by China Securities
Index, Co.
The CSI Overseas China Urbanization Index
The CSI Overseas China Urbanization Index is designed to measure the performance of a universe of
publicly traded China-based companies that facilitate the growth and development of urban areas.
The index is comprised of companies whose primary business or businesses are in the raw materials,
property and real estate, industrials and retail sectors, among other sectors.
45
Securities included in the index will generally be common stock issued by eligible companies. To
be eligible for inclusion in the index, securities must be tradeable to foreign investors without
restrictions, such as securities of companies that are incorporated in China and are listed on the
Hong Kong Exchange (H-Shares) and securities of companies with main business operations in China
that are listed on the Hong Kong Exchange (Red Chips). Securities may also be listed on U.S.
exchanges and other foreign exchanges, subject to the indexs other selection criteria. Eligible
securities are screened according to liquidity and listing requirements. Component securities are
market capitalization weighted and weightings are capped at 15% level on a semi-annual basis. The
index is generally comprised of [75-150] securities. The index was created and is maintained by
China Securities Index, Co.
The CSI Overseas China Five Year Plan Index
The CSI Overseas China Five Year Plan Index is designed to measure the performance of a universe of
publicly traded China-based companies that the index sponsor, China Securities Index, Co. (CSI),
has determined will be important in the Five Year Plan of the Chinese government. The Five-Year
Plan (the Plan) is a series of development initiatives that have been released by the Chinese
government every five years since 1953. The Plan outlines the governments goals for, among other
things, social and economic growth and industrial planning in key sectors and regions. For
example, the most recently released Plan, the Twelfth Five Year Plan (2011-2015), has proposed a
focus on several areas including, but not limited to, increasing domestic consumption; modernizing
agriculture through mechanization and improvement of agricultural service businesses; encouraging
stable urbanization; promoting energy saving and environmental protection; and encouraging domestic
technological innovation. In creating the Five Year Plan Index, CSI seeks to identify component
securities of companies that it believes will benefit from the areas of focus in the Plan. Index
components include securities of companies in various sectors including, but not limited to, the
consumer staples, retail, technology and Internet, health care and alternative energy sectors.
Securities included in the index will generally be common stock issued by eligible companies. To
be eligible for inclusion in the index, securities must be tradeable to foreign investors without
restrictions, such as securities of companies that are incorporated in China and are listed on the
Hong Kong Exchange (H-Shares) and securities of companies with main business operations in China
that are listed on the Hong Kong Exchange (Red Chips). Securities may also be listed on U.S.
exchanges and other foreign exchanges, subject to the indexs other selection criteria. Eligible
securities are screened according to liquidity and listing requirements. Component securities are
market capitalization weighted and weightings are capped at 15% level on a semi-annual basis. The
index is generally comprised of approximately [75-150] securities. The index was created and is
maintained by China Securities Index, Co.
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 Statement of Additional Information.
46
Fund Management
Exchange Traded Concepts, LLC or the Adviser, an Oklahoma limited liability company, is located at
3555 Northwest 58th Street, Suite 410, Oklahoma City, Oklahoma, 73112. The Adviser was formed in
2009 and has provided investment advisory services to other exchange-traded funds. The Adviser
serves as investment adviser to the Funds with overall responsibility for the general management
and administration of the Funds, subject to the supervision of the Trusts Board of Trustees. For
the services the Adviser provides, each Fund pays the Adviser a fee that is the greater of XX% per
annum of the average daily net assets of the Fund, calculated daily and paid monthly, and $XX per
annum, prorated and paid on a monthly basis.
Krane Funds Adviser LLC or the Sub-Adviser, a Delaware limited liability company, is a
newly formed investment adviser located at 152 West 57th Street, 16th Floor, New York, New York
10019. The Sub-Adviser is responsible for the day to day management of each Fund,
subject to the supervision of the Adviser and the Board. For the services it provides to the Funds,
the Trust pays the Sub-Adviser a fee, which is calculated daily and paid monthly at an
annual rate of XX% based on a percentage of the average daily net assets of each Fund. The
Sub-Adviser has contractually agreed to reduce fees and reimburse expenses to the extent
necessary to keep Total Annual Fund Operating Expenses (excluding distribution fees and expenses,
if any, paid pursuant to a Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage
and other expenses incurred in placing orders for the purchase and sale of securities and other
investment instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding
XX% of each Funds average daily net assets. This agreement shall continue in effect with respect
to each Fund until the termination of the Sub-Advisory Agreement with respect to the Fund, provided
that the agreement may be terminated, without payment of penalty, with respect to the Fund by the
Trust, for any reason and at any time.
A discussion regarding the basis for the Boards approval of the Investment Advisory Agreement with
the Adviser and the Investment Sub-Advisory Agreement with the Sub-Adviser will be available in the Funds Semi-Annual Report for the
period ended January 31, 2012.
Portfolio Manager
Jonathan Krane of the Sub-Adviser (the Portfolio Manager), is primarily responsible
for the day-to-day management of the Funds. The Portfolio Manager is responsible
47
for various functions related to portfolio management, including, but not limited to, investing
cash inflows, implementing investment strategy, researching and reviewing investment strategy, and
overseeing members of his portfolio management team with more limited responsibilities.
Mr. Krane founded the Sub-Adviser in 2011. He is also Managing Partner of Krane
Capital, an investment and advisory company based in New York that advises companies in the United
States and China on various financial investment opportunities. Prior to that, Mr. Krane was Chief
Executive Officer of the China division of a multinational company. Mr. Krane received a BA from
Connecticut College and an MBA from Columbia University.
The Statement of Additional Information provides additional information about the Portfolio
Managers compensation, other accounts managed, and ownership of Fund shares.
Buying and Selling the Funds
Fund shares are listed for secondary trading on the NYSE Arca. When you buy or sell a Funds
shares on the secondary market, you will pay or receive the market price. You may incur customary
brokerage commissions and charges and may pay some or all of the spread between the bid and the
offered price in the secondary market on each leg of a round trip (purchase and sale) transaction.
The shares will trade on the NYSE Arca at prices that may differ to varying degrees from the daily
NAV of the shares. The NYSE Arca is generally open Monday through Friday and is closed weekends
and the following holidays: New Years Day, Martin Luther King, Jr. Day, Presidents Day, Good
Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
NAV per share for the Funds is computed by dividing the value of the net assets of the Funds (
i.e.
the value of its total assets less total liabilities) by its total number of shares outstanding.
Expenses and fees, including management and distribution fees, if any, are accrued daily and taken
into account for purposes of determining NAV. NAV is determined each business day, normally as of
the close of regular trading of the NYSE (ordinarily 4:00 p.m., Eastern time).
When determining NAV, the value of each Funds portfolio securities is based on market prices of
the securities, which generally means a valuation obtained from an exchange or other market (or
based on a price quotation or other equivalent indication of the value supplied by an exchange or
other market) or a valuation obtained from an independent pricing service. If a securitys market
price is not readily available or does not otherwise accurately reflect the fair value of the
security, the security will be valued by another method that the Board believes will better reflect
fair value in accordance with the Trusts valuation policies and procedures. Fair value pricing may
be used in a variety of circumstances, including but not limited to, situations when the value of a
security in a Funds portfolio has been materially affected by events occurring after the close of
the market on which the security is principally traded but prior to the close of the NYSE Arca
(such as in the case of a corporate action or other news that may materially affect the price of a
security) or trading in a security has been suspended or halted. Accordingly, a Funds NAV may
reflect certain portfolio securities fair values rather than their market prices.
48
Fair value pricing involves subjective judgments and it is possible that a fair value determination
for a security will materially differ from the value that could be realized upon the sale of the
security. In addition, fair value pricing could result in a difference between the prices used to
calculate a Funds NAV and the prices used by the Funds benchmark Index. This may result in a
difference between the Funds performance and the performance of the Funds benchmark Index.
Frequent Purchases and Redemptions of Fund Shares
Unlike frequent trading of shares of a traditional open-end mutual funds (
i.e.
, not
exchange-traded) shares, frequent trading of shares of the Funds on the secondary market does not
disrupt portfolio management, increase the Funds trading costs, lead to realization of
capitalization gains, or otherwise harm the Funds shareholders because these trades do not involve
the Funds directly. Certain institutional investors are authorized to purchase and redeem a Funds
shares directly with the Fund. Because these trades are effected in-kind (
i.e.
, for securities, and
not for cash), they do not cause any of the harmful effects noted above that may result from
frequent cash trades. Moreover, each Fund imposes transaction fees on in-kind purchases and
redemptions of Creation Units to cover the custodial and other costs incurred by the Fund in
effecting in-kind trades. These fees increase if an investor substitutes cash in part or in whole
for Creation Units, reflecting the fact that the Funds trading costs increase in those
circumstances. For these reasons, the Board of Trustees has determined that it is not necessary to
adopt policies and procedures to detect and deter frequent trading and market-timing in shares of
the Funds.
Other Considerations
Distribution and Service Plan
. The Fund has adopted a Distribution and Service Plan in accordance
with Rule 12b-1 under the 1940 Act pursuant to which payments of up to 0.25% of each Funds average
daily net assets may be made for the sale and distribution of its Fund shares. However, the Board
of Trustees has determined that no payments pursuant to the Distribution and Service Plan will be
made for at least the next twelve (12) months of operation. Thereafter, 12b-1 fees may only be
imposed after approval by the Board of Trustees. Any forgone 12b-1 fees during the next 12 months
will not be recoverable during any subsequent period. Because these fees would be paid out of each
Funds assets on an on-going basis, if payments are made in the future, these fees will increase
the cost of your investment and may cost you more than paying other types of sales charges.
Dividends, Distributions and Taxes
Fund Distributions
Each Fund pays out dividends from its net investment income to investors at least quarterly. The
Fund distributes any net capital gains, if any, annually.
49
Dividend Reinvestment Service
Brokers may make available to their customers who own a Funds shares the DTC book-entry dividend
reinvestment service. If this service is available and used, dividend distributions of both income
and capital gains will automatically be reinvested in additional whole shares of that Fund. Without
this service, investors would receive their distributions in cash. In order to achieve the maximum
total return on their investments, investors are encouraged to use the dividend reinvestment
service. To determine whether the dividend reinvestment service is available and whether there is a
commission or other charge for using this service, consult your broker. Brokers may require a
Funds shareholders to adhere to specific procedures and timetables. If this service is available
and used, dividend distributions of both income and realized gains will be automatically reinvested
in additional whole shares of the Fund purchased in the secondary market.
Tax Information
The following is a summary of some important tax issues that affect the Funds and their
shareholders. The summary is based on current tax laws, which may be changed by legislative,
judicial or administrative action. You should not consider this summary to be a detailed
explanation of the tax treatment of the Funds, or the tax consequences of an investment in the
Funds. More information about taxes is located in the SAI. You are urged to consult your tax
adviser regarding specific questions as to federal, state and local income taxes.
Tax Status of Each Fund
Each Fund is treated as a separate entity for federal tax purposes, and intends to qualify for the
special tax treatment afforded to regulated investment companies under the Internal Revenue Code of
1986, as amended (the Code). As long as a Fund qualifies as a regulated investment company, it
pays no federal income tax on the earnings it distributes to shareholders.
Tax Status of Distributions
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Each Fund will distribute substantially all of its net investment income, quarterly, and
net capital gains income, annually.
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The income dividends and short-term capital gains distributions you receive from the
Funds will be taxed as either ordinary income or qualified dividend income. Dividends that
are qualified dividend income are currently eligible for the reduced maximum rate to
individuals of 15% (lower rates apply to individuals in lower tax brackets) to the extent
that the Fund receives qualified dividend income.
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Any long-term capital gains distributions you receive from a Fund are taxable as
long-term capital gains regardless of how long you have owned your shares. Long-term
capital gains are currently taxed at a maximum rate of 15%.
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Absent further legislation, the maximum 15% tax rate on qualified dividend income and
long-term capital gains will cease to apply to taxable years beginning after December 31,
2012.
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Dividends, interest and gains received by a Fund with respect to foreign securities may
be subject to withholding and other taxes imposed by foreign countries. Tax conventions
between certain countries and the United States may, in some cases, reduce or eliminate
such taxes. If more than 50% of the total assets of a Fund consist of foreign securities,
that Fund will be eligible to elect to treat some of those taxes as a distribution to
shareholders. This means that you will be considered to have received as an additional
dividend your share of such foreign taxes and may be entitled to either a corresponding tax
deduction in calculating your taxable income, or, subject to certain limitations, a credit
in calculating your federal income tax.
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Recent legislation effective beginning in 2013 provides that U.S. individuals with
income exceeding $200,000 ($250,000 if married and filing jointly) will be subject to a new
3.8% Medicare contribution tax on their net investment income, including interest,
dividends, and capital gains (including capital gains realized on the sale or exchange of
shares of a Fund).
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Dividends and distributions are generally taxable to you whether you receive them in
cash or in additional shares.
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Corporate shareholders may be entitled to a dividends-received deduction for the portion
of dividends they receive that are attributable to dividends received by a Fund from U.S.
corporations, subject to certain limitations.
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Long-term capital gains distributions will result from gains on the sale or exchange of
capital assets held by a Fund for more than one year.
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Distributions paid in January but declared by a Fund in October, November or December of
the previous year may be taxable to you in the previous year.
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A Fund will inform you of the amount of your ordinary income dividends, qualified
dividend income, and long-term capital gain distributions shortly after the close of each
calendar year.
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If you hold your shares in a tax-qualified retirement account, you generally will not be
subject to federal taxation on Fund distributions until you begin receiving distributions
from your retirement account. You should consult your tax adviser regarding the tax rules
that apply to your retirement account.
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Tax Status of Share Transactions.
Each sale, exchange, or redemption of Fund shares may be a
taxable event to you. For tax purposes, an exchange of Fund shares for shares of a different Fund
of the Trust is treated the same as a sale. Currently, any capital gain or loss realized upon a
sale of Fund shares is generally treated as a long-term gain or loss if the shares have been held
for more than one year. Any capital gain or loss realized upon a sale of Fund shares held for one
year or less is generally treated as short-term gain or loss, except that any capital loss on the
sale of shares held for six months or less is treated as long-term capital loss to the extent the
capital
51
gain dividends were paid with respect to such shares. You should consider the tax consequences of
any redemption or exchange before making such a request, especially with respect to redemptions if
you invest in the Funds through a tax-qualified retirement plan.
Non-U.S. Investors.
If you are not a citizen or permanent resident of the United States, a Funds
ordinary income dividends will generally be subject to a 30% U.S. withholding tax, unless a lower
treaty rate applies or unless such income is effectively connected with a U.S. trade or business.
For taxable years of a Fund beginning before January 1, 2012, a Fund may, under certain
circumstances, designate all or a portion of a dividend as an interest-related dividend or a
short-term capital gain dividend that if received by a nonresident alien or foreign entity
generally would be exempt from the 30% U.S. withholding tax, provided that the foreign person is a
nonresident alien individual who is not present in the United States for a period or periods
aggregating 183 days or more during the taxable year and certain other requirements are met.
Gains from the sale or other disposition of shares of the Fund generally are not subject to U.S.
taxation, unless the recipient is an individual who either (1) meets the Codes definition of
resident alien or (2) is physically present in the U.S. for 183 days or more per year. Different
tax consequences may result if the foreign shareholder is engaged in a trade or business within the
United States. Tax consequences to a foreign shareholder entitled to claim the benefits of a tax
treaty may be different than those described above.
Beginning in 2014, a 30% U.S. withholding tax will be imposed on dividends and proceeds from the
sale of Fund shares paid to foreign shareholders if certain disclosure requirements are not
satisfied.
Taxes on Exchange-Listed Share Sales.
Currently, any capital gain or loss realized upon a sale of
shares is generally treated as long-term capital gain or loss if the shares have been held for more
than one year and as short-term capital gain or loss if the shares have been held for one year or
less, except that any capital loss on the sale of shares held for six months or less is treated as
long-term capital loss to the extent that capital gain dividends were paid with respect to such
shares.
Backup Withholding.
A Fund will be required in certain cases to withhold at applicable withholding
rates and remit to the United States Treasury the amount withheld on amounts payable to any
shareholder who (1) has provided the Fund either an incorrect tax identification number or no
number at all, (2) who is subject to backup withholding by the Internal Revenue Service for failure
to properly report payments of interest or dividends, (3) who has failed to certify to the Fund
that such shareholder is not subject to backup withholding, or (4) has not certified that such
shareholder is a U.S. person (including a U.S. resident alien).
The foregoing discussion summarizes some of the consequences under current federal tax law of an
investment in the Funds. It is not a substitute for personal tax advice. Consult your personal tax
advisor about the potential tax consequences of an investment in the Funds under all applicable tax
laws.
52
Additional Information
Information regarding the number of days each Funds market price was at a discount or a premium to
its NAV for the most recently completed calender year and the most recently completed calendar
quarters since that year, will be provided, free of charge, on the Funds web site at XX.
53
Exchange Traded Concepts Trust
3555 Northwest 58
th
Street, Suite 410
Oklahoma City, Oklahoma 73112
ANNUAL/SEMI-ANNUAL REPORTS TO SHAREHOLDERS
Additional information about a Funds investments is available in the Funds annual and semi-annual
reports to shareholders. In a Funds annual reports, you will find a discussion of the market
conditions and investment strategies that significantly affected the Funds performance during its
last fiscal year.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
The SAI provides more detailed information about the Funds. The SAI is incorporated by reference
into, and is thus legally a part of, this Prospectus.
FOR MORE INFORMATION
To request a free copy of the latest annual or semi-annual report, when available, the SAI or to
request additional information about a Fund or to make other inquiries, please contact us as
follows:
Call:
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[Number]
Monday through Friday
8:30 a.m. to 6:30 p.m. (Eastern Time)
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Write:
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Exchange Traded Concepts Trust
3555 Northwest 58th Street, Suite 410
Oklahoma City, Oklahoma 73112
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Visit:
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INFORMATION PROVIDED BY THE SECURITIES AND EXCHANGE COMMISSION
You can review and copy information about the Funds (including the SAI) at the SECs Public
Reference Room in Washington, DC. To find out more about this public service, call the SEC at
1-202-551-8090. Reports and other information about the Funds are also available in the EDGAR
Database on the SECs Internet site at http://www.sec.gov, or you can receive copies of this
information, after paying a duplicating fee, by electronic request at the following e-mail address:
publicinfo@sec.gov, or by writing the Public Reference Section, Securities and Exchange Commission,
100 F Street, N.E., Washington, DC 20549-0102.
The Trusts Investment Company Act file number: 811-22263
SUBJECT TO COMPLETION
THE INFORMATION IN THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT COMPLETE AND MAY BE CHANGED. WE
MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE U.S. SECURITIES AND
EXCHANGE COMMISSION IS EFFECTIVE. THIS STATEMENT OF ADDITIONAL INFORMATION IS NOT AN OFFER TO SELL
THESE SECURITIES AND IS NOT SOLICITING AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE
OFFER OR SALE IS NOT PERMITTED.
PRELIMINARY STATEMENT OF ADDITIONAL INFORMATION
DATED August 17, 2011
STATEMENT OF ADDITIONAL INFORMATION
KraneShares China Consumer Luxury ETF [Ticker Symbol: ]
KraneShares China Alternative Energy ETF [Ticker Symbol: ]
KraneShares China Internet ETF [Ticker Symbol: ]
KraneShares China Consumer Staples ETF [Ticker Symbol: ]
KraneShares China Consumer Discretionary ETF [Ticker Symbol: ]
KraneShares China Urbanization ETF [Ticker Symbol: ]
KraneShares China Five Year Plan ETF [Ticker Symbol: ]
each, a series of EXCHANGE TRADED CONCEPTS TRUST (the Trust)
October ___, 2011
Investment Adviser:
Exchange Traded Concepts, LLC
Sub-Adviser:
Krane Funds Adviser LLC
This Statement of Additional Information (SAI) is not a prospectus. With respect to each of
the Trusts series, the SAI should be read in conjunction with the prospectus, dated October ___,
2011 may be revised from time to time (the Prospectus). Capitalized terms used herein that are
not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the
Prospectus may be obtained without charge, by writing the Funds Distributor, SEI Investments
Distribution Co. One Freedom Valley Drive, Oaks, PA 19456, by visiting the Trusts website at
XX.com or by calling XX.
i
TABLE OF CONTENTS
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ii
GENERAL INFORMATION ABOUT THE TRUST
The Trust is an open-end management investment company consisting of multiple investment series
(each a Fund and collectively the Funds). The Trust was organized as a Delaware statutory
trust on July 17, 2009. The Trust is registered with the SEC under the Investment Company Act of
1940, as amended, (the 1940 Act) as an open-end management investment company and the offering of
each Funds shares (Shares) is registered under the Securities Act of 1933, as amended (the
Securities Act). Exchange Traded Concepts, LLC (the Adviser) serves as investment adviser to
the Funds. Krane Funds Adviser LLC (the Sub-Adviser)
serves as the sub-adviser to the Funds. The investment objective of each Fund is provide investment results that, before
fees and expenses, correspond generally to the price and yield performance of a specified market
index (each, an Index and collectively, the Indexes).
Each Fund offers and issues Shares at their net asset value only in aggregations of a specified
number of Shares (each, a Creation Unit). Each Fund generally offers and issues Shares in
exchange for a basket of securities included in its Index (Deposit Securities) together with the
deposit of a specified cash payment (Cash Component). The Trust reserves the right to permit or
require the substitution of a cash in lieu amount (Deposit Cash) to be added to the Cash
Component to replace any Deposit Security. The Shares are listed on the NYSE Arca (NYSE Arca or
the Exchange) and trade on the Exchange at market prices. These prices may differ from the
Shares net asset values. The Shares are also redeemable only in Creation Unit aggregations, and
generally in exchange for portfolio securities and a specified cash payment. A Creation Unit of
each Fund consists of 50,000 Shares.
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 at least equal to a specified
percentage of the market value of the missing Deposit Securities as set forth in the Participant
Agreement (as defined below). The Trust may impose a transaction fee for each creation or
redemption. In all cases, such fees will be limited in accordance with the requirements of the
Securities and Exchange Commission (the SEC) applicable to management investment companies
offering redeemable securities. In addition to the fixed Creation or Redemption Transaction Fee,
an additional transaction fee of up to five times the fixed Creation or Redemption Transaction Fee
may apply.
ADDITIONAL INDEX INFORMATION
Dow Jones China Consumer Luxury Index
SM
(the Luxury Index)
The Luxury Index was created and is maintained by Dow Jones Indexes, a licensed trademark of CME
Group Index Services LLC (Dow Jones). Dow Jones is independent of the Adviser, the Sub-Adviser and their affiliates. The Luxury Index represents companies that provide global high-end
(luxury) goods and services that generate a sizeable portion of their sales from China or have
publicly stated expectations of achieving sales and revenue growth in China. Publicly stated
expectations of achieving sales and revenue growth in China include, but are not limited to,
statements made in company press releases, annual reports and regulatory filings, analyst reports
and in news media outlets.
A Luxury Index-eligible stock must also have:
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A minimum float-adjusted market capitalization of $200 million (U.S. Dollars); and
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A minimum six-month average daily trading volume of $2 million (U.S. Dollars).
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1
The Luxury Index was released by Dow Jones for circulation in XX. The composition of the Luxury
Index is reviewed by Dow Jones on a quarterly basis. Additions to and subtractions from the Luxury
Index occur on the close of business on the third Friday of the end of the calendar quarter, which
may impact the relative weightings of the securities in the Index prior to rebalancing
.
The Index is equal weighted, with the weight of any individual security restricted to no more than
5% of the Luxury Index, at the time of each rebalancing.
The Index is calculated using a Laspeyres formula that measures the aggregate price changes in the
component securities against a fixed base value.
The index is computed as follows:
Where:
(t) the time of calculation
(n) number of stocks in the index
(p
it
) price of stock i
(q
it
) number of shares of company i
(C) adjusted base date market capitalization [of the index]
(p
i0
) the closing price of stock I at the base date
(q
i0
) the number of shares of company i at the base date
(M) Market capitalization of the index
(B) Adjusted market capitalization of the index
The Luxury Index currently targets the inclusion of [20-30] companies. Subject to the selection
criteria above, companies may be added to the index at the time of quarterly rebalancing if,
through the course of their business, they enter into the luxury goods and services business in
China, are acquired by a company that is already in the index or are divested from a company that
is not currently in the index but the divested company would become eligible for inclusion. Dow
Jones publishes the changes to the Luxury Index prior to the effective date of the change and on
such effective date posts the changes to its website at
www.djindexes.com
.
2
Investors are able to access the holdings of the Fund and the composition and compilation
methodology of the Luxury Index through the Funds website at www.kraneshares.com.
