As filed with the Securities and Exchange Commission on January 27, 2006
Registration Numbers: 333-57791; 811-08837
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Post-Effective Amendment No. 11
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 14
THE SELECT SECTOR SPDR(R) TRUST
(Exact Name of Registrant as Specified in Charter)
One Lincoln Street
Boston, Massachusetts 02111
(Address of Principal Executive Offices)
Registrant's Telephone Number: (303) 623-2577
(Name and Address of Agent for Service)
Scott M. Zoltowski, Esq.
State Street Bank and Trust Company
One Lincoln Street
Boston, Massachusetts 02111
Copy to:
Stuart M. Strauss, Esq.
Clifford Chance US LLP
31 West 52nd Street,
New York, New York 10119
It is proposed that this filing will become effective:
[X] immediately upon filing pursuant to Rule 485, paragraph (b)
[ ] on _________________ pursuant to Rule 485, paragraph (b)
[ ] 60 days after filing pursuant to Rule 485, paragraph (a)(1)
[ ] on _________________ pursuant to Rule 485, paragraph (a)(1)
[ ] 75 days after filing pursuant to Rule 485, paragraph (a)(2)
[ ] on _________________ pursuant to Rule 485, paragraph (a)(2)
[ ] this post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
[SELECT SECTOR SPDR(R) TRUST LOGO]
PROSPECTUS
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
THE ENERGY SELECT SECTOR SPDR FUND
THE FINANCIAL SELECT SECTOR SPDR FUND
THE HEALTH CARE SELECT SECTOR SPDR FUND
THE INDUSTRIAL SELECT SECTOR SPDR FUND
THE MATERIALS SELECT SECTOR SPDR FUND
THE TECHNOLOGY SELECT SECTOR SPDR FUND
THE UTILITIES SELECT SECTOR SPDR FUND
JANUARY 27, 2006
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. SHARES IN EACH SELECT SECTOR SPDR FUND ARE NOT GUARANTEED OR INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT, NOR ARE SHARES DEPOSITS OR OBLIGATIONS OF ANY BANK. THE SHARES INVOLVE INVESTMENT RISKS, INCLUDING THE LOSS OF PRINCIPAL.
TABLE OF CONTENTS
BASIC INFORMATION ABOUT THE FUNDS.............................................. 3 Who Should Invest........................................................... 3 The Funds, Their Ticker Symbols and Their Investment Objective.............. 3 Principal Investment Strategies of the Funds................................ 4 Principal Risks of Investing in the Funds................................... 5 Bar Charts and Tables....................................................... 7 FEES AND EXPENSES.............................................................. 12 ADDITIONAL INVESTMENT STRATEGIES, RISKS AND OTHER CONSIDERATIONS.............................................................. 14 Additional Investment Strategies............................................ 14 Additional Risks............................................................ 14 Other Considerations........................................................ 15 MANAGEMENT..................................................................... 15 INDEX LICENSE.................................................................. 16 DETERMINATION OF NET ASSET VALUE............................................... 17 BUYING AND SELLING SELECT SECTOR SPDR FUNDS.................................... 17 CREATION AND REDEMPTION OF CREATION UNITS...................................... 17 DISTRIBUTIONS.................................................................. 19 PORTFOLIO HOLDINGS............................................................. 19 TAX MATTERS.................................................................... 19 ADDITIONAL INFORMATION CONCERNING THE ROLE OF S&P, MERRILL LYNCH AND THE AMEX.. 21 GENERAL INFORMATION............................................................ 22 FINANCIAL HIGHLIGHTS........................................................... 23 ADDITIONAL INFORMATION CONCERNING THE FUNDS.................................... 28 |
BASIC INFORMATION ABOUT THE FUNDS
The Select Sector SPDR Trust consists of nine separate investment portfolios (each a "Select Sector SPDR Fund" or a "Fund" and collectively the "Select Sector SPDR Funds" or the "Funds"). Each Select Sector SPDR Fund is an "index fund" that invests in a particular sector or group of industries represented by a specified Select Sector Index. The companies included in each Select Sector Index are selected on the basis of general industry classification from a universe of companies defined by the Standard & Poor's 500 Composite Stock Index ("S&P 500")*. The nine Select Sector Indexes (each a "Select Sector Index") upon which the Funds are based together comprise all of the companies in the S&P 500. The investment objective of each Fund is to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in a particular sector or group of industries, as represented by a specified market sector index. SSgA Funds Management, Inc. (the "Adviser") manages each Fund.
The shares of each Select Sector SPDR Fund (the "Shares") are listed on the American Stock Exchange LLC (the "AMEX"). The Shares trade on the AMEX at market prices that may differ to some degree from the Shares' net asset values. Each Select Sector SPDR Fund issues and redeems Shares on a continuous basis -- at net asset value -- only in a large, specified number of Shares called a "Creation Unit." Creation Units are issued and redeemed principally in-kind for securities included in the relevant Select Sector Index. Except when aggregated in Creation Units, the Shares are not redeemable securities of the Select Sector SPDR Funds.+
WHO SHOULD INVEST
Each Select Sector SPDR Fund is designed for investors who seek a relatively low-cost "passive" approach for investing in a portfolio of equity securities of companies in a particular sector or group of industries as represented by a specified Select Sector Index. Taken together, the Select Sector SPDR Funds are designed to represent all of the 500 stocks included in the S&P 500. Bought and sold separately, the Select Sector SPDR Funds are designed to enable investors to tailor asset allocations within the universe of S&P 500 companies to fit their particular investment needs.
Select Sector SPDR Funds may be suitable for long term investment in the market or market segment represented in the relevant Select Sector Index. Shares of each Select Sector SPDR Fund may also be used as an asset allocation tool or as a speculative trading instrument. Unlike many conventional mutual funds which are only bought and sold at closing net asset values, each Select Sector SPDR Fund's Shares have been designed to be tradable in a secondary market on the AMEX on an intraday basis and to be created and redeemed principally in-kind in Creation Units at each day's next calculated net asset value. These arrangements are designed to protect ongoing shareholders from adverse effects on the portfolio of a Select Sector SPDR Fund that could arise from frequent cash creation and redemption transactions that affect the net asset value of such Fund. Moreover, in contrast to conventional mutual funds where taxable gains can be generated on shareholder redemptions because of the need to sell portfolio securities, the in-kind redemption mechanism of the Select Sector SPDR Funds generally will not lead to a tax event for ongoing shareholders.
+ Except that under the "Dividend Reinvestment Service" described further in the Statement of Additional Information, Shares may be created in less than a Creation Unit and upon termination of a Fund, Shares may be redeemed in less than a Creation Unit.
THE FUNDS, THEIR TICKER SYMBOLS AND THEIR INVESTMENT OBJECTIVE
Each Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond to the price and yield performance of its benchmark Select Sector Index. The Funds and the Indexes are as follows:
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND (SYMBOL: XLY)
The Consumer Discretionary Select Sector Index includes companies from the following industries: automobiles and components, household durables, apparel, hotels, restaurants, leisure, media and retailing.
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND (SYMBOL: XLP)
The Consumer Staples Select Sector Index includes companies from the following industries: food and staples retailing, beverages, food products, tobacco, household products and personal products.
THE ENERGY SELECT SECTOR SPDR FUND (SYMBOL: XLE)
The Energy Select Sector Index includes companies from the following industries: oil, gas & consumable fuels and energy equipment & services.
THE FINANCIAL SELECT SECTOR SPDR FUND (SYMBOL: XLF)
The Financial Select Sector Index includes companies from the following industries: commercial banks, capital markets, diversified financial services, insurance and real estate.
THE HEALTH CARE SELECT SECTOR SPDR FUND (SYMBOL: XLV)
The Health Care Select Sector Index includes companies from the following industries: health care equipment and supplies, health care providers and services, biotechnology and pharmaceuticals.
THE INDUSTRIAL SELECT SECTOR SPDR FUND (SYMBOL: XLI)
The Industrial Select Sector Index includes companies from the following industries: aerospace and defense, building products, construction and engineering, electrical equipment, industrial conglomerates, machinery, commercial services and supplies, air freight & logistics, airlines, road & rail and transportation infrastructure.
THE MATERIALS SELECT SECTOR SPDR FUND (SYMBOL: XLB)
The Materials Select Sector Index includes companies from the following industries: chemicals, construction materials, containers and packaging, metals and mining and paper and forest products.
THE TECHNOLOGY SELECT SECTOR SPDR FUND (SYMBOL: XLK)
The Technology Select Sector Index includes companies from the following industries: internet software and services, IT services, software, communications equipment, computers and peripherals, electronic equipment and instruments, office electronics, semiconductors and semiconductor equipment, diversified telecommunication services and wireless telecommunication services.
THE UTILITIES SELECT SECTOR SPDR FUND (SYMBOL: XLU)
The Utilities Select Sector Index includes companies from the following industries: electric utilities, gas utilities, multi-utilities and independent power producers & energy traders.
PRINCIPAL INVESTMENT STRATEGIES OF THE FUNDS
Each Fund utilizes a low cost "passive" or "indexing" investment approach to attempt to approximate the investment performance of its benchmark Select Sector Index.
Each Fund generally will hold all of the securities which comprise its benchmark Select Sector Index. There may, however, be instances where the Adviser may choose to overweight another stock in the Select Sector Index, purchase securities not included within the Select Sector Index which the Adviser believes are appropriate to substitute for the Select Sector Index securities or utilize various combinations of other available investment techniques in seeking to track accurately the benchmark Select Sector Index.
Each Fund will normally invest at least 95% of its total assets in common stocks that comprise the relevant Select Sector Index. The Funds have adopted a policy that requires each Fund to provide shareholders with at least 60 days notice prior to any material change in a Fund's policy or its underlying index.
PRINCIPAL RISKS OF INVESTING IN THE FUNDS
GENERAL RISKS OF INVESTING IN INDEX FUNDS
Each of the Funds is subject to the same general risks.
Unlike many investment companies, the Funds are not actively "managed." Therefore, a Fund would not sell a stock because the stock's issuer was in financial trouble, unless that stock is removed from the Fund's benchmark Select Sector Index. An investment in a Fund involves risks similar to those of investing in any fund of equity securities traded on exchanges, such as market fluctuations caused by such factors as economic and political developments, changes in interest rates and perceived trends in stock prices. You should anticipate that the value of the Shares will decline, more or less, in correspondence with any decline in value of the Fund's applicable Select Sector Index.
The Adviser believes that over time the correlation between each Fund's performance and that of its benchmark Select Sector Index, before expenses, will be 95% or better, although there is no guarantee that such correlation will be achieved. A figure of 100% will indicate perfect correlation. The Funds' returns may not match the return of their benchmark Select Sector Indexes as a result of Fund expenses and other factors. For example, rebalancing of the Fund's securities holdings may at times be necessary to reflect changes in the composition of the relevant Select Sector Index. Rebalancing will result in transaction and other costs and could result in the realization of capital gains or losses.
You can lose money by investing in a Select Sector SPDR Fund.
RISKS SPECIFIC TO EACH SELECT SECTOR SPDR FUND
Each Fund is subject to the additional risks associated with concentrating its investments in companies in the market sector that its benchmark Select Sector Index targets. Additional Fund specific risks include:
The Consumer Discretionary Select Sector SPDR Fund. 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.
The Consumer Staples Select Sector SPDR Fund. Companies in this Select Sector Index 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.
The Energy Select Sector SPDR Fund. Energy companies in this Select Sector Index develop and produce crude oil and natural gas and provide drilling and other energy resources production and distribution related services. Stock prices for these types of companies are affected by supply and demand both for their specific product or service and for energy products in general. The price of oil and gas, exploration and production spending, government regulation, world events and economic conditions will likewise affect the performance of these companies. Correspondingly, securities of companies in the energy field are subject to swift price and supply fluctuations caused by events relating to international politics, energy conservation, the success of exploration projects, and tax and other governmental regulatory policies. Weak demand for the companies' products or services or for energy products and services in general, as well as negative developments in these other areas, would adversely impact this Select Sector SPDR Fund's performance.
The Financial Select Sector SPDR Fund. Financial services companies are subject to extensive governmental regulation which may limit both the amounts and types of loans and other financial commitments they can make, and the interest rates and fees they can charge. Profitability is largely dependent on the availability and cost of capital funds, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers can negatively impact the sector. Insurance companies may be subject to severe price competition.
The Health Care Select Sector SPDR Fund. Companies in the healthcare sector are heavily dependent on patent protection. The expiration of patents may adversely affect the profitability of the companies. Health care companies are also subject to extensive litigation based on product liability and similar claims. Many new products are subject to approval of the Food and Drug
Administration. The process of obtaining such approval can be long and costly. Health care companies are also subject to competitive forces that may make it difficult to raise prices and, in fact, may result in price discounting.
The Industrial Select Sector SPDR Fund. Stock prices for the types of companies included in this industry are affected by supply and demand both for their specific product or service and for industrial sector products in general. Government regulation, world events and economic conditions will likewise affect the performance of these companies. Transportation stocks are cyclical and have occasional sharp price movements which may result from changes in the economy, fuel prices, labor agreement and insurance costs. The Fund may also be susceptible to the same risks as the Materials Select Sector SPDR Fund.
The Materials Select Sector SPDR Fund. Many companies in this sector are significantly affected by the level and volatility of commodity prices, the exchange value of the dollar, import controls, and worldwide competition. At times, worldwide production of industrial materials has exceeded demand as a result of over-building or economic downturns, leading to poor investment returns or losses. Other risks may include liability for environmental damage, depletion of resources, and mandated expenditures for safety and pollution control. The success of equipment manufacturing and distribution companies is closely tied to overall capital spending levels, which are influenced by an individual company's profitability and broader factors such as interest rates and cross-border competition. The basic industries sector may also be affected by economic cycles, technical progress, labor relations, and government regulations.
The Technology Select Sector SPDR Fund. Products included in this Select Sector Index include software, including internet software, communications equipment, computers and peripherals, electronic equipment, office electronics and instruments and semiconductor equipment and products. The financial condition of, and investor interest in, defense companies are heavily influenced by governmental defense spending policies. Defense spending is under pressure from efforts to control the U.S. budget. Competitive pressures may have a significant effect on the financial condition of companies in the technology sector. Also, many of the products and services offered by technology companies are subject to the risk of rapid obsolescence. The Fund may also be susceptible to the same risks as the Utilities Select Sector SPDR Trust. Other risks include those related to regulatory changes such as the possible adverse effects on profits of recent increased competition among telecommunications companies and the uncertainties resulting from such companies' diversification into new domestic and international businesses, as well as agreements by any such companies linking future rate increases to inflation or other factors not directly related to the actual operating profits of the enterprise.
The Utilities Select Sector SPDR Fund. The rates that traditional regulated utility companies may charge their customers generally are subject to review and limitation by governmental regulatory commissions. Although rate changes of a utility usually fluctuate in approximate correlation with financing costs due to political and regulatory factors, rate changes ordinarily occur only following a delay after the changes in financing costs. This factor will tend to favorably affect a regulated utility company's earnings and dividends in times of decreasing costs, but conversely, will tend to adversely affect earnings and dividends when costs are rising. The value of regulated utility debt securities (and, to a lesser extent, equity securities) tends to have an inverse relationship to the movement of interest rates. Certain utility companies have experienced full or partial deregulation in recent years. These utility companies are frequently more similar to industrial companies in that they are subject to greater competition and have been permitted by regulators to diversify outside of their original geographic regions and their traditional lines of business. These opportunities may permit certain utility companies to earn more than their traditional regulated rates of return. Some companies, however, may be forced to defend their core business and may be less profitable.
Among the risks that may affect utility companies are the following: risks of increases in fuel and other operating costs; the high cost of borrowing to finance capital construction during inflationary periods; restrictions on operations and increased costs and delays associated with compliance with environmental and nuclear safety regulations; and the difficulties involved in obtaining natural gas for resale or fuel for generating electricity at reasonable prices. Other risks include those related to the construction and operation of nuclear power plants; the effects of energy conservation and the effects of regulatory changes.
BAR CHARTS AND TABLES
The bar charts and tables below provide some indication of the risks of investing in the Funds by showing the variability of the Funds' returns based on net assets and comparing Funds' performance to a broad measure of market performance. Past performance is not necessarily an indication of how the Funds will perform in the future. The after-tax returns presented below are calculated using highest historical individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns will depend on your specific tax situation and may differ from those shown below. After-tax returns are not relevant to investors who hold their Shares through tax-deferred arrangements, such as 401(k) plans or individual retirement accounts. After-tax returns may be higher than before-tax returns due to an assumed benefit from capital losses that would have been realized had Shares been sold at the end of the relevant periods.
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
[CHART]
ANNUAL
RETURN
------
Calendar Year End 1999 18.42%
Calendar Year End 2000 -16.61%
Calendar Year End 2001 13.39%
Calendar Year End 2002 -18.93%
Calendar Year End 2003 36.97%*
Calendar Year End 2004 12.92%
Calendar Year End 2005 -6.54%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 24.72% for the quarter ended December 31, 2001, and the lowest was -17.25% for the quarter ended September 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE (FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2) ------------------------------------- ----- ---- ------------ Return Before Taxes(1) -6.54% 5.85% 4.94% Return After Taxes on Distributions(1) -6.69% 5.65% 4.72% Return After Taxes on Distributions and Redemption of Creation Units(1) -4.07% 4.96% 4.17% Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58% The Consumer Discretionary Select Sector Index (reflects no deductions for fees, expenses or taxes)(3) -6.38% 6.13% 5.26% |
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
(3) Index performance from the Fund's inception to June 21, 2002 is based on the Cyclical/Transportation Select Sector Index (the predecessor to the Fund's underlying index).
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
[CHART]
ANNUAL
RETURN
------
Calendar Year End 1999 -14.70%
Calendar Year End 2000 25.74%
Calendar Year End 2001 -9.95%
Calendar Year End 2002 -19.94%
Calendar Year End 2003 10.92%*
Calendar Year End 2004 7.80%
Calendar Year End 2005 2.85%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 20.03% for the quarter ended June 30, 2000, and the lowest was -14.12% for the quarter ended June 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE (FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2) ------------------------------------- ---- ----- ------------ Return Before Taxes(1) 2.85% -2.38% -0.09% Return After Taxes on Distributions(1) 2.55% -2.77% -0.49% Return After Taxes on Distributions and Redemption of Creation Units(1) 2.23% -2.16% -0.27% Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58% The Consumer Staples Select Sector Index (reflects no deductions for fees, expenses or taxes) 3.11% -2.13% 0.17% |
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE ENERGY SELECT SECTOR SPDR FUND
[CHART]
ANNUAL
RETURN
------
Calendar Year End 1999 19.05%
Calendar Year End 2000 24.37%
Calendar Year End 2001 -18.36%
Calendar Year End 2002 -14.70%
Calendar Year End 2003 26.32%*
Calendar Year End 2004 33.41%
Calendar Year End 2005 40.24%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 20.99% for the quarter ended September 30, 2005, and the lowest was -18.92% for the quarter ended September 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE (FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2) ------------------------------------- ----- ----- ------------ Return Before Taxes(1) 40.24% 10.48% 13.21% Return After Taxes on Distributions(1) 39.97% 10.00% 12.66% Return After Taxes on Distributions and Redemption of Creation Units(1) 26.44% 8.84% 11.36% Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58% The Energy Select Sector Index (reflects no deductions for fees, expenses or taxes) 40.51% 10.82% 13.56% |
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE FINANCIAL SELECT SECTOR SPDR FUND
[CHART]
ANNUAL
RETURN
------
Calendar Year End 1999 3.40%
Calendar Year End 2000 25.42%
Calendar Year End 2001 -9.12%
Calendar Year End 2002 -14.84%
Calendar Year End 2003 30.47%*
Calendar Year End 2004 10.63%
Calendar Year End 2005 6.20%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 23.56% for the quarter ended September 30, 2000, and the lowest was -17.14% for the quarter ended September 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE (FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2) ------------------------------------- ---- ---- ------------ Return Before Taxes(1) 6.20% 3.48% 7.19% Return After Taxes on Distributions(1) 5.79% 2.99% 6.67% Return After Taxes on Distributions and Redemption of Creation Units(1) 4.45% 2.75% 6.00% Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58% The Financial Select Sector Index (reflects no deductions for fees, expenses or taxes) 6.50% 3.76% 7.46% |
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE HEALTH CARE SELECT SECTOR SPDR FUND
[CHART]
ANNUAL
RETURN
------
Calendar Year End 1999 20.07%
Calendar Year End 2000 -11.58%
Calendar Year End 2001 -0.19%
Calendar Year End 2002 -1.69%
Calendar Year End 2003 14.76%*
Calendar Year End 2004 1.46%
Calendar Year End 2005 6.45%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 15.95% for the quarter ended December 31, 1999 and the lowest was -20.25% for the quarter ended June 30, 2001.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE (FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2) ------------------------------------- ---- ---- ------------ Return Before Taxes(1) 6.45% 4.00% 4.86% Return After Taxes on Distributions(1) 6.25% 3.80% 4.67% Return After Taxes on Distributions and Redemption of Creation Units(1) 4.45% 3.37% 4.14% Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58% The Health Care Select Sector Index (reflects no deductions for fees, expenses or taxes)(3) 6.73% 4.27% 5.16% |
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
(3) Index performance from the Fund's inception to June 21, 2002 is based on the Consumer Services Select Sector Index.
THE INDUSTRIAL SELECT SECTOR SPDR FUND
(CHART)
ANNUAL
RETURN
------
Calendar Year End 1999 22.99%
Calendar Year End 2000 6.96%
Calendar Year End 2001 -10.26%
Calendar Year End 2002 -24.72%
Calendar Year End 2003 32.43%*
Calendar Year End 2004 17.45%
Calendar Year End 2005 2.77%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 19.47% for the quarter ended June 30, 1999, and the lowest was -18.41% for the quarter ended September 30, 2001.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE
(FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2)
------------------------------------- ----- ---- ------------
Return Before Taxes(1) 2.77% 1.55% 6.21%
Return After Taxes on Distributions(1) 2.52% 1.19% 5.80%
Return After Taxes on Distributions and Redemption of Creation Units(1) 2.11% 1.15% 5.18%
Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58%
The Industrial Select Sector Index (reflects no deductions for fees, expenses or taxes) 3.02% 1.84% 6.54%
|
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE MATERIALS SELECT SECTOR SPDR FUND
(CHART)
ANNUAL
RETURN
------
Calendar Year End 1999 24.27%
Calendar Year End 2000 -15.34%
Calendar Year End 2001 2.62%
Calendar Year End 2002 -5.70%
Calendar Year End 2003 37.49%*
Calendar Year End 2004 13.24%
Calendar Year End 2005 4.13%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 23.09% for the quarter ended December 31, 2003, and the lowest was -22.96% for the quarter ended September 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE
(FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2)
------------------------------------- ----- ---- ------------
Return Before Taxes(1) 4.13% 9.42% 8.01%
Return After Taxes on Distributions(1) 3.77% 8.85% 7.25%
Return After Taxes on Distributions and Redemption of Creation Units(1) 3.09% 7.90% 6.54%
Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58%
The Materials Select Sector Index (reflects no deductions for fees, expenses or taxes) 4.55% 9.84% 8.42%
|
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE TECHNOLOGY SELECT SECTOR SPDR FUND
(CHART)
ANNUAL
RETURN
------
Calendar Year End 1999 66.01%
Calendar Year End 2000 -42.20%
Calendar Year End 2001 -22.96%
Calendar Year End 2002 -38.40%
Calendar Year End 2003 38.99%*
Calendar Year End 2004 5.36%
Calendar Year End 2005 -0.25%(1)
|
During the periods shown above, the highest quarterly return for the Fund was 31.46% for the quarter ended December 31, 1999, and the lowest was -32.56% for the quarter ended December 31, 2000.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE
(FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2)
------------------------------------- ----- ---- ------------
Return Before Taxes(1) -0.25% -7.07% -4.52%
Return After Taxes on Distributions(1) -0.35% -7.18% -4.61%
Return After Taxes on Distributions and Redemption of Creation Units(1) -0.02% -5.88% -3.77%
Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58%
The Technology Select Sector Index (reflects no deductions for fees, expenses or taxes) -0.01% -6.84% -4.30%
|
(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
THE UTILITIES SELECT SECTOR SPDR FUND
(CHART)
ANNUAL
RETURN
------
Calendar Year End 1999 -3.34%
Calendar Year End 2000 22.01%
Calendar Year End 2001 -13.07%
Calendar Year End 2002 -28.10%
Calendar Year End 2003 25.74%*
Calendar Year End 2004 23.81%
Calendar Year End 2005 16.53%(1)
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During the periods shown above, the highest quarterly return for the Fund was 21.19% for the quarter ended June 30, 2003, and the lowest was -22.46% for the quarter ended September 30, 2002.
AVERAGE ANNUAL TOTAL RETURN ONE FIVE SINCE
(FOR PERIOD ENDING DECEMBER 31, 2005) YEAR YEAR INCEPTION(2)
------------------------------------- ----- ---- ------------
Return Before Taxes(1) 16.53% 2.54% 4.75%
Return After Taxes on Distribution(1) 15.97% 1.64% 3.68%
Return After Taxes on Distributions and Redemption of Creation Units(1) 11.47% 1.71% 3.48%
Standard & Poor's 500 Index (reflects no deductions for fees, expenses or taxes) 4.91% 0.54% 2.58%
The Utilities Select Sector Index (reflects no deductions for fees, expenses or taxes) 16.84% 2.86% 4.95%
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(1) Total return figures are calculated assuming the reinvested price for the December 16, 2005 income distribution is the December 30, 2005 net asset value. The actual reinvestment price is the January 31, 2006 net asset value, which was not available at the time of the above calculations. Actual total return calculations may or may not differ based on this assumption.
(2) Investment operations commenced on December 16, 1998.
FEES AND EXPENSES
The table describes the fees and expenses that you may pay if you buy and hold Shares of the Select Sector SPDR Funds.
THE
CONSUMER THE CONSUMER
DISCRETIONARY STAPLES THE ENERGY THE FINANCIAL
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND
------------- ------------- ------------- -------------
I. SHAREHOLDER TRANSACTION EXPENSES
A. CREATION TRANSACTION EXPENSES
Through the Continuous Net Settlement
System of the National Securities Clearing
Corporation ("NSCC")(a)................... $1,000 $1,000 $ 1,000 $1,000
Outside NSCC(a)........................... Up to Up to Up to Up to
$4,000 $4,000 $ 4,000 $4,000
B. REDEMPTION TRANSACTION EXPENSES.
Through NSCC(b)........................... $1,000 $1,000 $ 1,000 $1,000
Outside NSCC(b)........................... Up to Up to Up to Up to
$4,000 $4,000 $ 4,000 $4,000
II. ANNUAL FUND OPERATING EXPENSES (AS A
PERCENTAGE OF AVERAGE NET ASSETS)
Management Fees........................ 0.05% 0.05% 0.05% 0.05%
12b-1 Fees(c).......................... 0.07% 0.07% 0.07% 0.07%
Other Operating Expenses(d)............ 0.14% 0.14% 0.13% 0.14%
Total Annual Fund Operating Expenses... 0.26% 0.26% 0.25% 0.26%
Less Waivers(d)........................ 0.01% 0.01% 0.01% 0.01%
NET EXPENSES................................. 0.25% 0.25% 0.24% 0.25%
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THE THE
THE HEALTH CARE INDUSTRIAL THE MATERIALS TECHNOLOGY THE UTILITIES
SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR SELECT SECTOR
SPDR FUND SPDR FUND SPDR FUND SPDR FUND SPDR FUND
--------------- -------------- ------------- ------------- -------------
I. SHAREHOLDER TRANSACTION
EXPENSES
A. CREATION TRANSACTION
EXPENSES
Through the Continuous Net
Settlement System of the
National Securities
Clearing Corporation
("NSCC")(a) ............... $1,000 $1,000 $1,000 $1,000 $1,000
Outside NSCC(a) ........... Up to Up to Up to Up to Up to
$4,000 $4,000 $4,000 $4,000 $4,000
B. REDEMPTION TRANSACTION
EXPENSES.
Through NSCC(b) .............. $1,000 $1,000 $1,000 $1,000 $1,000
Outside NSCC(b) .............. Up to Up to Up to Up to Up to
$4,000 $4,000 $4,000 $4,000 $4,000
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II. ANNUAL FUND OPERATING
EXPENSES (AS A
PERCENTAGE OF AVERAGE
NET ASSETS)
Management Fees ........ 0.05% 0.05% 0.05% 0.05% 0.05%
12b-1 Fees(c) .......... 0.07% 0.07% 0.07% 0.07% 0.07%
Other Operating
Expenses(d) ......... 0.13% 0.13% 0.14% 0.14% 0.14%
Total Annual Fund
Operating Expenses ..... 0.25% 0.25% 0.26% 0.26% 0.26%
Less Waivers(d)......... 0.01% 0.01% 0.01% 0.01% 0.01%
NET EXPENSES ................. 0.24% 0.24% 0.25% 0.25% 0.25%
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(b) The redemption transaction fee is the same regardless of the number of Creation Units being redeemed pursuant to any one redemption order. One Creation Unit consists of 50,000 Shares.
(c) The Trust's Board of Trustees has voted to limit payments under each Fund's 12b-1 plan to 0.07% of its average daily nets assets although payments up to 0.25% are authorized.
(d) The other operating expenses include, among other expenses, a "unitary" fee. The "unitary" fee is paid by each Select Sector SPDR Fund to State Street Bank and Trust Company ("State Street") for the administration, custody and transfer agency services it provides to the Funds. Pursuant to a contractual fee waiver, State Street has agreed to reduce the Unitary Fee from 0.07% for the first $4.5 billion of net assets of the Trust, 0.05% for the next $4.5 billion of net assets of the Trust, 0.03% for the next $3.5 billion of net assets of the Trust, and 0.015% thereafter of average daily net assets to 0.065% for the first $4.5 billion of net assets of the Trust, 0.045% for the next $4.5 billion of net assets of the Trust, 0.025% for the next $3.5 billion of net assets of the Trust, and 0.01% thereafter of average daily net assets. The foregoing reductions will remain in effect for at least a 12-month period ending January 31, 2007. There is no assurance that the reductions will remain in effect for more than one year.
EXAMPLES OF EXPENSES
Each Select Sector SPDR Fund sells and redeems Shares in Creation Units principally on an in-kind basis for portfolio securities of the relevant Select Sector Index. SHARES IN LESS THAN CREATION UNIT AGGREGATIONS ARE NOT REDEEMABLE. An investor purchasing a Creation Unit on an in-kind basis would pay the following expenses on a $10,000 investment (payment with a deposit of securities included in the relevant Select Sector Index), assuming a 5% annual return and that the Funds' operating expenses remain the same. INVESTORS SHOULD NOTE THAT THE PRESENTATION BELOW OF A $10,000 INVESTMENT IN A CREATION UNIT IS FOR ILLUSTRATION PURPOSES ONLY, AS SHARES WILL BE ISSUED BY THE SELECT SECTOR SPDR FUNDS ONLY IN CREATION UNITS. FURTHER, THE RETURN OF 5% AND ESTIMATED EXPENSES ARE FOR ILLUSTRATION PURPOSES ONLY AND SHOULD NOT BE CONSIDERED INDICATIONS OF EXPECTED SELECT SECTOR SPDR FUND EXPENSES OR PERFORMANCE, WHICH MAY BE GREATER OR LESSER THAN THE ESTIMATES.
An investor would pay the following expenses, assuming no redemptions:
1 3 5 10
YEAR YEARS YEARS YEARS
---- ----- ----- -----
($) ($) ($) ($)
The Consumer Discretionary Select Sector SPDR Fund.. 26 81 141 320
The Consumer Staples Select Sector SPDR Fund........ 26 81 141 320
The Energy Select Sector SPDR Fund.................. 25 77 136 307
The Financial Select Sector SPDR Fund............... 26 81 141 320
The Health Care Select Sector SPDR Fund............. 25 77 136 307
The Industrial Select Sector SPDR Fund.............. 25 77 136 307
The Materials Select Sector SPDR Fund............... 26 81 141 320
The Technology Select Sector SPDR Fund.............. 26 81 141 320
The Utilities Select Sector SPDR Fund............... 26 81 141 320
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ADDITIONAL INVESTMENT STRATEGIES,
RISKS AND OTHER CONSIDERATIONS
ADDITIONAL INVESTMENT STRATEGIES
Each Select Sector SPDR Fund may invest its remaining assets in money market instruments including repurchase agreements or funds which invest exclusively in money market instruments (subject to applicable limitations under the 1940 Act), in convertible securities, structured notes (notes on which the amount of principal repayment and interest payments are based on the movement of one or more specified factors such as the movement of a particular stock or stock index) and in options and futures contracts. Options and futures contracts (and convertible securities and structured notes) may be used by a Fund in seeking performance that corresponds to its benchmark Select Sector Index and in managing cash flows. The Funds will not invest in money market instruments as part of a temporary defensive strategy to protect against potential stock market declines. The Adviser anticipates that it will take approximately three business days for additions and deletions to the S&P 500 to be reflected in the portfolio composition of each Fund.
Lending Securities. Each Select Sector SPDR Fund may lend securities from its holdings to brokers, dealers and other financial institutions desiring to borrow securities to complete transactions and for other purposes.
Borrowing Money. Each Select Sector SPDR Fund may borrow money from a bank up to a limit of 10% of the value of its assets, but only for temporary or emergency purposes.
ADDITIONAL RISKS
Lack of Diversification. The Select Sector SPDR Funds are non-diversified and, as a result, may have greater exposure to volatility than other funds. Because a non-diversified fund may invest a larger percentage of its assets in securities of a single company or a single industry than diversified funds, the performance of that company or industry can have a substantial impact on a Select Sector SPDR Fund's share price. Each Select Sector SPDR intends to maintain the required level of diversification so as to qualify as a "regulated investment company" for purposes of the Internal Revenue Code, in order to avoid liability for federal income tax to the extent that its earnings are distributed to shareholders. Compliance with diversification requirements of the Internal Revenue Code could limit the investment flexibility of each Fund.
The stocks of particular issuers, or of issuers in particular industries, may represent a large portion of a Select Sector Index. Consequently, a Select Sector SPDR Fund may be more adversely affected by the performance of one security (or group of securities) and be subject to greater price volatility than a more diversified investment company. Also, a Select Sector SPDR Fund may be more susceptible to any single economic, political or regulatory occurrence than the securities holdings of an investment company that is more broadly diversified than the Select Sector SPDR Fund.
Trading Issues. Trading in Shares on the AMEX may be halted due to market conditions or for reasons that, in the view of the AMEX, make trading in Shares inadvisable. In addition, trading in Shares on the AMEX is subject to trading halts caused by extraordinary market volatility pursuant to AMEX "circuit breaker" rules. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of a Select Sector SPDR Fund will continue to be met or will remain unchanged.
Fluctuation of Net Asset Value. The net asset value of the Shares will fluctuate with changes in the market value of a Select Sector SPDR Fund's securities holdings. The market prices of Shares will fluctuate in accordance with changes in net asset value and supply and demand on the AMEX. The Adviser cannot predict whether Shares will trade below, at or above their net asset value. 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 stocks of the Select Sector Index trading individually or in the aggregate at any point in time. 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 net asset value), the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained.
