As filed with the Securities and Exchange Commission on October 19, 2016
1933 Act File No. 333-150525
1940 Act File No. 811-22201
UNITED STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20543
FORM N-1A
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REGISTRATION STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
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Pre-Effective Amendment No.
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Post-Effective Amendment No. 171
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and/or
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REGISTRATION STATEMENT
UNDER
THE
INVESTMENT COMPANY ACT OF 1940
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Amendment No. 173
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(Check appropriate box or boxes.)
DIREXION SHARES ETF TRUST
(Exact name of Registrant as Specified in Charter)
1301 Avenue
of the Americas (6
th
Avenue), 28
th
Floor
New York, New York 10019
(Address of Principal Executive Office) (Zip Code)
Registrants Telephone Number, including Area Code: (646) 572-3390
Daniel D. ONeill, Chief Executive Officer
1301 Avenue of the Americas (6
th
Avenue),
28
th
Floor
New York, New York 10019
(Name and Address of Agent for Service)
Copy to:
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Angela Brickl
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Stacy L. Fuller
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Rafferty Asset Management, LLC
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K&L Gates LLP
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1301 Avenue of the Americas (6
th
Avenue)
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1601 K Street, NW
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28
th
Floor
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Washington, DC 20006
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New York, New York 10019
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It is proposed that this filing will become effective (check appropriate box)
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immediately upon filing pursuant to paragraph (b)
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On (date) pursuant to paragraph (b)
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60 days after filing pursuant to paragraph (a)(1)
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On (date) pursuant to paragraph (a)(1)
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75 days after filing pursuant to paragraph (a)(2)
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on (date) pursuant to paragraph (a)(2) of Rule 485.
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If appropriate, check the following box:
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This post-effective amendment designates a new effective date for a previously filed post-effective amendment.
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DIREXION SHARES ETF TRUST
CONTENTS OF REGISTRATION STATEMENT
This
registration document is comprised of the following:
Cover Sheet
Contents of Registration Statement:
Prospectus and Statement of Additional Information for the Direxion Daily Income Preferred Bull 2X Shares and the Direxion Daily Income
Preferred Bear 2X Shares;
Part C of Form N-1A;
Signature Page; and
Exhibits.
The information in this Prospectus is not complete and may
be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This Prospectus is not an offer to sell these securities and is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Subject to completion, dated October 19, 2016
Direxion Shares ETF Trust
1301
Avenue of the Americas (6th Avenue), 28th Floor
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New York,
New York 10019
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866-476-7523
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www.direxioninvestments.com
2X
Bull Fund
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2X
Bear Fund
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Direxion
Daily Income Preferred Bull 2X Shares (____)
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Direxion
Daily Income Preferred Bear 2X Shares (____)
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[ ], 2017
The shares offered in this prospectus (each a “Fund”
and collectively the “Funds”), upon commencement of operations, will be listed and traded on the NYSE Arca, Inc. (the “Exchange”).
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Fund with “Bull” in its name attempts to provide daily investment results that correspond to two times the performance of an underlying
index and is referred to as the “Bull Fund.” The Fund with “Bear” in its name attempts to provide daily investment results that correspond to two times the inverse (or opposite) of the performance of an underlying index and
is referred to as the “Bear Fund.”
The Funds
are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note
that:
(1)
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The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
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(2)
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The Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
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(3)
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The Funds
seek
daily leveraged
investment results. The pursuit of these investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of the series of daily
leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much, or more than, the return of the
underlying index. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective
and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period
that is different than one trading day.
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The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a)
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understand the risks associated
with the use of leverage;
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(b)
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understand the consequences of
seeking daily leveraged investment results;
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(c)
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for the Bear Fund, understand
the risk of shorting; and
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(d)
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intend to
actively monitor and manage their investments.
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Investors who do not understand the Funds or do not intend to
actively manage their funds and monitor their investments should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves more than 50% on a
given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s portfolio to ensure that
a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside
protection will be limitations on a Fund’s gains. As a consequence, a
Fund’s portfolio may not be responsive to underlying index movements beyond 45% on a given trading day, whether that movement is favorable or adverse to the Fund. For example, if the Bull Fund’s underlying index was to gain 50%, that
Fund might be limited to a daily gain of 90%, which corresponds to 200% of an underlying index gain of 45%, rather than 200% of an underlying index gain of 50%.
These securities have not been approved or disapproved by
the U.S. Securities and Exchange Commission (“SEC”) or the U.S. Commodity Futures Trading Commission (“CFTC”), nor have the SEC or CFTC passed upon the adequacy of this Prospectus. Any representation to the contrary is a
criminal offense.
Direxion Daily
Income Preferred Bull 2X Shares
Important Information Regarding the
Fund
The Direxion Daily
Income Preferred Bull 2X Shares (“Fund”) seeks
daily leveraged
investment results. The pursuit of daily leveraged goals means that the Fund
is riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the performance of an underlying index. The pursuit of daily leveraged investment goals means that the return of the Fund for a period longer than
a full trading day may have no resemblance to 200% of the return of its underlying index for such longer period because the aggregate return of the Fund is the product of the series of each trading day’s daily leveraged returns. During periods
of market volatility, the volatility of the underlying index may affect the Fund’s return as much as or more than the return of the underlying index. Further, the return for investors that invest for periods less than a full trading day or for
a period different than a trading day will not be the product of the return of the Fund’s stated investment objective and the performance of the underlying index for the full trading day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the performance of the S&P Enhanced Yield North American Preferred Stock Index.
The Fund seeks
daily
leveraged
investment results and does not seek to achieve its stated investment objective over a period of time greater than one day.
The Fund is different and much riskier than most
exchange-traded funds.
The Fund
is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged investment results, understand the risks associated with the use of leverage and are willing to monitor their portfolios
frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage. Therefore, the Fund is not intended to be used by, and is not
appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
(1)
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0.75%
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Distribution
and/or Service (12b-1) Fees
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0.00%
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Other
Expenses of the Fund
(2)
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0.21%
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Acquired
Fund Fees and Expenses
(2)
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0.17%
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Total
Annual Fund Operating Expenses
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1.13%
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Expense
Cap/Reimbursement
(3)
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-0.01%
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Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
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1.12%
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(1)
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Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has contractually agreed to waive 0.10% of its Management Fees through September 1, 2018, which is not subject to reimbursement by the Fund. There is no guarantee that the management fee
waiver will continue after September 1, 2018. This contractual waiver may be terminated at any time by the Board of Trustees.
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(2)
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Estimated for the Fund's
current fiscal year.
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(3)
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Rafferty has entered into
an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September
1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.85% of the Fund’s daily net assets (excluding, as applicable, among other expenses, any front-end or contingent deferred sales loads, taxes, swap
financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such
as litigation or other expenses outside the typical day-to-day operations of the Fund).
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Any expense cap is
subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
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Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
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Trust Prospectus
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Principal Investment Strategy
The Fund, under normal
circumstances, creates long positions by investing at least 80% of its assets in the securities that comprise the S&P Enhanced Yield North American Preferred Stock Index (“Index”) and/or financial instruments that provide leveraged
and unleveraged exposure to the Index. These financial instruments include: swap agreements; futures contracts; options; reverse repurchase agreements; exchange-traded funds (“ETFs”); and other financial instruments. On a day-to-day
basis, the Fund invests the remainder of its assets in money market funds, depository accounts with institutions with high quality credit ratings or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high
quality credit profiles, including U.S. government securities and repurchase agreements.
The Index is designed to measure the
performance of the 50 highest-yielding preferred stocks traded in the United States and Canada. The Index consists of all preferred securities in the S&P/TSX Preferred Shares Index and the S&P U.S. Preferred Stock Index. To be eligible for
inclusion in the Index, all preferred stocks must have a total market capitalization of greater than $250 million and have a three-month average daily value trade of $1 million (USD). Preferred stocks must also meet criteria related to rating,
ranking, yield and issuer concentration. The Index is rebalanced semiannually. As of September 30, 2016, the Index consisted of 41 constituents. As of September 30, 2016, the Index is concentrated in the financials sector. The Index may include many
different categories of preferred stock, such as floating and fixed rate preferreds, perpetual preferred stock, trust preferred securities, cumulative and non-cumulative preferreds or preferred stocks with a callable or conversion feature.
In general, preferred stock is a
class of equity security that pays a specified dividend that must be paid before any dividends can be paid to common stockholders, and which takes precedence over common stock in the event of the company’s liquidation. Although preferred
stocks represent a partial ownership interest in a company, preferred stocks generally do not carry voting rights and have economic characteristics similar to fixed-income securities. Preferred stocks generally are issued with a fixed par value and
pay dividends based on a percentage of that par value at a fixed or variable rate. Additionally, preferred stocks often have a liquidation value that generally equals the original purchase price of the preferred stock at the date of issuance.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment (
i.e.
, hold 25% or more of its total assets in the stocks of a particular industry or
group of industries) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
The Fund may gain leveraged exposure
to the Index by utilizing other ETFs or swaps on ETFs that track the same Index or a substantially similar index as the Fund. At times, however, the Fund will utilize other derivatives and investment strategies which may include gaining leveraged
exposure
to only a representative sample of the securities in
the Index that have aggregate characteristics similar to those of the Index. The Fund gains this exposure either by directly investing in the underlying securities of the Index or by investing in derivatives that provide leveraged exposure to those
securities. Derivatives are financial instruments that derive value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for
investing directly in a security in order to gain leveraged exposure to the Index or its components.
The Fund seeks to remain fully
invested at all times consistent with its stated investment objective. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s investment
objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has risen on a given day, net assets of the Fund should rise, meaning that the
Fund’s exposure will need to be increased. Conversely, if the Index has fallen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy typically results in
high portfolio turnover.
Because
of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from
200% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that
the Fund will lose money over time while the Index's performance increases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund could lose money or its performance could trail that of other investment alternatives. Rafferty cannot guarantee that the Fund will achieve its leveraged investment objective. In addition, the Fund presents some risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets
and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. There is the risk that you could lose all or a portion of your money invested in the
Fund.
Aggressive Investment
Techniques Risk
—
The Fund uses investment techniques that may be considered aggressive and may entail
significantly higher than normal risk. Risks associated with the use of swaps, futures and forward contracts, and options include potentially dramatic price changes (losses) in the value of the instruments and imperfect correlations between the
price of the contract and the underlying security or index. These instruments may increase the volatility of the Fund and may involve a small investment of cash relative to the magnitude of the risk assumed.
Direxion Shares
ETF Trust Prospectus
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Canadian Securities Risk
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The Fund may invest in, and/or have exposure to, Canadian securities. The United States is Canada’s largest
trading and investment partner and the Canadian economy is significantly affected by developments in the U.S. economy. Since the implementation of North American Free Trade Agreement (“NAFTA”) in 1994, among Canada, the United States and
Mexico, total two-way merchandise trade between the United States and Canada has more than doubled. To further this relationship, the three NAFTA countries entered into the Security and Prosperity Partnership of North America in March 2005, which
has further affected Canada’s dependency on the U.S. economy. Any downturn in U.S or Mexican economic activity is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other
key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas
and agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
Counterparty Risk
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The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain exposure
to a particular group of securities or an asset class without actually purchasing those securities or investments. The use of financial instruments, such as swap agreements, involves risks that are different from those associated with ordinary
portfolio securities transactions. For example, the Fund is exposed to the risk that the counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to the
agreement with the counterparty. If the counterparty becomes bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive. In addition, the Fund may enter into swap agreements that
involve a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk that
no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its leveraged investment objective.
Currency Exchange Rate Risk
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Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may invest in a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held
a more diversified number of currencies.
Daily Index Correlation/Tracking Risk
- There is no guarantee that the Fund will achieve a high degree of correlation to
the Index and therefore achieve its daily leveraged
investment objective. To achieve a high degree of correlation with the Index, the Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. The Fund may have difficulty achieving its daily
leveraged investment objective due to fees, expenses, transactions costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities
or derivatives held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also adversely affect the Fund’s ability to adjust exposure to the required levels. The Fund may not have investment exposure to all
securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be
subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the
Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is
volatile near the close of the trading day. Activities surrounding periodic Index reconstitutions and other Index rebalancing or reconstitution events may hinder the Fund’s ability to meet its daily leveraged investment objective.
Derivatives Risk
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The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other investments, including risk related to leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability,
counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
The use of derivatives may result in larger losses or smaller gains than directly investing in the underlying securities. Investments in such derivatives may generally be subject to market risks that may cause their prices to fluctuate over time and
may increase the volatility of the Fund. When the Fund uses derivatives, there may be imperfect correlation between the value of the underlying reference assets and the derivative, which may prevent the Fund from achieving its investment objective.
Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same or a substantially similar Index. The performance of this underlying ETF may not track the performance of the Index due to fees and other costs
borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as an underlying reference asset, the Fund may be subject to greater correlation
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Direxion Shares ETF
Trust Prospectus
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risk and may not achieve as high a degree of
correlation with the Index as it would if the Fund used swaps that utilized the Index as an underlying reference asset. Any financing, borrowing or other costs associated with using derivatives may also have the effect of lowering the Fund’s
return. Moreover, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit the counterparty to immediately close out the
swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s investment objective. This may prevent the
Fund from achieving its leveraged investment objective, even if the Index reverses all of a portion of its movement.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
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Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index. Swaps are particularly subject to counterparty, valuation and leveraging risks.
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Futures Contracts.
Futures contracts are typically exchange traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. In addition, there is a risk that the Fund may not be able to enter
into a closing transaction due to an illiquid market. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its leveraged investment strategy.
Futures markets are highly volatile and the use of futures may increase the volatility of the Fund. Futures are also subject to leverage and liquidity risks.
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Options.
Options give the holder of the option the right to buy (or sell) a position in a security to the writer of the option, at a certain price. There may be an imperfect correlation between the prices of options and
movements in the price of the securities (or indices) used for cover which may cause the Fund not to achieve its leveraged investment objective. Exchanges may limit the number of positions that can be held or controlled by the Fund or the Adviser,
thus limiting the ability of the Fund to implement its investment strategy. Options are also subject to leverage and liquidity risks.
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Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market
Volatility Risk
-
The Fund does not attempt to, and should not be expected to, provide returns which are 200%, before fees and expenses, of the return of the
Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to the Index’s daily gains or reducing exposure in response to the Index’s daily losses. This means that for a
period longer than one single day, the pursuit of a daily investment objective may result in daily leveraged compounding. It also means that the return of the Index over a period of time greater than one single day multiplied by the Fund’s
daily target of 200% generally will not equal the Fund’s performance over that same period. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance will lead to a
smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s investment, the
dollar amount lost due to future adverse performance will increase correspondingly.
As a result, over time, the
cumulative percentage increase or decrease in the value of the Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease of 200% of the return of the Index due to the compounding effect of losses and gains
on the returns of the Fund. It also is expected that the Fund's use of leverage will cause the Fund to underperform 200% of the return of the Index in a trendless or flat market. The effect of compounding becomes more pronounced on the Fund’s
performance as the Index experiences volatility. The Index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown. As shown in the chart below,
the Fund would be expected
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ETF Trust Prospectus
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to lose 6.1% if the Index provided no return over a
one year period during which the Index experienced annualized volatility of 25%. If the Index’s annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 43.0%.
At higher ranges of volatility, there
is a chance of a significant loss of value in the Fund, even if the Index is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 63.2% of its value, even if the cumulative Index return for the
year was 0%.
One
Year
Index
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200%
One
Year
Index
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Volatility
Rate
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Return
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Return
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10%
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25%
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50%
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75%
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100%
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-60%
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-120%
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-84.2%
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-85.0%
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-87.5%
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-90.9%
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-94.1%
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-50%
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-100%
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-75.2%
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-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2015 was 7.69%. The Index’s highest volatility rate for any one calendar year during the five-year period was 14.49% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2015 was 4.42%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Financials Sector Risk
—
The Fund may invest in, and/or have exposure to, financial services companies. Performance of companies in the
financials sector may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of
these companies is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector. This
sector has experienced significant losses in the recent past, and the impact of more stringent capital requirements and recent or future regulation on any individual company of the sector as a whole cannot be predicted.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
High-Yielding Dividend Stock Risk
—
The Fund may invest in, and/or have exposure to, high-yielding stocks. These stocks are often speculative, high risk
investments. These companies can be paying out more earnings than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse impact on the stock price of these companies and materially
impact the Fund’s performance.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index gains value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure. Conversely, if the Index declines, the Fund’s net assets will decline by the same amount as the Fund’s exposure. Since a Fund starts each trading day with
exposure which is 200% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount results
5
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Direxion Shares ETF
Trust Prospectus
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in a change in the comparative relationship of the
two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek $200 of exposure to the next trading day’s Index performance. If the Index rose by 1% by noon the following trading day, the
exposure of the Fund will have risen by 1% to $202 and the net assets will have risen by that $2 gain to $102. With net assets of $102 and exposure of $202, a purchaser at that point would be receiving 198% exposure of her investment instead of
200%.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Leverage Risk
—
To achieve its daily investment objective, the Fund obtains investment exposure in excess of its assets by utilizing
leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. If you invest in the Fund, you are exposed to the risk that a decline in the daily performance of the
Index will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 2% for every 1% daily decline in the Index, not including the cost of financing the portfolio and the impact of operating expenses, which
would further lower your investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index decline of more than 50%. Further, purchasing shares during a day may result in greater than 200% exposure to the
performance of the Index if the Index declines between the close of the markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of
using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the U.S.
Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true market value, the Fund may be
forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index, thus materially affecting Fund performance.
Market Risk
—
The Fund is subject to market risks that can affect the value of its Shares. These risks include political,
regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be
subject to credit risk with respect to the
short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of
securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. There is no guarantee that money market
instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
A non-diversified fund’s net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Other Investment Companies (including
ETFs) Risk
— The Fund may invest in, and/or have exposure to, the securities of other investment companies, including ETFs, which may involve duplication
of advisory fees and certain other expenses. By investing in another investment company or ETF, the Fund becomes a shareholder of that investment company or ETF. As a result, Fund shareholders indirectly bear the Fund’s proportionate share of
the fees and expenses paid by shareholders of the other investment company or ETF, in addition to the fees and expenses Fund shareholders bear in connection with the Fund’s own operations. As a shareholder, the Fund must rely on the investment
company or ETF to achieve its investment objective. The Fund’s performance may be magnified positively or negatively by virtue of its investment in other investment companies or ETFs. If the investment company or ETF fails to achieve its
investment objective, the value of the Fund’s investment will decline, thus affecting the Fund’s performance. In addition, because closed-end investment companies and ETFs are listed on national stock exchanges and are traded like stocks
on an exchange, their shares potentially may trade at a discount or a premium. Investments in such shares may be subject to brokerage and other trading costs, which could result in greater expenses to the Fund. Finally, because the value of
closed-end investment company or ETF shares depends on the demand in the market, the Adviser may not be able to liquidate the Fund’s holdings in those shares at the most optimal time, adversely affecting the Fund’s
performance.
Preferred
Stock Risk
—
A preferred stock is a blend of the characteristics of a bond and common stock. It may offer the
higher yield of a bond and has priority over common stock in equity ownership, but it does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Preferred stock has preference over
common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. Preferred stock is subject to many of the risks associated with debt instruments, including interest rate risk. As interest
rates rise, the value of preferred stocks are likely to decline. In addition, preferred stocks may not pay a dividend, an issue may suspend payment of dividends on preferred stocks at any time, and in certain situations
Direxion Shares
ETF Trust Prospectus
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6
|
an issuer may call of redeem its preferred stock or
convert it to common stock.
Regulatory Risk
—
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund
operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape.
Small- and/or Mid-Capitalization Company
Risk
—
Investing in, and/or having exposure to, the securities of small- and/or mid-capitalization companies, and securities that provide exposure to
small- and/or mid-capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger-capitalization companies. Small- and mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more-established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity
of securities held by the Fund. As a result, the performance of small- and/or mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s
portfolio.
Valuation Time
Risk
—
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern Time). In some cases, foreign markets may close before the New York Stock Exchange opens or may not be open for business on the same calendar days as the Fund. As a result, the performance of a fund that tracks a foreign market
index or an index that includes foreign securities can vary from the performance of that index.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to
changes in net asset value and supply and demand for Shares. The Adviser cannot predict whether Shares will trade above, below or at their net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser
believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times when the market price and the net asset value vary significantly and you may pay more than net asset value
when buying Shares on the secondary market, and you
may receive less than net asset value when you sell those Shares. The Fund’s investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary
market may not experience investment results consistent with those experienced by those creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio
Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares only to Authorized Participants in exchange for the deposit or delivery of a basket of assets (securities and/or cash) in large blocks, known as creation
units, each of which is comprised of 50,000 Shares. Retail investors may only purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net
asset value, Shares may trade at a price greater than net asset value (premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may also be subject to state and local taxes, unless you are investing through a tax-deferred arrangement,
such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may
7
|
Direxion Shares ETF
Trust Prospectus
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be taxed later upon withdrawal. Distributions by the
Fund may be significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Direxion Shares
ETF Trust Prospectus
|
8
|
Direxion
Daily Income Preferred Bear 2X Shares
Important Information Regarding the
Fund
The Direxion Daily
Income Preferred Bear 2X Shares (“Fund”) seeks
daily inverse leveraged
investment results. The pursuit of daily inverse leveraged goals
means that the Fund is riskier than alternatives that do not use leverage because the Fund’s objective is to magnify the performance of an underlying index. The pursuit of daily inverse leveraged investment goals means that the return of the
Fund for a period longer than a full trading day may have no resemblance to -200% of the return of its underlying index for such longer period because the aggregate return of the Fund is the product of the series of each trading day’s daily
leveraged returns. During periods of market volatility, the volatility of the underlying index may affect the Fund’s return as much as or more than the return of the underlying index. Further, the return for investors that invest for periods
less than a full trading day or for a period different than a trading day will not be the product of the return of the Fund’s stated investment objective and the performance of the underlying index for the full trading day.
Investment Objective
The Fund seeks daily investment
results, before fees and expenses, of 200% of the
inverse
(or opposite) of the performance of the S&P Enhanced Yield North American Preferred Stock Index.
The Fund seeks
daily inverse leveraged
investment results and does not seek to achieve its stated
investment objective over a period of time greater than one day
.
The Fund is different and much riskier than most exchange-traded funds.
The Fund is designed to be utilized
only by knowledgeable investors who understand the potential consequences of seeking daily inverse leveraged investment results, understand the risks associated with shorting and the use of leverage and are willing to monitor their portfolios
frequently. The Fund seeks daily leveraged investment results relative to the Index and is different and riskier than similarly benchmarked exchange-traded funds that do not use leverage, Therefore, the Fund is not intended to be used by, and is not
appropriate for, investors who do not intend to actively monitor and manage their portfolios.
Fees and Expenses of the Fund
This table describes the fees and
expenses that you may pay if you buy or hold shares of the Fund (“Shares”). Investors purchasing shares in the secondary market may pay costs (including customary brokerage commissions) charged by their broker.
Annual Fund Operating Expenses
(expenses that you pay each year as a percentage of the value of your investment)
Management
Fees
(1)
|
0.75%
|
Distribution
and/or Service (12b-1) Fees
|
0.00%
|
Other
Expenses of the Fund
(2)
|
0.21%
|
Acquired
Fund Fees and Expenses
(2)
|
0.02%
|
Total
Annual Fund Operating Expenses
|
0.98%
|
Expense
Cap/Reimbursement
(3)
|
-0.01%
|
Total
Annual Fund Operating Expenses After Expense Cap/Reimbursement
|
0.97%
|
(1)
|
Rafferty Asset Management,
LLC (“Rafferty” or the “Adviser”) has contractually agreed to waive 0.10% of its Management Fees through September 1, 2018, which is not subject to reimbursement by the Fund. There is no guarantee that the management fee
waiver will continue after September 1, 2018. This contractual waiver may be terminated at any time by the Board of Trustees.
|
(2)
|
Estimated for the Fund's
current fiscal year.
|
(3)
|
Rafferty has entered into
an Operating Expense Limitation Agreement with the Fund. Under the Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse the Fund for Other Expenses through September
1, 2018, to the extent that the Fund’s Total Annual Fund Operating Expenses exceed 0.85% of the Fund’s daily net assets (excluding, as applicable, among other expenses, any front-end or contingent deferred sales loads, taxes, swap
financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such
as litigation or other expenses outside the typical day-to-day operations of the Fund).
|
|
Any expense cap is
subject to reimbursement by the Fund within the following three years only if overall expenses fall below these percentage limitations. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
|
Example -
This example is intended to help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. The example assumes that you invest $10,000 in the Fund for the time periods indicated and
then redeem all of your shares at the end of those periods. The example also assumes that your investment has a 5% return each year and that the Fund’s operating expenses remain the same. Although your actual costs may be higher or lower,
based on these assumptions your costs would be:
Portfolio
Turnover
The Fund pays
transaction costs, such as commissions, when it buys and sells securities (or “turns over” its portfolio). A higher portfolio turnover rate may indicate higher transaction costs and may result in higher taxes when Fund shares are held in
a taxable account. These costs, which are not reflected in Annual Fund Operating Expenses or in the example, affect the Fund’s performance.
Principal Investment Strategy
The Fund, under normal
circumstances, creates short positions by investing at least 80% of its assets in: swap agreements; futures contracts; options; reverse repurchase agreements; exchange-traded funds (“ETFs”); and other financial
9
|
Direxion Shares ETF
Trust Prospectus
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instruments that, in combination, provide inverse
leveraged and unleveraged exposure to the S&P Enhanced Yield North American Preferred Stock Index (“Index”). On a day-to-day basis, the Fund invests the remainder of its assets in money market funds, depository accounts with
institutions with high quality credit ratings or short-term debt instruments that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements. The Fund does
not invest in long equity securities.
The Index is designed to measure the
performance of the 50 highest-yielding preferred stocks traded in the United States and Canada. The Index consists of all preferred securities in the S&P/TSX Preferred Shares Index and the S&P U.S. Preferred Stock Index. To be eligible for
inclusion in the Index, all preferred stocks must have a total market capitalization of greater than $250 million and have a three-month average daily value trade of $1 million (USD). Preferred stocks must also meet criteria related to rating,
ranking, yield and issuer concentration. The Index is rebalanced semiannually. As of September 30, 2016, the Index consisted of 41 constituents. As of September 30, 2016, the Index is concentrated in the financials sector. The Index may include many
different categories of preferred stock, such as floating and fixed rate preferreds, perpetual preferred stock, trust preferred securities, cumulative and non-cumulative preferreds or preferred stocks with a callable or conversion feature.
In general, preferred stock is a
class of equity security that pays a specified dividend that must be paid before any dividends can be paid to common stockholders, and which takes precedence over common stock in the event of the company’s liquidation. Although preferred
stocks represent a partial ownership interest in a company, preferred stocks generally do not carry voting rights and have economic characteristics similar to fixed-income securities. Preferred stocks generally are issued with a fixed par value and
pay dividends based on a percentage of that par value at a fixed or variable rate. Additionally, preferred stocks often have a liquidation value that generally equals the original purchase price of the preferred stock at the date of issuance.
The components of the Index and the
percentages represented by various sectors in the Index may change over time. The Fund will concentrate its investment (
i.e.
, hold 25% or more of its total assets in investments that provide inverse exposure
to a particular industry or group of industries) in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
Generally the Fund may gain inverse
leveraged exposure to the Index by utilizing swap contracts on ETFs that track the same Index or a substantially similar index as the Fund that provide short exposure. At times, however, the Fund will utilize other derivatives and investment
strategies which may include gaining inverse leveraged exposure to only a representative sample of the securities in the Index that have aggregate characteristics similar to those of the Index. The Fund gains this leveraged exposure by investing in
a combination of financial instruments that provide inverse leveraged exposure to the underlying securities of the Index.
Derivatives are financial instruments that derive
value from the underlying reference asset or assets, such as stocks, bonds, or funds (including ETFs), interest rates or indexes. The Fund invests in derivatives as a substitute for directly shorting securities in order to meet its investment
objective.
The Fund seeks to
remain fully invested at all times consistent with its stated investment objective. At the close of the markets each trading day, Rafferty positions the Fund’s portfolio so that its exposure to the Index is consistent with the Fund’s
investment objective. The impact of the Index’s movements during the day will affect whether the Fund’s portfolio needs to be re-positioned. For example, if the Index has fallen on a given day, net assets of the Fund should rise, meaning
that the Fund’s exposure will need to be increased. Conversely, if the Index has risen on a given day, net assets of the Fund should fall, meaning the Fund’s exposure will need to be reduced. This re-positioning strategy may result in
high portfolio turnover.
Because
of daily rebalancing and the compounding of each day’s return over time, the return of the Fund for periods longer than a single day will be the result of each day’s returns compounded over the period, which will very likely differ from
-200% of the return of the Index over the same period. The Fund will lose money if the Index performance is flat over time, and as a result of daily rebalancing, the Index’s volatility and the effects of compounding, it is even possible that
the Fund will lose money over time while the Index's performance decreases.