Dow Jones China Alternative Energy Index
SM
(the Alternative Energy Index)
The Alternative Energy Index was created and is maintained by Dow Jones Indexes, a licensed
trademark of CME Group Index Services LLC (Dow Jones). Dow Jones is independent of the Adviser,
the Sub-Adviser and their affiliates. The Alternative Energy Index represents alternative energy
companies that primarily operate in mainland China or generate a sizeable portion of their sales
from China or have publicly stated expectations of achieving sales and revenue growth in China.
Publicly stated expectations of achieving sales and revenue growth in China include, but are not
limited to, statements made in company press releases, annual reports and regulatory filings,
analyst reports and in news media outlets.
An Alternative Energy Index-eligible stock must also have:
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A minimum float-adjusted market capitalization of $200 million (U.S. Dollars); and
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A minimum six-month average daily trading volume of $2 million (U.S. Dollars).
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The Alternative Energy Index was released by Dow Jones for circulation in XX. The composition of
the Alternative Energy Index is reviewed by Dow Jones on a quarterly basis. Additions to and
subtractions from the Alternative Energy Index occur on the close of business on the third Friday
of the end of the calendar quarter.
The Index is equal weighted, with the weight of any individual security restricted to no more than
5% of the Alternative Energy Index, at the time of each rebalancing.
The Index is calculated using a Laspeyres formula, which measures the aggregate price changes in
the component securities against a fixed base value.
The index is computed as follows:
Where:
(t) the time of calculation
(n) number of stocks in the index
(p
it
) price of stock i
(q
it
) number of shares of company i
(C) adjusted base date market capitalization [of the index]
3
(p
i0
) the closing price of stock i at the base date
(q
i0
) the number of shares of company i at the base date
(M) Market capitalization of the index
(B) Adjusted market capitalization of the index
The Alternative Energy Index currently targets the inclusion of [20-30] companies. Subject to the
selection criteria above, companies may be added to the index at the time of quarterly rebalancing
if, through the course of their business, they enter into the alternative energy sector in China,
are acquired by a company that is already in the index or are divested from a company that is not
currently in the index but the divested company would become eligible for inclusion. Dow Jones
publishes the changes to the Alternative Energy Index prior to the effective date of the change and
on such effective date posts the changes to its website at
www.djindexes.com
.
Investors are able to access the holdings of the Fund and the composition and compilation
methodology of the Alternative Energy Index through the Funds website at www.kraneshares.com.
The CSI Overseas China Internet Index, the CSI Overseas China Consumer Discretionary Index, the
CSI Overseas China Consumer Staples Index, the CSI Overseas China Urbanization Index, the CSI
Overseas China Five Year Plan Index may each be referred to as a CSI Overseas China Index or collectively as the CSI Overseas China Indexes.
Index Provider Description
The CSI Overseas China Indexes are created and maintained by China Securities Index, Co., Ltd.
(CSI). CSI is a professional index service company jointly founded by the Shanghai Stock
Exchange and the Shenzhen Stock Exchange, to provide services relating to securities indices. CSI
is independent of the Adviser, the Sub-Adviser and their affiliates.
Constituents Selection
a. CSI Overseas China Index Universe
To qualify for index inclusion, a company must first meet the minimum requirements to enter and
remain in CSI Overseas China Index universe.
To be added to a CSI Overseas China Index, a company must:
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Be primarily listed for trading outside of mainland China; and
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Have traded for at least three (3) months.
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In addition, to be added to a CSI Overseas China Index a company must meet at least one of the
following criteria:
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Be incorporated in mainland China;
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Have its headquarters in mainland China;
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Derives at least 50% of its revenue from goods produced or sold, or
services performed, in mainland China.
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Securities which are listed on the Hong Kong Exchange (HKEx) (either on the main board or HKExs
alternative stock market exchange Growth Enterprise Market (GEM)) must also satisfy the following
conditions:
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Be either common stock or equity securities issued by real estate investment trusts (REITs);
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Be listed for more than three (3) months in the most recent year unless the daily average total market value of the
security since listing is ranked in the top 10 out of all HKEx-listed securities;
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Have a daily average close price in the most recent year of no less than $0.1 (Hong Kong Dollars (HKD));
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Have a daily average close price in the most recent year of no less than $0.5 HKD if the companys earnings per share
report is negative for the most recently completed annual period;
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Have a daily average turnover ratio (trading volume to shares issued) of no less than 0.1% during the most recent
three-month period.
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b. Selection Criteria
Once the CSI Overseas China Index universe has been identified, to qualify for inclusion in a
specific CSI Overseas China Index, a company must:
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Have a daily average trading value of more than $2 million (U.S. Dollars) in the past
year; and
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Fall within the sector or sectors in the relevant CSI Overseas China Index, as
determined by CSIs proprietary industry classification standards.
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Index Calculation
The CSI Overseas China Indexes are market capitalization weighted and are calculated using a
Paasche weighted composite price index formula. The formula is:
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Current Index =
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Curreent Adjusted Market Cap of Constituents
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x 1000
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Base Period
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5
Adjusted
market cap = Σ (Price X Adjusted No. of shares X Weight Cap Factor X Foreign Exchange
Rate). Weight cap factor is between 0 and 1. The weights of a component are capped at 15%. The
adjusted number of shares are calculated using a category-weighted method.
The Category-Weighted Method is shown in the below chart. For example, a security with a
negotiable market share ratio (negotiable market capitalization (
i.e.
, free float)/total market
capitalization) of 7%, which is below 10%, will have an inclusion factor equal to its negotiable
market capitalization ratio. A security with a negotiable market share ratio of 35% will belong to
category (30, 40]. The corresponding inclusion factor is 40%,
i.e.
40% of total market share will
be used for index calculation.
Category-Weighted Chart
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Negotiable
Market
Cap Ratio (%)
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≤10
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(10, 20]
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(20, 30]
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(30, 40]
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(40, 50]
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(50, 60]
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(60, 70
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)
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(70, 80
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>80
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Negotiable Market
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Inclusion Factor (%)
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Cap Ratio
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20
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30
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40
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50
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60
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70
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80
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100
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The following six categories are usually deemed as non-free float market capitalization by CSI:
Long term holdings by founders, families, & senior executives; Government holdings; Strategic
holdings (Companies, banks); Frozen shares; Restricted employee shares; Cross holdings.
Each CSI Overseas China Index is rebalanced on a semi-annual basis, on January 1 and July 1.
Index Maintenance and Issue Changes
The CSI Overseas China Indexes are reviewed and rebalanced by CSI on a semi-annual basis, effective
on January 1 and July 1. Securities will be added to an index at the semi-annual periods if they
become eligible. Component securities are adjusted on an ad hoc basis due to corporate actions
including, but not limited to, bankruptcy, suspension, shares issue and stock splits. In addition,
adjustments are made based on the following criteria:
(i) IPOs
CSI does not apply the fast entry rule, meaning that there is no rule that stocks of recently
issued IPOs be added to the index during the semi-annual review periods.
(ii) Delisted Securities
Delisted securities will be deleted from an index. No replacement security will be added.
(iii) Demerged Companies
Demerged companies will remain in the index.
6
(iv) Merger between Constituents
The new company will remain in the index. No replacement security will be added.
(v) Constituents Acquired by Non-Constituents
The acquiring company will not remain in the index. No replacement security will be added.
Index Rebalancing/Structural Changes
Changes to the index will be published to CSIs website at [website
]
before changes are effected.
Index Availability
Information regarding the CSI Overseas China Index will be disseminated through Reuters.
Exchange Rates and Pricing
WM/Reuters foreign exchange rates are taken daily at 6:30 a.m. Beijing time, and are used in the
calculation of the CSI Overseas China Indexes.
ADDITIONAL INFORMATION ABOUT INVESTMENT OBJECTIVES, POLICIES AND RELATED RISKS
Each Funds investment objectives and principal investment strategies are described in the
prospectus. The following information supplements, and should be read in conjunction with, the
prospectus. For a description of certain permitted investments, see Description of Permitted
Investments in this SAI.
NON-DIVERSIFICATION
Each Fund is classified as a non-diversified investment company under the 1940 Act. A
non-diversified classification means that a Fund is not limited by the 1940 Act with regard to
the percentage of its assets that may be invested in the securities of a single issuer. This means
that a Fund may invest a greater portion of its assets in the securities of a single issuer than a
diversified fund. The securities of a particular issuer may constitute a greater portion of an
Index of each Fund and, therefore, the securities may constitute a greater portion of the Funds
portfolio. This may have an adverse effect on a Funds performance or subject a Funds shares to
greater price volatility than more diversified investment companies. Moreover, in pursuing
its objective, each Fund may hold the securities of a single issuer in an amount exceeding 10% of
the market value of the outstanding securities of the issuer, subject to restrictions imposed by
the Code. In particular, as a Funds size grows and its assets increase, it will be more likely to
hold more than 10% of the securities of a single issuer if the issuer has a relatively small public
float as compared to other components in its benchmark Index.
Although each Fund is non-diversified for purposes of the 1940 Act, each Fund intends to maintain
the required level of diversification and otherwise conduct its operations so as to qualify as a
regulated investment company for purposes of the Internal Revenue Code of 1986, as amended (the
Code), and to relieve each Fund of any liability for federal income tax to the extent that its
earnings are distributed to shareholders. Compliance with the diversification requirements of the
Code may severely limit the investment flexibility of a Fund and may make it less likely that a
Fund will meet its investment objectives. Each Fund intends to satisfy the diversification
requirements necessary to qualify as a regulated investment company under the Code, which
7
requires that a Fund be diversified (e.g., that it will not invest more than 5% of its assets in
the securities of any one issuer nor acquire more than 10% of the outstanding voting securities of
any one issuer) with respect to 50% of its assets. With respect to the remaining 50% of its
assets, the Fund may invest an unlimited amount in any one issuer, subject to certain limitations.
See Federal Income Taxes in this SAI.
CONCENTRATION
Each Fund may concentrate its investments in a particular industry or group of industries, as
described in the Prospectus. The securities of issuers in particular industries may dominate the
benchmark Index of a Fund and consequently the Funds investment portfolio. This may adversely
affect a Funds performance or subject its Shares to greater price volatility than that experienced
by less concentrated investment companies.
DESCRIPTION OF PERMITTED INVESTMENTS
The following are descriptions of the permitted investments and investment practices and the
associated risk factors. The Funds will only invest in any of the following instruments or engage
in any of the following investment practices if such investment or activity is consistent with a
Funds investment objective and permitted by the Funds stated investment policies.
EQUITY SECURITIES
Equity securities represent ownership interests in a company and include common stocks, preferred
stocks, warrants to acquire common stock, and securities convertible into common stock.
Investments in equity securities 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 the Funds invest
will cause the net asset value of the Funds to fluctuate.
Types of Equity Securities:
Common Stocks Common stocks represent units of ownership in a company. Common stocks usually
carry voting rights and earn dividends. Unlike preferred stocks, which are described below,
dividends on common stocks are not fixed but are declared at the discretion of the companys board
of directors.
Preferred Stocks Preferred stocks are also units of ownership in a company. Preferred stocks
normally have preference over common stock in the payment of dividends and the liquidation of the
company. However, in all other respects, preferred stocks are subordinated to the liabilities of
the issuer. Unlike common stocks, preferred stocks are generally not entitled to vote on corporate
matters. Types of preferred stocks include adjustable-rate preferred stock, fixed dividend
preferred stock, perpetual preferred stock, and sinking fund preferred stock. Generally, the market
values of preferred stock with a fixed dividend rate and no conversion element varies inversely
with interest rates and perceived credit risk.
Convertible Securities Convertible securities are securities that may be exchanged for, converted
into, or exercised to acquire a predetermined number of shares of the issuers common stock at A
Funds option during a specified time period (such as convertible preferred stocks, convertible
debentures and warrants). A convertible security is generally a fixed income security that is
senior to common stock in an issuers capital structure, but is usually subordinated to similar
non-convertible securities. In exchange for the conversion feature, many corporations will pay a
lower rate of interest on convertible securities than debt securities of the
8
same corporation. In general, the market value of a convertible security is at least the higher of
its investment value (i.e., its value as a fixed income security) or its conversion value
(i.e., its value upon conversion into its underlying common stock).
Convertible securities are subject to the same risks as similar securities without the convertible
feature. The price of a convertible security is more volatile during times of steady interest rates
than other types of debt securities. The price of a convertible security tends to increase as the
market value of the underlying stock rises, whereas it tends to decrease as the market value of the
underlying common stock declines.
Rights and Warrants A right is a privilege granted to existing shareholders of a corporation to
subscribe to shares of a new issue of common stock before it is issued. Rights normally have a
short life of usually two to four weeks, are freely transferable and entitle the holder to buy the
new common stock at a lower price than the public offering price. Warrants are securities that are
usually issued together with a debt security or preferred stock and that give the holder the right
to buy proportionate amount of common stock at a specified price. Warrants are freely transferable
and are traded on major exchanges. Unlike rights, warrants normally have a life that is measured
in years and entitles the holder to buy common stock of a company at a price that is usually higher
than the market price at the time the warrant is issued. Corporations often issue warrants to make
the accompanying debt security more attractive.
An investment in warrants and rights may entail greater risks than certain other types of
investments. Generally, rights and warrants do not carry the right to receive dividends or
exercise voting rights with respect to the underlying securities, and they do not represent any
rights in the assets of the issuer. In addition, their value does not necessarily change with the
value of the underlying securities, and they cease to have value if they are not exercised on or
before their expiration date. Investing in rights and warrants increases the potential profit or
loss to be realized from the investment as compared with investing the same amount in the
underlying securities.
Risks of Investing in Equity Securities:
General
Risks of Investing in Stocks
While investing in stocks allows investors to participate in
the benefits of owning a company, such investors must accept the risks of ownership. Unlike
bondholders, who have preference to a companys earnings and cash flow, preferred stockholders,
followed by common stockholders in order of priority, are entitled only to the residual amount
after a company meets its other obligations. For this reason, the value of a companys stock will
usually react more strongly to actual or perceived changes in the companys financial condition or
prospects than its debt obligations. Stockholders of a company that fares poorly can lose money.
Stock markets tend to move in cycles with short or extended periods of rising and falling stock
prices. The value of a companys stock may fall because of:
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Factors that directly relate to that company, such as decisions made by its management or
lower demand for the companys products or services;
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Factors affecting an entire industry, such as increases in production costs; and
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Changes in general financial market conditions that are relatively unrelated to the company
or its industry, such as changes in interest rates, currency exchange rates or inflation
rates.
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9
Because preferred stock is generally junior to debt securities and other obligations of the issuer,
deterioration in the credit quality of the issuer will cause greater changes in the value of a
preferred stock than in a more senior debt security with similar stated yield characteristics.
Small- and Medium-Sized Companies
Investors in small- and medium-sized companies typically take
on greater risk and price volatility than they would by investing in larger, more established
companies. This increased risk may be due to the greater business risks of their small or medium
size, limited markets and financial resources, narrow product lines and frequent lack of management
depth. The securities of small- and medium-sized companies are often traded in the
over-the-counter market and might not be traded in volumes typical of securities traded on a
national securities exchange. Thus, the securities of small and medium capitalization companies
are likely to be less liquid, and subject to more abrupt or erratic market movements, than
securities of larger, more established companies.
When-Issued Securities
A when-issued security is one whose terms are available and for which a
market exists, but which have not been issued. When the Fund engages in when-issued transactions,
it relies on the other party to consummate the sale. If the other party fails to complete the
sale, the Fund may miss the opportunity to obtain the security at a favorable price or yield.
When purchasing a security on a when-issued basis, the Fund assumes the rights and risks of
ownership of the security, including the risk of price and yield changes. At the time of
settlement, the market value of the security may be more or less than the purchase price. The
yield available in the market when the delivery takes place also may be higher than those obtained
in the transaction itself. Because the Funds do not pay for the security until the delivery date,
these risks are in addition to the risks associated with its other investments.
Decisions to enter into when-issued transactions will be considered on a case-by-case basis when
necessary to maintain continuity in a companys index membership. The Funds will segregate cash or
liquid securities equal in value to commitments for the when-issued transactions. The Funds will
segregate additional liquid assets daily so that the value of such assets is equal to the amount of
the commitments.
FOREIGN SECURITIES
FOREIGN ISSUERS
Each Fund may invest a significant portion of its assets in issuers located outside the United
States directly, or in financial instruments that are indirectly linked to the performance of
foreign issuers. Examples of such financial instruments include depositary receipts, which are
described further below, ordinary shares, and New York shares issued and traded in the United
States. Ordinary shares are shares of foreign issuers that are traded abroad and on a United
States exchange. New York shares are shares that a foreign issuer has allocated for trading in the
United States. ADRs, ordinary shares, and New York shares all may be purchased with and sold for
U.S. Dollars, which protects a Fund from the foreign settlement risks described below.
Investing in foreign companies may involve risks not typically associated with investing in United
States companies. The value of securities denominated in foreign currencies, and of dividends from
such securities, can change significantly when foreign currencies strengthen or weaken relative to
the U.S. Dollar. Foreign securities markets generally have less trading volume and less liquidity
than United States markets, and prices in some foreign markets can be very volatile than those of
domestic securities. Therefore, a Funds investment in foreign securities may be less liquid and
subject to more rapid and erratic price movements than comparable securities listed for trading on
U.S. exchanges. Non-U.S. equity securities may trade at price/earnings multiples higher than
comparable U.S. securities and such levels may not be sustainable. There may be less government
10
supervision and regulation of foreign stock exchanges, brokers, banks and listed companies abroad
than in the U.S. Moreover, settlement practices for transactions in foreign markets may differ from
those in U.S. markets. Such differences may include delays beyond periods customary in the U.S. and
practices, such as delivery of securities prior to receipt of payment, which increase the
likelihood of a failed settlement, which can result in losses to a Fund. The value of non-U.S.
investments and the investment income derived from them may also be affected unfavorably by changes
in currency exchange control regulations. Foreign brokerage commissions, custodial expenses and
other fees are also generally higher than for securities traded in the U.S. This may cause the
Funds to incur higher portfolio transaction costs than domestic equity funds. Fluctuations in
exchange rates may also affect the earning power and asset value of the foreign entity issuing a
security, even one denominated in U.S. dollars. Dividend and interest payments may be repatriated
based on the exchange rate at the time of disbursement, and restrictions on capital flows may be
imposed. Many foreign countries lack uniform accounting, auditing and financial reporting standards
comparable to those that apply to United States companies, and it may be more difficult to obtain
reliable information regarding a foreign issuers financial condition and operations. In addition,
the costs of foreign investing, including withholding taxes, brokerage commissions, and custodial
fees, generally are higher than for United States investments.
Investing in companies located abroad carries political and economic risks distinct from those
associated with investing in the United States. Foreign investment may be affected by actions of
foreign governments adverse to the interests of United States investors, including the possibility
of expropriation or nationalization of assets, confiscatory taxation, restrictions on United States
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. Losses and other expenses may be incurred in converting between various currencies in
connection with purchases and sales of foreign securities. Investments in foreign countries also
involve a risk of local political, economic, or social instability, military action or unrest, or
adverse diplomatic developments.
Investing in companies domiciled in emerging market countries may be subject to greater risks than
investments in developed countries. These risks include: (i) less social, political, and economic
stability; (ii) greater illiquidity and price volatility due to smaller or limited local capital
markets for such securities, or low or non-existent trading volumes; (iii) foreign exchanges and
broker-dealers may be subject to less scrutiny and regulation by local authorities; (iv) local
governments may decide to seize or confiscate securities held by foreign investors and/or local
governments may decide to suspend or limit an issuers ability to make dividend
or interest payments; (v) local governments may limit or entirely restrict repatriation of invested
capital, profits, and dividends; (vi) capital gains may be subject to local taxation, including on
a retroactive basis; (vii) issuers facing restrictions on dollar or euro payments imposed by local
governments may attempt to make dividend or interest payments to foreign investors in the local
currency; (viii) investors may experience difficulty in enforcing legal claims related to the
securities and/or local judges may favor the interests of the issuer over those of foreign
investors; (ix) bankruptcy judgments may only be permitted to be paid in the local currency; (x)
limited public information regarding the issuer may result in greater difficulty in determining
market valuations of the securities, and (xi) lax financial reporting on a regular basis,
substandard disclosure, and differences in accounting standards may make it difficult to ascertain
the financial health of an issuer.
GEOGRAPHIC CONCENTRATION
Funds that are less diversified across countries or geographic regions are generally riskier than
more geographically diversified funds. A fund that focuses on a single country or a specific region
is more exposed to that countrys or regions economic cycles, currency exchange rates, stock
market valuations and political risks, among others, compared with a more geographically
diversified fund. The economies and financial markets of
11
certain regions, such as Asia and the Middle East, can be interdependent and may be adversely
affected by the same events.
RISK FACTORS REGARDING ASIA. The economies of many Asian countries are heavily dependent on
international trade and are accordingly affected by protective trade barriers and the economic
conditions of their trading partners, principally, the U.S., Japan, China, and the European Union.
The recent global economic crisis has impacted Asia, significantly lowering its exports and foreign
investments, which are driving forces of its economic growth. Current economic conditions are also
significantly affecting consumer confidence and local stock markets.
In addition to general risks affecting Asian countries, certain Asian countries, including China,
Hong Kong, and Taiwan, are subject to additional risks that are based on each countrys history,
economy and geography. Certain risks associated with investments in these countries are discussed
below.
PEOPLES REPUBLIC OF CHINA. The government of the Peoples Republic of China is dominated by the
one-party rule of the Chinese Communist Party. Chinas economy has transitioned from a rigidly
central-planned state-run economy to one that has been only partially reformed by more
market-oriented policies. Although the Chinese government has implemented economic reform measures,
reduced state ownership of companies and established better corporate governance practices, a
substantial portion of productive assets in China are still owned by the Chinese government. The
government continues to exercise significant control over industrial development and, ultimately,
control over Chinas economic growth through the allocation of resources, controlling payment of
foreign currency-denominated obligations, setting monetary policy and providing preferential
treatment to particular industries or companies.
HONG KONG. Hong Kong has been subject to the threat of social and political unrest since Great
Britain handed over control of the region to the Chinese mainland government. Since that time, Hong
Kong has been governed by the Chinese. Under Chinese control, Hong Kong is able to participate in
international organizations and agreements and it continues to function as an international
financial center, with no exchange controls, free convertibility of the Hong Kong dollar and free
inward and outward movement of capital.
China has committed by treaty to preserve Hong Kongs autonomy until 2047; however, if China were
to exert its authority so as to alter the economic, political, or legal structures or the existing
social policy of Hong Kong, investor and business confidence in Hong Kong could be negatively
affected, which in turn could negatively affect markets and business performance.
The Funds may invest in securities listed and traded on the Hong Kong Stock Exchange. In addition
to the aforementioned risks of investing in non-U.S. securities, investing in securities listed and
traded in Hong Kong involves special considerations not typically associated with investing in
countries with more democratic governments or more established economies or securities markets.
Such risks may include: (i) the risk of nationalization or expropriation of assets or confiscatory
taxation; (ii) greater social, economic and political uncertainty (including the risk of war);
(iii) dependency on exports and the corresponding importance of international trade; (iv)
increasing competition from Asias other low-cost emerging economies; (v) currency exchange rate
fluctuations and the lack of available currency hedging instruments; (vi) higher rates of
inflation; (vii) controls on foreign investment and limitations on repatriation of invested capital
and on the Funds ability to exchange local currencies for U.S. dollars; (viii) greater
governmental involvement in and control over the economy; (ix) the risk that the Chinese government
may decide not to continue to support the economic reform programs implemented since 1978 and could
return to the prior, completely centrally planned, economy; (x) the fact that Chinese companies,
particularly those located in China, may be smaller, less seasoned and newly
12
organized; (xi) the differences in, or lack of, auditing and financial reporting standards which
may result in unavailability of material information about issuers, particularly in China; (xii)
the fact that statistical information regarding the economy of China may be inaccurate or not
comparable to statistical information regarding the U.S. or other economies; (xiii) the less
extensive, and still developing, regulation of the securities markets, business entities and
commercial transactions; (xiv) the fact that the settlement period of securities transactions in
foreign markets may be longer; (xv) the willingness and ability of the Chinese government to
support the Chinese and Hong Kong economies and markets is uncertain; (xvi) the risk that it may be
more difficult, or impossible, to obtain and/or enforce a judgment than in other countries; (xvii)
the rapidity and erratic nature of growth, particularly in China, resulting in inefficiencies and
dislocations; (xviii) the risk that, because of the degree of interconnectivity between the
economies and financial markets of China and Hong Kong, any sizable reduction in the demand for
goods from China, or an economic downturn in China, could negatively affect the economy and
financial market of Hong Kong as well; and (xix) the risk that certain companies in a Funds Index
may have dealings with countries subject to sanctions or embargoes imposed by the U.S. Government
or identified as state sponsors of terrorism.