Lending of Securities. Although each Select Sector SPDR Fund that may lend its portfolio securities will receive collateral in connection with all loans of its securities holdings, a Select Sector SPDR Fund would be exposed to a risk of loss should a borrower default on its obligation to return the borrowed securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Fund). In addition, a Select Sector SPDR Fund will bear the risk of loss of any cash collateral that it invests.
Leverage. To the extent that a Select Sector SPDR Fund borrows money, it may be leveraged. Leveraging generally exaggerates the effect on net asset value of any increase or decrease in the market value of a Select Sector SPDR Fund's portfolio securities.
OTHER CONSIDERATIONS
CONSTRUCTION AND MAINTENANCE STANDARDS FOR THE SELECT SECTOR INDEXES
Each Select Sector Index is developed and maintained in accordance with the following criteria:
- Each of the component securities in a Select Sector Index is a constituent company of the S&P 500.
- Each stock in the S&P 500 is allocated to one and only one of the Select Sector Indexes.
- The Index Compilation Agent, Merrill Lynch Pierce Fenner & Smith,
assigns each constituent stock of the S&P 500 to a Select Sector
Index. The Index Compilation Agent, after consultation with S&P,
assigns a company's stock to a particular Select Sector Index on the
basis of such company's sales and earnings composition and the
sensitivity of the company's stock price and business results to the
common factors that affect other companies in each Select Sector
Index. S&P has sole control over the removal of stocks from the S&P
500 and the selection of replacement stocks to be added to the S&P
500. However, S&P plays only a consulting role in the Select Sector
Index assignment of the S&P 500 component stocks, which is the sole
responsibility of the Index Compilation Agent.
- Each Select Sector Index is calculated by the AMEX's Index Services Group using a modified "market capitalization" methodology. This design ensures that each of the component stocks within a Select Sector Index is represented in a proportion consistent with its percentage with respect to the total market capitalization of such Select Sector Index. Under certain conditions, however, the number of shares of a component stock within the Select Sector Index may be adjusted to conform to Internal Revenue Code requirements. See "Construction and Maintenance Standards for the Select Sector Indexes" under "GENERAL DESCRIPTION OF THE TRUST" in the Statement of Additional Information.
MANAGEMENT
Adviser. SSgA Funds Management, Inc. serves as the Adviser to the Trust and, subject to the supervision of the Board of Trustees, is responsible for the investment management of the Select Sector SPDR Funds. The Adviser, parts of State Street Bank and Trust Company ("State Street") and other affiliates of State Street make up State Street Global Advisors ("SSgA"), the investment management arm of State Street Corporation. As of December 31, 2005, the Adviser managed approximately $96.7 billion in assets. As of December 31, 2005, SSgA managed approximately $1.4 trillion in assets, including approximately $578 billion in equity index funds. The Adviser's principal business address is State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111.
For the services provided to the Select Sector SPDR Funds under the Investment Advisory Agreement, each Fund pays the Adviser monthly fees based on a percentage of each Fund's average daily net assets at the annual rate of 0.05% for the first $12.5 billion of average daily net assets of the Trust and 0.04% thereafter. From time to time, the Adviser may waive all or a portion of its fee.
A discussion regarding the Board of Trustees' consideration of the Investment Advisory Agreement will appear in the Trust's Semi-Annual report to shareholders for the period ended March 31, 2006 which will be available on or about May 31, 2006. For a discussion regarding the Board of Trustees' consideration of the previous year's Investment Advisory Agreement, please see the Trust's Semi-Annual Report for the period ended March 31, 2005. It is available by contacting the Trust's distributor at (800) 843-2639.
Portfolio Managers. The Adviser manages the Select Sector Funds using a team of investment professionals. The team approach is used to create an environment that encourages the flow of investment ideas. The portfolio managers within each team work together in a cohesive manner to develop and enhance techniques that drive the investment process for the respective investment strategy. This approach requires portfolio managers to share a variety of responsibilities including investment strategy and analysis while retaining responsibility for the implementation of the strategy within any particular portfolio. The approach also enables the team to draw upon the resources of other groups within SSgA. Each portfolio management team is overseen by the SSgA Investment Committee.
Key professionals primarily involved in the day-to-day portfolio management for each Select Sector Fund include Michael Feehily and John Tucker.
Mr. Feehily, CFA, is a Principal of SSgA and the Adviser. He joined the firm in 1992 and is head of the U.S. Equity Team within the Global Structured Products Team. Mr. Feehily is responsible for overseeing the management of all U.S. equity index funds for SSgA. Mr. Feehily holds a Bachelor of Science degree in Finance, Investments, and Economics from Babson College and an MBA in Finance from Bentley College. He is a member of the Boston Security Analysts Society.
Mr. Tucker, CFA, is a Principal of SSgA and the Adviser. He joined the firm in 1988 and is the Unit Head for the firm's Exchange Traded Funds Management Team. Mr. Tucker received a BA in Economics from Trinity College and an MS in Finance from Boston College. He is a member of the Boston Security Analysts Society.
Additional information about the portfolio managers' compensation, other accounts managed by the portfolio managers, and the portfolio managers' ownership of securities in the Funds is available in the Statement of Additional Information.
Administrator, Custodian, and Transfer Agent. State Street Bank and Trust Company ("State Street"), an affiliate of State Street Corporation and the Adviser, is the Administrator for each Select Sector SPDR Fund, the Custodian of each Select Sector SPDR Fund's assets, and serves as the Transfer Agent to the Select Sector SPDR Funds. State Street is paid a "unitary fee" for these services. The unitary fee is a sliding scale fee calculated as follows: (i) 0.07% of average daily net assets of the Trust up to the first $4.5 billion of net assets; (ii) 0.05% of average daily net assets up to the next $4.5 billion of net assets of the Trust; (iii) 0.03% of average daily net assets of the next $3.5 billion of net assets of the Trust; and (iv) 0.015% of average daily net assets on the remainder of net assets. Each Select Sector SPDR Fund will also bear all other expenses of its operation. Pursuant to a contractual fee waiver, State Street has agreed to reduce the Unitary Fee to 0.065% for the first $4.5 billion of net assets of the Trust, 0.045% for the next $4.5 billion of net assets of the trust, 0.025% for the next $3.5 billion of net assets of the Trust and 0.01% thereafter of average daily net assets, at least until January 31, 2007. There is no assurance that the waiver will remain in effect for more than one year.
Lending Agent. State Street has been designated as the lending agent for the Trust. In such capacity, it causes the delivery of loaned securities from each Select Sector SPDR Fund to borrowers, arranges for the return of loaned securities to the Select Sector SPDR Fund at the termination of the loans, requests deposit of collateral, monitors daily the 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. For its services, the lending agent typically receives a portion of the net investment income, if any, earned on the collateral for the securities loaned.
Distributor. ALPS Distributors, Inc. is the Distributor of each Select Sector SPDR Fund's Shares. The Distributor will not distribute Shares in less than Creation Units, and it does not maintain a secondary market in the Shares. The Distributor may enter into selected dealer agreements with other broker-dealers or other qualified financial institutions for the sale of Creation Units of Shares.
The Board of Trustees of the Trust has adopted for each Select Sector SPDR Fund a distribution plan pursuant to Rule 12b-1 under the 1940 Act. In accordance with its Rule 12b-1 plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets per annum for certain distribution related activities. Each Fund has limited its 12b-1 fee to 0.07% of its average daily net assets at least through January 31, 2007. Because these fees are paid out of each Fund's assets, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
INDEX LICENSE
The Trust pays an annual licensing fee to (i) S&P equal to the greater of
0.03% of the aggregate net assets of the Trust or $450,000 (the "S&P Fee"), and
(ii) Merrill Lynch equal to 0.03% of the aggregate net assets of the Trust. The
S&P Fee is payable in full on each anniversary of the first day of trading,
December 22, 1998. The fee to Merrill Lynch is payable on a quarterly basis.
Each Select Sector SPDR Fund will pay its proportionate share of the fees based
on the relative net assets of such Fund.
DETERMINATION OF NET ASSET VALUE
Net asset value per Share for each Select Sector SPDR Fund is computed by dividing the value of the net assets of such Select Sector SPDR Fund (i.e., the value of its total assets less total liabilities) by its total number of Shares outstanding. Expenses and fees, including the management, administration and distribution fees, are accrued daily and taken into account for purposes of determining net asset value. The net asset value of each Select Sector SPDR Fund is calculated by the Custodian and determined each business day at the close of regular trading of the New York Stock Exchange ("NYSE") (ordinarily 4:00 p.m. New York time).
In computing a Select Sector SPDR Fund's net asset value per Share, the Select Sector SPDR Fund's securities holdings, except for those traded on the NASDAQ, are valued based on their last sale price. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities traded on the NASDAQ are valued at the NASDAQ official close price. If no closing sale price or official close price is available, the security is valued at the previous closing sale price or previous official close price, as the case may be. Other portfolio securities and assets for which market quotations are not readily available are valued based on fair value as determined in good faith by the Pricing and Investment Committee in accordance with procedures adopted by the Board of Trustees. In these cases, a Select Sector SPDR Fund's 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.
BUYING AND SELLING SELECT SECTOR SPDR FUNDS
The Select Sector SPDR Fund Shares are listed for secondary trading on the AMEX. If you buy or sell Select Sector SPDR Fund Shares in the secondary market, you will 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 Select Sector SPDR Fund Shares will trade on the AMEX at prices that may differ to varying degrees from the daily net asset values of the Shares. Given, however, that Select Sector SPDR Fund Shares can be issued and redeemed in Creation Units, the Adviser believes that large discounts and premiums to net asset value should not be sustained for very long.
The Funds impose no restrictions on the frequency of purchases and redemptions. The Board of Trustees evaluated the risks of market timing activities by the Funds' shareholders when they considered that no restriction or policy was necessary. The Board considered that, unlike traditional mutual funds, each Select Sector SPDR Fund issues and redeems its shares at net asset value per share for a basket of securities intended to mirror a Fund's portfolio, plus a small amount of cash, and a Fund's shares may be purchased and sold on the exchange at prevailing market prices. Given this structure, the Board determined that it is unlikely that (a) market timing would be attempted by the Funds' shareholders or (b) any attempts to market time the Funds by shareholders would result in negative impact to the Funds or their shareholders.
CREATION AND REDEMPTION OF CREATION UNITS
Except for the purpose of dividend reinvestment, each Select Sector SPDR Fund issues Shares (through the Distributor) and redeems Shares (through the Transfer Agent) only in Creation Units (50,000 Shares per Creation Unit) at their net asset value on a continuous basis. Set forth below is a brief description of the procedures applicable to creation and redemption of Creation Units. For more detailed information, see "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional Information.
Creation
In order to create (i.e., purchase) Creation Units of a Select Sector SPDR Fund, an investor must deposit a designated portfolio of equity securities constituting a substantial replication, or a representation, of the stocks included in the relevant Select Sector SPDR Fund's Select Sector Index (the "Deposit Securities") and generally make a small cash payment referred to as the "Cash Component." For those Authorized Participants that are not eligible for trading a Deposit Security, custom orders are available. The list of the names and the number of shares of the Deposit Securities are made available by the Custodian through the facilities of the NSCC immediately prior to the opening of business on the AMEX. The Cash Component represents the difference between the net asset value of a Creation Unit and the market value of the Deposit Securities, and includes the Dividend Equivalent Payment. In the case of custom orders, cash-in-lieu may be added to the Cash Component to replace any Deposit Securities that the Authorized Participant may not be eligible to trade. The Dividend Equivalent Payment is an amount intended to enable a Select Sector SPDR Fund to make a distribution of dividends on the next dividend payment date as if all the portfolio securities of the Fund had been held for the entire dividend period. See the Statement of Additional Information for a description as to the manner in which the Dividend Equivalent Payment is calculated.
Orders must be placed in proper form by or through either (i) a "Participating Party", i.e., a broker-dealer or other participant in the clearing process of the Continuous Net Settlement System of the NSCC (the "Clearing Process"); or (ii) a DTC Participant, that, in either case, has entered into an agreement with the Trust, the Distributor and the Transfer Agent, with respect to creations and redemptions of Creation Units ("Participant Agreement"). Investors should contact the Distributor for the names of Participating Parties and/or DTC Participants that have signed a Participant Agreement. All standard orders must be placed for one or more whole Creation Units of Shares of a Select Sector SPDR Fund and must be received by the Distributor in proper form no later than the close
of regular trading on the NYSE (ordinarily 4:00 p.m., New York time) ("Closing Time") in order to receive that day's closing net asset value per Share. All custom orders must be placed for one or more whole Creation Units of Shares of a Select Sector SPDR Fund and must be received by the Distributor in proper form no later than one hour prior to Closing Time in order to receive that day's closing net asset value per Share.
Orders may be effected through the Clearing Process or outside the Clearing Process. A standard order to create Creation Units through the Clearing Process (through a Participating Party), or outside the Clearing Process (through a DTC Participant), is considered received by the Distributor on the date transmitted if the order is received by the Distributor no later than the Closing Time on such date and all other procedures set forth in the Participant Agreement are followed. A custom order to create Creation Units through the Clearing Process (through a Participating Party), or outside the Clearing Process (through a DTC Participant), is considered received by the Distributor on the date transmitted if the order is received by the Distributor no later than one hour prior to Closing Time on such date and all other procedures set forth in the Participant Agreement are followed. However, in the case of orders effected outside the Clearing Process, if the Custodian does not receive the requisite Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., New York time, respectively, on the next business day immediately following the transmittal date, the order will be canceled. Any order may be rejected under certain limited circumstances which are specified in the Statement of Additional Information.
A fixed transaction fee of $1,000 is applicable to each creation transaction regardless of the number of Creation Units created in the transaction. An additional charge of up to three (3) times the fixed transaction fee (for a total charge of up to $4,000) may be imposed with respect to transactions effected outside the Clearing Process (through a DTC Participant) and in the limited circumstances specified in the Statement of Additional Information in which any cash can be used in lieu of Deposit Securities to create Creation Units. 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 115% of the market value of the missing Deposit Securities. Any such transaction effected must be effected outside the Clearing Process. See "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional Information.
Legal Restrictions on Transactions in Certain Stocks. An investor subject to a legal restriction with respect to a particular stock required to be deposited in connection with the creation of a Creation Unit may, at the Fund's discretion, be permitted to deposit an equivalent amount of cash in substitution for any stock which would otherwise be included in the Deposit Securities applicable to the creation of a Creation Unit. See "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional Information for information on other situations where cash may be substituted for stock(s).
Redemption
Shares may be redeemed only in Creation Units at their net asset value and only on a day the NYSE is open for business. The Custodian makes available immediately prior to the opening of business on the AMEX, through the facilities of the NSCC, the list of the names and the number of Shares of each Select Sector SPDR Fund's portfolio securities that will be applicable that day to redemption requests in proper form ("Fund Securities"). Fund Securities received on redemption may not be identical to Deposit Securities which are applicable to creations of Creation Units. Unless cash redemptions are available or specified for a particular Select Sector SPDR Fund, the redemption proceeds consist of the Fund Securities, plus cash in an amount equal to the difference between the net asset value of the Shares being redeemed as next determined after receipt by the Transfer Agent of a redemption request in proper form, and the value of the Fund Securities (the "Cash Redemption Amount"), less the applicable redemption fee. Should the Fund Securities have a value greater than the net asset value of the Shares, a compensating cash payment to the Trust equal to the differential will be required to be arranged for by or on behalf of the redeeming shareholder by the Participating Party or DTC Participant, as the case may be. For more detail, see "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional Information.
Orders to redeem Creation Units of a Select Sector SPDR Fund may only be effected by or through a Participating Party (with respect to redemptions through the Clearing Process) or a DTC Participant (with respect to redemptions outside the Clearing Process). An order to redeem through the Clearing Process is deemed received on the date of transmittal if such order is received by the Transfer Agent prior to the Closing Time, or one hour prior to Closing Time in the case of custom orders, on the date of transmittal and all other procedures set forth in the Participant Agreement are properly followed. An order to redeem outside the Clearing Process is considered received by the Transfer Agent on the date of transmittal if: (i) such order is received by the Transfer Agent no later than the Closing Time, or one hour prior to Closing Time in the case of custom orders, on the transmittal date; (ii) such order is accompanied or proceeded by the requisite number of Shares and the cash redemption amount (if applicable) specified in the order, which delivery must be made through DTC to the Custodian no later than 11:00 a.m. and 2:00 p.m., New York time, respectively, on the next business day after the transmittal date; and (iii) all other procedures set forth in the Participant Agreement are followed.
A fixed transaction fee of $1,000 is applicable to each redemption transaction regardless of the number of Creation Units redeemed in the transaction. An additional charge of up to three (3) times the fixed transaction fee (for a total charge of up to $4,000) may be charged with respect to transactions effected outside the Clearing Process and in the limited circumstances specified in the Statement of Additional Information in which any cash may be used in lieu of securities to redeem Creation Units.
Legal Restrictions on Transactions in Certain Stocks. An investor subject to a legal restriction with respect to a particular stock included in the Fund Securities applicable to the redemption of a Creation Unit may, at the Fund's discretion, be paid an equivalent amount of cash. See "CREATION AND REDEMPTION OF CREATION UNITS" in the Statement of Additional Information for information on other situations where cash may be substituted for stock(s).
DISTRIBUTIONS
Dividends and Capital Gains. As a Select Sector SPDR Fund shareholder, you are entitled to your share of the Fund's income and net realized gains on its investments. Each Select Sector SPDR Fund pays out substantially all of its net earnings to its shareholders as "distributions."
Each Select Sector SPDR Fund typically earns income dividends from stocks and interest from debt securities. These amounts, net of expenses, are passed along to Fund shareholders as "income dividend distributions." Each Select Sector SPDR Fund realizes capital gains or losses whenever it sells securities. Net long-term capital gains are distributed to shareholders as "capital gain distributions."
Income dividends, if any, are distributed to shareholders quarterly. Net capital gains are distributed at least annually. Dividends may be declared and paid more frequently to improve Select Sector Index tracking or to comply with the distribution requirements of the Internal Revenue Code. In addition, each Select Sector SPDR Fund intends to distribute at least annually amounts representing the full dividend yield net of expenses on the underlying investment securities as if the Select Sector SPDR Fund owned the underlying investment securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital. You will be notified regarding the portion of the distribution which represents a return of capital.
Distributions in cash may be reinvested automatically in additional whole Shares only if the broker through which you purchased Shares makes such option available.
PORTFOLIO HOLDINGS
A description of the Trust's policies and procedures with respect to the disclosure of each of the Select Sector SPDR Funds' portfolio securities is available in the Trust's Statement of Additional Information.
TAX MATTERS
As with any investment, you should consider how your Select Sector SPDR Fund investment will be taxed. The tax information in this Prospectus is provided as general information. You should consult your own tax professional about the tax consequences of an investment in a Select Sector SPDR Fund.
Unless your investment in a Select Sector SPDR Fund is through a tax- exempt entity or tax-deferred retirement account, such as a 401(k) plan, you need to be aware of the possible tax consequences when:
- The Select Sector SPDR Fund makes distributions,
- You sell Shares listed on the AMEX, and
- You create or redeem Creation Units.
Taxes on Distributions. Each Select Sector SPDR Fund will distribute any net investment income quarterly, and any net realized long-term or short-term capital gains annually. Each Select Sector SPDR Fund may also pay a special distribution at the end of the calendar year to comply with federal tax requirements. In general, your distributions are subject to federal income tax when they are paid, whether you take them in cash or reinvest them in a Select Sector SPDR Fund. Dividends paid out of a Select Sector SPDR Fund's income and net short-term gains, if any, are taxable as ordinary income to the extent of the Fund's current and accumulated
earnings and profits. Distributions of net long-term capital gains, if any, in excess of net short-term capital losses are taxable as long-term capital gains, regardless of how long you have held the Shares. Under the provisions of the Jobs Growth Tax Relief Reconciliation Act of 2003, some ordinary dividends paid to individual shareholders may qualify for taxation at a lower tax rate applicable to long-term capital gains.
Distributions in excess of a Select Sector SPDR Fund's current and accumulated earnings and profits are treated as a tax-free return of capital to the extent of your basis in the Shares, and as capital gain thereafter. A distribution will reduce a Select Sector SPDR Fund's net asset value per Share and may be taxable to you as ordinary income or capital gain even though, from an investment standpoint, the distribution may constitute a return of capital.
If you are not a citizen or permanent resident of the United States, each Select Sector SPDR Fund's ordinary income dividends (which include distributions of net short-term capital gains) 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 carried on through a permanent establishment in the United States. The Fund may, under certain circumstances, designate all or a portion of a dividend as an "interest-related dividend" that if received by a nonresident alien or foreign entity generally would be exempt from the 30% U.S. withholding tax, provided that certain other requirements are met. The Fund may also, under certain circumstances, designate all or a portion of a dividend as a "short-term capital gain dividend" which if received by a nonresident alien or foreign entity generally would be exempt from the 30% U.S. withholding tax, unless the foreign person is a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year. In addition, distributions of the Fund attributable to gains from sales or exchanges of "U.S. real property interests," as defined in the Code and Treasury Regulations (including gains on the sale or exchange of shares in certain U.S. real property holding corporations, which may include certain REITs, and certain REIT capital gain dividends) will generally cause the foreign stockholder to be treated as recognizing such gain as income effectively connected to a trade or business within the United States, generally subject to tax at the same rates applicable to U.S. stockholders. Also, such gain may be subject to a 30% branch profits tax in the hands of a foreign stockholder that is a corporation. Such distributions may be subject to U.S. withholding tax and may give rise to an obligation on the part of the foreign stockholder to file a U.S. federal income tax return. The provisions contained in the legislation relating to dividends to foreign persons would apply to dividends with respect to taxable years of the Fund beginning after December 31, 2004 and before January 1, 2008. Prospective investors are urged to consult their tax advisors regarding the specific tax consequences relating to the proposed legislation.
Dividends and interest received by each Select Sector SPDR Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
By law, your Select Sector SPDR Fund must withhold a percentage of your distributions and proceeds if you have not provided a taxpayer identification number or social security number. The backup withholding rate for individuals is currently 28%.
Taxes on AMEX-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.
Taxes on Creations and Redemptions of Creation Units. A person who exchanges equity securities for Creation Units generally will recognize a gain or loss. The gain or loss will be equal to the difference between the market value of the Creation Units at the time and the exchanger's aggregate tax basis in the securities surrendered and the Cash Component paid. A person who exchanges Creation Units for equity securities will generally recognize a gain or loss equal to the difference between the exchanger's tax basis in the Creation Units and the aggregate market value of the securities received and the Cash Redemption Amount. 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. Persons exchanging securities should consult their own tax advisor with respect to whether wash sale rules apply and when a loss might be deductible.
Under current federal tax laws, any capital gain or loss realized upon a redemption of Creation Units is generally treated as long-term capital gain or loss if the Shares have been held for more than one year and as a short-term capital gain or loss if the Shares have been held for one year or less.
If you create or redeem Creation Units, you will be sent a confirmation statement showing how many Shares you purchased or sold and at what price.
The foregoing discussion summarizes some of the consequences under current federal tax law of an investment in a Select Sector SPDR Fund. It is not a substitute for personal tax advice. Consult your personal tax adviser about the potential tax consequences of an investment in a Select Sector SPDR Fund under all applicable tax laws.
ADDITIONAL INFORMATION CONCERNING THE ROLE OF
S&P, MERRILL LYNCH AND THE AMEX
The stocks included in each Select Sector Index are selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated acting as Index Compilation Agent in consultation with S&P from the universe of companies represented by the S&P 500. The composition and weighting of the stocks included in each Select Sector Index will likely differ from the composition and weighting of stocks included in any similar S&P 500 sector index that is published and disseminated by S&P. The AMEX acts as "index calculation agent" in connection with the calculation and dissemination of each Select Sector Index.
S&P does not sponsor, endorse, sell or promote the Shares. Additionally, Merrill Lynch and the AMEX do not sponsor or promote the Shares.
Neither S&P, Merrill Lynch nor the AMEX make any representation or warranty, express or implied, to the owners of Shares of the Select Sector SPDR Funds or any member of the public regarding the ability of a Select Sector SPDR Fund to track the performance of the various sectors represented in the stock market. Additionally S&P does not make any representation or warranty, express or implied, to the owners of the Shares or any member of the public regarding the advisability of investing in securities generally or in the Shares particularly.
S&P's only relationship to the Index Compilation Agent is the licensing of certain trademarks and trade names of S&P and of the S&P 500 which is determined, composed and calculated by S&P without regard to Merrill Lynch or any Select Sector SPDR Fund. S&P has no obligation to take the needs of the index compilation agent, the Trust or the owners of Shares of the Select Sector SPDR Funds into consideration in determining, composing or calculating the S&P 500.
S&P does not guarantee the accuracy and/or completeness of the S&P 500, the Select Sector Indexes or any data included therein. S&P makes no warranty, express or implied, as to results to be obtained by Merrill Lynch, the Trust, owners of the product, or any other person or entity from the use of the S&P 500, the Select Sector Indexes or any data included therein in connection with the rights licensed under the license agreement or for any other use. S&P makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the S&P 500, the Select Sector Indexes or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages.
The Select Sector Indexes identified herein are determined, composed and calculated without regard to the shares of any Select Sector SPDR Fund or the issuer thereof. Merrill Lynch and the AMEX are not responsible for, nor have they participated in, the determination of the timing of, prices of, or quantities of the shares of any Select Sector SPDR Fund to be issued, nor in the determination or calculation of the equation by which the shares are redeemable.
Although Merrill Lynch seeks to obtain and provide information to the AMEX from sources which it considers reliable, Merrill Lynch and the AMEX do not guarantee the accuracy and/or the completeness of any Select Sector Index or any data included therein. Merrill Lynch and the AMEX make no warranty, express or implied, as to results to be obtained by the Trust as licensee, licensee's customers and counterparties, owners of the shares, or any other person or entity from the use of the Select Sector Indexes or any data included therein in connection with the rights licensed as described herein or for any other use. Merrill Lynch and the AMEX make no express or implied warranties, and each hereby expressly disclaim all warranties of merchantability or fitness for a particular purpose with respect to the Select Sector Indexes or any data included therein. Without limiting any of the foregoing, in no event shall Merrill Lynch or the AMEX have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
GENERAL INFORMATION
The Trust was organized as a Massachusetts business trust on June 10, 1998. If shareholders are required to vote on any matters, each Share outstanding would be entitled to one vote. Annual meetings of shareholders will not be held except as required by the 1940 Act and other applicable law. See the Statement of Additional Information for more information concerning the Trust's form of organization.
For purposes of the 1940 Act, Shares of the Select Sector SPDR Funds are issued by the respective Funds and the acquisition of Shares by investment companies is subject to the restrictions of section 12(d)(1) of the 1940 Act. The Trust has requested exemptive relief from Section 12(d)(1). If the relief is granted, registered investment companies will be permitted to invest in the Select Sector SPDR Funds beyond the limits set forth in Section 12(d)(1), subject to certain terms and conditions which will be set forth in an SEC exemptive order issued to the Trust, including that such investment companies enter into an agreement with the Trust.
From time to time, the Select Sector SPDR Funds may advertise yield and total return figures. Yield is an historical measure of dividend income, and total return is a measure of past dividend income (assuming that it has been reinvested) plus capital appreciation. Neither yield nor total return should be used to predict the future performance of a Select Sector SPDR Fund. For a more detailed description of how each Select Sector SPDR Fund computes its performance figures and how these numbers may be used in advertisements, please consult the Statement of Additional Information.
Clifford Chance US LLP, 31 West 52nd Street, New York, New York 10119, serves as counsel to the Trust, including each Select Sector SPDR Fund. PricewaterhouseCoopers LLP, 125 High Street, Boston, Massachusetts 02110, serves as independent registered public accountants and will audit each Fund's financial statements annually.
THE SELECT SECTOR SPDR TRUST FINANCIAL HIGHLIGHTS
For a Select Sector SPDR outstanding throughout each period
The financial highlights table is intended to help you understand each Fund's financial performance. Certain information reflects the performance results for a single Fund share. The total returns in the table represent the rate that an investor would have earned (or lost) on an investment in each Fund (assuming reinvestment of all dividends and distributions). This information has been audited by PricewaterhouseCoopers LLP, whose report, along with each Fund's financial highlights and financial statements, are included in the 2005 Annual Report to Shareholders of each of the Funds, which is available upon request.