Principal Investment Risks
An investment in the Fund entails
risk. The Fund could lose money or its performance could trail that of other investment alternatives. Rafferty cannot guarantee that the Fund will achieve its inverse leveraged investment objective. In addition, the Fund presents some risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review all of the risks listed below and understand how these risks interrelate before making an investment in the Fund. Turbulence in financial markets
and reduced liquidity in equity, credit and fixed income markets may negatively affect many issuers worldwide, which could have an adverse effect on the Fund. There is the risk that you could lose all or a portion of your money invested in the
Fund.
Aggressive Investment
Techniques Risk
—
The Fund uses investment techniques that may be considered aggressive and may entail
significantly higher than normal risk. Risks associated with the use of swaps, futures and forward contracts, and options include potentially dramatic price changes (losses) in the value of the instruments and imperfect correlations between the
price of the contract and the underlying security or index. These instruments may increase the volatility of the Fund and may involve a small investment of cash relative to the magnitude of the risk assumed.
Canadian Securities Risk
—
The Fund may invest in, and/or have exposure to, Canadian securities. The United States is Canada’s largest
trading and investment partner and the Canadian economy is significantly affected by developments in the U.S. economy. Since the implementation of North
Direxion Shares
ETF Trust Prospectus
|
10
|
American Free Trade Agreement (“NAFTA”)
in 1994, among Canada, the United States and Mexico, total two-way merchandise trade between the United States and Canada has more than doubled. To further this relationship, the three NAFTA countries entered into the Security and Prosperity
Partnership of North America in March 2005, which has further affected Canada’s dependency on the U.S. economy. Any downturn in U.S or Mexican economic activity is likely to have an adverse impact on the Canadian economy. The Canadian economy
is also dependent upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of natural resources (
e.g.
, oil, natural gas and
agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
Cash Transaction Risk
- Unlike most ETFs, the Fund currently intends to effect creations and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial
instruments held by the Fund. As such, investments in Shares may be less tax efficient than investments in conventional ETFs.
Counterparty Risk
—
The Fund may invest in financial instruments involving counterparties for the purpose of attempting to gain inverse
exposure to a particular group of securities or an asset class without actually purchasing those securities or investments. The use of financial instruments, such as swap agreements, involves risks that are different from those associated with
ordinary portfolio securities transactions. For example, the Fund is exposed to the risk that the counterparty may be unwilling or unable to make timely payments to meet its contractual obligations or may fail to return holdings that are subject to
the agreement with the counterparty. If the counterparty becomes bankrupt or defaults on its payment obligations to the Fund, the Fund may not receive the full amount it is entitled to receive. In addition, the Fund may enter into swap agreements
that involve a limited number of counterparties, which may increase the Fund’s exposure to counterparty credit risk. The Fund does not specifically limit its counterparty risk with respect to any single counterparty. Further, there is a risk
that no suitable counterparties are willing to enter into, or continue to enter into, transactions with the Fund and, as a result, the Fund may not be able to achieve its inverse leveraged investment objective.
Currency Exchange Rate Risk
—
Changes in foreign currency exchange rates will affect the value of the Fund’s investments in securities
denominated in a country’s currency and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities markets.
Additionally, the Fund may invest in a limited number of currencies. As a result, an increase or decrease in the value of any of these currencies would have a greater impact on the Fund’s net asset value and total return than if the Fund held
a more diversified number of currencies.
Daily Inverse Index
Correlation/Tracking Risk
- Shareholders should lose money when the Index rises, which is a result that is the opposite from traditional index tracking funds. There is no guarantee that the Fund
will achieve a high degree of inverse correlation to the Index and therefore achieve its daily inverse leveraged investment objective. To achieve a high degree of inverse correlation with the Index, the Fund seeks to rebalance its portfolio daily to
keep leverage consistent with its daily inverse leveraged investment objective. The Fund may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transactions costs, financing costs related to the use of
derivatives, income items, valuation methodology, accounting standards and disruptions or illiquidity in the markets for the securities or derivatives held by the Fund. Market disruptions, regulatory restrictions or extreme volatility will also
adversely affect the Fund’s ability to adjust exposure to the required levels. The Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from
that of the Index. In addition, the Fund may invest in securities or financial instruments not included in the Index. The Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or
under-exposed to the Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Fund will be perfectly exposed to the Index at the end of
each day. The possibility of the Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding periodic Index reconstitutions and other Index
rebalancing or reconstitution events may hinder the Fund’s ability to meet its daily inverse leveraged investment objective.
Derivatives Risk
—
The Fund’s investments in derivatives may pose risks in addition to, and greater than, those associated with
directly investing in securities or other investments, including risk related to leverage, imperfect daily correlations with underlying investments or the Fund’s other portfolio holdings, higher price volatility, lack of availability,
counterparty risk, liquidity, valuation and legal restrictions. The use of derivatives is a highly specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
The use of derivatives may result in larger losses or smaller gains than directly shorting the underlying securities. Investments in such derivatives may generally be subject to market risks that may cause their prices to fluctuate over time and may
increase the volatility of the Fund. When the Fund uses derivatives, there may be imperfect correlation between the value of the underlying reference assets and the derivative, which may prevent the Fund from achieving its investment objective.
Because derivatives often require only a limited initial investment, the use of derivatives may expose the Fund to losses in excess of those amounts initially invested.
The Fund may use a combination of
swaps on the Index and swaps on an ETF whose investment objective is to track the performance of the same or a substantially similar Index.
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Direxion Shares ETF
Trust Prospectus
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The performance of this underlying ETF may not track
the performance of the Index due to fees and other costs borne by the ETF and other factors. Thus, to the extent that the Fund invests in swaps that use an ETF as an underlying reference asset, the Fund may be subject to greater correlation risk and
may not achieve as high a degree of inverse correlation with the Index as it would if the Fund used swaps that utilized the Index as an underlying reference asset. Any financing, borrowing or other costs associated with using derivatives may also
have the effect of lowering the Fund’s return. Moreover, if the Index has a dramatic intraday move that causes a material decline in the Fund’s net assets, the terms of a swap agreement between the Fund and its counterparty may permit
the counterparty to immediately close out the swap transaction with the Fund. In that event, the Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with the Fund’s
investment objective. This may prevent the Fund from achieving its inverse leveraged investment objective, even if the Index reverses all of a portion of its movement.
In addition, the Fund’s
investments in derivatives are subject to the following risks:
•
|
Swap Agreements.
Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to exchange
the return (or differentials in rates of return) earned or realized on particular predetermined reference assets or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index. Swaps are particularly subject to counterparty, valuation and leveraging risks.
|
•
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Futures Contracts.
Futures contracts are typically exchange traded contracts that call for the future delivery of an asset at a certain price and date, or cash settlement of the terms of the contract. There may be an imperfect correlation
between the changes in market value of the securities held by the Fund and the prices of futures contracts. There may not be a liquid secondary market for the futures contracts. In addition, there is a risk that the Fund may not be able to enter
into a closing transaction due to an illiquid market. Exchanges may also limit the number of positions that can be held or controlled by the Fund or the Adviser, thus limiting the ability of the Fund to implement its inverse leveraged investment
strategy. Futures markets are highly volatile and the use of futures may increase the volatility of the Fund. Futures are also subject to leverage and liquidity risks.
|
•
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Options.
Options give the holder of the option the right to buy (or sell) a position in a security to the writer of the option, at a certain price. There may be an imperfect correlation between the prices of options and
movements in the price of the securities (or indices) used for cover which may cause the Fund not to achieve its inverse leveraged investment objective. Exchanges may limit the number of positions that can be held or controlled by
|
|
the Fund or the
Adviser, thus limiting the ability of the Fund to implement its investment strategy. Options are also subject to leverage and liquidity risks.
|
Early Close/Trading Halt Risk
—
An exchange or market may close or issue trading halts on specific securities, or the ability to buy or sell certain
securities or financial instruments may be restricted, which may result in the Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, the Fund may be unable to rebalance its portfolio, may be unable to
accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market
Volatility Risk
-
The Fund does not attempt to, and should not be expected to, provide returns which are -200%, before fees and expenses, of the return of
the Index for periods other than a single day. The Fund rebalances its portfolio on a daily basis, increasing exposure in response to the Index’s daily losses or reducing exposure in response to the Index’s daily gains. This means that
for a period longer than one single day, the pursuit of a daily investment objective may result in daily leveraged compounding. It also means that the return of the Index over a period of time greater than one single day multiplied by the
Fund’s daily target of -200% generally will not equal the Fund’s performance over that same period. If adverse daily performance of the Index reduces the amount of a shareholder’s investment, any further adverse daily performance
will lead to a smaller dollar loss because the shareholder’s investment had already been reduced by the prior adverse performance. Equally, however, if favorable daily performance of the Index increases the amount of a shareholder’s
investment, the dollar amount lost due to future adverse performance will increase correspondingly.
As a result, over time, the
cumulative percentage increase or decrease in the value of the Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease of -200% of the return of the Index due to the compounding effect of losses and gains
on the returns of the Fund. It is also expected that the Fund's use of leverage will cause the Fund to underperform -200% of the return of the Index in a trendless or flat market. The effect of compounding becomes more pronounced on the Fund’s
performance as the Index experiences volatility. The Index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the Index.
The chart below provides examples of
how Index volatility could affect the Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) Index volatility; b) Index performance; c) period of
time; d) financing rates associated with inverse leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
Index volatility and Index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of Index volatility and Index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii)
Direxion Shares
ETF Trust Prospectus
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12
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borrowing/lending rates (to obtain inverse leveraged
exposure) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns would be different than those shown. As shown in the chart below, the Fund would be expected to lose 17.1% if the Index provided no return
over a one year period during which the Index experienced annualized volatility of 25%. If the Index’s annualized volatility were to rise to 75%, the hypothetical loss for a one year period for the Fund widens to approximately 81.5%.
At higher ranges of volatility, there
is a chance of a near complete loss of value in the Fund, even if the Index is flat. For instance, if the Index’s annualized volatility is 100%, the Fund would be expected to lose 95.0% of its value, even if the cumulative Index return for the
year was 0%.
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
The
Index’s annualized historical volatility rate for the five year period ended December 31, 2015 was 7.69%. The Index’s highest volatility rate for any one calendar year during the five-year period was 14.49% and volatility for a shorter
period of time may have been substantially higher. The Index’s annualized performance for the five-year period ended December 31, 2015 was 4.42%. Historical Index volatility and performance are not indications of what the Index volatility and
performance will be in the future. The volatility of ETFs or instruments that reflect the value of the Index, such as swaps, may differ from the volatility of the Index.
For information regarding the effects
of volatility and Index performance on the long-term performance of the Fund, see “Additional Information Regarding Investment Techniques and Policies” in the Fund’s statutory prospectus, and “Special Note Regarding the
Correlation Risks of the Funds” in the Fund’s Statement of Additional Information.
Financials Sector Risk
—
The Fund may invest in, and/or have exposure to, financial services companies. Performance of companies in the
financials sector may be materially impacted by many factors, including but not limited to, government regulations, economic conditions, credit rating downgrades, changes in interest rates and decreased liquidity in credit markets. Profitability of
these companies is largely dependent on the availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also
can negatively impact the sector. This sector has
experienced significant losses in the recent past, and the impact of more stringent capital requirements and recent or future regulation on any individual company of the sector as a whole cannot be predicted.
Foreign Securities Risk
—
Investing in, and/or having exposure to, foreign instruments may involve greater risks than investing in domestic
instruments. As a result, the Fund’s returns and net asset value may be affected to a large degree by fluctuations in currency exchange rates, political, diplomatic or economic conditions and regulatory requirements in other countries. The
laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
High Portfolio Turnover Risk
- Daily rebalancing of the Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active
market trading of the Fund’s Shares on such exchanges as the NYSE Arca, Inc., could cause more frequent creation and redemption activities which could increase the number of portfolio transactions. Frequent and active trading may lead to
higher transaction costs because of increased broker commissions resulting from such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income
when distributed to them). The Fund calculates portfolio turnover without including the short-term cash instruments or derivative transactions that comprise the majority of the Fund’s trading. As such, if the Fund’s extensive use of
derivative instruments were reflected, the calculated portfolio turnover rate would be significantly higher.
High-Yielding Dividend Stock Risk
—
The Fund may invest in, and/or have exposure to, high-yielding stocks. These stocks are often speculative, high risk
investments. These companies can be paying out more earnings than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse impact on the stock price of these companies and materially
impact the Fund’s performance.
International Closed-Market Trading
Risk
—
Because the Fund may invest in, and/or have
exposure to, investments that may be traded in markets that are closed when the NYSE Arca, Inc. is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed foreign market), resulting in premiums or discounts to net asset value that may be greater than those experienced by other
ETFs.
Intra-Day Investment
Risk
- The Fund seeks leveraged investment results from the close of the market on a given trading day until the close of the market on the subsequent trading day. The exact exposure of an
investment in the Fund intraday in the secondary market is a function of the difference between the value of the Index at the market close on the first trading day and the value of the Index at the time of purchase. If the Index loses value, the
Fund’s net assets will rise by the same amount as the Fund’s exposure.
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Direxion Shares ETF
Trust Prospectus
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Conversely, if the Index rises, the Fund’s net
assets will decline by the same amount as the Fund’s exposure. Since the Fund starts each trading day with exposure which is -200% of its net assets, a change in both the exposure and the net assets of the Fund by the same absolute amount
results in a change in the comparative relationship of the two. As an example (using simplified numbers), if the Fund had $100 in net assets at the market close, it would seek -$200 of exposure to the next trading day’s Index performance. If
the Index declined by 1% by noon the following trading day, the exposure of the Fund will fall by 1% to -$198 and the net assets will rise by $2 to $102. With net assets of $102 and exposure of -$198, a purchaser at that point would be receiving
-194% exposure of her investment instead of -200%.
Investment Risk
—
An investment in the Fund is not a deposit in a bank and is
not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Leverage Risk
—
To achieve its daily investment objective, the Fund obtains investment exposure in excess of its assets by utilizing
leverage and may lose more money in market conditions that are adverse to its investment objective than a fund that does not utilize leverage. If you invest in the Fund, you are exposed to the risk that a rise in the daily performance of the Index
will be leveraged. This means that your investment in the Fund will be reduced by an amount equal to 2% for every 1% daily rise in the Index, not including the cost of financing the portfolio and the impact of operating expenses, which would further
lower your investment. If the Index declines more than 50%, the result would be the total loss of an investor’s investment. The Fund could theoretically lose an amount greater than its net assets in the event of an Index rise of more than 50%.
Further, purchasing shares during a day may result in greater than -200% exposure to the performance of the Index if the Index rises between the close of the markets on one trading day and before the close of the markets on the next trading
day.
To fully understand
the risks of using leverage in the Fund, see “Effects of Compounding and Market Volatility Risk” above.
Liquidity Risk
—
Some securities held by the Fund, including derivatives, may be difficult to sell or illiquid, particularly during
times of market turmoil. Markets for securities or financial instruments could be disrupted by a number of events, including but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the U.S.
Illiquid securities also may be difficult to value. If the Fund is forced to sell an illiquid security at an unfavorable time or at a price that is lower than Rafferty’s judgment of the security’s true market value, the Fund may be
forced to sell the security at a loss. Such a situation may prevent the Fund from limiting losses, realizing gains or achieving a high correlation with the Index, thus materially affecting Fund performance.
Market Risk
—
The Fund is subject to market risks that can affect the value of its Shares. These risks include
political,
regulatory, market and economic developments,
including developments that impact specific economic sectors, industries or segments of the market.
Money Market Instrument Risk
—
The Fund may use a variety of money market instruments for cash management purposes, including money market funds,
depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may be subject to credit risk with respect to the financial
institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price. Repurchase agreements may be subject to market and credit risk
related to the collateral securing the repurchase agreement. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
Non-Diversification Risk
—
The Fund is non-diversified, which means it invests a high percentage of its assets in a limited number of securities.
A non-diversified fund’s net asset value and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund.
Preferred Stock Risk
—
A preferred stock is a blend of the characteristics of a bond and common stock. It may offer the higher yield of a
bond and has priority over common stock in equity ownership, but it does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in
the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. Preferred stock is subject to many of the risks associated with debt instruments, including interest rate risk. As interest rates rise, the
value of preferred stocks are likely to decline. In addition, preferred stocks may not pay a dividend, an issue may suspend payment of dividends on preferred stocks at any time, and in certain situations an issuer may call of redeem its preferred
stock or convert it to common stock.
Regulatory Risk
—
The Fund is subject to the risk that a change in U.S. law and related regulations will impact the way the Fund
operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape.
Shorting Risk
- In order to achieve its daily inverse investment objective, the Fund may engage in short sales which are designed to provide the Fund gains when the price of a particular security, basket of
securities or index declines. When the Fund shorts securities, including securities of another investment company, it borrows shares of that security or investment company, which it then sells. The Fund closes out a short sale by purchasing the
security that it has sold short and returning that security to the entity that lent the security. The Fund may also seek inverse or “short” exposure through the use of derivatives such as swap agreements or futures contracts, which may
expose the Fund to certain risks such as an increase in volatility or decrease in the liquidity of the securities of the underlying short position. If the Fund were to experience this volatility or decreased liquidity, the Fund’s return may be
lower, the
Direxion Shares
ETF Trust Prospectus
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14
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Fund’s ability to obtain inverse exposure
through the use of derivatives may be limited or the Fund may be required to obtain inverse exposure through alternative investments strategies that may be less desirable or more costly to implement. If the securities underlying the short positions
are thinly traded or have a limited market due to various factors, including regulatory action, the Fund may be unable to meet its investment objective due to lack of available securities or counterparties. During such periods, the Fund’s
ability to issue additional creation units may be adversely affected. Obtaining inverse exposure through the use of derivatives or other financial instruments may be considered an aggressive investment technique.
Small- and/or Mid-Capitalization Company
Risk
—
Investing in, and/or having exposure to, the securities of small- and/or mid-capitalization companies, and securities that provide exposure to
small- and/or mid-capitalization companies, involves greater risks and the possibility of greater price volatility than investing in more-established, larger-capitalization companies. Small- and mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more-established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity
of securities held by the Fund. As a result, the performance of small- and/or mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of the Fund’s
portfolio.
Valuation Time
Risk
—
The Fund values its portfolio as of the close of regular trading on the New York Stock Exchange (generally
4:00 p.m. Eastern Time). In some cases, foreign markets may close before the New York Stock Exchange opens or may not be open for business on the same calendar days as the Fund. As a result, the performance of a fund that tracks a foreign market
index or an index that includes foreign securities can vary from the performance of that index.
Special Risks of Exchange-Traded
Funds
Authorized Participants
Concentration Risk.
The Fund may have a limited number of financial institutions that may act as Authorized Participants. To the extent that those Authorized Participants exit the business or are
unable to process creation and/or redemption orders, Shares may trade at a discount to net asset value.
Market Price Variance Risk.
Individual Shares of the Fund that are listed for trading on an exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to
changes in net asset value and supply and demand for Shares. The Adviser
cannot predict whether Shares will trade above,
below or at their net asset value. Given the fact that Shares can be created and redeemed in creation units, the Adviser believes that large discounts or premiums to the net asset value of Shares should not be sustained. There may, however, be times
when the market price and the net asset value vary significantly and you may pay more than net asset value when buying Shares on the secondary market, and you may receive less than net asset value when you sell those Shares. The Fund’s
investment results are measured based upon the daily net asset value of the Fund over a period of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those
creating and redeeming directly with the Fund. There is no guarantee that an active secondary market will develop for Shares of the Fund.
Trading Issues.
Trading in Shares on an exchange may be halted due to market conditions or for reasons that, in the view of that exchange, make trading in Shares inadvisable, such as extraordinary market volatility or
other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the exchange on which they trade, and the listing requirements may be amended from time to time.
Fund Performance
No prior investment performance is
provided for the Fund because it had not commenced operations prior to the date of this Prospectus. Upon commencement of operations, updated performance will be available on the Fund’s website at
www.direxioninvestments.com/etfs?producttab=performance or by calling the Fund toll-free at 866-476-7523.
Management
Investment Adviser.
Rafferty Asset Management, LLC is the Fund’s investment adviser.
Portfolio Managers.
The following members of Rafferty’s investment team are jointly and primarily responsible for the day-to-day management of the Fund:
Portfolio
Managers
|
Years
of Service with the Fund
|
Primary
Title
|
Paul
Brigandi
|
Since
Inception
|
Portfolio
Manager
|
Tony
Ng
|
Since
Inception
|
Portfolio
Manager
|
Purchase
and Sale of Fund Shares
The
Fund’s shares are not individually redeemable. The Fund will issue and redeem Shares for cash only to Authorized Participants in large blocks, known as creation units, each of which is comprised of 50,000 Shares. Retail investors may only
purchase and sell Shares on a national securities exchange through a broker-dealer and may incur brokerage costs. Because the Shares trade at market prices rather than net asset value, Shares may trade at a price greater than net asset value
(premium) or less than net asset value (discount).
Tax Information
The Fund intends to make
distributions that may be taxed as ordinary income or long-term capital gains. Those distributions will be subject to federal income tax and may
15
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Direxion Shares ETF
Trust Prospectus
|
also be subject to state and local taxes, unless you
are investing through a tax-deferred arrangement, such as a 401(k) plan or an individual retirement account. Distributions or investments made through tax-deferred arrangements may be taxed later upon withdrawal. Distributions by the Fund may be
significantly higher than those of most other ETFs.
Payments to Broker-Dealers and Other
Financial Intermediaries
If
you purchase shares of the Fund through a broker-dealer or other financial intermediary (such as a bank or financial advisor), the Fund and/or its Adviser may pay the intermediary for the sale of Fund shares and related services. These payments may
create a conflict of interest by influencing the broker-dealer or other financial intermediary and your salesperson to recommend the Fund over another investment. Ask your salesperson or visit your financial intermediary’s website for more
information.
Direxion Shares
ETF Trust Prospectus
|
16
|
The Direxion Shares ETF Trust
(“Trust”) is a registered investment company offering a number of separate exchange-traded funds (“ETFs”). This Prospectus describes the ETFs noted below (each a “Fund” and collectively the “Funds”).
Rafferty Asset Management, LLC (“Rafferty,” or “Adviser”) serves as the investment adviser to each Fund.
Shares of the Funds
(“Shares”), upon commencement of operations, will be listed and traded on the NYSE Arca, Inc. (the “Exchange”). When Shares are listed and traded on the Exchange, the market prices for the Shares may be different from the
intra-day value of the Shares disseminated by the Exchange and from their net asset value (“NAV”). Unlike conventional mutual funds, Shares are not individually redeemable securities. Rather, each Fund issues and redeems Shares on a
continuous basis at NAV only in large blocks of Shares called “Creation Units.” A Creation Unit consists of 50,000 Shares. Creation Units of the Bull Fund are issued and redeemed in cash and/or in-kind for securities included in the
relevant underlying index. Creation Units of the Bear Fund are issued and redeemed for cash.
Shares may only be purchased from, or
redeemed with, each Fund in Creation Units. As a result, retail investors generally will not be able to purchase or redeem Shares directly from, or with, each Fund. Most retail investors will purchase or sell Shares in the secondary market with the
assistance of a broker. Thus, some of the information contained in this Prospectus, such as information about purchasing and redeeming Shares from, or with, a Fund and all references to the transaction fee imposed on purchases and redemptions, is
not relevant to retail investors.
As used in this Prospectus, the terms
“daily,” “day,” and “trading day,” refer to the period from the close of the markets on one trading day to the close of the markets on the next trading day.
The Direxion Daily Income Preferred
Bull 2X Shares (the “Bull Fund”) seeks to provide daily leveraged investment results, before fees and expenses, that correspond to 200% of the performance of the S&P Enhanced Yield North American Preferred Stock Index (the
“Index”). The Direxion Daily Income Preferred Bear 2X Shares (the “Bear Fund”) seeks to provide daily investment results, before fees and expenses, that correspond to 200% of the inverse, or opposite, of the performance of
the Index. If, on a given day, the Index gains 1%, the Bull Fund is designed to gain approximately 2% (which is equal to 200% of 1%), while the Bear Fund is designed to lose approximately 2%. Conversely, if the Index loses 1% on a given day, the
Bull Fund is designed to lose approximately 2%, while the Bear Fund is designed to gain approximately 2% (which is equal to -200% of the 1% index loss).
To pursue these results, each Fund
uses aggressive investment techniques such as engaging in futures, swaps and options transactions. As a result, each Fund is designed to be utilized only by knowledgeable investors who understand the potential consequences of seeking daily leveraged
and daily inverse leveraged investment results, understand the risks associated with the Funds' use of leverage, and are willing to monitor their portfolios frequently. Additionally, the Bear Fund is designed to be utilized by knowledgeable
investors who understand the risks of shorting. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. There is no assurance that a Fund will achieve its
investment objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
Changes in Investment Objective.
Each Fund’s investment objective is not a fundamental policy and may be changed by the Funds' Board of Trustees without shareholder approval.
Additional Information Regarding Investment
Techniques and Policies
Rafferty uses a number of investment
techniques in an effort to achieve the stated investment objective for each Fund. Each Fund seeks 200% or -200% of the return of the Index on a given day.
For the Bull Fund, Rafferty attempts
to provide two times the returns of the Index for a one-day period. The Bear Fund is managed to provide two times the inverse (or opposite) of the return of the Index for a one-day period. To do this, Rafferty creates net “long”
positions for the Bull Fund and net “short” positions for the Bear Fund. (Rafferty may create short positions in the Bull Fund and long positions in the Bear Fund even though the net exposure in the Bull Fund will be long and the net
exposure in the Bear Fund will be short.) Long positions move in the same direction as the Index, advancing when the Index advances and declining when the Index declines. Short positions move in the opposite direction of the Index, advancing when
the Index declines and declining when the Index advances. Additionally, none of the Funds seek income that is exempt from federal, state or local income taxes.
In seeking to achieve each
Fund’s investment objective, Rafferty uses statistical and quantitative analysis to determine the investments each Fund makes and the techniques it employs. Rafferty relies upon a pre-determined model to generate orders that result in
repositioning each Fund’s investments in accordance with its daily leveraged investment objective. Using this approach, Rafferty determines the type, quantity and mix of investment positions that it believes in combination should produce daily
returns consistent with a Fund’s investment objective. In general, if a Fund is performing as designed,
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the return of the Index will dictate the return for
that Fund. Each Fund generally pursues its investment objective regardless of the market conditions and does not take defensive positions.
Each Fund has a clearly articulated
daily leveraged investment objective which requires the Fund to seek economic exposure in excess of its net assets (
i.e.
, net assets plus borrowing for investment purposes). To meet its objectives, each Fund
invests in some combination of financial instruments so that it generates economic exposure consistent with the Fund’s investment objective.
Each Fund offered in this Prospectus
may invest significantly in: futures contracts; options on securities, indices and futures contracts; equity caps, floors and collars; swap agreements; forward contracts; short positions; reverse repurchase agreements; ETFs; and other financial
instruments. In addition, Rafferty uses these types of investments for the Funds to produce economically “leveraged” investment results. Leveraging allows Rafferty to generate a greater positive or negative return for the Funds than what
would be generated on the invested capital without leverage, thus changing small market movements into larger changes in the value of the investments of a Fund.
The Bull Fund generally may hold a
representative sample of the securities in the Index. The sampling of securities that is held by the Bull Fund is intended to maintain high correlation with, and similar aggregate characteristics (
e.g.
, market
capitalization and industry weightings) to, the Index. The Bull Fund also may invest in securities that are not included in the Index or may overweight or underweight certain components of the Index. Certain Fund assets may be concentrated in an
industry or group of industries to the extent that the Index concentrates in a particular industry or group of industries. In addition, each Fund offered in this Prospectus is non-diversified, which means that it may invest in the securities of a
limited number of issuers.
At
the close of the markets each trading day, each Fund will position its portfolio to ensure that the Fund’s exposure to the Index is consistent with the Fund’s stated investment objective. The impact of market movements during the day
determines whether a portfolio needs to be repositioned. If the Index has risen on a given day, the Bull Fund’s net assets should rise, meaning its exposure may need to be increased. Conversely, if the Index has fallen on a given day, the Bull
Fund’s net assets should fall, meaning its exposure may need to be reduced. If the Index has risen on a given day, the Bear Fund’s net assets should fall, meaning its exposure may need to be reduced. If the Index has fallen on a given
day, the Bear Fund’s net assets should rise, meaning its exposure may need to be increased. Any of the Funds’ portfolios may also need to be changed to reflect changes in the composition of the Index. Rafferty increases a Fund’s
exposure when its assets rise and reduces a Fund’s exposure when its assets fall.
The Funds are designed to provide
daily leveraged investment returns, before fees and expenses, that are 200% or -200% of the returns of the Index. A Fund may have difficulty in achieving its daily leveraged investment objective due to fees, expenses, transaction costs, income
items, accounting standards, significant purchase and redemption activity by Fund shareholders and/or disruptions or a temporary lack of liquidity in the markets for the securities held by the Fund. Additionally, if the Index includes foreign
securities or tracks a foreign market index where the foreign market closes before or after the New York Stock Exchange (“NYSE”) closes (generally at 4 p.m. Eastern Time), the performance of the Index may differ from the expected daily
leveraged performance.