INVESTMENTS IN A-SHARES IN CHINA. A-Shares are issued by companies incorporated in mainland China
and that are traded on Chinese exchanges. Investments in A-Shares are made available to domestic
Chinese investors and certain foreign investors, mainly those who have been approved as a Qualified
Foreign Institutional Investor (QFII) and have obtained a QFII license from the China Securities
Regulatory Commission. Investments by other foreign investors in A-shares are generally
prohibited. Investments in A-shares are also subject to various restrictions. The Luxury Fund,
the Alternative Energy Fund and the CSI Overseas China Funds currently do not invest in A-Shares
and none of the Funds indexes include A-shares. The Adviser and/or the Sub-Adviser may
obtain a QFII license in the future and, provided that other restrictions can be complied with, the
Funds may become eligible to invest in A-Shares in the future.
DEPOSITARY RECEIPTS
A Funds investment in securities of foreign companies may be in the form of depositary receipts or
other securities convertible into securities of foreign issuers. American Depositary Receipts
(ADRs) are dollar-denominated receipts representing interests in the securities of a foreign
issuer, which securities may not necessarily be denominated in the same currency as the securities
into which they may be converted. ADRs are receipts typically issued by United States banks and
trust companies which evidence ownership of underlying securities issued by a foreign corporation.
Generally, ADRs in registered form are designed for use in domestic securities markets and are
traded on exchanges or over-the-counter in the United States. Global Depositary Receipts (GDRs),
European Depositary Receipts (EDRs), and International Depositary Receipts (IDRs) are similar
to ADRs in that they are certificates evidencing ownership of shares of a foreign issuer, however,
GDRs, EDRs, and IDRs may be issued in bearer form and denominated in other currencies, and are
generally designed for use in specific or multiple securities markets outside the U.S. EDRs, for
example, are designed for use in European securities markets while GDRs are designed for use
throughout the world. Depositary receipts will not necessarily be denominated in the same currency
as their underlying securities.
A Fund will not invest in any unlisted Depositary Receipts or any Depositary Receipt that the
Sub-Adviser deems to be illiquid or for which pricing information is not readily
available. In addition, all Depositary Receipts generally must be sponsored. However, a Fund may
invest in unsponsored Depositary Receipts under certain limited circumstances. The issuers of
unsponsored Depositary Receipts are not obligated to disclose material information in the United
States, and, therefore, there may be less information available regarding such issuers and there
may not be a correlation between such information and the market value of the Depositary Receipts.
The use of Depositary Receipts may increase tracking error relative to an underlying Index.
13
REAL ESTATE INVESTMENT TRUSTS (REITS)
A REIT is a corporation or business trust (that would otherwise be taxed as a corporation) which
meets the definitional requirements of the Internal Revenue Code. The Internal Revenue Code
permits a qualifying REIT to deduct from taxable income the dividends paid, thereby effectively
eliminating corporate level federal income tax and making the REIT a pass-through vehicle for
federal income tax purposes. To meet the definitional requirements of the Internal Revenue Code, a
REIT must, among other things: invest substantially all of its assets in interests in real estate
(including mortgages and other REITs), cash and government securities; derive most of its income
from rents from real property or interest on loans secured by mortgages on real property; and
distribute annually 95% or more of its otherwise taxable income to shareholders.
REITs are sometimes informally characterized as Equity REITs and Mortgage REITs. An Equity REIT
invests primarily in the fee ownership or leasehold ownership of land and buildings; a Mortgage
REIT invests primarily in mortgages on real property, which may secure construction, development or
long-term loans.
REITs may be affected by changes in underlying real estate values, which may have an exaggerated
effect to the extent that REITs in which a Fund invests may concentrate investments in particular
geographic regions or property types. Additionally, rising interest rates may cause investors in
REITs to demand a higher annual yield from future distributions, which may in turn decrease market
prices for equity securities issued by REITs. Rising interest rates also generally increase the
costs of obtaining financing, which could cause the value of the Funds investments to decline.
During periods of declining interest rates, certain Mortgage REITs may hold mortgages that the
mortgagors elect to prepay, which prepayment may diminish the yield on securities issued by such
Mortgage REITs. In addition, Mortgage REITs may be affected by the ability of borrowers to repay
when due the debt extended by the REIT and Equity REITs may be affected by the ability of tenants
to pay rent.
Certain REITs have relatively small market capitalization, which may tend to increase the
volatility of the market price of securities issued by such REITs. Furthermore, REITs are
dependent upon specialized management skills, have limited diversification and are, therefore,
subject to risks inherent in operating and financing a limited number of projects. By investing in
REITs indirectly through a Fund, a shareholder will bear not only his or her proportionate share of
the expenses of the Fund, but also, indirectly, similar expenses of the REITs. REITs depend
generally on their ability to generate cash flow to make distributions to shareholders.
In addition to these risks, Equity REITs may be affected by changes in the value of the underlying
property owned by the trusts, while Mortgage REITs may be affected by the quality of any credit
extended. Further, Equity and Mortgage REITs are dependent upon management skills and generally
may not be diversified. Equity and Mortgage REITs are also subject to heavy cash flow dependency
defaults by borrowers and self-liquidation. In addition, Equity and Mortgage REITs could possibly
fail to qualify for tax free pass-through of income under the Internal Revenue Code or to maintain
their exemptions from registration under the 1940 Act. The above factors may also adversely affect
a borrowers or a lessees ability to meet its obligations to the REIT. In the event of default by
a borrower or lessee, the REIT may experience delays in enforcing its rights as a mortgagee or
lessor and may incur substantial costs associated with protecting its investments.
REPURCHASE AGREEMENTS
Each Fund may invest in repurchase agreements with commercial banks, brokers or dealers to generate
income from its excess cash balances and to invest securities lending cash collateral. A repurchase
agreement is an agreement under which a Fund acquires a financial instrument (e.g., a security
issued by the U.S. government or an agency thereof, a bankers acceptance or a certificate of
deposit) from a seller, subject to resale to the seller
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at an agreed upon price and date (normally, the next Business Day). A repurchase agreement may be
considered a loan collateralized by securities. The resale price reflects an agreed upon interest
rate effective for the period the instrument is held by a Fund and is unrelated to the interest
rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by a Fund (including accrued
interest earned thereon) must have a total value in excess of the value of the repurchase agreement
and are held by the Custodian until repurchased. No more than an aggregate of 15% of a Funds net
assets will be invested in illiquid securities, including repurchase agreements having maturities
longer than seven days and securities subject to legal or contractual restrictions on resale, or
for which there are no readily available market quotations.
The use of repurchase agreements involves certain risks. For example, if the other party to the
agreement defaults on its obligation to repurchase the underlying security at a time when the value
of the security has declined, a Fund may incur a loss upon disposition of the security. If the
other party to the agreement becomes insolvent and subject to liquidation or reorganization under
the U.S. Bankruptcy Code or other laws, a court may determine that the underlying security is
collateral for a loan by a Fund not within the control of the Fund and, therefore, the Fund may not
be able to substantiate its interest in the underlying security and may be deemed an unsecured
creditor of the other party to the agreement.
U.S. GOVERNMENT SECURITIES
Each Fund may invest in U.S. government securities. Securities issued or guaranteed by the U.S.
government or its agencies or instrumentalities include U.S. Treasury securities, which are backed
by the full faith and credit of the U.S. Treasury and which differ only in their interest rates,
maturities, and times of issuance. U.S. Treasury bills have initial maturities of one-year or less;
U.S. Treasury notes have initial maturities of one to ten years; and U.S. Treasury bonds generally
have initial maturities of greater than ten years. Certain U.S. government securities are issued
or guaranteed by agencies or instrumentalities of the U.S. government including, but not limited
to, obligations of U.S. government agencies or instrumentalities such as Fannie Mae, the Government
National Mortgage Association (Ginnie Mae), the Small Business Administration, the Federal Farm
Credit Administration, the Federal Home Loan Banks, Banks for Cooperatives (including the Central
Bank for Cooperatives), the Federal Land Banks, the Federal Intermediate Credit Banks, the
Tennessee Valley Authority, the Export-Import Bank of the United States, the Commodity Credit
Corporation, the Federal Financing Bank, the Student Loan Marketing Association, the National
Credit Union Administration and the Federal Agricultural Mortgage Corporation (Farmer Mac).
Some obligations issued or guaranteed by U.S. government agencies and instrumentalities, including,
for example, Ginnie Mae pass-through certificates, are supported by the full faith and credit of
the U.S. Treasury. Other obligations issued by or guaranteed by federal agencies, such as those
securities issued by Fannie Mae, are supported by the discretionary authority of the U.S.
government to purchase certain obligations of the federal agency, while other obligations issued by
or guaranteed by federal agencies, such as those of the Federal Home Loan Banks, are supported by
the right of the issuer to borrow from the U.S. Treasury, while the U.S. government provides
financial support to such U.S. government-sponsored federal agencies, no assurance can be given
that the U.S. government will always do so, since the U.S. government is not so obligated by law.
U.S. Treasury notes and bonds typically pay coupon interest semi-annually and repay the principal
at maturity.
On September 7, 2008, the U.S. Treasury announced a federal takeover of Fannie Mae, and Freddie
Mac, placing the two federal instrumentalities in conservatorship. Under the takeover, the U.S.
Treasury agreed to acquire $1 billion of senior preferred stock of each instrumentality and
obtained warrants for the purchase of common stock of each instrumentality (the Senior Preferred
Stock Purchase Agreement or Agreement).
15
Under the Agreement, the U.S. Treasury pledged to provide up to $200 billion per instrumentality as
needed, including the contribution of cash capital to the instrumentalities in the event their
liabilities exceed their assets. This was intended to ensure that the instrumentalities maintain a
positive net worth and meet their financial obligations, preventing mandatory triggering of
receivership. On December 24, 2009, the U.S. Treasury announced that it was amending the Agreement
to allow the $200 billion cap on the U.S. Treasurys funding commitment to increase as necessary to
accommodate any cumulative reduction in net worth over the next three years. As a result of this
Agreement, the investments of holders, including the Funds, of mortgage-backed securities and other
obligations issued by Fannie Mae and Freddie Mac are protected.
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U.S. Treasury Obligations.
U.S. Treasury obligations consist of bills, notes
and bonds issued by the U.S. Treasury and separately traded interest and principal
component parts of such obligations that are transferable through the federal book-entry
system known as Separately Traded Registered Interest and Principal Securities (STRIPS)
and Treasury Receipts (TRs).
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Receipts.
Interests in separately traded interest and principal component
parts of U.S. government obligations that are issued by banks or brokerage firms and are
created by depositing U.S. government obligations into a special account at a custodian
bank. The custodian holds the interest and principal payments for the benefit of the
registered owners of the certificates or receipts. The custodian arranges for the issuance
of the certificates or receipts evidencing ownership and maintains the register. TRs and
STRIPS are interests in accounts sponsored by the U.S. Treasury. Receipts are sold as zero
coupon securities.
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U.S. Government Zero Coupon Securities.
STRIPS and receipts are sold as zero
coupon securities, that is, fixed income securities that have been stripped of their
unmatured interest coupons. Zero coupon securities are sold at a (usually substantial)
discount and redeemed at face value at their maturity date without interim cash payments of
interest or principal. The amount of this discount is accreted over the life of the
security, and the accretion constitutes the income earned on the security for both
accounting and tax purposes. Because of these features, the market prices of zero coupon
securities are generally more volatile than the market prices of securities that have
similar maturity but that pay interest periodically. Zero coupon securities are likely to
respond to a greater degree to interest rate changes than are non-zero coupon securities
with similar maturity and credit qualities.
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U.S. Government Agencies.
Some obligations issued or guaranteed by agencies of
the U.S. government are supported by the full faith and credit of the U.S. Treasury, others
are supported by the right of the issuer to borrow from the U.S. Treasury, while still
others are supported only by the credit of the instrumentality. Guarantees of principal by
agencies or instrumentalities of the U.S. government may be a guarantee of payment at the
maturity of the obligation so that in the event of a default prior to maturity there might
not be a market and thus no means of realizing on the obligation prior to maturity.
Guarantees as to the timely payment of principal and interest do not extend to the value or
yield of these securities nor to the value of a Funds shares.
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BORROWING
While the Funds do not anticipate doing so, the Funds may borrow money for investment purposes.
Borrowing for investment purposes is one form of leverage. Leveraging investments, by purchasing
securities with borrowed money, is a speculative technique that increases investment risk, but also
increases investment opportunity. Because substantially all of a Funds assets will fluctuate in
value, whereas the interest obligations on borrowings may be fixed, the net asset value per share
(NAV) of the Fund will increase more when the
16
Funds portfolio assets increase in value and decrease more when the Funds portfolio assets
decrease in value than would otherwise be the case. Moreover, interest costs on borrowings may
fluctuate with changing market rates of interest and may partially offset or exceed the returns on
the borrowed funds. Under adverse conditions, the Funds might have to sell portfolio securities to
meet interest or principal payments at a time when investment considerations would not favor such
sales. The Funds intend to use leverage during periods when the Sub-Adviser believes
that the respective Funds investment objective would be furthered.
Each Fund may also borrow money to facilitate management of the Funds portfolio by enabling the
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 Investment Company Act of 1940 (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 a Funds assets should fail to meet this 300% coverage test, the Fund,
within three days (not including Sundays and holidays), will reduce the amount of the Funds
borrowings to the extent necessary to meet this 300% coverage requirement. Maintenance of this
percentage limitation may result in the sale of portfolio securities at a time when investment
considerations otherwise indicate that it would be disadvantageous to do so.
LENDING PORTFOLIO SECURITIES
Each Fund may lend portfolio securities to certain creditworthy borrowers. The borrowers provide
collateral that is maintained in an amount at least equal to the current market value of the
securities loaned. A Fund may terminate a loan at any time and obtain the return of the securities
loaned. A Fund receives the value of any interest or cash or non-cash distributions paid on the
loaned securities. Distributions received on loaned securities in lieu of dividend payments (
i.e.,
substitute payments) would not be considered qualified dividend income.
With respect to loans that are collateralized by cash, the borrower will be entitled to receive a
fee based on the amount of cash collateral. A Fund is compensated by the difference between the
amount earned on the reinvestment of cash collateral and the fee paid to the borrower. In the case
of collateral other than cash, a Fund is compensated by a fee paid by the borrower equal to a
percentage of the market value of the loaned securities. Any cash collateral may be reinvested in
certain short-term instruments either directly on behalf of each lending Fund or through one or
more joint accounts or money market funds, which may include those managed by the Sub-Adviser.
A Fund may pay a portion of the interest or fees earned from securities lending to a borrower as
described above, and to one or more securities lending agents approved by the Board who administer
the lending program for the Funds in accordance with guidelines approved by the Board. In such
capacity, the lending agent causes the delivery of loaned securities from a Fund to borrowers,
arranges for the return of loaned securities to the Fund at the termination of a loan, requests
deposit of collateral, monitors the daily value of the loaned securities and collateral, requests
that borrowers add to the collateral when required by the loan agreements, and provides
recordkeeping and accounting services necessary for the operation of the program.
Securities lending involves exposure to certain risks, including operational risk (
i.e.
, the risk
of losses resulting from problems in the settlement and accounting process), gap risk (
i.e.
, the
risk of a mismatch between the return on cash collateral reinvestments and the fees the Fund has
agreed to pay a borrower), and credit, legal, counterparty and market risk. In the event a borrower
does not return a Funds securities as agreed, the Fund may experience losses if the proceeds
received from liquidating the collateral do not at least equal the value of
17
the loaned security at the time the collateral is liquidated plus the transaction costs incurred in
purchasing replacement securities.
REVERSE REPURCHASE AGREEMENTS
Each Fund may enter into reverse repurchase agreements, which involve the sale of securities with
an agreement to repurchase the securities at an agreed-upon price, date and interest payment and
have the characteristics of borrowing. The securities purchased with the funds obtained from the
agreement and securities collateralizing the agreement will have maturity dates no later than the
repayment date. Generally the effect of such transactions is that a Fund can recover all or most of
the cash invested in the portfolio securities involved during the term of the reverse repurchase
agreement, while in many cases a Fund is able to keep some of the interest income associated with
those securities. Such transactions are only advantageous if a Fund has an opportunity to earn a
greater rate of interest on the cash derived from these transactions than the interest cost of
obtaining the same amount of cash. Opportunities to realize earnings from the use of the proceeds
equal to or greater than the interest required to be paid may not always be available and a Fund
intends to use the reverse repurchase technique only when the Sub-Adviser believes it
will be advantageous to the Fund. The use of reverse repurchase agreements may exaggerate any
interim increase or decrease in the value of a Funds assets. A Funds exposure to reverse
repurchase agreements will be covered by securities having a value equal to or greater than such
commitments. Under the 1940 Act, reverse repurchase agreements are considered borrowings. Although
there is no limit on the percentage of total assets the Fund may invest in reverse repurchase
agreements, the use of reverse repurchase agreements is not a principal strategy of the Funds.
OTHER SHORT-TERM INSTRUMENTS
In addition to repurchase agreements, each Fund may invest in short-term instruments, including
money market instruments, on an ongoing basis to provide liquidity or for other reasons. Money
market instruments are generally short-term investments that may include but are not limited to:
(i) shares of money market funds; (ii) obligations issued or guaranteed by the U.S. government, its
agencies or instrumentalities (including government-sponsored enterprises); (iii) negotiable
certificates of deposit (CDs), bankers acceptances, fixed time deposits and other obligations of
U.S. and foreign banks (including foreign branches) and similar institutions; (iv) commercial paper
rated at the date of purchase Prime-1 by Moodys or A-1 by S&P, or if unrated, of comparable
quality as determined by the Sub-Adviser; (v) non-convertible corporate debt securities
(e.g., bonds and debentures) with remaining maturities at the date of purchase of not more than 397
days and that satisfy the rating requirements set forth in Rule 2a-7 under the 1940 Act; and (vi)
short-term U.S. dollar-denominated obligations of foreign banks (including U.S. branches) that, in
the opinion of the Sub-Adviser, are of comparable quality to obligations of U.S. banks
which may be purchased by a Fund. Any of these instruments may be purchased on a current or a
forward-settled basis. Money market instruments also include shares of money market funds. Time
deposits are non-negotiable deposits maintained in banking institutions for specified periods of
time at stated interest rates. Bankers acceptances are time drafts drawn on commercial banks by
borrowers, usually in connection with international transactions.
INVESTMENT COMPANIES
Each Fund may invest in the securities of other investment companies, including money market funds,
subject to applicable limitations under Section 12(d)(1) of the 1940 Act. Pursuant to Section
12(d)(1), a Fund may invest in the securities of another investment company (the acquired
company) provided that the Fund, immediately after such purchase or acquisition, does not own in
the aggregate: (i) more than 3% of the total outstanding voting stock of the acquired company;
(ii) securities issued by the acquired company having an aggregate value in excess of 5% of the
value of the total assets of the Fund; or (iii) securities issued by the
18
acquired company and all other investment companies (other than Treasury stock of the Fund) having
an aggregate value in excess of 10% of the value of the total assets of the Fund. To the extent
allowed by law or regulation, a Fund may invest its assets in securities of investment companies
that are money market funds in excess of the limits discussed above.
If a Fund invests in and, thus, is a shareholder of, another investment company, the Funds
shareholders will indirectly bear the Funds proportionate share of the fees and expenses paid by
such other investment company, including advisory fees, in addition to both the management fees
payable directly by the Fund to the Funds own investment adviser and the other expenses that the
Fund bears directly in connection with the Funds own operations.
Section 12(d)(1) of the 1940 Act restricts investments by registered investment companies in
securities of other registered investment companies, including the Funds. The acquisition of a
Funds shares by registered investment companies is subject to the restrictions of Section 12(d)(1)
of the 1940 Act, except as may be permitted by exemptive rules under the 1940 Act or as may at some
future time be permitted by an exemptive order that permits registered investment companies to
invest in the Fund beyond the limits of Section 12(d)(1), subject to certain terms and conditions,
including that the registered investment company enter into an agreement with the Fund regarding
the terms of the investment.
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Fund may utilize futures contracts, options contracts and swap agreements. A Fund will
segregate cash and/or appropriate liquid assets if required to do so by SEC or Commodity Futures
Trading Commission (CFTC) regulation or interpretation.
Futures contracts generally provide for the future sale by one party and purchase by another party
of a specified commodity or security at a specified future time and at a specified price. Index
futures contracts are settled daily with a payment by one party to the other of a cash amount based
on the difference between the level of the index specified in the contract from one day to the
next. Futures contracts are standardized as to maturity date and underlying instrument and are
traded on futures exchanges.
A Fund is required to make a good faith margin deposit in cash or U.S. government securities with a
broker or custodian to initiate and maintain open positions in futures contracts. A margin deposit
is intended to assure completion of the contract (delivery or acceptance of the underlying
commodity or payment of the cash settlement amount) if it is not terminated prior to the specified
delivery date. Brokers may establish deposit requirements which are higher than the exchange
minimums. Futures contracts are customarily purchased and sold on margin deposits which may range
upward from less than 5% of the value of the contract being traded.
After a futures contract position is opened, the value of the contract is marked to market daily.
If the futures contract price changes to the extent that the margin on deposit does not satisfy
margin requirements, payment of additional variation margin will be required. Conversely, change
in the contract value may reduce the required margin, resulting in a repayment of excess margin to
the contract holder. Variation margin payments are made to and from the futures broker for as long
as the contract remains open. In such case, a Fund would expect to earn interest income on its
margin deposits. Closing out an open futures position is done by taking an opposite position
(buying a contract which has previously been sold, or selling a contract previously
purchased) in an identical contract to terminate the position. Brokerage commissions are incurred
when a futures contract position is opened or closed.
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A Fund may purchase and sell put and call options. Such options may relate to particular
securities and may or may not be listed on a national securities exchange and issued by the Options
Clearing Corporation. Options trading is a highly specialized activity that entails greater than
ordinary investment risk. Options on particular securities may be more volatile than the
underlying securities, and therefore, on a percentage basis, an investment in options may be
subject to greater fluctuation than an investment in the underlying securities themselves.
A Fund may use exchange-traded futures and options, together with positions in cash and money
market instruments, to simulate full investment in its underlying Index. Exchange-traded futures
and options contracts are not currently available for all of the Indexes. Under such circumstances,
the Sub-Adviser may seek to utilize other instruments that it believes to be correlated
to the applicable Index components or a subset of the components.
To the extent a Fund use futures and options, it will do so in accordance with Rule 4.5 of the
Commodity Exchange Act (CEA). [The Trust, on behalf of the Funds, has filed a notice of
eligibility for exclusion from the definition of the term commodity pool operator in accordance
with Rule 4.5 so that the Funds are not subject to registration or regulation as a commodity pool
operator under the CEA.]
Restrictions on the Use of Futures and Options. Each Fund reserves the right to engage in
transactions involving futures and options thereon to the extent allowed by the CFTC regulations in
effect from time to time and in accordance with each Funds policies. Each Fund would take steps to
prevent its futures positions from leveraging its securities holdings. When it has a long futures
position, it will maintain with its custodian bank, cash or equivalents. When it has a short
futures position, it will maintain with its custodian bank assets substantially identical to those
underlying the contract or cash and equivalents (or a combination of the foregoing) having a value
equal to the net obligation of a Fund under the contract (less the value of any margin deposits in
connection with the position).
Short Sales. The Funds may engage in short sales that are either uncovered or against the box.
A short sale is against the box if at all times during which the short position is open, the Fund
owns at least an equal amount of the securities or securities convertible into, or exchangeable
without further consideration for, securities of the same issue as the securities that are sold
short. A short sale against the box is a taxable transaction to the Funds with respect to the
securities that are sold short.
Uncovered short sales are 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 the 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 the
lender amounts equal to any dividends or interest that accrue during the period of the loan. To
borrow the security, a Fund also may be required to pay a premium, which would increase the cost of
the security sold. The proceeds of the short sale will be retained by the broker, to the extent
necessary to meet margin requirements, until the short position is closed out.
Until a Fund closes its short position or replaces the borrowed security, a Fund may: (a) segregate
cash or liquid securities at such a level that (i) the amount segregated plus the amount deposited
with the broker as collateral will equal the current value of the security sold short; and (ii) the
amount segregated plus the amount deposited with the broker as collateral will not be less than the
market value of the security at the time the security was sold short; or (b) otherwise cover the
Funds short position.
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Swap Agreements. Each Fund may enter into swap agreements; including interest rate, index, and
total return swap agreements. Swap agreements are contracts between parties in which one party
agrees to make periodic payments to the other party based on the change in market value or level of
a specified rate, index or asset. In return, the other party agrees to make payments to the first
party based on the return of a different specified rate, index or asset. Swap agreements will
usually be done on a net basis,
i.e.
, where the two parties make net payments with a Fund receiving
or paying, as the case may be, only the net amount of the two payments. The net amount of the
excess, if any, of a Funds obligations over its entitlements with respect to each swap is accrued
on a daily basis and an amount of cash or equivalents having an aggregate value at least equal to
the accrued excess is maintained by the Fund.