THE CONSUMER DISCRETIONARY
SELECT SECTOR SPDR FUND
-------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
-------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 31.22 $ 27.61 $ 22.73 $ 23.08 $ 24.89
-------- -------- -------- -------- --------
Net investment income (loss) ......... 0.27(1) 0.24 0.18 0.14 0.23
Net realized and unrealized gain
(loss)(2) ......................... 1.19 3.59 4.84 (0.36) (1.80)
-------- -------- -------- -------- --------
Total from investment operations ..... 1.46 3.83 5.02 (0.22) (1.57)
-------- -------- -------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... 0.04 (0.01) 0.02 0.03 --
-------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.26) (0.21) (0.16) (0.16) (0.24)
Net realized gain .................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions to shareholders .. (0.26) (0.21) (0.16) (0.16) (0.24)
-------- -------- -------- -------- --------
Net asset value, end of year ......... $ 32.46 $ 31.22 $ 27.61 $ 22.73 $ 23.08
======== ======== ======== ======== ========
Total return(3) ...................... 4.82% 13.83% 22.27% (0.93)% (6.46)%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $277,558 $254,431 $229,187 $113,635 $106,175
Ratio of expenses to average net
assets ............................ 0.26% 0.28% 0.28% 0.27% 0.27%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.31% 0.31% 0.32%
Ratio of net investment income
(loss) to average net assets ...... 0.82% 0.69% 0.66% 0.57% 0.89%
Portfolio turnover rate(4) ........... 18.03% 2.61% 28.68% 42.34% 4.71%
|
THE CONSUMER STAPLES
SELECT SECTOR SPDR FUND
-------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
-------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 21.66 $ 20.30 $ 19.83 $ 25.10 $ 25.02
-------- -------- -------- -------- --------
Net investment income (loss) ......... 0.42(1) 0.34 0.34 0.43 0.27
Net realized and unrealized gain
(loss)(2) ......................... 1.60 1.35 0.50 (5.29) 0.09
-------- -------- -------- -------- --------
Total from investment operations ..... 2.02 1.69 0.84 (4.86) 0.36
-------- -------- -------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... 0.02 0.02 -- (0.04) 0.03
-------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.42) (0.35) (0.37) (0.37) (0.31)
Net realized gain .................... -- -- -- -- --
-------- -------- -------- -------- --------
Total distributions to shareholders .. (0.42) (0.35) (0.37) (0.37) (0.31)
-------- -------- -------- -------- --------
Net assets value, end of year ........ $ 23.28 $ 21.66 $ 20.30 $ 19.83 $ 25.10
======== ======== ======== ======== ========
Total return(3) ...................... 9.44% 8.38% 4.31% (19.68)% 1.53%
======== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $857,861 $617,237 $276,106 $205,270 $368,956
Ratio of expenses to average net
assets ............................ 0.26% 0.27% 0.27% 0.28% 0.28%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.30% 0.32% 0.33%
Ratio of net investment income
(loss) to average net assets ...... 1.84% 1.62% 1.87% 1.48% 1.21%
Portfolio turnover rate(4) ........... 24.17% 2.84% 37.16% 59.68% 6.42%
|
THE ENERGY
SELECT SECTOR SPDR FUND
-------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
---------- ---------- -------- -------- --------
Net asset value, beginning of year ... $ 35.00 $ 23.99 $ 21.14 $ 25.90 $ 32.81
---------- ---------- -------- -------- --------
Net investment income (loss) ......... 0.58(1) 0.51(1) 0.50 0.43 0.45
Net realized and unrealized gain
(loss)(2) ......................... 18.67 10.98 2.83 (4.73) (6.90)
---------- ---------- -------- -------- --------
Total from investment operations ..... 19.25 11.49 3.33 (4.30) (6.45)
---------- ---------- -------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... (0.04) 0.03 (0.01) 0.01 0.02
---------- ---------- -------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.56) (0.51) (0.47) (0.47) (0.48)
Net realized gain .................... -- -- -- -- --
---------- ---------- -------- -------- --------
Total distributions to shareholders .. (0.56) (0.51) (0.47) (0.47) (0.48)
---------- ---------- -------- -------- --------
Net assets value, end of year ........ $ 53.65 $ 35.00 $ 23.99 $ 21.14 $ 25.90
========== ========== ======== ======== ========
Total return(3) ...................... 55.29% 48.27% 15.87% (16.72)% (19.81)%
========== ========== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $3,431,320 $1,463,233 $395,863 $239,941 $244,739
Ratio of expenses to average net
assets ............................ 0.25% 0.27% 0.28% 0.27% 0.28%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.31% 0.31% 0.33%
Ratio of net investment income
(loss) to average net assets ...... 1.36% 1.70% 2.06% 1.82% 1.56%
Portfolio turnover rate(4) ........... 10.32% 9.70% 6.72% 38.55% 17.36%
|
THE FINANCIAL
SELECT SECTOR SPDR FUND
-----------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
---------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 28.51 $ 25.41 $ 20.66 $ 24.70 $ 28.96
---------- -------- -------- -------- --------
Net investment income (loss) ......... 0.67(1) 0.58 0.49(1) 0.49 0.41
Net realized and unrealized gain
(loss)(2) ......................... 1.07 3.10 4.75 (4.03) (4.27)
---------- -------- -------- -------- --------
Total from investment operations ..... 1.74 3.68 5.24 (3.54) (3.86)
---------- -------- -------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... (0.06) 0.02 -- (0.07) (0.01)
---------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.69) (0.60) (0.49) (0.43) (0.39)
Net realized gain .................... -- -- -- -- --
---------- -------- -------- -------- --------
Total distributions to shareholders .. (0.69) (0.60) (0.49) (0.43) (0.39)
---------- -------- -------- -------- --------
Net assets value, end of year ........ $ 29.50 $ 28.51 $ 25.41 $ 20.66 $ 24.70
========== ======== ======== ======== ========
Total return(3) ...................... 5.88% 14.62% 25.45% (14.87)% (13.50)%
========== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $1,569,450 $995,236 $785,161 $400,857 $612,568
Ratio of expenses to average net
assets ............................ 0.26% 0.26% 0.28% 0.27% 0.27%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.32% 0.31% 0.32%
Ratio of net investment income
(loss) to average net assets ...... 2.30% 2.14% 2.09% 1.70% 1.43%
Portfolio turnover rate(4) ........... 9.34% 8.67% 5.90% 10.58% 8.77%
|
THE HEALTH CARE
SELECT SECTOR SPDR FUND
--------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
---------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 28.80 $ 27.86 $ 25.36 $ 23.55 $ 29.06
---------- -------- -------- -------- --------
Net investment income (loss) ......... 0.37(1) 0.36 0.32 0.14 0.07
Net realized and unrealized gain
(loss)(2) ......................... 2.57 0.90 2.49 1.82 (5.49)
---------- -------- -------- -------- --------
Total from investment operations ..... 2.94 1.26 2.81 1.96 (5.42)
---------- -------- -------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... 0.02 0.03 0.03 -- --
---------- -------- -------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.39) (0.35) (0.34) (0.15) (0.08)
Net realized gain .................... -- -- -- -- (0.01)
---------- -------- -------- -------- --------
Total distributions to shareholders .. (0.39) (0.35) (0.34) (0.15) (0.09)
---------- -------- -------- -------- --------
Net assets value, end of year ........ $ 31.37 $ 28.80 $ 27.86 $ 25.36 $ 23.55
========== ======== ======== ======== ========
Total return(3) ...................... 10.32% 4.57% 11.22% 8.27% (18.71)%
========== ======== ======== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $1,617,139 $809,168 $316,268 $110,337 $114,228
Ratio of expenses to average net
assets ............................ 0.25% 0.27% 0.28% 0.28% 0.28%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.31% 0.32% 0.33%
Ratio of net investment income
(loss) to average net assets ...... 1.20% 1.20% 1.21% 0.49% 0.26%
Portfolio turnover rate(4) ........... 3.48% 7.15% 6.00% 102.64% 27.99%
|
THE INDUSTRIAL
SELECT SECTOR SPDR FUND
----------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
-------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 28.36 $ 23.26 $ 19.50 $ 23.60 $ 30.30
-------- -------- -------- ------- -------
Net investment income (loss) ......... 0.46(1) 0.38(1) 0.35(1) 0.39 0.30
Net realized and unrealized gain
(loss)(2) ......................... 1.79 5.12 3.70 (4.11) (6.66)
-------- -------- -------- ------- -------
Total from investment operations ..... 2.25 5.50 4.05 (3.72) (6.36)
-------- -------- -------- ------- -------
Undistributed net investment income
included in price of units
issued and redeemed ............... (0.01) (0.02) 0.04 (0.06) 0.02
-------- -------- -------- ------- -------
Distributions to shareholders from:
Net investment income ................ (0.46) (0.38) (0.33) (0.32) (0.36)
Net realized gain .................... -- -- -- -- --
-------- -------- -------- ------- -------
Total distributions to shareholders .. (0.46) (0.38) (0.33) (0.32) (0.36)
-------- -------- -------- ------- -------
Net assets value, end of year ........ $ 30.14 $ 28.36 $ 23.26 $ 19.50 $ 23.60
======== ======== ======== ======= =======
Total return(3) ...................... 7.87% 23.64% 21.07% (16.24)% (21.10)%
======== ======== ======== ======= =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $717,293 $580,057 $580,292 $86,781 $67,265
Ratio of expenses to average net
assets ............................ 0.25% 0.28% 0.27% 0.28% 0.28%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.30% 0.31% 0.33%
Ratio of net investment income
(loss) to average net assets ...... 1.54% 1.44% 1.59% 1.26% 1.25%
Portfolio turnover rate(4) ........... 6.20% 2.98% 14.85% 57.63% 7.14%
|
THE MATERIALS
SELECT SECTOR SPDR FUND
---------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
-------- -------- -------- -------- --------
Net asset value, beginning of year ... $ 27.54 $ 21.86 $ 17.74 $ 19.33 $ 18.03
-------- -------- -------- -------- -------
Net investment income (loss) ......... 0.58(1) 0.50(1) 0.44 0.43 0.36
Net realized and unrealized gain
(loss)(2) ......................... (0.06) 5.70 4.10 (1.60) 1.86
-------- -------- -------- -------- -------
Total from investment operations ..... 0.52 6.20 4.54 (1.17) 2.22
-------- -------- -------- -------- -------
Undistributed net investment income
included in price of units
issued and redeemed ............... (0.02) (0.03) 0.05 0.02 0.02
-------- -------- -------- -------- -------
Distributions to shareholders from:
Net investment income ................ (0.57) (0.49) (0.47) (0.44) (0.43)
Net realized gain .................... -- -- -- -- (0.51)
-------- -------- -------- -------- -------
Total distributions to shareholders .. (0.57) (0.49) (0.47) (0.44) (0.94)
-------- -------- -------- -------- -------
Net assets value, end of year ........ $ 27.47 $ 27.54 $ 21.86 $ 17.74 $ 19.33
======== ======== ======== ======== =======
Total return(3) ...................... 1.78% 28.35% 26.04% (6.27)% 12.08%
======== ======== ======== ======== =======
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $757,085 $659,685 $447,072 $159,645 $99,541
Ratio of expenses to average net
assets ............................ 0.26% 0.27% 0.27% 0.28% 0.27%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.30% 0.31% 0.32%
Ratio of net investment income
(loss) to average net assets ...... 2.01% 1.96% 2.39% 1.96% 2.12%
Portfolio turnover rate(4) ........... 16.06% 3.47% 3.94% 27.79% 5.59%
|
THE TECHNOLOGY
SELECT SECTOR SPDR FUND
-----------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
---------- -------- ---------- -------- --------
Net asset value, beginning of year ... $ 19.10 $ 18.25 $ 11.84 $ 19.18 $ 46.44
---------- -------- ---------- -------- --------
Net investment income (loss) ......... 0.47(5) 0.13 0.10 0.02 (0.01)
Net realized and unrealized gain
(loss)(1) .......................... 1.74 0.85 6.36 (7.34) (27.18)
---------- -------- ---------- -------- --------
Total from investment operations ..... 2.21 0.98 6.46 (7.32) (27.19)
---------- -------- ---------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... 0.00(6) 0.01 (0.01) (0.02) (0.07)
---------- -------- ---------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.42) (0.14) (0.04) -- --
Net realized gain .................... -- -- -- -- --
---------- -------- ---------- -------- --------
Total distributions to shareholders .. (0.42) (0.14) (0.04) -- --
---------- -------- ---------- -------- --------
Net assets value, end of year ........ $ 20.89 $ 19.10 $ 18.25 $ 11.84 $ 19.18
========== ======== ========== ======== ========
Total return(3) ...................... 11.65% 5.37% 54.66% (38.28)% (58.71)%
========== ======== ========== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $1,306,948 $936,192 $1,062,298 $632,588 $897,427
Ratio of expenses to average net
assets ............................ 0.26% 0.26% 0.28% 0.27% 0.28%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.32% 0.30% 0.33%
Ratio of net investment income
(loss) to average net assets ...... 2.33% 0.68% 0.65% 0.12% (0.05)%
Portfolio turnover rate(4) ........... 8.33% 2.87% 9.86% 17.92% 10.85%
|
THE UTILITIES
SELECT SECTOR SPDR FUND
--------------------------------------------------------------
YEAR YEAR YEAR YEAR YEAR
ENDED ENDED ENDED ENDED ENDED
09/30/05 09/30/04 09/30/03 09/30/02 09/30/01
---------- ---------- ---------- --------- --------
Net asset value, beginning of year ... $ 25.10 $ 21.79 $ 18.57 $ 29.35 $ 32.24
---------- ---------- ---------- -------- --------
Net investment income (loss) ......... 0.98(1) 0.85(1) 0.81 0.89 0.70
Net realized and unrealized gain
(loss)(2) ......................... 8.50 3.33 3.16 (10.82) (2.48)
---------- ---------- ---------- -------- --------
Total from investment operations ..... 9.48 4.18 3.97 (9.93) (1.78)
---------- ---------- ---------- -------- --------
Undistributed net investment income
included in price of units
issued and redeemed ............... (0.02) (0.05) 0.06 0.06 0.04
---------- ---------- ---------- -------- --------
Distributions to shareholders from:
Net investment income ................ (0.98) (0.82) (0.81) (0.91) (0.90)
Net realized gain .................... -- -- -- -- (0.25)
---------- ---------- ---------- -------- --------
Total distributions to shareholders .. (0.98) (0.82) (0.81) (0.91) (1.15)
---------- ---------- ---------- -------- --------
Net assets value, end of year ........ $ 33.58 $ 25.10 $ 21.79 $ 18.57 $ 29.35
========== ========== ========== ======== ========
Total return(3) ...................... 38.18% 19.13% 22.16% (34.15)% (5.53)%
========== ========== ========== ======== ========
RATIOS AND SUPPLEMENTAL DATA:
Net assets, end of year (in 000's) ... $2,057,493 $1,270,116 $1,181,940 $139,244 $110,068
Ratio of expenses to average net
assets ............................ 0.26% 0.27% 0.27% 0.27% 0.29%
Ratio of expenses to average net
assets before waivers ............. 0.26% 0.30% 0.31% 0.30% 0.34%
Ratio of net investment income
(loss) to average net assets ...... 3.33% 3.64% 4.02% 3.60% 2.87%
Portfolio turnover rate(4) ........... 4.40% 9.67% 5.70% 56.89% 11.79%
|
(2) The amounts shown at this caption for a share outstanding may not accord with the change in aggregate gains and losses in securities for the fiscal period because of the timing of sales and repurchases of Fund shares in relation to fluctuating market values for the Fund.
(3) Total return is calculated assuming a purchase of shares at net asset value per share on the first day and a sale at net asset value per share on the last day of each period reported. Distributions are assumed for the purposes of this calculation, to be reinvested at the net asset value per share on the respective payment dates of each Fund. Total return for a period of less than one year is not annualized. Broker commission charges are not included in the calculation.
(4) Portfolio turnover rate excludes securities received or delivered from processing creations or redemptions on Select Sector SPDRs.
(5) Net investment income per share reflects receipt of a special one time dividend from a portfolio holding (Microsoft Corp.). The effect of this dividend amounted to $0.31 per share.
(6) Less than $0.005 per share.
ADDITIONAL INFORMATION CONCERNING THE FUNDS
The following charts are provided to: (i) show the frequency at which the closing price (last trade) for each of the Funds was at a discount or premium to the daily net asset value (NAV); and (ii) compare each Fund's total return at NAV with the total return based on market price and its benchmark index.
The discount or premium is the percentage difference between the NAV and the closing price of a Fund. A discount is the amount that a fund is trading below the reported NAV, expressed as a percentage of the NAV. A premium is the amount that a fund is trading above the reported NAV, expressed as a percentage of the NAV. Because a Fund's last trade may occur on a different date or at some time prior to Closing Time (when the Funds normally calculate their NAV), a Fund's closing price may differ from the NAV of the Fund.
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
---------------------------------- ----------------------------------
CONSUMER CONSUMER
DISCRETIONARY DISCRETIONARY
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------- --------- ------ -------------
One Year ended 12/31/05...... -6.54% -6.55% -6.38% -6.54% -6.55% -6.38%
Since Trading Commenced(1)... 35.93% 35.17% 38.82% 4.47% 4.38% 4.78%
|
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
CONSUMER CONSUMER
STAPLES STAPLES
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 2.85% 2.85% 3.11% 2.85% 2.85% 3.11%
Since Trading Commenced(1)... -2.08% -2.27% -0.34% -0.30% -0.33% -0.05%
|
THE ENERGY SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
ENERGY ENERGY
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 40.24% 40.23% 40.51% 40.24% 40.23% 40.51%
Since Trading Commenced(1)... 143.41% 143.14% 148.78% 13.50% 13.48% 13.85%
|
THE FINANCIAL SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
FINANCIAL FINANCIAL
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 6.20% 6.20% 6.50% 6.20% 6.20% 6.50%
Since Trading Commenced(1)... 54.61% 53.89% 57.42% 6.40% 6.33% 6.67%
|
THE HEALTH CARE SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
HEALTH CARE HEALTH CARE
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 6.45% 6.41% 6.73% 6.45% 6.41% 6.73%
Since Trading Commenced(1)... 33.89% 34.29% 36.62% 4.24% 4.29% 4.54%
|
THE INDUSTRIAL SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
INDUSTRIAL INDUSTRIAL
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 2.77% 2.77% 3.02% 2.77% 2.77% 3.02%
Since Trading Commenced(1)... 48.57% 48.66% 51.91% 5.80% 5.81% 6.13%
|
THE MATERIALS SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05... 1 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ----------------------------------
MATERIALS MATERIALS
NET ASSET MARKET SELECT NET ASSET MARKET SELECT SECTOR
VALUE VALUE SECTOR INDEX VALUE VALUE INDEX
--------- ------ ------------ --------- ------ -------------
One Year ended 12/31/05...... 4.13% 4.11% 4.55% 4.13% 4.11% 4.55%
Since Trading Commenced(1)... 71.22% 71.19% 75.78% 7.96% 7.95% 8.36%
|
THE TECHNOLOGY SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05.... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05.... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05.... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05.... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ----------------------------------
TECHNOLOGY TECHNOLOGY
NET ASSET MARKET SELECT NET ASSET MARKET SELECT SECTOR
VALUE VALUE SECTOR INDEX VALUE VALUE INDEX
--------- ------ ------------ --------- ------ -------------
One Year ended 12/31/05...... -0.25% -0.29% -0.01% -0.25% -0.29% -0.01%
Since Trading Commenced(1)... -32.18% -32.31% -31.06% -5.38% -5.40% -5.16%
|
THE UTILITIES SELECT SECTOR SPDR FUND
FREQUENCY DISTRIBUTION OF DISCOUNTS AND PREMIUMS
CLOSING PRICE VS. NAV
AS OF DECEMBER 31, 2005
------------------------------------------------------
CLOSING PRICE ABOVE NAV CLOSING PRICE BELOW NAV
(PREMIUM) (DISCOUNT)
------------------------ ---------------------------
>0.50% >1.00% >2.00% <-0.50% <-1.00% <-2.00%
------ ------ ------ ------- ------- -------
Quarter Ending: 12/31/05.... 0 0 0 0 0 0
61 Trading Days
Quarter Ending: 09/30/05.... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 06/30/05.... 0 0 0 0 0 0
64 Trading Days
Quarter Ending: 03/31/05.... 0 0 0 0 0 0
63 Trading Days
|
CUMULATIVE TOTAL RETURN AVERAGE ANNUAL TOTAL RETURN
--------------------------------- ---------------------------------
UTILITIES UTILITIES
NET ASSET MARKET SELECT NET ASSET MARKET SELECT
VALUE VALUE SECTOR INDEX VALUE VALUE SECTOR INDEX
--------- ------ ------------ --------- ------ ------------
One Year ended 12/31/05...... 16.53% 16.39% 16.84% 16.53% 16.39% 16.84%
Since Trading Commenced(1)... 35.71% 34.83% 37.57% 4.44% 4.35% 4.65%
|
This Prospectus does not contain all the information included in the Registration Statement filed with the SEC with respect to each Select Sector SPDR Fund's Shares. A Statement of Additional Information (dated January 27, 2006) and the annual and semi-annual reports to shareholders, each of which has been filed with the SEC, provide more information about each Select Sector SPDR Fund. In the annual report, you will find a discussion of the market conditions and investment strategies that significantly affected each Fund's performance over the past fiscal year. The Statement of Additional Information and the financial statements included in the Trust's most recent annual reports to shareholders are incorporated herein by reference (i.e., are legally part of this Prospectus). These materials may be obtained without charge by writing to the Distributor, ALPS Distributors, Inc., at 1625 Broadway, Suite 2200, Denver, CO 80202, by visiting the Trust's website at www.sectorspdrs.com, or by calling the following number:
Investor Information: (800) 843-2639
The Registration Statement, including this Prospectus, the Statement of
Additional Information, and the exhibits as well as the reports may be reviewed
and copied at the SEC's Public Reference Room (100 F Street, NE, Washington D.C.
20549) or on the EDGAR Database on the SEC's Web site (http://www.sec.gov).
Information on the operation of the public reference room may be obtained by
calling the SEC at 1-202-551-8090. These documents and other information
concerning the Trust also may be inspected at the offices of the AMEX (86
Trinity Place, New York, New York 10006). You may get copies of this and other
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 of the SEC, Washington, D.C. 20549-0102.
Shareholder inquiries may be directed to the Select Sector SPDR Funds in writing to ALPS Distributors, Inc. at 1625 Broadway, Suite 2200, Denver, CO 80202.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER OF A SELECT SECTOR SPDR FUND'S SHARES, AND, IF GIVEN OR MADE, THE INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE TRUST OR ANY SELECT SECTOR SPDR FUND. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE OF SHARES SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE AFTER THE DATE OF THIS PROSPECTUS.
DEALERS EFFECTING TRANSACTIONS IN A SELECT SECTOR SPDR FUND'S SHARES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, ARE GENERALLY REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO ANY OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
THE TRUST'S INVESTMENT COMPANY ACT OF 1940 FILE NUMBER IS 811-08837.
THE SELECT SECTOR SPDR(R)TRUST
THE CONSUMER DISCRETIONARY SELECT SECTOR SPDR FUND
THE CONSUMER STAPLES SELECT SECTOR SPDR FUND
THE ENERGY SELECT SECTOR SPDR FUND
THE FINANCIAL SELECT SECTOR SPDR FUND
THE HEALTH CARE SELECT SECTOR SPDR FUND
THE INDUSTRIAL SELECT SECTOR SPDR FUND
THE MATERIALS SELECT SECTOR SPDR FUND
THE TECHNOLOGY SELECT SECTOR SPDR FUND
THE UTILITIES SELECT SECTOR SPDR FUND
STATEMENT OF ADDITIONAL INFORMATION
DATED JANUARY 27, 2006
This Statement of Additional Information is not a Prospectus. It should be read in conjunction with the Prospectus dated January 27, 2006 (the "Prospectus") for The Select Sector SPDR Trust (the "Trust"), as it may be revised from time to time. Capitalized terms used herein that are not defined have the same meaning as in the Prospectus, unless otherwise noted. A copy of the Prospectus for the Trust may be obtained without charge by writing to the Trust's Distributor, ALPS Distributors, Inc., at 1625 Broadway, Suite 2200, Denver, CO 80202. The Report of Independent Registered Public Accountants, financial highlights and financial statements of the Funds included in the Trust's Annual Report to Shareholders for the fiscal year ended September 30, 2005 are incorporated by reference into this Statement of Additional Information.
"Standard & Poor's(R)", "S&P(R)", "S&P 500(R)", "Standard & Poor's 500", "500", "Standard & Poor's Depositary Receipts(R)", "SPDR(R)", "Select Sector SPDR", "Select Sector SPDRs" and "Select Sector Standard & Poor's Depositary Receipts" are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use in connection with the listing and trading of Select Sector SPDRs on the American Stock Exchange LLC (the "AMEX"). The stocks included in each Select Sector Index (upon which the Select Sector SPDRs are based) are selected by Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch" and sometimes referred to as the "Index Compilation Agent") in consultation with Standard & Poor's ("S&P") from the universe of companies represented by the Standard & Poor's 500 Composite Stock Index ("S&P 500"). The composition and weighting of the stocks included in each Select Sector Index can be expected to differ from the composition and weighting of stocks included in any similar S&P 500 sector index that is published and disseminated by S&P.
TABLE OF CONTENTS
GENERAL DESCRIPTION OF THE TRUST.......................................... 2 INVESTMENT POLICIES AND RESTRICTIONS...................................... 11 SPECIAL CONSIDERATIONS AND RISKS.......................................... 14 EXCHANGE LISTING AND TRADING.............................................. 16 MANAGEMENT OF THE TRUST................................................... 17 BROKERAGE TRANSACTIONS.................................................... 25 BOOK ENTRY ONLY SYSTEM.................................................... 26 CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES....................... 27 CREATION AND REDEMPTION OF CREATION UNITS................................. 30 DETERMINATION OF NET ASSET VALUE.......................................... 35 DIVIDENDS AND DISTRIBUTIONS............................................... 36 TAXES..................................................................... 36 CAPITAL STOCK AND SHAREHOLDER REPORTS..................................... 39 COUNSEL AND INDEPENDENT AUDITORS.......................................... 39 FINANCIAL STATEMENTS...................................................... 39 SSGA FUNDS MANAGEMENT, INC.--PROXY VOTING POLICY.......................... 40 |
The information contained herein regarding the Select Sector Indexes, securities markets and The Depository Trust Company ("DTC") was obtained from publicly available sources.
Each Select Sector Index is based on equity securities of public companies that are components of the S&P 500, selected on the basis of general industrial classification, and included as constituent securities of a particular Select Sector Index by the index compilation agent in consultation with S&P, a division of the McGraw-Hill Companies, Inc. The AMEX acts as "index calculation agent" in connection with the calculation and dissemination of each Select Sector Index.
Select Sector SPDRs are not sponsored, endorsed, sold or promoted by S&P. S&P
makes no representation or warranty, express or implied, to the owners of the
Select Sector SPDRs or any member of the public regarding the advisability of
investing in securities generally or in the Select Sector SPDRs particularly or
the ability of a Select Sector SPDR Fund to track the performance of the various
sectors represented in the stock market. The stocks included in each Select
Sector Index were selected by the index compilation agent in consultation with
S&P from a universe of companies represented by the S&P 500. The composition and
weighting of stocks included in each Select Sector Index can be expected to
differ from the composition and weighting of stocks included in the
corresponding S&P 500 sector index that is published and disseminated by S&P.
S&P's only relationship to the index compilation agent is the licensing of
certain trademarks and trade names of S&P and of the S&P 500 which is
determined, composed and calculated by S&P without regard to the index
compilation agent or any Select Sector SPDR Fund. S&P has no obligation to take
the needs of the index compilation agent, the Trust or the owners of Select
Sector SPDRs into consideration in determining, composing or calculating the S&P
500. S&P is not responsible for and has not participated in any determination or
calculation made with respect to issuance or redemption of the Select Sector
SPDRs. S&P has no obligation or liability in connection with the administration,
marketing or trading of the Select Sector SPDRs.
S&P does not guarantee the accuracy and/or completeness of the S&P 500, the select sector indexes or any data included therein. S&P makes no warranty, express or implied, as to results to be obtained by the index compilation agent, the trust, owners of the product, or any other person or entity from the use of the S&P 500, the select sector indexes or any data included therein in connection with the rights licensed under the license agreement or for any other use. S&P makes no express or implied warranties, and hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the S&P 500, the select sector indexes or any data included therein. Without limiting any of the foregoing, in no event shall S&P have any liability for any special, punitive, indirect or consequential damages (including lost profits), even if notified of the possibility of such damages.
The shares are not sponsored or promoted by either the Index Calculation Agent or the Index Compilation Agent.
Neither the Index Calculation Agent nor the Index Compilation Agent makes any representation or warranty, express or implied, to the owners of the shares of any Select Sector SPDR Fund or any member of the public regarding the ability of the indexes identified herein to track stock market performance. The select sector indexes identified herein are determined, composed and calculated without regard to the shares of any Select Sector SPDR Fund or the issuer thereof. The Index Calculation Agent and the Index Compilation Agent are not responsible for, nor have they participated in, the determination of the timing of, prices of, or quantities of the shares of any Select Sector SPDR Fund to be issued, nor in the determination or calculation of the equation by which the shares are redeemable. The Index Calculation Agent and the Index Compilation Agent have no obligation or liability to owners of the shares of any Select Sector SPDR Fund in connection with the administration, marketing or trading of the shares of any Select Sector SPDR Fund.
Although Merrill Lynch -- as the Index Compilation Agent - shall obtain and provide information to the AMEX -- as the Index Calculation Agent -- from sources which it considers reliable, the Index Compilation Agent and the Index Calculation Agent do not guarantee the accuracy and/or the completeness of any Select Sector Index or any data included therein. The Index Compilation Agent and the Index Calculation Agent make no warranty, express or implied, as to results to be obtained by the trust as licensee, licensee's customers and counterparties, owners of the shares, or any other person or entity from the use of the Select Sector Indexes or any data included therein in connection with the rights licensed as described herein or for any other use. The Index Compilation Agent and the Index Calculation Agent make no express or implied warranties, and each hereby expressly disclaims all warranties of merchantability or fitness for a particular purpose with respect to the Select Sector Indexes or any data included therein. Without limiting any of the foregoing, in no event shall the Index Compilation Agent and the Index Calculation Agent have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.
GENERAL DESCRIPTION OF THE TRUST
The Trust is an open-end management investment company. The Trust currently consists of nine investment series (each, a "Select Sector SPDR Fund" or "Fund" and collectively the "Select Sector SPDR Funds" or "Funds"). The Trust was organized as a Massachusetts business trust on June 10, 1998. The shares of each Select Sector SPDR Fund are referred to herein as "Shares." The Select Sector SPDR Funds offered by the Trust are: The Consumer Discretionary Select Sector SPDR Fund; The Consumer Staples Select Sector SPDR Fund; The Energy Select Sector SPDR Fund; The Financial Select Sector SPDR Fund; The Health Care Select Sector SPDR Fund; The Industrial Select Sector SPDR Fund; The Materials Select Sector SPDR Fund; The Technology Select Sector SPDR Fund; and The Utilities Select Sector SPDR Fund. The investment objective of each Select Sector SPDR Fund is to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in a particular sector or group of industries, as represented by a specified market sector index (each a "Select Sector Index"). SSgA Funds Management, Inc. ("SSgA FM" or the "Adviser") manages each Select Sector SPDR Fund.
Each Select Sector SPDR Fund offers and issues Shares at their net asset value only in aggregations of a specified number of Shares (each, a "Creation Unit") generally in exchange for a basket of equity securities included in its Select Sector Index ("Deposit Securities") together with the deposit of a specified cash payment ("Cash Component").* The Shares trade on the AMEX at market prices. These prices may differ from the Shares' net asset value. 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 Select Sector SPDR Fund consists of 50,000 Shares.
The Trust reserves the right to offer a "cash" option for creations and redemptions of Shares (subject to applicable legal requirements) although it has no current intention of doing so. 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 115% of the market value of the missing Deposit Securities. See "CREATION AND REDEMPTION OF CREATION UNITS." In each instance of such cash creations or redemptions, the Trust may impose transaction fees that will be higher than the transaction fees associated with in-kind creations or redemptions. 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.
THE SELECT SECTOR INDEXES AND RELEVANT EQUITY MARKETS
Each of the nine Select Sector Indexes which is the benchmark for a Select Sector SPDR Fund is intended to give investors an efficient, modified market capitalization-based way to track the movement of baskets of equity securities of public companies that are components of the S&P 500 and are included in specific sectors.
CONSTRUCTION AND MAINTENANCE STANDARDS FOR THE SELECT SECTOR INDEXES
SELECTION CRITERIA
Each Select Sector Index was developed and is maintained in accordance with the following criteria:
Each of the component stocks in a Select Sector Index (the "Component Stocks") has been selected from the universe of companies defined by the S&P 500.
The nine Select Sector Indexes together will include all of the companies represented in the S&P 500 and each of the stocks in the S&P 500 will be allocated to one and only one of the Select Sector Indexes.
The Component Stocks have been assigned to a Select Sector Index by the Index Compilation Agent. The Index Compilation Agent, after consultation with S&P, assigns Component Stocks to a particular Select Sector Index on the basis of such company's sales and earnings composition and the sensitivity of the company's stock price and business results to the common factors that affect other companies in such Select Sector Index. S&P has sole control over the removal of stocks from the S&P 500 and the selection of replacement stocks to be added to the S&P 500. However, S&P plays only a consulting role in the assignment of the S&P 500 component securities to any Select Sector Index, which is the sole responsibility of the Index Compilation Agent.
Each Select Sector Index is weighted based on the market capitalization of each of the Component Stocks, subject to the following asset diversification requirements: (i) the market capitalization-based weighted value of any single Component Stock measured on the last day of a calendar quarter may not exceed 24.99% of the total value of its respective Select Sector Index; and (ii) with respect to 50% of the total value of the Select Sector Index, the market capitalization-based weighted value of the Component Stocks must be diversified so that no single Component Stock measured on the last day of a calendar quarter represents more than 4.99% of the total value of its respective Select Sector Index.
Rebalancing the Select Sector Indexes to meet the asset diversification requirements will be the responsibility of the American Stock Exchange Index Services Group ("ISG"). If shortly prior to the last business day of any calendar quarter (a "Quarterly Qualification Date"), a Component Stock (or two or more Component Stocks) approaches the maximum allowable value limits set forth above (the "Asset Diversification Limits"), the percentage that such Component Stock (or Component Stocks) represents in the Select Sector Index will be reduced and the market capitalization-based weighted value of such Component Stock (or Component Stocks) will be redistributed across the Component Stocks that do not closely approach the Asset Diversification Limits in accordance with the following methodology: First, each Component Stock that exceeds 24% of the total value of the Select Sector Index will be reduced to 23% of the total value of the Select Sector Index and the aggregate amount by which all Component Stocks exceed 24% will be redistributed equally across the remaining Component Stocks that represent less than 23% of the total value of the Select Sector Index. If as a result of this redistribution, another Component Stock then exceeds 24%, the redistribution will be repeated as necessary. Second, with respect to the 50% of the value of the Select Sector Index accounted for by the lowest weighted Component Stocks, each Component Stock that exceeds 4.8% of the total value of the Select Sector Index will be reduced to 4.6% and the aggregate amount by which all Component Stocks exceed 4.8% will be distributed equally across all remaining Component Stocks that represent less than 4.6% of the total value of the Select Sector Index. If as a result of this redistribution another Component Stock that did not previously exceed 4.8% of the Select Sector Index value then exceeds 4.8%, the redistribution will be repeated as necessary until at least 50% of the value of the Select Sector Index is accounted for by Component Stocks representing no more than 4.8% of the total value of the Select Sector Index. If necessary, this reallocation process may take place more than once prior to a Quarterly Qualification Date to insure that the Select Sector Index and the Select Sector SPDR Fund portfolio based upon it conform to the requirements for qualification of the Fund as a regulated investment company.
As detailed below, the Select Sector Indexes are calculated and disseminated by ISG. As of the market close on December 31, 2005, the weighting of each Select Sector Index in the S&P 500 based on the capitalization of the stocks in the index was as follows:
LIST OF THE INDEXES WEIGHTING
------------------- ---------
The Consumer Discretionary Select Sector Index 10.70%
The Consumer Staples Select Sector Index 9.56%
The Energy Select Sector Index 9.32%
The Financial Select Sector Index 21.25%
The Health Care Select Sector Index 13.35%
The Industrial Select Sector Index 11.36%
The Materials Select Sector Index 2.99%
The Technology Select Sector Index 18.11%
The Utilities Select Sector Index 3.36%
------
100.00%
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Periodically, the Index Compilation Agent will supply ISG with sector designations for a number of stocks deemed likely candidates for replacement selection by the Standard & Poor's 500 Index Committee. If a replacement not on the current list is selected by the Standard & Poor's 500 Index Committee, ISG will ask the Index Compilation Agent to assign the stock to one of the nine sectors promptly. AMEX will disseminate information on this assignment and on consequent changes in the Select Sector Index(es).
The Index Compilation Agent at any time may determine that a Component Stock which has been assigned to one Select Sector Index has undergone such a transformation in the composition of its business that it should be removed from that Select Sector Index and assigned to a different Select Sector Index. In the event that the Index Compilation Agent notifies ISG that a Component Stock's Select Sector Index assignment should be changed, the AMEX will disseminate notice of the change following its standard procedure for announcing index changes and will implement the change in the affected Select Sector Indexes on a date no less than one week after the initial dissemination of information on the sector change to the maximum extent practicable. It is not anticipated that Component Stocks will change sectors frequently.
Component Stocks removed from and added to the S&P 500 will be deleted from and added to the appropriate Select Sector Index on the same schedule used by S&P for additions and deletions from the S&P 500 insofar as practicable.
Select Sector Index Calculations
With the exception of the weighting constraints described above, each Select Sector Index is calculated using the same methodology utilized by S&P in calculating the S&P 500. In particular:
Each Select Sector Index is calculated using a base-weighted aggregate methodology; that means the level of the Select Sector Index reflects the total market value of all of its Component Stocks relative to a particular base period. Statisticians refer to this type of index, one with a set of combined variables (such as price and number of shares), as a composite index.
Total market value of a company is determined by multiplying the price of the stock by the number of common shares outstanding. An indexed number is used to represent the results of the aggregate market value calculation in order to make the value easier to work with and track over time.
The daily calculation of each Select Sector Index is computed by dividing the total market value of the companies in the Select Sector Index by a number called the "Index Divisor." By itself, the Index Divisor is an arbitrary number. However, in the context of the calculation of the Select Sector Index, it is the only link to the original base period value of the Select Sector Index. The Index Divisor keeps the Select Sector Index comparable over time and adjustments to the Index Divisor ensure that there are no changes in the Select Sector Index level as a result of non-market forces (corporate actions, replacements of stocks in a Select Sector Index, weighting changes, etc.).
Four times a year on a Friday close to the end of each calendar quarter, the share totals of the companies in the S&P 500 are updated by S&P. This information is utilized to update the share totals of companies in each Select Sector Index. After the totals are updated, the Index Divisor is adjusted to compensate for the net change in the market value of the Select Sector Index.
Once a week the database containing the current common shares outstanding for the S&P 500 companies is compared by S&P against the shares outstanding used to actually calculate the S&P 500. Any difference of 5% or more is screened for review by S&P. If appropriate, a share change will be implemented by S&P after the close of trading on the following Wednesday. Preannounced corporate actions such as restructurings and recapitalizations can significantly change a company's shares outstanding. Any changes over 5% are reviewed by S&P and, when appropriate, an immediate adjustment is made to the number of shares outstanding used to calculate the Select Sector Index. Any adjustment made by S&P in shares outstanding will result in a corresponding adjustment to each affected Select Sector Index.
S&P will advise ISG regarding the handling of non-routine corporate actions which may arise from time to time and which may have an impact on the calculation of the S&P 500 and, consequently, on the calculation of the Select Sector Index Corporate actions such as a merger or acquisition, stock splits, routine spin-offs, etc., which require adjustments in the Select Sector Index calculation, will be handled by the AMEX staff and Index Divisor adjustments, calculated when necessary, are handled by S&P in its maintenance of the S&P 500. In the event a merger or acquisition changes the relative importance of a company's participation in two or more sectors in a major way, the Select Sector Index assignment of the stock may change. In any event, a new Index Divisor for affected Select Sector Indexes will be disseminated promptly by ISG.
Select Sector Index Dissemination
Similar to other stock index values published by the AMEX, the value of each Select Sector Index will be calculated continuously and disseminated every 15 seconds over the Consolidated Tape Association's Network B. The major electronic financial data vendors - Bloomberg, Quotron, Reuters and Bridge Information Systems - are expected to publish information on each Select Sector Index for their subscribers.
Brief descriptions of the Select Sector Indexes on which the Select Sector SPDR Funds are based and the equity markets in which the Select Sector SPDR Funds are invested are provided below.