Seeking
daily leveraged investment results provides potential for greater gains and losses for the Funds relative to the Index’s performance. For a period longer than one day, the pursuit of a daily investment objective may result in daily leveraged
compounding for the Funds. This means that the return of the Index over a period of time greater than one day multiplied by a Fund’s daily leveraged investment objective (
e.g.
, 200% or -200%) generally
will not equal a Fund’s performance over that same period. Consider the following examples:
Mary is considering investments in
two Funds, Funds A and B. Fund A is a traditional index ETF which seeks (before fees and expenses) to match the performance of the XYZ index. Fund B is a leveraged ETF and seeks daily leveraged investment results (before fees and expenses) that
correspond to 200% of the daily performance of the XYZ index.
On Day 1, the XYZ index increases in
value from $100 to $105, a gain of 5%. On Day 2, the XYZ index declines from $105 back to $100, a loss of 4.76%. In the aggregate, the XYZ index has not moved.
An investment in Fund A would be
expected to gain 5% on Day 1 and lose 4.76% on Day 2 to return to its original value. The following example assumes a $100 investment in Fund A when the index is also valued at $100:
Day
|
Index
Value
|
Index
Performance
|
Value
of Investment
|
|
$100.00
|
|
$100.00
|
1
|
$105.00
|
5.00%
|
$105.00
|
2
|
$100.00
|
-4.76%
|
$100.00
|
The same $100
investment in Fund B, however, would be expected to gain in value on Day 1 but decline in value on Day 2.
The $100 investment in Fund B would be
expected to gain 10% on Day 1 (200% of 5%) but decline 9.52% on Day 2.
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ETF Trust Prospectus
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Day
|
Index
Performance
|
200%
of Index Performance
|
Value
of Investment
|
|
|
|
$100.00
|
1
|
5.00%
|
10.0%
|
$110.00
|
2
|
-4.76%
|
-9.52%
|
$99.52
|
Although
the percentage decline in Fund B is smaller on Day 2 than the percentage gain on Day 1, the loss is applied to a higher principal amount, so the investment in Fund B experiences a loss even when the aggregate index value for the two-day period has
not declined. (These calculations do not include the charges for expense ratio and financing charges.)
As you can see, an investment in Fund B
has additional risks due to the effects of leverage and compounding.
The Funds are very different from
most mutual funds and ETFs. First, each Fund pursues a daily leveraged investment objective, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of the Index. Second, the Bear
Fund pursues investment goals which are inverse to the performance of the Index, a result opposite of most mutual funds and ETFs. Third, the Funds seek daily leveraged investment results. An investor who purchases shares of a Fund intra-day will
generally receive more, or less, than 200% exposure to the Index from that point until the end of the trading day. The actual exposure is a function of the performance of the Index from the end of the prior trading day. If a Fund’s shares are
held for a period longer than a single trading day, the Fund’s performance is likely to deviate from 200% or -200% of the return of the Index’s performance for the longer period. This deviation will increase with higher index volatility
and longer holding periods. As a consequence, investors should not plan to hold the Funds unmonitored for periods longer than a single trading day. Further, the return for investors that invest for periods less than a full trading day or for a
period different than a trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the performance of the Index for the full trading day. The Funds are not suitable for all investors.
For investments held for longer than
a trading day, volatility in the performance of the Index from day to day is the primary cause of any disparity between a Fund’s actual returns, the product of the Fund’s beta and the returns of the Index for such longer period.
Volatility causes such disparity because it exacerbates the effects of compounding on a Fund’s returns. In addition, the effects of volatility are magnified in the Funds due to leverage. For example, consider the following three examples that
demonstrate the effect of volatility on a hypothetical fund:
Example
1
–
Underlying Index Experiences Low Volatility
Mary invests $10.00 in a hypothetical
Bull Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain. Mary’s investment rises 4% to $10.40. Mary holds her investment through the close of trading on Day 3, during which
the Fund’s underlying index rises from 102 to 104, a gain of 1.96%. Mary’s investment rises to $10.81, a gain during Day 3 of 3.92%. For the two day period since Mary invested in the Fund, the underlying index gained 4% although
Mary’s investment increased by 8.1%. Because the underlying index continued to trend upwards with low volatility, Mary’s return closely correlates to the 200% return of the return of the underlying index for the period.
John invests $10.00 in a hypothetical
Bear Fund at the close of trading on Day 1. During Day 2, the Fund’s underlying index gains 2%, and John’s investment falls by 4% to $9.60. On Day 3, the underlying index rises by 1.96%, and John’s Fund falls by 3.92% to $9.22. For
the two day period the underlying index returned 4% while the Fund lost 7.8%. John’s return still correlates to -200% return of the underlying index, but not as closely as Mary’s investment in the Bull Fund.
Example
2
–
Underlying Index Experiences High Volatility
Mary invests $10.00 in a hypothetical
Bull Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and Mary’s investment rises 4% to $10.40. Mary continues to hold her investment through the end of Day 3, during
which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. Mary’s investment declines by 7.84%, from $10.40 to $9.58. For the two day period since Mary invested in the Fund, the Fund’s underlying index lost 2%
while Mary’s investment decreased from $10 to $9.58, a 4.2% loss. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and Mary’s return. In this situation,
Mary lost more than two times the return of the underlying index.
Conversely, John invests $10.00 in a
hypothetical Bear Fund after the close of trading on Day 1. During Day 2, the Fund’s underlying index rises from 100 to 102, a 2% gain, and John’s investment falls 4% to $9.60. John continues to hold his investment through the end of Day
3, during which the Fund’s underlying index declines from 102 to 98, a loss of 3.92%. John’s investment rises by 7.84%, from $9.60 to $10.35. For the two day period since John invested in the Fund, the Fund’s underlying index lost
2% while John’s investment increased from $10 to $10.35, a 3.5% gain. The volatility of the underlying index affected the correlation between the underlying index’s return for the two day period and John’s return. In this
situation, John gained less than two times the return of the underlying index.
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Example
3
–
Intra-day Investment with Volatility
The examples above assumed that Mary
purchased the hypothetical Bull Fund at the close of trading on Day 1 and sold her investment at the close of trading on a subsequent day. However, if she made an investment intra-day, she would have received a beta determined by the performance of
the underlying index from the end of the prior trading day until her time of purchase on the next trading day. Consider the following example.
Mary invests $10.00 in a hypothetical
Bull Fund at 11 a.m. on Day 2. From the close of trading on Day 1 until 11 a.m. on Day 2, the underlying index moved from 100 to 102, a 2% gain. In light of that gain, the Fund beta at the point at which Mary invests is 196%. During the remainder of
Day 2, the Fund’s underlying index rises from 102 to 110, a gain of 7.84%, and Mary’s investment rises 15.4% (which is the underlying index gain of 7.84% multiplied by the 196% beta that she received) to $11.54. Mary continues to hold
her investment through the close of trading on Day 3, during which the Fund’s underlying index declines from 110 to 90, a loss of 18.18%. Mary’s investment declines by 36.4%, from $11.54 to $7.34. For the period of Mary’s
investment, the Fund’s underlying index declined from 102 to 90, a loss of 11.76%, while Mary’s investment decreased from $10.00 to $7.34, a 27% loss. The volatility of the underlying index affected the correlation between the underlying
index’s return for period and Mary’s return. In this situation, Mary lost more than two times the return of the underlying index. Mary was also hurt because she missed the first 2% move of the underlying index and had a beta of 196% for
the remainder of Day 2.
The
Funds are designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should: (a)
understand the risks associated with the use of leverage, (b) understand the consequences of seeking daily leveraged investment results, (c) for the Bear Fund, understand the risk of shorting, and (d) intend to actively monitor and manage their
investments. Investors who do not understand the Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this Prospectus will achieve their
investment objectives and an investment in any Fund could lose money. No single Fund is a complete investment program.
Market Volatility.
Each Fund seeks to provide a return which is a multiple of the daily performance of the Index. No Fund attempts to, and no Fund should be expected to, provide returns which are a multiple of the return of the Index for
periods other than a single day. Each Fund rebalances its portfolio on a daily basis, increasing exposure in response to that day’s gains or reducing exposure in response to that day’s losses.
Daily rebalancing will impair a
Fund’s performance if the Index experiences volatility. For instance, the Bull Fund would be expected to lose 4% (as shown in Table 1 below) if the Index provided no return over a one year period and experienced annualized volatility of 20%.
The Bear Fund would be expected to lose 12% (as shown in Table 1 below) if the Index provided no return over a one year period during which the Index experienced annualized volatility of 20%. If the Index’s annualized volatility were to rise
to 40%, the hypothetical loss for a one year period for the Bull Fund widens to approximately 15% while the loss for the Bear Fund rises to 45%.
At higher ranges of volatility, there
is a chance of a near complete loss of Fund value even if the Index is flat. For instance, if annualized volatility of the Index is 90%, the Funds would be expected to lose more than 76% and 99% respectively, of their value even if the cumulative
Index return for the year was 0%. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of an index.
Table 1
Volatility
Range
|
2X
Bull Fund
Loss
|
2X
Bear Fund
Loss
|
10%
|
-1%
|
-3%
|
20%
|
-4%
|
-12%
|
30%
|
-9%
|
-26%
|
40%
|
-15%
|
-45%
|
50%
|
-23%
|
-65%
|
60%
|
-33%
|
-92%
|
70%
|
-47%
|
-99%
|
80%
|
-55%
|
-99%
|
90%
|
-76%
|
-99%
|
100%
|
-84%
|
-99%
|
The Index
had an annualized historical volatility rate for the five year period ended December 31, 2015 of 7.69%. The Index’s highest volatility rate for any one calendar year during the five year period ended December 31, 2015 was 14.49% and volatility
for a shorter period of time may have been substantially higher. Since market volatility has negative implications for funds which rebalance daily, investors should be sure to monitor and manage their investments in the Funds particularly in
volatile markets. The negative implications of volatility in Table 1 can be combined with the five year volatility rate to give investors some sense of the risks of holding the Funds for long periods.
This information
is intended to simply underscore
Direxion Shares
ETF Trust Prospectus
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20
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the fact that the each Fund is designed as a short-term
trading vehicle. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios.
A Precautionary Note to Investors
Regarding Dramatic Index Movement
. The Bull Fund seeks daily exposure to the Index equal to 200% of its net assets while the Bear Fund seeks daily exposure to the Index equal to -200% of its net assets. As a
consequence, a Fund could theoretically lose an amount greater than its net assets in the event of a movement of the Index in excess of 50% in a direction adverse to the Fund (meaning a decline in the value of the Index of the Bull Fund and a gain
in the value of the Index for the Bear Fund). Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be symmetrical
limitations on gains. If Rafferty successfully positions a Fund’s portfolio to provide such limits, a Fund’s portfolio and NAV will not be responsive to movements in the Index beyond 45% in a given day, whether that movement is favorable
or adverse to the Fund. For example, if the Index were to gain 50%, the Bull Fund might be limited to a daily gain of 90%, which corresponds to 200% of a 45% gain of the Index, rather than 100%, which is 200% of the Index's gain of 50%. Rafferty
cannot be assured of similarly limiting a Fund’s losses and shareholders should not expect such protection. In short, the risk of total loss exists. In the event of a severe Index movement within one trading day, which results in such a limit
on gains and losses, a Fund’s performance may be inconsistent with its stated investment objective.
The intra-day value of each
Fund’s shares, otherwise known as the “intraday indicative value” or “IIV,” which is disseminated by the Exchange every 15 seconds throughout the business day, is based on the current market value of the securities and
cash required to be deposited in exchange for a Creation Unit on the prior business day. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund at a particular point in time, nor the best
possible valuation of the current portfolio. Therefore, the IIV should not be viewed as a “real-time” update of the Fund’s NAV, which is computed only once a day.
The Projected Return of the Bull Fund
for a Single Trading Day
. The Bull Fund seeks to provide a daily return that is 200% of the daily return of the Index. Doing so requires the use of leveraged investment techniques, which necessarily incur financing
charges. For instance, the Bull Fund seeks exposure to the Index in an amount equal to 200% of its assets, meaning it uses leveraged investment techniques to seek exposure to the the Index in an amount equal to 200% of its net assets. In light of
the financing charges and the Bull Fund’s operating expenses, the expected return of the Bull Fund over one trading day is equal to the gross expected return, which is the daily the Index return multiplied by the Bull Fund’s investment
objective, minus (i) financing charges incurred by the portfolio and (ii) daily operating expenses. For instance, if the the Index returns 2% on a given day, the gross expected return of the Bull Fund would be 4%, but the net expected return, which
factors in the cost of financing the portfolio and the impact of operating expenses, would be lower. The Bull Fund will reposition its portfolio at the end of every trading day. Therefore, if an investor purchases Fund shares at close of the markets
on a given trading day, the investor’s exposure to the Index of the Bull Fund would reflect 200% of the performance of the Index during the following trading day, subject to the charges and expenses noted above, regardless of whether the
investor sells the shares during that day.
The Projected Return of the Bear Fund
for a Single Trading Day.
The Bear Fund seeks to provide a daily return which is 200% of the inverse (or opposite) of the daily return of the Index. To create the necessary exposure, the Bear Fund engages in short
selling
—
borrowing and selling securities it does not own. The money that the Bear
Fund receives from short sales
—
the short sale proceeds
—
is an asset of the Bear Fund that can generate income to help offset the Bear Fund’s operating expenses. However, the costs of creating short exposure, which may
require the Bear Fund’s counterparties to borrow and sell certain securities, may offset or outweigh such income. As the holder of a short position, the Bear Fund also is responsible for paying the dividends and interest accruing on the short
position, which is an expense to the Bear Fund that could cause the Bear Fund to lose money on the short sale and may adversely affect its performance. Each Fund will reposition its portfolio at the end of every trading day. Therefore, if an
investor purchases Fund shares at close of the markets on a given trading day, the investor’s exposure to the Index of the Bear Fund would reflect 200% of the inverse performance of the Index during the following trading day, subject to the
charges and expenses noted above, regardless of whether the investor sells the shares during that day.
The Projected Returns of Funds for
Intra-Day Purchases.
Because the Funds rebalance their portfolios once daily, an investor who purchases shares during a day will likely have more, or less, than 200% leveraged investment exposure to the Index. The
exposure to the Index received by an investor who purchases a Fund intra-day will differ from the Fund’s stated daily leveraged investment objective (
e.g.
, 200% or -200%) by an amount determined by the movement of the Index from its value at the end of the prior day. If the Index moves in a direction favorable to the Fund between the close of the market on one trading day
through the time on the next trading day when the investor purchases Fund shares, the investor will receive less exposure to the Index than the stated fund daily leveraged investment objective (
e.g.
, 200% or -200%). Conversely, if the Index moves in a direction adverse to the Fund, the investor will receive more exposure to the Index than the stated
fund daily leveraged investment objective (
e.g.
, 200% or -200%).
Table 2 below indicates the exposure
to the Index that an intra-day purchase of the Bull Fund would be expected to provide based upon the movement in the value of the Bull Fund’s the Index from the close of the market on the prior trading day. Such exposure holds until a
subsequent sale on that same trading day or until the close of the market on that trading day. For instance, if the Index has moved 5% in a direction favorable to the Bull Fund, the investor would receive exposure to
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the performance of the Index from that point until the
investor sells later that day or the end of the day equal to approximately 191% of the investor’s investment.
Conversely, if the Index has moved
5% in a direction unfavorable to the Bull Fund, an investor at that point would receive exposure to the performance of the Index from that point until the investor sells later that day or the end of the day equal to approximately 211% of the
investor’s investment.
The
table includes a range of the Index moves from 20% to -20% for the Bull Fund. Index moves beyond the range noted below will result in exposure further from the Bull Fund’s daily leveraged investment objective.
Table 2
Index
Move
|
Resulting
Exposure for Bull Fund
|
-20%
|
267%
|
-15%
|
243%
|
-10%
|
225%
|
-5%
|
211%
|
0%
|
200%
|
5%
|
191%
|
10%
|
183%
|
15%
|
177%
|
20%
|
171%
|
Table 3
below indicates the exposure to the Index that an intra-day purchase of the Bear Fund would be expected to provide based upon the movement in the value of the Index from the close of the market on the prior trading day. Such exposure holds until a
subsequent sale on that same trading day or until the close of the market on that trading day. Table 3 indicates that, if the Index has moved 5% in a direction favorable to the Bear Fund, the investor would receive exposure to the performance of the
Index from that point until the investor sells later that day or the end of the day equal to approximately -173% of the investor’s investment. Conversely, if the Index has moved 5% in a direction unfavorable to the Bear Fund, an investor would
receive exposure to the performance of the Index from that point until the investor sells later that day or the end of the day equal to approximately 233% of the investor’s investment.
The table includes a range of the Index
moves from 20% to -20% for the Bear Fund. Index moves beyond the range noted below will result in exposure further from the Bear Fund’s daily inverse leveraged investment objective.
Table 3
Index
Move
|
Resulting
Exposure for Bear Fund
|
-20%
|
114%
|
-15%
|
131%
|
-10%
|
150%
|
-5%
|
173%
|
0%
|
200%
|
5%
|
233%
|
10%
|
275%
|
15%
|
329%
|
20%
|
400%
|
The Projected
Returns of the Funds for Periods Other Than a Single Trading Day
. The Funds seek leveraged investment results on a daily
basis
—
from the close of regular trading on one trading day to the close on the next
trading day
— which should not be equated with seeking a leveraged investment objective for any other period. For instance, if the the Index gains 10% for a week,
the Bull Fund should not be expected to provide a return of 20% for the week even if it meets its daily leveraged investment objective throughout the week. This is true because of the financing charges noted above but also because the pursuit of
daily goals may result in daily leveraged compounding, which means that the return of the Index over a period of time greater than one day multiplied by a Fund’s daily leveraged investment objective or inverse daily leveraged investment
objective (
e.g.
, 200% or -200%) will not generally equal a Fund’s performance over that same period. In addition, the effects of compounding
become greater the longer Shares are held beyond a single trading day.
The following charts set out a range
of hypothetical daily performances during a given 10 trading days of a hypothetical underlying index and demonstrate how changes in the hypothetical underlying index impact the hypothetical Funds’ performance for a trading day and cumulatively
up to, and including, the entire 10 trading day period. The charts are based on a hypothetical $100 investment in hypothetical Funds over a 10 trading day period and do not reflect expenses of any kind.
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ETF Trust Prospectus
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Table 4
–
The Index Lacks a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
DailyPerformance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
105
|
5.00%
|
5.00%
|
$110.00
|
10.00%
|
10.00%
|
$
90.00
|
-10.00%
|
-10.00%
|
Day
2
|
110
|
4.76%
|
10.00%
|
$120.48
|
9.52%
|
20.47%
|
$
81.43
|
-9.52%
|
-18.57%
|
Day
3
|
100
|
-9.09%
|
0.00%
|
$
98.57
|
-18.18%
|
-1.43%
|
$
96.23
|
18.18%
|
-3.76%
|
Day
4
|
90
|
-10.00%
|
-10.00%
|
$
78.86
|
-20.00%
|
-21.14%
|
$115.48
|
20.00%
|
15.48%
|
Day
5
|
85
|
-5.56%
|
-15.00%
|
$
70.10
|
-11.12%
|
-29.91%
|
$128.31
|
11.12%
|
28.33%
|
Day
6
|
100
|
17.65%
|
0.00%
|
$
94.83
|
35.30%
|
-5.17%
|
$
83.03
|
-35.30%
|
-16.97%
|
Day
7
|
95
|
-5.00%
|
-5.00%
|
$
85.35
|
-10.00%
|
-14.65%
|
$
91.33
|
10.00%
|
-8.67%
|
Day
8
|
100
|
5.26%
|
0.00%
|
$
94.34
|
10.52%
|
-5.68%
|
$
81.71
|
-10.52%
|
-18.28%
|
Day
9
|
105
|
5.00%
|
5.00%
|
$103.77
|
10.00%
|
3.76%
|
$
73.54
|
-10.00%
|
-26.45%
|
Day
10
|
100
|
-4.76%
|
0.00%
|
$
93.89
|
-9.52%
|
-6.12%
|
$
80.55
|
9.52%
|
-19.45%
|
The
cumulative performance of the hypothetical underlying index in Table 4 is 0% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 6.12%, while the return of the hypothetical Bear Fund is -19.45%. The
volatility of the hypothetical underlying index performance and lack of a clear trend results in performance for each hypothetical Fund for the period which bears little relationship to the performance of the hypothetical underlying index for the 10
trading day period.
Table 5
–
The Index Rises in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
102
|
2.00%
|
2.00%
|
$104.00
|
4.00%
|
4.00%
|
$
96.00
|
-4.00%
|
-4.00%
|
Day
2
|
104
|
1.96%
|
4.00%
|
$108.08
|
3.92%
|
8.08%
|
$
92.24
|
-3.92%
|
-7.76%
|
Day
3
|
106
|
1.92%
|
6.00%
|
$112.24
|
3.84%
|
12.23%
|
$
88.69
|
-3.84%
|
-11.31%
|
Day
4
|
108
|
1.89%
|
8.00%
|
$116.47
|
3.78%
|
16.47%
|
$
85.34
|
-3.78%
|
-14.66%
|
Day
5
|
110
|
1.85%
|
10.00%
|
$120.78
|
3.70%
|
20.78%
|
$
82.18
|
-3.70%
|
-17.82%
|
Day
6
|
112
|
1.82%
|
12.00%
|
$125.18
|
3.64%
|
25.17%
|
$
79.19
|
-3.64%
|
-20.81%
|
Day
7
|
114
|
1.79%
|
14.00%
|
$129.65
|
3.58%
|
29.66%
|
$
76.36
|
-3.58%
|
-23.64%
|
Day
8
|
116
|
1.75%
|
16.00%
|
$134.20
|
3.50%
|
34.19%
|
$
73.68
|
-3.50%
|
-26.31%
|
Day
9
|
118
|
1.72%
|
18.00%
|
$138.82
|
3.44%
|
38.81%
|
$
71.14
|
-3.44%
|
-28.85%
|
Day
10
|
120
|
1.69%
|
20.00%
|
$143.53
|
3.38%
|
43.50%
|
$
68.73
|
-3.38%
|
-31.25%
|
The
cumulative performance of the hypothetical underlying index in Table 5 is 20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 43.50%, while the return of the hypothetical Bear Fund is -31.25%. In this
case, because of the positive hypothetical underlying index trend, the hypothetical Bull Fund’s gain is greater than 200% of the hypothetical underlying index gain and the hypothetical Bear Fund’s decline is less than -200% of the
hypothetical underlying index gain for the 10 trading day period.
23
|
Direxion Shares ETF
Trust Prospectus
|
Table 6
–
The Index Declines in a Clear Trend
Index
|
Bull
Fund
|
Bear
Fund
|
|
Value
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
NAV
|
Daily
Performance
|
Cumulative
Performance
|
|
100
|
|
|
$100.00
|
|
|
$100.00
|
|
|
Day
1
|
98
|
-2.00%
|
-2.00%
|
$
96.00
|
-4.00%
|
-4.00%
|
$104.00
|
4.00%
|
4.00%
|
Day
2
|
96
|
-2.04%
|
-4.00%
|
$
92.08
|
-4.08%
|
-7.92%
|
$108.24
|
4.08%
|
8.24%
|
Day
3
|
94
|
-2.08%
|
-6.00%
|
$
88.24
|
-4.16%
|
-11.75%
|
$112.76
|
4.16%
|
12.75%
|
Day
4
|
92
|
-2.13%
|
-8.00%
|
$
84.49
|
-4.26%
|
-15.51%
|
$117.55
|
4.26%
|
17.55%
|
Day
5
|
90
|
-2.17%
|
-10.00%
|
$
80.82
|
-4.34%
|
-19.17%
|
$122.66
|
4.34%
|
22.65%
|
Day
6
|
88
|
-2.22%
|
-12.00%
|
$
77.22
|
-4.44%
|
-22.76%
|
$128.12
|
4.44%
|
28.10%
|
Day
7
|
86
|
-2.27%
|
-14.00%
|
$
73.71
|
-4.54%
|
-26.27%
|
$133.94
|
4.54%
|
33.91%
|
Day
8
|
84
|
-2.33%
|
-16.00%
|
$
70.29
|
-4.66%
|
-29.71%
|
$140.17
|
4.66%
|
40.15%
|
Day
9
|
82
|
-2.38%
|
-18.00%
|
$
66.94
|
-4.76%
|
-33.05%
|
$146.84
|
4.76%
|
46.82%
|
Day
10
|
80
|
-2.44%
|
-20.00%
|
$
63.67
|
-4.88%
|
-36.32%
|
$154.01
|
4.88%
|
53.99%
|
The
cumulative performance of the hypothetical underlying index in Table 6 is -20% for 10 trading days. The return of the hypothetical Bull Fund for the 10 trading day period is 36.32%, while the return of the hypothetical Bear Fund is 53.99%. In this
case, because of the negative hypothetical underlying index trend, the hypothetical Bull Fund’s decline is less than 200% of the hypothetical underlying index decline and the hypothetical Bear Fund’s gain is greater than 200% of the
hypothetical underlying index decline for the 10 trading day period.
Direxion Shares
ETF Trust Prospectus
|
24
|
Additional Information Regarding Principal
Risks
An investment
in a Fund entails risks. A Fund could lose money, or its performance could trail that of other investment alternatives. Rafferty cannot guarantee that a Fund will achieve its investment objective. In addition, a Fund presents some risks not
traditionally associated with most mutual funds and ETFs. It is important that investors closely review and understand these risks before making an investment in a Fund. Turbulence in financial markets and reduced liquidity in equity, credit and
fixed income markets may negatively affect many issuers worldwide including the Funds. The table below provides the risks of investing in the Funds. Following the table, each risk is explained.
|
|
|
|
Direxion
Daily Income Preferred
Bull 2X Shares
|
Direxion
Daily Income Preferred
Bear 2X Shares
|
Aggressive
Investment Techniques Risk
|
X
|
X
|
Canadian
Securities Risk
|
X
|
X
|
Cash
Transaction Risk
|
|
X
|
Counterparty
Risk
|
X
|
X
|
Currency
Exchange Rate Risk
|
X
|
X
|
Daily
Index Correlation/Tracking Risk
|
X
|
|
Daily
Inverse Index Correlation/Tracking Risk
|
|
X
|
Derivatives
Risk
|
X
|
X
|
Early
Close/ Trading Halt Risk
|
X
|
X
|
Effects
of Compounding and Market Volatility Risk
|
X
|
X
|
Financials
Sector Risk
|
X
|
X
|
Foreign
Securities Risk
|
X
|
X
|
High
Portfolio Turnover Risk
|
X
|
X
|
High-Yielding
Dividend Stock Risk
|
X
|
X
|
International
Closed-Market Trading Risk
|
X
|
X
|
Intra-Day
Investment Risk
|
X
|
X
|
Investment
Risk
|
X
|
X
|
Leverage
Risk
|
X
|
X
|
Liquidity
Risk
|
X
|
X
|
Market
Risk
|
X
|
X
|
Money
Market Instrument Risk
|
X
|
X
|
Non-Diversification
Risk
|
X
|
X
|
Other
Investment Companies (including ETFs) Risk
|
X
|
|
Preferred
Stock Risk
|
X
|
X
|
Regulatory
Risk
|
X
|
X
|
Shorting
Risk
|
|
X
|
Small-
and/or Mid-Capitalization Risk
|
X
|
X
|
Valuation
Time Risk
|
X
|
X
|
Special
Risks of Exchange-Traded Funds
|
X
|
X
|
Adverse Market Conditions Risk
The performance of a Fund is designed to correlate
to the performance of the Index. As a consequence, a Fund’s performance will suffer during conditions which are adverse to the Fund’s investment objective. For example, if the Index has risen on a given day, then the Bear Fund’s
performance should fall. Conversely, if the Index has fallen on a given day, then the Bear Fund’s performance should rise. If the Index has risen on a given day, then the Bull Fund's performance should rise. Conversely, if the Index has fallen
on a given day, then the Bull Fund's performance should also fall.
Adviser’s Investment Strategy
Risk
The Adviser utilizes a quantitative
methodology to select investments for each Fund. Although this methodology is designed to correlate the Bull Fund's daily performance with 200% of the daily performance of the Index and the Bear Fund's daily performance with -200% of the daily
performance
of the Index, there is no assurance that such
methodology will be successful and will enable a Fund to achieve its investment objective.
Aggressive Investment Techniques
Risk
Using investment techniques that may be
considered aggressive may entail significantly higher than normal risk. Risks associated with the use of swaps, futures and forward contracts, and options include potentially dramatic price changes (losses) in the value of the instruments and
imperfect correlations between the price of the contract and the underlying security or index. These instruments may increase the volatility of a Fund and may involve a small investment of cash relative to the magnitude of the risk assumed.
Canadian Securities Risk
A Fund may invest in, and/or have exposure to,
Canadian securities. The United States is Canada’s largest trading and investment partner and the Canadian economy is significantly
25
|
Direxion Shares ETF
Trust Prospectus
|
affected by developments in the U.S. economy. Since
the implementation of North American Free Trade Agreement (“NAFTA”) in 1994, among Canada, the United States and Mexico, total two-way merchandise trade between the United States and Canada has more than doubled. To further this
relationship, the three NAFTA countries entered into the Security and Prosperity Partnership of North America in March 2005, which has further affected Canada’s dependency on the U.S. economy. Any downturn in the U.S or Mexican economic
activity is likely to have an adverse impact on the Canadian economy. The Canadian economy is also dependent upon external trade with other key trading partners, including China and the European Union. In addition, Canada is a large supplier of
natural resources (
e.g.