FUTURE DEVELOPMENTS
A Fund may take advantage of opportunities in the area of options and futures contracts, options on
futures contracts, warrants, swaps and any other investments which are not presently contemplated
for use by the Fund or which are not currently available but which may be developed, to the extent
such opportunities are both consistent with the Funds investment objective and legally permissible
for the Fund. Before entering into such transactions or making any such investment, a Fund will
provide appropriate disclosure.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in each Fund is contained in the
Prospectus. The discussion below supplements, and should be read in conjunction with, the
Prospectus.
GENERAL
Investment in a Fund should be made with an understanding that the value of the Funds portfolio
securities may fluctuate in accordance with changes in the financial condition of the issuers of
the portfolio securities, the value of securities generally and other factors.
An investment in a Fund should also be made with an understanding of the risks inherent in an
investment in securities, including the risk that the financial condition of issuers may become
impaired or that the general condition of the securities markets may deteriorate (either of which
may cause a decrease in the value of the portfolio securities and thus in the value of Shares).
Securities are susceptible to general market fluctuations and to volatile increases and decreases
in value as market confidence in and perceptions of their issuers change. These investor
perceptions are based on various and unpredictable factors including expectations regarding
government, economic, monetary and fiscal policies, inflation and interest rates, economic
expansion or contraction, and global or regional political, economic and banking crises.
Holders of common stocks incur more risk than holders of preferred stocks and debt obligations
because common stockholders, as owners of the issuer, have generally inferior rights to receive
payments from the issuer in comparison with the rights of creditors of, or holders of debt
obligations or preferred stocks issued by, the issuer. Further, unlike debt securities which
typically have a stated principal amount payable at maturity (whose value, however, will be subject
to market fluctuations prior thereto), or preferred stocks which typically have a liquidation
preference and which may have stated optional or mandatory redemption provisions, common stocks
have neither a fixed principal amount nor a maturity. Common stock values are subject to market
fluctuations as long as the common stock remains outstanding.
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FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange which provides a
secondary market therefore. However, there can be no assurance that a liquid secondary market will
exist for any particular futures contract or option at any specific time. Thus, it may not be
possible to close a futures or options position. In the event of adverse price movements, a Fund
would continue to be required to make daily cash payments to maintain its required margin. In such
situations, if the Fund has insufficient cash, it may have to sell portfolio securities to meet
daily margin requirements at a time when it may be disadvantageous to do so. In addition, the
applicable Fund may be required to make delivery of the instruments underlying futures contracts it
has sold.
Each Fund will minimize the risk that it will be unable to close out a futures or options contract
by only entering into futures and options for which there appears to be a liquid secondary market.
The risk of loss in trading futures contracts or uncovered call options in some strategies (e.g.,
selling uncovered index futures contracts) is potentially unlimited. The Funds do not plan to use
futures and options contracts, when available, in this manner. The risk of a futures position may
still be large as traditionally measured due to the low margin deposits required. In many cases, a
relatively small price movement in a futures contract may result in immediate and substantial loss
or gain to the investor relative to the size of a required margin deposit. The Funds, however,
intend to utilize futures and options contracts in a manner designed to limit their risk exposure
to that which is comparable to what they would have incurred through direct investment in
securities.
Utilization of futures transactions by a Fund involves the risk of imperfect or even negative
correlation to the benchmark Index if the index underlying the futures contracts differs from the
benchmark Index. There is also the risk of loss by a Fund of margin deposits in the event of
bankruptcy of a broker with whom the Fund has an open position in the futures contract or option.
Certain financial futures exchanges limit the amount of fluctuation permitted in futures contract
prices during a single trading day. The daily limit establishes the maximum amount that the price
of a futures contract may vary either up or down from the previous days settlement price at the
end of a trading session. Once the daily limit has been reached in a particular type of contract,
no trades may be made on that day at a price beyond that limit. The daily limit governs only price
movement during a particular trading day and therefore does not limit potential losses, because the
limit may prevent the liquidation of unfavorable positions. Futures contract prices have
occasionally moved to the daily limit for several consecutive trading days with little or no
trading, thereby preventing prompt liquidation of futures positions and subjecting some futures
traders to substantial losses.
RISKS OF SWAP AGREEMENTS
Swap agreements are subject to the risk that the swap counterparty will default on its obligations.
If such a default occurs, a Fund will have contractual remedies pursuant to the agreements related
to the transaction, but such remedies may be subject to bankruptcy and insolvency laws which could
affect the Funds rights as a creditor.
The use of interest-rate and index swaps is a highly specialized activity that involves investment
techniques and risks different from those associated with ordinary portfolio security transactions.
These transactions generally do not involve the delivery of securities or other underlying assets
or principal.
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TAX RISKS
As with any investment, you should consider how your investment in Shares of a Fund will be taxed.
The tax information in the Prospectus and this SAI is provided as general information. You should
consult your own tax professional about the tax consequences of an investment in Shares of a Fund.
Unless your investment in Shares is made through a tax-exempt entity or tax-deferred retirement
account, such as an individual retirement account, you need to be aware of the possible tax
consequences when a Fund makes distributions or you sell Shares.
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 such Shares directly to customers, or if it chooses to couple the creation of a
supply of new Shares with an active selling effort involving solicitation of secondary market
demand for Shares. A determination of whether one is an underwriter for purposes of the Securities
Act must take into account all the facts and circumstances pertaining to the activities of the
broker-dealer or its client in the particular case, and the examples mentioned above should not be
considered a complete description of all the activities that could lead to a categorization as an
underwriter.
Broker-dealer firms should also note that dealers who are not underwriters but are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally
required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3)
of the Securities Act is not available in respect of such transactions as a result of Section 24(d)
of the 1940 Act. Firms that incur a prospectus-delivery obligation with respect to Shares of a Fund
are reminded that under Securities Act Rule 153, a prospectus-delivery obligation under Section
5(b)(2) of the Securities Act owed to an exchange member in connection with a sale on the Exchange
is satisfied by the fact that a Funds prospectus is available at the Exchange upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions
on an exchange.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental policies with respect to
each Fund. These restrictions cannot be changed with respect to a Fund without the approval of the
holders of a majority of the Funds outstanding voting securities. For these purposes of the 1940
Act, a majority of outstanding shares means the vote of the lesser of: (1) 67% or more of the
voting securities of the Fund present at the meeting if the holders of more than 50% of the Funds
outstanding voting securities are present or represented by proxy; or (2) more than 50% of the
outstanding voting securities of the Fund. Except with the approval of a majority of the
outstanding voting securities, a Fund may not:
1.
|
|
Concentrate its investments in an industry or group of industries (
i.e.
, hold 25% or more of
its total assets in the stocks of a particular industry or group of industries), except that a
Fund will concentrate to approximately the same extent that its underlying Index concentrates
in the stocks of such particular
|
23
|
|
industry or group of industries. For purposes of this limitation, securities of the U.S.
government (including its agencies and instrumentalities), repurchase agreements
collateralized by U.S. government securities and securities of state or municipal governments
and their political subdivisions are not considered to be issued by members of any industry.
|
2.
|
|
Borrow money or issue senior securities (as defined under the 1940 Act), except to the extent
permitted under the 1940 Act, the rules and regulations thereunder or any exemption therefrom,
as such statute, rules or regulations may be amended or interpreted from time to time.
|
3.
|
|
Make loans, except to the extent permitted under the 1940 Act, the rules and regulations
thereunder or any exemption therefrom, as such statute, rules or regulations may be amended or
interpreted from time to time.
|
4.
|
|
Purchase or sell commodities or real estate, except to the extent permitted under the 1940
Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
|
5.
|
|
Underwrite securities issued by other persons, except to the extent permitted under the 1940
Act, the rules and regulations thereunder or any exemption therefrom, as such statute, rules
or regulations may be amended or interpreted from time to time.
|
In addition to the investment restrictions adopted as fundamental policies as set forth above, each
Fund observes the following restrictions, which may be changed without a shareholder vote.
1.
|
|
A Fund will not hold illiquid assets in excess of 15% of its net assets. An illiquid asset is
any asset which may not be sold or disposed of in the ordinary course of business within seven
days at approximately the value at which the Fund has valued the investment.
|
2.
|
|
Under normal circumstances, the China Consumer Luxury Fund will not invest less than 80% of its net
assets in securities of publicly traded companies that provide high-end (luxury) goods and
services and that generate or expect to generate a sizable portion of their sales in China
(China Luxury Companies). Prior to any change in this 80% investment policy, the Fund will
provide shareholders with 60 days written notice.
|
3.
|
|
Under normal circumstances, the China Alternative Energy Fund will not invest less than 80%
of its net assets in securities of publicly traded China-based companies whose primary
business line is related to or in the alternative energy sector (China Alternative Energy
Companies). Prior to any change in this 80% investment policy, the Fund will provide
shareholders with 60 days written notice.
|
4.
|
|
Under normal circumstances, the China Internet Fund will not invest less than 80% of its net
assets in securities of publicly traded China-based companies whose primary business or
businesses are in the Internet or Internet-related sectors (China Internet Companies).
Prior to any change in this 80% investment policy, the Fund will provide shareholders with 60
days written notice.
|
5.
|
|
Under normal circumstances, the China Consumer Staples Fund will not invest less than 80% of
its net assets in securities of publicly traded China-based companies whose primary business
or businesses are in the consumer staples sector (China Consumer Staples Companies). Prior
to any change in this 80% investment policy, the Fund will provide shareholders with 60 days
written notice.
|
24
6.
|
|
Under normal circumstances, the China Consumer Discretionary Fund will not invest less than
80% of its net assets in securities of publicly traded China-based companies whose primary
business or businesses are in the consumer discretionary sector (China Consumer Discretionary
Companies). Prior to any change in this 80% investment policy, the Fund will provide
shareholders with 60 days written notice.
|
7.
|
|
Under normal circumstances, the China Urbanization Fund will not invest less than 80% of its
net assets in securities of China-based companies. Prior to any change in this 80% investment
policy, the Fund will provide shareholders with 60 days written notice.
|
8.
|
|
Under normal circumstances, the China Five Year Plan Fund will not invest less than 80% of
its net assets in securities of China-based companies. Prior to any change in this 80%
investment policy, the Fund will provide shareholders with 60 days written notice.
|
If a percentage limitation is adhered to at the time of investment or contract, a later increase or
decrease in percentage resulting from any change in value or total or net assets will not result in
a violation of such restriction, except that the percentage limitations with respect to the
borrowing of money and illiquid securities will be observed continuously.
The following descriptions of certain provisions of the 1940 Act may assist investors in
understanding the above policies and restrictions:
Concentration
. The SEC has defined concentration as investing 25% or more of an investment
companys total assets in an industry or group of industries, with certain exceptions.
Borrowing
. The 1940 Act presently allows a fund to borrow from any bank (including
pledging, mortgaging or hypothecating assets) in an amount up to 33 1/3% of its total assets (not
including temporary borrowings not in excess of 5% of its total assets).
Senior Securities
. Senior securities may include any obligation or instrument issued by a
fund evidencing indebtedness. The 1940 Act generally prohibits funds from issuing senior
securities, although it does not treat certain transactions as senior securities, such as certain
borrowings, short sales, reverse repurchase agreements, firm commitment agreements and standby
commitments, with appropriate earmarking or segregation of assets to cover such obligation.
Lending
. Under the 1940 Act, a fund may only make loans if expressly permitted by its
investment policies. The Funds current investment policy on lending is as follows: a Fund may
not make loans if, as a result, more than 33 1/3% of its total assets would be lent to other
parties, except that the Fund may: (i) purchase or hold debt instruments in accordance with its
investment objective and policies; (ii) enter into repurchase agreements; and (iii) engage in
securities lending as described in its SAI.
Underwriting
. Under the 1940 Act, underwriting securities involves a fund purchasing
securities directly from an issuer for the purpose of selling (distributing) them or participating
in any such activity either directly or indirectly.
Real Estate
. The 1940 Act does not directly restrict an investment companys ability to
invest in real estate, but does require that every investment company have a fundamental investment
policy governing such investments. The Funds will not purchase or sell real estate, except that
the Funds may purchase marketable securities issued by companies which own or invest in real estate
(including REITs).
25
Commodities
. The Funds will not purchase or sell physical commodities or commodities
contracts, except that the Funds may purchase: (i) marketable securities issued by companies which
own or invest in commodities or commodities contracts; and (ii) commodities contracts relating to
financial instruments, such as financial futures contracts and options on such contracts.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in a Fund is
contained in the Prospectus under the SUMMARY INFORMATION ABOUT PURCHASING AND SELLING SHARES,
TAXES AND FINANCIAL INTERMEDIARY COMPENSATION and BUYING AND SELLING THE FUNDS. The discussion
below supplements, and should be read in conjunction with, such sections of the Prospectus.
The Shares of each Fund are approved for listing and trading on the Exchange, subject to notice of
issuance. The Shares 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 any Fund will continue to be met.
The Exchange may, but is not required to, remove the Shares of a Fund from listing if: (1)
following the initial twelve-month period beginning upon the commencement of trading of the Fund,
there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days;
(2) the value of its underlying Index or portfolio of securities on which the Fund is based is no
longer calculated or available; (3) the indicative optimized portfolio value (IOPV) of the Fund
is no longer calculated or available; or (4) such other event shall occur or condition exists that,
in the opinion of the Exchange, makes further dealings on the Exchange inadvisable. In addition,
the Exchange will remove the Shares from listing and trading upon termination of the Trust or a
Fund.
The Exchange will disseminate, every fifteen seconds during the regular trading day, an indicative
optimized portfolio value (IOPV) relating to the Funds. The IOPV calculations are estimates of
the value of a Funds net asset value per Share using market data converted into U.S. dollars at
the current currency rates. The IOPV price is based on quotes and closing prices from the
securities local market and may not reflect events that occur subsequent to the local markets
close. Premiums and discounts between the IOPV and the market price may occur. This should not be
viewed as a real-time update of the net asset value per Share of the Funds, which is calculated
only once a day. Neither the Funds, the Adviser, the Sub-Adviser or any of their affiliates are involved in, or responsible for, the calculation or
dissemination of such IOPVs and make no warranty as to their accuracy.
The Trust reserves the right to adjust the Share price of a Fund in the future to maintain
convenient trading ranges for investors. Any adjustments would be accomplished through stock
splits or reverse stock splits, which would have no effect on the net assets of the Fund.
As in the case of other publicly traded securities, brokers commissions on transactions will be
based on negotiated commission rates at customary levels.
The base and trading currencies of the Funds is the U.S. dollar. The base currency is the currency
in which a Funds net asset value per Share is calculated and the trading currency is the currency
in which Shares of a Fund are listed and traded on the Exchange.
26
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the section in the
Prospectus entitled Fund Management.
TRUSTEES AND OFFICERS OF THE TRUST
Board Responsibilities.
The management and affairs of the Trust and its series, including the Funds
described in this SAI, are overseen by the Trustees. The Board elects the officers of the Trust
who are responsible for administering the day-to-day operations of the Trust and each Fund. The
Board has approved contracts, as described below, under which certain companies provide essential
services to the Trust.
Like most mutual funds, the day-to-day business of the Trust, including the management of risk, is
performed by third party service providers, such as the Adviser, the Sub-Adviser, the
Distributor and Administrator. The Trustees are responsible for overseeing
the Trusts service providers and, thus, have oversight responsibility with respect to risk
management performed by those service providers. Risk management seeks to identify and address
risks,
i.e.
, events or circumstances that could have material adverse effects on the business,
operations, shareholder services, investment performance or reputation of the Funds. The Funds and
their service providers employ a variety of processes, procedures and controls to identify various
of those possible events or circumstances, to lessen the probability of their occurrence and/or to
mitigate the effects of such events or circumstances if they do occur. Each service provider is
responsible for one or more discrete aspects of the Trusts business (e.g., the Sub-Adviser is responsible for the day-to-day management of the Funds portfolio investments) and,
consequently, for managing the risks associated with that business. The Board has emphasized to the
Funds service providers the importance of maintaining vigorous risk management.
The Trustees role in risk oversight begins before the inception of a Fund, at which time certain
of the Funds service providers present the Board with information concerning the investment
objectives, strategies and risks of the Fund as well as proposed investment limitations for the
Fund. Additionally, the Funds Adviser provides the Board with an overview of, among other things,
its investment philosophy, brokerage practices and compliance infrastructure. Thereafter, the
Board continues its oversight function as various personnel, including the Trusts Chief Compliance
Officer, as well as personnel of the Sub-Adviser and other
service providers such as the Funds independent accountants, make periodic reports to the Audit
Committee or to the Board with respect to various aspects of risk management. The Board and the
Audit Committee oversee efforts by management and service providers to manage risks to which the
Funds may be exposed.
The Board is responsible for overseeing the nature, extent and quality of the services provided to
the Funds by the Adviser and the Sub-Adviser and receives
information about those services at its regular meetings. In addition, on an annual basis, in
connection with its consideration of whether to renew the Advisory Agreements with the Adviser and
the Sub-Adviser, the Board meets with the Adviser and the Sub-Adviser to review such services.
Among other things, the Board regularly considers the Advisers and the Sub-Advisers adherence to
the Funds investment restrictions and compliance with various Fund policies and procedures and
with applicable securities regulations. The Board also reviews information about each Funds
performance and each Funds investments, including, for example, portfolio holdings schedules.
The Trusts Chief Compliance Officer reports regularly to the Board to review and discuss
compliance issues and Fund and Adviser risk assessments. At least annually, the Trusts Chief
Compliance Officer provides the
27
Board with a report reviewing the adequacy and effectiveness of the Trusts policies and procedures
and those of its service providers, including the Adviser and the Sub-Adviser. The report
addresses the operation of the policies and procedures of the Trust and each service provider since
the date of the last report; any material changes to the policies and procedures since the date of
the last report; any recommendations for material changes to the policies and procedures; and any
material compliance matters since the date of the last report.
The Board receives reports from the Funds service providers regarding operational risks and risks
related to the valuation and liquidity of portfolio securities. The Board has also established a
Fair Value Committee that is responsible for implementing the Trusts Fair Value Procedures and
providing reports to the Board concerning investments for which market quotations are not readily
available. Annually, the independent registered public accounting firm reviews with the Audit
Committee its audit of the Funds financial statements, focusing on major areas of risk encountered
by the Funds and noting any significant deficiencies or material weaknesses in the Funds internal
controls. Additionally, in connection with its oversight function, the Board oversees Fund
managements implementation of disclosure controls and procedures, which are designed to ensure
that information required to be disclosed by the Trust in its periodic reports with the SEC are
recorded, processed, summarized, and reported within the required time periods. The Board also
oversees the Trusts internal controls over financial reporting, which comprise policies and
procedures designed to provide reasonable assurance regarding the reliability of the Trusts
financial reporting and the preparation of the Trusts financial statements.
From their review of these reports and discussions with the Adviser, the Sub-Adviser, the Chief
Compliance Officer, the independent registered public accounting firm and other service providers,
the Board and the Audit Committee learn in detail about the material risks of the Funds, thereby
facilitating a dialogue about how management and service providers identify and mitigate those
risks.
The Board recognizes that not all risks that may affect the Funds can be identified and/or
quantified, that it may not be practical or cost-effective to eliminate or mitigate certain risks,
that it may be necessary to bear certain risks (such as investment-related risks) to achieve the
Funds goals, and that the processes, procedures and controls employed to address certain risks may
be limited in their effectiveness. Moreover, reports received by the Trustees as to risk
management matters are typically summaries of the relevant information. Most of the Funds
investment management and business affairs are carried out by or through the Funds Adviser and
other service providers each of which has an independent interest in risk management but whose
policies and the methods by which one or more risk management functions are carried out may differ
from the Funds and each others in the setting of priorities, the resources available or the
effectiveness of relevant controls. As a result of the foregoing and other factors, the Boards
ability to monitor and manage risk, as a practical matter, is subject to limitations.
Members of the Board.
There are five members of the Board of Trustees, four of whom are not
interested persons of the Trust, as that term is defined in the 1940 Act (independent Trustees).
[J. Garrett Stevens] serves as Chairman of the Board. The Trust does not have a lead independent trustee. The
Board of Trustees is comprised of a super-majority (67 percent) of independent Trustees. There is
an Audit Committee of the Board that is chaired by an independent Trustee and comprised solely of
independent Trustees. The Audit Committee chair presides at the Committee meetings, participates
in formulating agendas for Committee meetings, and coordinates with management to serve as a
liaison between the independent Trustees and management on matters within the scope of
responsibilities of the Committee as set forth in its Board-approved charter. The Trust has
determined its leadership structure is appropriate given the specific characteristics and
circumstances of the Trust. The Trust made this determination in consideration of, among other
things, the fact that the independent Trustees of the Funds constitute a super-majority of the
Board, the number of independent Trustees that constitute the
28
Board, the amount of assets under management in the Trust, and the number of Funds overseen by the
Board. The Board also believes that its leadership structure facilitates the orderly and efficient
flow of information to the independent Trustees from Fund management.
The Board of Trustees has two standing committees: the Audit Committee and Nominating Committees.
The Audit Committee and Nominating Committee are chaired by an independent Trustee and composed of
independent Trustees.
Set forth below are the names, dates of birth, position with the Trust, length of term of office,
and the principal occupations and other directorships held during at least the last five years of
each of the persons currently serving as a Trustee of the Trust.
29
|
|
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|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
Portfolios in
|
|
|
|
|
|
|
|
|
Principal
|
|
Fund
|
|
|
|
|
|
|
Term of Office
|
|
Occupation(s)
|
|
Complex
|
|
Other
|
Name, Address,
|
|
Position(s) Held
|
|
and Length of
|
|
During Past 5
|
|
Overseen By
|
|
Directorships
|
and Age
|
|
with the Trust
|
|
Time Served
|
|
Years
|
|
Trustee
|
|
held by Trustee
|
Interested Trustee
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
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|
|
J. Garrett Stevens
3555 Northwest
58
th
Street
Suite 410
Oklahoma City, OK
73112
(31 years old)
|
|
Trustee, Chief
Executive Officer
and Secretary
|
|
Since 2009
|
|
Phillips Capital
Advisors 2001
Present Vice
President;
T.S. Phillips
Investments, Inc.
2001 to Present
Vice President;
Exchange Traded
Concepts, LLC 2009
to Present Chief
Executive Officer
and Portfolio
Manager
|
|
|
8
|
|
|
None
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
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|
|
|
|
|
|
|
|
Portfolios in
|
|
|
|
|
|
|
|
|
Principal
|
|
Fund
|
|
|
|
|
|
|
Term of Office
|
|
Occupation(s)
|
|
Complex
|
|
Other
|
Name, Address,
|
|
Position(s) Held
|
|
and Length of
|
|
During Past 5
|
|
Overseen By
|
|
Directorships
|
and Age
|
|
with the Trust
|
|
Time Served
|
|
Years
|
|
Trustee
|
|
held by Trustee
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
|
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|
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|
|
|
|
|
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|
|
Dr. Adrian E. Cole
c/o Exchange Traded
Concepts Trust
3555 Northwest
58
th
Street
Suite 410
Oklahoma City, OK
73112
(60 years old)
|
|
Trustee
|
|
Since 2009
|
|
New Covenant United
Methodist Church
1996-Present-Senior
Minister
|
|
|
8
|
|
|
Director of
Oklahoma Federal
Credit Union
|
|
|
|
|
|
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|
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|
|
Edward A. Kerbs
c/o Exchange Traded
Concepts Trust
3555 Northwest
58
th
Street
Suite 410
Oklahoma City, OK
73112
(60 years old)
|
|
Trustee
|
|
Since 2011
|
|
IAT Reinsurance
Ltd. 2001 to
Present Vice
President and
Managing Director
|
|
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8
|
|
|
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David M. Mahle
c/o Exchange Traded
Concepts Trust
3555 Northwest
58
th
Street
Suite 410
Oklahoma City, OK
73112
(68 years old)
|
|
Trustee
|
|
Since 2011
|
|
Jones Day 2008 to
present Of
Counsel; Jones Day
1988-2008 Partner
|
|
|
8
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Steven McConnell
c/o Exchange Traded
Concepts Trust
3555 Northwest
58
th
Street
Suite 410
Oklahoma City, OK
73112
(44 years old)
|
|
Trustee
|
|
Since 2009
|
|
DeBee Gilchrist
Attorney
2004-2006
Legacy Bank-
Corporate Counsel &
Senior Trust
Officer
2006-Present
|
|
|
8
|
|
|
None
|
|
|
|
|
|
|
|
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|
|
|
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31
Individual Trustee Qualifications.
The Trust has concluded that each of the Trustees should serve
on the Board because of their ability to review and understand information about the Funds provided
to them by management, to identify and request other information they may deem relevant to the
performance of their duties, to question management and other service providers regarding material
factors bearing on the management and administration of the Funds, and to exercise their business
judgment in a manner that serves the best interests of the Funds shareholders. The Trust has
concluded that each of the Trustees should serve as a Trustee based on their own experience,
qualifications, attributes and skills as described below.