THE CONSUMER DISCRETIONARY SELECT SECTOR INDEX
General Background
The Consumer Discretionary Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are involved in the development and production of consumer discretionary products. Consumer discretionary products include automobiles and components, consumer durables, apparel, hotels, restaurants, leisure, media and retail. As of December 31, 2005, the Consumer Discretionary Select Sector Index included 90 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $1,217,632,646,280
10 Largest Components by Market Capitalization (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
COMPANY NAME CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
------------ --------------- ------ ------ ------------
Home Depot $85,991,097,280 7.06% 7.06% 7.06%
Time Warner Inc. $81,315,918,400 6.68% 6.68% 13.74%
Comcast Corp. $56,372,165,960 4.63% 4.63% 18.37%
Lowe's Cos $52,122,720,540 4.28% 4.28% 22.65%
eBay Inc. $49,429,946,655 4.06% 4.06% 26.71%
Target Corp. $48,328,744,480 3.97% 3.97% 30.68%
Walt Disney Co. $46,108,931,700 3.79% 3.79% 34.47%
McDonald's Corp. $42,439,047,840 3.49% 3.49% 37.95%
News Corporation $37,838,024,925 3.11% 3.11% 41.06%
Viacom Inc.CL B $31,797,098,800 2.61% 2.61% 43.67%
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10 Largest Industries (% Index Weight) (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
INDUSTRY CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
-------- ---------------- ------ ------ ------------
Media $374,623,084,385 30.77% 30.77% 30.77%
Specialty Retail $249,243,915,111 20.47% 20.47% 51.24%
Hotels Restaurants & Leisure $169,857,610,171 13.95% 13.95% 65.19%
Multiline Retail $128,543,299,940 10.56% 10.56% 75.74%
Household Durables $ 83,195,491,598 6.83% 6.83% 82.58%
Internet & Catalog Retail $ 63,891,324,098 5.25% 5.25% 87.82%
Textiles, Apparel & Luxury Goods $ 44,567,174,470 3.66% 3.66% 91.48%
Automobiles $ 39,462,939,910 3.24% 3.24% 94.72%
Leisure Equipment & Products $ 20,630,120,440 1.69% 1.69% 96.42%
Auto Components $ 19,154,620,730 1.57% 1.57% 97.99%
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THE CONSUMER STAPLES SELECT SECTOR INDEX
General Background
The Consumer Staples Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are involved in the development and production of consumer products. Consumer Staples include cosmetic and personal care, soft drinks, tobacco and food products. As of December 31, 2005, the Consumer Staples Select Sector Index included 38 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $1,074,978,574,543
10 Largest Components by Market Capitalization (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
COMPANY NAME CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
------------ ---------------- ------ ------ ------------
Procter & Gamble $194,000,100,320 18.05% 18.05% 18.05%
Altria Group, Inc. $155,594,611,680 14.47% 14.47% 32.52%
Wal-Mart Stores $116,910,799,200 10.88% 10.88% 43.40%
PepsiCo Inc. $ 98,025,181,520 9.12% 4.58% 47.98%
Coca Cola Co. $ 83,436,778,149 7.76% 4.55% 52.52%
Walgreen Co. $ 44,794,660,800 4.17% 4.41% 56.93%
Anheuser-Busch $ 33,351,351,600 3.10% 3.34% 60.28%
Colgate-Palmolive $ 28,415,316,750 2.64% 2.89% 63.16%
Kimberly-Clark $ 27,867,823,850 2.59% 2.83% 66.00%
Costco Co. $ 23,354,737,530 2.17% 2.41% 68.41%
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6 Largest Industries (% Index Weight) (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
INDUSTRY CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
-------- ---------------- ------ ------ ------------
Food & Staples Retailing $273,099,149,730 25.41% 27.35% 27.35%
Household Products $258,856,677,700 24.08% 24.80% 52.15%
Beverages $239,246,336,947 22.26% 15.96% 68.11%
Tobacco $170,423,514,180 15.85% 16.34% 84.45%
Food Products $116,812,023,426 10.87% 13.53% 97.98%
Personal Products $ 16,540,872,560 1.54% 2.02% 100.00%
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THE ENERGY SELECT SECTOR INDEX
General Background
The Energy Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are involved in the development and production of energy products. Energy companies in the Index develop and produce crude oil and natural gas and provide drilling and other energy related services; as well as airlines, marine, road and rail and transportation infrastructure companies. As of December 31, 2005, the Energy Select Sector Index included 29 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $1,047,942,260,842
10 Largest Components by Market Capitalization (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
COMPANY NAME CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
------------ ---------------- ------ ------ ------------
Exxon Mobil Corp. $349,511,983,320 33.35% 16.24% 16.24%
Chevron Corp. $127,447,741,680 12.16% 12.07% 28.31%
ConocoPhillips $ 80,728,531,700 7.70% 8.10% 36.41%
Burlington Resources $ 32,586,789,400 3.11% 4.50% 40.91%
|
Halliburton Co. $ 31,775,566,400 3.03% 4.29% 45.20% Occidental Petroleum $ 32,111,680,120 3.06% 3.97% 49.17% Schlumberger Ltd. $ 57,229,899,200 5.46% 3.93% 53.10% Devon Energy Corp. $ 27,786,522,000 2.65% 3.74% 56.83% EOG Resources $ 17,724,797,970 1.69% 3.62% 60.46% Transocean Inc. $ 23,003,414,580 2.20% 3.54% 64.00% |
2 Largest Industries (% Index Weight) (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
INDUSTRY CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
-------- ---------------- ------ ------ ------------
Oil, Gas & Consumable Fuels $854,299,176,382 81.52% 75.68% 75.68%
Energy Equipment & Services $193,643,084,460 18.48% 24.32% 100.00%
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THE FINANCIAL SELECT SECTOR INDEX
General Background
The Financial Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are involved in the development and production of financial products. Companies in the Index include a wide array of diversified financial services firms whose business lines range from investment management to commercial and business banking. As of December 31, 2005, the Financial Services Sector Index included 84 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $2,391,453,923,797
10 Largest Components by Market Capitalization (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
COMPANY NAME CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
------------ ---------------- ------ ------ ------------
Citigroup Inc. $245,512,250,870 10.27% 10.27% 10.27%
Bank of America Corp. $214,355,350,950 8.96% 8.96% 19.23%
American Int'l. Group $177,098,333,840 7.41% 7.41% 26.64%
JPMorgan Chase & Co. $138,877,889,850 5.81% 5.81% 32.44%
Wells Fargo $105,067,090,520 4.39% 4.39% 36.84%
Wachovia Corp. (New) $ 82,116,371,340 3.43% 3.43% 40.27%
American Express $ 63,897,315,940 2.67% 2.67% 42.94%
Merrill Lynch $ 62,240,483,500 2.60% 2.60% 45.54%
Morgan Stanley $ 61,161,294,280 2.56% 2.56% 48.10%
Goldman Sachs Group $ 57,571,540,290 2.41% 2.41% 50.51%
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7 Largest Industries (% Index Weight) (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
INDUSTRY CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
-------- ---------------- ------ ------ ------------
Commercial Banks $673,260,694,146 28.15% 28.15% 28.15%
Insurance $552,739,856,922 23.11% 23.11% 51.27%
Diversified Financial Services $423,262,617,050 17.70% 17.70% 68.96%
Capital Markets $359,323,744,298 15.03% 15.03% 83.99%
Thrifts & Mortgage Finance $186,253,014,430 7.79% 7.79% 91.78%
Consumer Finance $112,764,839,510 4.72% 4.72% 96.49%
Real Estate $ 83,849,157,441 3.51% 3.51% 100.00%
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THE HEALTH CARE SELECT SECTOR INDEX
General Background
The Health Care Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are health care related firms. The Health Care Select Sector Index will only include companies involved in the health care industry, such as health care equipment and supplies, health care providers and services, biotechnology and pharmaceuticals. As of December 31, 2005, the Health Care Select Sector Index included 57 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $1,501,401,217,480
10 Largest Components by Market Capitalization (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
COMPANY NAME CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
------------ ---------------- ------ ------ ------------
Johnson & Johnson $178,793,293,000 11.91% 11.86% 11.86%
Pfizer, Inc. $171,900,954,720 11.45% 11.40% 23.26%
Amgen $ 97,338,475,200 6.48% 6.46% 29.72%
United Health Group Inc. $ 84,744,792,080 5.64% 5.67% 35.39%
Medtronic Inc. $ 69,636,384,150 4.64% 4.64% 40.03%
Merck & Co. $ 69,556,763,920 4.63% 4.61% 44.65%
Lilly (Eli) & Co. $ 64,321,778,520 4.28% 4.27% 48.91%
Wyeth $ 61,837,872,130 4.12% 4.12% 53.03%
WellPoint Inc. $ 52,657,729,660 3.51% 3.59% 56.62%
Abbott Labs $ 61,164,920,040 4.07% 3.44% 60.06%
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4 Largest Industries (% Index Weight) (as of 12/31/05):
MARKET MARKET INDEX CUMULATIVE
INDUSTRY CAPITALIZATION WEIGHT WEIGHT INDEX WEIGHT
-------- ---------------- ------ ------ ------------
Pharmaceuticals $723,051,857,310 48.16% 47.48% 47.48%
Health Care Providers & Services $362,788,013,883 24.16% 24.58% 72.06%
Health Care Equipment & Supplies $241,989,157,380 16.12% 16.32% 88.38%
Biotechnology $173,572,188,907 11.56% 11.62% 100.00%
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THE INDUSTRIAL SELECT SECTOR INDEX
General Background
The Industrial Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are industrials. Industrials include electrical equipment, construction equipment and building products, waste management services, aerospace and defense, and industrial machinery products. As of December 31, 2005, the Industrial Select Sector Index included 53 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $1,277,421,523,630
10 Largest Components by Market Capitalization (as of 12/31/05):
CUMULATIVE
COMPANY NAME MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
------------ --------------------- ------------- ------------ ------------
General Electric $370,344,153,350 28.99% 21.35% 21.35%
United Parcel Service $ 82,931,707,350 6.49% 6.57% 27.93%
3M Company $ 58,894,730,000 4.61% 4.70% 32.63%
Tyco International $ 58,096,853,880 4.55% 4.68% 37.31%
United Technologies $ 56,952,889,230 4.46% 4.61% 41.91%
Boeing Company $ 56,702,293,600 4.44% 4.61% 46.52%
Caterpillar Inc. $ 39,295,616,160 3.08% 3.26% 49.79%
Honeywell Int'l Inc. $ 31,392,772,750 2.46% 2.58% 52.37%
FedEx Corporation $ 31,331,202,210 2.45% 2.62% 54.98%
Emerson Electric $ 30,687,880,500 2.40% 2.53% 57.51%
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10 Largest Industries (% Index Weight) (as of 12/31/05):
CUMULATIVE
INDUSTRY MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
-------- --------------------- ------------- ------------ ------------
Industrial Conglomerates $497,525,733,790 38.95% 31.72% 31.72%
Aerospace & Defense $252,063,661,646 19.73% 21.05% 52.77%
Machinery $156,892,933,657 12.28% 14.20% 66.98%
Air Freight & Logistics $116,895,327,040 9.15% 9.56% 76.54%
Commercial Services & Supplies $ 81,590,460,924 6.39% 7.82% 84.36%
Road & Rail $ 77,025,239,710 6.03% 6.82% 91.19%
Electrical Equipment $ 51,755,339,220 4.05% 4.71% 95.90%
Building Products $ 20,098,113,884 1.57% 1.81% 97.71%
Airlines $ 11,461,549,598 0.90% 0.98% 98.69%
Construction & Engineering $ 6,708,099,500 0.53% 0.76% 99.45%
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THE MATERIALS SELECT SECTOR INDEX
General Background
The Materials Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are in basic industries. Basic industries include integrated steel products, construction materials, fibers, paper and gold. As of December 31, 2005, the Materials Select Sector Index included 31 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $ 336,267,571,077
10 Largest Components by Market Capitalization (as of 12/31/05):
CUMULATIVE
COMPANY NAME MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
------------ --------------------- ------------- ------------ -------------
Dow Chemical $42,291,646,040 12.58% 12.58% 12.58%
Du Pont (E.I.) $39,073,395,000 11.62% 11.62% 24.19%
Alcoa Inc $25,732,198,410 7.65% 7.65% 31.84%
Newmont Mining Corp. (Hldg. Co.) $23,858,372,400 7.10% 7.09% 38.94%
Monsanto Co. $20,815,564,520 6.19% 6.19% 45.13%
Weyerhaeuser Corp. $16,136,408,920 4.80% 4.59% 49.72%
Praxair, Inc. $17,069,219,840 5.08% 4.57% 54.29%
International Paper $16,485,671,390 4.90% 4.52% 58.81%
Phelps Dodge $14,609,998,500 4.34% 4.39% 63.20%
Air Products & Chemicals $13,134,261,000 3.91% 3.95% 67.15%
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5 Largest Industries (% Index Weight) (as of 12/31/05):
CUMULATIVE
INDUSTRY MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
-------- --------------------- ------------- ------------ ------------
Chemicals $175,925,367,057 52.32% 52.28% 52.28%
Metals & Mining $ 93,003,792,270 27.66% 27.89% 80.18%
Paper & Forest Products $ 40,614,099,980 12.08% 11.58% 91.76%
Containers & Packaging $ 19,825,058,270 3.17% 6.14% 97.90%
Construction Materials $ 6,899,253,500 2.05% 2.10% 100.00%
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THE TECHNOLOGY SELECT SECTOR INDEX
General Background
The Technology Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are involved in the development and production of technology products. Technology products include computers and peripherals, semiconductor equipment and products, telecommunications equipment, microcomputer components, integrated computer circuits and process monitoring systems. As of December 31, 2005, the Technology Select Sector Index included 86 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $ 2,038,423,846,406
10 Largest Components by Market Capitalization (as of 12/31/05):
CUMULATIVE
COMPANY NAME MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
------------ --------------------- ------------- ------------ ------------
Microsoft Corp. $239,388,073,586 11.74% 11.64% 11.64%
Intel Corp. $150,483,840,000 7.38% 7.32% 18.96%
International Bus. Machines $129,836,297,400 6.37% 6.31% 25.27%
Cisco Systems $105,160,404,640 5.16% 5.11% 30.38%
AT&T Inc. $ 95,667,662,530 4.69% 3.54% 33.92%
Verizon Communications $ 83,281,077,120 4.09% 4.05% 37.97%
Hewlett-Packard $ 82,024,663,700 4.02% 4.01% 41.98%
QUALCOMM Inc. $ 70,831,619,040 3.47% 3.48% 45.46%
Dell Inc. $ 70,582,124,780 3.46% 3.44% 48.90%
Sprint Nextel Corp. $ 69,016,349,120 3.39% 3.43% 52.33%
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10 Largest Industries (% Index Weight) (as of 12/31/05):
CUMULATIVE
INDUSTRY MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
-------- --------------------- ------------- ------------ ------------
Computers & Peripherals $414,658,255,845 20.34% 20.50% 20.50%
Software $400,478,838,310 19.65% 19.85% 40.34%
Semiconductor & Semiconductor Equipment $363,896,561,722 17.85% 18.13% 58.47%
Communications Equipment $305,346,989,304 14.98% 15.30% 73.76%
Diversified Telecommunication Services $245,654,142,823 12.05% 10.89% 84.66%
IT Services $116,652,827,213 5.72% 5.72% 90.38%
Wireless Telecommunication Services $ 93,178,222,520 4.57% 4.62% 95.00%
Internet Software & Services $ 49,471,608,067 2.43% 2.47% 97.47%
Electronic Equipment & Instruments $ 35,016,511,303 1.72% 1.82% 99.28%
Office Electronics $ 14,069,889,300 0.69% 0.72% 100.00%
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THE UTILITIES SELECT SECTOR INDEX
General Background
The Utilities Select Sector Index is intended to give investors an efficient, modified market capitalization-based way to track the movements of certain public companies that are components of the S&P 500 and are in the utilities industry. Utilities include communication services, electrical power providers and natural gas distributors. As of December 31, 2005, the Utilities Select Sector Index included 32 Component Stocks. A list of the Component Stocks included in the Fund as of September 30, 2005 is included in the Fund's Annual Report to Shareholders dated September 30, 2005.
Constituent Stocks and Industries/Sectors
Summary:
Aggregate Market Capitalization (12/31/05): $378,434,162,600
10 Largest Components by Market Capitalization (as of 12/31/05):
CUMULATIVE
COMPANY NAME MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
------------ --------------------- ------------- ------------ ------------
Exelon Corp. $35,456,336,500 9.37% 9.37% 9.37%
Dominion Resources $26,809,707,200 7.08% 7.08% 16.45%
Southern Co. $25,603,822,350 6.77% 6.77% 23.22%
Duke Energy $25,461,714,150 6.73% 6.73% 29.95%
TXU Corp. $24,233,137,320 6.40% 6.40% 36.35%
FPL Group $16,410,173,800 4.34% 4.34% 40.69%
Public Serv. Enterprise Inc. $16,287,719,120 4.30% 4.30% 44.99%
FirstEnergy Corp. $16,158,665,640 4.27% 4.27% 49.26%
American Electric Power $14,601,739,560 3.86% 3.86% 53.12%
Entergy Corp. $14,243,913,900 3.76% 3.76% 56.88%
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4 Largest Industries (% Index Weight) (as of 12/31/05):
CUMULATIVE
INDUSTRY MARKET CAPITALIZATION MARKET WEIGHT INDEX WEIGHT INDEX WEIGHT
-------- --------------------- ------------- ------------ ------------
Electric Utilities $176,628,351,110 139.12% 46.67% 46.67%
Multi-Utilities $126,958,348,240 33.55% 33.55% 80.22%
Independent Power Producers & Energy Traders $ 71,773,295,580 18.97% 18.97% 99.19%
Gas Utilities $ 3,074,167,670 0.81% 0.81% 100.00%
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INVESTMENT POLICIES AND RESTRICTIONS
LENDING PORTFOLIO SECURITIES
Each Select Sector SPDR Fund may lend portfolio securities to brokers, dealers and other financial institutions needing to borrow securities to complete transactions and for other purposes. Because the U.S. government securities or other assets that are pledged as collateral to each Select Sector SPDR Fund in connection with these loans generate income, securities lending may enable a Select Sector SPDR Fund to earn additional income that may partially offset the expenses of such Select Sector SPDR Fund, and thereby reduce the effect that expenses have on such Select Sector SPDR Fund's ability to provide investment results that substantially correspond to the price and yield performance of its respective Select Sector Index.
Loans of portfolio securities may not exceed 33% of a Select Sector SPDR Fund's total assets. The documentation for these loans provides that a Select Sector SPDR Fund will receive collateral equal to at least 100% of the current market value of the loaned securities, as marked to market each day that the net asset value of the Select Sector SPDR Fund is determined. Each Select Sector SPDR Fund will pay reasonable administrative and custodial fees in connection with the loan of securities and invests collateral in money market instruments or funds which invest exclusively in money market instruments.
Each Select Sector SPDR Fund will comply with the conditions for lending established by the SEC. Although each Select Sector SPDR Fund will receive collateral in connection with all loans of portfolio securities, and such collateral will be marked to market, each Select Sector SPDR Fund will be exposed to the risk of loss should a borrower default on its obligation to return the borrowed securities (e.g., the loaned securities may have appreciated beyond the value of the collateral held by the Select Sector SPDR Fund). In addition, each Select Sector SPDR Fund bears the risk of loss of any cash collateral that it invests in money market instruments.
REPURCHASE AGREEMENTS
Each Select Sector SPDR 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 Select Sector SPDR Fund acquires a money market instrument (generally a security issued by the U.S. Government or an agency thereof, a banker's acceptance or a certificate of deposit) from a seller, subject to resale to the seller 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 Select Sector SPDR Fund and is unrelated to the interest rate on the underlying instrument.
In these repurchase agreement transactions, the securities acquired by a Select Sector SPDR 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 each Select Sector SPDR Fund's 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 Select Sector SPDR 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 Select Sector SPDR Fund not within the control of the Select Sector SPDR Fund and, therefore, the Select Sector SPDR 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.
OTHER MONEY MARKET INSTRUMENTS
In addition to repurchase agreements, other money market instruments in which the Select Sector SPDR Funds may invest are certificates of deposit of U.S. domestic banks with assets of $1 billion or more, bankers' acceptances, time deposits, U.S. government and U.S. government agency securities, or commercial paper rated within the two highest grades by S&P or Moody's Investors Service, Inc., or, if not rated, are of comparable quality as determined by the Adviser, and which mature within one year from the date of purchase, and investment companies which invest exclusively in such money market instruments (subject to applicable limitations under Section 12(d)(1) of the Investment Company Act of 1940, as amended ("1940 Act")).
FUTURES CONTRACTS, OPTIONS AND SWAP AGREEMENTS
Each Select Sector SPDR Fund may utilize exchange-traded futures and options contracts and swap agreements.
FUTURES CONTRACTS AND OPTIONS
Futures contracts generally provide for the future sale by one party and purchase by another party of a specified commodity at a specified future time and at a specified price. Stock 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 stock 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.
Futures traders are 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 Select Sector SPDR 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.
Each Select Sector SPDR Fund may use exchange-traded futures and options, together with positions in cash and money market instruments, to simulate full investment in the underlying Select Sector SPDR Index. Exchange-traded futures and options contracts are not currently available for the Select Sector Indexes. Under such circumstances, the Adviser may seek to utilize other instruments that it believes to be correlated to the underlying Select Sector Index components or a subset of the components. Options on the Shares have been listed on the AMEX.
RESTRICTIONS ON THE USE OF FUTURES AND OPTIONS
In connection with its management of the Select Sector SPDR Funds, the Adviser has claimed an exclusion from registration as a commodity trading advisor under the Commodity Exchange Act ("CEA") and, therefore, is not subject to the registration and regulatory requirements of the CEA. The Select Sector SPDR Funds reserve the right to engage in transactions involving futures and options thereon to the extent allowed by the Commodity Futures Trading Commission ("CFTC") regulations in effect from time to time and in accordance with each Select Sector SPDR Fund's policies. Each Select Sector SPDR 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 the Select Sector SPDR Fund under the contract (less the value of any margin deposits in connection with the position).
SWAP AGREEMENTS
Swap agreements are contracts between parties in which one party agrees to make 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 the Select Sector SPDR 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 Select Sector SPDR Fund's obligations over its entitlements with respect to each swap is accrued on a daily basis and an amount of cash or high liquid securities having an aggregate value at least equal to the accrued excess is maintained in an account at the Trust's custodian bank.
INVESTMENT RESTRICTIONS
The Trust has adopted the following investment restrictions as fundamental policies with respect to each Select Sector SPDR Fund. These restrictions cannot be changed with respect to a Select Sector SPDR Fund without the approval of the holders of a majority of such Select Sector SPDR Fund's outstanding voting securities. For purposes of the 1940 Act, a majority of the outstanding voting securities of a Select Sector SPDR Fund means the vote, at an annual or a special meeting of the security holders of the Trust, of the lesser of (1) 67% or more of the voting securities of the Select Sector SPDR Fund present at such meeting, if the holders of more than 50% of the outstanding voting securities of such Select Sector SPDR Fund are present or represented by proxy, or (2) more than 50% of the outstanding voting securities of the Select Sector SPDR Fund. Except with the approval of a majority of the outstanding voting securities, a Select Sector SPDR Fund may not:
1. Change its investment objective;
2. Lend any funds or other assets except through the purchase of all or a portion of an issue of securities or obligations of the type in which it is permitted to invest (including participation interests in such securities or obligations) and except that a Select Sector SPDR Fund may lend its portfolio securities in an amount not to exceed 33% of the value of its total assets;
3. Issue senior securities or borrow money, except borrowings from banks for temporary or emergency purposes in an amount up to
10% of the value of the Select Sector SPDR Fund's total assets (including the amount borrowed), valued at market, less liabilities (not including the amount borrowed) valued at the time the borrowing is made, and the Select Sector SPDR Fund will not purchase securities while borrowings in excess of 5% of the Select Sector SPDR Fund's total assets are outstanding, provided, that for purposes of this restriction, short-term credits necessary for the clearance of transactions are not considered borrowings (this limitation on purchases does not apply to acceptance by the Select Sector SPDR Fund of a deposit principally of securities included in the relevant Select Sector Index for creation of Creation Units);
4. Pledge, hypothecate, mortgage or otherwise encumber its assets, except to secure permitted borrowings. (The deposit of underlying securities and other assets in escrow and collateral arrangements with respect to initial or variation margin for futures contracts or options contracts will not be deemed to be pledges of the Select Sector SPDR Fund's assets);
5. Purchase, hold or deal in real estate, or oil, gas or mineral interests or leases, but a Select Sector SPDR Fund may purchase and sell securities that are issued by companies that invest or deal in such assets;
6. Act as an underwriter of securities of other issuers, except to the extent the Select Sector SPDR Fund may be deemed an underwriter in connection with the sale of securities in its portfolio;
7. Purchase securities on margin, except for such short-term credits as are necessary for the clearance of transactions, except that a Select Sector SPDR Fund may make margin deposits in connection with transactions in options, futures and options on futures;
8. Sell securities short; or
9. Invest in commodities or commodity contracts, except that a Select Sector SPDR Fund may transact in exchange traded futures contracts on securities, stock indexes and options on such futures contracts and make margin deposits in connection with such contracts.
In addition to the investment restrictions adopted as fundamental policies as set forth above, each Select Sector SPDR Fund observes the following restrictions, which may be changed by the Board of Trustees without a shareholder vote. A Select Sector SPDR Fund will not:
1. Invest in the securities of a company for the purpose of exercising management or control, or in any event purchase and hold more than 10% of the securities of a single issuer, provided that the Trust may vote the investment securities owned by each Select Sector SPDR Fund in accordance with its views; or
2. 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 Select Sector SPDR Fund has valued the investment.
3. Under normal circumstances the Funds will invest at least 95% of their total
assets in common stocks that comprise their relevant Select Sector Index. Prior
to any change in a Fund's 95% investment policy, a Fund will provide
shareholders with 60 days written notice. 4. Invest in securities issued by
other investment companies so that, as determined immediately after a purchase
of such securities is made: (i) not more than 5% of the value of the Fund's
total assets will be invested in the securities of any one investment company;
(ii) not more than 10% of the value of its total assets will be invested in the
aggregate in securities of investment companies as a group; and (iii) not more
than 3% of the outstanding voting stock of any one investment company will be
owned by the Fund.
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.
SPECIAL CONSIDERATIONS AND RISKS
A discussion of the risks associated with an investment in a Select Sector SPDR Fund is contained in the Prospectus under the heading "INVESTMENT CONSIDERATIONS AND RISKS." The discussion below supplements, and should be read in conjunction with, such section of the Prospectus.
GENERAL
Investment in a Select Sector SPDR Fund should be made with an understanding that the value of a Select Sector SPDR Fund's portfolio securities may fluctuate in accordance with changes in the financial condition of the issuers of the portfolio securities, the value of common stocks generally and other factors.
An investment in a Select Sector SPDR Fund should also be made with an understanding of the risks inherent in an investment in equity securities, including the risk that the financial condition of issuers may become impaired or that the general condition of the stock market may deteriorate (either of which may cause a decrease in the value of the portfolio securities and thus in the value of Shares). Common stocks are susceptible to general stock 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.
While S&P often chooses a replacement company for the S&P 500 with some characteristics in common with a company or companies removed from the index, it is not uncommon for a replacement company to have little in common with the company it replaces. Consequently, the removal of one company and its replacement by another may affect two Select Sector Indexes and two Select Sector SPDR Funds, one of which included a company now removed from the S&P 500 and another which may have a company added to it.
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.
Although most of the securities in the Select Sector Indexes are listed on a national securities exchange, the principal trading market for some may be in the over-the-counter market. The existence of a liquid trading market for certain securities may depend on whether dealers will make a market in such securities. There can be no assurance that a market will be made or maintained or that any such market will be or remain liquid. The price at which securities may be sold and the value of a Select Sector SPDR Fund's Shares will be adversely affected if trading markets for a Select Sector SPDR Fund's portfolio securities are limited or absent or if bid/ask spreads are wide.
FUTURES AND OPTIONS TRANSACTIONS
Positions in futures contracts and options may be closed out only on an exchange which provides a secondary market therefor. 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 Select Sector SPDR Fund would continue to be required to make daily cash payments to maintain its required margin. In such situations, if a Select Sector SPDR 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, a Select Sector SPDR Fund may be required to make delivery of the instruments underlying futures contracts it has sold.
A Select Sector SPDR 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 stock index futures contracts) is potentially unlimited. The Select Sector SPDR Funds do not plan to use futures and options contracts, when available, in this way. 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 Select Sector SPDR 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 stocks.
Utilization of futures transactions by a Select Sector SPDR Fund involves the risk of imperfect or even negative correlation to the benchmark Select Sector Index if the index underlying the futures contracts differs from the benchmark Select Sector Index. There is also the risk of loss by a Select Sector SPDR Fund of margin deposits in the event of bankruptcy of a broker with whom a Select Sector SPDR 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 day's 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 Select Sector SPDR 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 such Fund's rights as a creditor.
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 of 1933 (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 Select Sector SPDR 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 AMEX is satisfied by the fact that such Select Sector SPDR Fund's prospectus is available at the AMEX upon request. The prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on an exchange.
EXCHANGE LISTING AND TRADING
A discussion of exchange listing and trading matters associated with an investment in the Select Sector SPDR Funds is contained in the Prospectus under the "DETERMINATION OF NET ASSET VALUE" and "BUYING AND SELLING SELECT SECTOR SPDRs." The discussion below supplements, and should be read in conjunction with, such sections of the Prospectus.
The Shares trade on the AMEX at prices that may differ to some degree from their net asset value. There can be no assurance that the requirements of the AMEX necessary to maintain the listing of Shares of any Select Sector SPDR Fund will continue to be met.
The AMEX may but is not required to remove the Shares of a Select Sector SPDR Fund from listing if (1) following the initial twelve-month period beginning upon the commencement of trading of a Select Sector SPDR Fund, there are fewer than 50 beneficial holders of the Shares for 30 or more consecutive trading days; (2) the value of the underlying Select Sector Index or portfolio of securities on which such Select Sector SPDR Fund is based is no longer calculated or available; or (3) such other event shall occur or condition
exists that, in the opinion of the AMEX, makes further dealings on the AMEX inadvisable. In addition, the AMEX will remove the Shares from listing and trading upon termination of the Trust.
As in the case of other stocks traded on the AMEX, brokers' commissions on transactions will be based on negotiated commission rates at customary levels.
MANAGEMENT OF THE TRUST
The following information supplements and should be read in conjunction with the section in the Prospectus entitled "MANAGEMENT."
TRUSTEES AND OFFICERS OF THE TRUST
The Board has responsibility for the overall management and operations of the
Trust, including general supervision of the duties performed by the Adviser and
other service providers. The Board currently consists of six (6) Trustees, five
(5) of whom are not "interested persons" (as defined in the 1940 Act) of the
Trust or any of the Select Sector SPDR Funds.
NUMBER OF
PORTFOLIOS
IN FUND
TERM OF OFFICE COMPLEX OTHER
NAME, ADDRESS POSITION(S) AND LENGTH PRINCIPAL OCCUPATION(S) OVERSEEN BY DIRECTORSHIPS
AND DATE OF BIRTH WITH FUNDS OF TIME SERVED DURING PAST 5 YEARS TRUSTEE HELD BY TRUSTEE
------------------------------ ------------- ----------------- ------------------------ ----------- -----------------------
GEORGE R. GASPARI Trustee, Unlimited Financial Services 9 0
P.O Box 844 Chairman, Elected: October Consultant (1996 to
124 Island Drive Member of the 1998 present).
Highland Lakes, NJ 07422 Audit
3/15/40 Committee
ERNEST J. SCALBERG Trustee, Unlimited Associate Vice President 9 0
Monterey Institute of Member of the Elected: October for External Programs
International Studies Audit 1998 and Dean of Fisher
460 Pierce St. Committee Graduate School of
Monterey, CA 93940 International Business
5/18/45 (2001 to present); Dean
of the Graduate School
of Business
Administration and Dean
of Faculty of the School
of Business at Fordham
University (April 1994
to 2001); Director,
Adviser or Trustee to
numerous non-profit
organizations (1974 to
present).
R. CHARLES TSCHAMPION Trustee; Unlimited Director, Industry 9 Trustee of Lehigh
CFA Institute Member of the Elected: October Relations, CFA Institute University and Chair of
477 Madison Ave. Audit 1998 (2005 to present) the Investment
New York, NY 10022 Committee Managing Director of Sub-Committee for the
4/15/46 Investment Research and Lehigh University
Managing Director of Endowment Fund.
Defined Contribution
Plans, General Motors
Asset Management
Corporation (1994 to
2005); Board of
Governors of the
Association for
Investment Management
Research (Member, 1995
to 2001; Chair,
1999-2000); India Magnum
Fund (1994 to 2005);
Trustee of Lehigh
University and Chair of
the Investment
Sub-Committee for the
Lehigh University
Endowment Fund
(October 1998 to
present).
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CHERYL BURGERMEISTER Trustee; Unlimited Retired; Trustee and 9 Trustee and Treasurer
One Lincoln Street Chairman Elected: October Treasurer of Portland of Portland Community
Boston, MA 02111 of the 1998 Community College College Foundation;
6/26/51 Audit Foundation (2001 to Trustee and Audit
Committee present); Finance Committee Chairman of
Committee Member/ E*Trade Funds (February
Chairman Portland 2004 to present).
Community College
Foundation (January 2001
to present); Trustee
Zero Gravity Internet
Fund (May 2000 to
November 2001); Active
CPA in Oregon.
KATHLEEN C. CUOCOLO Trustee; Unlimited President, Cuocolo & 9 Trustee, Boston College
243 Caterina Heights Member of Elected: May Associates, Fund School of Finance
Concord, MA 01742 the Audit 2001** Governance and Operation Advisory board;
2/3/52 Committee Consulting Director, Guardian Life
(2003-present); Park Avenue Series
Executive Vice
President, State Street
Bank and Trust Company
(March 2000-2003); CPA
in Massachusetts.
JAMES E. ROSS* Interested Unlimited President, SSgA Funds 32 streetTRACKS Series
SSgA Funds Management, Inc. Trustee Elected: Management, Inc. Trust (Trustee);
State Street Financial Center November 2005 (2005-present); streetTRACKS Index
One Lincoln Street Principal, SSgA Funds Shares Funds (Trustee).
Boston, MA 02111 Management, Inc.
6/24/65 (2001-present);
Principal, State Street
Global Advisors (March
2000 to present); Vice
President, State Street
Bank and Trust Company
(1998-March 2000).
OFFICERS
GARY L. FRENCH President Unlimited Senior Vice President, N/A N/A
State Street Bank and Elected: State Street Bank and
Trust Company May 2005 Trust Company
State Street Financial Center (2002-present); Managing
One Lincoln Street Director, Deutsche Bank
Boston, MA 02111 (2001-2002); President,
7/04/51 UAM Fund Services
(1995-2001).
MICHAEL P. RILEY Vice Unlimited Principal, State Street N/A N/A
SSgA Funds Management, Inc. President Elected: Global Advisors (2005 to
State Street Financial Center February 2005 present); Assistant Vice
One Lincoln Street President, State Street
Boston, MA 02111 Bank and Trust Company
3/22/69 (2000-2004).
JOHN W. CLARK Treasurer Unlimited Vice President, State N/A N/A
State Street Bank and Trust Elected: Street Bank & Trust
Company August 2005 Company (2001 -
State Street Financial Center present); Director,
One Lincoln Street Investors Bank & Trust
Boston, MA 02111 Company (1998 - 2000);
3/24/67 Assistant Vice
President, Investors
Bank & Trust Company
(1996 - 1998).