, oil, natural gas and agricultural products). As a result, the Canadian economy is sensitive to fluctuations in certain commodity prices.
Cash Transaction Risk
Unlike most ETFs, the Bear Fund currently intends to
effect creation and redemptions principally for cash, rather than principally for in-kind securities, because of the nature of the financial instruments held by the Bear Fund. As such, investment in the Bear Fund may be less tax efficient than
investment in a conventional ETF. ETFs generally are able to make in-kind redemptions and avoid being taxed on gains on the distributed portfolio securities at the fund level. Because the Bear Fund currently intends to effect redemptions principally
for cash, the Bear Fund may be required to sell portfolio securities in order to obtain the cash needed to distribute redemption proceeds. The Bear Fund may recognize a capital gain on these sales that might not have been incurred if such Bear Fund
had made a redemption in-kind and this may decrease the tax efficiency of the Bear Fund compared to ETFs that utilize an in-kind redemption process.
Counterparty Risk
A Fund may invest in financial instruments involving
counterparties for the purpose of attempting to gain exposure to a particular group of securities or an asset class without actually purchasing those securities or investments. The use of financial instruments, such as swap agreements, involves
risks that are different from those associated with ordinary portfolio securities transactions. For example, a Fund is exposed to the risk that the counterparty may be unwilling or unable to make timely payments to meet its contractual obligations
or may fail to return holdings that are subject to the agreement with the counterparty. If the counterparty becomes bankrupt or defaults on its payment obligations to a Fund, it may not receive the full amount it is entitled to receive. In addition,
a Fund may enter into swap agreements with a limited number of counterparties, which may increase a Fund’s exposure to counterparty credit risk. A Fund does not specifically limit its counterparty risk with respect to any single counterparty.
Further, there is a risk that no suitable counterparties are willing to enter into, or continue to enter into, transactions with a Fund and, as a result, a Fund may not be able to achieve its investment objectives. A Fund will not enter into any
agreement involving a counterparty unless the Adviser believes that the other party to the transaction is creditworthy.
Currency Exchange Rate Risk
Changes in foreign currency exchange rates will
affect the value of what a Fund owns and the Fund’s share price. Generally, when the U.S. Dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. Dollars.
Devaluation of a currency by a country’s government or banking authority also will have a significant impact on the value of any investments denominated in that currency. Currency markets generally are not as regulated as securities
markets.
Daily Index
Correlation/Tracking Risk
For the Bull Fund,
there can be no guarantee that the Bull Fund will achieve a high degree of correlation to the Index and therefore achieve its daily leveraged investment objective. To achieve a high degree of correlation with the Index, the Bull Fund seeks to
rebalance its portfolio daily to keep leverage consistent with its daily leveraged investment objective. The Bull Fund may have difficulty achieving its daily leveraged investment objective due to fees and expenses, high portfolio turnover,
transaction costs and costs associated with the use of leveraged investment techniques and/or a temporary lack of liquidity in the markets for the securities held by the Bull Fund. Market disruptions, regulatory restrictions or extreme volatility
will also adversely affect the Bull Fund’s ability to adjust exposure to the required levels. The Bull Fund may not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries
may be different from that of the Index. In addition, the Bull Fund may invest in securities or financial instruments not included in the Index. The Bull Fund may be subject to large movements of assets into and out of the Bull Fund, potentially
resulting in the Bull Fund being over- or under-exposed to the Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because of this, it is unlikely that the Bull Fund will be
perfectly exposed to the Index at the end of each day. The possibility of the Bull Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the close of the trading day. Activities surrounding
periodic the Index reconstitutions and other the Index rebalancing or reconstitution events may hinder the Bull Fund’s ability to meet its daily leveraged investment objective.
Daily Inverse Index Correlation/Tracking
Risk
For the Bear Fund, shareholders should
lose money when the Index rises, which is a result that is the opposite from traditional index tracking funds. There is no guarantee that the Bear Fund will achieve a high degree of inverse correlation to the Index and therefore achieve its daily
inverse leveraged investment objective. To achieve a high degree of inverse correlation with the Index, the Bear Fund seeks to rebalance its portfolio daily to keep leverage consistent with its daily inverse leveraged investment objective. The Bear
Fund may have difficulty achieving its daily inverse leveraged investment objective due to fees, expenses, transactions costs, financing costs related to the use of derivatives, income items, valuation methodology, accounting standards and
disruptions or illiquidity in the markets for the securities or derivatives
Direxion Shares
ETF Trust Prospectus
|
26
|
held by the Bear Fund. Market disruptions,
regulatory restrictions or extreme volatility will also adversely affect the Bear Fund’s ability to adjust exposure to the required levels. The Bear Fund may not have investment exposure to all securities in the Index, or its weighting of
investment exposure to such stocks or industries may be different from that of the Index. In addition, the Bear Fund may invest in securities or financial instruments not included in the Index. The Bear Fund may be subject to large movements of
assets into and out of the Bear Fund, potentially resulting in the Bear Fund being over- or under-exposed to the Index. In addition, the target amount of portfolio exposure to the Index is impacted dynamically by the Index’s movement. Because
of this, it is unlikely that the Bear Fund will be perfectly exposed to the Index at the end of each day. The possibility of the Bear Fund being materially over- or under-exposed to the Index increases on days when the Index is volatile near the
close of the trading day. Activities surrounding periodic the Index reconstitutions and other the Index rebalancing or reconstitution events may hinder the Bear Fund’s ability to meet its daily inverse leveraged investment objective.
Derivatives Risk
A Fund uses investment techniques, including
investments in derivatives, such as swaps, futures and forward contracts, and options that may be considered aggressive. The use of derivatives may result in larger losses or smaller gains than investing in the underlying securities directly, or in
the case of the Bear Fund, directly shorting the underlying securities. Investments in these derivatives may generally be subject to market risks that cause their prices to fluctuate more than an investment directly in a security and may increase
the volatility of a Fund. The use of derivatives may expose a Fund to additional risks such as counterparty risk, liquidity risk and increased daily correlation risk. When a Fund uses derivatives, there may be imperfect correlation between the value
of the underlying reference assets and the derivative, which may prevent a Fund from achieving its investment objective.
A Fund may use a combination of swaps
on the Index and swaps on an ETF whose investment objective is to track the performance of the same or a substantially similar underlying index. The performance of this underlying ETF may not track the performance of the Index due to fees and other
costs borne by the ETF and other factors. Thus, to the extent that a Fund invests in swaps that use an ETF as an underlying reference asset, a Fund may be subject to greater correlation risk and may not achieve as high a degree of correlation with
the Index as it would if the Fund used swaps that utilized the underlying index securities as a reference or as an underlying asset. Additionally, with respect to the use of swap agreements, if the Index has a dramatic intraday move in value that
causes a material decline in a Fund’s NAV, the terms of the swap agreement between a Fund and its counterparty may allow the counterparty to immediately
close out of the transaction with a Fund. In such
circumstances, a Fund may be unable to enter into another swap agreement or invest in other derivatives to achieve the desired exposure consistent with a Fund’s daily leveraged investment objective. This may prevent a Fund from achieving its
daily leveraged investment objective particularly if the Index reverses all or a portion of its intraday move by the end of the day. Any financing, borrowing or other costs associated with using derivatives may also have the effect of lowering a
Fund’s return. In addition, a Fund’s investments in derivatives are subject to the following risks:
•
|
Swap Agreements
. Swap agreements are entered into primarily with major global financial institutions for a specified period which may range from one day to more than one year. In a standard swap transaction, two parties agree to
exchange the return (or differentials in rates of return) earned or realized on particular predetermined reference or underlying securities or instruments. The gross return to be exchanged or swapped between the parties is calculated based on a
notional amount or the return on or change in value of a particular dollar amount invested in a basket of securities representing a particular index. Total return swaps are subject to counterparty risk, which relates to credit risk of the
counterparty and liquidity risk of the swaps themselves.
|
•
|
Futures Contracts
. A futures contact is a contract to purchase or sell a particular security, or the cash value of an index, at a specified future date at a price agreed upon when the contract is made. Under such contracts, no delivery of
the actual securities is required. Rather, upon the expiration of the contract, settlement is made by exchanging cash in an amount equal to the difference between the contract price and the closing price of a security or index at expiration, net of
the variation margin that was previously paid.
|
•
|
Forward Contracts
. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities, or the cash value of the commodities, securities
or the securities index, at an agreed upon date. A forward currency contract is an obligation to buy or sell a specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a
price set at the time of the contract.
|
•
|
Options
. An option is a contract that gives the purchaser (holder) of the option, in return for a premium, the right to buy from (call) or sell to (put) the seller (writer) of the option the security or currency underlying
the option at a specified exercise price at any time during the term of the option (normally not exceeding nine months). The writer of an option has the obligation upon exercise of the option to deliver the underlying security or currency upon
payment of the exercise price or to pay the exercise price upon delivery of the underlying security or currency.
|
27
|
Direxion Shares ETF
Trust Prospectus
|
•
|
Options on Futures
Contracts
. An option on a futures contract provides the holder with the right to enter into a “long” position in the underlying futures contract, in the case of a call option, or a “short”
position in the underlying futures contract in the case of a put option, at a fixed exercise price to a stated expiration date. Upon exercise of the option by the holder, the contract market clearing house establishes a corresponding short position
for the writer of the option, in the case of a call option, or a corresponding long position, in the case of a put option.
|
Early Close/Trading Halt Risk
An exchange or market may close or issue trading
halts on specific securities, or the ability to buy or sell certain securities or financial instruments may be restricted, which may result in a Fund being unable to buy or sell certain securities or financial instruments. In such circumstances, a
Fund may be unable to rebalance its portfolio, may be unable to accurately price its investments and/or may incur substantial trading losses.
Effects of Compounding and Market
Volatility Risk
There can be no guarantee that
a Fund will achieve a high degree of correlation with its daily leveraged investment objective relative to the Index. A failure to achieve a high degree of correlation may prevent a Fund from achieving its daily leveraged investment objective. A
number of factors may adversely affect a Fund’s correlation with the Index, including fees, expenses, transaction costs, costs associated with the Funds' use of leveraged investment techniques, income items and accounting standards. A Fund may
not have investment exposure to all securities in the Index, or its weighting of investment exposure to such stocks or industries may be different from that of the Index. In addition, a Fund may invest in securities or financial instruments not
included in the Index. A Fund may be subject to large movements of assets into and out of the Fund, potentially resulting in the Fund being over- or under-exposed to the Index. Activities surrounding periodic index reconstitutions and other index
rebalancing or reconstitution events may hinder each Fund’s ability to meet its daily leveraged investment objectives. Each Fund seeks to rebalance its portfolio daily to keep exposure consistent with each Fund’s daily leveraged
investment objective.
A Fund
does not attempt to, and should not be expected to, provide returns, before fees and expenses, which are 200% or -200% of the return of the Index for periods other than one single day. A Fund rebalances its portfolio on a daily basis, increasing
exposure in response to the Index’s daily gains or reducing exposure in response to the Index’s daily losses. This means that for a period longer than one single day, the pursuit of a daily leveraged investment
objective may result in daily leveraged compounding
for the Funds. It also means that the return of the Index over a period of time greater than one single day multiplied by each Fund’s daily leveraged investment objective (
e.g.
, 200% or -200%) generally
will not equal a Fund’s performance over that same period.
As a result, over time, the
cumulative percentage increase or decrease in the value of a Fund’s portfolio may diverge significantly from the cumulative percentage increase or decrease in 200% or -200% of the return of the Index due to the compounding effect of losses and
gains on the returns of a Fund. It also is expected that a Fund's use of leverage will cause the Fund to underperform the return of 200% of the Index in a trendless or flat market.The effect of compounding becomes more pronounced on a Fund’s
performance as the Index experiences volatility. An index’s volatility rate is a statistical measure of the magnitude of fluctuations in the returns of the index.
The chart below provides examples of
how index volatility could affect a Fund’s performance. Fund performance for periods greater than one single day can be estimated given any set of assumptions for the following factors: a) index volatility; b) index performance; c) period of
time; d) financing rates associated with leveraged exposure; e) other Fund expenses; and f) dividends or interest paid with respect to securities in the Index. The chart below illustrates the impact of two principal factors
–
index volatility and index performance
–
on Fund performance. The chart shows estimated
Fund returns for a number of combinations of index volatility and index performance over a one-year period. Performance shown in the chart assumes that: (i) no dividends were paid with respect to the securities included in the Index; (ii) there were
no Fund expenses; and (iii) borrowing/lending rates (to obtain leveraged exposure for the Bull Fund and inverse leveraged exposure for the Bear Fund) of 0%. If Fund expenses and/or actual borrowing/lending rates were reflected, the estimated returns
would be different than those shown.
As shown below, the Bull Fund would
be expected to lose 6.1% and the Bear Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Index’s annualized volatility were to
rise to 75%, the hypothetical loss for a one year period widens to approximately 43.0% for the Bull Fund and 81.5% for the Bear Fund.
At higher ranges of volatility, there
is a chance of a significant loss of value even if the Index is flat. For instance, if the Index’s annualized volatility is 100%, it is likely that the Bull Fund would lose 63.2% of its value, and the Bear Fund would lose approximately 95.0%
of its value, even if the Index’s
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cumulative return for the year was only 0%. The
volatility of ETFs or instruments that reflect the value of the Index such as swaps, may differ from the volatility of the Index.
Bull Fund
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
Bear Fund
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
Holding an
unmanaged position opens the investor to the risk of market volatility adversely affecting the performance of the investment. A Fund is not appropriate for investors who do not intend to actively monitor and manage their portfolios. Each table is
intended to underscore the fact that a Fund is designed as a short-term trading vehicle for investors who intend to actively monitor and manage their portfolios.
For additional information and examples
demonstrating the effects of volatility and index performance on the long-term performance of the Funds, see the “Additional Information Regarding Investment Techniques and Policies” section, and “Special Note Regarding the
Correlation Risks of the Funds” in the Funds' Statement of Additional Information.
Financials Sector Risk
Companies in the financials sector are often subject
to extensive government regulation and intervention, which may adversely impact their activities, prices they may charge and the amount of capital they must maintain. Government
regulation may change frequently and may have
significant adverse or unintended consequences on companies in the financials sector. The impact of such regulation on any individual financial company or the sector as a whole cannot be predicted. Companies in the financials sector may also be
adversely impacted by increases in interest rates and loan losses, decreases in the availability of money or asset valuations, credit rating downgrades and adverse conditions in other relation markets. Profitability is largely dependent on the
availability and cost of capital, and can fluctuate significantly when interest rates change. Credit losses resulting from financial difficulties of borrowers also can negatively impact the sector.
Foreign Securities Risk
Foreign instruments may involve greater risks than
domestic instruments. As a result, a Fund’s returns and NAVs may be affected to a large degree by fluctuations in currency exchange rates, interest rates, political, diplomatic or economic conditions and regulatory requirements in other
countries. The laws and accounting, auditing, and financial reporting standards in foreign countries typically are not as strict as they are in the U.S., and there may be less public information available about foreign companies.
Foreign securities may involve
additional risk, including, greater market volatility, the availability of less reliable financial information, higher transactional and custody costs, taxation by foreign governments, decreased market liquidity and political instability. Certain
foreign markets may rely heavily on particular industries or foreign capital and are more vulnerable to diplomatic developments, the imposition of economic sanctions against a particular country or countries, organizations, entities and/or
individuals, changes in international trade patterns, trade barriers, and other protectionists or retaliatory measures.
Gain Limitation Risk
Rafferty will attempt to position each Fund’s
portfolio to ensure that a Fund does not lose more than 90% of its NAV on a given day. The cost of such downside protection will be limitations on a Fund’s gains. As a consequence, a Fund’s portfolio may not be responsive to the Index
movements beyond 45% in a given day whether that movement is favorable or adverse to the Fund. For example, for the Bull Fund, if the Index were to gain 50%, the Bull Fund might be limited to a daily gain of 90% rather than 100%, which is 200% of
the the Index gain of 50%.
High
Portfolio Turnover Risk
Daily rebalancing of a
Fund’s holdings pursuant to its daily investment objective causes a much greater number of portfolio transactions when compared to most ETFs. Additionally, active market trading of a Fund’s shares on such exchanges as the NYSE Arca,
Inc., could cause more frequent creation and redemption activities which could increase the number of portfolio transactions. Frequent and active trading may lead to higher transaction costs because of increased broker commissions resulting from
such transactions. In addition, there is the possibility of significantly increased short-term capital gains (which will be taxable to shareholders as ordinary income when distributed to them).
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A Fund calculates portfolio turnover without
including the short-term cash instruments or derivative transactions that comprise the majority of a Fund’s trading. As such, if a Fund’s extensive use of derivative instruments were reflected, the calculated portfolio turnover rate
would be significantly higher.
High-Yielding Dividend Stock Risk
High-yielding dividend stocks are often speculative,
high risk investments. These companies can be paying out more earnings than they can support and may reduce their dividends or stop paying dividends at any time, which could have a material adverse impact on the stock price of these companies and
materially impact a Fund’s performance.
International Closed-Market Trading
Risk
Because a Fund’s investments may be
traded in markets that are closed when the Exchange is open, there are likely to be deviations between the current value of an underlying investment and last sale pricing (
i.e.
, the last quote from its closed
foreign market), resulting in premiums or discounts to NAV that may be greater than those experienced by other ETFs.
Intra-Day Investment Risk
Each Fund seeks daily leveraged investment results,
which should not be equated with seeking an investment objective for shorter than a day. Thus, an investor who purchases Fund shares after the close of the markets on one trading day and before the close of the markets on the next trading day will
likely have more, or less, than 200% or -200% leveraged investment exposure to the Index, depending upon the movement of the Index from the end of one trading day until the time of purchase. If the Index moves in a direction favorable to a Fund, the
investor will receive less than 200% or -200% exposure to the Index. Conversely, if the Index moves in a direction adverse to a Fund, the investor will receive exposure to the Index greater than 200% or -200%. Investors may consult the Funds'
website at any point during the day to determine how the current value of the Index relates to the value of the Index at the end of the previous day.
Investment Risk
An investment in a Fund is not a deposit in a bank
and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. When you sell your Shares, they could be worth less than what you paid for them.
Leverage Risk
To achieve its daily investment objective, each Fund
employs leverage and is exposed to the risk that adverse daily performance of the Index will be leveraged. This means that, if the Index experiences an adverse daily performance, your investment in the Fund will be reduced by an amount equal to 2%
for every 1% of adverse performance, not including the cost of financing the portfolio and the impact of operating expenses, which would further lower your investment.
A Fund could theoretically lose an
amount greater than its net assets in the event of a movement of the Index in excess of 50% in a direction adverse to the Fund (meaning a decline
in the value of the Index for the Bull Fund and a
gain in the value of the Index for the Bear Fund). Further, purchasing shares during a single day may result in greater than 200% exposure to the performance of the Index if the Index moves in a direction adverse to the Fund between the close of the
markets on one trading day and before the close of the markets on the next trading day.
To fully understand the risks of
using leverage in a Fund, see “Effects of Compounding and Market Volatility Risk” above.
Liquidity Risk
Some securities held by a Fund, including
derivatives, may be difficult to sell or illiquid, particularly during times of market turmoil. Illiquid securities also may be difficult to value. Markets for securities or financial instruments could be disrupted by a number of events, including,
but not limited to, an economic crisis, natural disasters, new legislation or regulatory changes inside or outside the U.S. Illiquid securities may also be difficult to value. If a Fund is forced to sell an illiquid security at an unfavorable time
or at a price that is lower than Rafferty’s judgment of the security’s true market value, a Fund may be forced to sell the security at a loss. Such a situation may prevent a Fund from limiting losses, realizing gains or achieving a high
correlation with the Index, thus adversely affecting Fund performance.
Market Risk
A Fund is subject to market risks that can affect
the value of its shares. These risks include political, regulatory, market and economic developments, including developments that impact specific economic sectors, industries or segments of the market. The Bull Fund typically would lose value on a
day when the Index declines. The Bear Fund typically would lose value on a day when the Index increases.
Turbulence in the financial markets
and reduced liquidity may negatively affect issuers, which could have an adverse effect on each Fund. In addition, there is a risk that policy changes by the U.S. Government, Federal Reserve, or other government actors, which could include
increasing interest rates, could cause increased volatility in financial markets and lead to higher levels of Fund redemptions, which could have a negative impact on a Fund. A Fund’s NAV could decline over short periods due to short-term
market movements and over longer periods during market downturns.
Money Market Instrument Risk
A Fund may use a variety of money market instruments
for cash management purposes, including money market funds, depositary accounts and repurchase agreements. Money market funds may be subject to credit risk with respect to the short-term debt instruments in which they invest. Depository accounts may
be subject to credit risk with respect to the financial institution in which the depository account is held. Repurchase agreements are contracts in which a seller of securities agrees to buy the securities back at a specified time and price.
Repurchase agreements may be subject to market and credit risk related to the collateral securing the repurchase agreement. There is no guarantee that money market instruments will maintain a stable value, and they may lose money.
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Non-Diversification Risk
A non-diversified fund invests a high percentage of
its assets in a limited number of securities. A non-diversified fund’s NAV and total return may fluctuate more or fall greater in times of weaker markets than a diversified mutual fund because the Fund may invest its assets in a smaller number
of issuers or may invest a larger proportion of its assets in a single issuer. As a result, the gains or losses on a single investment may have a greater impact on a Fund’s NAV and may make a Fund more volatile than more diversified
funds.
Other Investment Companies
(including ETFs) Risk
The Bull Fund may invest
in, and/or have exposure to, the securities of other investment companies, including ETFs, which may involve duplication of advisory fees and certain other expenses. By investing in another investment company or ETF, a fund becomes a shareholder of
that investment company or ETF. As a result, fund shareholders indirectly bear a fund’s proportionate share of the fees and expenses paid by shareholders of the other investment company or ETF, in addition to the fees and expenses fund
shareholders bear in connection with a fund’s own operations. As a shareholder, a fund must rely on the investment company or ETF to achieve its investment objective. A fund’s performance may be magnified positively or negatively by
virtue of its investment in other investment companies or ETFs. If the investment company or ETF fails to achieve its investment objective, the value of a fund’s investment will decline, thus affecting a fund’s performance. In addition,
because closed-end investment companies and ETFs are listed on national stock exchanges and are traded like stocks on an exchange, their shares potentially may trade at a discount or a premium. Investments in such shares may be subject to brokerage
and other trading costs, which could result in greater expenses to a fund. Finally, because the value of closed-end investment company or ETF shares depends on the demand in the market, an investment adviser may not be able to liquidate a
fund’s holdings in those shares at the most optimal time, adversely affecting a fund’s performance.
Preferred Stock Risk
A preferred stock is a blend of the characteristics
of a bond and common stock. It may offer the higher yield of a bond and has priority over common stock in equity ownership, but it does not have the seniority of a bond and, unlike common stock, its participation in the issuer’s growth may be
limited. Preferred stock generally has preference over common stock in the receipt of dividends or in any residual assets after payment to creditors should the issuer be dissolved. Although the dividend on a preferred stock may be set at a fixed
annual rate, in some circumstances it may be changed or passed by the issuer. Unlike interest payments on debt securities, dividend payments on preferred stock must be declared by the issuer’s board of directors. An issuer’s board of
directors is generally not under any obligation to pay a dividend (even if such dividend has been accrued) and may suspend payment of dividends on preferred stock at any time. In the event an issuer of preferred stock experiences economic
difficulties, the issuer’s preferred stock may lose substantial value due to the reduced likelihood that the
issuer’s board of directors will declare a
dividend and the fact that preferred stock may be subordinated to other securities of the same issuer.
Additionally, because many preferred
stocks pay dividends at a fixed rate, their market price can be sensitive to changes in interest rates in a manner similar to bonds
–
that is, as interest rates rise,
the value of the preferred stocks are likely to decline. Also because many preferred stocks allow holders to convert the preferred stock into common stock of the issuer, their market price can be sensitive to changes in the value of the
issuer’s common stock. Preferred stocks are subject to market volatility and the prices of preferred stocks will fluctuate based on market demand.
Regulatory Risk
Each Fund is subject to the risk that a change in
U.S. law and related regulations will impact the way the Fund operates, increase the particular costs of the Fund’s operations and/or change the competitive landscape. In particular, there is no guarantee that the Bear Fund will be permitted
to continue to engage in short sales, which are designed to earn the Bear Fund a profit from the decline of the price of a particular security, basket of securities or index.
Additional legislative or regulatory
changes could occur that may materially and adversely affect each Fund. For example, the regulatory environment for derivative instruments in which a Fund may invest is evolving, and changes in the regulation or taxation of derivative instruments
may materially and adversely affect the ability of a Fund to pursue its trading strategies. Similarly, the regulatory environment for leveraged funds generally also may evolve, and changes in the direct or indirect regulation of leveraged funds
could have a material adverse effect on the ability of a Fund to pursue its investment objective or strategy. Such legislative or regulatory changes could pose additional risks and result in material adverse consequences to a Fund.
Shorting Risk
The Bear Fund may engage in short sales designed to
earn the Bear Fund a profit from the decline in the price of particular securities, baskets of securities or indices. Short sales are transactions in which the Bear Fund borrows securities from a broker and sells the borrowed securities. The Bear
Fund is obligated to replace the security borrowed by purchasing the security at the market price at the time of replacement. If the market price of the underlying security goes down between the time the Bear Fund sells the security and buys it
back, the Bear Fund will realize a gain on the transaction. Conversely, if the underlying security goes up in price during the period, the Bear Fund will realize a loss on the transaction. Any such loss is increased by the amount of premium or
interest the Bear Fund must pay to the lender of the security. Likewise, any gain will be decreased by the amount of premium or interest the Bear Fund must pay to the lender of the security. The Bear Fund’s investment performance may also
suffer if the Bear Fund is required to close out a short position earlier than it had intended. This would occur if the securities lender required the Bear Fund to deliver the securities the Bear Fund borrowed at the commencement of the short sale
and the Bear Fund was unable to borrow the securities from another securities
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lender or otherwise obtain the security by other
means. In addition, the Bear Fund may be subject to expenses related to short sales that are not typically associated with investing in securities directly, such as costs of borrowing and margin account maintenance costs associated with the Bear
Fund’s open short positions. As the holder of a short position, the Bear Fund also is responsible for paying the dividends and interest accruing on the short position, which is an expense to the Bear Fund that could cause the Bear Fund to lose
money on the short sale and may adversely affect its performance.
Small- and/or Mid-Capitalization Company
Risk
The securities of small- and/or
mid-capitalization companies are subject to greater risks and the possibility of greater price volatility than the securities of more established, larger capitalization companies. Small- and/or mid-capitalization companies often have narrower
markets for their goods and/or services and more limited managerial and financial resources than larger, more established companies. Furthermore, those companies often have limited product lines, services, markets, financial resources or are
dependent on a small management group. In addition, because these stocks are not well-known to the investing public, do not have significant institutional ownership and are followed by relatively few security analysts, there will normally be less
publicly available information concerning these securities compared to what is available for the securities of larger companies. Adverse publicity and investor perceptions, whether based on fundamental analysis, can decrease the value and liquidity
of securities held by a Fund. As a result, the performance of small- and/or mid-capitalization companies can be more volatile and they face greater risk of business failure, which could increase the volatility of a Fund’s portfolio.
Valuation Time Risk
A Fund values its portfolio as of the close of
regular trading on the New York Stock Exchange ("NYSE") (generally 4:00 p.m. Eastern Time). In some cases, foreign markets may close before the NYSE opens or may not be open for business on the same calendar days as a Fund. As a result, the
performance of a fund that tracks a foreign market index or an index that includes foreign securities can vary from the performance of that index.
Special Risks of Exchange-Traded
Funds
Authorized Participants Concentration Risk
. A Fund may have a limited number of financial institutions that may act as Authorized Participants. Only Authorized Participants who have entered into agreements with a Fund’s distributor may
engage in creation or redemption transactions directly with the Fund. To the extent that those Authorized Participants exit the business or are unable to process creation and/or redemption orders, Shares may trade like closed-end fund shares at a
discount to NAV and possibly face delisting from the Exchange.
Market Price Variance Risk
. Individual Shares of a Fund that are listed for trading on the Exchange can be bought and sold in the secondary market at market prices. The market prices of Shares will fluctuate in response to
changes in NAV and supply and demand for Shares. The Adviser cannot predict
whether Shares will trade above, below or at their
NAV. Given the fact that Shares can be created and redeemed in Creation Units, the Adviser believes that large discounts or premiums to the NAV of Shares should not be sustained. There may, however, be times when the market price and the NAV vary
significantly and you may pay more than NAV when buying Shares on the secondary market, and you may receive less than NAV when you sell those Shares. A Fund’s investment results are measured based upon the daily NAV of the Fund over a period
of time. Investors purchasing and selling Shares in the secondary market may not experience investment results consistent with those experienced by those creating and redeeming directly with a Fund. There is no guarantee that an active secondary
market will develop for Shares of the Funds.