The Trust has concluded that Mr. Stevens should serve as Trustee because of the experience he
gained in his roles with registered broker-dealer and investment management firms, as Chief
Executive Officer of the Adviser, his experience in and knowledge of the financial services
industry, and the experience he has gained as serving as trustee of the Trust since 2009.
The Trust has concluded that Dr. Cole should serve as Trustee because of the experience he has
gained in a variety of leadership roles with various organizations, the experience he has gained as
a member of the board of directors of a credit union, his knowledge of and experience in the
financial services industry, and the experience he has gained serving as trustee of the Trust since
2009.
The Trust has concluded that Mr. Kerbs should serve as Trustee because of the experience he has
gained serving in various leadership roles in the securities and financial services industry,
including with a firm that conducts the trading and clearing of equities and equity derivatives,
and his knowledge of such industries.
The Trust has concluded that Mr. Mahle should serve as Trustee because of the experience he has
gained as an attorney in the investment management industry of a major law firm, representing
exchange-traded funds and other investment companies as well as their sponsors and advisers and his
knowledge and experience in investment management law and the financial services industry.
The Trust has concluded that Mr. McConnell should serve as Trustee because of the experience he has
gained serving as in-house corporate counsel of a banking institution, his knowledge of and
experience in banking law and the financial services industry, and the experience he has gained
serving as trustee of the Trust since 2009.
In its periodic assessment of the effectiveness of the Board, the Board considers the complementary
individual skills and experience of the individual Trustees primarily in the broader context of the
Boards overall composition so that the Board, as a body, possesses the appropriate (and
appropriately diverse) skills and experience to oversee the business of the funds.
Set forth below are the names, dates of birth, position with the Trust, length and term of office,
and the principal occupations and other directorships held during at least the last five years of
each of the persons currently serving as officers of the Trust.
32
OFFICERS
|
|
|
|
|
|
|
|
|
|
|
|
|
Term of
|
|
|
|
Other
|
|
|
Position(s)
|
|
Office and
|
|
|
|
Directorships
|
Name, Address,
|
|
Held with the
|
|
Length of
|
|
Principal Occupation(s) During
|
|
held during the
|
and Age
|
|
Trust
|
|
Time Served
|
|
Past 5 Years
|
|
Past 5 Years
|
Thompson S.
Phillips, Jr.
3555 Northwest 58
th
Street
Suite 600
Oklahoma City, OK
73112
(59 years old)
|
|
President and
Treasurer
|
|
Since 2009
|
|
Phillips Capital Advisors 1990 to
Present Founder;
T.S. Phillips Investments, Inc.
2004 Present President and
Founder;
FaithShares Advisors, LLC 2009 to
Present President and
Portfolio Manager
|
|
Exchange Traded
Concepts Trust
2009-2011
Trustee.
|
|
|
|
|
|
|
|
|
|
J. Garrett Stevens
3555 Northwest 58
th
Street
Suite 410
Oklahoma City, OK
73112
(31 years old)
|
|
Trustee, Chief
Executive Officer
and Secretary
|
|
Since 2009
|
|
Phillips Capital Advisors 2001
Present Vice President;
T.S. Phillips Investments, Inc.
2001 to Present Vice President;
FaithShares Advisors, LLC 2009 to
Present Chief Executive
Officer and Portfolio Manager
|
|
None.
|
|
|
|
|
|
|
|
|
|
Carolyn Mead
SEI Investments
Company
One Freedom Valley
Drive
Oaks, PA 19456
(53 years old)
|
|
Assistant Secretary
|
|
Since 2009
|
|
Counsel at SEI Investments since
2007. Associate at Stradley,
Ronon, Stevens & Young from 2004
to 2007. Counsel at ING Variable
Annuities from 1999 to 2002.
|
|
None.
|
33
COMPENSATION OF THE TRUSTEES AND OFFICERS
The Trust paid the following fees to the Trustees during its most recently completed fiscal year.
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
Pension or
|
|
|
|
|
|
|
|
|
|
|
Retirement Benefits
|
|
Estimated
|
|
Total Compensation from
|
|
|
Aggregate
|
|
Accrued as Part of
|
|
Annual Benefits
|
|
the Trust and Fund
|
Name
|
|
Compensation
|
|
Fund Expenses
|
|
Upon Retirement
|
|
Complex
1
|
Interested Trustees
|
|
|
|
|
|
|
Phillips
|
|
$
|
0
|
|
|
n/a
|
|
n/a
|
|
$0 for service on (1) board
|
Stevens
|
|
$
|
0
|
|
|
n/a
|
|
n/a
|
|
$0 for service on (1) board
|
Independent Trustees
|
|
|
|
|
|
|
Bainbridge
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
Burgin
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
Cole
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
Kerbs
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
Mahle
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
McConnell
|
|
$XX
|
|
n/a
|
|
n/a
|
|
$XX for service on (1) board
|
|
|
|
1
|
|
The Trust is the only investment company in the Fund Complex.
|
BOARD COMMITTEES
The Board has established the following standing committees:
Audit Committee
. The Board has a standing Audit Committee that is composed of each of the
independent Trustees of the Trust. The Audit Committee operates under a written charter approved
by the Board. The principal responsibilities of the Audit Committee include: recommending which
firm to engage as each Funds independent registered public accounting firm and whether to
terminate this relationship; reviewing the independent registered public accounting firms
compensation, the proposed scope and terms of its engagement, and the firms independence;
pre-approving audit and non-audit services provided by each Funds independent registered public
accounting firm to the Trust and certain other affiliated entities; serving as a channel of
communication between the independent registered public accounting firm and the Trustees; reviewing
the results of each external audit, including any qualifications in the independent registered
public accounting firms opinion, any related management letter, managements responses to
recommendations made by the independent registered public accounting firm in connection with the
audit, reports submitted to the Committee by the internal auditing department of the Trusts
Administrator that are material to the Trust as a whole, if any, and managements responses to any
such reports; reviewing each Funds audited financial statements and considering any significant
disputes between the Trusts management and the independent registered public accounting firm that
arose in connection with the preparation of those financial statements; considering, in
consultation with the independent registered public accounting firm and the Trusts senior internal
accounting executive, if any, the independent registered public accounting firms report on the
adequacy of the Trusts internal financial controls; reviewing, in consultation with each Funds
independent registered public accounting firm, major changes regarding auditing and accounting
principles and practices to be followed when preparing each Funds financial statements; and other
audit related matters. Three Independent Trustees currently serve as members of the Audit
Committee. The Audit Committee also acts as the Trusts qualified legal compliance committee. The
Audit Committee meets periodically, as necessary, and met XX times in the most recently completed
Trust fiscal year.
Nominating Committee
. The Board has a standing Nominating Committee that is composed of
each of the independent Trustees of the Trust. The Nominating Committee operates under a written
charter approved by
the Board. The principal responsibility of the Nominating Committee is to consider, recommend and
nominate candidates to fill vacancies on the Trusts Board, if any. The Nominating Committee
generally will not consider nominees recommended by shareholders. All of the Independent Trustees
currently serve as members of the Nominating Committee. The Nominating Committee meets
periodically, as necessary, and met XX times in the most recently completed fiscal year.
Fair Value Committee
. The Board also has established a Fair Value Committee that may be
comprised of representatives from the Adviser, representatives from the Funds administrator,
counsel to the Funds, and/or members of the Board of Trustees. The Fair Value Committee operates
under procedures approved by the Board. The Fair Value Committee is responsible for the valuation
and revaluation of any portfolio investments for which market quotations or prices are not readily
available. Mr. Stevens currently serves as the Boards
34
delegate on the Fair Value Committee. The
Fair Value Committee meets periodically, as necessary, and did not meet during the most recently
completed fiscal year.
OWNERSHIP OF SHARES
The following table shows the dollar amount ranges of each Trustees beneficial ownership of
shares of each Fund and each other series of the Trust as of the end of the most recently
completely calendar year. Dollar amount ranges disclosed are established by the SEC. Beneficial
ownership is determined in accordance with Rule 16a-1(a)(2) under the 1934 Act.
|
|
|
|
|
|
|
|
|
Aggregate Dollar Range of
|
|
|
|
|
Shares (All Funds in the
|
Name
|
|
Dollar Range of Shares
1,2
|
|
Complex)
2,3
|
Interested Trustees
|
|
|
|
|
|
|
|
|
|
Thompson S. Phillips
|
|
$XX
|
|
$XX
|
|
|
|
|
|
J. Garrett Stevens
|
|
$XX
|
|
$XX
|
|
|
|
|
|
Independent Trustees
|
|
|
|
|
|
|
|
|
|
Nancy Bainbridge
|
|
$XX
|
|
$XX
|
|
|
|
|
|
Thomas C. Burgin
|
|
$XX
|
|
$XX
|
|
|
|
|
|
Dr. Adrian E. Cole
|
|
$XX
|
|
$XX
|
|
|
|
|
|
Edward A. Kerbs
|
|
$XX
|
|
$XX
|
|
|
|
|
|
David M. Mahle
|
|
$XX
|
|
$XX
|
|
|
|
|
|
Steven McConnell
|
|
$XX
|
|
$XX
|
|
|
|
|
|
|
|
|
1
|
|
Because the Funds are new, as of the date of this SAI, none of the Trustees owned shares of the Fund.
|
|
2
|
|
Valuation date is May 31, 2011.
|
|
3
|
|
The Trust is the only investment company in the Fund Complex.
|
CODES OF ETHICS
The Trust, the Adviser, the Sub-Adviser and SEI Investments Distribution Co. (the Distributor)
have each adopted codes of ethics pursuant to Rule 17j-1 of the 1940 Act. These codes of ethics
designed to prevent affiliated persons of the Trust, the Adviser, the Sub-Adviser and the
Distributor from engaging in deceptive,
manipulative or fraudulent activities in connection with securities held or to be acquired by the
Funds (which may also be held by persons subject to the codes of ethics).
There can be no assurance that the codes of ethics will be effective in preventing such activities.
Each code of ethics, filed as exhibits to this registration statement, may be examined at the
office of the SEC in Washington, D.C. or on the Internet at the SECs website at
http://www.sec.gov.
PROXY VOTING POLICIES
The Funds have delegated proxy voting responsibilities to the Adviser, subject to the Boards of
Trustees oversight, who has delegated proxy voting responsibilities to the Sub-Adviser.
In delegating proxy
35
responsibilities, the Board has directed that proxies be voted consistent with
each Funds and its shareholders best interests and in compliance with all applicable proxy voting
rules and regulations. The Sub-Adviser has adopted proxy voting policies and guidelines
for this purpose (Proxy Voting Policies) and has engaged a third party proxy solicitation firm to
assist with voting proxies in a timely manner, while the CCO is responsible for monitoring the
effectiveness of the Proxy Voting Policies. The Proxy Voting Policies have been adopted by the
Trust as the policies and procedures that the Sub-Adviser will use when voting proxies
on behalf of the Funds.
The Proxy Voting Policies address, among other things, material conflicts of interest that may
arise between the interests of the Funds and the interests of the Sub-Adviser. The Proxy
Voting Policies will ensure that all issues brought to shareholders are analyzed in light of the
Sub-Advisers fiduciary responsibilities.
In voting to elect board nominees for uncontested seats, the following factors will be taken into
account: (i) whether majority of the companys directors are independent; (ii) whether key board
committees are entirely composed of independent directors; (iii) excessive board memberships and
professional time commitments to effectively serve the companys board; and (iv) the attendance
record of incumbent directors at board and committee meetings.
Equity compensation plans will also be reviewed on a case-by-case basis based upon their
specific features. For example, stock option plans will be evaluated using criteria such as: (i)
whether the plan is performance-based; (ii) dilution to existing shareholders; (iii) the cost of
the plan; (iv) whether discounted options are allowed under the plan; (v) whether the plan
authorizes the repricing of options or reload options without shareholder approval; and (vi) the
equity overhang of all plans. Similarly, employee stock purchase plans generally will be supported
under the guidelines upon consideration of factors such as (i) whether the plan sets forth adequate
limits on share issuance; (ii) whether participation limits are defined; and (iii) whether
discounts to employees exceed a threshold amount.
The Proxy Voting Policies provide for review and vote on shareholder proposals on a case-by-case
basis. In accordance with this approach, these guidelines support a shareholder proposal upon the
compelling showing that it has a substantial economic impact on shareholder value. As such,
proposals that request that the company report on environmental, labor or human rights issues are
only supported when such concerns pose a substantial risk to shareholder value.
With regard to voting proxies of foreign companies, the Sub-Adviser may weigh the cost
of voting, and potential inability to sell the securities (which may occur during the voting
process), against the benefit of voting the proxies to determine whether or not to vote.
Information on how the Funds voted proxies relating to portfolio securities during the most recent
12 month period is available (1) without charge, upon request, by calling X-XXX-XXX-XXXX and (2) on
the SECs website at
www.sec.gov
.
INVESTMENT ADVISORY AND OTHER SERVICES
Exchange Traded Concepts, LLC, an Oklahoma limited liability company located at 3555 Northwest 58th
Street, Suite 410 Oklahoma City, Oklahoma 73112, serves as the investment adviser to the Funds.
The Adviser is majority owned by Yorkville ETF Holdings LLC.
36
The Trust and the Adviser have entered into an investment advisory agreement dated XX, 2011
(the Advisory Agreement) with respect to the Funds. Under the Advisory Agreement, the Adviser
serves as the investment adviser, makes investment decisions for each Fund, and manages the
investment portfolios and business affairs of the Funds, subject to the supervision of, and
policies established by, the Trustees of the Trust. Under the Advisory Agreement, the Adviser is
also responsible for arranging transfer agency, custody, fund administration and accounting, and
other non-distribution related services necessary for the Funds to operate. The Adviser
administers the Funds business affairs, provides office facilities and equipment and certain
clerical, bookkeeping and administrative services, and permits its officers and employees to serve
as officers, Trustees or employees of the Trust. The Advisory Agreement provides that the Adviser
shall not be protected against any liability to the Trust or its shareholders by reason of willful
misfeasance, bad faith or gross negligence generally in the performance of its duties hereunder or
its reckless disregard of its obligation and duties under the Advisory Agreement.
After the initial two-year term, the continuance of the Advisory Agreement must be specifically
approved at least annually: (i) by the vote of the Trustees or by a vote of the shareholders of the
Funds; and (ii) by the vote of a majority of the Trustees who are not parties to the Advisory
Agreement or interested persons or of any party thereto, cast in person at a meeting called for
the purpose of voting on such approval. The Advisory Agreement will terminate automatically in the
event of its assignment, and is terminable at any time without penalty by the Trustees of the Trust
or, with respect to the Funds, by a majority of the outstanding voting securities of the Funds, or
by the Adviser on not more than 60 days nor less than 30 days written notice to the Trust. As
used in the Advisory Agreement, the terms majority of the outstanding voting securities,
interested persons and assignment have the same meaning as such terms in the 1940 Act.
For the services the Adviser provides, each Fund pays the Adviser a fee that is the greater of XX%
per annum of the average daily net assets of the Fund, calculated daily and paid monthly, and $XX
per annum, prorated and paid on a monthly basis.
The Trust, on behalf of each Fund, and the Adviser have retained Krane Funds Adviser LLC, 152 West
57th Street, 16th Floor, New York, New York, to be responsible for the day to day management of the
Funds, subject to the supervision
of the Adviser and the Board. For the services it provides to the Funds, each Fund pays the
Sub-Adviser a fee, which is calculated daily and paid monthly at an annual rate of XX%
based on a percentage of the average daily net assets of each Fund. The Sub-Adviser has
contractually agreed to reduce fees and reimburse expenses to the extent necessary to keep Total
Annual Fund Operating Expenses (excluding distribution fees and expenses, if any, paid pursuant to
a Rule 12b-1 plan, Trustees fees and expenses, interest, taxes, brokerage and other expenses
incurred in placing orders for the purchase and sale of securities and other investment
instruments, acquired fund fees and expenses, and extraordinary expenses) from exceeding XX% of
each Funds average daily net assets until XX. The Sub-Advisory Agreement provides that the
Sub-Adviser shall not be protected against any liability by reason of willful misfeasance, bad
faith or gross negligence or the reckless disregard of its duties under the Sub-Advisory Agreement.
37
THE PORTFOLIO MANAGER
This section includes information about the Funds portfolio manager, including information about
other accounts they manage, the dollar range of Shares they own and how they are compensated.
COMPENSATION
Jonathan Krane is the portfolio manager of the Funds. The portfolio manager is compensated by the
Sub-Adviser. Mr. Krane is an equity owner of the Sub-Adviser and therefore
is able to receive distributions based on the Sub-Advisers profitability. He does not
currently receive a salary directly from the Sub-Adviser.
SHARES OWNED BY PORTFOLIO MANAGER
Each Fund is required to show the dollar range of each portfolio managers beneficial
ownership of shares of each Fund as of the end of the most recently completed fiscal year. Dollar
amount ranges disclosed are established by the SEC. Beneficial ownership is determined in
accordance with Rule 16a-1(a)(2) under the 1934 Act. Because the Funds are new, as of the date of
this SAI, the Portfolio Manager did not beneficially own shares of a Fund.
OTHER ACCOUNTS
As of the date of this SAI, the portfolio manager did not manage any accounts other than the Funds.
CONFLICTS OF INTEREST
The portfolio managers management of other accounts is not expected to give rise to potential
conflicts of interest in connection with his management of the Funds investments, on the one
hand, and the investments of the other accounts, on the other. The Sub-Adviser manages
no accounts other than the Funds and does not expect there to be any conflicts arising from the
management of other accounts. No account has a performance based fee.
THE DISTRIBUTOR
The Trust and SEI Investments Distribution Co. (the Distributor), a wholly-owned subsidiary of
SEI Investments, and an affiliate of the Administrator, are parties to a distribution agreement
dated October 20, 2009 (Distribution Agreement), whereby the Distributor acts as principal underwriter
for the Trusts shares and distributes the shares of each Fund. Shares are continuously offered
for sale by the Distributor only in Creation Units. Each Creation Unit is made up of 50,000 Shares.
The Distributor will not distribute Shares in amounts less than a Creation Unit. The principal
business address of the Distributor is One Freedom Valley Drive, Oaks, Pennsylvania 19456.
Under the Distribution Agreement, the Distributor, as agent for the Trust, will solicit orders for
the purchase of the Shares, provided that any subscriptions and orders will not be binding on the
Trust until accepted by the Trust. The Distributor will deliver Prospectuses and, upon request,
Statements of Additional Information to persons purchasing Creation Units and will maintain records
of orders placed with it. The Distributor is a broker-dealer registered under the Securities
Exchange Act of 1934 (the Exchange Act) and a member of the Financial Industry Regulatory
Authority (FINRA).
38
The Distributor may also enter into agreements with securities dealers (Soliciting Dealers) who
will solicit purchases of Creation Units of Shares. Such Soliciting Dealers may also be Authorized
Participants (as discussed in Procedures for Creation of Creation Units below) or DTC
participants (as defined below).
The Distribution Agreement will continue for two years from its effective date and is renewable
thereafter. The continuance of the Distribution Agreement must be specifically approved at least
annually (i) by the vote of the Trustees or by a vote of the shareholders of the Fund and (ii) by
the vote of a majority of the Trustees who are not interested persons of the Trust and have no
direct or indirect financial interest in the operations of the Distribution Agreement or any
related agreement, cast in person at a meeting called for the purpose of voting on such approval.
The Distribution Agreement is terminable without penalty by the Trust on 60 days written notice
when authorized either by majority vote of its outstanding voting shares or by a vote of a majority
of its Board (including a majority of the Independent Trustees), or by the Distributor on 60 days
written notice, and will automatically terminate in the event of its assignment. The Distribution
Agreement provides that in the absence of willful misfeasance, bad faith or gross negligence on the
part of the Distributor, or reckless disregard by it of its obligations thereunder, the Distributor
shall not be liable for any action or failure to act in accordance with its duties thereunder.
Distribution Plan.
The Trust has adopted a Distribution Plan (the Plan) in accordance with the
provisions of Rule 12b-1 under the 1940 Act, which regulates circumstances under which an
investment company may directly or indirectly bear expenses relating to the distribution of its
shares. No payments pursuant to the Plan will be made during the next twelve (12) months of
operation. Continuance of the Plan must be approved annually by a majority of the Trustees of the
Trust and by a majority of the Trustees who are not interested persons (as defined in the 1940 Act)
of the Trust and have no direct or indirect financial interest in the Plan or in any agreements
related to the Plan (Qualified Trustees). The Plan requires that quarterly written reports of
amounts spent under the Plan and the purposes of such expenditures be furnished to and reviewed by
the Trustees. The Plan may not be amended to increase materially the amount that may be spent
thereunder without approval by a majority of the outstanding shares of any class of a Fund that is
affected by such increase. All material amendments of the Plan will require approval by a majority
of the Trustees of the Trust and of the Qualified Trustees.
The Plan provides that shares of each Fund pay the Distributor an annual fee of up to a maximum of
0.25% of the average daily net assets of the shares. Under the Plan, the Distributor may make
payments pursuant to written agreements to financial institutions and intermediaries such as banks,
savings and loan associations and insurance companies including, without limit, investment
counselors, broker-dealers and the Distributors affiliates and subsidiaries (collectively,
Agents) as compensation for services and reimbursement of expenses incurred in connection with
distribution assistance. The Plan is characterized as a compensation plan since the distribution
fee will be paid to the Distributor without regard to the distribution expenses incurred by the
Distributor or the amount of payments made to other financial institutions and intermediaries. The
Trust intends to operate the Plan in accordance with its terms and with the Financial Industry
Regulatory Authority (FINRA) rules concerning sales charges.
|
|
|
Description of Distribution Services.
Distribution services may include: (i)
services in connection with distribution assistance; or (ii) payments to financial
institutions and other financial intermediaries, such as banks, savings and loan
associations, insurance companies, investment counselors, broker-dealers, mutual fund
supermarkets and the Distributors affiliates and subsidiaries, as compensation for
services or reimbursement of expenses incurred in connection with distribution assistance.
The Distributor may, at its discretion, retain a portion of such payments to compensate
itself for distribution services and distribution related expenses such as the costs of
preparation, printing, mailing or otherwise disseminating sales literature, advertising,
and prospectuses (other than those
|
39
|
|
|
furnished to current shareholders of the Fund), promotional and incentive programs, and such
other marketing expenses that the Distributor may incur.
|
THE ADMINISTRATOR
SEI Investments Global Funds Services (the Administrator), a Delaware statutory trust, has its
principal business offices at One Freedom Valley Drive, Oaks, Pennsylvania 19456. SEI Investments
Management Corporation (SIMC), a wholly-owned subsidiary of SEI Investments Company (SEI
Investments), is the owner of all beneficial interest in the Administrator. SEI Investments and
its subsidiaries and affiliates, including the Administrator, are leading providers of funds
evaluation services, trust accounting systems, and brokerage and information services to financial
institutions, institutional investors, and money managers. The Administrator and its affiliates
also serve as administrator or sub-administrator to other mutual funds.
The Trust and the Administrator have entered into an administration agreement October 20, 2009 (the
Administration Agreement). Under the Administration Agreement, the Administrator provides the
Trust with administrative services, including regulatory reporting and all necessary office space,
equipment, personnel and facilities. Pursuant to a schedule to the Administration Agreement, the
Administrator also serves as the shareholder servicing agent for the Fund whereby the Administrator
provides certain shareholder services to the Funds.
The Administration Agreement provides that the Administrator shall not be liable for any error of
judgment or mistake of law or for any loss suffered by the Trust in connection with the matters to
which the Administration Agreement relates, except a loss resulting from willful misfeasance, bad
faith or gross negligence on the part of the Administrator in the performance of its duties or from
reckless disregard by it of its duties and obligations thereunder.
For its services under the Administration Agreement, the Administrator is entitled to a fee, which
is detailed below in the following schedule:
|
|
|
|
|
Fee (as a percentage of aggregate
|
|
|
|
average annual assets)
|
|
Funds Average Daily Net Assets
|
|
XX%
|
|
First XX
|
XX%
|
|
over XX
|
The foregoing fee is subject to a minimum annual fee as follows: Year 1 $ XX per Fund, Year 2 $XX
per Fund, Year 3 $XX per Fund.
|
|
|
Each additional fund established after the initial 5 Funds will be subject to a minimum
annual fee equal to the schedule above.
|
|
|
|
|
Each additional class of shares of a Fund established after the initial (1) class of
shares per Fund will be subject to an additional minimum annual fee equal to the schedule
above per class.
|
THE CUSTODIAN
Brown Brothers Harriman (the Custodian), 40 Water St. Boston, MA 02109 serves as the custodian of
the Funds. The Custodian holds cash, securities and other assets of the Funds as required by the
1940 Act.
40
THE TRANSFER AGENT
Brown Brothers Harriman (the Transfer Agent), 40 Water St. Boston, MA 02109, serves as the Funds
transfer agent and dividend disbursing agent under a transfer agency agreement with the Trust.