MATTHEW FLAHERTY Assistant Unlimited Assistant Director, N/A N/A
State Street Bank and Trust Treasurer Elected: State Street Bank and
Company May 2005 Trust (1994-present).
State Street Financial Center
One Lincoln Street
Boston, MA 02111
2/19/71
MARY MORAN ZEVEN Secretary Unlimited Senior Vice President N/A N/A
State Street Bank and Elected: November and Senior Managing
Trust Company 2001 Counsel, (2002-present)
State Street Financial Center and Vice President and
One Lincoln Street Associate Counsel,
Boston, MA 02111 (2000-2002), State
2/27/61 Street Bank and Trust
Company; Vice President
and Counsel, PFPC, Inc.
1999 to 2000.
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SCOTT M. ZOLTOWSKI Assistant Unlimited Vice President and N/A N/A
State Street Bank and Secretary Elected: November Counsel, (2004-present);
Trust Company 2004 Senior Counsel, BISYS,
State Street Financial Center Inc. (2001-2004);
One Lincoln Street Associate, Dechert LLP
Boston, MA 02111 (1999-2001).
1/30/69
PETER A. AMBROSINI Chief Unlimited Senior Principal and N/A N/A
SSgA Funds Compliance Elected: Chief Compliance and
Management, Inc. Officer May 2003 Risk Management Officer,
State Street Financial Center SSgA Funds Management,
One Lincoln Street Inc. and State Street
Boston, MA 02111 Global Advisors
12/17/43 (2001-present); Managing
Director,
PricewaterhouseCoopers
LLP (1986-2001).
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* Mr. Ross is an "interested person" of the Trust, as defined in the 1940 Act, by virtue of his position as an officer of the Adviser.
** Deemed to not be an interested person since September 2005.
REMUNERATION OF TRUSTEES AND OFFICERS
No officer, director or employee of the Adviser, its parent or subsidiaries receives any compensation from the Trust for serving as an officer or Trustee of the Trust. The Trust pays each Trustee, who is not an "interested person" (as defined in the 1940 Act), an annual fee of $24,000 plus a per meeting fee of $3,000 for scheduled quarterly meetings of the Board of Trustees attended by the Trustee and $1,000 for each special telephone meeting, if applicable. The Chairman of the Board receives an additional fee of $12,000 per year. The Trust also reimburses each Trustee for travel and other out-of-pocket expenses incurred by him/her in connection with attending such meetings. Audit Committee Members receive $2,000 per committee meeting attended except for the Chairman of the Audit Committee who receives $3,000 per committee meeting attended. Any interested Trustees receive no compensation for his/her service as Trustee. The Trustee fees and expenses are allocated among the Funds based on net assets. For the fiscal year ended September 30, 2005, the Funds contributed the following amounts:
FUND AMOUNT ---- ------- The Consumer Discretionary Select Sector SPDR Fund $ 9,679 The Consumer Staples Select Sector SPDR Fund $18,314 The Energy Select Sector SPDR Fund $46,912 The Financial Select Sector SPDR Fund $33,112 The Health Care Select Sector SPDR Fund $27,748 The Industrial Select Sector SPDR Fund $19,715 The Materials Select Sector SPDR Fund $19,981 The Technology Select Sector SPDR Fund $30,701 The Utilities Select Sector SPDR Fund $44,654 |
The following table sets forth the total remuneration of Trustees and officers of the Trust for the fiscal year ended September 30, 2005.
TOTAL COMPENSATION
AGGREGATE PENSION OR RETIREMENT ESTIMATED ANNUAL FROM TRUST & TRUST
COMPENSATION FROM BENEFITS ACCRUED AS BENEFITS UPON COMPLEX PAID TO
NAME OF TRUSTEE TRUST PART OF TRUST EXPENSES RETIREMENT TRUSTEES
--------------------- ----------------- ---------------------- ---------------- ------------------
George R. Gaspari $42,000 N/A N/A $42,000
Ernest J. Scalberg $40,000 N/A N/A $40,000
R. Charles Tschampion $40,000 N/A N/A $40,000
Cheryl Burgermeister $40,000 N/A N/A $40,000
Kathleen Cuocolo $ 7,652 N/A N/A $ 7,652
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No Trustee or officer is entitled to any pension or retirement benefits from the Trust.
STANDING COMMITTEES OF THE BOARD OF TRUSTEES
Audit Committee. The Board of Trustees has an Audit Committee consisting of all Trustees who are not "interested persons" (as defined by the 1940 Act) of the Trust. The Audit Committee meets with the Trust's independent auditors to review and approve the scope and results of their professional services; to review the procedures for evaluating the adequacy of the Trust's accounting controls; to review and approve the fees charged by the independent auditors for audit and non-audit services; and to make recommendations to the Board regarding the engagement or termination of the Trust's independent auditors. The Audit Committee met twice during the fiscal year ended September 30, 2005.
Pricing Committee. The Board of Trustees also has established a Pricing Committee that is composed of Officers of the Trust, investment management personnel of the Adviser and senior operations and administrative personnel of State Street. The Pricing Committee is responsible for the valuation and revaluation of any portfolio investments for which market quotations or prices are not readily available. The Pricing Committee meets only when necessary. During the fiscal year ended September 30, 2005, the Pricing Committee did not meet. Committee members do not receive any compensation from the Trust for their services.
OWNERSHIP OF FUND SHARES
The following table sets forth information describing the dollar range of equity securities beneficially owned by each Trustee in the Trust as of December 31, 2005.
AGGREGATE DOLLAR RANGE OF EQUITY
SECURITIES IN ALL REGISTERED INVESTMENT
DOLLAR RANGE OF EQUITY SECURITIES COMPANIES OVERSEEN BY TRUSTEE IN FAMILY
NAME OF TRUSTEE IN THE TRUST OF INVESTMENT COMPANIES
------------------------ --------------------------------- ---------------------------------------
Cheryl Burgermeister None None
Kathleen Cuocolo None None
George Gaspari, Chairman $10,001-$50,000 $10,001-$50,000
Ernest Scalberg None None
R. Charles Tschampion None None
James Ross* None None
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* Indicates an Interested Trustee
CODE OF ETHICS
The Trust, the Adviser, and the Distributor each have adopted a code of ethics as required by applicable law, which is designed to prevent affiliated persons of the Trust, the 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 SEC's website at http://www.sec.gov.
PROXY VOTING POLICIES
The Funds have adopted the proxy voting policies of the Adviser. The Adviser's proxy voting policy is attached to this Statement of Additional Information as Appendix A. Information regarding how the Funds voted proxies relating to their portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge by calling 1-866-787-2257; and (2) on the SEC's website at http://www.sec.gov.
DISCLOSURE OF PORTFOLIO HOLDINGS POLICY
The Trust has adopted a policy regarding the disclosure of information about the Trust's portfolio holdings. The Board of Trustees of the Trust must approve all material amendments to this policy. The Funds' portfolio holdings are publicly disseminated each day the Funds are open for business through financial reporting and news services including publicly accessible Internet web sites. In addition, a basket composition file, which includes the security names and share quantities to deliver in exchange for Fund shares, together with estimates and actual cash components, is publicly disseminated daily prior to the opening of the AMEX via the National
Securities Clearing Corporation (NSCC). The basket represents one creation unit of the Funds. The Trust, the Adviser or State Street will not disseminate non-public information concerning the Trust.
THE INVESTMENT ADVISER
SSgA Funds Management Inc., State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, acts as investment adviser to the Trust and, subject to the supervision of the Board, is responsible for the investment management of each Select Sector SPDR Fund. The Adviser and other advisory affiliates of State Street make up State Street Global Advisors ("SSgA"), the investment management arm of State Street Corporation. As of December 31, 2005, the Adviser managed approximately $96.7 billion in assets. As of December 31, 2005, SSgA managed approximately $1.4 trillion in assets, including approximately $578 billion in equity index funds. SSgA provides complete global investment management services from offices in the U.S., London, Sydney, Hong Kong, Tokyo, Toronto, Luxembourg, Montreal, Paris, Dublin, Munich and Brussels.
The Adviser serves as investment adviser to each Select Sector SPDR Fund pursuant to an Investment Advisory Agreement between the Trust and the Adviser. Under the Investment Advisory Agreement, the Adviser, subject to the supervision of the Board and in conformity with the stated investment policies of each Select Sector SPDR Fund, manages the investment of each Select Sector SPDR Fund's assets. The Adviser is responsible for placing purchase and sale orders and providing continuous supervision of the investment portfolio of each Select Sector SPDR Fund.
In considering whether to continue each Fund's Investment Advisory Agreement, the Trustees considered all information they deemed relevant, including, among other things, the nature and quality of the services rendered, the reasonableness of overall compensation to be paid by the Fund to the Adviser, the requirements of the Fund for the services provided by the Adviser, the investment performance of the Fund, the costs of the Adviser in providing services, the extent to which economies of scale are shared with the Fund, the Adviser's profitability in providing services, the Fund's total expenses, and information with respect to the Adviser's fees as compared to those of comparable funds.
Pursuant to the Investment Advisory Agreement, the Trust has agreed to indemnify the Adviser for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations and duties.
The Investment Advisory Agreement with respect to each Select Sector SPDR Fund continues in effect for two years from its effective date, and thereafter is subject to annual approval by (1) the Board of Trustees or (2) vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the Select Sector SPDR Fund, provided that in either event such continuance also is approved by a majority of the Board of Trustees who are not interested persons (as defined in the 1940 Act) of the Trust by a vote cast in person at a meeting called for the purpose of voting on such approval. The Investment Advisory Agreement with respect to each Select Sector SPDR Fund is terminable without penalty, on 60 days notice, by the Board of Trustees or by a vote of the holders of a majority (as defined in the 1940 Act) of the applicable Select Sector SPDR Fund's outstanding voting securities. The Investment Advisory Agreement is also terminable upon 60 days notice by the Adviser and will terminate automatically in the event of its assignment (as defined in the 1940 Act).
PORTFOLIO MANAGERS
The Adviser manages the Select Sector SPDR Funds using a team of investment professionals. The following table lists the number and types of accounts managed by each of the key professionals involved in the day-to-day portfolio management for the Funds and assets under management in those accounts as of November 30, 2005:
Registered Pooled Total
Investment Assets Investment Assets Assets Assets
Portfolio Company Managed Vehicle Managed Other Managed Managed
Manager Accounts (billions) Accounts (billions) Accounts (billions) (billions)*
--------------- ---------- ---------- ---------- ---------- -------- ---------- -----------
Michael Feehily 2 $7.41 5 $17.08 12 $9.77 $34.26
John Tucker 9 $1.23 4 $ 4.42 7 $8.74 $14.39
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* The total number of accounts and assets have been allocated to each respective manager. Therefore, some accounts and assets have been counted twice.
The portfolio managers listed above, do not beneficially own any shares of the Fund or the Portfolio as of September 30, 2005.
A portfolio manager may be subject to potential conflicts of interest because he or she is responsible for other accounts in addition to the fund. Potential conflicts may arise out of: (a) the portfolio manager's execution of different investment strategies for various accounts; or (b) the allocation of investment opportunities among the portfolio manager's accounts with the same strategy.
A potential conflict of interest may arise as a result of the portfolio managers' responsibility for multiple accounts with similar investment guidelines. Under these circumstances, a potential investment may be suitable for more than one of the portfolio manager's accounts, but the quantity of the investment available for purchase is less than the aggregate amount the accounts would ideally devote to the opportunity. Similar conflicts may arise when multiple accounts seek to dispose of the same investment. The portfolio manager may also manage accounts whose objective and policies differ from that of the fund. These differences may be such that under certain circumstances, trading activity appropriate for one account managed by the portfolio manager may have adverse consequences for another account managed by the portfolio manager. For example, an account may sell a significant position in a security, which could cause the market price of that security to decrease, while the fund maintained its position in that security.
A potential conflict may arise when the portfolio manager is responsible for accounts that have different advisory fees - the difference in fees could create an incentive for the portfolio manager to favor one account over another, for example, in terms of access to investment opportunities. This conflict may be heightened if an account is subject to a performance-based fee. Another potential conflict may arise when the portfolio manager has an investment in one or more accounts that participates in transactions with other accounts. His or her investment(s) may create an incentive for the portfolio manager to favor one account over another. The Adviser has adopted policies and procedures reasonably designed to address these potential material conflicts. For instance, portfolio managers within SSgA FM are normally responsible for all accounts within a certain investment discipline, and do not, absent special circumstances, differentiate among the various accounts when allocating resources. Additionally, the Adviser and its advisory affiliates have processes and procedures for allocating investment opportunities among portfolios that are designed to provide a fair and equitable allocation.
The compensation of the portfolio managers is based on a number of factors. The first factor considered is external market. Through extensive compensation survey process, the Adviser seeks to understand what its competitors are paying people to perform similar roles. This data is then used to determine a competitive baseline in the areas of base pay, bonus, and long term incentive (i.e. equity). The second factor taken into consideration is the size of the pool available for this compensation. The Adviser is a part of State Street Corporation, and therefore works within its corporate environment on determining the overall level of its incentive compensation pool. Once determined, this pool is then allocated to the various locations and departments of the Adviser and its affiliates. The discretionary determination of the allocation amounts to these locations and departments is influenced by the competitive market data, as well as the overall performance of the group. The pool is then allocated on a discretionary basis to individual employees based on their individual performance. There is no fixed formula for determining these amounts, nor is anyone's compensation directly tied to the investment performance or asset value of a product or strategy. The same process is followed in determining incentive equity allocations.
THE ADMINISTRATOR
State Street Bank and Trust Company, State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, serves as Administrator for the Trust pursuant to an Administrative Services Agreement. Under the Administrative Services Agreement, State Street is obligated on a continuous basis to provide such administrative services as the Board of Trustees of the Trust reasonably deems necessary for the proper administration of the Trust and each Select Sector SPDR Fund. State Street will generally assist in all aspects of the Trust's and the Select Sector SPDR Funds' operations; supply and maintain office facilities (which may be in State Street's own offices), statistical and research data, data processing services, clerical, accounting, bookkeeping and record keeping services (including without limitation the maintenance of such books and records as are required under the 1940 Act and the rules thereunder, except as maintained by other agents), internal auditing, executive and administrative services, and stationery and office supplies; prepare reports to shareholders or investors; prepare and file tax returns; supply financial information and supporting data for reports to and filings with the SEC and various state Blue Sky authorities; supply supporting documentation for meetings of the Board of Trustees; provide monitoring reports and assistance regarding compliance with the Declaration of Trust, by-laws, investment objectives and policies and with federal and state securities laws; arrange for appropriate insurance coverage; and negotiate arrangements with, and supervise and coordinate the activities of, agents and others to supply services.
Pursuant to the Administrative Services Agreement, the Trust has agreed to indemnify the Administrator for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from gross negligence or willful misconduct in the performance of its duties.
CUSTODIAN AND TRANSFER AGENT
State Street Bank and Trust Company, State Street Financial Center, One Lincoln Street, Boston, Massachusetts 02111, also serves as Custodian for the Select Sector SPDR Funds pursuant to a Custodian Agreement. As Custodian, State Street holds the Select Sector SPDR Funds' assets, calculates the net asset value of the Shares and calculates net income and realized capital gains or losses. State Street also serves as Transfer Agent of the Select Sector SPDR Funds pursuant to a Transfer Agency Agreement. State Street may be reimbursed by the Select Sector SPDR Funds for its out-of-pocket expenses. State Street and the Trust will comply with the self-custodian provisions of Rule 17f-2 under the 1940 Act.
COMPENSATION
As compensation for its services under the Investment Advisory Agreement, the Adviser is paid a monthly fee based on a percentage of each Select Sector SPDR Fund's average daily net assets at the annual rate of 0.05% for the first $12.5 billion of average daily net assets of the Trust and 0.04% thereafter. From time to time, the Adviser may waive all or a portion of its fee. For the past three fiscal years ended September 30, the Funds paid the following amounts to the Adviser:
FUND NAME 2005 2004 2003 --------- ---------- -------- -------- The Consumer Discretionary Select Sector SPDR Fund $ 190,197 $139,331 $ 81,623 The Consumer Staples Select Sector SPDR Fund $ 370,882 $219,410 $120,240 The Energy Select Sector SPDR Fund $1,115,841 $455,031 $168,327 The Financial Select Sector SPDR Fund $ 653,020 $410,354 $341,280 The Health Care Select Sector SPDR Fund $ 656,316 $303,368 $109,698 The Industrial Select Sector SPDR Fund $ 371,691 $284,930 $183,344 The Materials Select Sector SPDR Fund $ 380,163 $326,434 $153,091 The Technology Select Sector SPDR Fund $ 579,378 $514,957 $493,135 The Utilities Select Sector SPDR Fund $ 874,980 $611,252 $380,486 |
As compensation for its services under the Administrative Services Agreement, the Custodian Agreement and the Transfer Agency Agreement, State Street is paid a "unitary fee." See "Annual Fund Operating Expenses" under "SUMMARY OF SELECT SECTOR SPDR FUND EXPENSES" in the Prospectus for a description of the unitary fee. Each Select Sector SPDR Fund will also bear all other expenses of its operation.
THE DISTRIBUTOR
ALPS Distributors, Inc. is the principal underwriter and Distributor of Shares. Its principal address is 1625 Broadway, Suite 2200, Denver, CO 80202. Investor information can be obtained by calling 1-800-843-2639. The Distributor has entered into a Distribution Agreement with the Trust pursuant to which it distributes Shares of each Select Sector SPDR Fund. The Distribution Agreement will continue for two years from its effective date and is renewable annually thereafter. Shares will be continuously offered for sale by the Trust through the Distributor only in Creation Units, as described in the Prospectus and below under "CREATION AND REDEMPTION OF CREATION UNITS." Shares in less than Creation Units are not distributed by the Distributor. The Distributor will deliver the Prospectus to persons purchasing Creation Units and will maintain records of both orders placed with it and confirmations of acceptance furnished by it. The Distributor is a broker-dealer registered under the Securities Exchange Act of 1934 (the "Exchange Act") and is a member of the National Association of Securities Dealers, Inc. The Distributor has no role in determining the investment policies of the Trust or which securities are to be purchased or sold by the Trust.
The Board of Trustees has adopted a distribution plan pursuant to Rule 12b-1 under the 1940 Act (each, a "Plan") for each Select Sector SPDR Fund. The terms of each Plan are described in the Prospectus.
Under its terms, each Select Sector SPDR Fund's Plan remains in effect from year to year, provided such continuance is approved annually by vote of the Board, including a majority of the "Independent Trustees" (Trustees who are not interested persons of the Fund (as defined in the 1940 Act) and have no direct or indirect financial interest in the operation of the Plan or any agreement related to the
Plan). The Plan may not be amended to increase materially the amount to be spent for the services provided by the Distributor without approval by the shareholders of the Select Sector SPDR Fund to which the Plan applies, and all material amendments of the Plan also require Board approval (as described above). Each Plan may be terminated at any time, without penalty, by vote of a majority of the Independent Trustees, or, by a vote of a majority of the outstanding voting securities of such Select Sector SPDR Fund (as such vote is defined in the 1940 Act). Pursuant to the Distribution Agreement, the Distributor will provide the Board with periodic reports of any amounts expended under the Plan and the purpose for which such expenditures were made.
The Distribution Agreement provides that it may be terminated at any time, without the payment of any penalty, as to each Select Sector SPDR Fund: (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Select Sector SPDR Fund, on at least 60 days written notice to the Distributor. The Distribution Agreement is also terminable upon 60 days notice by the Distributor and will terminate automatically in the event of its assignment (as defined in the 1940 Act).
Pursuant to agreements entered into with such persons, the Distributor will make payments under each Select Sector SPDR Fund's Plan to certain broker-dealers or other persons ("Investor Services Organizations") that enter into agreements with the Distributor in the form approved by the Board of Trustees to provide distribution assistance and shareholder support, account maintenance and educational and promotional services (which may include compensation and sales incentives to the registered brokers or other sales personnel of the broker-dealer or other financial entity that is a party to an investor services agreement) ("Investor Services Agreements"). Each Investor Services Agreement will be a "related agreement" under the Plan of the relevant Select Sector SPDR Fund. No Investor Services Agreement will provide for annual fees of more than 0.10% of a Select Sector SPDR Fund's average daily net assets per annum attributable to Shares subject to such agreement.
Subject to an aggregate limitation of 0.25% of a Select Sector SPDR Fund's average net assets per annum, the fees paid by a Select Sector SPDR Fund under its Plan will be compensation for distribution, investor services or marketing services for that Fund. To the extent the Plan fees aggregate less than 0.25% per annum of the average daily net assets of a Select Sector SPDR Fund, each Fund may also reimburse the Distributor and other persons for their respective costs incurred in printing prospectuses and producing advertising or marketing material prepared at the request of the Fund. The aggregate payments under each Plan will not exceed, on an annualized basis, 0.25% of average daily net assets of any Select Sector SPDR Fund. Each Fund limited its Rule 12b-1 fee to 0.07% of its average daily net assets at least through January 31, 2007.
The continuation of the Distribution Agreement, any Investor Services Agreements and any other related agreements is subject to annual approval of the Board, including by a majority of the Independent Trustees, as described above.
Each of the Investor Services Agreements will provide that it may be terminated at any time, without the payment of any penalty, (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority of the outstanding voting securities (as defined in the 1940 Act) of the relevant Select Sector SPDR Fund, on at least 60 days' written notice to the other party. Each of the Distribution Agreement and the Investor Services Agreements is also terminable upon 60 days' notice by the Distributor and will terminate automatically in the event of its assignment (as defined in the 1940 Act). Each Investor Services Agreement is also terminable by the applicable Investor Service Organization upon 60 days' notice to the other party thereto.
The allocation among the Select Sector SPDR Funds of fees and expenses payable under the Distribution Agreement and the Investor Services Agreements will be made pro rata in accordance with the daily net assets of the respective Funds.
The Distributor may also enter into agreements with securities dealers ("Soliciting Dealers") who will solicit purchases of Creation Unit aggregations of Select Sector SPDR Fund Shares. Such Soliciting Dealers may also be Participating Parties (as defined below), DTC Participants (as defined below) and/or Investor Services Organizations.
Pursuant to the Distribution Agreement, the Trust has agreed to indemnify the Distributor, and may indemnify Soliciting Dealers entering into agreements with the Distributor, for certain liabilities, including certain liabilities arising under the federal securities laws, unless such loss or liability results from willful misfeasance, bad faith or gross negligence in the performance of its duties or the reckless disregard of its obligations and duties under the Distribution Agreement or other agreement, as applicable.
INDEX LICENSE
S&P, the AMEX and Merrill Lynch have entered into a license agreement with respect to each Select Sector SPDR Fund's Select Sector Index. The Trust pays an annual sub-license fee per annum (i) to S&P equal to the greater of 0.03% of the aggregate net assets
of the Trust or $450,000 (the "Minimum Annual Fee"), and (ii) to Merrill Lynch equal to 0.03% of the aggregate net assets of the Trust. The Minimum Annual Fee is payable in full on each anniversary of the first day of trading, December 22, 1998 (the "First Trading Day"). The fee to Merrill Lynch is payable on a quarterly basis. Each Select Sector SPDR Fund will pay its proportionate share of the annual sub-license fees based on the relative net assets of such Fund.
BROKERAGE TRANSACTIONS
The policy of the Trust regarding purchases and sales of securities for the Select Sector SPDR Funds 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 Trust's 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 the Select Sector SPDR Funds and the Adviser from obtaining a high quality of brokerage services. In seeking to determine the reasonableness of brokerage commissions paid in any transaction, the Adviser relies 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, an exact dollar value for those services is not ascertainable.
The Adviser owes a duty to its clients to provide best execution on trades effected. In selecting a broker/dealer for each specific transaction, The Adviser chooses the broker/dealer deemed most capable of providing the services necessary to obtain the most favorable execution and does not take the sales of Fund shares into account. 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 Adviser will also use ECNs when appropriate.
The Adviser does not presently participate in any soft dollar arrangements. It may aggregate trades with clients of SSgA, whose commission dollars are used to generate soft dollar credits. Although the Adviser's clients' commissions are not used for soft dollars, the clients may benefit from the soft dollar products/services received by SSgA.
The Select Sector SPDR Funds will not deal with affiliates in principal transactions unless permitted by exemptive order or applicable rule or regulation.
The table below shows the aggregate dollar amount of brokerage commissions paid by the Funds for the fiscal years ended September 30. None of the brokerage commissions paid were paid to affiliated brokers.
FUND 2005 2004 2003 ---- ------- -------- ------- The Consumer Discretionary Select Sector SPDR Fund $ 5,941 $ 932 $ 2,620 The Consumer Staples Select Sector SPDR Fund $ 3,817 $ 2,021 $ 4,170 The Energy Select Sector SPDR Fund $63,513 $ 26,493 $19,326 The Financial Select Sector SPDR Fund $15,707 $ 6,201 $10,272 The Health Care Select Sector SPDR Fund $ 3,779 $ 2,497 $ 2,561 The Industrial Select Sector SPDR Fund $ 2,237 $ 6,725 $ 5,116 The Materials Select Sector SPDR Fund $64,960 $ 11,483 $10,007 The Technology Select Sector SPDR Fund $22,908 $ 14,704 $22,050 The Utilities Select Sector SPDR Fund $22,256 $ 27,252 $45,346 |
Holdings in Shares of Regular Broker-Dealers as of September 30, 2005.
Morgan Stanley Company Incorporated $41,260,432 Merrill Lynch and Company Incorporated $40,057,992 Goldman Sachs Group Incorporated $39,856,599 |
Lehman Brothers Holdings Incorporated $22,342,029 State Street Corporation* $11,412,253 |
* Holdings in the Financial Select Sector SPDR Fund represent a security affiliated with the Adviser and State Street.
The Financial Select Sector SPDR Fund invests in the shares of some of the Funds' regular broker-dealers because those issuers are components in the Financial Select Sector Index.
The Adviser assumes general supervision over placing orders on behalf of the Trust for the purchase or sale of portfolio securities. If purchases or sales of portfolio securities of the Trust and one or more other investment companies or clients supervised by the Adviser or SSgA 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 to all by the Adviser. In some cases, this procedure could have a detrimental effect on the price or volume of the security so far as the Trust is 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 Trust. The primary consideration is prompt execution of orders at the most favorable net price.
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 portfolio turnover rate for each Select Sector SPDR Fund is expected to be under 50%. See "INVESTMENT POLICIES AND STRATEGIES" in the Prospectus. The overall reasonableness of brokerage commissions is evaluated by the Adviser based upon its knowledge of available information as to the general level of commissions paid by other institutional investors for comparable services.
BOOK ENTRY ONLY SYSTEM
The following information supplements and should be read in conjunction with the section in the Prospectus entitled "BUYING AND SELLING SELECT SECTOR SPDRs."
DTC acts as securities depositary for the Shares. Shares of each Select Sector SPDR Fund are represented by securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except in the limited circumstance provided below, certificates will not be issued for Shares.
DTC, a limited-purpose trust company, was created to hold securities of its participants (the "DTC Participants") and to facilitate the clearance and settlement of securities transactions among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the New York Stock Exchange ("NYSE"), the AMEX and the National Association of Securities Dealers, Inc. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or indirectly (the "Indirect Participants").
Beneficial ownership of Shares is limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as "Beneficial Owners") is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and Beneficial Owners that are not DTC Participants). Beneficial Owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares.
Conveyance of all notices, statements and other communications to Beneficial Owners is effected as follows. Pursuant to the Depositary Agreement between the Trust and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of the Shares of each Fund held by each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial Owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial Owners. In addition, the Trust shall pay to each such DTC Participant a fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
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 Shares of each 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 aspects of the records relating to or notices to Beneficial Owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants and the Indirect Participants and Beneficial Owners owning through such DTC Participants.
DTC may determine to discontinue providing its service with respect to Shares at any time by giving reasonable notice to the Trust and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Trust shall take action either to find a replacement for DTC to perform its functions at a comparable cost or, if such a replacement is unavailable, to issue and deliver printed certificates representing ownership of Shares, unless the Trust makes other arrangements with respect thereto satisfactory to the AMEX.
CONTROL PERSONS AND PRINCIPAL HOLDERS OF SECURITIES
Although the Select Sector SPDR Funds do not have information concerning the beneficial ownership of Select Sector SPDR's held in the names of DTC Participants, as of December 30, 2005 the names, addresses and percentage ownership of each DTC Participant that owned of record 5% or more of the outstanding shares of a Select Sector SPDR Fund were as follows:
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- ----------------------
CONSUMER
DISCRETIONARY
SELECT SECTOR
SPDR FUND
1 North Jefferson
A.G. Edwards & Sons, Inc. 23.71% St. Louis, MO 63103
4 Corporate Place
Merrill, Lynch, Pierce Fenner Smith Corporate Park 287
Safekeeping 9.84% Piscataway, NJ 08855r
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 6.72% Edgewood, NY 11717
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- ----------------------
CONSUMER
STAPLES SELECT
SECTOR SPDR
FUND
4 Corporate Place
Merrill, Lynch, Pierce Fenner Corporate Park 287
Smith Safekeeping 21.97% Piscataway, NJ 08855
1 North Jefferson
AG Edwards & Sons, Inc. 10.08% St. Louis, MO 63103
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Co., Inc. 8.64% Edgewood, NY 11717
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
ENERGY SELECT
SECTOR SPDR
FUND
One Lincoln Street
State Street Bank & Trust Co. 19.30% Boston, MA 02111
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 9.55% Edgewood, NY 11717
4 Corporate Place
Corporate Park 287
Merrill, Lynch, Pierce Fenner Smith 7.15% Piscataway, NJ 08855
Safekeeping
200 Liberty Street
National Financial Services 6.33% New York, NY 10281
63 Wall Street, 8th Floor
Brown Brothers Harriman & Co. 5.10% New York, NY 10005
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
FINANCIAL
SELECT SECTOR
SPDR FUND
1 North Jefferson
A.G. Edwards & Sons, Inc. 15.64% St. Louis, MO 63103
600 Montgomery Street
4th Floor
Banc of America Securities LLC 11.84% San Francisco, CA 94111
One Lincoln Street
State Street Bank & Trust Co. 6.82% Boston, MA 02111
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 6.02% Edgewood, NY 11717
One Pierrepont Plaza,
7th Floor, Brooklyn,
Morgan Stanley & Co., Inc. 5.07% NY 11201
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
HEALTH CARE
SELECT SECTOR
SPDR FUND
600 Montgomery Street
4th Floor
Banc of America Securities LLC 12.91% San Francisco, CA 94111
4 Corporate Place
Corporate Park 287
Merrill, Lynch, Pierce Fenner Smith 11.32% Piscataway, NJ 08855
Safekeeping
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 10.44% Edgewood, NY 11717
|
200 Liberty Street
National Financial Services Corp. 5.11% New York, NY 10281
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
INDUSTRIAL
SELECT SECTOR
SPDR FUND
1 North Jefferson
A.G. Edwards & Sons, Inc. 21.04% St. Louis, MO 63103
4 Corporate Place
Corporate Park 287
Merrill, Lynch, Pierce Fenner Smith 9.12% Piscataway, NJ 08855
Safekeeping
225 Franklin Street
State Street Bank & Trust Company 8.02% Boston, MA 02110
333 W. 34th Street
CitiGroup 5.01% New York, NY 10001
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
MATERIALS
SELECT SECTOR
SPDR FUND
One Lincoln Street
State Street Bank & Trust Co. 25.98% Boston, MA 02111
c/o ADP Proxy Services,
51 Mercedes Way
Charles Schwab & Company, Inc. 8.13% Edgewood, NY 11717
925 Patterson Plank Road
Bank of New York 7.39% Secaucus, NJ 07094
200 Liberty Street
National Financial Services 5.36% New York, NY 10281
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- -------------------------
TECHNOLOGY
SELECT SECTOR
SPDR FUND
1 North Jefferson
A.G. Edwards & Sons, Inc. 14.08% St. Louis, MO 63103
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 13.05% Edgewood, NY 11717
4 Corporate Place
Corporate Park 287
Merrill, Lynch, Pierce Fenner Smith 6.98 Piscataway, NJ 08855
Safekeeping
200 Liberty Street
National Financial Services 6.17% New York, NY 10281
|
FUND NAME COMPANY NAME % OWNERSHIP ADDRESS
--------- ----------------------------------- ----------- ----------------------------
UTILITIES
SELECT SECTOR
SPDR FUND
4 Corporate Place
Corporate Park 287
Merrill, Lynch, Pierce Fenner Smith 14.82% Piscataway, NJ 08855
Safekeeping
4 New York Plaza, 13th Floor
JP Morgan Chase 7.90% New York, NY 10004
c/o ADP Proxy Services
51 Mercedes Way
Charles Schwab & Company, Inc. 6.91% Edgewood, NY 11717
333 W. 34th Street
CitiGroup 6.10% New York, NY 10001
26610 West Agoura Road
Wells Fargo & Co. 5.90% Calabasas, CA 91302
|
CREATION AND REDEMPTION OF CREATION UNITS
CREATION
The Trust issues and sells Shares of each Select Sector SPDR Fund only: (i) in Creation Units on a continuous basis through the Distributor, without a sales load, at their net asset value next determined after receipt, on any Business Day (as defined below), of an order in proper form; or (ii) pursuant to the Dividend Reinvestment Plan.
A "Business Day" with respect to each Select Sector SPDR Fund is any day on which the NYSE is open for business. As of the date of the Prospectus, the NYSE observes the following holidays: New Year's Day, Martin Luther King, Jr. Day, President's Day (Washington's Birthday), Good Friday, Memorial Day (observed), Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
FUND DEPOSIT
The consideration for purchase of a Creation Unit of a Select Sector SPDR Fund generally consists of the in-kind deposit of a designated portfolio of equity securities -- the "Deposit Securities" -- per each Creation Unit constituting a substantial replication, or a representation, of the stocks included in the relevant Select Sector SPDR Fund's Select Sector Index and an amount of cash - the "Cash Component" -- computed as described below. Together, the Deposit Securities and the Cash Component constitute the "Fund Deposit," which represents the minimum initial and subsequent investment amount for a Creation Unit of any Select Sector SPDR Fund. The Cash Component is an amount equal to the Dividend Equivalent Payment (as defined below), plus or minus, as the case may be, a Balancing Amount (as defined below). The "Dividend Equivalent Payment" enables each Fund to make a complete distribution of dividends on the day preceding the next dividend payment date, and is an amount equal, on a per Creation Unit basis, to the dividends on all the portfolio securities of the Fund ("Fund Securities") with ex-dividend dates within the accumulation period for such distribution (the "Accumulation Period"), net of expenses and liabilities for such period, as if all of the Fund Securities had been held by the Fund for the entire Accumulation Period. The Accumulation Period begins on the ex-dividend date for each Fund and ends on the day preceding the next ex-dividend date. The "Balancing Amount" is an amount equal to the difference between the net asset value of the Shares (per Creation Unit) and the "Deposit Amount" -- an amount equal to the sum of the market value of the Deposit Securities and the Dividend Equivalent Payment. If the Balancing Amount is a positive number (i.e., the net asset value per Creation Unit exceeds the Deposit Amount), the Cash Component shall be increased by such positive amount. If the Balancing Amount is a negative number (i.e., the net asset value per Creation Unit is less than the Deposit Amount), the Cash Component shall be decreased by such negative amount. If the negative number is greater than the Dividend Equivalent Payment, the creator will be entitled to receive cash in an amount equal to the differential. The Balancing Amount serves the function of compensating for any differences between the net asset value per Creation Unit and the Deposit Amount.