Trading Issues
. Trading in Shares on the Exchange may be halted due to market conditions or for reasons that, in the view of the Exchange, make trading in Shares inadvisable, such as extraordinary market volatility
or other reasons. There can be no assurance that Shares will continue to meet the listing requirements of the Exchange, and the listing requirements may be amended from time to time.
A Precautionary Note to Retail
Investors
. The Depository Trust Company (“DTC”), a limited trust company and securities depositary that serves as a national clearinghouse for the settlement of trades for its participating banks and
broker-dealers, or its nominee, will be the registered owner of all outstanding Shares of each fund of the Trust. Your ownership of Shares will be shown on the records of DTC and the DTC Participant broker through whom you hold the Shares. THE TRUST
WILL NOT HAVE ANY RECORD OF YOUR OWNERSHIP. Your account information will be maintained by your broker, who will provide you with account statements, confirmations of your purchases and sales of Shares, and tax information. Your broker also will be
responsible for ensuring that you receive shareholder reports and other communications from a Fund whose Shares you own. Typically, you will receive other services (
e.g.
, average basis information) only if your broker offers these services.
A Precautionary Note to Purchasers of
Creation Units
. You should be aware of certain legal risks unique to investors purchasing Creation Units directly from the issuing Fund. Because new Shares may be issued on an ongoing basis, a
“distribution” of Shares could be occurring at any time. As a dealer, certain activities on your part could, depending on the circumstances, result in your being deemed a participant in the distribution, in a manner that could render you
a statutory underwriter and subject you to the prospectus delivery and liability provisions of the Securities Act of 1933, as amended (“Securities Act”). For example, you could be deemed a statutory underwriter if you purchase Creation
Units from an issuing Fund, break them down into the constituent Shares and sell those Shares directly to customers, or if you choose to couple the creation of a supply of new Shares with an active selling effort involving solicitation of secondary
market demand for Shares. Whether a person is an underwriter depends upon all of the facts and circumstances pertaining to that person’s activities, and the examples mentioned here should not be considered a
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complete description of all the activities that
could cause you to be deemed an underwriter. Dealers who are not “underwriters,” but are participating in a distribution (as opposed to engaging in ordinary secondary market transactions), and thus dealing with Shares as part of an
“unsold allotment” within the meaning of Section 4(3)(C) of the Securities Act, will be unable to take advantage of the prospectus delivery exemption provided by Section 4(3) of the Securities Act.
A Precautionary Note to Investment
Companies
. For purposes of the Investment Company Act of 1940, as amended (“1940 Act”) each Fund is a registered investment company, and the acquisition of Shares by other investment companies is subject
to the restrictions of Section 12(d)(1) thereof.
The Trust and the Funds have obtained
an exemptive order from the U.S. Securities and Exchange Commission (the “SEC”)
allowing a registered investment company to invest
in a Fund beyond the limits of Section 12(d)(1) subject to certain conditions, including that a registered investment company enters into a Participation Agreement with the Trust regarding the terms of the investment. Any investment company
considering purchasing Shares of a Fund in amounts that would cause it to exceed the restrictions under Section 12(d)(1) should contact the Trust.
A Precautionary Note Regarding Unusual
Circumstances
. The Trust can postpone payment of redemption proceeds for any period during which (1) the Exchange is closed other than customary weekend and holiday closings, (2) trading on the Exchange is
restricted, as determined by the SEC, (3) any emergency circumstances exist, as determined by the SEC, or (4) the SEC by order permits for the protection of shareholders of a Fund.
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Share Price of the Funds
A fund’s share price is known
as its NAV. Each Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The NYSE is
open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day and Christmas Day.
The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated.
The value of a Fund’s assets that
trade in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but the Fund is not open for business.
Share price is calculated by dividing
a Fund’s net assets by its shares outstanding. In calculating its NAV, each Fund generally values its assets on the basis of market quotations, last sale prices, or estimates of value furnished by a pricing service or brokers who make markets
in such instruments. If such information is not available for a security held by a Fund, is determined to be unreliable, or (to the Adviser’s knowledge) does not reflect a significant event occurring after the close of the market on which the
security principally trades (but before the close of trading on the NYSE), the security will be valued at fair value estimates by the Adviser under guidelines established by the Board of Trustees. Foreign securities, currencies and other assets
denominated in foreign currencies are translated into U.S. Dollars at the exchange rate of such currencies against the U.S. Dollar, as provided by an independent pricing service or reporting agency. Each Fund also relies on a pricing service in
circumstances where the U.S. securities markets exceed a pre-determined threshold to value foreign securities held in a Fund’s portfolio. The pricing service, its methodology or the threshold may change from time to time. Debt obligations with
maturities of 60 days or less are valued at amortized cost.
Fair Value Pricing
. Securities are priced at a fair value as determined by the Adviser, under the oversight of the Board of Trustees, when reliable market quotations are not readily available, the Funds’ pricing service does not
provide a valuation for such securities, the Funds’ pricing service provides a valuation that in the judgment of the Adviser does not represent fair value, the Adviser believes that the market price is stale, or an event that affects the value
of an instrument (a “Significant Event”) has occurred since closing prices were established, but before the time as of which the Funds calculate their NAVs. Examples of Significant Events may include: (1) events that relate to a single
issuer or to an entire market sector; (2) significant fluctuations in domestic or foreign markets; or (3) occurrences not tied directly to the securities markets, such as natural disasters, armed conflicts, or significant government actions. If such
Significant Events occur, the Funds may value the instruments at fair value, taking into account such events when it calculates each Fund’s NAV. Fair value determinations are made in good faith in accordance with procedures adopted by the
Board of Trustees. In addition, the Funds may also fair value an instrument if trading in a particular instrument is halted and does not resume prior to the closing of the exchange or other market.
Attempts to determine the fair value
of securities introduce an element of subjectivity to the pricing of securities. As a result, the price of a security determined through fair valuation techniques may differ from the price quoted or published by other sources and may not accurately
reflect the market value of the security when trading resumes. If a reliable market quotation becomes available for a security formerly valued through fair valuation techniques, Rafferty compares the market quotation to the fair value price to
evaluate the effectiveness of the Funds’ fair valuation procedures and will use that market value in the next calculation of NAV.
Rule 12b-1 Fees
The Board of Trustees of the Trust
has adopted a Distribution and Service Plan (the “Plan”) pursuant to Rule 12b-1 under the 1940 Act. In accordance with the Plan, each Fund is authorized to pay an amount up to 0.25% of its average daily net assets each year for certain
distribution-related activities and shareholder services.
No 12b-1 fees are currently paid by
any Fund, and there are no plans to impose these fees. However, in the event 12b-1 fees are charged in the future, because the fees are paid out of each Fund’s assets, over time these fees will increase the cost of your investment and may cost
you more than certain other types of sales charges.
Rafferty expects a significant
portion of the Funds' assets to come from professional money managers and investors who use the Funds as part of “asset allocation” and “market timing” investment strategies. These strategies often call for frequent trading
to take advantage of anticipated changes in market conditions. Frequent trading of Shares could increase the rate of creations and redemptions of Shares and a Fund’s portfolio turnover, which could involve correspondingly adverse tax
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consequences to a Fund’s shareholders.
Although each Fund reserves the right to reject any purchase orders or suspend the offering of Shares, each Fund does not currently impose any trading restrictions on frequent trading nor actively monitor for trading abuses.
Creations, Redemptions and Transaction
Fees
Creation Units.
Investors such as market makers, large investors and institutions who wish to deal in Creation Units directly with a Fund must have entered into an authorized participant agreement with the principal underwriter and the
transfer agent, or purchase through a dealer that has entered into such an agreement. These investors are known as “Authorized Participants.” Set forth below is a brief description of the procedures applicable to the purchase and
redemption of Creation Units.
Purchase of the Bull Fund
. To purchase Creation Units directly from the Bull Fund, you must deposit with the Fund a basket of securities and/or cash. Each Business Day, prior to the opening of trading on the Exchange, an agent of the Fund
(“Index Receipt Agent”) will make available through the NSCC a list of the names and number of shares of each security, if any, to be included in that day’s creation basket (“Deposit Securities”). The identity and
number of shares of the Deposit Securities required for a Creation Unit will change from time to time. The Bull Fund reserves the right to permit or require the substitution of an amount of cash
–
i.e.
, a “cash in lieu” amount
–
to be added to the Balancing Amount (defined below) to replace any Deposit Security that may
not be available in sufficient quantity for delivery, eligible for transfer through the clearing process (discussed below) or the Federal Reserve System or eligible for trading by an Authorized Participant or the investor for which it is acting. For
such custom orders, “cash in lieu” may be added to the Balancing Amount (defined below). The Balancing Amount and any “cash in lieu” must be paid to the Trust on or before the third Business Day following the Transmittal
Date. You must also pay a Transaction Fee, described below, in cash.
In addition to the in-kind deposit of
securities, Authorized Participants will either pay to, or receive from, the Bull Fund an amount of cash referred to as the “Balancing Amount.” The Balancing Amount is the amount equal to the differential, if any, between the market
value of the Deposit Securities and the NAV of a Creation Unit. The Bull Fund will publish, on a daily basis, information about the previous day’s Balancing Amount. The Balancing Amount may, at times, represent a significant portion of the
aggregate purchase price (or, in the case of redemptions, the redemption proceeds). This is because the mark-to-market value of the financial instruments held by the Funds will be included in the Balancing Amount (not in the Deposit Basket or
Redemption Basket). The Balancing Amount for the Bull Fund may fluctuate significantly due to the leveraged nature of the Bull Fund.
All purchase orders for Creation
Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process (“Enhanced
Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized Participants that do not
use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). A purchase order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer
agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order
for you to receive the NAV determined on that day.
Shares may be issued in advance of
receipt of Deposit Securities subject to various conditions including a requirement to maintain on deposit with the Trust cash in an amount up to 115% of the market value of the missing Deposit Securities. Any such transaction effected with the
Trust must be effected using the Manual Clearing Process consistent with the terms of the Authorized Participant Agreement.
Redemption from the Bull Fund
. Redemption proceeds will be paid either in cash or in-kind with a basket of securities (“Redemption Securities”). In most cases, Redemption Securities will be the same as Deposit Securities on a given day.
There will be times, however, when the Deposit and Redemption Securities differ. The composition of the Redemption Securities will be available through the NSCC. The Bull Fund reserves the right to honor a redemption request with a non-conforming
redemption basket.
If
the value of a Creation Unit is higher than the value of the Redemption Securities, you will receive from the Bull Fund a Balancing Amount in cash. If the value of a Creation Unit is lower than the value of the Redemption Securities, you will be
required to pay to the Bull Fund a Balancing Amount in cash. If you are receiving a Balancing Amount, the amount due will be reduced by the amount of the applicable Transaction Fee.
As with purchases, redemptions may be
processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received in good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s
automated system, telephone, facsimile or other means permitted under the Participant Agreement, in order to receive that day’s NAV per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to
receive the NAV determined on that day.
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An investor may request a redemption
in cash, which the Bull Fund may in its sole discretion permit. Investors that elect to receive cash in lieu of one or more of the Redemption Securities are subject to an additional charge. Redemptions of Creation Units for cash (when available)
and/or outside of the Enhanced Clearing Process also require the payment of an additional charge.
Purchase of the Bear Fund.
The Bear Fund only accepts cash to purchase Creation Units. The purchaser must transfer cash in an amount equal to the value of the Creation Unit(s) purchased and the applicable Transaction Fee. All purchase orders for
Creation Units must be placed by or through an Authorized Participant. Purchase orders will be processed either through a manual clearing process run at the DTC (“Manual Clearing Process”) or through an enhanced clearing process
(“Enhanced Clearing Process”) that is available only to those DTC participants that also are participants in the Continuous Net Settlement System of the National Securities Clearing Corporation (“NSCC”). Authorized
Participants that do not use the Enhanced Clearing Process will be charged a higher Transaction Fee (discussed below). The Trust will deliver Shares of the Bear Fund upon payment of cash to the Trust on or before the third Business Day following the
Transmittal Date consistent with the terms of the Authorized Participant Agreement.
Redemption from the Bear Fund.
Redemption proceeds will be paid in cash. As with purchases, redemptions may be processed either through the Manual Clearing Process or the Enhanced Clearing Process. A redemption order must be received in good order by
the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Participant Agreement in order to receive that day’s NAV
per Share. All other procedures set forth in the Participant Agreement must be followed in order for you to receive the NAV determined on that day.
Transaction Fees on Creation and
Redemption Transactions.
Each Fund will impose Transaction Fees to offset transfer and other transaction costs associated with the issuance and redemption of Creation Units. There is a fixed and a variable component
to the total Transaction Fee on transactions in Creation Units. A fixed Transaction Fee is applicable to each creation and redemption transaction, regardless of the number of Creation Units transacted. A variable Transaction Fee based upon the value
of each Creation Unit also is applicable to each redemption transaction. Purchasers and redeemers of Creation Units of a Fund effected through the Manual Clearing Process are required to pay an additional charge to compensate for brokerage and other
expenses. In addition, purchasers of Creation Units are responsible for payment of the costs of transferring the Deposit Securities to the Trust. However, in no instance will the fees charged exceed 2% of the value of the Creation Units subject to
the transaction. Redeemers of Creation Units are responsible for the costs of transferring securities from the Trust. Investors who use the services of a broker or other such intermediary may pay additional fees for such services. In addition,
Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services.
The table below summarizes the
components of the Transaction Fees.
Direxion
Shares ETF Trust
|
Fixed
Transaction Fee
|
Maximum
Additional
Charge for
Purchases
and
Redemptions*
|
|
In-Kind
|
Cash
|
NSCC
|
Outside
NSCC
|
Outside
NSCC
|
Direxion
Daily Income Preferred Bull 2X Shares
|
$250
|
Up
to 300% of NSCC Amount
|
$250
|
Up
to 0.15%
|
Direxion
Daily Income Preferred Bear 2X Shares
|
N/A
|
N/A
|
$250
|
Up
to 0.15%
|
*
|
As a percentage of the amount
invested.
|
How to Buy and Sell Shares
Each Fund issues and redeems Shares
only in large blocks of Shares called “Creation Units.”
Most investors will buy and sell
Shares of each Fund in secondary market transactions through brokers. Shares of each Fund that are listed for trading on the secondary market on the Exchange can be bought and sold throughout the trading day like other publicly traded shares. There
is no minimum investment. Although Shares are generally purchased and sold in “round lots” of 50,000 Shares, brokerage firms typically permit investors to purchase or sell Shares in smaller “oddlots” at no per-share price
differential.
When buying or
selling Shares through a broker, you will incur customary brokerage commissions and charges, and you may pay some or all of the spread between the bid and the offer price in the secondary market on each leg of a round trip (purchase and sale)
transaction. In addition, because secondary market transactions occur at market prices, you may pay more than NAV when you buy Shares, and receive less than NAV when you sell those Shares.
If you purchase shares of the Fund
through a broker-dealer or other financial intermediary (such as a bank), the Adviser may pay the intermediary for educational training programs, the development of technology platforms and reporting
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systems or other administrative services related to a
Fund. Ask your salesperson or visit your financial intermediary’s website for more information.
The Funds’ Exchange trading
symbols are as follows:
Fund
|
Symbol
|
Direxion
Daily Income Preferred Bull 2X Shares
|
|
Direxion
Daily Income Preferred Bear 2X Shares
|
|
Share prices are reported in dollars and
cents per Share.
Investors may
acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units, as discussed in the “Creations, Redemptions and Transaction Fees” section above. A Creation
Unit consists of 50,000 Shares.
For information about acquiring Shares
through a secondary market purchase, please contact your broker. If you wish to sell Shares of a Fund on the secondary market, you must do so through your broker.
Book Entry
. Shares are held in book-entry form, which means that no stock certificates are issued. The DTC or its nominee is the record owner of all outstanding Shares of the Funds and is recognized as the owner of all Shares for
all purposes.
Investors
owning Shares are beneficial owners as shown on the records of the DTC or its participants. DTC serves as the securities depository for all Shares. Participants in the DTC include securities brokers and dealers, banks, trust companies, clearing
corporations and other institutions that directly or indirectly maintain a custodial relationship with DTC. As a beneficial owner of Shares, you are not entitled to receive physical delivery of stock certificates or to have Shares registered in your
name, and you are not considered a registered owner of Shares. Therefore, to exercise any right as an owner of Shares, you must rely upon the procedures of DTC and its participants. These procedures are the same as those that apply to any other
stocks that you hold in book entry or “street name” through your brokerage account.
Rafferty provides investment
management services to the Funds. Rafferty has been managing investment companies since 1997. Rafferty is located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of [ ], 2016, the Adviser had approximately $[ ]
billion in assets under management.
Under an investment advisory agreement
between the Trust and Rafferty, each Fund pays Rafferty a fee at an annualized rate based on a percentage of its daily net assets of 0.75%.
Rafferty has contractually agreed to
waive 0.10% of its Management Fees through September 1, 2018. There is no guarantee that the management fee waiver will continue after September 1, 2018. This contractual fee waiver may be terminated at any time by the Board of Trustees.
A discussion regarding the basis on
which the Board of Trustees approved the investment advisory agreement for the Funds will be included in the Funds' Semi-Annual Report for the period ended April 30, 2017.
Rafferty has entered into an
Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other Expenses through September
1, 2018, to the extent that a Fund’s Total Annual Fund Operating Expenses exceed 0.85% of the Fund’s daily net assets (excluding, as applicable, among other expenses, any front-end or contingent deferred sales loads, taxes, swap
financing and related costs, acquired fund fees and expenses, dividends or interest on short positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such
as litigation or other expenses outside the typical day-to-day operations of a Fund).
Any expense cap is subject to
reimbursement by a Fund within the following three years only if overall expenses fall below these percentage limitations. Solely at Rafferty’s option and discretion, Rafferty may pay, reimburse or otherwise assume one or more of the excluded
expenses, in which case such expense will be subject to reimbursement by Rafferty in accordance with the Operating Expense Limitation Agreement. This agreement may be terminated or revised at any time with the consent of the Board of Trustees.
Paul Brigandi and Tony Ng are jointly
and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary responsibility and oversight.
The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds consistent with the target
allocation. The members of the investment trading team rotate periodically among the various series of the Trust, including the Funds, so that no single individual is assigned to a specific Fund for extended periods of time.
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Mr. Brigandi has been a Portfolio
Manager at Rafferty since June 2004. Mr. Brigandi was previously involved in the equity trading training program for Fleet Boston Financial Corporation from August 2002 to April 2004. Mr. Brigandi is a 2002 graduate of Fordham University.
Mr. Ng has been a Portfolio Manager
at Rafferty since April 2006. Mr. Ng was previously a Team Leader in the Trading Assistant Group with Goldman Sachs from 2004 to 2006. He was employed with Deutsche Asset Management from 1998 to 2004. Mr. Ng graduated from State University at
Buffalo in 1998.
The Funds'
Statement of Additional Information ("SAI") provides additional information about the investment team members’ compensation, other accounts they manage and their ownership of securities in the Funds.
A description of the Funds' policies
and procedures with respect to the disclosure of the Funds' portfolio securities is available in the Funds' SAI.
Foreside Fund Services, LLC
(“Distributor”) serves as the Funds' distributor. U.S. Bancorp Fund Services, LLC serves as the Funds' administrator. Bank of New York Mellon (“BNYM”) serves as the Funds' transfer agent, fund accountant, custodian and index
receipt agent. The Distributor is not affiliated with Rafferty or BNYM.
Fund Distributions
. Each Fund pays out dividends from its net investment income, and distributes any net capital gains, if any, to its shareholders at least annually. Each Fund is authorized to declare and pay capital gain distributions
in additional Shares or in cash. A Fund may have extremely high portfolio turnover, which may cause it to generate significant amounts of taxable income. Each Fund will generally need to distribute net short-term capital gain to satisfy certain tax
requirements. As a result of the Funds' high portfolio turnover, they could need to make larger and/or more frequent distributions than traditional unleveraged ETFs.
Dividend Reinvestment Service
. Brokers may make the DTC book-entry dividend reinvestment service (“Reinvestment Service”) available to their customers who are shareholders of a Fund. If the Reinvestment Service is used with respect to a
Fund, its distributions of both net income and capital gains will automatically be reinvested in additional and fractional Shares thereof purchased in the secondary market. Without the Reinvestment Service, investors will receive Fund distributions
in cash, except as noted above under “Fund Distributions.” To determine whether the Reinvestment Service is available and whether there is a commission or other charge for using the service, consult your broker. Fund shareholders should
be aware that brokers may require them to adhere to specific procedures and timetables to use the Reinvestment Service.
As with any investment, you
should consider the tax consequences of buying, holding, and disposing of Shares. The tax information in this Prospectus is only a general summary of some important federal tax considerations generally affecting a Fund and its shareholders. No
attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a substitute for careful tax planning. Accordingly, potential investors are urged to consult their own
tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to the Funds and to an investment in Shares.
Fund distributions to you and your
sale of your Shares will have tax consequences to you unless you hold your Shares through a tax-exempt entity or tax-deferred retirement arrangement, such as an individual retirement account (“IRA”) or 401(k) plan.
Each Fund intends to qualify each
taxable year for taxation as a “regulated investment company” under Subchapter M of the Internal Revenue Code. If a Fund so qualifies and satisfies certain distribution requirements, the Fund will not be subject to federal income tax on
income that is distributed in a timely manner to its shareholders in the form of income dividends or capital gain distributions.
Taxes on Distributions
. Dividends from a Fund’s investment company taxable income
–
generally, the sum of net investment income, the excess of net short-term capital gain over net long-term capital loss, and net gains and losses from certain foreign currency transactions, if any, all determined without
regard to any deduction for dividends paid
–
will be taxable
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to you as ordinary income to the extent of its
earnings and profits, whether they are paid in cash or reinvested in additional Shares. However, dividends a Fund pays to you that are attributable to its “qualified dividend income” (i.e., dividends it receives on stock of most domestic
and certain foreign corporations with respect to which it satisfies certain holding period and other restrictions) generally will be taxed to you, if you are an individual, trust, or estate and satisfy those restrictions with respect to your Shares,
for federal income tax purposes, at the rates of 15% or 20% for such shareholders with taxable income exceeding certain thresholds (which will be indexed for inflation annually). A portion of a Fund’s dividends also may be eligible for the
dividends-received deduction allowed to corporations
–
the eligible portion may not exceed the aggregate dividends the Fund receives from domestic corporations subject
to federal income tax (excluding real estate investment trusts) and excludes dividends from foreign corporations
–
subject to similar restrictions; however, dividends
a corporate shareholder deducts pursuant to that deduction are subject indirectly to the federal alternative minimum tax. No Fund expects to earn a significant amount of income that would qualify for those maximum rates or that deduction.
Distributions of a Fund’s net
capital gain (which is the excess of net long-term capital gain over net short-term capital loss) that it recognizes on sales or exchanges of capital assets (“capital gain distributions”), if any, will be taxable to you as long-term
capital gains, at the maximum rates mentioned above if you are an individual, trust, or estate, regardless of your holding period for the Shares on which the distributions are paid and regardless of whether they are paid in cash or reinvested in
additional Shares. A Fund’s capital gain distributions may vary considerably from one year to the next as a result of its investment activities and cash flows and the performance of the markets in which it invests. No Fund expects to earn a
significant amount of net capital gain.
Distributions in excess of a
Fund’s current and accumulated earnings and profits, if any, first will reduce your adjusted tax basis in your Shares in the Fund and, after that basis is reduced to zero, will constitute capital gain. That capital gain will be long-term
capital gain, and thus will be taxed at the maximum rates mentioned above if you are an individual, trust, or estate if the distributions are attributable to Shares you held for more than one year.
Investors should be aware that the
price of Shares at any time may reflect the amount of a forthcoming dividend or capital gain distribution, so if they purchase Shares shortly before the record date therefor, they will pay full price for the Shares and receive some part of the
purchase price back as a taxable distribution even though it represents a partial return of invested capital.
In general, distributions are subject to
federal income tax for the year when they are paid. However, certain distributions paid in January may be treated as paid on December 31 of the prior year.
Because of the possibility of high
portfolio turnover, the Funds may generate significant amounts of taxable income. Accordingly, the Funds may need to make larger and/or more frequent distributions than traditional unleveraged ETFs. A substantial portion of that income typically
will be short-term capital gain, which will generally be treated as ordinary income when distributed to shareholders.
Fund distributions to tax-deferred or
qualified plans, such as an IRA, retirement plan or pension plan, generally will not be taxable. However, distributions from such plans will be taxable to the individual participant notwithstanding the character of the income earned by the qualified
plan. Please consult a tax adviser for a more complete explanation of the federal, state, local and foreign tax consequences of investing in a Fund through such a plan.
Taxes When Shares are Sold.
Generally, you will recognize taxable gain or loss if you sell or otherwise dispose of your Shares. Any gain arising from such a disposition generally will be treated as long-term capital gain if you held the Shares for
more than one year, taxable at the maximum rates (15% or 20%) mentioned above if you are an individual, trust, or estate; otherwise, the gain will be treated as short-term capital gain. However, any capital loss arising from the disposition of
Shares held for six months or less will be treated as long-term capital loss to the extent of capital gain distributions, if any, received with respect to those Shares. In addition, all or a portion of any loss recognized on a sale or exchange of
Shares of a Fund will be disallowed to the extent other Shares of the same Fund are purchased (whether through reinvestment of distributions or otherwise) within a period of 61 days beginning 30 days before and ending 30 days after the date of the
sale or exchange; in that event, the basis in the newly purchased Shares will be adjusted to reflect the disallowed loss.
Holders of Creation Units
. A person who purchases Shares of the Bull Fund by exchanging securities for a Creation Unit generally will recognize capital gain or loss equal to the difference between the market value of the Creation Unit and the
person’s aggregate basis in the exchanged securities, adjusted for any Balancing Amount paid or received. A shareholder who redeems a Creation Unit generally will recognize gain or loss to the same extent and in the same manner as described in
the immediately preceding paragraph.
Miscellaneous.
Backup Withholding
. A Fund must withhold and remit to the U.S. Treasury 28% of dividends and capital gain distributions otherwise payable to any individual or
certain other non-corporate shareholder who fails to certify that the social security or other taxpayer identification number furnished to the Fund is correct or who furnishes an incorrect number (together with the withholding described in the next
sentence, “backup withholding”). Withholding at that rate also is required from a Fund’s dividends and capital gain distributions otherwise payable to such a shareholder who is subject to backup withholding for any other reason.
Backup withholding is not an additional tax, and any amounts so withheld may be credited against a shareholder’s federal income tax liability or refunded.
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Additional Tax
. An individual must pay a 3.8% federal tax on the lesser of (1) the individual’s “net investment income,” which generally includes dividends, interest, and net gains from the disposition of investment
property (including dividends and capital gain distributions a Fund pays and net gains realized on the sale or redemption of Shares), or (2) the excess of the individual’s “modified adjusted gross income” over a threshold amount
($250,000 for married persons filing jointly and $200,000 for single taxpayers). This tax is in addition to any other taxes due on that income. A similar tax will apply for those years to estates and trusts. Shareholders should consult their own tax
advisers regarding the effect, if any, this provision may have on their investment in Fund shares.
Basis Determination
. A shareholder who wants to use the average basis method for determining basis in Shares he or she acquires after December 31, 2011 (“Covered Shares”), must elect to do so in writing (which may be electronic)
with the broker through which he or she purchased the Shares. A shareholder who wishes to use a different IRS-acceptable method for basis determination (
e.g.
, a specific identification method) may elect to do
so. Fund shareholders are urged to consult with their brokers regarding the application of the basis determination rules to them.
You may also be subject to state and
local taxes on Fund distributions and dispositions of Shares.
Non-U.S. Shareholders
. “A “non-U.S. shareholder” is an investor that, for federal tax purposes, is a nonresident alien individual, a foreign corporation or a foreign estate or trust. Except where discussed otherwise, the
following disclosure assumes that a non-U.S. shareholder’s ownership of Shares is not effectively connected with a trade or business conducted by such non-U.S. shareholder in the United States and does not address non-U.S. shareholders who are
present in the United States for 183 days or more during the taxable year. The tax consequences to a non-U.S. shareholder entitled to claim the benefits of an applicable tax treaty may be different from those described herein. Non-U.S. shareholders
should consult their tax advisers with respect to the particular tax consequences to them of an investment in a Fund.
Withholding
. Dividends paid by a Fund to non-U.S. shareholders will be subject to withholding tax at a 30% rate or a reduced rate specified by an applicable income tax treaty to the extent derived from investment income (other than
“qualified interest income” or “qualified short-term capital gains,” as described below). In order to obtain a reduced rate of withholding, a non-U.S. shareholder will be required to provide an IRS Form W-8BEN (or substitute
form) certifying its entitlement to benefits under a treaty. The withholding tax does not apply to regular dividends paid to a non-U.S. shareholder who provides an IRS Form W-8ECI, certifying that the dividends are effectively connected with the
non-U.S. shareholder’s conduct of a trade or business within the United States. Instead, the effectively connected dividends will be subject to regular U.S. income tax as if the non-U.S. shareholder were a U.S. shareholder. A non-U.S.
corporation’s earnings and profits attributable to such dividends may also be subject to additional “branch profits tax” imposed at a rate of 30% (or lower treaty rate).