LEGAL COUNSEL
Morgan, Lewis & Bockius, LLP, 1111 Pennsylvania Avenue NW, Washington, DC 20004, serves as legal
counsel to the Trust.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Cohen Fund Audit Services, Ltd., [800 Westpoint Pkwy., Ste. 100, Westlake, OH 44145-1524] serves as
the independent registered public accounting firm for the Funds.
PORTFOLIO HOLDINGS DISCLOSURE POLICIES AND PROCEDURES
The Trusts Board of Trustees has adopted a policy regarding the disclosure of information about
each Funds security holdings. Each Funds entire portfolio holdings are publicly disseminated each
day the Fund is open for business through financial reporting and news services including publicly
available internet web sites. In addition, the composition of the In-Kind Creation Basket and the
In-Kind Redemption Basket, is publicly disseminated daily prior to the opening of the NYSE Arca via
the NSCC.
DESCRIPTION OF SHARES
The Declaration of Trust authorizes the issuance of an unlimited number of funds and shares of each
fund. Each share of a fund represents an equal proportionate interest in that fund with each other
share. Shares are entitled upon liquidation to a pro rata share in the net assets of the fund.
Shareholders have no preemptive rights. The Declaration of Trust provides that the Trustees of the
Trust may create additional series or classes of shares. All consideration received by the Trust
for shares of any additional funds and all assets in which such consideration is invested would
belong to that fund and would be subject to the liabilities related thereto. Share certificates
representing shares will not be issued. The Funds shares, when issued, are fully paid and
non-assessable.
Each Share has one vote with respect to matters upon which a shareholder vote is required
consistent with the requirements of the 1940 Act and the rules promulgated thereunder. Shares of
all funds vote together as a single class, except that if the matter being voted on affects only a
particular Fund it will be voted on only by that Fund and if a matter affects a particular Fund
differently from other Funds, that Fund will vote separately on such matter. As a Delaware
statutory trust, the Trust is not required, and does not intend, to hold annual meetings of
shareholders. Approval of shareholders will be sought, however, for certain changes in the
operation of the Trust and for the election of Trustees under certain circumstances. Upon the
written request of shareholders owning at least 10% of the Trusts shares, the Trust will call for
a meeting of shareholders to consider the removal of one or more trustees and other certain
matters. In the event that such a meeting is requested, the Trust will provide appropriate
assistance and information to the shareholders requesting the meeting.
Under the Declaration of Trust, the Trustees have the power to liquidate each Fund without
shareholder approval. While the Trustees have no present intention of exercising this power, they
may do so if any Fund
41
fails to reach a viable size within a reasonable amount of time or for such other reasons as may be
determined by the Board.
LIMITATION OF TRUSTEES LIABILITY
The Declaration of Trust provides that a Trustee shall be liable only for his or her own willful
misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the
conduct of the office of Trustee, and shall not be liable for errors of judgment or mistakes of
fact or law. The Trustees shall not be responsible or liable in any event for any neglect or
wrong-doing of any officer, agent, employee, investment adviser or principal underwriter of the
Trust, nor shall any Trustee be responsible for the act or omission of any other Trustee. The
Declaration of Trust also provides that The Trust shall indemnify each person who is, or has been,
a Trustee, officer, employee or agent of the Trust, any person who is serving or has served at the
Trusts request as a Trustee, officer, trustee, employee or agent of another organization in which
the Trust has any interest as a shareholder, creditor or otherwise to the extent and in the manner
provided in the By-Laws. However, nothing in the Declaration of Trust shall protect or indemnify a
Trustee against any liability for his or her willful misfeasance, bad faith, gross negligence or
reckless disregard of the duties involved in the conduct of the office of Trustee. Nothing
contained in this section attempts to disclaim a Trustees individual liability in any manner
inconsistent with the federal securities laws.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for each Fund is that primary
consideration will be given to obtaining the most favorable prices and efficient executions of
transactions. Consistent with this policy, when securities transactions are effected on a stock
exchange, the Trusts policy is to pay commissions which are considered fair and reasonable without
necessarily determining that the lowest possible commissions are paid in all circumstances. The
Trust believes that a requirement always to seek the lowest possible commission cost could impede
effective portfolio management and preclude a Fund and the Sub-Adviser from obtaining a
high quality of brokerage and research services. In seeking to determine the reasonableness of
brokerage commissions paid in any transaction, the Sub-Adviser will rely upon its
experience and knowledge regarding commissions generally charged by various brokers and on its
judgment in evaluating the brokerage services received from the broker effecting the transaction.
Such determinations are necessarily subjective and imprecise, as in most cases, an exact dollar
value for those services is not ascertainable. The Trust has adopted policies and procedures that
prohibit the consideration of sales of a Funds shares as a factor in the selection of a broker or
dealer to execute its portfolio transactions.
The Sub-Adviser owes a fiduciary duty to its clients to seek to provide best execution on
trades effected. In selecting a broker/dealer for each specific transaction, the
Sub-Adviser chooses the broker/dealer deemed most capable of providing the services necessary to
obtain the most favorable execution. Best execution is generally understood to mean the most
favorable cost or net proceeds reasonably obtainable under the circumstances. The full range of
brokerage services applicable to a particular transaction may be considered when making this
judgment, which may include, but is not limited to: liquidity, price, commission, timing,
aggregated trades, capable floor brokers or traders, competent block trading coverage, ability to
position, capital strength and stability, reliable and accurate communications and settlement
processing, use of automation, knowledge of other buyers or sellers, arbitrage skills,
administrative ability, underwriting and provision of information on a particular security or
market in which the transaction is to occur. The specific criteria will vary depending upon the
nature of the transaction, the market in which it is executed, and the extent to which it is
possible to select from among multiple broker/dealers. The Sub-Adviser will also use
electronic crossing networks (ECNs) when appropriate.
42
The Sub-Adviser does not currently use the Funds assets for, or participate in, any third
party soft dollar arrangements, although it may receive proprietary research from various full
service brokers, the cost of which is bundled with the cost of the brokers execution services.
The Sub-Adviser does not pay up for the value of any such proprietary research.
The Sub-Adviser is responsible, subject to oversight by the Adviser and the Board, for
placing orders on behalf of the Funds for the purchase or sale of portfolio securities. If
purchases or sales of portfolio securities of the Funds and one or more other investment companies
or clients supervised by the Sub-Adviser are considered at or about the same time,
transactions in such securities are allocated among the several investment companies and clients in
a manner deemed equitable and consistent with its fiduciary obligations to all by the
Sub-Adviser. In some cases, this procedure could have a detrimental effect on the price or volume
of the security so far as the Funds are concerned. However, in other cases, it is possible that the
ability to participate in volume transactions and to negotiate lower brokerage commissions will be
beneficial to the Funds. The primary consideration is prompt execution of orders at the most
favorable net price.
The Funds may deal with affiliates in principal transactions to the extent permitted by exemptive
order or applicable rule or regulation.
The Funds had not commenced operations as of the date of this SAI and therefore did not pay
brokerage commissions during the past fiscal year.
Brokerage with Fund Affiliates. The Funds may execute brokerage or other agency transactions
through registered broker-dealer affiliates of either the Funds, the Adviser, the Sub-Adviser or
the Distributor for a commission in conformity with the 1940 Act, the 1934 Act and rules
promulgated by the SEC. These rules require that commissions paid to the affiliate by the Funds for
exchange transactions not exceed
"
usual and customary brokerage commissions. The rules define
usual and customary commissions to include amounts which are reasonable and fair compared to the
commission, fee or other remuneration received or to be received by other brokers in connection
with comparable transactions involving similar securities being purchased or sold on a securities
exchange during a comparable period of time. The Trustees, including those who are not
interested persons of the Funds, have adopted procedures for evaluating the reasonableness of
commissions paid to affiliates and review these procedures periodically.
Securities of Regular Broker-Dealer. Each Fund is required to identify any securities of its
regular brokers and dealers (as such term is defined in the 1940 Act) which it may hold at the
close of its most recent fiscal year. Regular brokers or dealers of the Trust are the ten
brokers or dealers that, during the most recent fiscal year: (i) received the greatest dollar
amounts of brokerage commissions from the Trusts portfolio transactions; (ii) engaged as
principal in the largest dollar amounts of portfolio transactions of the Trust; or (iii) sold the
largest dollar amounts of the Trusts shares. Because the Funds are new, as of the date of this
SAI, the Funds do not hold any securities of regular broker dealers to report.
PORTFOLIO TURNOVER RATE
Portfolio turnover may vary from year to year, as well as within a year. High turnover rates are
likely to result in comparatively greater brokerage expenses. The overall reasonableness of
brokerage commissions is evaluated by the Sub-Adviser based upon its knowledge of available
information as to the general level of commissions paid by other institutional investors for
comparable services.
43
BOOK ENTRY ONLY SYSTEM
DTC acts as securities depositary for the Shares. Shares of each Fund are represented by securities
registered in the name of DTC or its nominee, Cede & Co., and deposited with, or on behalf of, DTC.
Except in limited circumstances set forth below, certificates will not be issued for Shares.
DTC is a limited-purpose trust company that was created to hold securities of its participants (the
DTCs 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 NYSE and
FINRA. Access to the DTC system is also available to others such as banks, brokers, dealers, and
trust companies that clear through or maintain a custodial relationship with a DTC Participant,
either directly or indirectly (the Indirect Participants).
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants, and persons
holding interests through DTC Participants and Indirect Participants. Ownership of beneficial
interests in Shares (owners of such beneficial interests are referred to herein as Beneficial
Owners) is shown on, and the transfer of ownership is effected only through, records maintained by
DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to
Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will
receive from or through the DTC Participant a written confirmation relating to their purchase of
Shares. The Trust recognizes DTC or its nominee as the record owner of all Shares for all
purposes. Beneficial Owners of Shares are not entitled to have Shares registered in their names,
and will not receive or be entitled to physical delivery of share certificates. Each Beneficial
Owner must rely on the procedures of DTC and any DTC Participant and/or Indirect Participant
through which such Beneficial Owner holds its interests, to exercise any rights of a holder of
Shares.
Conveyance of all notices, statements, and other communications to Beneficial Owners is effected as
follows. DTC will make available to the Trust upon request and for a fee a listing of Shares held
by each DTC Participant. The Trust shall obtain from each such DTC Participant 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.
Share distributions 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 the Fund 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 aspect of the records relating to or notices
to Beneficial Owners, or payments made on account of beneficial ownership interests in a Funds
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 and the Indirect Participants and
Beneficial Owners owning through such DTC Participants.
44
DTC may determine to discontinue providing its service with respect to a Fund at any time by giving
reasonable notice to the Fund and discharging its responsibilities with respect thereto under
applicable law. Under such circumstances, the Fund shall take action either to find a replacement
for DTC to perform its functions at a
comparable cost or, if such 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.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
The Funds had not commenced operations as of the date of this SAI and therefore no person owned of record
beneficially 5% or more of any Shares of the Fund.
PURCHASE AND ISSUANCE OF SHARES IN CREATION UNITS
The Trust issues and sells Shares of each Fund only: (i) in Creation Units on a continuous basis
through the Distributor, without a sales load (but subject to transaction fees), at their NAV per
share next determined after receipt of an order, on any Business Day, in proper form pursuant to
the terms of the Authorized Participant Agreement (Participant Agreement); or (ii) pursuant to
the Dividend Reinvestment Service (defined below). The NAV of each Funds shares is calculated each
business day as of the close of regular trading on the NYSE Arca, generally 4:00 p.m., Eastern
Time. The Funds will not issue fractional Creation Units. A Business Day is any day on which the
NYSE Arca is open for business.
FUND DEPOSIT. The consideration for purchase of a Creation Unit of a Fund generally consists of the
in-kind deposit of a designated portfolio of securities (the Deposit Securities) per each
Creation Unit, constituting a substantial replication, or a portfolio sampling representation, of
the securities included in the relevant Funds benchmark Index and the Cash Component (defined
below), computed as described below. Notwithstanding the foregoing, the Trust reserves the right
to permit or require the substitution of a cash in lieu amount (Deposit Cash) to be added to
the Cash Component to replace any Deposit Security. When accepting purchases of Creation Units for
all or a portion of Deposit Cash, a Fund may incur additional costs associated with the acquisition
of Deposit Securities that would otherwise be provided by an in-kind purchaser.
Together, the Deposit Securities or Deposit Cash, as applicable, and the Cash Component constitute
the Fund Deposit, which represents the minimum initial and subsequent investment amount for a
Creation Unit of any Fund. The Cash Component is an amount equal to the difference between the
net asset value of the Shares (per Creation Unit) and the market value of the Deposit Securities or
Deposit Cash, as applicable. If the Cash Component is a positive number (
i.e.
, the net asset value
per Creation Unit exceeds the market value of the Deposit Securities or Deposit Cash, as
applicable), the Cash Component shall be such positive amount. If the Cash Component is a negative
number (
i.e.
, the net asset value per Creation Unit is less than the market value of the Deposit
Securities or Deposit Cash, as applicable), the Cash Component shall be such negative amount and
the creator will be entitled to receive cash in an amount equal to the Cash Component. The Cash
Component serves the function of compensating for any differences between the net asset value per
Creation Unit and the market value of the Deposit Securities or Deposit Cash, as applicable.
Computation of the Cash Component excludes any stamp duty or other similar fees and expenses
payable upon transfer of beneficial ownership of the Deposit Securities, if applicable, which shall
be the sole responsibility of the Authorized Participant (as defined below).
Each Fund, through NSCC, makes available on each Business Day, immediately prior to the opening of
business on the Exchange (currently 9:30 a.m., Eastern time), the list of the names and the
required number of shares of each Deposit Security or the required amount of Deposit Cash, as
applicable, to be included in the
45
current Fund Deposit (based on information at the end of the previous Business Day) for a Fund.
Such Fund Deposit is subject to any applicable adjustments as described below, in order to effect
purchases of Creation Units of a Fund until such time as the next-announced composition of the
Deposit Securities or the required amount of Deposit Cash, as applicable, is made available.
The identity and number of shares of the Deposit Securities or the amount of Deposit Cash, as
applicable, required for a Fund Deposit for each Fund changes as rebalancing adjustments and
corporate action events are reflected from time to time by the Investment Adviser with a view to
the investment objective of the Fund. The composition of the Deposit Securities may also change in
response to adjustments to the weighting or composition of the component securities of a Funds
Index.
The Trust reserves the right to permit or require the substitution of an amount of cash (
i.e.,
a
cash in lieu amount) to replace any Deposit Security, which shall be added to the Deposit Cash,
if applicable, and the Cash Component, including, without limitation, in situations where the
Deposit Security: (i) may not be available in sufficient quantity for delivery; (ii) may not be
eligible for transfer through the systems of DTC for corporate securities and municipal securities;
(iii) may not be eligible for trading by an Authorized Participant (as defined below) or the
investor for which it is acting; (iv) would be restricted under the securities laws or where the
delivery of the Deposit Security to the Authorized Participant would result in the disposition of
the Deposit Security by the Authorized Participant becoming restricted under the securities laws;
or (v) in certain other situations (collectively, custom orders). The Trust also reserves the
right to include or remove Deposit Securities from the basket in anticipation of index rebalancing
changes. The adjustments described above will reflect changes, known to the Adviser on the date of
announcement to be in effect by the time of delivery of the Fund Deposit, in the composition of the
subject Index being tracked by the relevant Fund or resulting from certain corporate actions.
PROCEDURES FOR PURCHASE OF CREATION UNITS. To be eligible to place orders with the Distributor to
purchase a Creation Unit of a Fund, an entity must be (i) a Participating Party,
i.e.
, a
broker-dealer or other participant in the clearing process through the Continuous Net Settlement
System of the NSCC (the Clearing Process), a clearing agency that is registered with the SEC; or
(ii) a DTC Participant (see BOOK ENTRY ONLY SYSTEM). In addition, each Participating Party or DTC
Participant (each, an Authorized Participant) must execute a Participant Agreement that has been
agreed to by the Distributor, and that has been accepted by the Transfer Agent and the Trust, with
respect to purchases and redemptions of Creation Units. Each Authorized Participant will agree,
pursuant to the terms of a Participant Agreement, on behalf of itself or any investor on whose
behalf it will act, to certain conditions, including that it will pay to the Trust, an amount of
cash sufficient to pay the Cash Component together with the Creation Transaction Fee (defined
below) and any other applicable fees and taxes. The Adviser may retain all or a portion of the
Transaction Fee to the extent the Adviser bears the expenses that otherwise would be borne by the
Trust in connection with the purchase of a Creation Unit, which the Transaction Fee is designed to
cover.
All orders to purchase Shares directly from a Fund must be placed for one or more Creation Units
and in the manner and by the time set forth in the Participant Agreement and/or applicable order
form. The date on which an order to purchase Creation Units (or an order to redeem Creation Units,
as set forth below) is received and accepted is referred to as the Order Placement Date.
An Authorized Participant may require an investor to make certain representations or enter into
agreements with respect to the order, (e.g., to provide for payments of cash, when required).
Investors should be aware that their particular broker may not have executed a Participant
Agreement and that, therefore, orders to purchase Shares directly from a Fund in Creation Units
have to be placed by the investors broker through an Authorized
46
Participant that has executed a Participant Agreement. In such cases there may be additional
charges to such investor. At any given time, there may be only a limited number of broker-dealers
that have executed a Participant Agreement and only a small number of such Authorized Participants
may have international capabilities.
On days when the Exchange closes earlier than normal, a Fund may require orders to create Creation
Units to be placed earlier in the day. In addition, if a market or markets on which the Funds
investments are primarily traded is closed, the Funds will also generally not accept orders on such
day(s). Orders must be transmitted by an Authorized Participant by telephone or other transmission
method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement
and in accordance with the applicable order form. With respect to a Fund, the Distributor will
notify the Custodian of such order. The Custodian will then provide such information to the
appropriate local sub-custodian(s). Those placing orders through an Authorized Participant should
allow sufficient time to permit proper submission of the purchase order to the Distributor by the
cut-off time on such Business Day. Economic or market disruptions or changes, or telephone or other
communication failure may impede the ability to reach the Distributor or an Authorized Participant.
Fund Deposits must be delivered by an Authorized Participant through the Federal Reserve System
(for cash) or through DTC (for corporate securities), through a subcustody agent for (for foreign
securities) and/or through such other arrangements allowed by the Trust or its agents. With respect
to foreign Deposit Securities, the Custodian shall cause the subcustodian of such Fund to maintain
an account into which the Authorized Participant shall deliver, on behalf of itself or the party on
whose behalf it is acting, such Deposit Securities (or Deposit Cash for all or a part of such
securities, as permitted or required), with any appropriate adjustments as advised by the Trust.
Foreign Deposit Securities must be delivered to an account maintained at the applicable local
subcustodian. The Fund Deposit transfer must be ordered by the Authorized Participant in a timely
fashion so as to ensure the delivery of the requisite number of Deposit Securities or Deposit Cash,
as applicable, to the account of a Fund or its agents by no later than the Settlement Date. The
Settlement Date for a Fund is generally the third Business Day after the Order Placement Date.
All questions as to the number of Deposit Securities or Deposit Cash to be delivered, as
applicable, and the validity, form and eligibility (including time of receipt) for the deposit of
any tendered securities or cash, as applicable, will be determined by the Trust, whose
determination shall be final and binding. The amount of cash represented by the Cash Component must
be transferred directly to the Custodian through the Federal Reserve Bank wire transfer system in a
timely manner so as to be received by the Custodian no later than the Settlement Date. If the Cash
Component and the Deposit Securities or Deposit Cash, as applicable, are not received by in a
timely manner by the Settlement Date, the creation order may be cancelled. Upon written notice to
the Distributor, such canceled order may be resubmitted the following Business Day using a Fund
Deposit as newly constituted to reflect the then current NAV of the Fund.
The order shall be deemed to be received on the Business Day on which the order is placed
provided that the order is placed in proper form prior to the applicable cut-off time and the
federal funds in the appropriate amount are deposited by 2:00 p.m. or 3:00 p.m. Eastern time
(as set forth on the applicable order form), with the Custodian on the Settlement Date. If the
order is not placed in proper form as required, or federal funds in the appropriate amount are
not received by 2:00 p.m. or 3:00 p.m. Eastern time (as set forth on the applicable order form)
on the Settlement Date, then the order may be deemed to be rejected and the Authorized
Participant shall be liable to the Fund for losses, if any, resulting therefrom. A creation
request is considered to be in proper form if all procedures set forth in the Participant
Agreement, order form and this SAI are properly followed.
47
ISSUANCE OF A CREATION UNIT. Except as provided herein, Creation Units will not be issued until the
transfer of good title to the Trust of the Deposit Securities or payment of Deposit Cash, as
applicable, and the payment of the Cash Component have been completed. When the subcustodian has
confirmed to the Custodian that the required Deposit Securities (or the cash value thereof) have
been delivered to the account of the relevant subcustodian or subcustodians, the Distributor and
the Adviser shall be notified of such delivery, and the Trust will issue and cause the delivery of
the Creation Units. The delivery of Creation Units so created generally will occur no later than
the third Business Day following the day on which the purchase order is deemed received by the
Distributor. However, as discussed in Appendix A, the Funds reserve the right to settle Creation
Unit transactions on a basis other than the third Business Day following the day on which the
purchase order is deemed received by the Distributor in order to accommodate foreign market holiday
schedules, to account for different treatment among foreign and U.S. markets of dividend record
dates and ex-dividend dates (that is the last day the holder of a security can sell the security
and still receive dividends payable on the security), and in certain other circumstances. The
Authorized Participant shall be liable to the Fund for losses, if any, resulting from unsettled
orders.
Creation Units may be purchased in advance of receipt by the Trust of all or a portion of the
applicable Deposit Securities as described below. In these circumstances, the initial deposit will
have a value greater than the net asset value of the Shares on the date the order is placed in
proper form since in addition to available Deposit Securities, cash must be deposited in an amount
equal to the sum of (i) the Cash Component, plus (ii) an additional amount of cash equal to a
percentage of the market value as set forth in the Participant Agreement, of the undelivered
Deposit Securities (the Additional Cash Deposit), which shall be maintained in a separate
non-interest bearing collateral account. 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 the
applicable percentage, as set forth in the Participant Agreement, of the daily marked to market
value of the missing Deposit Securities. The Participant Agreement will permit the Trust to buy the
missing Deposit Securities at 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 or purchased by the Trust and deposited
into the Trust. In addition, a Transaction Fee as set forth below under Creation Transaction Fee
will be charged in all cases. The delivery of Creation Units so created generally will occur no
later than the Settlement Date.
ACCEPTANCE OF ORDERS OF CREATION UNITS. The Trust reserves the absolute right to reject an order
for Creation Units transmitted to it by the Distributor in respect of a Fund including, without
limitation, if (a) the order is not in proper form; (b) the Deposit Securities or Deposit Cash, as
applicable, delivered by the Participant are not as disseminated through the facilities of the NSCC
for that date by the Custodian; (c) the investor(s), upon obtaining the Shares ordered, would own
80% or more of the currently outstanding Shares of the Fund; (d) acceptance of the Deposit
Securities would have certain adverse tax consequences to the Fund; (e) the acceptance of the Fund
Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the Fund Deposit would
otherwise, in the discretion of the Trust or the Adviser, have an adverse effect on the Trust or
the rights of beneficial owners; (g) the acceptance or receipt of the order for a Creation Unit
would, in the opinion of counsel to the Trust, be unlawful; or (h) in the event that circumstances
outside the control of the Trust, the Custodian, the Transfer Agent and/or the Adviser make it for
all practical purposes not feasible to process orders for Creation Units.
48
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 Distributor, the Custodian, a
sub-custodian, the Transfer Agent, DTC, NSCC, Federal Reserve System, or any other participant in
the creation process, and other extraordinary events. The Distributor shall notify a prospective
creator of a Creation Unit and/or the Authorized Participant acting on behalf of the creator of a
Creation Unit of its rejection of the order of such person. The Trust, the Transfer Agent, the
Custodian, any sub-custodian and the Distributor are under no duty, however, to give notification
of any defects or irregularities in the delivery of Fund Deposits nor shall either of them incur
any liability for the failure to give any such notification. The Trust, the Transfer Agent, the
Custodian and the Distributor shall not be liable for the rejection of any purchase order for
Creation Units.
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 Trusts determination shall be final and binding.
CREATION TRANSACTION FEE. A purchase (
i.e.
, creation) transaction fee is imposed for the transfer
and other transaction costs associated with the purchase of Creation Units, and investors will be
required to pay a creation transaction fee regardless of the number of Creation Units created in
the transaction. A Fund may adjust the creation transaction fee from time to time based upon
actual experience. An additional charge of up to five (5) times the fixed transaction fee may be
imposed for cash purchases, non-standard orders, or partial cash purchases for each Fund.