The Custodian, through the National Securities Clearing Corporation ("NSCC") (discussed below), makes available on each Business Day, immediately prior to the opening of business on the AMEX (currently 9:30 a.m., New York time), the list of the names and the required number of shares of each Deposit Security to be included in the current Fund Deposit (based on information at the end of the previous Business Day) for each Select Sector SPDR Fund. Such Fund Deposit is applicable, subject to any adjustments as described below, in order to effect creations of Creation Units of a given Select Sector SPDR Fund until such time as the next-announced composition of the Deposit Securities is made available.
The identity and number of shares of the Deposit Securities required for a Fund Deposit for each Select Sector SPDR Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by the Adviser with a view to the investment objective of the Select Sector SPDR Fund. The composition of the Deposit Securities may also change in response to adjustments to the weighting or composition of the Component Stocks of the relevant Select Sector Index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash -- i.e., a "cash in lieu" amount -- to be added to the Cash Component to replace any Deposit Security which may not be available in sufficient quantity for delivery or which may not be eligible for transfer through the Clearing Process (discussed below), or which may not be eligible for trading by an Authorized Participant (as defined below) or the investor for which it is acting, (a "Custom Order"). Brokerage commissions incurred in connection with acquisition of Deposit Securities not eligible for transfer through the systems of DTC and hence not eligible for transfer through the Clearing Process (discussed below) will be at the expense of the Fund and will affect the value of all Shares; but the Adviser, subject to the approval of the Board of Trustees, may adjust the transaction fee within the parameters described above to protect ongoing shareholders. 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 Select Sector Index being tracked by the relevant Select Sector SPDR Fund or resulting from certain corporate actions.
In addition to the list of names and numbers of securities constituting the current Deposit Securities of a Fund Deposit, the Custodian, through the NSCC, also makes available on each Business Day, the Dividend Equivalent Payment, effective through and including the previous Business Day, per outstanding Share of each Select Sector SPDR Fund.
PROCEDURES FOR CREATION OF CREATION UNITS
To be eligible to place orders with the Distributor to create a Creation Unit of a Select Sector SPDR 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"), and, in each case, must have executed an agreement with the Trust, the Distributor and the Transfer Agent with respect to creations and redemptions of Creation Units ("Participant Agreement") (discussed below). A Participating Party and DTC Participant are collectively referred to as an "Authorized Participant". Investors should contact the Distributor for the names of Authorized Participants that have signed a Participant Agreement. All Shares of Select Sector SPDR Funds, however created, will be entered on the records of DTC in the name of Cede & Co. for the account of a DTC Participant.
All orders to create Select Sector SPDR Funds must be placed for one or more Creation Unit size aggregations of Shares (50,000 in the case of each Fund). All standard orders to create Creation Units, whether through the Clearing Process (through a Participating Party) or outside the Clearing Process (through a DTC Participant), must be received by the Distributor no later than the close of regular trading session on the NYSE ("Closing Time") (ordinarily 4:00 p.m. New York time) in each case on the date such order is placed in order for creation of Creation Units to be effected based on the net asset value of Shares of each Select Sector SPDR Fund as next determined on such date after receipt of the order in proper form. In the case of Custom Orders, the order must be received by the Distributor no later than one hour prior to Closing Time. The date on which an order to create Creation Units (or an order to redeem Creation Units as discussed below) is placed is referred to as the "Transmittal Date". Orders must be transmitted by an Authorized Participant by telephone or other transmission method acceptable to the Distributor pursuant to procedures set forth in the Participant Agreement, as described below (see "Placement of Creation Orders Using Clearing Process" and "Placement of Creation Orders Outside Clearing Process"). Severe economic or market disruptions or changes, or telephone or other communication failure, may impede the ability to reach the Distributor or an Authorized Participant.
Orders to create Creation Units of Select Sector SPDR Funds shall be placed with an Authorized Participant, as applicable, in the form required by such Authorized Participant. In addition, the Authorized Participant may request the 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 create Creation Units of Select Sector SPDR Funds have to be placed by the investor's broker through an Authorized Participant that has executed a Participant Agreement. At any given time there may be only a limited number of broker-dealers that have executed a
Participant Agreement. Those placing orders for Creation Units through the Clearing Process should afford sufficient time to permit proper submission of the order to the Distributor prior to the Closing Time on the Transmittal Date.
Orders for creations that are effected outside the Clearing Process are likely to require transmittal by the DTC Participant earlier on the Transmittal Date than orders effected using the Clearing Process. Those persons placing orders outside the Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve Bank wire system by contacting the operations department of the broker or depository institution effectuating such transfer of Deposit Securities and Cash Component.
PLACEMENT OF CREATION ORDERS USING CLEARING PROCESS
The Clearing Process is the process of creating or redeeming Creation Units through the Continuous Net Settlement System of the NSCC. Fund Deposits made through the Clearing Process must be delivered through a Participating Party that has executed a Participant Agreement. The Participant Agreement authorizes the Distributor to transmit through the Transfer Agent to NSCC, on behalf of the Participating Party, such trade instructions as are necessary to effect the Participating Party's creation order. Pursuant to such trade instructions to NSCC, the Participating Party agrees to deliver the requisite Deposit Securities and the Cash Component to the Trust, together with such additional information as may be required by the Distributor. An order to create Select Sector SPDR Funds in Creation Units through the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time in the case of standard orders or one hour prior to Closing Time in the case of Custom Orders on such Transmittal Date and (ii) all other procedures set forth in the Participant Agreement are properly followed.
PLACEMENT OF CREATION ORDERS OUTSIDE CLEARING PROCESS
Fund Deposits made outside the Clearing Process must be delivered through a DTC Participant that has executed a Participant Agreement with the Trust, the Distributor and the Transfer Agent. A DTC Participant who wishes to place an order creating Creation Units to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that the creation of Creation Units will instead be effected through a transfer of securities and cash directly through DTC. The Fund Deposit transfer must be ordered by the DTC Participant on the Transmittal Date in a timely fashion so as to ensure the delivery of the requisite number of Deposit Securities through DTC to the account of the Trust by no later than 11:00 a.m., New York time, of the next Business Day immediately following the Transmittal Date. All questions as to the number of Deposit Securities to be delivered, and the validity, form and eligibility (including time of receipt) for the deposit of any tendered securities, will be determined by the Trust, whose determination shall be final and binding. The cash equal to the Cash Component must be transferred directly to the Custodian through the Federal Reserve wire system in a timely manner so as to be received by the Custodian no later than 2:00 p.m., New York time, on the next Business Day immediately following such Transmittal Date. An order to create Creation Units of Select Sector SPDR Funds outside the Clearing Process is deemed received by the Distributor on the Transmittal Date if (i) such order is received by the Distributor not later than the Closing Time on such Transmittal Date or one hour prior to Closing Time in the case of custom orders; and (ii) all other procedures set forth in the Participant Agreement are properly followed. However, if the Custodian does not receive both the requisite Deposit Securities and the Cash Component by 11:00 a.m. and 2:00 p.m., respectively, on the next Business Day immediately following the Transmittal Date, such order will be cancelled. Upon written notice to the Distributor, such cancelled order may be resubmitted the following Business Day using a Fund Deposit as newly constituted to reflect the then current net asset value of the Fund. The delivery of Creation Units of Select Sector SPDR Funds so created will occur no later than the third (3rd) Business Day following the day on which the purchase order is deemed received by the Distributor.
Creation Units of Select Sector SPDR Funds may be created in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a value greater than the 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) 115% of the market value of the undelivered Deposit Securities (the "Additional Cash Deposit"). 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 Closing Time, on such date and federal funds in the appropriate amount are deposited with the Trust's Custodian by 11:00 a.m., New York time, the following Business Day. If the order is not placed in proper form by Closing Time or federal funds in the appropriate amount are not received by 11:00 a.m. the next Business Day, then the order may be deemed to be rejected and the investor shall be liable to the Trust for losses, if any, resulting therefrom. An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at least equal to 115% of the daily marked to market value of the missing Deposit Securities. To the extent that missing Deposit Securities are not received by 1:00 p.m., New York time, on the third Business Day following the day on which the purchase order is deemed received by the Distributor or in the event a mark to market payment is
not made within one Business Day following notification by the Distributor that such a payment is required, the Trust may use the cash on deposit to purchase the missing Deposit Securities. Authorized Participants will be liable to the Trust for the costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities have been properly received by the Custodian or purchased by the Trust and deposited into the Trust. In addition, a transaction fee of $4,000 will be charged in all cases. The delivery of Creation Units of Select Sector SPDR Funds so created will occur no later than the third Business Day following the day on which the purchase order is deemed received by the Distributor.
ACCEPTANCE OF ORDERS FOR CREATION UNITS
The Trust reserves the absolute right to reject a creation order transmitted to
it by the Distributor in respect of any Select Sector SPDR Fund if (a) the order
is not in proper form; (b) the investor(s), upon obtaining the Shares ordered,
would own 80% or more of the currently outstanding Shares of any Select Sector
SPDR Fund; (c) the Deposit Securities delivered are not as disseminated through
the facilities of the AMEX for that date by the Custodian, as described above;
(d) acceptance of the Deposit Securities would have certain adverse tax
consequences to the Select Sector SPDR Fund; (e) the acceptance of the Fund
Deposit would, in the opinion of counsel, be unlawful; (f) the acceptance of the
Fund Deposit would otherwise, in the discretion of the Trust or the Adviser,
have an adverse effect on the Trust or the rights of beneficial owners; or (g)
in the event that circumstances outside the control of the Trust, the
Distributor and the Adviser make it for all practical purposes impossible to
process creation orders. Examples of such circumstances include acts of God or
public service or utility problems such as fires, floods, extreme weather
conditions and power outages resulting in telephone, telecopy and computer
failures; market conditions or activities causing trading halts; systems
failures involving computer or other information systems affecting the Trust,
the Adviser, the Distributor, DTC, NSCC or any other participant in the creation
process, and similar extraordinary events. The Distributor 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 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.
All questions as to the number of shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust's determination shall be final and binding.
CREATION TRANSACTION FEE
Investors will be required to pay a fixed creation transaction fee of $1,000. An additional charge of up to three (3) times the fixed transaction fee (expressed as a percentage of the value of the Deposit Securities) may be imposed for (i) creations effected outside the Clearing Process; (ii) Custom Orders; and (iii) cash creations, for a total charge of up to $4,000. Investors are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust.
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 the Select Sector SPDR 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. Beneficial Owners must accumulate enough Shares in the secondary market to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any time to permit assembly of a Creation Unit. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit. As of September 30, 2005, the value of the securities comprising a deposit of designated equity securities necessary for an in-kind purchase of a Creation Unit for each Select Sector SPDR Fund was as follows:
The Consumer Discretionary Select Sector SPDR Fund - $1,623,000; The Consumer Staples Select Sector SPDR Fund - $1,164,000; The Energy Select Sector SPDR Fund - $2,682,500; The Financial Select Sector SPDR Fund - $1,475,000; The Health Care Select Sector SPDR Fund - $1,568,500; The Industrial Select Sector SPDR Fund - $1,507,000; The Materials Select Sector SPDR Fund - $1,373,500; The Technology Select Sector SPDR Fund - $1,044,500; and The Utilities Select Sector SPDR Fund - $1,679,000. |
With respect to each Select Sector SPDR Fund, the Custodian, through the NSCC, makes available immediately prior to the opening of business on the AMEX (currently 9:30 a.m. New York time) on each Business Day, the Fund 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 received on redemption may not be identical to Deposit Securities which are applicable to creations of Creation Units.
Unless cash redemptions are available or specified for a Select Sector SPDR Fund, the redemption proceeds for a Creation Unit generally 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 redemption transaction fee of $1,000. 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.
REDEMPTION TRANSACTION FEE
To offset the costs for transfer and other transaction fees involved in transactions for the redemption of Creation Units, investors will be required to pay the Redemption Transaction Fee. The redemption transaction fee is the same no matter how many Creation Units are being redeemed pursuant to any one redemption request. The Select Sector SPDR Funds, subject to approval by the Board of Trustees, may adjust the fee from time to time based upon actual experience. An additional charge for cash redemptions, Custom Orders, or partial cash redemptions (when cash redemptions are available) for each Select Sector SPDR Fund may be imposed. Investors who use the services of a broker or other such intermediary in addition to an Authorized Participant to effect a redemption of a Creation Unit may be charged a fee for such services.
PLACEMENT OF REDEMPTION ORDERS USING CLEARING PROCESS
Orders to redeem Creation Units of Select Sector SPDR Funds through the Clearing
Process must be delivered through a Participating Party that has executed the
Participant Agreement. An order to redeem Creation Units of Select Sector SPDR
Funds using the Clearing Process is deemed received on the Transmittal Date if
(i) such order is received by the Transfer Agent not later than Closing Time in
the case of standard orders or one hour prior to Closing Time in the case of
Custom Orders, on such Transmittal Date; and (ii) all other procedures set forth
in the Participant Agreement are properly followed; such order will be effected
based on the net asset value of the Fund as next determined. An order to redeem
Creation Units of a Select Sector SPDR Fund using the Clearing Process made in
proper form but received by the Fund after Closing Time in the case of standard
orders or one hour prior to Closing Time in the case of Custom Orders, will be
deemed received on the next Business Day immediately following the Transmittal
Date and will be effected at the net asset value next determined on such
Business Day. The requisite Fund Securities and the Cash Redemption Amount will
be transferred by the third (3rd) NSCC Business Day following the date on which
such request for redemption is deemed received.
PLACEMENT OF REDEMPTION ORDERS OUTSIDE CLEARING PROCESS
Orders to redeem Creation Units of Select Sector SPDR Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Participant Agreement. A DTC Participant who wishes to place an order for redemption of Creation Units of Select Sector SPDR Funds to be effected outside the Clearing Process need not be a Participating Party, but such orders must state that the DTC Participant is not using the Clearing Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC. An order to redeem Creation Units of Select Sector SPDR Funds outside the Clearing Process is deemed received by the Transfer Agent on the Transmittal Date if (i) such order is received by the Transfer Agent not later than Closing Time on such Transmittal Date or one hour prior to Closing Time in the case of Custom Orders; (ii) such order is accompanied or proceeded by the requisite number of Shares of Select Sector SPDR Funds specified in such order, which delivery must be made through DTC to the Custodian no later than 11:00 a.m., and the Cash Component (if applicable) is received by 2:00 p.m. next business day, New York time, on the next Business Day following such Transmittal Date (the "DTC Cut-Off-Time"); and (iii) all other procedures set forth in the Participant Agreement are properly followed.
After the Transfer Agent has deemed an order for redemption outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Fund Securities which are expected to be delivered within three Business Days and the Cash
Redemption Amount to the Authorized Participant on behalf of the redeeming Beneficial Owner by the third Business Day following the Transmittal Date on which such redemption order is deemed received by the Transfer Agent.
The calculation of the value of the Fund Securities and the Cash Redemption Amount to be delivered upon redemption will be made by the Custodian according to the procedures set forth under "DETERMINATION OF NET ASSET VALUE" computed on the Business Day on which a redemption order is deemed received by the Transfer Agent. Therefore, if a redemption order in proper form is submitted to the Transfer Agent by a DTC Participant not later than the Closing Time or one hour prior to Closing Time in the case of Custom Orders on the Transmittal Date, and the requisite number of Shares of the relevant Select Sector SPDR Fund are delivered to the Custodian prior to the DTC Cut-Off-Time, then the value of the Fund Securities and the Cash Redemption Amount to be delivered will be determined by the Custodian on such Transmittal Date. If, however, a redemption order is submitted to the Distributor by a DTC Participant not later than the Closing Time or one hour prior to Closing Time in the case of Custom Orders on the Transmittal Date but either (1) the requisite number of Shares and Cash Component of the relevant Select Sector SPDR Fund are not delivered by the DTC Cut-Off-Time as described above on the next Business Day following the Transmittal Date or (2) the redemption order is not submitted in proper form, then the redemption order will not be deemed received as of the Transmittal Date. In such case, the value of the Fund Securities and the Cash Redemption Amount to be delivered will be computed on the Business Day that such order is deemed received by the Transfer Agent, i.e., the Business Day on which the Shares of the relevant Select Sector SPDR Funds are delivered through DTC to the Custodian by the DTC Cut-Off-Time on such Business Day pursuant to a properly submitted redemption order.
If it is not possible to effect deliveries of the Fund Securities, the Trust may in its discretion exercise its option to redeem such Shares in cash, and the redeeming Beneficial Owner will be required to receive its redemption proceeds in cash. In addition, an investor may request a redemption in cash which the Select Sector SPDR Fund may, in its sole discretion, permit. In either case, the investor will receive a cash payment equal to the net asset value of its Shares based on the net asset value of Shares of the relevant Select Sector SPDR Fund next determined after the redemption request is received in proper form (minus a redemption transaction fee and additional charge for requested cash redemptions specified above, to offset the Trust's brokerage and other transaction costs associated with the disposition of Fund Securities). The Select Sector SPDR Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the Fund Securities but does not differ in net asset value.
Redemptions of Shares for Fund Securities will be subject to compliance with applicable federal and state securities laws and each Select Sector SPDR Fund (whether or not it otherwise permits cash redemptions) reserves the right to redeem Creation Units for cash to the extent that the Select Sector SPDR Fund 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 stock included in the Fund Securities applicable to the redemption of a Creation Unit may be paid an equivalent amount of cash. The Authorized Participant may request the redeeming Beneficial Owner of the Shares to complete an order form or to enter into agreements with respect to such matters as compensating cash payment, beneficial ownership of Shares or delivery instructions.
The right of redemption may be suspended or the date of payment postponed with respect to any Select Sector SPDR Fund (1) for any period during which the NYSE is closed (other than customary weekend and holiday closings); (2) for any period during which trading on the NYSE is suspended or restricted; (3) for any period during which an emergency exists as a result of which disposal of the Shares of the Select Sector SPDR Fund or determination of the Shares' net asset value is not reasonably practicable; or (4) in such other circumstance as is permitted by the SEC.
DETERMINATION OF NET ASSET VALUE
The following information supplements and should be read in conjunction with the section in the Prospectus entitled "DETERMINATION OF NET ASSET VALUE."
Net asset value per Share for each Select Sector SPDR Fund of the Trust is computed by dividing the value of the net assets of such Select Sector SPDR 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, administration and distribution fees, are accrued daily and taken into account for purposes of determining net asset value. The net asset value of each Select Sector SPDR is calculated by the Custodian and determined at the close of the regular trading session on the NYSE (ordinarily 4:00 p.m. New York time) on each day that such exchange is open.
In computing a Select Sector SPDR Fund's net asset value per Share, the Select Sector SPDR Fund's securities holdings, except for those traded on the NASDAQ, are valued based on their last sale price. Price information on listed securities is taken from the exchange where the security is primarily traded. Securities traded on the NASDAQ are valued at the NASDAQ official close price. Securities regularly traded in an over-the-counter market are valued at the last sale price in such market. If no closing sale price or official close price is available, the security is valued at the previous closing sale price or previous official close price, as the case may be. Other portfolio securities and assets for which market quotations are not readily available are valued based on fair value as determined in good faith by the Pricing Committee in accordance with procedures adopted by the Board.
DIVIDENDS AND DISTRIBUTIONS
The following information supplements and should be read in conjunction with the section in the Prospectus entitled "DISTRIBUTIONS."
GENERAL POLICIES
Dividends from net investment income, if any, are declared and paid quarterly by each Select Sector SPDR Fund. 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 certain Select Sector SPDR Funds to improve index tracking or to comply with the distribution requirements of the Internal Revenue Code, in all events in a manner consistent with the provisions of the 1940 Act. In addition, the Trust intends to distribute at least annually amounts representing the full dividend yield on the underlying portfolio securities of each Fund, net of expenses of such Select Sector SPDR, as if such Select Sector SPDR Fund owned such underlying portfolio securities for the entire dividend period. As a result, some portion of each distribution may result in a return of capital for tax purposes for shareholders.
Dividends and other distributions on Shares are distributed, as described below, on a pro rata basis to Beneficial Owners of such Shares. Dividend payments are made through DTC Participants and Indirect Participants to Beneficial Owners then of record with proceeds received from the Trust.
The Trust makes additional distributions to the 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 Internal Revenue 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 each Select Sector SPDR Fund as a regulated investment company ("RIC") or to avoid imposition of income or excise taxes on undistributed income.
DIVIDEND REINVESTMENT SERVICE
Broker-dealers may make available the DTC book-entry Dividend Reinvestment Service (the "Service") for use by Beneficial Owners of Select Sector SPDR Funds through DTC Participants for reinvestment of their dividend distributions. If the 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 Select Sector SPDR Fund at NAV per share. Shares will be issued at NAV under the Service regardless of whether the Shares are then trading in the secondary market at a premium or discount to net asset value. Broker dealers, at their own discretion, may also offer a dividend reinvestment program under which Shares are purchased in the secondary market at current market prices. Investors should consult their broker dealer for further information regarding the Service or other dividend reinvestment programs.
TAXES
The following information also supplements and should be read in conjunction with the section in the Prospectus entitled "TAX MATTERS."
Each Select Sector SPDR Fund intends to qualify for and to elect treatment as a separate RIC under Subchapter M of the Internal Revenue Code. As such, each Select Sector SPDR Fund will not be subject to federal income tax on its net investment income and capital gains, if any, to the extent that it timely distributes such income and capital gains to its shareholders. To qualify for treatment as a RIC, a company must annually distribute at least 90% of its net investment company taxable income (which includes dividends, interest and net short-term capital gains) and meet several other requirements relating to the nature of its income and the diversification of its assets, among others.
Each Select Sector SPDR Fund is treated as a separate corporation for federal income tax purposes. Each Fund therefore is considered to be a separate entity in determining its treatment under the rules for RICs described herein and in the Prospectus. Losses in one Select Sector SPDR Fund do not offset gains in another and the requirements (other than certain organizational requirements) for qualifying RIC status are determined at the Fund level rather than at the Trust level.
A Select Sector SPDR Fund will be subject to a 4% excise tax on certain undistributed income if it does not distribute to its shareholders in each calendar year at least 98% of its ordinary income for the calendar year plus 98% of its capital gain net income for the twelve months ended October 31 of such year. Each Select Sector SPDR Fund intends to declare and distribute dividends and distributions in the amounts and at the times necessary to avoid the application of this 4% excise tax.
As a result of tax requirements, the Trust on behalf of each Select Sector SPDR Fund has the right to reject an order to purchase Shares 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 Select Sector SPDR Fund and if, pursuant to section 351 of the Internal Revenue Code, the respective Select Sector SPDR Fund would have a basis in the Deposit Securities different from the market value of such securities on the date of deposit. The Trust also has the right to require information necessary to determine beneficial share ownership for purposes of the 80% determination.
Dividends and interest received by a Select Sector SPDR Fund may give rise to withholding and other taxes imposed by foreign countries. Tax conventions between certain countries and the United States may reduce or eliminate such taxes.
Each Select Sector SPDR Fund will report to shareholders annually the amounts of dividends received from ordinary income, the amount of distributions received from capital gains and the portion of dividends which may qualify for the dividends received deduction. Under the provision of the Jobs Growth Tax Relief Reconciliation Act of 2003, some ordinary dividends paid to individual shareholders may qualify for taxation at a lower tax rate applicable to long-term capital gains.
In general, a sale of shares results in capital gain or loss, and for individual shareholders, is taxable at a federal rate dependent upon the length of time the shares were held. A redemption of a shareholder's Select Sector SPDR Fund Shares is normally treated as a sale for tax purposes. Fund Shares held for a period of one year or less at the time of such sale or redemption will, for tax purposes, generally result in short-term capital gains or losses and those held for more than one year will generally result in long-term capital gains or losses. Under current law, the maximum tax rate on long-term capital gains available to non-corporate shareholders generally is 15%. Without future congressional action, the maximum tax rate on long-term capital gains would return to 20% in 2009.
Gain or loss on the sale or redemption of Shares in each Select Sector SPDR Fund
is measured by the difference between the amount received and the adjusted tax
basis of the Shares. Shareholders should keep records of investments made
(including Shares acquired through reinvestment of dividends and distribution)
so they can compute the tax basis of their Shares.
A loss realized on a sale or exchange of Shares of a Select Sector SPDR Fund may
be disallowed if other substantially identical Shares are acquired (whether
through the automatic reinvestment of dividends or otherwise) within a sixty-one
(61) day period beginning thirty (30) days before and ending thirty (30) days
after the date that the Shares are disposed of. In such a case, the basis of the
Shares acquired must be adjusted to reflect the disallowed loss. Any loss upon
the sale or exchange of Shares held for six (6) months or less is treated as
long-term capital loss to the extent of any capital gain dividends received by
the shareholders.
Distribution of ordinary income and capital gains may also be subject to state and local taxes.
Distributions reinvested in additional Shares of a Select Sector SPDR Fund through the means of the service (see "DIVIDEND REINVESTMENT SERVICE") will nevertheless be taxable dividends to Beneficial Owners acquiring such additional Shares to the same extent as if such dividends had been received in cash.
Distributions of ordinary income paid to shareholders who are nonresident aliens or foreign entities will be subject to a 30% United States withholding tax unless a reduced rate of withholding or a withholding exemption is provided under applicable treaty law or unless such income is effectively connected with a U.S. trade or business carried on through a permanent establishment in the United States. Nonresident shareholders are urged to consult their own tax advisors concerning the applicability of the United States withholding tax. Under recently enacted legislation, the Fund may, under certain circumstances, designate all or a portion of a dividend as an "interest-related dividend" that if received by a nonresident alien or foreign entity generally would be exempt from the 30% U.S. withholding tax, provided that certain other requirements are met. The Fund may also, under certain circumstances, designate all or a portion of a dividend as a "short-term capital gain dividend" which if received by a nonresident alien or foreign
entity generally would be exempt from the 30% U.S. withholding tax, unless the foreign person is a nonresident alien individual present in the United States for a period or periods aggregating 183 days or more during the taxable year. In addition, distributions of the Fund attributable to gains from sales or exchanges of "U.S. real property interests," as defined in the Code and Treasury Regulations (including gains on the sale or exchange of shares in certain U.S. real property holding corporations, which may include certain REITs, and certain REIT capital gain dividends) will generally cause the foreign stockholder to be treated as recognizing such gain as income effectively connected to a trade or business within the United States, generally subject to tax at the same rates applicable to U.S. stockholders. Also, such gain may be subject to a 30% branch profits tax in the hands of a foreign stockholder that is a corporation. Such distributions may be subject to U.S. withholding tax and may give rise to an obligation on the part of the foreign stockholder to file a U.S. federal income tax return. The provisions contained in the legislation relating to dividends to foreign persons would apply to dividends with respect to taxable years of the Fund beginning after December 31, 2004 and before January 1, 2008. Prospective investors are urged to consult their tax advisors regarding the specific tax consequences relating to the proposed legislation.
Some shareholders may be subject to a withholding tax on distributions of ordinary income, capital gains and any cash received on redemption of Creation Units ("backup withholding"). The backup withholding rate for individuals is currently 28%. Generally, shareholders subject to backup withholding will be those for whom no certified taxpayer identification number is on file with the Fund or who, to the Fund's knowledge, have furnished an incorrect number. When establishing an account, an investor must certify under penalty of perjury that such number is correct and that such investor is not otherwise subject to backup withholding.
The foregoing discussion is a summary only and is not intended as a substitute for careful tax planning. Purchasers of Shares of the Trust should consult their own tax advisors as to the tax consequences of investing in such shares, including under state, local and other tax laws. Finally, the foregoing discussion is based on applicable provisions of the Internal Revenue Code, regulations, judicial authority and administrative interpretations in effect on the date hereof. Changes in applicable authority could materially affect the conclusions discussed above, and such changes often occur.
FEDERAL TAX TREATMENT OF FUTURES AND OPTIONS CONTRACTS
Each Select Sector SPDR Fund is required for federal income tax purposes to mark to market and recognize as income for each taxable year its net unrealized gains and losses on certain futures contracts as of the end of the year as well as those actually realized during the year. Gain or loss from futures and options contracts on broad-based indexes required to be marked to market will be 60% long-term and 40% short-term capital gain or loss. Application of this rule may alter the timing and character of distributions to shareholders. A Select Sector SPDR Fund may be required to defer the recognition of losses on futures contracts, options contracts and swaps to the extent of any unrecognized gains on offsetting positions held by the Select Sector SPDR Fund.
In order for a Select Sector SPDR Fund to continue to qualify for federal income tax treatment as a RIC, at least 90% of its gross income for a taxable year must be derived from qualifying income, i.e., dividends, interest, income derived from loans of securities, gains from the sale of securities or of foreign currencies or other income derived with respect to the Select Sector SPDR Fund's business of investing in securities. It is anticipated that any net gain realized from the closing out of futures or options contracts will be considered gain from the sale of securities and therefore will be qualifying income for purposes of the 90% requirement.
Each Select Sector SPDR Fund distributes to shareholders annually any net capital gains which have been recognized for federal income tax purposes including unrealized gains at the end of the Select Sector SPDR Fund's fiscal year on futures or options transactions. Shareholders are advised on the nature of the distributions on an annual basis.
REPORTABLE TRANSACTIONS
Under promulgated Treasury regulations, if a shareholder recognizes a loss on disposition of a Select Sector SPDR Fund's Shares of $2 million or more for an individual shareholder or $10 million or more for a corporate shareholder, the shareholder must file with the IRS 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 regulated investment company are not excepted. Future guidance may extend the current exception from this reporting requirement to shareholders of most or all regulated investment companies. In addition, pursuant to recently enacted legislation, significant penalties may be imposed for the failure to comply with the reporting requirements. The fact that a loss is reportable under these regulations does not affect the legal determination of whether the taxpayer's treatment of the loss is proper. Shareholders should consult their tax advisers to determine the applicability of these regulations in light of their individual circumstances.
CAPITAL STOCK AND SHAREHOLDER REPORTS
The Trust currently is comprised of nine Select Sector SPDR Funds. Each Select Sector SPDR Fund issues shares of beneficial interest, par value $0.01 per Share. The Board of Trustees may designate additional Select Sector SPDR Funds.
Each Share issued by the Trust has a pro rata interest in the assets of the corresponding Select Sector SPDR Fund. Shares have no preemptive, exchange, subscription or conversion rights and are freely transferable. Each Share is entitled to participate equally in dividends and distributions declared by the Board with respect to the relevant Select Sector SPDR Fund, and in the net distributable assets of such Select Sector SPDR Fund on liquidation.
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 Select Sector SPDR Funds vote together as a single class except that if the matter being voted on affects only a particular Select Sector SPDR Fund it will be voted on only by that Select Sector SPDR Fund and if a matter affects a particular Select Sector SPDR Fund differently from other Select Sector SPDR Funds, that Select Sector SPDR Fund will vote separately on such matter. Under Massachusetts law, the Trust is not required to hold an annual meeting of shareholders unless required to do so under the 1940 Act. The policy of the Trust is not to hold an annual meeting of shareholders unless required to do so under the 1940 Act. All Shares of the Trust (regardless of the Select Sector SPDR Fund) have noncumulative voting rights for the election of Trustees. Under Massachusetts law, Trustees of the Trust may be removed by vote of the shareholders.
Under Massachusetts law, shareholders of a business trust may, under certain circumstances, be held personally liable as partners for obligations of the Trust. However, the Declaration of Trust contains an express disclaimer of shareholder liability for acts or obligations of the Trust, requires that Trust obligations include such disclaimer, and provides for indemnification and reimbursement of expenses out of the Trust's property for any shareholder held personally liable for the obligations of the Trust. Thus, the risk of a shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Trust itself would be unable to meet its obligations. Given the above limitations on shareholder personal liability, and the nature of each Fund's assets and operations, the risk to shareholders of personal liability is believed to be remote.
Shareholder inquiries may be made by writing to the Trust, c/o the Distributor, ALPS Distributors, Inc., at 1625 Broadway, Suite 2200, Denver, CO 80202.
COUNSEL AND REGISTERED INDEPENDENT PUBLIC ACCOUNTANTS
Clifford Chance US LLP, 31 West 52nd Street, New York, New York 10119, serves as counsel to the Trust. PricewaterhouseCoopers LLP, 125 High Street, Boston, Massachusetts 02110, serves as the independent registered public accountants of the Trust.
FINANCIAL STATEMENTS
The Funds' financial statements for the fiscal year ended September 30, 2005 and the independent registered public accounting firm report thereon dated November 14, 2005, which is contained in the Funds' Annual Report, dated September 30, 2005 (as filed with the Securities and Exchange Commission on December 7, 2005 pursuant to Section 30(b) of the Investment Company Act of 1940, as amended and Rule 30b2-1 thereunder are incorporated herein by reference.
APPENDIX A--SSGA FUNDS MANAGEMENT, INC. PROXY VOTING POLICIES AND PROCEDURES
INTRODUCTION
SSgA Funds Management, Inc. ("FM") seeks to vote proxies in the best interests of its clients. In the ordinary course, this entails voting proxies in a way which FM believes will maximize the monetary value of each portfolio's holdings. FM takes the view that this will benefit our direct clients (e.g. investment funds) and, indirectly, the ultimate owners and beneficiaries of those clients (e.g. fund shareholders).
Oversight of the proxy voting process is the responsibility of the State Street Global Advisors (SSgA) Investment Committee. The SSgA Investment Committee reviews and approves amendments to the FM Proxy Voting Policy and delegates authority to vote in accordance with this policy to Proxy Voting Services. FM retains the final authority and responsibility for voting. In addition to voting proxies, FM:
1) describes its proxy voting procedures to its clients in Part II of its Form ADV;
2) provides the client with this written proxy policy, upon request;
3) discloses to its clients how they may obtain information on how FM voted the client's proxies;
4) matches proxies received with holdings as of record date;
5) reconciles holdings as of record date and rectifies any discrepancies;
6) generally applies its proxy voting policy consistently and keeps records of votes for each client;
7) documents the reason(s) for voting for all non-routine items; and
8) keeps records of such proxy voting available for inspection by the client or governmental agencies.
PROCESS
The SSgA FM Principal -- Manager of Corporate Actions is responsible for monitoring corporate actions. As stated above, oversight of the proxy voting process is the responsibility of the SSgA Investment Committee, which retains oversight responsibility for all investment activities of all State Street Corporation investment firms.
In order to facilitate our proxy voting process, FM retains a firm with expertise in the proxy voting and corporate governance fields to assist in the due diligence process. The Manager of Corporate Actions is responsible, working with this firm, for ensuring that proxies are submitted in a timely manner.
All proxies received on behalf of FM clients are forwarded to our proxy voting
firm. If (i) the request falls within one of the guidelines listed below, and
(ii) there are no special circumstances relating to that company or proxy which
come to our attention (as discussed below), the proxy is voted according to our
guidelines.