A non-U.S. shareholder who fails to
provide an IRS Form W-8BEN or other applicable form may be subject to backup withholding at the appropriate rate. See the discussion of backup withholding under “Miscellaneous” above.
Exemptions from Withholding
. In general, federal income tax will not apply to gain realized on the sale or other disposition of Shares or to any Fund distributions reported as capital gain dividends, short-term capital gain dividends, or
interest-related dividends.
“ Short-term capital gain
dividends” are dividends that are attributable to “qualified short-term gain” a Fund realizes (generally, the excess of a Fund’s net short-term capital gain over long-term capital loss for a taxable year, computed with
certain adjustments). “Interest-related dividends” are dividends that are attributable to “qualified net interest income” from U.S. sources. Depending on its circumstances, a Fund may report all, some or none of its
potentially eligible dividends as short-term capital gain dividends and interest-related dividends and/or treat such dividends, in whole or in part, as ineligible for this exemption from withholding. To qualify for the exemption, a non-U.S.
shareholder will need to comply with applicable certification requirements relating to its non-U.S. status (including, in general, furnishing an IRS Form W-8BEN or substitute form). In the case of shares held through an intermediary, the
intermediary may withhold even if a Fund designates the payment as a short-term capital gain dividend or an interest-related dividend. Non-U.S. shareholders should contact their intermediaries with respect to the application of these rules to their
accounts.
Foreign Account Tax
Compliance Act (“FATCA”).
Under FATCA, “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund shareholders
may be subject to a generally nonrefundable 30% withholding tax on (1) income dividends, and (2) certain capital gain distributions and the proceeds of a redemption of Shares a Fund pays after December 31, 2018. As discussed more fully in the Funds'
SAI under “Taxes,” the FATCA withholding tax generally can be avoided (a) by an FFI, if it reports certain information regarding direct and indirect ownership of financial accounts U.S. persons hold with the FFI and (b) by an NFFE, if it
certifies as such and, in certain circumstances, that (i) it has no substantial U.S. persons as owners or (ii) it does have such owners and reports information relating to them to the withholding agent. The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. Non-U.S. shareholders should consult their own tax advisers regarding the application of these requirements to their own situation and the impact thereof on their
investment in a Fund.
More
information about taxes is in the Funds' SAI.
Direxion Shares
ETF Trust Prospectus
|
40
|
The Trust enters into contractual
arrangements with various parties, which may include, among others, the Funds' investment adviser, custodian, and transfer agent, who provide services to the Funds. Shareholders are not parties to any such contractual arrangements and are not
intended beneficiaries of those contractual arrangements, and those contractual arrangements are not intended to create in any shareholder any right to enforce them against the service providers or to seek any remedy under them against the service
providers, either directly or on behalf of the Trust.
This Prospectus provides information
concerning the Funds that you should consider in determining whether to purchase Fund shares. Neither this Prospectus nor the SAI is intended, or should be read, to be or give rise to an agreement or contract between the Trust or the Funds and any
investor, or to give rise to any rights in any shareholder or other person other than any rights under federal or state law that may not be waived.
Standard and Poor’s Index.
The S&P Enhanced Yield North American Preferred Stock Index (the “S&P Index”) is/are products of S&P Dow Jones Indices LLC (“SPDJI”), and has/have been licensed for use by the Trust.
Standard & Poor’s
®
, S&P
®
and
S&P 500
®
are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”); Dow Jones
®
is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”); and these trademarks have been licensed for use by SPDJI and
sublicensed for certain purposes by the Trust. The Funds are not sponsored, endorsed, sold or promoted by SPDJI, Dow Jones, S&P, any of their respective affiliates (collectively, “S&P Dow Jones Indices”). S&P Dow Jones
Indices makes no representation or warranty, express or implied, to the owners of the Funds or any member of the public regarding the advisability of investing in securities generally or in the Funds particularly or the ability of the S&P Index
to track general market performance. S&P Dow Jones Indices’ only relationship to the Trust with respect to the S&P Index is the licensing of such Index(es) and certain trademarks, service marks and/or trade names of S&P Dow Jones
Indices or its licensors. The S&P Index is/are determined, composed and calculated by S&P Dow Jones Indices without regard to the Trust or the Funds. S&P Dow Jones Indices have no obligation to take the needs of the Trust or the owners
of the Funds into consideration in determining, composing or calculating the S&P Index. S&P Dow Jones Indices is not responsible for and has not participated in the determination of the prices, and amount of the Funds or the timing of the
issuance or sale of the Funds or in the determination or calculation of the equation by which the Funds are to be converted into cash, surrendered or redeemed, as the case may be. S&P Dow Jones Indices has no obligation or liability in
connection with the administration, marketing or trading of the Funds. There is no assurance that investment products based on the S&P Index will accurately track index performance or provide positive investment returns. S&P Dow Jones
Indices LLC is not an investment advisor. Inclusion of a security within an index is not a recommendation by S&P Dow Jones Indices to buy, sell, or hold such security, nor is it considered to be investment advice. Notwithstanding the foregoing,
CME Group Inc. and its affiliates may independently issue and/or sponsor financial products based on the S&P 500 Index and other S&P proprietary indices unrelated to the Funds currently being issued by the Trust, but which may be similar to
and competitive with the Funds. CME Group Inc. is an indirect shareholder of S&P Dow Jones Indices LLC.
S&P DOW JONES INDICES DOES NOT
GUARANTEE THE ADEQUACY, ACCURACY, TIMELINESS AND/OR THE COMPLETENESS OF THE S&P INDEX OR ANY DATA RELATED THERETO OR ANY COMMUNICATION, INCLUDING BUT NOT LIMITED TO, ORAL OR WRITTEN COMMUNICATION (INCLUDING ELECTRONIC COMMUNICATIONS) WITH
RESPECT THERETO. S&P DOW JONES INDICES SHALL NOT BE SUBJECT TO ANY DAMAGES OR LIABILITY FOR ANY ERRORS, OMISSIONS, OR DELAYS THEREIN. S&P DOW JONES INDICES MAKES NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIMS ALL WARRANTIES, OF
MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE OR AS TO RESULTS TO BE OBTAINED BY THE TRUST, OWNERS OF THE FUNDS, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE S&P ENHANCED YIELD NORTH AMERICAN PREFERRED STOCK INDEX OR WITH
RESPECT TO ANY DATA RELATED THERETO. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT WHATSOEVER SHALL S&P DOW JONES INDICES BE LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES INCLUDING BUT NOT LIMITED TO, LOSS
OF PROFITS, TRADING LOSSES, LOST TIME OR GOODWILL, EVEN IF THEY HAVE BEEN ADVISED OF THE POSSIBLITY OF SUCH DAMAGES, WHETHER IN CONTRACT, TORT, STRICT LIABILITY, OR OTHERWISE. THERE ARE NO THIRD PARTY BENEFICIARIES OF ANY AGREEMENTS OR ARRANGEMENTS
BETWEEN S&P DOW JONES INDICES AND THE TRUST, OTHER THAN THE LICENSORS OF S&P DOW JONES INDICES.
No financial information is
available for the Funds because the Funds had not commenced operations prior to the date of this Prospectus.
41
|
Direxion Shares ETF
Trust Prospectus
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
More Information on the Direxion Shares Etf Trust
Statement of Additional Information
(“SAI”):
The Funds' SAI contains
more information on each Fund and its investment policies. The SAI is incorporated in this Prospectus by reference (meaning it is legally part of this Prospectus). A current SAI is on file with the Securities and Exchange Commission
(“SEC”).
Annual and Semi-Annual Reports
to Shareholders:
The Funds' reports will provide
additional information on the Funds' investment holdings, performance data and a letter discussing the market conditions and investment strategies that significantly affected the Funds' performance during that period.
To Obtain the SAI or Fund Reports Free of Charge:
Write
to:
|
Direxion
Shares ETF Trust
|
|
1301
Avenue of the Americas (6th Avenue), 28th Floor
New York, New York 10019
|
Call:
|
866-476-7523
|
By
Internet:
|
www.direxioninvestments.com
|
These documents and other
information about the Funds can be reviewed and copied at the SEC Public Reference Room in Washington, D.C. Information on the operation of the Public Reference Room may be obtained by calling the SEC at (202) 551-8090. Reports and other information
about the Funds may be viewed on screen or downloaded from the EDGAR Database on the SEC’s website at http://www.sec.gov. Copies of these documents may be obtained, after paying a duplicating fee, by electronic request at the following e-mail
address: publicinfo@sec.gov, or by writing the SEC’s Public Reference Section, Washington, D.C. 20549-0102.
SEC File Number: 811-22201
The information in this Statement of Additional Information
(“SAI”) is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This SAI is not an offer to sell these securities and is not
soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
Subject to completion, dated October 19, 2016
Direxion Shares ETF Trust
Statement of Additional Information
1301
Avenue of the Americas (6th Avenue), 28th Floor
|
New York,
New York 10019
|
866-476-7523
|
www.direxioninvestments.com
The Direxion Shares ETF Trust (“Trust”) is an
investment company that offers shares of a variety of exchange-traded funds to the public. The shares of the funds (“Shares”) offered in this Statement of Additional Information (“SAI”), upon commencement of operations, will
be listed and traded on the NYSE Arca, Inc. This SAI relates to the funds listed below (each a “Fund” and collectively the “Funds”).
2X
Bull Fund
|
2X
Bear Fund
|
Direxion
Daily Income Preferred Bull 2X Shares (____)
|
Direxion
Daily Income Preferred Bear 2X Shares (____)
|
The Funds seek
daily
leveraged
investment results and are intended to be used as short-term trading vehicles. The Fund with “Bull” in its name attempts to provide daily investment results that correspond to two times the performance of an underlying
index and is referred to as the “Bull Fund.” The Fund with “Bear” in its name attempts to provide daily investment results that correspond to two times the inverse (or opposite) of the performance of an underlying index and
is referred to as the “Bear Fund.”
The Funds
are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds. Investors should note
that:
(1)
|
The Funds pursue
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because the Funds magnify the performance of their underlying index.
|
(2)
|
The Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of its underlying index, a result opposite of most mutual funds and exchange-traded funds.
|
(3)
|
The Funds
seek
daily leveraged
investment results. The pursuit of these investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of the series of daily
leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the underlying index may affect a Fund’s return as much, or more than, the return of the
underlying index. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective
and the performance of the underlying index for the full trading day. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected gains if the Funds are held for a period
that is different than one trading day.
|
The Funds are not suitable for all investors. The Funds are
designed to be utilized only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a)
|
understand the risks associated
with the use of leverage;
|
(b)
|
understand the consequences of
seeking daily leveraged investment results;
|
(c)
|
for the Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend to
actively monitor and manage their investments.
|
Investors who do not understand the Funds or do not intend to
actively manage their funds and monitor their investments should not buy the Funds.
There is no assurance that any Fund will achieve its investment
objective and an investment in a Fund could lose money. No single Fund is a complete investment program.
If a Fund’s underlying index moves more than 50% on a
given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. The Funds’ investment adviser, Rafferty Asset Management, LLC, will attempt to position each Fund’s portfolio to ensure that
a Fund does not lose more than 90% of its net asset value on a given trading day. The cost of such downside protection will be limitations on a Fund’s gains. As a consequence, a Fund’s portfolio may not be responsive to underlying index
movements
beyond 45% on a given trading day, whether that movement is favorable or
adverse to the Fund. For example, if the Bull Fund’s underlying index was to gain 50%, that Fund might be limited to a daily gain of 90%, which corresponds to 200% of an underlying index gain of 45%, rather than 200% of an underlying index
gain of 50%.
This SAI, dated [ ], 2017, is not a
prospectus. It should be read in conjunction with the Funds' prospectus dated [ ], 2017 (“Prospectus”). This SAI is incorporated by reference into the Prospectus. In other words, it is legally part of the Prospectus. To receive a copy of
the Prospectus, without charge, write or call the Trust at the address or telephone number listed above.
[ ], 2017
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A-1
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B-1
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The Direxion Shares ETF Trust
The Trust is a Delaware statutory
trust organized on April 23, 2008 and is registered with the Securities and Exchange Commission (“SEC”) as an open-end management investment company under the Investment Company Act of 1940, as amended (“1940 Act”). The Trust
currently consists of [ ] separate series or “Funds.”
The Funds seek to provide
daily leveraged
investment results, before fees and expenses, which correspond to 200% or -200%, respectively, of the performance of a particular underlying index. The correlations sought by the Direxion Daily
Income Preferred Bull 2X Shares (the “Bull Fund”) and the Direxion Daily Income Preferred Bear 2X Shares (the “Bear Fund”) are 200% or -200%, respectively, of the returns of the S&P Enhanced Yield North American Preferred
Stock Index (the “Index”). For example, the investment objective for the Bull Fund is 200% of the daily total return of the performance of the Index, while the Bear Fund seeks 200% of the inverse, or opposite, of the daily total return
of the performance of the Index. If, on a given day, the Index gains 1%, the Bull Fund is designed to gain approximately 2% (which is equal to 200% of the 1% index gain), while the Bear Fund is designed to lose approximately 2%. Conversely, if the
Index loses 1% on a given day, the Bull Fund is designed to lose approximately 2%, while the Bear Fund is designed to gain approximately 2% (which is equal to -200% of the 1% index loss).
Shares of each Fund
(“Shares”) are issued and redeemed only in large blocks called “Creation Units.” Most investors will buy and sell Shares of each Fund in secondary market transactions through brokers. Shares can be bought and sold throughout
the trading day like other publicly traded shares. There is no minimum investment. Although Shares are generally purchased and sold in “round lots” of 100 Shares, brokerage firms typically permit investors to purchase or sell Shares in
smaller “odd lots,” at no per-share price differential. Investors may acquire Shares directly from each Fund, and shareholders may tender their Shares for redemption directly to each Fund, only in Creation Units of 50,000 Shares, as
discussed in the “Purchases and Redemptions” section below.
The Shares offered in this SAI, upon
commencement of operations, will be listed and traded on the NYSE Arca, Inc. (the “Exchange”).
The Funds seek
daily leveraged
investment results and are intended to be used as short-term trading vehicles. The Funds are not intended to be used by, and are not appropriate for, investors who do not intend to actively monitor
and manage their portfolios. The Funds are very different from most mutual funds and exchange-traded funds.
(1)
|
Each Fund pursues
daily leveraged
investment objectives, which means that the Funds are riskier than alternatives that do not use leverage because each Fund magnifies the performance of the Index.
|
(2)
|
The Bear Fund pursues a
daily leveraged
investment objective that is
inverse
to the performance of the Index, a result opposite of most mutual funds and ETFs.
|
(3)
|
Each
Fund seeks
daily leveraged
investment results. The pursuit of these daily leveraged investment objectives means that the return of a Fund for a period longer than a full trading day will be the product of the
series of daily leveraged returns for each trading day during the relevant period. As a consequence, especially in periods of market volatility, the volatility of the Index may affect a Fund’s return as much, or more than, the return of the
Index. Further, the return for investors that invest for periods less than a full trading day or for a period different than a trading day will not be the product of the return of a Fund’s stated daily leveraged investment objective and the
performance of the Index for the full trading day. The Funds are not suitable for all investors. During periods of high volatility, the Funds may not perform as expected and the Funds may have losses when an investor may have expected gains if the
Funds are held for a period that is different than one trading day.
|
The Funds are designed to be utilized
only by sophisticated investors, such as traders and active investors employing dynamic strategies. Such investors are expected to monitor and manage their portfolios frequently. Investors in the Funds should:
(a)
|
understand the risks
associated with the use of leverage;
|
(b)
|
understand the consequences
of seeking
daily leveraged
investment results;
|
(c)
|
for the Bear Fund, understand
the risk of shorting; and
|
(d)
|
intend to
actively monitor and manage their investments.
|
Investors who do not understand the
Funds or do not intend to actively manage their funds and monitor their investments should not buy the Funds. There is no assurance that any of the Funds offered in this SAI will achieve their objectives and an investment in a Fund could lose money.
No single Fund is a complete investment program.
If the Index moves more than 50% on a
given trading day in a direction adverse to the Fund, the Fund’s investors would lose all of their money. Rafferty will attempt to position each Fund’s portfolio to ensure that a Fund does not lose more than 90% of its net asset value
(“NAV”) on a given trading day. The cost of such downside protection will be limitations on a Fund’s gains. As a consequence, a Fund’s portfolio may not be responsive to Index movements beyond 45% on a given trading day,
whether that movement is favorable or adverse to the Fund. For example, if the Index was to gain 50%, the Bull Fund might be limited to a daily gain of 90%, which corresponds to 200% of an Index gain of 45%, rather than 200% of an Index gain of
50%.
Classification of the Funds
Each Fund is a
“non-diversified” series of the Trust pursuant to the 1940 Act. A Fund is considered “non-diversified” because a relatively high percentage of its assets may be invested in the securities of a limited number of issuers. To
the extent that a Fund assumes large positions in the securities of a small number of issuers, the Fund’s NAV may fluctuate to a greater extent than that of a diversified company as a result of changes in the financial condition or in the
market’s assessment of the issuers, and the Fund may be more susceptible to any single economic, political or regulatory occurrence than a diversified company.
Each Fund intends to meet certain
tax-related diversification standards at the end of each quarter of its taxable year.
Exchange Listing and Trading
The Shares, upon commencement of
operations, will be listed and traded on the Exchange and may trade at prices that differ to some degree from its NAV. There can be no assurance that the requirements of the Exchange necessary to maintain the listing of Shares of each Fund will
continue to be met. The Exchange may, but is not required to, remove the Shares of a Fund from listing if (i) following the initial 12-month period beginning at the commencement of trading of a Fund, there are fewer than 50 beneficial owners of the
Shares of the Fund for 30 or more consecutive trading days; (ii) the value of the Index is no longer calculated or available; or (iii) such other event shall occur or condition exist that, in the opinion of the Exchange, makes further dealings on
the Exchange inadvisable. The Exchange will remove the Shares of a Fund from listing and trading upon termination of such Fund.
As is the case of other stocks traded
on the Exchange, brokers’ commissions on transactions will be based on negotiated commission rates at customary levels. The Trust reserves the right to adjust the price levels of the Shares in the future to help maintain convenient trading
ranges for investors. Any adjustments would be accomplished through stock splits or reverse stock splits, which would have no effect on the net assets of a Fund.
The trading prices of each
Fund’s shares in the secondary market generally differ from each Fund’s daily NAV per share and are affected by market forces such as supply and demand, economic conditions and other factors. Rafferty Asset Management, LLC ("Rafferty" or
"Adviser") may, from time to time, make payments to certain market makers in the Trust’s shares. Information regarding the intraday value of shares of each Fund, also known as the “intraday indicative value” (“IIV”), is
disseminated every 15 seconds throughout the trading day by the national securities exchange on which a Fund is listed or by market data vendors or other information providers. The IIV is based on the current market value of the securities and cash
required to be deposited in exchange for a Creation Unit. The IIV does not necessarily reflect the precise composition of the current portfolio of securities held by a Fund as a particular point in time, nor the best possible valuation of the
current portfolio. Therefore, the IIV should not be viewed as a “real-time” update of the NAV, which is computed only once a day. The IIV is generally determined by using both current market quotations and/or price quotations obtained
from broker-dealers that may trade in the portfolio securities held by the Funds. The quotations of certain Fund holdings may not be updated during U.S. trading hours if such holdings do not trade in the U.S. Each Fund is not involved in, nor
responsible for, the calculation or dissemination of the IIV and makes no representations or warranty as to its accuracy.
Investment Policies and Techniques
The Bull Fund generally
invests at least 80% of its net assets (plus any borrowings for investment purposes) in the securities of the Index and/or: swap agreements; exchange-traded funds (“ETFs”); futures contracts; options on securities; index futures
contracts; equity caps, collars and floors; forward contracts; reverse repurchase agreements; and other financial instruments (collectively, “Financial Instruments”) and the remainder in money market funds or short-term debt instruments
that have terms-to-maturity of less than 397 days and exhibit high quality credit profiles, including U.S. government securities and repurchase agreements (collectively, “Money Market Instruments”).
The Bear Fund generally invests at
least 80% of its net assets (plus any borrowings for investment purposes) in short positions and Financial Instruments and the remainder in Money Market Instruments. In particular, each Fund seeks investment results that correspond to the
performance of the Index, before fees and expenses, as follows:
Fund
|
Underlying
Index
|
Daily
Leveraged
Investment
Objective
|
Direxion
Daily Income Preferred Bull 2X Shares
|
S&P
Enhanced Yield
North American Preferred Stock Index
|
200%
|
Direxion
Daily Income Preferred Bear 2X Shares
|
-200%
|
With the
exception of limitations described in the “Investment Restrictions” section, each Fund may engage in the investment strategies discussed below. There is no assurance that any of these strategies or any other strategies and methods of
investment available to a Fund will result in the achievement of the Fund’s investment objective.
This section provides a description
of the securities in which a Fund may invest to achieve its investment objective, the strategies it may employ and the corresponding risks of such securities and strategies. The greatest risk of investing in an ETF is that its returns will fluctuate
and you could lose money. Recent events in the financial sector have resulted, and may continue to result, in an unusually high degree of volatility in the financial markets. Both domestic and foreign equity markets could experience increased
volatility and turmoil, with issuers that have exposure to the real estate, mortgage and credit markets particularly affected, and it is uncertain whether, or for how long, these conditions could continue. The U.S. government has already taken a
number of unprecedented actions designed to support certain financial institutions and segments of the financial markets that have experienced extreme volatility, and in some cases a lack of liquidity.
Reduced liquidity in equity, credit
and fixed-income markets may adversely affect many issuers worldwide. This reduced liquidity may result in less money being available to purchase raw materials, goods and services from emerging markets, which may, in turn, bring down the prices of
these economic staples. It may also result in emerging market issuers having more difficulty obtaining financing, which may, in turn, cause a decline in their stock prices. These events and possible continued market turbulence may have an adverse
effect on the Funds.
A Fund may invest in asset-backed
securities of any rating or maturity. Asset-backed securities are securities issued by trusts and special purpose entities that are backed by pools of assets, such as automobile and credit-card receivables and home equity loans, which pass through
the payments on the underlying obligations to the security holders (less servicing fees paid to the originator or fees for any credit enhancement). Typically, the originator of the loan or accounts receivable paper transfers it to a specially
created trust, which repackages it as securities with a minimum denomination and a specific term. The securities are then privately placed or publicly offered. Examples include certificates for automobile receivables and so-called plastic bonds,
backed by credit card receivables.
The value of an asset-backed security
is affected by, among other things, changes in the market’s perception of the asset backing the security, the creditworthiness of the servicing agent for the loan pool, the originator of the loans and the financial institution providing any
credit enhancement. Payments of principal and interest passed through to holders of asset-backed securities are frequently supported by some form of credit enhancement, such as a letter of credit, surety bond, limited guarantee by another entity or
by having a priority to certain of the borrower’s other assets. The degree of credit enhancement varies, and generally applies to only a portion of the asset-backed security’s par value. Value is also affected if any credit enhancement
has been exhausted.
Money Market Instruments
. A Fund may invest in bankers’ acceptances, certificates of deposit, demand and time deposits, savings shares and commercial paper of domestic
banks and savings and loans that have assets of at least $1 billion and capital, surplus, and undivided profits of over $100 million as of the close of their most recent fiscal year, or instruments that are insured by the Bank Insurance Fund or the
Savings Institution Insurance Fund of the Federal Deposit Insurance Corporation (“FDIC”). A Fund also may invest in high quality, short-term, corporate debt obligations, including variable rate demand notes, having terms-to-maturity of
less than 397 days. Because there is no secondary trading market in demand notes, the inability of the issuer to make required payments could impact adversely a Fund’s ability to resell when it deems advisable to do so.
A Fund may invest in foreign money
market instruments, which typically involve more risk than investing in U.S. money market instruments. See “Foreign Securities” below. These risks include, among others, higher brokerage commissions, less public information, and less
liquid markets in which to sell and meet large shareholder redemption requests.
Bankers’ Acceptances
. Bankers’ acceptances generally are negotiable instruments (time drafts) drawn to finance the export, import, domestic shipment or storage
of goods. They are termed “accepted” when a bank writes on the draft its agreement to pay it at maturity, using the word “accepted.” The bank is, in effect, unconditionally guaranteeing to pay the face value of the instrument
on its maturity date. The acceptance may then be held by the accepting bank as an asset, or it may be sold in the secondary market at the going rate of interest for a specified maturity.
Certificates of Deposit (“CDs”)
. The FDIC is an agency of the U.S. government that insures the deposits of certain banks and savings and loan associations up to
$250,000 per deposit. The interest on such deposits may not be insured to the extent this limit is exceeded. Current federal regulations also permit such institutions to issue insured negotiable CDs in amounts of $250,000 or more without regard to
the interest rate ceilings on other deposits. To remain fully insured, these investments must be limited to $250,000 per insured bank or savings and loan association.
Commercial Paper
. Commercial paper includes notes, drafts or similar instruments payable on demand or having a maturity at the time of issuance not exceeding nine months,
exclusive of days of grace or any renewal thereof. A Fund may invest in commercial paper rated A-l or A-2 by Standard & Poor’s
®
Ratings
Services (“S&P
®
”) or Prime-1 or Prime-2 by Moody’s Investors Service
®
, Inc. (“Moody’s”), and in other lower quality commercial paper.
A Fund may enter into caps,
floors and collars relating to securities, interest rates or currencies. In a cap or floor, the buyer pays a premium (which is generally, but not always, a single up-front amount) for the right to receive payments from the other party if, on
specified payment dates, the applicable rate, index or asset is greater than (in the case of a cap) or less than (in the case of a floor) an agreed level, for the period involved and the applicable notional amount. A collar is a combination
instrument in which the same party buys a cap and sells a floor. Depending upon the terms of the cap and floor comprising the collar, the premiums will partially, or entirely, offset each other. The notional amount of a cap, collar or floor is used
to calculate payments, but is not itself exchanged. A Fund may be both a buyer and seller of these instruments. In addition, a Fund may engage in combinations of put and call options on securities (also commonly known as collars), which may involve
physical delivery of securities. Like swaps, caps, floors and collars are very flexible products. The terms of the transactions entered by the Funds may vary from the typical examples described here.
Corporate Debt Securities
A Fund may invest in investment
grade corporate debt securities of any rating or maturity. Investment grade corporate bonds are those rated BBB or better by S&P
®
or Baa or
better by Moody’s. Securities rated BBB by S&P
®
are considered investment grade, but Moody’s considers securities rated Baa to have
speculative characteristics. See Appendix A for a description of corporate bond ratings. A Fund may also invest in unrated securities.
Corporate debt securities are
fixed-income securities issued by businesses to finance their operations, although corporate debt instruments may also include bank loans to companies. Notes, bonds, debentures and commercial paper are the most common types of corporate debt
securities, with the primary difference being their maturities and secured or un-secured status. Commercial paper has the shortest term and is usually unsecured.
The broad category of corporate debt
securities includes debt issued by domestic or foreign companies of all kinds, including those with small-, mid- and large-capitalizations. Corporate debt may be rated investment-grade or below investment-grade and may carry variable or floating
rates of interest.
Because of
the wide range of types and maturities of corporate debt securities, as well as the range of creditworthiness of its issuers, corporate debt securities have widely varying potentials for return and risk profiles. For example, commercial paper issued
by a large established domestic corporation that is rated investment grade may have a modest return on principal, but carries relatively limited risk. On the other hand, a long-term corporate note issued by a small foreign corporation from an
emerging market country that has not been rated may have the potential for relatively large returns on principal, but carries a relatively high degree of risk.
Corporate debt securities carry both
credit risk and interest rate risk. Credit risk is the risk that a Fund could lose money if the issuer of a corporate debt security is unable to pay interest or repay principal when it is due. Some corporate debt securities that are rated below
investment grade are generally considered speculative because they present a greater risk of loss, including default, than higher-quality debt securities. The credit risk of a particular issuer’s debt security may vary based on its priority
for repayment. For example, higher ranking (senior) debt securities have a higher priority than lower ranking (subordinated) securities. This means that the issuer might not make payments on subordinated securities while continuing to make payments
on senior securities. In addition, in the event of bankruptcy, holders of higher-ranking senior securities may receive amounts otherwise payable to the holders of more junior securities. Interest rate risk is the risk that the value of certain
corporate debt securities will tend to fall when interest rates rise. In general, corporate debt securities with longer terms tend to fall more in value when interest rates rise than corporate debt securities with shorter terms.
Since the use of technology has
become more prevalent in the course of business, the Funds may be more susceptible to operational risks through breaches in cybersecurity. A cybersecurity incident may refer to either intentional or unintentional events that allow an unauthorized
party to gain access to fund assets, customer data, or proprietary information, or cause a Fund or a Fund service provider to suffer data corruption or lose operational functionality. A cybersecurity incident could,
among other things, result in the loss or theft of
customer data or funds, customers or employees being unable to access electronic systems (“denial of services”), loss or theft of proprietary information or corporate data, physical damage to a computer or network system, or remediation
costs associated with system repairs. Any of these results could have a substantial impact on the Funds. For example, if a cybersecurity incident results in a denial of service, Fund shareholders could lose access to their electronic accounts for an
unknown period of time, and employees could be unable to access electronic systems to perform critical duties for the Funds, such as trading, NAV calculation, shareholder accounting or fulfillment of Fund share purchases and redemptions.