Investors who use the services of a broker or other such intermediary may be charged a fee for such
services. Investors are responsible for the costs of transferring the securities constituting the
Deposit Securities to the account of the Trust. The Adviser may retain all or a portion of the
Transaction Fee to the extent the Adviser bears the expenses that otherwise would be borne by the
Trust in connection with the purchase of a Creation Unit, which the Transaction Fee is designed to
cover.
The standard creation transaction fee for each Fund will be $500. The maximum creation transaction
fee for each Fund will be $3,000.
RISKS OF PURCHASING CREATION UNITS. There are certain legal risks unique to investors purchasing
Creation Units directly from the Funds. Because each Funds shares may be issued on an ongoing
basis, a distribution of Shares could be occurring at any time. Certain activities that a
shareholder performs as a dealer could, depending on the circumstances, result in the shareholder
being deemed a participant in the distribution in a manner that could render the shareholder a
statutory underwriter and subject to the prospectus delivery and liability provisions of the
Securities Act of 1933. For example, s shareholder could be deemed a statutory underwriter if it
purchases Creation Units from the Fund, breaks them down into the constituent Shares, and sells
those shares directly to customers, or if a shareholder chooses 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 persons 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 a Funds 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.
49
REDEMPTION. Shares may be redeemed only in Creation Units at their net asset value next determined
after
receipt of a redemption request in proper form by a Fund through the Transfer Agent and only on a
Business Day. EXCEPT UPON LIQUIDATION OF A FUND, THE TRUST WILL NOT REDEEM SHARES IN AMOUNTS LESS
THAN CREATION UNITS. Investors must accumulate enough Shares in the secondary market to constitute
a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance,
however, that there will be sufficient liquidity in the public trading market at any time to permit
assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in
connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
With respect to each Fund, the Custodian, through the NSCC, makes available immediately prior to
the opening of business on the Exchange (currently 9:30 a.m. Eastern time) on each Business Day,
the list of the names and share quantities of each Funds 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 (Fund Securities). Fund Securities received on redemption may
not be identical to Deposit Securities.
Redemption proceeds for a Creation Unit are paid either in-kind or in cash, or combination thereof,
as determined by the Trust. With respect to in-kind redemptions of a Fund, redemption proceeds for
a Creation Unit will consist of Fund Securities as announced by the Custodian on the Business
Day of the request for redemption received in proper form plus cash in an amount equal to the
difference between the net asset value of the Shares being redeemed, as next determined after a
receipt of a request in proper form, and the value of the Fund Securities (the Cash Redemption
Amount), less a fixed redemption transaction fee as set forth below. In the event that the Fund
Securities have a value greater than the net asset value of the Shares, a compensating cash payment
equal to the differential is required to be made by or through an Authorized Participant by the
redeeming shareholder. Notwithstanding the foregoing, at the Trusts discretion, an Authorized
Participant may receive the corresponding cash value of the securities in lieu of the in-kind
securities value representing one or more Fund Securities.
REDEMPTION TRANSACTION FEE. A redemption transaction fee is imposed for the transfer and other
transaction costs associated with the redemption of Creation Units, and investors will be required
to pay a fixed redemption transaction fee regardless of the number of Creation Units created in the
transaction, as set forth in each Funds Prospectus, as may be revised from time to time. The
redemption transaction fee is the same no matter how many Creation Units are being redeemed
pursuant to any one redemption request. A Fund may adjust the redemption transaction fee from time
to time based upon actual experience. An additional charge of up to five (5) times the fixed
transaction fee may be imposed for cash redemptions, non-standard orders, or partial cash
redemptions (when cash redemptions are available) for each Fund. Investors who use the services of
a broker or other such intermediary may be charged a fee for such services. Investors are
responsible for the costs of transferring the Fund Securities from the Trust to their account or on
their order. The Adviser may retain all or a portion of the Transaction Fee to the extent the
Adviser bears the expenses that otherwise would be borne by the Trust in connection with the
redemption of a Creation Unit, which the Transaction Fee is designed to cover.
The standard redemption transaction fee for each Fund will be $500. The maximum redemption
transaction fee for each Fund will be $3,000.
PROCEDURES FOR REDEMPTION OF CREATION UNITS. Orders to redeem Creation Units must be submitted in
proper form to the Transfer Agent prior to the time as set forth in the Participant Agreement. A
redemption request is considered to be in proper form if (i) an Authorized Participant has
transferred or caused to be transferred to the Trusts Transfer Agent the Creation Unit(s) being
redeemed through the book-entry system of DTC so as to be effective by the time as set forth in the
Participant Agreement and (ii) a request
50
in form satisfactory to the Trust is received by the Transfer Agent from the Authorized Participant
on behalf of itself or another redeeming investor within the time periods specified in the
Participant Agreement. If the Transfer Agent does not receive the investors Shares through DTCs
facilities by the times and pursuant to the other terms and conditions set forth in the Participant
Agreement, the redemption request shall be rejected.
The Authorized Participant must transmit the request for redemption, in the form required by the
Trust, to the Transfer Agent in accordance with procedures set forth in the Authorized Participant
Agreement. Investors should be aware that their particular broker may not have executed an
Authorized Participant Agreement, and that, therefore, requests to redeem Creation Units may have
to be placed by the investors broker through an Authorized Participant who has executed an
Authorized Participant Agreement. Investors making a redemption request should be aware that such
request must be in the form specified by such Authorized Participant. Investors making a request to
redeem Creation Units should allow sufficient time to permit proper submission of the request by an
Authorized Participant and transfer of the Shares to the Trusts Transfer Agent; such investors
should allow for the additional time that may be required to effect redemptions through their
banks, brokers or other financial intermediaries if such intermediaries are not Authorized
Participants.
In connection with taking delivery of shares of Fund Securities upon redemption of Creation Units,
a redeeming shareholder or Authorized Participant acting on behalf of such Shareholder must
maintain appropriate custody arrangements with a qualified broker-dealer, bank or other custody
providers in each jurisdiction in which any of the Fund Securities are customarily traded, to which
account such Fund Securities will be delivered. Deliveries of redemption proceeds generally will be
made within three business days of the trade date.
ADDITIONAL REDEMPTION PROCEDURES. In connection with taking delivery of shares of Fund Securities
upon redemption of Creation Units, the Authorized Participant must maintain appropriate custody
arrangements with a qualified broker-dealer, bank or other custody providers in each jurisdiction
in which any of the Fund Securities are customarily traded, to which account such Fund Securities
will be delivered. Deliveries of redemption proceeds generally will be made within three business
days of the trade date. However, due to the schedule of holidays in certain countries, the
different treatment among foreign and U.S. markets of dividend record dates and dividend ex-dates
(that is the last date the holder of a security can sell the security and still receive dividends
payable on the security sold), and in certain other circumstances, the delivery of in-kind
redemption proceeds may take longer than three Business Days after the day on which the redemption
request is received in proper form. Appendix A identifies the instances where more than seven days
would be needed to deliver redemption proceeds. Pursuant to an order of the SEC, in respect of the
Fund, the Trust will make delivery of in-kind redemption proceeds within the number of days stated
in Appendix A to be the maximum number of days necessary to deliver redemption proceeds. If neither
the redeeming Shareholder nor the Authorized Participant acting on behalf of such redeeming
Shareholder has appropriate arrangements to take delivery of the Fund Securities in the applicable
foreign jurisdiction and it is not possible to make other such arrangements, or if it is not
possible to effect deliveries of the Fund Securities in such jurisdiction, the Trust may, in its
discretion, exercise its option to redeem such Shares in cash, and the redeeming Shareholders will
be required to receive its redemption proceeds in cash.
If it is not possible to make other such arrangements, or it is not possible to effect deliveries
of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Shares
in cash, and the redeeming investor will be required to receive its redemption proceeds in cash. In
addition, an investor may request a redemption in cash that the Fund may, in its sole discretion,
permit. In either case, the investor will receive a cash payment equal to the NAV of its Shares
based on the NAV of Shares of the relevant Fund next determined after the redemption request is
received in proper form (minus a redemption transaction fee and additional charge for requested
cash redemptions specified above, to offset the Trusts brokerage and other transaction
51
costs associated with the disposition of Fund Securities). A Fund may also, in its sole
discretion, upon request of a shareholder, provide such redeemer a portfolio of securities that
differs from the exact composition of the Fund Securities but does not differ in net asset value. A
Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a
portfolio of securities that differs from the exact composition of the Fund Securities but does not
differ in net asset value.
Redemptions of shares for Fund Securities will be subject to compliance with applicable federal and
state securities laws and each Fund (whether or not it otherwise permits cash redemptions) reserves
the right to redeem Creation Units for cash to the extent that the Trust could not lawfully deliver
specific Fund Securities upon redemptions or could not do so without first registering the Fund
Securities under such laws. An Authorized Participant or an investor for which it is acting subject
to a legal restriction with respect to a particular security included in the Fund Securities
applicable to the redemption of Creation Units may be paid an equivalent amount of cash. The
Authorized Participant may request the redeeming investor of the Shares to complete an order form
or to enter into agreements with respect to such matters as compensating cash payment. Further, an
Authorized Participant that is not a qualified institutional buyer, (QIB) as such term is
defined under Rule 144A of the Securities Act, will not be able to receive Fund Securities that are
restricted securities eligible for resale under Rule 144A. An Authorized Participant may be
required by the Trust to provide a written confirmation with respect to QIB status in order to
receive Fund Securities.
Because the portfolio securities of a Fund may trade on the relevant exchange(s) on days that the
Exchange is closed or are otherwise not Business Days for such Fund, shareholders may not be able
to redeem their shares of such Fund, or to purchase or sell shares of such Fund on the Exchange, on
days when the NAV of such Fund could be significantly affecting by events in the relevant foreign
markets.
The right of redemption may be suspended or the date of payment postponed with respect to a Fund
(1) for any period during which the Exchange is closed (other than customary weekend and holiday
closings); (2) for any period during which trading on the Exchange is suspended or restricted; (3)
for any period during which an emergency exists as a result of which disposal of the Shares of the
Fund or determination of the NAV of the Shares is not reasonably practicable; or (4) in such other
circumstance as is permitted by the SEC.
REQUIRED EARLY ACCEPTANCE OF ORDERS. Notwithstanding the foregoing, as described in the Participant
Agreement and/or applicable order form, the Funds may require orders to be placed up to one or more
business days prior to the trade date, as described in the Participant Agreement or the applicable
order form, in order to receive the trade dates net asset value. Orders to purchase Shares of a
Fund that are submitted on the Business Day immediately preceding a holiday or a day (other than a
weekend) that the equity markets in the relevant foreign market are closed will not be accepted.
Authorized Participants may be notified that the cut-off time for an order may be earlier on a
particular business day, as described in the Participant Agreement and the order form.
DETERMINATION OF NET ASSET VALUE
Net asset value per Share for the Funds is computed by dividing the value of the net assets of a
Fund (
i.e.
, the value of its total assets less total liabilities) by the total number of Shares
outstanding, rounded to the nearest cent. Expenses and fees, including the management fees, are
accrued daily and taken into account for purposes of determining net asset value. The net asset
value of each Fund is calculated by the Custodian and determined at the close of the regular
trading session on the NYSE (ordinarily 4:00 p.m. Eastern time) on each day that such exchange is
open, provided that fixed-income assets may be valued as of the announced closing time for trading
52
in fixed-income instruments on any day that the Securities Industry and Financial Markets
Association (SIFMA) announces an early closing time.
In calculating a Funds net asset value per Share, a Funds investments are generally valued using
market valuations. A market valuation generally means a valuation (i) obtained from an exchange, a
pricing service, or a major market maker (or dealer), (ii) based on a price quotation or other
equivalent indication of value supplied by an exchange, a pricing service, or a major market maker
(or dealer) or (iii) based on amortized cost. In the case of shares of other funds that are not
traded on an exchange, a market valuation means such funds published net asset value per share.
The Sub-Adviser may use various pricing services, or discontinue the use of any pricing
service, as approved by the Board from time to time. A price obtained from a pricing service based
on such pricing services valuation matrix may be considered a market valuation. Any assets or
liabilities denominated in currencies other than the U.S. dollar are converted into U.S. dollars at
the current market rates on the date of valuation as quoted by one or more sources.
In the event that current market valuations are not readily available or such valuations do not
reflect current market value, the Trusts procedures require the Fair Value Committee to determine
a securitys fair value if a market price is not readily available. In determining such value the
Pricing and Investment Committee may consider, among other things, (i) price comparisons among
multiple sources, (ii) a review of corporate actions and news events, and (iii) a review of
relevant financial indicators (e.g., movement in interest rates, market indices, and prices from
the Funds index providers). In these cases, a Funds net asset value may reflect certain
portfolio securities fair values rather than their market prices. Fair value pricing involves
subjective judgments and it is possible that the fair value determination for a security is
materially different than the value that could be realized upon the sale of the security. In
addition, fair value pricing could result in a difference between the prices used to calculate a
Funds net asset value and the prices used by a Funds benchmark Index. This may result in a
difference between a Funds performance and the performance of the Funds benchmark Index. With
respect to securities that are primarily listed on foreign exchanges, the value of the Funds
portfolio securities may change on days when you will not be able to purchase or sell your Shares.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the section in the
Prospectus entitled Dividends, Distributions and Taxes.
General Policies
. Dividends from net investment income, if any, are declared and paid
quarterly by the Trust. Distributions of net realized securities gains, if any, generally are
declared and paid once a year, but the Trust may make distributions on a more frequent basis for a
Fund to improve index tracking or to comply with the distribution requirements of the Code, in all
events in a manner consistent with the provisions of the 1940 Act.
Dividends and other distributions on shares are distributed, as described below, on a pro rata
basis to Beneficial Owners of such shares. Dividend payments are made through DTC Participants and
Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust.
The Trust makes additional distributions to the extent necessary (i) to distribute the entire
annual taxable income of the Trust, plus any net capital gains and (ii) to avoid imposition of the
excise tax imposed by Section 4982 of the Code. Management of the Trust reserves the right to
declare special dividends if, in its reasonable discretion, such action is necessary or advisable
to preserve the status of the Trust as a regulated investment company (RIC) or to avoid
imposition of income or excise taxes on undistributed income.
53
Dividend Reinvestment Service
. 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 individual broker-dealers may make available the DTC book-entry Dividend
Reinvestment Service for use by Beneficial Owners of a Fund through DTC Participants for
reinvestment of their dividend distributions. Investors should contact their brokers to ascertain
the availability and description of these services. Beneficial Owners should be aware that each
broker may require investors to adhere to specific procedures and timetables in order to
participate in the dividend reinvestment service and investors should ascertain from their brokers
such necessary details. If this service is available and used, dividend distributions of both
income and realized gains will be automatically reinvested in additional whole Shares issued by the
Trust of the same Fund at NAV per share. Distributions reinvested in additional shares of a Fund
will nevertheless be taxable to Beneficial Owners acquiring such additional shares to the same
extent as if such distributions had been received in cash.
FEDERAL INCOME TAXES
The following is only a summary of certain additional federal income tax considerations generally
affecting the Funds and their shareholders that are not described in the Prospectus. No attempt is
made to present a detailed explanation of the federal, state, local or foreign tax treatment of the
Funds or their shareholders, and the discussion here and in the Prospectus is not intended to be a
substitute for careful tax planning.
The following general discussion of certain federal income tax consequences is based on provisions
of the Code and the regulations issued thereunder as in effect on the date of this SAI. New
legislation, as well as administrative changes or court decisions, may significantly change the
conclusions expressed herein, and may have a retroactive effect with respect to the transactions
contemplated herein.
Shareholders are urged to consult their own tax advisers regarding the application of the
provisions of tax law described in this SAI in light of the particular tax situations of the
shareholders and regarding specific questions as to federal, state, or local taxes.
Congress passed the Regulated Investment Company Modernization Act on December 22, 2010 (the RIC
Mod Act) which makes certain beneficial changes for RICs and their shareholders, some of which are
referenced below. In general, the RIC Mod Act contains simplification provisions effective for
taxable years beginning after December 22, 2010, which are aimed at preventing disqualification of
a RIC for inadvertent failures of the asset diversification and/or qualifying income tests.
Additionally, the RIC Mod Act allows capital losses to be carried forward indefinitely and retain
the character of the original loss, exempts certain RICs from the preferential dividend rule, and
repealed the 60-day designation requirement for certain types of income and gains.
Regulated Investment Company (RIC) Status
. The Funds will seek to qualify for treatment as
a RIC under the Code. Provided that for each tax year each Fund: (i) meets the requirements to be
treated as a RIC (as discussed below); and (ii) distributes at least 90% of the Funds net
investment income for such year (including, for this purpose, the excess of net realized short-term
capital gains over net long-term capital losses), the Fund itself will not be subject to federal
income taxes to the extent the Funds net investment income and the Funds net realized capital
gains, if any, are distributed to the Funds shareholders. One of several requirements for RIC
qualification is that a Fund must receive at least 90% of the Funds gross income each year from
dividends, interest, payments with respect to securities loans, gains from the sale or other
disposition of stock, securities or foreign currencies, or other income derived with respect to the
Funds investments in stock, securities, foreign currencies and net income from an interest in a
qualified publicly traded partnership (the 90% Test). A second requirement for qualification as a
RIC is that a Fund must diversify its holdings so that, at the end of each fiscal quarter of the
Funds taxable year: (a) at least 50% of the market value of the Funds total assets is represented
54
by cash and cash items, U.S. government securities, securities of other RICs, and other securities,
with these other securities limited, in respect to any one issuer, to an amount not greater than 5%
of the value of the Funds total assets or 10% of the outstanding voting securities of such issuer;
and (b) not more than 25% of the value of its total assets are invested in the securities (other
than U.S. government securities or securities of other RICs) of any one issuer or two or more
issuers which the Fund controls and which are engaged in the same, similar, or related trades or
businesses, or the securities of one or more qualified publicly traded partnership (the Asset
Test).
If a Fund fails to satisfy the qualifying income or diversification requirements in any taxable
year, a Fund may be eligible for relief provisions if the failures are due to reasonable cause and
not willful neglect and if a penalty tax is paid with respect to each failure to satisfy the
applicable requirements. Additionally, relief is provided for certain
de minimis
failures of the
diversification requirements where a Fund corrects the failure within a specified period of time.
In the event of a failure by a Fund to qualify as a RIC, and the relief provisions are not
available, the Funds distributions, to the extent such distributions are derived from the Funds
current or accumulated earnings and profits, would constitute dividends that would be taxable to
the shareholders of the Fund as ordinary income and would be eligible for the dividends received
deduction for corporate shareholders and as qualified dividend income for individual shareholders,
subject to certain limitations. This treatment would also apply to any portion of the
distributions that might have been treated in the shareholders hands as long-term capital gains,
as discussed below, had a Fund qualified as a RIC. In addition, a Fund could be required to
recognize unrealized gains, pay substantial taxes and interest and make substantial distributions
before requalifying as a RIC. The Board reserves the right not to maintain the qualification of a
Fund as a RIC if it determines such course of action to be beneficial to shareholders. If a Fund
determines that it will not qualify as a RIC the Fund will establish procedures to reflect the
anticipated tax liability in the Funds NAV.
The RIC Mod Act provides that for taxable years beginning after December 22, 2010, a Fund may elect
to treat part or all of any qualified late year loss as if it had been incurred in the succeeding
taxable year in determining such Funds taxable income, net capital gain, net short-term capital
gain, and earnings and profits. The effect of this election is to treat any such qualified late
year loss as if it had been incurred in the succeeding taxable year in characterizing Fund
distributions for any calendar. A qualified late year loss generally includes net capital loss,
net long-term capital loss, or net short-term capital loss incurred after October 31 of the current
taxable year (commonly referred to as post-October losses) and certain other late-year losses.
The RIC Mod Act also changed the treatment of capital loss carryovers for RICs. The new rules are
similar to those that apply to capital loss carryovers of individuals are made applicable to RICs
and provide that such losses are carried over by a Fund indefinitely. Thus, if a Fund has a net
capital loss (that is, capital losses in excess of capital gains) for a taxable year beginning
after December 22, 2010, the excess of a Funds net short-term capital losses over its net
long-term capital gains is treated as a short-term capital loss arising on the first day of such
Funds next taxable year, and the excess (if any) of the Funds net long-term capital losses over
its net short-term capital gains is treated as a long-term capital loss arising on the first day of
the Funds next taxable year. Certain transition rules require post-enactment capital losses (i.e.,
capital losses incurred in taxable years beginning after December 22, 2010) to be utilized first,
which, depending on the circumstances for a Fund, may result in the expiration of unused
pre-enactment losses. In addition, the carryover of capital losses may be limited under the
general loss limitation rules if a Fund experiences an ownership change as defined in the Code.
Each Fund will generally be subject to a nondeductible 4% federal excise tax to the extent it fails
to distribute by the end of any calendar year 98% of its ordinary income for the year and 98.2% of
its capital gain net income for the one-year period ending on October 31 of that year, plus certain
other amounts. The Funds intend to
55
make sufficient distributions, or deemed distributions, to avoid imposition of the excise tax, but
can make no assurances that all such tax liability will be eliminated.
Each Fund intends to distribute substantially all its net investment income quarterly and net
realized capital gains to shareholders annually. The distribution of net investment income and net
realized capital gains will be taxable to Fund shareholders regardless of whether the shareholder
elects to receive these distributions in cash or in additional shares. All or a portion of the net
investment income distributions may be treated as qualified dividend income (which is currently
eligible for a reduced maximum rate to individuals of 15% (lower rates apply to individuals in
lower tax brackets)) to the extent that a Fund receives qualified dividend income. Qualified
dividend income is, in general, dividend income from taxable domestic corporations and certain
foreign corporations (
i.e.
, foreign corporations incorporated in a possession of the United States
or in certain countries with a comprehensive tax treaty with the United States, or the stock of
which is readily tradable on an established securities market in the United States).
In order for some portion of the dividends received by a Fund shareholder to be qualified dividend
income, the Fund must meet holding period and other requirements with respect to the dividend
paying stocks in its portfolio, and the shareholder must meet holding period and other requirements
with respect to the Funds shares. Distributions reported to Fund shareholders as long-term
capital gains shall be taxable as such (which is currently taxable to individuals at a maximum rate
of 15%), regardless of how long the shareholder has owned the shares. A Funds shareholders will
be notified annually by the Fund as to the federal tax status of all distributions made by the
Fund. Distributions may be subject to state and local taxes.
Absent further legislation, the maximum 15% tax rate (as well as the lower tax rates applicable to
individuals in lower tax brackets) on qualified dividend income and long-term capital gains will
cease to apply in taxable years beginning after December 31, 2012.
Recent legislation effective beginning in 2013 provides that U.S. individuals with income exceeding
$200,000 ($250,000 if married and filing jointly) will be subject to a new 3.8% Medicare
contribution tax on their net investment income, including interest, dividends, and capital gains
(including capital gains realized on the sale or exchange of shares of a Fund).
Shareholders who have not held Fund shares for a full year should be aware that the Funds may
designate and distribute, as ordinary income or capital gain, a percentage of income that is not
equal to the actual amount of such income earned during the period of investment in the Funds.
If a Funds distributions exceed its taxable income and capital gains realized during a taxable
year, all or a portion of the distributions made in the same taxable year may be recharacterized as
a return of capital to shareholders. A return of capital distribution will generally not be
taxable, but will reduce each shareholders cost basis in a Fund and result in a higher reported
capital gain or lower reported capital loss when those shares on which the distribution was
received are sold.
A sale or exchange of shares in the Funds may give rise to a gain or loss. In general, any gain or
loss realized upon a taxable disposition of shares will be treated as long-term capital gain or
loss if the shares have been held for more than 12 months. Otherwise, the gain or loss on the
taxable disposition of shares will be treated as short-term capital gain or loss. Any loss
realized upon a taxable disposition of shares held for six months or less will be treated as
long-term, rather than short-term, to the extent of any long-term capital gain distributions
received (or deemed received) by the shareholder with respect to the shares. All or a portion of
any loss realized upon a taxable disposition of shares will be disallowed if other substantially
identical shares of a Fund
56
are purchased (through reinvestment of dividends or otherwise) within 30 days before or after the
disposition. In such a case, the basis of the newly purchased shares will be adjusted to reflect
the disallowed loss.
Legislation passed by Congress in 2008 requires a Fund (or its administrative agent) to report to
the IRS and furnish to Fund shareholders the cost basis information for Fund shares purchased on or
after January 1, 2012, and sold on or after that date. In addition to the present law requirement
to report the gross proceeds from the sale of Fund shares, a Fund will also be required to report
the cost basis information for such shares and indicate whether these shares had a short-term or
long-term holding period. For each sale of Fund shares a Fund will permit Fund shareholders to
elect from among several IRS-accepted cost basis methods, including average cost. In the absence
of an election, a Fund will use a default cost basis method that has not yet been determined. The
cost basis method elected by a Fund shareholder (or the cost basis method applied by default) for
each sale of Fund shares may not be changed after the settlement date of each such sale of Fund
shares. Fund shareholders should consult with their tax advisors to determine the best IRS-accepted
cost basis method for their tax situation and to obtain more information about how the new cost
basis reporting law applies to them. The current law requirement to report only the gross proceeds
from the sale of Fund shares will continue to apply to all Fund shares acquired through December
31, 2011, and sold on and after that date.