However, from time to time, proxy votes will be solicited which (i) involve special circumstances and require additional research and discussion or (ii) are not directly addressed by our policies. These proxies are identified through a number of methods, including but not limited to notification from our third party proxy voting specialist, concerns of clients, review by internal proxy specialists, and questions from consultants.
In instances of special circumstances or issues not directly addressed by our policies, the Chairman of the Investment Committee is consulted for a determination of the proxy vote. The first determination is whether there is a material conflict of interest between the interests of our client and those of FM. If the Manager of Corporate Actions and the Chairman of the Investment Committee determine that there is a material conflict, the process detailed below under "Potential Conflicts" is followed. If there is no material conflict, we examine each of the issuer's proposals in detail in seeking to determine what vote would be in the best interests of our clients. At this point, the Chairman of the Investment
Committee makes a voting decision based on maximizing the monetary value of each portfolio's holdings. However, the Chairman of the Investment Committee may determine that a proxy involves the consideration of particularly significant issues and present the proxy to the entire Investment Committee for a decision on voting the proxy.
FM also endeavors to show sensitivity to local market practices when voting proxies of non-U.S. issuers. SSgA votes in all markets where it is feasible to do so. Note that certain custodians utilized by our clients do not offer proxy voting in every foreign jurisdiction. In such a case, FM will be unable to vote such a proxy.
VOTING
For most issues and in most circumstances, we abide by the following general guidelines. However, as discussed above, in certain circumstances, we may determine that it would be in the best interests of our clients to deviate from these guidelines.
Management Proposals
I. Generally, SSgA votes in support of management on the following ballot items, which are fairly common management sponsored initiatives.
- Elections of directors who do not appear to have been remiss in the performance of their oversight responsibilities and who do not simultaneously serve on an unreasonable (as determined by SSgA based on the particular facts and circumstances) (other than those affiliated with the issuer) number of other boards
- Approval of auditors
- Directors' and auditors' compensation
- Directors' liability and indemnification
- Discharge of board members and auditors
- Financial statements and allocation of income
- Dividend payouts that are greater than or equal to country and industry standards
- Authorization of share repurchase programs
- General updating of or corrective amendments to charter
- Change in Corporation Name
- Elimination of cumulative voting
II. Generally, SSgA votes in support of management on the following items, which have potentially substantial financial or best-interest impact:
- Capitalization changes which eliminate other classes of stock and voting rights
- Changes in capitalization authorization for stock splits, stock dividends, and other specified needs which are no more than 50% of the existing authorization for U.S. companies and no more than 100% of existing authorization for non-U.S. companies
- Elimination of pre-emptive rights for share issuance of less than a given percentage (country specific - ranging from 5% to 20%) of the outstanding shares
- Elimination of "poison pill" rights
- Stock purchase plans with an exercise price of not less that 85% of fair market value
- Stock option plans which are incentive based and not excessive
- Other stock-based plans which are appropriately structured
- Reductions in super-majority vote requirements
- Adoption of anti-"greenmail" provisions
III. Generally, SSgA votes against management on the following items, which have potentially substantial financial or best interest impact:
- Capitalization changes that add "blank check" classes of stock or classes that dilute the voting interests of existing shareholders
- Changes in capitalization authorization where management does not offer an appropriate rationale or which are contrary to the best interest of existing shareholders
- Anti-takeover and related provisions that serve to prevent the majority of shareholders from exercising their rights or effectively deter appropriate tender offers and other offers
- Amendments to bylaws which would require super-majority shareholder votes to pass or repeal certain provisions
- Elimination of Shareholders' Right to Call Special Meetings
- Establishment of classified boards of directors
- Reincorporation in a state which has more stringent anti-takeover and related provisions
- Shareholder rights plans that allow the board of directors to block appropriate offers to shareholders or which trigger provisions preventing legitimate offers from proceeding
- Excessive compensation
- Change-in-control provisions in non-salary compensation plans, employment contracts, and severance agreements which benefit management and would be costly to shareholders if triggered
- Adjournment of Meeting to Solicit Additional Votes
- "Other business as properly comes before the meeting" proposals which extend "blank check" powers to those acting as proxy
- Proposals requesting re-election of insiders or affiliated directors who serve on audit, compensation, and nominating committees.
IV. SSgA evaluates Mergers and Acquisitions on a case-by-case basis. Consistent with our proxy policy, we support management in seeking to achieve their objectives for shareholders. However, in all cases, SSgA uses its discretion in order to maximize shareholder value. SSgA generally votes as follows:
- Against offers with potentially damaging consequences for minority shareholders because of illiquid stock, especially in some non-US markets
- For offers that concur with index calculators treatment and our ability to meet our clients return objectives for passive funds
- Against offers when there are prospects for an enhanced bid or other bidders
- For proposals to restructure or liquidate closed end investment funds in which the secondary market price is substantially lower than the net asset value
Shareholder Proposals
Traditionally, shareholder proposals have been used to encourage management and other shareholders to address socio-political issues. SSgA believes that it is inappropriate to use client assets to attempt to affect such issues. Thus, we examine shareholder proposals primarily to determine their economic impact on shareholders.
I. Generally, SSgA votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives:
- Requirements that auditors attend the annual meeting of shareholders
- The establishment of annual elections of the board of directors unless the board is composed by a majority of independent directors, the board's key committees (auditing, nominating and compensation) are composed of independent directors, and there are no other material governance issues or performance issues
- Mandates requiring a majority of independent directors on the Board of Directors and the audit, nominating, and compensation committees
- Mandates that amendments to bylaws or charters have shareholder approval
- Mandates that shareholder-rights plans be put to a vote or repealed
- Establishment of confidential voting
- Expansions to reporting of financial or compensation-related information, within reason
- Repeals of various anti-takeover related provisions
- Reduction or elimination of super-majority vote requirements
- Repeals or prohibitions of "greenmail" provisions
- "Opting-out" of business combination provisions
- Proposals requiring the disclosure of executive retirement benefits if the -- issuer does not have an independent compensation committee
II. In light of recent events surrounding corporate auditors and taking into account corporate governance provisions released by the SEC, NYSE, and NASDAQ, SSgA votes in support of shareholders on the following ballot items, which are fairly common shareholder-sponsored initiatives:
- Disclosure of Auditor and Consulting relationships when the same or related entities are conducting both activities
- Establishment of selection committee responsible for the final approval of significant management consultant contract awards where existing firms are already acting in an auditing function
- Mandates that Audit, Compensation and Nominating Committee members should all be independent directors
- Mandates giving the Audit Committee the sole responsibility for the selection and dismissal of the auditing firm and any subsequent result of audits are reported to the audit committee
III. SSgA votes against shareholders on the following initiatives, which are fairly common shareholder-sponsored initiatives:
- Limits to tenure of directors
- Requirements that candidates for directorships own large amounts of stock before being eligible to be elected
- Restoration of cumulative voting in the election of directors
- Requirements that the company provide costly, duplicative, or redundant reports; or reports of a non-business nature
- Restrictions related to social, political, or special interest issues which affect the ability of the company to do business or be competitive and which have significant financial or best-interest impact
- Proposals which require inappropriate endorsements or corporate actions
- Requiring the company to expense stock options unless already mandated by FASB (or similar body) under regulations that supply a common valuation model
- Proposal asking companies to adopt full tenure holding periods for their executives
- Proposals requiring the disclosure of executive retirement benefits if the issuer has an independent compensation committee
Shareholder Activism
We at FM agree entirely with the United States Department of Labor's position that "where proxy voting decisions may have an effect on the economic value of the plan's underlying investment, plan fiduciaries should make proxy voting decisions with a view to enhancing the value of the shares of stock" (IB 94-2). Our proxy voting policy and procedures are designed to ensure that our clients receive the best possible returns on their investments. We meet directly with corporation representatives and participate in conference calls and third-party inquiries in order to ensure our processes are as fully informed as possible.
Through our membership in the Council of Institutional Investors as well as our contact with corporate pension plans, public funds, and unions, we are also able to communicate extensively with other shareholders regarding events and issues relevant to individual corporations, general industry, and current shareholder concerns.
In addition, FM monitors "target" lists of underperforming companies prepared by various shareholder groups, including: California Public Employee Retirement System, The City of New York - Office of the Comptroller, International Brotherhood of Teamsters, and Council of Institutional Investors. Companies, so identified, receive an individual, systematic review by the Corporate Governance Subcommittee of SSgA's Investment Committee.
As an active shareholder, FM's role is to ensure that corporate policies serve the best interests of the corporation's investor-owners. Though we do not seek involvement in the day-to-day operations of an organization, we recognize the need for conscientious oversight of and input into management decisions that may affect a company's value. To that end, our monitoring of corporate management and industry events is substantially more detailed than that of the typical voter. We have demonstrated our willingness to vote against management-sponsored initiatives and to support shareholder proposals when appropriate. To date we have not filed proposals or initiated letter-writing or other campaigns, but have used our active participation in the corporate governance process--especially the proxy voting process--as the most effective means by which to communicate our and our clients' legitimate shareholder concerns. Should an issue arise in conjunction with a specific corporation that cannot be satisfactorily resolved through these means, we shall consider other approaches.
Through the consistent, conscientious execution of our responsibilities as both fiduciary and shareholder, FM is able to promote the best interests of its fellow shareholders and its clients. The SSgA Funds Management, Inc. Proxy Voting Policy provides for this active, informed participation in the management of those corporations in which we hold shares.
POTENTIAL CONFLICTS
As discussed above under Process, from time to time, FM will review a proxy which presents a potential material conflict. For example, FM or its affiliates may provide services to a company whose management is soliciting proxies, or to another entity which is a proponent of a particular proxy proposal. Another example could arise when FM has business or other relationships with participants involved in proxy contests, such as a candidate for a corporate directorship.
As a fiduciary to its clients, FM takes these potential conflicts very seriously. While FM's only goal in addressing any such potential conflict is to ensure that proxy votes are cast in the clients' best interests and are not affected by FM's potential conflict, there are a number of courses FM may take. The final decision as to which course to follow shall be made by the Investment Committee.
When the matter falls clearly within one of the proposals enumerated above, casting a vote which simply follows FM's pre-determined policy would eliminate FM's discretion on the particular issue and hence avoid the conflict.
In other cases, where the matter presents a potential material conflict and is not clearly within one of the enumerated proposals, or is of such a nature that FM believes more active involvement is necessary, the Chairman of the Investment Committee shall present the proxy to the Investment Committee, who will follow one of two courses of action. First, FM may employ the services of a third party, wholly independent of FM, its affiliates and those parties involved in the proxy issue, to determine the appropriate vote.
Second, in certain situations the Investment Committee may determine that the employment of a third party is unfeasible, impractical or unnecessary. In such situations, the Investment Committee shall make a decision as to the voting of the proxy. The basis for the voting decision, including the basis for the determination that the decision is in the best interests of FM's clients, shall be formalized in writing as a part of the minutes to the Investment Committee. As stated above, which action is appropriate in any given scenario would be the decision of the Investment Committee in carrying out its duty to ensure that the proxies are voted in the clients', and not FM's, best interests.
RECORDKEEPING
In accordance with applicable law, FM shall retain the following documents for not less than five years from the end of the year in which the proxies were voted, the first two years in FM's office:
1) FM's Proxy Voting Policy and any additional procedures created pursuant to such Policy;
2) a copy of each proxy statement FM receives regarding securities held by its clients (note: this requirement may be satisfied by a third party who has agreed in writing to do so or by obtaining a copy of the proxy statement from the EDGAR database);
3) a record of each vote cast by FM (note: this requirement may be satisfied by a third party who has agreed in writing to do so);
4) a copy of any document created by FM that was material in making its voting decision or that memorializes the basis for such decision; and
5) a copy of each written request from a client, and response to the client, for information on how FM voted the client's proxies.
DISCLOSURE OF CLIENT VOTING INFORMATION
Any client who wishes to receive information on how its proxies were voted should contact its FM client service officer.
PART C
OTHER INFORMATION
ITEM 23. FINANCIAL STATEMENTS AND EXHIBITS
EXHIBITS (a)(i) Declaration of Trust dated June 9, 1998 and filed on June 26, 1998 and incorporated herein by reference.
(a)(ii) Amendment No.1 to the Declaration of Trust dated October 8, 1998 and filed on October 16, 1998 and incorporated herein by reference.
(a)(iii) Amended and Restated Declaration of Trust dated October 23, 1998 and filed November 17, 1998 and incorporated herein by reference.
(b)(i) By-Laws of the Trust dated June 10, 1998 and filed November 17, 1998 and incorporated herein by reference.
(b)(ii) Amended and Restated By-Laws of the Trust dated November 15, 2004 and filed November 28, 2004 and incorporated herein by reference.
(c) Global certificate evidencing shares of the Beneficial Interest, $0.01 par value, of each Select Sector SPDR Fund filed November 17, 1998 and incorporated herein by reference.
(d)(i) Investment Advisory Agreement between the Trust and State Street Bank and Trust Company filed November 17, 1998 and incorporated herein by reference.
(d)(ii) Investment Advisory Agreement between the Trust and SSgA Funds Management, Inc. filed January 28, 2002 and incorporated herein by reference.
(d)(iii) Amended and Restated Investment Advisory dated December 1, 2003 filed January 28, 2004 and incorporated herein by reference.
(e)(i) Distribution Agreement between the Trust and ALPS Mutual Funds Services, Inc. filed November 17, 1998 and incorporated herein by reference.
(e)(ii) Form of Participant Agreement filed January 28, 2004 and incorporated herein by reference.
(e)(iii) Investor Services Agreement filed on November 17, 1998 and incorporated herein by reference.
(e)(iv) Soliciting Dealer Agreement filed on November 17, 1998 and incorporated herein by reference.
(e)(v) Distribution Agreement between the Trust and ALPS Distributors, Inc. filed January 28, 2002 and incorporated herein by reference.
(e)(vi) Amended Distribution Agreement between the Trust and ALPS Distributors, Inc. is filed herewith.
(e)(vii) Marketing Agreement between the Trust and ALPS Distributors, Inc. is filed herewith.
(e)(viii) Amended and Restated Marketing Agreement between the Trust and ALPS Mutual Funds Services, Inc. is filed herewith.
(f) Not applicable
(g)(i) Custodian Agreement between the Trust and State Street Bank and Trust Company filed on November 17, 1998 and incorporated herein by reference.
(g)(ii) Amendment to Custodian Agreement between the Trust and State Street Bank and Trust Company is filed herewith.
(h)(i) Administration Agreement between the Trust and State Street Bank and Trust Company filed on November 17, 1998 and incorporated herein by reference.
(h)(ii) Transfer Agency Services Agreement between the Trust and State Street Bank and Trust Company filed on November 17, 1998 and incorporated herein by reference.
(h)(iii) Sub-License Agreement between the Trust, Merrill Lynch and Standard & Poor's filed on December 15, 1998 and incorporated herein by reference.
(h)(iv) DTC Letter of Representation filed on November 17, 1998 and incorporated herein by reference.
(i) Opinion of Gordon Altman Butowsky Weitzen Shalov & Wein filed on November 17, 1998 and incorporated herein by reference.
(j)(i) Consent of PricewaterhouseCoopers LLP is filed herewith.
(k) Not applicable
(l) Subscription Agreement(s) between the Trust and ALPS Mutual Funds Services, Inc. filed on December 15, 1998 and incorporated herein by reference.
(m) 12b-1 Plan filed on November 17, 1998 and incorporated herein by reference.
(n) Not applicable.
(p)(i) Revised Code of Ethics of the Trust filed November 28, 2004 and incorporated herein by reference.
(p)(ii) Code of Ethics of the Adviser filed November 28, 2004 and incorporated herein by reference.
(p)(iii) Code of Ethics of the Distributor filed on January 26, 2001 and incorporated herein by reference
(q)(i) Powers of Attorney filed on April 21, 2002 and incorporated herein by reference
(q)(ii) Powers of Attorney filed January 28, 2004 and incorporated herein by reference.
(q)(iii) Power of Attorney is filed herewith.
(r) Secretary's Certificate is filed herewith.
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH REGISTRANT
Not applicable.
ITEM 25. INDEMNIFICATION
Pursuant to Section 5.3 of the Registrant's Amended and Restated Declaration of Trust and under Section 4.8 of the Registrant's By-Laws, the Trust will indemnify any person who is, or has been, a Trustee, officer, employee or agent of the Trust against all expenses reasonably incurred or paid by him/her in connection with any claim, action, suit or proceeding in which he/she becomes involved as a party or otherwise by virtue of his/her being or having been a Trustee, officer, employee or agent and against amounts paid or incurred by him/her in the settlement thereof, if he/she acted in good faith and in a manner he/she reasonably believed to be in or not opposed to the best interests of the Trust, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his/her conduct was unlawful. In addition, indemnification is permitted only if it is determined that the actions in question did not render him/her liable by reason of willful misfeasance, bad faith or gross negligence in the performance of his/her duties or by reason of reckless disregard of his/her obligations and duties to the Registrant. The Registrant may also advance money for litigation expenses provided that Trustees, officers, employees and/or agents give their undertakings to repay the Registrant unless their conduct is later determined to permit indemnification. Pursuant to Section 5.2 of the Registrant's Amended and Restated Declaration of Trust, no Trustee, officer, employee or agent of the Registrant shall be liable for any action or failure to act, except in the case of willful misfeasance, bad faith or gross negligence or reckless disregard of duties to the Registrant. Pursuant to paragraph 9 of the Registrant's Investment Advisory Agreement, the Adviser shall not be liable for any action or failure to act, except in the case of willful misfeasance, bad faith or gross negligence or reckless disregard of duties to the Registrant. Insofar as indemnification for liability arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions of Rule 484 under the Act, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, 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. The Registrant hereby undertakes that it will apply the indemnification provision of its by-laws in a manner consistent with Release 11330 of the Securities and Exchange Commission under the Investment Company Act of 1940, so long as the interpretation of Sections 17(h) and 17(i) of such Act remains in effect. The Registrant maintains insurance on behalf of any person who is or was a Trustee, officer, employee or agent of Registrant, or who is or was serving at the request of Registrant as a trustee, director, officer, employee or agent of another trust or corporation, against any liability asserted against him/her and incurred by him/her or arising out of his/her position. However, in no event will Registrant maintain insurance to indemnify any such person for any act for which Registrant itself is not permitted to indemnify him/her.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
See "MANAGEMENT OF THE TRUST" in the Statement of Additional Information. Neither the investment adviser of the Registrant nor any director, officer or partner of the investment adviser is, or has been, at any time during the past two years, engaged for his own account or in the capacity of director, officer, employee, partner or trustee, in any other business, profession, vocation or employment of a substantial nature.
ITEM 27. PRINCIPAL UNDERWRITERS
(1) The sole principal underwriter for the Fund is ALPS Distributors, Inc.
which acts as distributor for the Registrant and the following other funds:
Westcore Trust, Financial Investors Trust, Stonebridge Growth Fund, Inc.,
Stonebridge Aggressive Growth Fund, Inc., SPDR Trust, MidCap SPDR Trust,
DIAMONDS Trust, PowerShares Exchange- Traded Funds Trust, Nasdaq 100 Trust,
Firsthand Funds, Holland Balanced Fund, Financial Investors Variable
Insurance Trust, State Street Institutional Investment Trust, Ameristock
Mutual Fund, Inc., W.P. Stewart & Co. Growth Fund, Inc., Accessor Funds,
Inc., BLDRS Index Fund Trust, Drake Funds, Wasatch Funds, Williams Capital
Liquid Assets Fund, First Funds, Agile Funds, The Henssler Funds, Inc.,
CornerCap Group of Funds and Milestone Funds.
(b) To the best of Registrant's knowledge, the directors and executive officers of ALPS Distributors, Inc., the distributor for Registrant, are as follows:
NAME AND PRINCIPAL POSITIONS AND OFFICES POSITIONS AND OFFICES
BUSINESS ADDRESS* WITH REGISTRANT WITH UNDERWRITER
------------------ --------------------- ---------------------------------
Thomas A. Carter None Managing Director-Sales and
Finance and Treasurer
Edmund J. Burke None Director and President
Jeremy May None Managing Director-Operations and
Client Services and Secretary
Tane T. Tyler None Chief Legal Officer and Assistant
Secretary
Diana M. Adams None Vice President and Controller
Bradley J. Swenson None Chief Compliance Officer
|
* All Addresses are 1625 Broadway, Suite 2200, Denver, Colorado 80202
(c) Not Applicable
ITEM 28. LOCATION OF ACCOUNTS AND RECORD
All accounts, books and other documents required to be maintained by Section 31(a) of the 1940 Act and the Rules thereunder will be maintained at the offices of the Administrator, State Street Bank & Trust Company, 2 Avenue de Lafayette, Boston, Massachusetts 02111.
ITEM 29. MANAGEMENT SERVICES
Not applicable.
ITEM 30. UNDERTAKINGS
Not applicable.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended, the Registrant certifies that it meets all of the requirements for effectiveness of this Post Effective Amendment to the registration statement under Rule 485(b) under the Securities Act and caused this amendment to the registration statement to be signed on its behalf by the undersigned, duly authorized, in the City of Boston and the Commonwealth of Massachusetts, on the 27th day of January 2006.
THE SELECT SECTOR SPDR(R)TRUST
/s/ Gary L. French* ---------------------------------------- Gary L. French President |
Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment to the Registrant's Registration Statement has been signed below by the following persons in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ Cheryl Burgermeister* Trustee January 27, 2006 ------------------------------ Cheryl Burgermeister /s/ John Clark* Treasurer and Chief Financial Officer January 27, 2006 ------------------------------ for purposes of Section 32(b) John Clark /s/ Kathleen C. Cuocolo* Trustee January 27, 2006 ------------------------------ Kathleen C. Cuocolo /s/ George R. Gaspari* Trustee January 27, 2006 ------------------------------ George R. Gaspari /s/ Gary L. French* President January 27, 2006 ------------------------------ Gary L. French /s/ James Ross* Trustee January 27, 2006 ------------------------------ James Ross /s/ Ernest J. Scalberg* Trustee January 27, 2006 ------------------------------ Ernest J. Scalberg /s/ R. Charles Tschampion* Trustee January 27, 2006 ------------------------------ R. Charles Tschampion |
*By: /s/ Scott M. Zoltowski
-------------------------
Scott M. Zoltowski
As Attorney-in-Fact Pursuant
to Power of Attorney
|
Exhibit List
Item 22
(e)(vi) Amended Distribution Agreement (e)(vii) Marketing Agreement (e)(viii) Amended and Restated Marketing Agreement (g)(ii) Amendment to Custodian Agreement. (j) Consent of PricewaterhouseCoopers, LLP (q) Power of Attorney (r) Secretary's Certificate |
DISTRIBUTION AGREEMENT
Distribution Agreement made this 30th day of September, 2005, by and between The Select Sector SPDR(R) Trust, a Massachusetts business trust (the "Trust"), and ALPS Distributors, Inc., a Colorado corporation (the "Distributor").
WHEREAS, the Trust is a registered open-end management investment company organized as a series trust offering a number of portfolios of securities (each a "Fund" and collectively the "Funds"), each investing primarily in equity securities selected to reflect the performance of a specified securities index, having filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form N-1A (Registration No. 333-57791; 811-08837) under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended;
WHEREAS, the Trust intends to create and redeem shares of beneficial interest, par value $0.01 per Share (the "Shares") of each Fund on a continuous basis at their net asset value only in aggregations constituting a Creation Unit, as such term is defined in the Registration Statement;
WHEREAS, the Shares of each Fund will be listed on the American Stock Exchange LLC (the "AMEX") and traded under the symbols set forth in Annex I hereto;
WHEREAS, the Trust desires to retain the Distributor to act as the distributor with respect to the issuance and distribution of Creation Units of Shares of each Fund, hold itself available to receive and process orders for such Creation Units in the manner set forth in the Trust's Prospectus, and to enter into arrangements with broker-dealers who may solicit purchases of Shares and with broker-dealers and others to provide for servicing of shareholder accounts and for distribution assistance, including broker-dealer and shareholder support;
WHEREAS, the Board of Trustees of the Trust has adopted a plan of distribution (each a "12b-1 Plan") pursuant to Rule 12b-1 under the 1940 Act with respect to each Fund and may make payments to the Distributor pursuant to such 12b-1 Plans, subject to and in accordance with the terms and conditions thereof and any related agreements;
WHEREAS, the Distributor is a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the "1934 Act") and a member of the National Association of Securities Dealers ("NASD"); and
WHEREAS, the Distributor desires to provide such services to the Trust.
NOW, THEREFORE, in consideration of the mutual promises and undertakings herein contained, the parties agree as follows:
1. Appointment. The Trust hereby appoints the Distributor as the exclusive distributor for Creation Unit aggregations of Shares of each Fund listed in Annex I hereto, as may be amended by the parties from time to time, on the terms and for the period set forth in this Agreement and subject to the registration requirements of the 1933 Act and of the laws governing the sale of securities in the various states, and the Distributor hereby accepts such appointment and agrees to act in such capacity hereunder.
2. Definitions. Wherever they are used herein, the following terms have the following respective meanings:
a. "1940 Act" means the Investment Company Act of 1940 and the rules and regulations thereunder as amended from time to time;
b. "Prospectus" means the Prospectus and Statement of Additional Information constituting parts of the Registration Statement of the Trust under the 1933 Act and the 1940 Act as such Prospectus and Statement of Additional Information may be amended or supplemented and filed with the Commission from time to time;
c. "Registration Statement" means the registration statement most recently filed from time to time by the Trust with the Commission and effective under the 1933 Act and the 1940 Act, as such registration statement is amended by any amendments thereto at the time in effect;
d. All capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Registration Statement and the Prospectus.
3. Duties of the Distributor.
(a) The Trust grants to the Distributor the exclusive right to receive all orders for purchases of Creation Units of each Fund from Participating Parties or DTC Participants which have executed a Participant Agreement ("Authorized Participants") and to transmit such orders to the Trust in accordance with the Registration Statement and Prospectus; provided, however, that nothing herein shall affect or limit the right and ability of the Trust to accept Deposit Securities and related Cash Components through or outside the Clearing Process, and as provided in and in accordance with the Registration Statement and Prospectus. The Trust acknowledges that the Distributor shall not be obligated to accept any certain number of orders for Creation Units and nothing herein shall prevent the Distributor from entering into like distribution arrangements with other investment companies.
(b) The Distributor agrees to act as agent of the Trust with respect to the continuous distribution of Creation Units of each Fund as set forth in the Registration Statement and in accordance with the provisions thereof. The Distributor further agrees as follows: (a) at the request of the Trust, the Distributor shall enter into Participant Agreements between and among Authorized Participants, the Distributor and the Transfer Agent in accordance with the Registration Statement and Prospectus and in the form attached hereto as Exhibit A; (b) the Distributor shall generate and transmit confirmations of Creation Unit purchase order acceptances to the purchaser; (c) the Distributor shall deliver copies of the prospectus, included in the Registration Statement, to purchasers of such Creation Units and upon request the Statement of Additional Information; and (d) the Distributor shall maintain telephonic, facsimile and/or access to direct computer communications links with the Transfer Agent.
(c) (i) The Distributor agrees to use all reasonable efforts, consistent with its other business, to facilitate the purchase of Creation Units through Authorized Participants in accordance with the procedures set forth in the Prospectus and the Participant Agreement.
(ii) The Distributor shall, at its own expense, execute the following
agreements in the forms and as approved by the Board of Trustees of the Trust,
providing for activities which the Distributor deems reasonable and appropriate
and which are primarily intended to result in the sale of such Creation Units:
(A) selected or soliciting dealer agreements ("Soliciting Dealer Agreements")
with registered broker-dealers and other eligible entities providing for the
purchase of Creation Units of Shares of the Funds and related promotional
activities, and (B) investor services agreements ("Investor Services
Agreements") with broker-dealers or other financial institutions providing for
broker-dealer, investor and
stockholder support, account maintenance and educational and promotional services relating to the Shares and facilitation through broker-dealers and other persons of communications with beneficial owners of Shares. Pursuant to this Agreement, the Dealer Agreements and the Investor Services Agreements, the Distributor shall facilitate the coordination of the performance of any marketing and promotional services, including advertising; the development and implementation of any marketing plan; and clearing and filing all advertising, sales, marketing and promotional materials of the Funds with the NASD as provided below.
(d) The Distributor agrees to administer the Distribution and Service Plan on behalf of the Trust. The Distributor shall, at its own expense, set up and maintain a system of recording and payments for fees and reimbursement of expenses disseminated pursuant to this Agreement and any other related agreements under the Funds' Rule 12b-1 Plans and shall, pursuant to the 1940 Act, report such payment activity under the Distribution and Service Plan to the Trust at least quarterly.
(e) The Distributor shall provide toll-free lines, by way of the American Stock Exchange Index Share Product Hotline (1800-THE-AMEX) for direct investor and shareholder use between the hours of 7:30 a.m. and 2:00 p.m. Mountain time on each day the New York Stock Exchange is open for business, with appropriate NASD licensed order taking and distribution services staff.
(f) All activities by the Distributor and its agents and employees which are primarily intended to result in the sale of Creation Units shall comply with the Registration Statement and Prospectus, the instructions of the Board of Trustees of the Trust and all applicable laws, rules and regulations including, without limitation, all rules and regulations made or adopted pursuant to the 1940 Act by the Commission or any securities association registered under the 1934 Act, including the NASD and the AMEX.
(g) Except as otherwise noted in the Registration Statement and Prospectus, the offering price for all Creation Units of Shares will be the aggregate net asset value of the Shares per Creation Unit of the relevant Fund, as determined in the manner described in the Registration Statement and Prospectus.
(h) If and whenever the determination of net asset value is suspended and until such suspension is terminated, no further orders for Creation Units will be processed by the Distributor except such unconditional orders as may have been placed with the Distributor before it had knowledge of the suspension. In addition, the Trust reserves the right to suspend sales and Distributor's authority to process orders for Creation Units on behalf of the Trust, upon due notice to the Distributor, if, in the judgment of the Trust, it is in the best interests of the Trust to do so. Suspension will continue for such period as may be determined by the Trust.
(i) The Distributor is not authorized by the Trust to give any information or to make any representations other than those contained in the Registration Statement or Prospectus or contained in shareholder reports or other material that may be prepared by or on behalf of the Trust for the Distributor's use. The Distributor shall be entitled to rely on and shall not be responsible in any way for information provided to it by the Trust and its respective service providers and shall not be liable or responsible for the errors and omissions of such service providers, provided that the foregoing shall not be construed to protect the Distributor against any liability to the Trust or the Trust's shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement.
(j) The Board of Trustees shall approve the form of any Soliciting Dealer Agreement or Investor Services Agreement to be entered into by the Distributor.
(k) At the request of the Trust, the Distributor shall enter into agreements in the form specified by the Trust (each a "Participant Agreement") with participants in the system for book-entry of The Depository Trust Company and the NSCC as described in the Prospectus.
(l) The Distributor shall ensure that all direct requests for Prospectuses and Statements of Additional of Information are fulfilled. In addition, the Distributor shall arrange to provide the AMEX (and any other national stock exchange on which the Shares may be listed) with copies of Prospectuses to be provided to purchasers in the secondary market. The Distributor will generally make it known in the brokerage community that prospectuses and statements of additional information are available, including by (i) advising the AMEX on behalf of its member firms of the same, (ii) making such disclosure in all marketing and advertising materials prepared and/or filed by the Distributor with the NASD, and (iii) as may otherwise be required by the Commission.
(m) The Distributor agrees to make available, at the Trust's request one or more members of its staff to attend Board meetings of the Trust in order to provide information with regard to the ongoing distribution process and for such other purposes as may be requested by the Board of Trustees of the Trust.
4. Duties of the Trust.
(a) The Trust agrees to issue Creation Unit aggregations of Shares of each Fund and to request The Depository Trust Company to record on its books the ownership of such Shares in accordance with the book-entry system procedures described in the Prospectus in such amounts as the Distributor has requested through the Transfer Agent in writing or other means of data transmission, as promptly as practicable after receipt by the Trust of the requisite Deposit Securities and Cash Component (together with any fees) and acceptance of such order, upon the terms described in the Registration Statement. The Trust may reject any order for Creation Units or stop all receipts of such orders at any time upon reasonable notice to the Distributor, in accordance with the provisions of the Prospectus.
(b) The Trust agrees that it will take all action necessary to register an indefinite number of Shares under the 1933 Act. The Trust will make available to the Distributor such number of copies of its then currently effective Prospectus as the Distributor may reasonably request. The Trust will furnish to the Distributor copies of all information, financial statements and other papers which the Distributor may reasonably request for use in connection with the distribution of Creation Units. The Trust shall keep the Distributor informed of the jurisdictions in which Shares of the Trust are authorized for sale and shall promptly notify the Distributor of any change in this information. The Distributor shall not be liable for damages resulting from the sale of Shares in authorized jurisdictions where the Distributor had no information from the Trust that such sale or sales were unauthorized at the time of such sale or sales.
(c) The Trust represents to the Distributor that the Registration Statement and Prospectus filed by the Trust with the Commission with respect to the Trust have been prepared in conformity with the requirements of the 1933 Act, the 1940 Act and the rules and regulations of the Commission thereunder. The Trust will notify the Distributor promptly of any amendment to the Registration Statement or supplement to the Prospectus and any stop order suspending the effectiveness of the Registration Statement.
5. Fees and Expenses.
(a) The Trust will, with respect to each Fund, pay to the Distributor all fees and expenses pursuant to the terms of the Distribution and Service Plan in effect for each respective Fund.
(b) The Distributor will bear the following costs and expenses relating to the distribution of Creation Units of the Funds: (a) the costs of processing and maintaining records of creations of Creation
Units; (b) the costs of maintaining the records required of a broker-dealer registered under the 1934 Act; (c) the expenses of maintaining its registration or qualification as a dealer or broker under federal or state laws; (d) the expenses incurred by the Distributor in connection with normal (non-expedited) NASD filing fees; and (e) all other expenses incurred in connection with the distribution services contemplated herein, except as specifically provided in this Agreement.
(c) The Distributor shall pay, from the fees received by it from the Funds pursuant to the Rule 12b-1 Plans, all fees and make reimbursement of expenses, pursuant to and in accordance with any and all Investor Services Agreements, as approved by the Board of Trustees of the Trust, as set forth in Section 3 of this Agreement. Further, the Distributor will pay, from the fees received by it from the Funds pursuant to the Rule 12b-1 Plans, all fees with respect to expedited NASD filing fees.