Cybersecurity incidents could cause a Fund or the Funds' Adviser or distributor to incur regulatory penalties, reputational damage, additional compliance costs associated with corrective measures, or financial loss of a significant magnitude. They
may also cause a Fund to violate applicable privacy and other laws. The Funds' service providers have established risk management systems that seek to reduce the risks associated with cybersecurity, and business continuity plans in the event there
is a cybersecurity breach. However, there is no guarantee that such efforts will succeed, especially since a Fund does not directly control the cybersecurity systems of the issuers of securities in which each Fund invests or the Funds' third party
service providers (including the Funds' transfer agent and custodian).
To the extent a Fund invests in
stocks of foreign corporations, a Fund’s investment in such stocks may also be in the form of depositary receipts or other securities convertible into securities of foreign issuers. Depositary receipts may not necessarily be denominated in the
same currency as the underlying securities into which they may be converted. American Depositary Receipts (“ADRs”) are receipts typically issued by an American bank or trust company that evidence ownership of underlying securities issued
by a foreign corporation. European Depositary Receipts (“EDRs”) are receipts issued in Europe that evidence a similar ownership arrangement. Global Depositary Receipts (“GDRs”) are receipts issued throughout the world that
evidence a similar arrangement. Generally, ADRs, in registered form, are designed for use in the U.S. securities markets, and EDRs, in bearer form, are designed for use in European securities markets. GDRs are tradable both in the United States and
in Europe and are designed for use throughout the world. Depositary receipts will not necessarily be denominated in the same currency as their underlying securities.
Depositary receipts may be purchased
through “sponsored” or “unsponsored” facilities. A sponsored facility is established jointly by the issuer of the underlying security and a depositary, whereas a depositary may establish an unsponsored facility without
participation by the issuer of the depositary security. Holders of unsponsored depositary receipts generally bear all the costs of such facilities and the depositary of an unsponsored facility frequently is under no obligation to distribute
shareholder communications received from the issuer of the deposited security or to pass through voting rights to the holders of such receipts of the deposited securities.
Fund investments in depositary receipts,
which include ADRs, GDRs and EDRs, are deemed to be investments in foreign securities for purposes of a Fund’s investment strategy.
Common Stocks
. A Fund may invest in common stocks. Common stocks represent the residual ownership interest in the issuer and are entitled to the income and increase in the
value of the assets and business of the entity after all of its obligations and preferred stock are satisfied. Common stocks generally have voting rights. Common stocks fluctuate in price in response to many factors including historical and
prospective earnings of the issuer, the value of its assets, general economic conditions, interest rates, investor perceptions and market liquidity.
Convertible Securities
. A Fund may invest in convertible securities that may be considered high yield securities. Convertible securities include corporate bonds, notes and
preferred stock that can be converted into or exchanged for a prescribed amount of common stock of the same or a different issue within a particular period of time at a specified price or formula. A convertible security entitles the holder to
receive interest paid or accrued on debt or dividends paid on preferred stock until the convertible stock matures or is redeemed, converted or exchanged. While no securities investment is without some risk, investments in convertible securities
generally entail less risk than the issuer’s common stock, although the extent to which such risk is reduced depends in large measure upon the degree to which the convertible security sells above its value as a fixed income security. The
market value of convertible securities tends to decline as interest rates increase and, conversely, to increase as interest rates decline. While convertible securities generally offer lower interest or dividend yields than nonconvertible debt
securities of similar quality, they do enable the investor to benefit from increases in the market price of the underlying common stock. When investing in convertible securities, a Fund may invest in the lowest credit rating category.
Preferred Stock
. A Fund may invest in preferred stock. A preferred stock blends the characteristics of a bond and common stock. It can offer the higher yield of a bond and
has priority over common stock in equity ownership, but does not have the seniority of a bond and its participation in the issuer’s growth may be limited. Preferred stock has preference over common stock in the receipt of dividends and in any
residual assets after payment to creditors if the issuer is dissolved.
Although the dividend is set at a fixed annual rate, in
some circumstances it can be changed or omitted by the issuer. When investing in preferred stocks, a Fund may invest in the lowest credit rating category.
Warrants and Rights
. A Fund may purchase warrants and rights, which are instruments that permit a Fund to acquire, by subscription, the capital stock of a corporation at a
set price, regardless of the market price for such stock. Warrants may be either perpetual or of limited duration, but they usually do not have voting rights or pay dividends. The market price of warrants is usually significantly less than the
current price of the underlying stock. Thus, there is a greater risk that warrants might drop in value at a faster rate than the underlying stock.
A Fund may invest directly and
indirectly in foreign currencies. Investments in foreign currencies are subject to numerous risks not least being the fluctuation of foreign currency exchange rates with respect to the U.S. Dollar. Exchange rates fluctuate for a number of
reasons.
Inflation
. Exchange rates change to reflect changes in a currency’s buying power. Different countries experience different inflation rates due to different monetary
and fiscal policies, different product and labor market conditions, and a host of other factors.
Trade
Deficits
. Countries with trade deficits tend to experience a depreciating currency. Inflation may be the cause of a trade deficit, making a country’s goods more expensive and less competitive and so
reducing demand for its currency.
Interest
Rates
. High interest rates may raise currency values in the short term by making such currencies more attractive to investors. However, since high interest rates are often the result of high inflation,
long-term results may be the opposite.
Budget Deficits and Low Savings Rates
. Countries that run large budget deficits and save little of their national income tend to suffer a depreciating currency because they
are forced to borrow abroad to finance their deficits. Payments of interest on this debt can inundate the currency markets with the currency of the debtor nation. Budget deficits also can indirectly contribute to currency depreciation if a
government chooses inflationary measures to cope with its deficits and debt.
Political
Factors
. Political instability in a country can cause a currency to depreciate. Demand for a certain currency may fall if a country appears a less desirable place in which to invest and do
business.
Government Control
. Through their own buying and selling of currencies, the world’s central banks sometimes manipulate exchange rate movements. In addition,
governments occasionally issue statements to influence people’s expectations about the direction of exchange rates, or they may instigate policies with an exchange rate target as the goal.
The value of a Fund’s
investments is calculated in U.S. Dollars each day that the New York Stock Exchange (“NYSE”) is open for business. As a result, to the extent that a Fund’s assets are invested in instruments denominated in foreign currencies and
the currencies appreciate relative to the U.S. Dollar, a Fund’s NAV per share as expressed in U.S. Dollars (and, therefore, the value of your investment) should increase. If the U.S. Dollar appreciates relative to the other currencies, the
opposite should occur.
The
currency-related gains and losses experienced by a Fund will be based on changes in the value of portfolio securities attributable to currency fluctuations only in relation to the original purchase price of such securities as stated in U.S. Dollars.
Gains or losses on shares of a Fund will be based on changes attributable to fluctuations in the NAV of such shares, expressed in U.S. Dollars, in relation to the original U.S. Dollar purchase price of the shares. The amount of appreciation or
depreciation in a Fund’s assets also will be affected by the net investment income generated by the money market instruments in which each Fund invests and by changes in the value of the securities that are unrelated to changes in currency
exchange rates.
A Fund may incur
currency exchange costs when it sells instruments denominated in one currency and buy instruments denominated in another.
Currency Transactions
. A Fund conducts currency exchange transactions on a spot basis. Currency transactions made on a spot basis are for cash at the spot rate prevailing in
the currency exchange market for buying or selling currency. A Fund also enters into forward currency contracts. See “Options, Futures and Other Derivatives Strategies” below. A forward currency contract is an obligation to buy or sell a
specific currency at a future date, which may be any fixed number of days from the date of the contract agreed upon by the parties, at a price set at the time of the contract. These contracts are entered into on the interbank market conducted
directly between currency traders (usually large commercial banks) and their customers.
A Fund may invest in a combination of
forward currency contracts and U.S. Dollar-denominated market instruments in an attempt to obtain an investment result that is substantially the same as a direct investment in a foreign currency-denominated instrument. This investment technique
creates a “synthetic” position in the particular foreign-currency instrument whose performance the Adviser is trying to duplicate. For example, the combination of U.S. Dollar-denominated instruments with “long” forward
currency exchange contracts creates a position economically equivalent to a money market instrument denominated in the foreign currency itself. Such combined positions are sometimes necessary when the money market in a particular foreign currency is
small or relatively illiquid.
A Fund may invest in forward currency
contracts to hedge either specific transactions (transaction hedging) or portfolio positions (position hedging). Transaction hedging is the purchase or sale of forward currency contracts with respect to specific receivables or payables of a Fund in
connection with the purchase and sale of portfolio securities. Position hedging is the sale of a forward currency contract on a particular currency with respect to portfolio positions denominated or quoted in that currency.
A Fund may use forward currency
contracts for position hedging if consistent with its policy of trying to expose its net assets to foreign currencies. A Fund is not required to enter into forward currency contracts for hedging purposes and it is possible that a Fund may not be
able to hedge against a currency devaluation that is so generally anticipated that a Fund is unable to contract to sell the currency at a price above the devaluation level it anticipates. It also is possible, under certain circumstances, that a Fund
may have to limit its currency transactions to qualify as a “regulated investment company” (“RIC”) under Subchapter M of Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended (“Code”). See
“Dividends, Other Distributions and Taxes.”
Each Fund currently does not intend
to enter into a forward currency contract with a term of more than one year, or to engage in position hedging with respect to the currency of a particular country to more than the aggregate market value (at the time the hedging transaction is
entered into) of its portfolio securities denominated in (or quoted in or currently convertible into or directly related through the use of forward currency contracts in conjunction with money market instruments to) that particular currency.
At or before the maturity of a
forward currency contract, a Fund may either sell a portfolio security and make delivery of the currency, or retain the security and terminate its contractual obligation to deliver the currency by buying an “offsetting” contract
obligating it to buy, on the same maturity date, the same amount of the currency. If a Fund engages in an offsetting transaction, it may later enter into a new forward currency contract to sell the currency.
If a Fund engages in an offsetting
transaction, it will incur a gain or loss to the extent that there has been movement in forward currency contract prices. If forward prices go down during the period between the date a Fund enters into a forward currency contract for the sale of a
currency and the date it enters into an offsetting contract for the purchase of the currency, a Fund will realize a gain to the extent that the price of the currency it has agreed to sell exceeds the price of the currency it has agreed to buy. If
forward prices go up, a Fund will suffer a loss to the extent the price of the currency it has agreed to buy exceeds the price of the currency it has agreed to sell.
Since a Fund invests in money market
instruments denominated in foreign currencies, it may hold foreign currencies pending investment or conversion into U.S. Dollars. Although a Fund values its assets daily in U.S. Dollars, it does not convert its holdings of foreign currencies into
U.S. Dollars on a daily basis. A Fund will convert its holdings from time to time, however, and incur the costs of currency conversion. Foreign exchange dealers do not charge a fee for conversion, but they do realize a profit based on the difference
between the prices at which they buy and sell various currencies. Thus, a dealer may offer to sell a foreign currency to a Fund at one rate, and offer to buy the currency at a lower rate if a Fund tries to resell the currency to the dealer.
Foreign Currency Options
. A Fund may invest in foreign currency-denominated securities and may buy or sell put and call options on foreign currencies. A Fund may buy or sell
put and call options on foreign currencies either on exchanges or in the over-the-counter (“OTC”) market. A put option on a foreign currency gives the purchaser of the option the right to sell a foreign currency at the exercise price
until the option expires. A call option on a foreign currency gives the purchaser of the option the right to purchase the currency at the exercise price until the option expires. Currency options traded on U.S. or other exchanges may be subject to
position limits which may limit the ability of a Fund to reduce foreign currency risk using such options. OTC options differ from traded options in that they are two-party contracts with price and other terms negotiated between buyer and seller, and
generally do not have as much market liquidity as exchange-traded options.
Foreign Currency Exchange-Related Securities
Foreign Currency Warrants
. Foreign currency warrants such as Currency Exchange Warrants
SM
(“CEWs
SM
”) are warrants which entitle the
holder to receive from their issuer an amount of cash (generally, for warrants issued in the United States, in U.S. Dollars) which is calculated pursuant to a predetermined formula and based on the exchange rate between a specified foreign currency
and the U.S. Dollar as of the exercise date of the warrant. Foreign currency warrants generally are exercisable upon their issuance and expire as of a specified date and time. Foreign currency warrants have been issued in connection with U.S.
Dollar-denominated debt offerings by major corporate issuers in an attempt to reduce the foreign currency exchange risk which, from the point of view of prospective purchasers of the securities, is inherent in the international fixed-income
marketplace. Foreign currency warrants may attempt to reduce the foreign exchange risk assumed by purchasers of a security by, for example, providing for a supplemental payment in the event that the U.S. Dollar depreciates against the value of a
major foreign currency such as the Japanese yen or the Euro. The formula used to determine the amount payable upon exercise of a foreign currency warrant may make the warrant worthless unless the applicable foreign currency exchange rate moves in a
particular direction (
e.g.
, unless the U.S. Dollar appreciates or depreciates against the particular foreign currency to which the warrant is linked or indexed). Foreign currency warrants are severable from
the debt obligations with which they may be offered, and may be listed on exchanges. Foreign currency warrants may be exercisable only in
certain minimum amounts, and an investor wishing to
exercise warrants who possesses less than the minimum number required for exercise may be required either to sell the warrants or to purchase additional warrants, thereby incurring additional transaction costs. In the case of any exercise of
warrants, there may be a time delay between the time a holder of warrants gives instructions to exercise and the time the exchange rate relating to exercise is determined, during which time the exchange rate could change significantly, thereby
affecting both the market and cash settlement values of the warrants being exercised. The expiration date of the warrants may be accelerated if the warrants should be delisted from an exchange or if their trading should be suspended permanently,
which would result in the loss of any remaining “time value” of the warrants (
i.e.
, the difference between the current market value and the exercise value of the warrants), and, in the case the
warrants were “out-of-the-money,” in a total loss of the purchase price of the warrants.
Warrants are generally unsecured
obligations of their issuers and are not standardized foreign currency options issued by the Options Clearing Corporation (“OCC”). Unlike foreign currency options issued by OCC, the terms of foreign exchange warrants generally will not
be amended in the event of governmental or regulatory actions affecting exchange rates or in the event of the imposition of other regulatory controls affecting the international currency markets. The initial public offering price of foreign currency
warrants is generally considerably in excess of the price that a commercial user of foreign currencies might pay in the interbank market for a comparable option involving significantly larger amounts of foreign currencies. Foreign currency warrants
are subject to significant foreign exchange risk, including risks arising from complex political or economic factors.
Principal Exchange Rate Linked Securities
. Principal exchange rate linked securities (“PERLs
SM
”) are debt obligations the principal on which is payable at maturity in an amount that may vary based on the exchange rate between the U.S. Dollar
and a particular foreign currency at or about that time. The return on “standard” principal exchange rate linked securities is enhanced if the foreign currency to which the security is linked appreciates against the U.S. Dollar, and is
adversely affected by increases in the foreign exchange value of the U.S. Dollar; “reverse” principal exchange rate linked securities are like the “standard” securities, except that their return is enhanced by increases in
the value of the U.S. Dollar and adversely impacted by increases in the value of foreign currency. Interest payments on the securities are generally made in U.S. Dollars at rates that reflect the degree of foreign currency risk assumed or given up
by the purchaser of the notes (
i.e.
, at relatively higher interest rates if the purchaser has assumed some of the foreign exchange risk, or relatively lower interest rates if the issuer has assumed some of the
foreign exchange risk, based on the expectations of the current market). Principal exchange rate linked securities may in limited cases be subject to acceleration of maturity (generally, not without the consent of the holders of the securities),
which may have an adverse impact on the value of the principal payment to be made at maturity.
Performance Indexed Paper
. Performance indexed paper (“PIPs
SM
”)
is U.S. Dollar-denominated commercial paper the yield of which is linked to certain foreign exchange rate movements. The yield to the investor on performance indexed paper is established at maturity as a function of spot exchange rates between the
U.S. Dollar and a designated currency as of or about that time (generally, the index maturity two days prior to maturity). The yield to the investor will be within a range stipulated at the time of purchase of the obligation, generally with a
guaranteed minimum rate of return that is below, and a potential maximum rate of return that is above, market yields on U.S. Dollar-denominated commercial paper, with both the minimum and maximum rates of return on the investment corresponding to
the minimum and maximum values of the spot exchange rate two business days prior to maturity.
A Fund may have both direct and
indirect exposure through investments in stock index futures contracts, options on stock index futures contracts and options on securities and on stock indices to foreign securities. In most cases, the best available market for foreign securities
will be on exchanges or in OTC markets located outside the United States.
Investing in foreign securities
carries political and economic risks distinct from those associated with investing in the United States. Investments in foreign securities also involve the risk of possible adverse changes in investment or exchange control regulations, expropriation
or confiscatory taxation, limitation on or delays in the removal of funds or other assets of a fund, political or financial instability or diplomatic and other developments that could affect such investments. Foreign investments may be affected by
actions of foreign governments adverse to the interests of U.S. investors, including the possibility of expropriation or nationalization of assets, confiscatory taxation, restrictions on U.S. investment or on the ability to repatriate assets or to
convert currency into U.S. Dollars. There may be a greater possibility of default by foreign governments or foreign-government sponsored enterprises. Investments in foreign countries also involve a risk of local political, economic or social
instability, military action or unrest or adverse diplomatic developments.
Asia-Pacific Countries
. In addition to the risks of foreign investing and the risks of investing in emerging markets, the developing market Asia-Pacific countries in which a
Fund may invest are subject to certain additional or specific risks. A Fund may make substantial investments in Asia-Pacific countries. In the Asia-Pacific markets, there is a high concentration of market capitalization and trading volume in a small
number of issuers representing a limited number of industries, as well as a high concentration of investors and financial intermediaries. Many of these markets also may be affected by developments with respect to more established markets in the
region, such as Japan and Hong Kong. Brokers in developing market Asia-Pacific countries
typically are fewer in number and less well
capitalized than brokers in the United States. These factors, combined with the U.S. regulatory requirements for open-end investment companies and the restrictions on foreign investment, result in potentially fewer investment opportunities for a
Fund and may have an adverse impact on a Fund’s investment performance.
Many of the developing market
Asia-Pacific countries may be subject to a greater degree of economic, political and social instability than is the case in the United States and Western European countries. Such instability may result from, among other things: (i) authoritarian
governments or military involvement in political and economic decision-making, including changes in government through extra-constitutional means; (ii) popular unrest associated with demands for improved political, economic and social conditions;
(iii) internal insurgencies; (iv) hostile relations with neighboring countries; and/or (v) ethnic, religious and racial disaffection. In addition, the governments of many of such countries, such as Indonesia, have a heavy role in regulating and
supervising the economy.
An
additional risk common to most such countries is that the economy is heavily export-oriented and, accordingly, is dependent upon international trade. The existence of overburdened infrastructure and obsolete financial systems also present risks in
certain countries, as do environmental problems. Certain economies also depend to a significant degree upon exports of primary commodities and, therefore, are vulnerable to changes in commodity prices that, in turn, may be affected by a variety of
factors. The legal systems in certain developing market Asia-Pacific countries also may have an adverse impact on a Fund. For example, while the potential liability of a shareholder in a U.S. corporation with respect to acts of the corporation is
generally limited to the amount of the shareholder's investment, the notion of limited liability is less clear in certain emerging market Asia-Pacific countries. Similarly, the rights of investors in developing market Asia-Pacific companies may be
more limited than those of shareholders of U.S. corporations. It may be difficult or impossible to obtain and/or enforce a judgment in a developing market Asia-Pacific country.
Governments of many developing
market Asia-Pacific countries have exercised and continue to exercise substantial influence over many aspects of the private sector. In certain cases, the government owns or controls many companies, including the largest in the country. Accordingly,
government actions in the future could have a significant effect on economic conditions in developing market Asia-Pacific countries, which could affect private sector companies and a Fund itself, as well as the value of securities in a Fund's
portfolio. In addition, economic statistics of developing market Asia-Pacific countries may be less reliable than economic statistics of more developed nations.
It is possible that developing market
Asia-Pacific issuers may not be subject to the same accounting, auditing and financial reporting standards as U.S. companies. Inflation accounting rules in some developing market Asia-Pacific countries require companies that keep accounting records
in the local currency, for both tax and accounting purposes, to restate certain assets and liabilities on the company’s balance sheet in order to express items in terms of currency of constant purchasing power. Inflation accounting may
indirectly generate losses or profits for certain developing market Asia-Pacific companies. In addition, satisfactory custodial services for investment securities may not be available in some developing Asia-Pacific countries, which may result in a
Fund incurring additional costs and delays in providing transportation and custody services for such securities outside such countries.
Certain developing Asia-Pacific
countries are especially large debtors to commercial banks and foreign governments. Fund management may determine that, notwithstanding otherwise favorable investment criteria, it may not be practicable or appropriate to invest in a particular
developing Asia-Pacific country. A Fund may invest in countries in which foreign investors, including management of the Fund, have had no or limited prior experience.
Brazil
. Investing in Brazil involves certain considerations not typically associated with investing in the United States. Additional considerations include: (i) investment
and repatriation controls, which could affect a Fund’s ability to operate, and to qualify for the favorable tax treatment afforded to RICs for U.S. Federal income tax purposes; (ii) fluctuations in the rate of exchange between the Brazilian
Real and the U.S. Dollar; (iii) the generally greater price volatility and lesser liquidity that characterize Brazilian securities markets, as compared with U.S. markets; (iv) the effect that balance of trade could have on Brazilian economic
stability and the Brazilian government's economic policy; (v) potentially high rates of inflation; (vi) governmental involvement in and influence on the private sector; (vii) Brazilian accounting, auditing and financial standards and requirements,
which differ from those in the United States; (viii) political and other considerations, including changes in applicable Brazilian tax laws; and (ix) restrictions on investments by foreigners. While the economy of Brazil has enjoyed substantial
economic growth in recent years there can be no guarantee this growth will continue.
China
. Investing in China involves special considerations not typically associated with investing in countries with more democratic governments or more established economies
or currency markets. These risks include: (i) the risk of nationalization or expropriation of assets or confiscatory taxation; (ii)greater governmental involvement in and control over the economy, interest rates and currency exchange rates; (iii)
controls on foreign investment and limitations on repatriation of invested capital; (iv) greater social, economic and political uncertainty (including the risk of war); (v) dependency on exports and the corresponding importance of international
trade; (vi) currency exchange rate fluctuations; and (vii) the risk that certain companies in which the Fund may invest may have dealings with countries subject to sanctions or embargoes imposed by the U.S. government or identified as state sponsors
of terrorism. The government of China maintains strict currency controls in support of economic, trade and political objectives and regularly intervenes in the currency market. The government's actions in this respect may not be transparent or
predictable. As a result, the value of the Yuan, and the value of securities designed to provide
exposure to the Yuan, can change quickly and
arbitrarily. Furthermore, it is difficult for foreign investors to directly access money market securities in China because of investment and trading restrictions. While the economy of China has enjoyed substantial economic growth in recent years
there can be no guarantee this growth will continue. These and other factors may decrease the value and liquidity of a Fund's investments.
Developing and Emerging Markets
. Emerging and developing markets abroad may offer special opportunities for investing but may have greater risks than more developed foreign
markets, such as those in Europe, Canada, Australia, New Zealand and Japan. There may be even less liquidity in their securities markets, and settlements of purchases and sales of securities may be subject to additional delays. They are subject to
greater risks of limitations on the repatriation of income and profits because of currency restrictions imposed by local governments. Those countries may also be subject to the risk of greater political and economic instability, which can greatly
affect the volatility of prices of securities in those countries.
Investing in emerging market
securities imposes risks different from, or greater than, risks of investing in foreign developed countries. These risks include: smaller market capitalization of securities markets, which may suffer periods of relative illiquidity; significant
price volatility; restrictions on foreign investment; possible repatriation of investment income and capital. In addition, foreign investors may be required to register the proceeds of sales; future economic or political crises could lead to price
controls, forced mergers, expropriation or confiscatory taxation, seizure, nationalization, or creation of government monopolies. The currencies of emerging market countries may experience significant declines against the U.S. Dollar. Inflation and
rapid fluctuations in inflation rates have had, and may continue to have, negative effects on the economies and securities markets of certain emerging market countries. Additional risks of emerging markets securities may include: greater social,
economic and political uncertainty and instability; more substantial governmental involvement in the economy; less governmental supervision and regulation; unavailability of currency hedging techniques; companies that are newly organized and small;
differences in auditing and financial reporting standards, which may result in unavailability of material information about issuers; and less developed legal systems. In addition, emerging securities markets may have different clearance and
settlement procedures, which may be unable to keep pace with the volume of securities transactions or otherwise make it difficult to engage in such transactions.
Europe
.
Investing in European countries may impose economic and political risks associated with Europe in general and the specific European countries in which it invests.
The economies and markets of European countries are often closely connected and interdependent, and events in one European country can have an adverse impact on other European countries. A Fund makes investments in securities of issuers that are
domiciled in, or have significant operations in, member countries of the Economic and Monetary Union of the European Union (the “EU”), which requires member countries to comply with restrictions on inflation rates, deficits, interest
rates, debt levels and fiscal and monetary controls, each of which may significantly affect every country in Europe. Decreasing imports or exports, changes in governmental or EU regulations on trade, changes in the exchange rate of the euro (the
common currency of certain EU countries), the default or threat of default by an EU member country on its sovereign debt, and/or an economic recession in an EU member country may have a significant adverse effect on the economies of EU member
countries and their trading partners, including some or all of the emerging markets materials sector countries. Although certain European countries do not use the euro, many of these countries are obliged to meet the criteria for joining the euro
zone. Consequently, these countries must comply with many of the restrictions noted above. The European financial markets have experienced volatility and adverse trends in recent years due to concerns about economic downturns, rising government debt
levels and the possible default of government debt in several European countries, including Greece, Ireland, Italy, Portugal and Spain. In order to prevent further economic deterioration, certain countries, without prior warning, can institute
“capital controls.” Countries may use these controls to restrict volatile movements of capital entering and exiting their country. Such controls may negatively affect a Fund’s investments. A default or debt restructuring by any
European country would adversely impact holders of that country’s debt and sellers of credit default swaps linked to that country’s creditworthiness, which may be located in countries other than those listed above. In addition, the
credit ratings of certain European countries were recently downgraded. These downgrades may result in further deterioration of investor confidence. These events have adversely affected the value and exchange rate of the euro and may continue to
significantly affect the economies of every country in Europe, including countries that do not use the euro and non-EU member countries. Responses to the financial problems by European governments, central banks and others, including austerity
measures and reforms, may not produce the desired results, may result in social unrest and may limit future growth and economic recovery or have other unintended consequences. Further defaults or restructurings by governments and other entities of
their debt could have additional adverse effects on economies, financial markets and asset valuations around the world. In addition, one or more countries may abandon the euro and/or withdraw from the EU, including, with respect to the latter, the
United Kingdom, which is a significant market in the global economy. The impact of these actions, especially if they occur in a disorderly fashion, is not clear but could be significant and far-reaching and could adversely impact the value of
investments in the region.
The announcement of the Referendum of
the United Kingdom’s (the “UK”) Membership of the EU (referred to as “Brexit”), advising for the exit of the UK from the EU, could cause business disruptions and uncertainty and thus adversely impact the financial
results and operations of various European companies and economies. The Referendum is non-binding, however, if it is passed into law, negotiations would commence to determine the future terms of the UK’s relationship with the EU, including the
terms of trade between the UK and the EU. The effects of Brexit will depend on any agreements the UK
makes to retain access to EU markets either during a
transitional period or more permanently. Brexit could lead to legal and tax uncertainty and potentially divergent national laws and regulations as the UK determines which EU laws to replace or replicate. Additionally, Brexit could lead to global
economic uncertainty and result in significant volatility in the global stock markets and currency exchange rate fluctuations.
India
. Investments in India involve special considerations not typically associated with investing in countries with more established economies or currency markets.
Political and economic conditions and changes in regulatory, tax, or economic policy in India could significantly affect the market in that country and in surrounding or related countries and have a negative impact on a Fund's performance.
Agriculture occupies a prominent position in the Indian economy and the Indian economy therefore may be negatively affected by adverse weather conditions. The Indian government has exercised and continues to exercise significant influence over many
aspects of the economy, and the number of public sector enterprises in India is substantial. While the Indian government has implemented economic structural reform with the objective of liberalizing India's exchange and trade policies, reducing the
fiscal deficit, controlling inflation, promoting a sound monetary policy, reforming the financial sector, and placing greater reliance on market mechanisms to direct economic activity, there can be no assurance that these policies will continue or
that the economic recovery will be sustained. While the government of India is moving to a more liberal approach, it still places restrictions on the capability and capacity of foreign investors to access and trade Rupee directly. Foreign investors
in India still face burdensome taxes on investments in income producing securities. While the economy of India has enjoyed substantial economic growth in recent years there can be no guarantee this growth will continue. These and other factors may
decrease the value and liquidity of a Fund's investments.