An Authorized Participant who exchanges securities for Creation Units generally will recognize a
gain or a loss. The gain or loss will be equal to the difference between the market value of the
Creation Units at the time and the sum of the exchangers aggregate basis in the securities
surrendered plus the amount of cash paid for such Creation Units. A person who redeems Creation
Units will generally recognize a gain or loss equal to the difference between the exchangers basis
in the Creation Units and the sum of the aggregate market value of any securities received plus the
amount of any cash received for such Creation Units. The Internal Revenue Service, however, may
assert that a loss realized upon an exchange of securities for Creation Units cannot be deducted
currently under the rules governing wash sales, or on the basis that there has been no
significant change in economic position.
Any capital gain or loss realized upon the creation of Creation Units will generally be treated as
long-term capital gain or loss if the securities exchanged for such Creation Units have been held
for more than one year. Any capital gain or loss realized upon the redemption of Creation Units
will generally be treated as long-term capital gain or loss if the shares comprising the Creation
Units have been held for more than one year. Otherwise, such capital gains or losses will be
treated as short-term capital gains or losses.
The Trust on behalf of each Fund has the right to reject an order for a purchase of shares of the
Trust if the purchaser (or group of purchasers) would, upon obtaining the shares so ordered, own
80% or more of the outstanding shares of a given Fund and if, pursuant to Section 351 of the Code,
that Fund would have a basis in the securities different from the market value of such securities
on the date of deposit. The Trust also has the right to require information necessary to determine
beneficial share ownership for purposes of the 80% determination.
Persons purchasing or redeeming Creation Units should consult their own tax advisors with respect
to the tax treatment of any creation or redemption transaction.
Foreign Investments. Income received by a Fund from sources within foreign countries (including,
for example, dividends or interest on stock or securities of non-U.S. issuers) may be subject to
withholding and other taxes imposed by such countries. Tax treaties between such countries and the
U.S. may reduce or eliminate such taxes. If as of the end of a Funds taxable year more than 50% of
a Funds assets consist of the securities of foreign corporations, that Fund may elect to permit
shareholders to claim a credit or deduction on their income tax returns for their pro rata portions
of qualified taxes paid by that Fund during that taxable year to foreign
57
countries in respect of foreign securities the Fund has held for at least the minimum period
specified in the Code. In such a case, shareholders will include in gross income from foreign
sources their pro rata shares of such taxes. A shareholders ability to claim a foreign tax credit
or deduction in respect of foreign taxes paid by a Fund may be subject to certain limitations
imposed by the Code, which may result in the shareholder not getting a full credit or deduction for
the amount of such taxes. Shareholders who do not itemize on their federal income tax returns may
claim a credit, but not a deduction, for such foreign taxes.
Foreign Currency Transactions. Under the Code, gains or losses attributable to fluctuations in
exchange rates which occur between the time a Fund accrues income or other receivables or accrues
expenses or other liabilities denominated in a foreign currency and the time a Fund actually
collects such receivables or pays such liabilities generally are treated as ordinary income or
loss. Similarly, on the disposition of debt securities denominated in a foreign currency and on the
disposition of certain other instruments, gains or losses attributable to fluctuations in the value
of the foreign currency between the date of acquisition of the security or contract and the date of
disposition are also treated as ordinary gain or loss. The gains and losses may increase or
decrease the amount of a Funds investment company taxable income to be distributed to its
shareholders as ordinary income.
Options, Swaps and Other Complex Securities
. The Funds may invest in complex securities
such as equity options, index options, repurchase agreements, foreign currency contracts, hedges
and swaps, and futures contracts. These investments may be subject to numerous special and complex
tax rules. These rules could affect whether gains and losses recognized by a Fund are treated as
ordinary income or capital gain, accelerate the recognition of income to the Fund and/or defer the
Funds ability to recognize losses. In turn, those rules may affect the amount, timing or
character of the income distributed by a Fund. The Funds may be subject to foreign withholding
taxes on income they may earn from investing in foreign securities, which may reduce the return on
such investments.
With respect to investments in zero coupon securities which are sold at original issue discount and
thus do not make periodic cash interest payments, a Fund will be required to include as part of its
current income the imputed interest on such obligations even though the Fund has not received any
interest payments on such obligations during that period. Because each Fund distributes all of its
net investment income to its shareholders, a Fund may have to sell Fund securities to distribute
such imputed income which may occur at a time when the Advisor would not have chosen to sell such
securities and which may result in taxable gain or loss.
Back-Up Withholding
. A Fund will be required in certain cases to withhold at the
applicable withholding rate and remit to the U.S. Treasury the withheld amount of taxable dividends
paid to any shareholder who (1) fails to provide a correct taxpayer identification number certified
under penalty of perjury; (2) is subject to withholding by the Internal Revenue Service for failure
to properly report all payments of interest or dividends; (3) fails to provide a certified
statement that he or she is not subject to backup withholding; or (4) fails to provide a
certified statement that he or she is a U.S. person (including a U.S. resident alien). Backup
withholding is not an additional tax and any amounts withheld may be credited against the
shareholders ultimate U.S. tax liability.
Foreign Shareholders
. Foreign shareholders (
i.e.
, nonresident alien individuals and
foreign corporations, partnerships, trusts and estates) are generally subject to U.S. withholding
tax at the rate of 30% (or a lower tax treaty rate) on distributions derived from net investment
income and short-term capital gains. Gains from the sale or other disposition of shares of the
Fund generally are not subject to U.S. taxation, unless the recipient is an individual who either
(1) meets the Codes definition of resident alien or (2) is physically present in the U.S. for
183 days or more per year. For taxable years of a Fund beginning before January 1, 2012, a Fund
may, under certain circumstances, designate all or a portion of a dividend as an interest related
dividend or short-
58
term capital gain dividend which if received by a nonresident alien individual or foreign entity
generally would be exempt from the 30% U.S. withholding tax, provided certain other requirements
are satisfied. Different tax consequences may result if the foreign shareholder is engaged in a
trade or business within the United States. In addition, the tax consequences to a foreign
shareholder entitled to claim the benefits of a tax treaty may be different than those described
above.
For taxable years beginning after December 31, 2013, a U.S. withholding tax at a 30% rate will be
imposed on dividends and proceeds from the sale of Fund shares received by Fund shareholders who
own their shares through foreign accounts or foreign intermediaries if certain disclosure
requirements related to U.S. accounts or ownership are not satisfied.
In order for a foreign investor to qualify for an exemption from backup withholding, the foreign
investor must comply with special certification and filing requirements. Foreign investors in the
Funds should consult their tax advisors in this regard. Backup withholding is not an additional
tax. Any amounts withheld may be credited against the shareholders U.S. federal income tax
liability, provided the appropriate information is furnished to the Internal Revenue Service.
A beneficial holder of shares who is a foreign person may be subject to state and local tax and to
the U.S. federal estate tax in addition to the federal income tax consequences referred to above.
If a shareholder is eligible for the benefits of a tax treaty, any effectively connected income or
gain will generally be subject to U.S. federal income tax on a net basis only if it is also
attributable to a permanent establishment maintained by the shareholder in the United States.
Tax Shelter Reporting Regulations. Under U.S. Treasury regulations, if a shareholder recognizes a
loss of $2 million or more for an individual shareholder or $10 million or more for a corporate
shareholder, the shareholder must file with the Internal Revenue Service a disclosure statement on
Form 8886. Direct shareholders of portfolio securities are in many cases excepted from this
reporting requirement, but under current guidance shareholders of a RIC are not excepted. Future
guidance may extend the current exception from this reporting requirement to shareholders of most
or all RICs. The fact that a loss is reportable under these regulations does not affect the legal
determination of whether the taxpayers treatment of the loss is proper. Shareholders should
consult their tax advisors to determine the applicability of these regulations in light of their
individual circumstances.
Other Issues
. The Funds may be subject to tax or taxes in certain states where the Funds
do business. Furthermore, in those states which have income tax laws, the tax treatment of the
Funds and of Fund shareholders with respect to distributions by the Funds may differ from federal
tax treatment.
The foregoing discussion is based on federal tax laws and regulations which are in effect on the
date of this Statement of Additional Information. Such laws and regulations may be changed by
legislative or administrative action. Shareholders are advised to consult their tax advisors
concerning their specific situations and the application of state, local and foreign taxes.
59
Appendix A
Each Fund generally intends to effect deliveries of Creation Units and portfolio securities on a
basis of T plus three business days. Each Fund 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 the normal settlement period.
The securities delivery cycles currently practicable for transferring portfolio securities to
redeeming investors, coupled with foreign market holiday schedules, will require a delivery process
longer than seven calendar days in certain circumstances.
The holidays applicable to the 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 dates of the Regular Holidays in [calendar year 2012] are:
[To be provided]
In the [calendar year 2012], the dates of regular holidays affecting the following securities
markets present the worst-case redemption cycle for a Fund as follows:
[To be provided]
60
PART C: OTHER INFORMATION
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Item 28.
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Exhibits
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(a)(1)
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Certificate of Trust dated July 17, 2009 of Exchange Traded Concepts Trust (formerly,
FaithShares Trust) (the Trust or the Registrant) is incorporated herein by reference to
Exhibit (a)(1) of Pre-Effective Amendment No. 1 to the Registrants Registration Statement on
Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the U.S. Securities and Exchange
Commission (the SEC) via EDGAR Accession No. 0000950123-09-023575 on July 20, 2009.
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(a)(2)
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Written Instrument amending the Certificate of Trust, dated July 14, 2011, is filed
herewith.
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(a)(3)
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Registrants Agreement and Declaration of Trust dated October 13, 2009 is incorporated
herein by reference to Exhibit (a)(2) of Pre-Effective Amendment No. 3 to the Registrants
Registration Statement on Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the
SEC via EDGAR Accession No. 0000950123-09-068184 on December 4, 2009.
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(a)(4)
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Registrants Amended and Restated Declaration of Trust, to be filed by amendment.
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(b)(1)
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Registrants By-Laws dated October 20, 2009 are incorporated herein by reference to Exhibit
(b) of Pre-Effective Amendment No. 1 to the Registrants Registration Statement on Form N-1A
(File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession No.
0000950123-09-023575 on July 20, 2009.
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(b)(2)
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Registrants Amended and Restated By-Laws, to be filed by amendment.
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(c)
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Not applicable.
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(d)(1)
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Advisory Agreement between the Registrant and Exchange Traded Concepts, LLC, to be filed by
amendment.
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(d)(2)
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Sub-Advisory Agreement by and among the Registrant, Exchange Traded Concepts, LLC and Krane
Funds Adviser LLC, to be filed by amendment.
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(d)(3)
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Expense Limitation Agreement between the Registrant and Krane Funds Adviser LLC to be filed
by amendment.
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(e)(1)
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Distribution Agreement dated October 20, 2009 between the Registrant and SEI Investments
Distribution Co. is incorporated herein by reference to Exhibit (e)(1) of Pre-Effective
Amendment No. 2 to the Registrants Registration Statement on Form N-1A (File Nos. 333-156529
and 811-22263), as filed with the SEC via EDGAR Accession No. 0000950123-09-059434 on November
6, 2009.
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(e)(2)
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Amended Schedule A to the Distribution Agreement dated October 20, 2009 between
the Registrant and SEI Investments Distribution Co., to be filed by amendment.
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1
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Item 28.
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Exhibits
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(e)(3)
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Form of Authorized Participant Agreement is incorporated herein by reference to Exhibit
(e)(2) of Pre-Effective Amendment No. 2 to the Registrants Registration Statement on
Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession
No. 0000950123-09-059434 on November 6, 2009.
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(f)
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Not applicable.
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(g)
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Custodian Agreement dated September 28, 2009 between the Registrant and Brown Brothers
Harriman & Co. is incorporated herein by reference to Exhibit (g) of Pre-Effective Amendment
No. 2 to the Registrants Registration Statement on Form N-1A (File Nos. 333-156529 and
811-22263), as filed with the SEC via EDGAR Accession No. 0000950123-09-059434 on November 6,
2009.
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(h)(1)
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Administration Agreement dated October 20, 2009 between the Registrant and SEI Investments Global Funds Services to be filed by amendment.
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(h)(2)
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Transfer Agency Services Agreement dated September 28, 2009 between the Registrant and Brown
Brothers Harriman & Co. is incorporated herein by reference to Exhibit (h) of Pre-Effective
Amendment No. 2 to the Registrants Registration Statement on Form N-1A (File Nos. 333-156529
and 811-22263), as filed with the SEC via EDGAR Accession No. 0000950123-09-059434 on November
6, 2009.
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(i)
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Opinion and Consent of Counsel, Morgan, Lewis & Bockius LLP, to be filed by amendment.
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(j)
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Not applicable.
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(k)
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Not applicable.
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(l)
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Seed Capital Subscription Agreement between the Registrant and Exchange Traded Concepts, LLC
(formerly, FaithShares Advisors, LLC) is incorporated herein by reference to Exhibit (l) of
Pre-Effective Amendment No. 3 to the Registrants Registration Statement on Form N-1A (File
Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession No.
0000950123-09-068184 on December 4, 2009.
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(m)(1)
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Distribution and Service Plan, dated October 20, 2009 is incorporated herein by reference to
Exhibit (m)(1) of Pre-Effective Amendment No. 2 to the Registrants Registration Statement on
Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession No.
0000950123-09-059434 on November 6, 2009.
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(m)(2)
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Amended Exhibit A to the Distribution and Service Plan, dated October 20, 2009, to be filed
by amendment.
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(n)
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Not applicable.
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(o)
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Not applicable.
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(p)(1)
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Code of Ethics of the Registrant is incorporated herein by reference to Exhibit (p)(1) of
Pre-Effective Amendment No. 2 to the Registrants Registration Statement on Form N-1A (File
Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession No.
0000950123-09-059434 on November 6, 2009.
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2
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Item 28.
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Exhibits
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(p)(2)
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Code of Ethics of Exchange Traded Concepts, LLC (formerly, FaithShares Advisors, LLC) is
incorporated herein by reference to Exhibit (p)(2) of Pre-Effective Amendment No. 2 to the
Registrants Registration Statement on Form N-1A (File Nos. 333-156529 and 811-22263), as
filed with the SEC via EDGAR Accession No. 0000950123-09-059434 on November 6, 2009.
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(p)(3)
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Code of Ethics of Krane Funds Adviser LLC to be filed by amendment.
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(p)(4)
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Code of Ethics of SEI Investments Distribution Co. is incorporated herein by reference to
Exhibit (p)(3) of Pre-Effective Amendment No. 2 to the Registrants Registration Statement on
Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR Accession No.
0000950123-09-059434 on November 6, 2009.
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(q)(1)
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Powers of Attorney for Steven McConnell and Adrian E. Cole are incorporated herein by
reference to Exhibit (q) of Pre-Effective Amendment No. 2 to the Registrants Registration
Statement on Form N-1A (File Nos. 333-156529 and 811-22263), as filed with the SEC via EDGAR
Accession No. 0000950123-09-059434 on November 6, 2009.
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(q)(2)
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Powers of Attorney for Edward A. Kerbs and David M. Mahle are filed herewith.
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Item 29
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Persons Controlled by or under Common Control with the Fund
Not Applicable.
Item 30
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Indemnification
The Trustees shall not be responsible or liable in any event for any neglect or wrongdoing of any
officer, agent, employee, adviser or principal underwriter of the Trust, nor shall any Trustee be
responsible for the act or omission of any other Trustee, and, subject to the provisions of the
By-Laws, the Trust out of its assets may indemnify and hold harmless each and every Trustee and
officer of the Trust from and against any and all claims, demands, costs, losses, expenses, and
damages whatsoever arising out of or related to such Trustees or officers performance of his or
her duties as a Trustee or officer of the Trust; provided that nothing herein contained shall
indemnify, hold harmless or protect any Trustee or officer from or against any liability to the
Trust or any Shareholder 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.
Every note, bond, contract, instrument, certificate or undertaking and every other act or thing
whatsoever issued, executed or done by or on behalf of the Trust or the Trustees or any of them in
connection with the Trust shall be conclusively deemed to have been issued, executed or done only
in or with respect to their or his or her capacity as Trustees or Trustee, and such Trustees or
Trustee shall not be personally liable thereon.
Insofar as indemnification for liability arising under the Securities Act of 1933 (the Securities
Act) may be permitted to Trustees, officers and controlling persons of the Registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the
SEC 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 director, officer or controlling
person of the Registrant in the successful
3
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 to 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 31
.
Business and other Connections of the Investment Adviser
Exchange Traded Concepts, LLC (formerly, FaithShares Advisors, LLC) (the Adviser) serves as the
investment adviser for each series of the Trust. The principal address of the Adviser is 3555
Northwest 58th Street, Suite 410, Oklahoma City, Oklahoma 73112. Krane Funds Adviser LLC (the
Sub-Adviser) serves as investment sub-adviser for the
KraneShares China Consumer Luxury Fund, KraneShares China
Alternative Energy Fund, KraneShares China Internet Fund, KraneShares China Consumer Staples Fund,
KraneShares China Consumer Discretionary Fund, KraneShares China Five Year Plan Fund, and
KraneShares China Urbanization Fund. The principal address of the Sub-Adviser is 152
West 57th Street, 16th Floor, New York, New York 10019. The Adviser and the Sub-Adviser are investment advisers
registered with the SEC under the Investment Advisers Act of 1940.
Any other business, profession, vocation or employment of a substantial nature in which each
director or principal officer of the Adviser and Sub-Adviser is or has been, at any time during the
last two fiscal years, engaged for his or her own account or in the capacity of director, officer,
employee, partner or trustee are as follows:
Adviser
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Name and Position with
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Investment Adviser
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Name of Other Company
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Connection with Other Company
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Thompson S. Phillips, Jr.
President
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T.S. Phillips
Investments, Inc.
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President
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Phillips Capital
Advisors, Inc.
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President
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Phillips Securities
Insurance Agency, Inc.
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President
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Phillips Investment Consultants, LLC
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President
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J. Garrett Stevens
Chief Executive Officer
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T.S. Phillips
Investments, Inc.
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Vice President
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Phillips Capital
Advisors, Inc.
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Vice President
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Capitalist Asset Management, LLC
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President
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4
Sub-Adviser
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Name and Position with
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Sub-Adviser
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Name of Other Company
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Connection with Other Company
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Additional information as to any other business, profession, vocation or employment of a
substantial nature engaged in by each such officer and director is included in the Trusts
Statement of Additional Information.
Item 32
.
Principal Underwriters
(a)
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Furnish the name of each investment company (other than the Registrant) for which each
principal underwriter currently distributing the securities of the Registrant also acts as a
principal underwriter, distributor or investment adviser.
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The Registrants distributor, SEI Investments Distribution Co. (the Distributor), acts as
distributor for:
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SEI Daily Income Trust
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July 15, 1982
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SEI Liquid Asset Trust
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November 29, 1982
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SEI Tax Exempt Trust
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December 3, 1982
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SEI Institutional Managed Trust
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January 22, 1987
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SEI Institutional International Trust
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August 30, 1988
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The Advisors Inner Circle Fund
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November 14, 1991
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The Advisors Inner Circle Fund II
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January 28, 1993
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Bishop Street Funds
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January 27, 1995
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SEI Asset Allocation Trust
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April 1, 1996
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SEI Institutional Investments Trust
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June 14, 1996
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Oak Associates Funds
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February 27, 1998
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CNI Charter Funds
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April 1, 1999
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iShares Inc.
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January 28, 2000
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iShares Trust
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April 25, 2000
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Optique Funds, Inc.
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November 1, 2000
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Causeway Capital Management Trust
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September 20, 2001
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BlackRock Funds III (f/k/a Barclays Global Investors Funds)
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March 31, 2003
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SEI Opportunity Fund, LP
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October 1, 2003
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The Arbitrage Funds
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May 17, 2005
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ProShares Trust
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November 14, 2005
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Community Reinvestment Act Qualified Investment Fund
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January 8, 2007
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SEI Alpha Strategy Portfolios, LP
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June 29, 2007
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TD Asset Management USA Funds
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July 25, 2007
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SEI Structured Credit Fund, LP
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July 31, 2007
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Wilshire Mutual Funds, Inc.
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July 12, 2008
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Wilshire Variable Insurance Trust
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July 12, 2008
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Global X Funds
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October 24, 2008
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ProShares Trust II
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November 17, 2008
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Exchange Traded Concepts Trust
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August 7, 2009
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Schwab Strategic Trust
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October 12, 2009
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RiverPark Funds
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September 8, 2010
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5
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The Distributor provides numerous financial services to investment managers, pension plan
sponsors, and bank trust departments. These services include portfolio evaluation,
performance measurement and consulting services (Funds Evaluation) and automated
execution, clearing and settlement of securities transactions (MarketLink).
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(b)
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Furnish the Information required by the following table with respect to each director,
officer or partner of each principal underwriter named in the answer to Item 20 of Part B.
Unless otherwise noted, the business address of each director or officer is Oaks, PA 19456.
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Position and Office
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Positions and Offices
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Name
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with Underwriter
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with Registrant
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William M. Doran
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Director
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Edward D. Loughlin
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Director
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Wayne M. Withrow
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Director
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Kevin P. Barr
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President & Chief Executive Officer
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Maxine Chou
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Chief Financial Officer, Chief
Operations Officer, & Treasurer
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Karen E. LaTourette
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Chief Compliance Officer,
Anti-Money Laundering Officer & Assistant Secretary
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John C. Munch
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General Counsel & Secretary
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Mark J. Held
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Senior Vice President
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Lori L. White
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Vice President & Assistant Secretary
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John P. Coary
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Vice President & Assistant Secretary
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John J. Cronin
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Vice President
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Robert M. Silvestri
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Vice President
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Item 33.
Location of Accounts and Records:
State the name and address of each person maintaining principal possession of each account, book or
other document required to be maintained by section 31(a) of the 1940 Act Section 15 U.S.C.
80a-30(a) and the rules under that section.
All accounts, books, and other documents required to be maintained by Section 31(a) of the
Investment Company Act of 1940, as amended, and the rules promulgated thereunder are maintained at
the following offices:
(a)
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Registrant:
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c/o Exchange Traded Concepts Trust
3555 Northwest 58th Street, Suite 410
Okalahoma City, Oklahoma 73112
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(b)
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Adviser:
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Exchange Traded Concepts, LLC (formerly, FaithShares Advisors, LLC)
3555 Northwest 58th Street, Suite 410
Okalahoma City, Oklahoma 73112
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6
(c)
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Sub-Adviser:
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Krane Funds Adviser LLC
152 West 57th Street, 16th Floor
New York, New York 10019
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(d)
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Principal Underwriter:
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SEI Investments Distribution Co.
One Freedom Valley Drive
Oaks, Pennsylvania 19456
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(e)
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Custodian:
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Brown Brothers Harriman
40 Water Street
Boston, MA 02109
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Item 34
.
Management Services
Not Applicable.
Item 35
.
Undertakings
Not Applicable.
7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 (the Securities Act) and the
Investment Company Act of 1940, the Trust has duly caused this Post-Effective Amendment No. 2 to
Registration Statement No. 333-156529 to be signed on its behalf by the undersigned, thereto duly
authorized, in the City of Oklahoma, State of Oklahoma on this 16th day of August, 2011.
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Exchange Trade Concepts Trust
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/s/ J. Garrett Stevens
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J. Garrett Stevens
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Trustee and Chief Executive Officer
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Pursuant to the requirements of the Securities Act, this Post-Effective Amendment No. 2 has been
signed below by the following persons in the capacity and on the date indicated.
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Signature
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Title
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Date
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Trustee
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August 16, 2011
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Trustee
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August 16, 2011
|
|
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Trustee
|
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August 16, 2011
|
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Trustee
|
|
August 16, 2011
|
|
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|
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/s/ J. Garrett Stevens
J. Garrett Stevens
|
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Trustee, Chief Executive Officer
and Secretary
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August 16, 2011
|
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/s/ Thompson S. Phillips, Jr.
Thompson S. Phillips, Jr.
|
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President and Treasurer
|
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August 16, 2011
|
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*/s/ J. Garrett Stevens
J. Garrett Stevens
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*
|
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Attorney-in-Fact, pursuant to power of attorney.
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8
Exhibit Index
|
|
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Exhibit Number
|
|
Exhibit:
|
|
|
|
EX-99.A(2)
|
|
Written Instrument amending the Certificate of Trust, dated
July 14, 2011
|
|
|
|
EX-99.Q(2)
|
|
Powers of Attorney for Edward A. Kerbs and David M. Mahle
|
9