6. Indemnification.
(a) The Trust agrees to indemnify and hold harmless the Distributor and any soliciting dealer that enters into a Soliciting Dealer Agreement with the Distributor, which provides for such indemnification, in the form approved by the Board of Trustees (each an "Indemnified Dealer") and each of the directors, officers, agents and employees and any person who controls the Distributor or the Indemnified Dealer within the meaning of Section 15 of the 1933 Act (any of the Distributor, any Indemnified Dealer, their officers, agents, employees and directors or such control persons, for purposes of this paragraph, an "Indemnitee") against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon the claim that the Registration Statement, Prospectus, shareholder reports or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein (and in the case of the Prospectus, in light of the circumstances under which they were made) not misleading under the 1933 Act, or any other statute or the common law. However, the Trust does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in reliance upon, and in conformity with information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Indemnitee with respect to any untrue statement or omission made in the Registration Statement or Prospectus that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy of the Prospectus (or such amendment or supplement) was not sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation to such person in any case where such delivery is required by the 1933 Act and the Trust had notified the Distributor of the amendment or supplement prior to the sending of the confirmation. In no case (i) is the indemnity of the Trust in favor of any Indemnitee to be deemed to protect the Indemnitee against any liability to the Trust or its shareholders to which the Indemnitee would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the Trust to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against any Indemnitee unless the Indemnitee shall have notified the Trust in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon Indemnitee (or after Indemnitee shall have received notice of service on any designated agent). However, failure to notify the Trust of any claim shall not relieve the Trust from any liability which it may have to any Indemnitee against whom such action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Trust shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to Indemnitee, defendant or defendants in the suit. In the event the Trust elects to assume the defense of any suit and retain counsel, Indemnitee, defendant or defendants in the suit, shall bear the
fees and expenses of any additional counsel retained by them. If the Trust does not elect to assume the defense of any suit, it will reimburse the Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to notify the Distributor and any Indemnified Dealer promptly of the commencement of any litigation or proceedings against it or any of its officers or trustees in connection with the issuance or sale of any of the Creation Units or the Shares.
(b) The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and officers and any person who controls the Trust within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the "Trust Affiliates") against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) which the Trust Affiliate may incur under the 1933 Act or any other statute or common law, but only to the extent that such loss, liability, claim, damages or expense shall arise out of or be based upon (i) the allegation of any wrongful act of the Distributor or any of its employees or (ii) allegation that the Registration Statement, Prospectus, shareholder reports or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated or necessary in order to make the statements not misleading, insofar as the statement or omission was made in reliance upon, and in conformity with information furnished to the Trust by or on behalf of the Distributor. In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be deemed to protect any Trust Affiliate against any liability to the Trust or its security holders to which such Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the Distributor to be liable under its indemnity agreement contained in this paragraph with respect to any claim made against any Trust Affiliate unless the Trust Affiliate shall have notified the Distributor in writing of the claim within a reasonable time after the summons or the first written notification giving information of the nature of the claim shall have been served upon the Trust Affiliate (or after the Trust Affiliate shall have received notice of service on any designated agent). However, failure to notify the Distributor of any claim shall not relieve the Distributor from any liability which it may have to the Trust Affiliate against whom the action is brought otherwise than on account of its indemnity agreement contained in this paragraph. The Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Trust, its officers and Board and to any controlling person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the defense of any suit and retain counsel, the Trust or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any suit, it will reimburse the Trust, its officers and Board or controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify the Trust promptly of the commencement of any litigation or proceedings against it in connection with the issuance and sale of any of the shares.
(c) No indemnified party shall settle any claim against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior written notice to and consent from the indemnifying party, which consent shall not be unreasonably withheld. No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. This section 6 shall survive the termination of this Agreement.
7. Representations.
(a) The Distributor represents and warrants that (i) it is duly organized as a Colorado
corporation and is and at all times will remain duly authorized and licensed to carry out its services as contemplated herein; (ii) the execution, delivery and performance of this Agreement are within its power and have been duly authorized by all necessary action; and (iii) its entering into this Agreement or providing the services contemplated hereby does not conflict with or constitute a default or require a consent under or breach of any provision of any agreement or document to which the Distributor is a party or by which it is bound and (iv) it is registered as a broker-dealer under the 1934 Act and is a member of the NASD.
(b) The Trust represents and warrants that (i) it is duly organized as a Massachusetts business trust and is and at all times will remain duly authorized to carry out its obligations as contemplated herein; (ii) it is registered as an investment company under the 1940 Act; (iii) the execution, delivery and performance of this Agreement are within its power and have been duly authorized by all necessary action; and (iv) its entering into this Agreement does not conflict with or constitute a default or require a consent under or breach of any provision of any agreement or document to which the Trust is a party or by which it is bound.
8. Duration, Termination and Amendment.
(a) This Agreement shall be effective on the date first set forth above, and unless terminated as provided herein, shall continue for two years from its effective date, and thereafter from year to year, provided such continuance is approved annually by the vote of a majority of the Board of Trustees, and by the vote of those Trustees who are not "interested persons" of the Trust (the "Independent Trustees") and, if a plan under Rule 12b-1 under the 1940 Act is in effect, by the vote of those Trustees who are not "interested persons" of the Trust and who are not parties to such plan or this Agreement and have no financial interest in the operation of such plan or in any agreements related to such plan, cast in person at a meeting called for the purpose of voting on the approval. This Agreement may be terminated at any time, without the payment of any penalty, as to each Fund (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, on at least sixty (60) days prior written notice to the Distributor. In addition, this Agreement may be terminated at any time by the Distributor upon at least sixty (60) days prior written notice to the Trust. This Agreement shall automatically terminate in the event of its assignment. As used in this paragraph, the terms "assignment" and "interested persons" shall have the respective meanings specified in the 1940 Act.
(b) During such period as the Distributor receives compensation pursuant to
the 12b-1 Plans, and this Agreement constitutes a 12b-1 Plan related agreement,
(i) any material amendment to this Agreement requires the approval provided for
in paragraph (a) with respect to annual renewals of this Agreement, and (ii) any
amendment that materially increases the amount to be spent for distribution
services requires the additional approval of the majority of the Trust's
outstanding voting securities (as defined in the 1940 Act) of each affected
Fund; and (iii) the selection and nomination of those Trustees who are not
"interested persons" (as defined in the 1940 Act) of the Trust shall be
committed to the discretion of the Trustees of the Trust who are not such
"interested persons" of the Trust;
(c) No provision of this Agreement may be changed, waived, discharged or terminated except by an instrument in writing signed by the party against which an enforcement of the change, waiver, discharge or termination is sought.
9. Notice. Any notice or other communication authorized or required by this Agreement to be given to either party shall be in writing and deemed to have been given when delivered in person or by confirmed facsimile, or posted by certified mail, return receipt requested, to the following address (or such other address as a party may specify by written notice to the other): if to the Distributor: ALPS Distributors, Inc., Attn.: General Counsel, 1625 Broadway, Suite 2200, Denver, CO 80202, fax: (303) 623-7850; if to
the Trust: State Street Bank and Trust Company, Attn.: Legal Department, P.O. Box 5049, Boston, MA 02206-5049 fax: (617) 662-3805.
10. Limitation of Liability. The Distributor is expressly put on notice of the limitation of shareholder liability as set forth in the Declaration of Trust of the Trust and agrees that the obligations assumed by the Trust under this contract shall be limited in all cases to the Trust and its assets. The Distributor shall not seek satisfaction of any such obligation from the shareholders or any shareholder of the Trust, nor shall the Distributor seek satisfaction of any such obligation from the Trustees or any individual Trustee of the Trust. The Distributor understands that the rights and obligations of each series of shares of the Trust under the Declaration of Trust are separate and distinct from those of any and all other series.
11. Choice of Law. This Agreement shall be governed by, and construed in accordance with, the laws of The Commonwealth of Massachusetts, without giving effect to the choice of laws provisions thereof.
12. Counterparties. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
13. Severability. If any provisions of this Agreement shall be held or made invalid, in whole or in part, then the other provisions of this Agreement shall remain in force. Invalid provisions shall, in accordance with this Agreement's intent and purpose, be amended, to the extent legally possible, by valid provisions in order to effectuate the intended results of the invalid provisions.
14. Insurance. The Distributor will maintain at its expense an errors and omissions insurance policy which covers services by the Distributor hereunder.
15. Segregation of Fees and Expenses. Amounts paid by each Fund to the Distributor under its 12b-1 Plan either for distribution related services or shareholder services shall not be used to pay for the distribution of Shares of, or shareholder servicing in respect of, any other Fund. However, fees under the 12b-1 Plan attributable to the Trust as a whole shall be allocated to each Fund according to the method adopted by the Trust's Board of Trustees. Fees attributable to the Trust as a whole shall include any amounts payable under the 12b-1 Plans to the Distributor for its services rendered hereunder. The Distributor's allocation of such 12b-1 Plan fees shall be subject to review by the Trust's Board of Trustees.
16. Limitation of Liability. The Declaration of Trust dated June 10, 1998, establishing the Trust, which is hereby referred to and a copy of which is on file with the Secretary of The Commonwealth of Massachusetts, provides that the name The Select Sector SPDR Trust means the Trustees from time to time serving (as Trustees but not personally) under such Declaration of Trust. It is expressly acknowledged and agreed that the obligations of the Trust hereunder shall not be binding upon any of the shareholders, Trustees, officers, employees or agents of the Trust, personally, but shall bind only the trust property of the Trust, as provided in its Declaration of Trust. The execution and delivery of this Agreement have been authorized by the Trustees of the Trust and signed by an officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in its Declaration of Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their officers designated below as of the date first set forth above.
THE SELECT SECTOR SPDR(R) TRUST
By: /s/ Gary L. French
------------------------------------
Name: Gary L. French
Title: President
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ALPS DISTRIBUTORS, INC.
By: /s/ Jeremy O. May
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Name: Jeremy O. May
Title: Managing Director, Operations and
Client Service
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Annex I
FUND
The Consumer Discretionary Select Sector SPDR Fund
The Consumer Staples Select Sector SPDR Fund
The Energy Select Sector SPDR Fund
The Financial Select Sector SPDR Fund
The Health Care Select Sector SPDR Fund
The Industrial Select Sector SPDR Fund
The Materials Select Sector SPDR Fund
The Technology Select Sector SPDR Fund
The Utilities Select Sector SPDR Fund
As of September 30, 2005
THE SELECT SECTOR SPDR TRUST
MARKETING AGREEMENT
THIS MARKETING AGREEMENT (the "Agreement") is made as of September 30, 2005, between The Select Sector SPDR Trust, a Massachusetts business Trust (the "Trust"), and ALPS Distributors, Inc., a Colorado corporation ("ADI").
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"), presently offering shares in separate series (each a "Fund" and collectively the "Funds" or the "Product") as listed on Appendix A attached hereto;
WHEREAS, the Trust has entered into a Distribution Agreement (the "Distribution Agreement") dated as of September 30, 2005 with ADI providing for, among other things, the distribution and sale of the shares ("Shares") of the Funds;
WHEREAS, the Trust desires to retain ADI to provide various marketing and shareholder services with respect to the Shares of the Funds as described herein;
WHEREAS, ADI desires to render these services to the Trust; and
WHEREAS, the Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (each, a "12b-1 Plan") with respect to each Fund and will make payments to ADI pursuant to such 12b-1 Plans for providing these marketing and shareholder services; and
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the Trust and ADI agree as follows:
1. Definitions.
(a) The term "Registration Statement" shall mean the registration statement most recently filed from time to time by the Trust with the Securities and Exchange Commission (the "Commission") and effective under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act, as such registration statement is amended by any amendments thereto at the time in effect.
(b) The term "Prospectus" shall mean the prospectus included as part of the Trust's Registration Statement, as such prospectus may be amended or supplemented from time to time.
(c) The term "Statement of Additional Information" or "SAI" shall mean the Statement of Additional Information included as part of the Trust's Registration Statement, as such Statement of Additional Information may be amended or supplemented from time to time.
(d) All capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Trust's Registration Statement.
2. Representations and Warranties of ADI.
ADI represents and warrants to the Trust that:
(a) It is empowered under applicable laws and by its Articles of Incorporation and By-laws to enter into and perform this Agreement.
(b) It is duly organized as a Colorado corporation and is and at all times will remain duly authorized and licensed to carry out its services as contemplated herein; and
(c) Its entering into this Agreement or providing the services contemplated hereby does not conflict with or constitute a default or require a consent (except for any consent in writing which shall have been obtained by the date hereof) under or breach of any provision of any agreement or document to which it is a party or by which it is bound.
3. Representations and Warranties of the Trust.
The Trust represents and warrants to ADI that:
(a) The Trust shall take, from time to time, such steps, including payment of the related filing fee, as may be necessary to register the Trust's Shares under the 1933 Act to the end that Shares of each Series to which the services under this Agreement relate will be registered under the 1933 Act during the term of this Agreement.
(b) It is an open-end management investment company duly organized and existing, in good standing, under the laws of the Commonwealth of Massachusetts.
(c) It is empowered under applicable laws and by its Declaration of Trust and By- laws to enter into and perform this Agreement.
(d) The Board of Trustees has duly authorized it to enter into and perform this Agreement.
The Trust agrees to notify ADI immediately in writing of:
(a) any request by the Commission for amendments to the Trust's Registration Statement, Prospectus or SAI, or for additional information regarding such documents;
(b) any stop order suspending the effectiveness of the Trust's Registration Statement or the initiation of any proceeding for that purpose; and
(c) all actions of the Commission with respect to any amendment to the Trust's Registration Statement, Prospectus, or Statement of Additional Information.
4. Duties of ADI.
ADI agrees to make available one Director of Wealth Management Strategies ("Director") and one Product Specialist (the "Specialist"), or individuals with equivalent titles and/or responsibilities, on a full time basis to carry out the following duties.
(a) Conduct Product training for the benefit of branch managers and account executives of broker/dealers who are active or potentially active in the secondary markets;
(b) Conduct Product seminars for the same persons listed in 4(a) above and potential retail and/or institutional investors;
(c) Work with an advertising agency and public relations firm to enhance brand identification and develop marketing material to be used with broker/dealers and/or the public;
(d) Help maintain and continue to improve content on the Trust website, www.spdrindex.com.
(e) Provide support for broker/dealers active in the secondary market;
(f) Provide Product information suitable for the secondary market upon inquiry;
(g) Maintain lists of dealer contacts;
(h) Work with broker/dealers and other intermediaries who hold Shares for the benefit of their customers to facilitate communications with such customers and to develop a knowledge and understanding of the Trust's shares with such customers.
(i) Provide marketing and graphic design resources to help develop, consult and advise on the preparation of marketing material.
(j) ADI will target the independent planner market, identifying independent financial planners and registered investment advisors that use exchange traded funds and promote the Funds shares to these planners and advisors for use in their asset allocation models.
The Director, Mr. Dan Dolan, will be exclusively dedicated to the services to be provided
by ADI hereunder and will be based in the metropolitan New York area. Mr. Dolan will be involved with the services provided by ADI hereunder as long as he remains employed by or has a consulting relationship with ADI or any affiliate of ADI and the Trust so desires.
Senior management of ADI will work with the Director and Specialist to coordinate the aforementioned duties, attend various conferences, and perform presentations to potential investors as needed.
5. Compensation and Marketing Budget.
Subject to the terms and conditions of the 12b-1 Plans, each Fund will pay to ADI a fee for its services hereunder, calculated daily and payable monthly, equal to such Fund's allocable portion of the aggregate fees payable by the initial nine Funds, as follows:
(a) 0.03% per annum of the average aggregate daily net assets of all nine Funds ("Aggregate Net Assets") up to Aggregate Net Assets of $4.5 billion, plus
(c) 0.035% per annum of Aggregate Net Assets in excess of $4.5 billion up to $9 billion, plus
(d) 0.0275% per annum of Aggregate Net Assets in excess of $9 billion
Such fees shall be allocated by the Distributor among the Funds subject to this Agreement pro rata in accordance with the average daily net assets of the respective Funds, the method of such allocation to be subject to the annual review and approval of the Board of Trustees of the Trust.
ADI will provide an annual marketing budget of $150,000 and 0.0025% of aggregate net assets over $4.5 Billion for the production of marketing materials and promotional items in association with the sales and marketing of the Trust's Shares.
6. Term and Termination.
This Agreement shall be effective as of the date first set forth above, and
unless terminated as provided herein, shall continue from its effective date,
and thereafter from year to year, provided such continuance is approved annually
by the vote of a majority of the Board of Trustees, and by the vote of those
Trustees who are not "interested persons" of the Trust and, if a plan under Rule
12b-1 under the 1940 Act is in effect, by the vote of those Trustees who are not
"interested persons" of the Trust and who are not parties to such plan or this
Agreement and have no financial interest in the operation of such plan or in any
agreements related to such plan (the "Independent Trustees"), cast in person at
a meeting called for the purpose of voting on the approval. This Agreement may
be terminated at any time, without the payment of any penalty, as to each Fund
(i) by vote of a majority of the Independent Trustees or (ii) by vote of a
majority (as defined in the 1940 Act) of the outstanding voting securities of
the Fund, on sixty (60) days prior written notice to ADI. In addition, this
Agreement may be terminated at any time by ADI upon sixty (60) days prior
written notice to the Trust. This Agreement shall automatically
terminate in the event of its assignment. As used in this paragraph, the terms "assignment" and "interested persons" shall have the respective meanings specified in the 1940 Act. This Agreement will automatically terminate in the event of a termination of the Distribution Agreement, or if Mr. Dan Dolan is no longer employed by ADI or an affiliate of ADI.
7. Limitation of Liability.
The Declaration of Trust dated June 10, 1998, establishing the Trust, which is hereby referred to and a copy of which is on file with the Secretary of The Commonwealth of Massachusetts, provides that the name The Select Sector SPDR Trust means the Trustees from time to time serving (as Trustees but not personally) under such Declaration of Trust. It is expressly acknowledged and agreed that the obligations of the Trust hereunder shall not be binding upon any of the shareholders, Trustees, officers, employees or agents of the Trust, personally, but shall bind only the trust property of the Trust, as provided in its Declaration of Trust. The execution and delivery of this Agreement have been authorized by the Trustees of the Trust and signed by an officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in its Declaration of Trust.
8. Miscellaneous.
(a) Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.
(b) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction.
(c) Severability. If any provision of this Agreement shall be held or made invalid, in whole or in part, then the other provisions of this Agreement shall remain in full force and effect. Invalid provisions shall, in accordance with this Agreement's intent and purpose, be replaced, to the extent legally possible, by valid provisions in order to effectuate the intended economic results of the invalid provisions.
(d) Assignment. This Agreement may not be assigned and shall automatically terminate in the event of its "assignment" as defined in the 1940 Act or upon a change of control of ADI.
(e) Amendment. This Agreement may be amended by mutual written consent, provided that the Trust's consent to any material amendment to this Agreement requires the approval provided for in Section 6 above and in paragraph (b)(4) of Rule 12b-1 under the 1940 Act.
(f) Notification of Parties. Any notice or other communication required or permitted to be given pursuant to this Agreement shall be deemed duly given if addressed
and delivered, or mailed by registered mail, postage prepaid, to (1) ALPS Distributors, Inc., 1625 Broadway, Suite 2200, Denver, Colorado 80202 Attention: General Counsel; and (2) The Select Sector SPDR Trust, c/o State Street Bank and Trust Company, P.O. Box 5049, Boston, Massachusetts 02206-5049, Attn.: Legal Department.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first written above.
THE SELECT SECTOR SPDR TRUST
By: /s/ Gary L. French
---------------------------------
Name: Gary L. French
Title: President
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ALPS DISTRIBUTORS, INC.
By: /s/ Thomas A. Carter
---------------------------------
Name: Thomas A. Carter
Title: Managing Director
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THE SELECT SECTOR SPDR TRUST
AMENDED AND RESTATED MARKETING AGREEMENT
THIS AMENDED AND RESTATED MARKETING AGREEMENT (the "Agreement") is made as of November 11, 2005, between The Select Sector SPDR Trust, a Massachusetts business Trust (the "Trust"), and ALPS Mutual Funds Services, Inc. ("ALPS"), a Colorado corporation ("ALPS").
WHEREAS, the Trust is an open-end management investment company registered under the Investment Company Act of 1940 (the "1940 Act"), presently offering shares in separate series (each a "Fund" and collectively the "Funds" or the "Product") as listed on Appendix A attached hereto;
WHEREAS, the Trust has entered into a Distribution Agreement (the "Distribution Agreement") dated as of September 30, 2005 with ALPS Distributors Inc. ("ADI") providing for, among other things, the distribution and sale of the shares ("Shares") of the Funds;
WHEREAS, ADI desires to change the name of the signatory from ADI to ALPS to reflect the more appropriate entity to perform the marketing services; and
WHEREAS, the Trust desires to retain ALPS to provide various marketing and shareholder services with respect to the Shares of the Funds as described herein;
WHEREAS, ALPS desires to render these services to the Trust; and
WHEREAS, the Trust has adopted a Plan of Distribution pursuant to Rule 12b-1 under the 1940 Act (each, a "12b-1 Plan") with respect to each Fund and will make payments to ALPS pursuant to such 12b-1 Plans for providing these marketing and shareholder services;
NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement, the Trust and ALPS agree as follows:
1. Definitions.
(a) The term "Registration Statement" shall mean the registration statement most recently filed from time to time by the Trust with the Securities and Exchange Commission (the "Commission") and effective under the Securities Act of 1933, as amended (the "1933 Act"), and the 1940 Act, as such registration statement is amended by any amendments thereto at the time in effect.
(b) The term "Prospectus" shall mean the prospectus included as part of the Trust's Registration Statement, as such prospectus may be amended or supplemented from time to time.
(c) The term "Statement of Additional Information" or "SAI" shall mean the Statement of Additional Information included as part of the Trust's Registration Statement, as such Statement of Additional Information may be amended or supplemented from time to time.
(d) All capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the Trust's Registration Statement.
2. Representations and Warranties of ALPS.
ALPS represents and warrants to the Trust that:
(a) It is empowered under applicable laws and by its Articles of Incorporation and By-laws to enter into and perform this Agreement.
(b) It is duly organized as a Colorado corporation and is and at all times will remain duly authorized and licensed to carry out its services as contemplated herein; and
(c) Its entering into this Agreement or providing the services contemplated hereby does not conflict with or constitute a default or require a consent (except for any consent in writing which shall have been obtained by the date hereof) under or breach of any provision of any agreement or document to which it is a party or by which it is bound.
3. Representations and Warranties of the Trust.
The Trust represents and warrants to ALPS that:
(a) The Trust shall take, from time to time, such steps, including payment of the related filing fee, as may be necessary to register the Trust's Shares under the 1933 Act to the end that Shares of each Series to which the services under this Agreement relate will be registered under the 1933 Act during the term of this Agreement.
(b) It is an open-end management investment company duly organized and existing, in good standing, under the laws of the Commonwealth of Massachusetts.
(c) It is empowered under applicable laws and by its Declaration of Trust and By- laws to enter into and perform this Agreement.
(d) The Board of Trustees has duly authorized it to enter into and perform this Agreement.
The Trust agrees to notify ALPS immediately in writing of:
(a) any request by the Commission for amendments to the Trust's Registration Statement, Prospectus or SAI, or for additional information regarding such documents;
(b) any stop order suspending the effectiveness of the Trust's Registration Statement or the initiation of any proceeding for that purpose; and
(c) all actions of the Commission with respect to any amendment to the Trust's Registration Statement, Prospectus, or Statement of Additional Information.
4. Duties of ALPS.
ALPS agrees to make available one Director of Wealth Management Strategies ("Director") and one Product Specialist (the "Specialist"), or individuals with equivalent titles and/or responsibilities, on a full time basis to carry out the following duties.
(a) Conduct Product training for the benefit of branch managers and account executives of broker/dealers who are active or potentially active in the secondary markets;
(b) Conduct Product seminars for the same persons listed in 4(a) above and potential retail and/or institutional investors;
(c) Work with an advertising agency and public relations firm to enhance brand identification and develop marketing material to be used with broker/dealers and/or the public;
(d) Help maintain and continue to improve content on the Trust website, www.spdrindex.com.
(e) Provide support for broker/dealers active in the secondary market;
(f) Provide Product information suitable for the secondary market upon inquiry;
(g) Maintain lists of dealer contacts;
(h) Work with broker/dealers and other intermediaries who hold Shares for the benefit of their customers to facilitate communications with such customers and to develop a knowledge and understanding of the Trust's shares with such customers.
(i) Provide marketing and graphic design resources to help develop, consult and advise on the preparation of marketing material.
(j) ALPS will target the independent planner market, identifying independent financial planners and registered investment advisors that use exchange traded
funds and promote the Funds shares to these planners and advisors for use in their asset allocation models.
The Director, Mr. Dan Dolan, will be exclusively dedicated to the services to be provided by ALPS hereunder and will be based in the metropolitan New York area. Mr. Dolan will be involved with the services provided by ALPS hereunder as long as he remains employed by or has a consulting relationship with ALPS or any affiliate of ALPS and the Trust so desires.
Senior management of ALPS will work with the Director and Specialist to coordinate the aforementioned duties, attend various conferences, and perform presentations to potential investors as needed.
5. Compensation and Marketing Budget.
Subject to the terms and conditions of the 12b-1 Plans, each Fund will pay to ALPS a fee for its services hereunder, calculated daily and payable monthly, equal to such Fund's allocable portion of the aggregate fees payable by the initial nine Funds, as follows:
(a) 0.03% per annum of the average aggregate daily net assets of all nine Funds ("Aggregate Net Assets") up to Aggregate Net Assets of $4.5 billion, plus
(c) 0.035% per annum of Aggregate Net Assets in excess of $4.5 billion up to $9 billion, plus
(d) 0.0275% per annum of Aggregate Net Assets in excess of $9 billion
Such fees shall be allocated by the Distributor among the Funds subject to this Agreement pro rata in accordance with the average daily net assets of the respective Funds, the method of such allocation to be subject to the annual review and approval of the Board of Trustees of the Trust.
ALPS will provide an annual marketing budget of $150,000 and 0.0025% of aggregate net assets over $4.5 Billion for the production of marketing materials and promotional items in association with the sales and marketing of the Trust's Shares.
6. Term and Termination.
This Agreement shall be effective as of the date first set forth above, and unless terminated as provided herein, shall continue from its effective date, and thereafter from year to year, provided such continuance is approved annually by the vote of a majority of the Board of Trustees, and by the vote of those Trustees who are not "interested persons" of the Trust and, if a plan under Rule 12b-1 under the 1940 Act is in effect, by the vote of those Trustees who are not "interested persons" of the Trust and who are not parties to such plan or this Agreement and have no financial interest in the operation of such plan or in any agreements related to such plan (the "Independent Trustees"), cast in person at a meeting called for the purpose of voting on the approval. This Agreement may be terminated at any time, without the payment of any penalty,
as to each Fund (i) by vote of a majority of the Independent Trustees or (ii) by vote of a majority (as defined in the 1940 Act) of the outstanding voting securities of the Fund, on sixty (60) days prior written notice to ALPS. In addition, this Agreement may be terminated at any time by ALPS upon sixty (60) days prior written notice to the Trust. This Agreement shall automatically terminate in the event of its assignment. As used in this paragraph, the terms "assignment" and "interested persons" shall have the respective meanings specified in the 1940 Act. This Agreement will automatically terminate in the event of a termination of the Distribution Agreement, or if Mr. Dan Dolan is no longer employed by ALPS or an affiliate of ALPS.
7. Limitation of Liability.
The Declaration of Trust dated June 10, 1998, establishing the Trust, which is hereby referred to and a copy of which is on file with the Secretary of The Commonwealth of Massachusetts, provides that the name The Select Sector SPDR Trust means the Trustees from time to time serving (as Trustees but not personally) under such Declaration of Trust. It is expressly acknowledged and agreed that the obligations of the Trust hereunder shall not be binding upon any of the shareholders, Trustees, officers, employees or agents of the Trust, personally, but shall bind only the trust property of the Trust, as provided in its Declaration of Trust. The execution and delivery of this Agreement have been authorized by the Trustees of the Trust and signed by an officer of the Trust, acting as such, and neither such authorization by such Trustees nor such execution and delivery by such officer shall be deemed to have been made by any of them individually or to impose any liability on any of them personally, but shall bind only the trust property of the Trust as provided in its Declaration of Trust.
8. Miscellaneous.
(a) Choice of Law. This Agreement shall be governed by and construed in accordance with the laws of the Commonwealth of Massachusetts.
(b) Captions. The captions in this Agreement are included for convenience of reference only and in no way define or limit any of the provisions hereof or otherwise affect their construction.
(c) Severability. If any provision of this Agreement shall be held or made invalid, in whole or in part, then the other provisions of this Agreement shall remain in full force and effect. Invalid provisions shall, in accordance with this Agreement's intent and purpose, be replaced, to the extent legally possible, by valid provisions in order to effectuate the intended economic results of the invalid provisions.
(d) Assignment. This Agreement may not be assigned and shall automatically terminate in the event of its "assignment" as defined in the 1940 Act or upon a change of control of ALPS.
(e) Amendment. This Agreement may be amended by mutual written consent, provided that the Trust's consent to any material amendment to this Agreement
requires the approval provided for in Section 6 above and in paragraph
(b)(4) of Rule 12b-1 under the 1940 Act.
(f) Notification of Parties. Any notice or other communication required or permitted to be given pursuant to this Agreement shall be deemed duly given if addressed and delivered, or mailed by registered mail, postage prepaid, to (1) ALPS Distributors, Inc., 1625 Broadway, Suite 2200, Denver, Colorado 80202 Attention: General Counsel; and (2) The Select Sector SPDR Trust, c/o State Street Bank and Trust Company, P.O. Box 5049, Boston, Massachusetts 02206-5049, Attn.: Legal Department.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed as of the day and year first written above.
THE SELECT SECTOR SPDR TRUST
By: /s/ Gary L. French
---------------------------------
Name: Gary L. French
Title: President
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ALPS MUTUAL FUNDS SERVICES, INC.
By: /s/ Thomas A. Carter
---------------------------------
Name: Thomas A. Carter
Title: Managing Director
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AMENDMENT TO CUSTODIAN AGREEMENT
THIS AMENDMENT is made as of November 11, 2005, by and between THE SELECT SECTOR SPDR TRUST, a Massachusetts business trust (the "FUND") and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company (the "CUSTODIAN").
RECITALS
A. The Fund and the Custodian are parties to that certain Custodian Agreement dated as of December 1, 1998, as amended, (the "AGREEMENT") pursuant to which the Custodian was appointed custodian of the Fund's assets;
B. The Fund and the Custodian wish to amend the terms of the Agreement as set forth herein; and
C. All capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to them in the Agreement.
NOW, THEREFORE, in consideration of the covenants and agreements set forth herein, and other good and valuable consideration, the receipt and sufficiency of which is hereby jointly and severally acknowledged, the parties hereto agree as follows:
1. Amendment to Agreement. The Agreement is hereby amended to add the following new Section 2.5A:
Section 2.5A. ALLOCATION OF DEPOSIT SECURITY SHORTFALLS. The Fund acknowledges that the Custodian maintains only one account on the books of the National Securities Clearing Corporation (the "NSCC") for the benefit of all exchange traded funds for which the Custodian serves as custodian, including the Fund (collectively, the "ETF CUSTODY CLIENTS"). In the event that (a) two or more ETF Custody Clients require delivery of the same Deposit Security in order to purchase a Creation Unit, and (b) the NSCC, pursuant to its Continuous Net Settlement system, delivers to the Custodian's NSCC account less than the full amount of such Deposit Security necessary to satisfy in full each affected ETF Custody Client's required amount (a "COMMON DEPOSIT SECURITY SHORTFALL"), then, until all Common Deposit Security Shortfalls for a given Deposit Security are satisfied in full, the Custodian will allocate to each affected ETF Custody Client, on a pro rata basis, securities and/or cash received in the Custodian's NSCC account relating to such shortfall, first to satisfy any prior unsatisfied Common Deposit Security Shortfall, and then to satisfy the current Common Deposit Security Shortfall.
2. No Other Modifications. Except to the extent amended hereby, the terms of the Agreement shall remain unchanged and unaffected hereby and shall remain in full force and effect to the extent of, and in accordance with, its terms.
3. Governing Law. This Amendment shall be governed by, subject to and construed under the laws of the Commonwealth of Massachusetts without regard to the conflict of laws provisions thereof.
4. Counterparts. This Amendment may be signed in counterparts, which shall together with the Agreement constitute the original Agreement.
IN WITNESS WHEREOF, the parties hereto have caused to be duly executed this Amendment as of the day and year written above.
THE SELECT SECTOR SPDR TRUST
By: /s/ Gary L. French
------------------------------------
Gary L. French,
President
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STATE STREET BANK AND TRUST COMPANY
By: /s/ Joseph L. Hooley
------------------------------------
Joseph L. Hooley,
Executive Vice President
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CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Statement of Additional Information constituting part of this Post-Effective Amendment No. 14 to the registration statement on Form N-1A (the "Registration Statement") of our report dated November 14, 2005, relating the financial statements and financial highlights appearing in the September 30, 2005 Annual Report to Shareholders of each of the funds comprising The Select Sector SPDR Trust, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "General Information" and "Financial Highlights" in the Prospectus and under the heading "Counsel and Registered Independent Public Accountants" in the Statement of Additional Information.
PricewaterhouseCoopers LLP
Boston, Massachusetts
January 26, 2006
POWER OF ATTORNEY
The undersigned Trustee and Officer of Select Sector SPDR(R) Trust (the "Trust") hereby constitutes and appoints Mary Moran Zeven and Scott M. Zoltowski, each of them with full powers of substitution, as his true and lawful attorney-in-fact and agent to execute in his name and on his behalf in any and all capacities the Registration Statements on Form N-1A, and any and all amendments thereto, and all other documents, filed by the Trust with the Securities and Exchange Commission (the "SEC"') under the Investment Company Act of 1940, as amended, and (as applicable) the Securities Act of 1933, as amended, and any and all instruments which such attorneys and agents, or any of them, deem necessary or advisable to enable the Trust to comply with such Acts, the rules, regulations and requirements of the SEC, the securities or Blue Sky laws of any state or other jurisdiction, any securities exchange, the CFTC, and the regulatory authorities of any foreign jurisdiction, and to file the same, with all exhibits thereto and other documents in connection therewith, with the SEC and such other jurisdictions, and the undersigned hereby ratifies and confirms as his own act and deed any and all acts that such attorneys and agents, or any of them, shall do or cause to be done by virtue hereof. Any one of such attorneys and agents has, and may exercise, all of the powers hereby conferred. The undersigned hereby revokes any Powers of Attorney previously granted with respect to the Trust concerning the filings and actions described herein.
IN WITNESS WHEREOF, the undersigned has hereunto set his hand as of the 19th day of January, 2006.
/s/ James E. Ross ---------------------------------------- James E. Ross |
SECRETARY'S CERTIFICATE
I, Mary Moran Zeven, Secretary of the Select Sector SPDR(R) Trust (the "Trust"), hereby certify that the following resolution was approved by a majority of the Board of Trustees of the Trust at a meeting held on November 11, 2005:
RESOLVED, that Scott Zoltowski and Mary Moran Zeven be, and each hereby is, authorized to execute and sign on behalf of Gary L French, as President of the Trust, and John W. Clark, as Treasurer and CFO of the Trust, all amendments to the Trust's Registration Statement on Form N-1A pursuant to powers of attorney from Gary L. French and John W. Clark.
In witness whereof, I have hereunto set my hand this January 27, 2006.
/s/ Mary Moran Zeven ---------------------------------------- Mary Moran Zeven Secretary |