Japan
. Japanese investments may be significantly affected by events influencing Japan’s economy and the exchange rate between the Japanese yen and the U.S. Dollar.
Japan’s economy fell into a long recession in the 1990s. After a few years of mild recovery in the mid-2000s, Japan’s economy fell into another recession as a result of the recent global economic crisis. Japan is heavily dependent on
exports and foreign oil. Japan is located in a seismically active area, and in 2011 experienced an earthquake of a sizeable magnitude and a tsunami that significantly affected important elements of its infrastructure and resulted in a nuclear
crisis. Since these events, Japan’s financial markets have fluctuated dramatically. The full extent of the impact of these events on Japan’s economy and on foreign investment in Japan is difficult to estimate. Japan’s economic
prospects may be affected by the political and military situations of its near neighbors, notably North and South Korea, China, and Russia.
Latin America
. Investments in Latin American countries involve special considerations not typically associated with investing in the United States. Most Latin American
countries have experienced, at one time or another, severe and persistent levels of inflation, including, in some cases, hyperinflation. This has, in turn, led to high interest rates, extreme measures by governments to keep inflation in check, and a
generally debilitating effect on economic growth. Although inflation in many countries has lessened, there is no guarantee it will remain at lower levels. In addition, the political history of certain Latin American countries has been characterized
by political uncertainty, intervention by the military in civilian and economic spheres, and political corruption. Such developments, if they were to reoccur, could reverse favorable trends toward market and economic reform, privatization, and
removal of trade barriers, and result in significant disruption in securities markets. Certain Latin American countries may also have managed currencies which are maintained at artificial levels to the U.S. Dollar rather than at levels determined by
the market. This type of system can lead to sudden and large adjustments in the currency which, in turn, can have a disruptive and negative effect on foreign investors. For example, in late 1994 the value of the Mexican peso lost more than one-third
of its value relative to the dollar. Certain Latin American countries also restrict the free conversion of their currency into foreign currencies, including the U.S. Dollar. There is no significant foreign exchange market for many currencies and it
would, as a result, be difficult for the Fund to engage in foreign currency transactions designed to protect the value of the Fund’s interests in securities denominated in such currencies. Finally, a number of Latin American countries are
among the largest debtors of developing countries. There have been moratoria on, and reschedulings of, repayment with respect to these debts. Such events can restrict the flexibility of these debtor nations in the international markets and result in
the imposition of onerous conditions on their economies.
Russia
. Investing in Russia involves risks and special considerations not typically associated with investing in United States. Since the breakup of the Soviet Union at the
end of 1991, Russia has experienced dramatic political and social change. The political system in Russia is emerging from a long history of extensive state involvement in economic affairs. The country is undergoing a rapid transition from a
centrally-controlled command system to a market-oriented, democratic model. As a result, relative to companies operating in Western economies, companies in Russia are characterized by a lack of: (i) management with experience of operating in a
market economy; (ii) modern technology; and, (iii) a sufficient capital base with which to develop and expand their operations. It is unclear what will be the future effect on Russian companies, if any, of Russia’s continued attempts to move
toward a more market-oriented economy. Russia’s economy has experienced severe economic recession, if not depression, since 1990 during which time the economy has been characterized by high rates of inflation, high rates of unemployment,
declining gross domestic product, deficit government spending, and a devaluing currency. The economic reform program has involved major disruptions and dislocations in various sectors of the economy, and those problems have been exacerbated by
growing liquidity problems. Further, Russia presently receives significant financial assistance from a number of countries through various programs. To the extent these programs are reduced or eliminated in the future, Russian economic development
may be adversely impacted. The laws and regulations in Russia affecting Western
investment business continue to evolve in an
unpredictable manner. Russian laws and regulations, particularly those involving taxation, foreign investment and trade, title to property or securities, and transfer of title, which may be applicable to a Fund’s activities are relatively new
and can change quickly and unpredictably in a manner far more volatile than in the United States or other developed market economies. Although basic commercial laws are in place, they are often unclear or contradictory and subject to varying
interpretation, and may at any time be amended, modified, repealed or replaced in a manner adverse to the interest of the Funds.
As a result of recent events
involving Ukraine and Russia, the United States and the European Union have imposed sanctions on certain Russian individuals and companies, including certain financial institutions, and have limited certain exports and imports to and from Russia.
The United States and other nations or international organizations may impose additional, broader economic sanctions or take other actions that may adversely affect Russian-related issuers in the future. These sanctions, any future sanctions or
other actions, or even the threat of further sanctions or other actions, may negatively affect the value and liquidity of a Fund’s investments. Russia may undertake countermeasures or retaliatory actions which may further impair the value and
liquidity of a Fund’s investments.
A Fund may invest in hybrid
instruments. A hybrid instrument is a type of potentially high-risk derivative that combines a traditional stock, bond, or commodity with an option or forward contract. Generally, the principal amount, amount payable upon maturity or redemption, or
interest rate of a hybrid is tied (positively or negatively) to the price of some commodity, currency or securities index or another interest rate or some other economic factor (each a “benchmark”). The interest rate or (unlike most
fixed income securities) the principal amount payable at maturity of a hybrid security may be increased or decreased, depending on changes in the value of the benchmark. A hybrid could be, for example, a bond issued by an oil company that pays a
small base level of interest, in addition to interest that accrues when oil prices exceed a certain predetermined level. Such a hybrid instrument would be a combination of a bond and a call option on oil.
Hybrids can be used as an efficient
means of pursuing a variety of investment goals, including currency hedging, and increased total return. Hybrids may not bear interest or pay dividends. The value of a hybrid or its interest rate may be a multiple of a benchmark and, as a result,
may be leveraged and move (up or down) more steeply and rapidly than the benchmark. These benchmarks may be sensitive to economic and political events, such as commodity shortages and currency devaluations, which cannot be readily foreseen by the
purchaser of a hybrid. Under certain conditions, the redemption value of a hybrid could be zero. Thus, an investment in a hybrid may entail significant market risks that are not associated with a similar investment in a traditional, U.S.
Dollar-denominated bond that has a fixed principal amount and pays a fixed rate or floating rate of interest. The purchase of hybrids also exposes a Fund to the credit risk of the issuer of the hybrids. These risks may cause significant fluctuations
in the NAV of a Fund.
Certain
issuers of structured products such as hybrid instruments may be deemed to be investment companies as defined in the 1940 Act. As a result, a Fund’s investment in these products may be subject to limits applicable to investments in investment
companies and may be subject to restrictions contained in the 1940 Act.
Illiquid Investments and Restricted
Securities
Each Fund
may purchase and hold illiquid investments. A Fund will not purchase or otherwise acquire any security if, as a result, more than 15% of its net assets (taken at current value) would be invested in investments that are illiquid. This policy does not
include restricted securities eligible for resale pursuant to Rule 144A under the Securities Act of 1933, as amended (“1933 Act”), which the Trust’s Board of Trustees (“Board” or “Trustees”), or Rafferty
under Board-approved guidelines has determined are liquid. Each Fund, however, currently does not anticipate investing in such restricted securities.
The term “illiquid
investments” for this purpose means investments that cannot be disposed of within seven days in the ordinary course of business at approximately the amount at which a Fund has valued the investments. Investments currently considered to be
illiquid include: (1) repurchase agreements not terminable within seven days; (2) securities for which market quotations are not readily available; (3) OTC options and their underlying collateral; (4) bank deposits, unless they are payable at
principal amount plus accrued interest on demand or within seven days after demand; (5) restricted securities not determined to be liquid pursuant to guidelines established by the Board; and (6) in certain circumstances, securities involved in swap,
cap, floor or collar transactions.
A Fund may not be able to sell
illiquid investments when Rafferty considers it desirable to do so or may have to sell such investments at a price that is lower than the price that could be obtained if the investments were liquid. In addition, the sale of illiquid investments may
require more time and result in higher dealer discounts and other selling expenses than does the sale of investments that are not illiquid. Illiquid investments also may be more difficult to value due to the unavailability of reliable market
quotations for such investments, and investment in illiquid investments may have an adverse impact on NAV.
Rule 144A establishes a “safe
harbor” from the registration requirements of the 1933 Act for resales of certain securities to qualified institutional buyers. Institutional markets for restricted securities that have developed as a result of Rule 144A
provide both readily ascertainable values for
certain restricted securities and the ability to liquidate an investment to satisfy share redemption orders. An insufficient number of qualified institutional buyers interested in purchasing Rule 144A-eligible securities held by a Fund, however,
could affect adversely the marketability of such portfolio securities, and a Fund may be unable to dispose of such securities promptly or at reasonable prices.
A Fund may purchase indexed
securities, which are securities, the value of which varies positively or negatively in relation to the value of other securities, securities indices or other financial indicators, consistent with its investment objective. Indexed securities may be
debt securities or deposits whose value at maturity or coupon rate is determined by reference to a specific instrument or statistic. Recent issuers of indexed securities have included banks, corporations and certain U.S. government agencies.
The performance of indexed securities
depends to a great extent on the performance of the security or other instrument to which they are indexed and also may be influenced by interest rate changes in the United States and abroad. At the same time, indexed securities are subject to the
credit risks associated with the issuer of the security, and their values may decline substantially if the issuer’s creditworthiness deteriorates. Indexed securities may be more volatile than the underlying instruments. Certain indexed
securities that are not traded on an established market may be deemed illiquid. See “Illiquid Investments and Restricted Securities” above.
Inflation Protected Securities
Inflation protected securities
are fixed income securities whose value is periodically adjusted according to the rate of inflation. Two structures are common. The U.S. Treasury and some other issuers utilize a structure that accrues inflation into the principal value of the bond.
Other issuers pay out the Consumer Price Index (“CPI”) accruals as part of a semiannual coupon. Inflation protected securities issued by the U.S. Treasury have maturities of approximately five, ten or thirty years, although it is
possible that securities with other maturities will be issued in the future. The U.S. Treasury securities pay interest on a semi-annual basis equal to a fixed percentage of the inflation adjusted principal amount.
If the periodic adjustment rate
measuring inflation falls, the principal value of inflation protected bonds will be adjusted downward, and consequently the interest payable on these securities (calculated with respect to a smaller principal amount) will be reduced. Repayment of
the original bond principal upon maturity (as adjusted for inflation) is guaranteed by the U.S. Treasury in the case of U.S. Treasury inflation indexed bonds, even during a period of deflation. However, the current market value of the bonds is not
guaranteed and will fluctuate. A Fund may also invest in other inflation related bonds which may or may not provide a similar guarantee. If a guarantee of principal is not provided, the adjusted principal value of the bond to be repaid at maturity
may be less than the original principal amount and, therefore, is subject to credit risk.
The value of inflation protected
bonds is expected to change in response to changes in real interest rates. Real interest rates in turn are tied to the relationship between nominal interest rates and the rate of inflation. Therefore, if the rate of inflation rises at a faster rate
than nominal interest rates, real interest rates might decline, leading to an increase in value of inflation protected bonds. In contrast, if nominal interest rates increase at a faster rate than inflation, real interest rates might rise, leading to
a decrease in value of inflation protected bonds. While these securities are expected to be protected from long-term inflationary trends, short-term increases in inflation may lead to a decline in value. If interest rates rise due to reasons other
than inflation, investors in these securities may not be protected to the extent that the increase is not reflected in the bond’s inflation measure.
The periodic adjustment of U.S.
inflation protected bonds is tied to the non-seasonally adjusted U.S. City Average All Items Consumer Price Index for All Urban Consumers (“CPI-U”), published monthly by the U.S. Bureau of Labor Statistics. The CPI-U is a measurement of
changes in the cost of living, made up of components such as housing, food, transportation and energy.
Any increase in principal for an
inflation protected security resulting from inflation adjustments is considered by the IRS to be taxable income in the year it occurs. A Fund’s distributions to shareholders include interest income and the income attributable to principal
adjustments, both of which will be taxable to shareholders. The tax treatment of the income attributable to principal adjustments may result in the situation where a Fund needs to make its required annual distributions to shareholders in amounts
that exceed the cash received. As a result, a Fund may need to liquidate certain investments when it is not advantageous to do so. Also, if the principal value of an inflation protected security is adjusted downward due to deflation, amounts
previously distributed in the taxable year may be characterized in some circumstances as a return of capital.
A Fund may enter into interest
rate swaps for hedging purposes and non-hedging purposes. Since swaps are entered into for good faith hedging purposes or are offset by a segregated account maintained by an approved custodian, Rafferty
believes that swaps do not constitute senior
securities as defined in the 1940 Act and, accordingly, will not treat them as being subject to a Fund’s borrowing restrictions. The net amount of the excess, if any, of a Fund’s obligations over its entitlement with respect to each
interest rate swap will be accrued on a daily basis and an amount of cash or other liquid securities having an aggregate NAV at least equal to such accrued excess will be maintained in a segregated account by each Fund’s custodian. A Fund will
not enter into any interest rate swap unless Rafferty believes that the other party to the transaction is creditworthy. If there is a default by the other party to such a transaction, a Fund will have contractual remedies pursuant to the agreement.
The swap market has grown substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. In addition, some interest rate swaps are, and more
in the future may be, centrally cleared. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments which are traded in the interbank market.
A Fund may invest in lower-rated
debt securities, including securities in the lowest credit rating category, of any maturity, otherwise known as “junk bonds.”
Junk bonds generally offer a higher
current yield than that available for higher-grade issues. However, lower-rated securities involve higher risks, in that they are especially subject to adverse changes in general economic conditions and in the industries in which the issuers are
engaged, to changes in the financial condition of the issuers and to price fluctuations in response to changes in interest rates. During periods of economic downturn or rising interest rates, highly leveraged issuers may experience financial stress
that could adversely affect their ability to make payments of interest and principal and increase the possibility of default. In addition, the market for lower-rated debt securities has expanded rapidly in recent years, and its growth paralleled a
long economic expansion. At times in recent years, the prices of many lower-rated debt securities declined substantially, reflecting an expectation that many issuers of such securities might experience financial difficulties. As a result, the yields
on lower-rated debt securities rose dramatically, but such higher yields did not reflect the value of the income stream that holders of such securities expected, but rather, the risk that holders of such securities could lose a substantial portion
of their value as a result of the issuers’ financial restructuring or default. There can be no assurance that such declines will not recur.
The market for lower-rated debt
issues generally is thinner and less active than that for higher quality securities, which may limit a Fund’s ability to sell such securities at fair value in response to changes in the economy or financial markets. Adverse publicity and
investor perceptions, whether based on fundamental analysis, may also decrease the values and liquidity of lower-rated securities, especially in a thinly traded market. Changes by recognized rating services in their rating of a fixed-income security
may affect the value of these investments. A Fund will not necessarily dispose of a security when its rating is reduced below its rating at the time of purchase. However, Rafferty will monitor the investment to determine whether continued investment
in the security will assist in meeting a Fund’s investment objective.
Mortgage-Backed Securities
A Fund may invest in
mortgage-backed securities. A mortgage-backed security is a type of pass-through security, which is a security representing pooled debt obligations repackaged as interests that pass income through an intermediary to investors. In the case of
mortgage-backed securities, the ownership interest is in a pool of mortgage loans.
Mortgage-backed securities are most
commonly issued or guaranteed by the Government National Mortgage Association (“Ginnie Mae
®
” or “GNMA”), Federal National
Mortgage Association (“Fannie Mae
®
” or “FNMA”) or Federal Home Loan Mortgage Corporation (“Freddie Mac
®
” or “FHLMC”), but may also be issued or guaranteed by other private issuers. GNMA is a government-owned corporation that is an
agency of the U.S. Department of Housing and Urban Development. It guarantees, with the full faith and credit of the United States, full and timely payment of all monthly principal and interest on its mortgage-backed securities. FNMA is a publicly
owned, government-sponsored corporation that mostly packages mortgages backed by the Federal Housing Administration, but also sells some non-governmentally backed mortgages. Pass-through securities issued by FNMA are guaranteed as to timely payment
of principal and interest only by FNMA. The FHLMC is a publicly chartered agency that buys qualifying residential mortgages from lenders, re-packages them and provides certain guarantees. The corporation’s stock is owned by savings
institutions across the United States and is held in trust by the Federal Home Loan Bank System. Pass-through securities issued by the FHLMC are guaranteed as to timely payment of principal and interest only by the FHLMC.
Mortgage-backed securities issued by
private issuers, whether or not such obligations are subject to guarantees by the private issuer, may entail greater risk than obligations directly or indirectly guaranteed by the U.S. government. The average life of a mortgage-backed security is
likely to be substantially less than the original maturity of the mortgage pools underlying the securities. Prepayments of principal by mortgagors and mortgage foreclosures will usually result in the return of the greater part of principal invested
far in advance of the maturity of the mortgages in the pool.
Collateralized mortgage obligations
(“CMOs”) are debt obligations collateralized by mortgage loans or mortgage pass-through securities (collateral collectively hereinafter referred to as “Mortgage Assets”). Multi-class pass-through securities are
interests
in a trust composed of Mortgage Assets and all
references in this section to CMOs include multi-class pass-through securities. Principal prepayments on the Mortgage Assets may cause the CMOs to be retired substantially earlier than their stated maturities or final distribution dates, resulting
in a loss of all or part of the premium if any has been paid. Interest is paid or accrues on all classes of the CMOs on a monthly, quarterly or semi-annual basis. The principal and interest payments on the Mortgage Assets may be allocated among the
various classes of CMOs in several ways. Typically, payments of principal, including any prepayments, on the underlying mortgages are applied to the classes in the order of their respective stated maturities or final distribution dates, so that no
payment of principal is made on CMOs of a class until all CMOs of other classes having earlier stated maturities or final distribution dates have been paid in full.
Stripped mortgage-backed securities
(“SMBS”) are derivative multi-class mortgage securities. A Fund will only invest in SMBS that are obligations backed by the full faith and credit of the U.S. government. SMBS are usually structured with two classes that receive different
proportions of the interest and principal distributions from a pool of Mortgage Assets. A Fund will only invest in SMBS whose Mortgage Assets are U.S. government obligations. A common type of SMBS will be structured so that one class receives some
of the interest and most of the principal from the Mortgage Assets, while the other class receives most of the interest and the remainder of the principal. If the underlying Mortgage Assets experience greater than anticipated prepayments of
principal, each Fund may fail to fully recoup its initial investment in these securities. The market value of any class which consists primarily, or entirely, of principal payments generally is unusually volatile in response to changes in interest
rates.
Investment in
mortgage-backed securities poses several risks, including among others, prepayment, market and credit risk. Prepayment risk reflects the risk that borrowers may prepay their mortgages faster than expected, thereby affecting the investment’s
average life and perhaps its yield. Whether or not a mortgage loan is prepaid is almost entirely controlled by the borrower. Borrowers are most likely to exercise prepayment options at the time when it is least advantageous to investors, generally
prepaying mortgages as interest rates fall, and slowing payments as interest rates rise. Besides the effect of prevailing interest rates, the rate of prepayment and refinancing of mortgages may also be affected by home value appreciation, ease of
the refinancing process and local economic conditions. Market risk reflects the risk that the price of a security may fluctuate over time. The price of mortgage-backed securities may be particularly sensitive to prevailing interest rates, the length
of time the security is expected to be outstanding, and the liquidity of the issue. In a period of unstable interest rates, there may be decreased demand for certain types of mortgage-backed securities, and a Fund invested in such securities wishing
to sell them may find it difficult to find a buyer, which may in turn decrease the price at which they may be sold. Credit risk reflects the risk that a Fund may not receive all or part of its principal because the issuer or credit enhancer has
defaulted on its obligations. Obligations issued by U.S. government-related entities are guaranteed as to the payment of principal and interest, but are not backed by the full faith and credit of the U.S. government. The performance of private label
mortgage-backed securities, issued by private institutions, is based on the financial health of those institutions. With respect to GNMA certificates, although GNMA guarantees timely payment even if homeowners delay or default, tracking the
“pass-through” payments may, at times, be difficult.
A Fund may invest in municipal
obligations. Municipal securities are fixed income securities issued by states, counties, cities and other political subdivisions and authorities. Although most municipal securities are exempt from federal income tax, municipalities also may issue
taxable securities. Tax exempt securities are generally classified by their source of payment. In addition to the usual risks associated with investing for income, the value of municipal obligations can be affected by changes in the actual or
perceived credit quality of the issuers. The credit quality of a municipal obligation can be affected by, among other factors: a) the financial condition of the issuer or guarantor; b) the issuer’s future borrowing plans and sources of
revenue; c) the economic feasibility of the revenue bond project or general borrowing purpose; d) political or economic developments in the region or jurisdiction where the security is issued; and e) the liquidity of the security. Because municipal
obligations are generally traded OTC, the liquidity of a particular issue often depends on the willingness of dealers to make a market in the security. The liquidity of some municipal issues can be enhanced by demand features, which enable a Fund to
demand payment from the issuer or a financial intermediary on short notice.
Options, Futures and Other Derivative
Strategies
General
. A Fund may use certain Financial Instruments, including options (traded on an exchange or OTC, or otherwise), futures contracts (sometimes referred to as
“futures”) and options on futures contracts as a substitute for a comparable market position in the underlying security, to attempt to hedge or limit the exposure of a Fund’s position, to create a synthetic money market position,
for certain tax-related purposes or to effect closing transactions.
The use of Financial Instruments is
subject to applicable regulations of the SEC, the several exchanges upon which they are traded and the Commodity Futures Trading Commission (the “CFTC”). In addition, a Fund’s ability to use Financial Instruments will be limited by
tax considerations. See “Dividends, Other Distributions and Taxes.”
Under current CFTC regulations, if a
Fund uses commodity interests (such as futures contracts, options on futures contracts and swaps) other than for bona fide hedging purposes (as defined by the CFTC) the aggregate initial margin and premiums required to establish these positions
(after taking into account unrealized profits and unrealized losses on any such positions and excluding the amount by which options that are “in-the-money” at the time of purchase) may not exceed 5% of a Fund’s NAV, or
alternatively, the aggregate net notional value of those positions, as determined at the time the most recent position was established, may not exceed 100% of the fund’s NAV (after taking into account unrealized profits and unrealized losses
on any such positions). Accordingly, each Fund will register prior to commencement of operations as a commodity pool, and the Adviser has registered as a commodity pool operator with the National Futures Association.
Each Fund is subject to the risk that
a change in U.S. law and related regulations will impact the way a Fund operates, increase the particular costs of a Fund’s operation and/or change the competitive landscape. In this regard, any further amendment to the Commodity Exchange Act
or its related regulations that subject a Fund to additional regulation may have adverse impacts on a Fund’s operations and expenses.
In addition to the instruments,
strategies and risks described below and in the Prospectus, Rafferty may discover additional opportunities in connection with Financial Instruments and other similar or related techniques. These new opportunities may become available as Rafferty
develops new techniques, as regulatory authorities broaden the range of permitted transactions and as new Financial Instruments or other techniques are developed. Rafferty may utilize these opportunities to the extent that they are consistent with a
Fund’s investment objective and permitted by a Fund’s investment limitations and applicable regulatory authorities. A Fund’s Prospectus or this SAI will be supplemented to the extent that new products or techniques involve
materially different risks than those described below or in the Prospectus.
Special
Risks
. The use of Financial Instruments involves special considerations and risks, certain of which are described below. Risks pertaining to particular Financial Instruments are described in the sections that
follow.
(1) Successful
use of most Financial Instruments depends upon Rafferty’s ability to predict movements of the overall securities markets, which requires different skills than predicting changes in the prices of individual securities. The ordinary spreads
between prices in the cash and futures markets, due to the differences in the natures of those markets, are subject to distortion. Due to the possibility of distortion, a correct forecast of stock market trends by Rafferty may still not result in a
successful transaction. Rafferty may be incorrect in its expectations as to the extent of market movements or the time span within which the movements take place, which, thus, may result in the strategy being unsuccessful.
(2) Options and futures prices can
diverge from the prices of their underlying instruments. Options and futures prices are affected by such factors as current and anticipated short-term interest rates, changes in volatility of the underlying instrument and the time remaining until
expiration of the contract, which may not affect security prices the same way. Imperfect or no correlation also may result from differing levels of demand in the options and futures markets and the securities markets, from structural differences in
how options and futures and securities are traded, and from imposition of daily price fluctuation limits or trading halts.
(3) As described below, a Fund might
be required to maintain assets as “cover,” maintain segregated accounts or make margin payments when it takes positions in Financial Instruments involving obligations to third parties (
e.g.
,
Financial Instruments other than purchased options). If a Fund were unable to close out its positions in such Financial Instruments, it might be required to continue to maintain such assets or accounts or make such payments until the position
expired or matured. These requirements might impair a Fund’s ability to sell a portfolio security or make an investment when it would otherwise be favorable to do so or require that a Fund sell a portfolio security at a disadvantageous time. A
Fund’s ability to close out a position in a Financial Instrument prior to expiration or maturity depends on the existence of a liquid secondary market or, in the absence of such a market, the ability and willingness of the other party to the
transaction (the “counterparty”) to enter into a transaction closing out the position. Therefore, there is no assurance that any position can be closed out at a time and price that is favorable to a Fund.
(4) Losses may arise due to
unanticipated market price movements, lack of a liquid secondary market for any particular instrument at a particular time or due to losses from premiums paid by a Fund on options transactions.
Cover
. Transactions using Financial Instruments, other than purchased options, expose a Fund to an obligation to another party. A Fund will not enter into any such
transactions unless it owns either (1) an offsetting (“covered”) position in securities or other options or futures contracts or (2) cash and liquid assets with a value, marked-to-market daily, sufficient to cover its potential
obligations to the extent not covered as provided in (1) above. Each Fund will comply with SEC guidelines regarding cover for these instruments and will, if the guidelines so require, set aside cash or liquid assets in an account with its custodian,
the Bank of New York Mellon ("BNYM"), in the prescribed amount as determined daily.
Assets used as cover or held in an
account cannot be sold while the position in the corresponding Financial Instrument is open, unless they are replaced with other appropriate assets. As a result, the commitment of a large portion of a Fund’s assets to cover or accounts could
impede portfolio management or a Fund’s ability to meet redemption requests or other current obligations.
Options
. The value of an option position will reflect, among other things, the current market value of the underlying investment, the time remaining until expiration, the
relationship of the exercise price to the market price of the underlying investment
and general market conditions. Options that expire
unexercised have no value. Options currently are traded on the Chicago Board Options Exchange
®
(“CBOE
®
”), the Exchange and other exchanges, as well as the OTC markets.
By buying a call option on a
security, a Fund has the right, in return for the premium paid, to buy the security underlying the option at the exercise price. By writing (selling) a call option and receiving a premium, a Fund becomes obligated during the term of the option to
deliver securities underlying the option at the exercise price if the option is exercised. By buying a put option, a Fund has the right, in return for the premium, to sell the security underlying the option at the exercise price. By writing a put
option, a Fund becomes obligated during the term of the option to purchase the securities underlying the option at the exercise price.
Because options premiums paid or
received by a Fund are small in relation to the market value of the investments underlying the options, buying and selling put and call options can be more speculative than investing directly in securities.
A Fund may effectively terminate its
right or obligation under an option by entering into a closing transaction. For example, a Fund may terminate its obligation under a call or put option that it had written by purchasing an identical call or put option; this is known as a closing
purchase transaction. Conversely, a Fund may terminate a position in a put or call option it had purchased by writing an identical put or call option; this is known as a closing sale transaction. Closing transactions permit a Fund to realize profits
or limit losses on an option position prior to its exercise or expiration.
Risks of Options on Currencies and Securities
. Exchange-traded options in the United States are issued by a clearing organization affiliated with the exchange on which the
option is listed that, in effect, guarantees completion of every exchange-traded option transaction. In contrast, OTC options are contracts between a Fund and its counterparty (usually a securities dealer or a bank) with no clearing organization
guarantee. Thus, when a Fund purchases an OTC option, it relies on the counterparty from which it purchased the option to make or take delivery of the underlying investment upon exercise of the option. Failure by the counterparty to do so would
result in the loss of any premium paid by a Fund as well as the loss of any expected benefit of the transaction.
A Fund’s ability to establish
and close out positions in exchange-traded options depends on the existence of a liquid market. However, there can be no assurance that such a market will exist at any particular time. Closing transactions can be made for OTC options only by
negotiating directly with the counterparty, or by a transaction in the secondary market if any such market exists. There can be no assurance that a Fund will in fact be able to close out an OTC option position at a favorable price prior to
expiration. In the event of insolvency of the counterparty, a Fund might be unable to close out an OTC option position at any time prior to its expiration.
If a Fund were unable to effect a
closing transaction for an option it had purchased, it would have to exercise the option to realize any profit. The inability to enter into a closing purchase transaction for a covered call option written by a Fund could cause material losses
because a Fund would be unable to sell the investment used as cover for the written option until the option expires or is exercised.
Options on Indices
. An index fluctuates with changes in the market values of the securities included in the index. Options on indices give the holder the right to receive an
amount of cash upon exercise of the option. Receipt of this cash amount will depend upon the closing level of the index upon which the option is based being greater than (in the case of a call) or less than (in the case of put) the exercise price of
the option. Some stock index options are based on a broad market index such as the S&P 500
®
Composite Stock Index, the NYSE Composite Index or
the AMEX
®
Major Market Index or on a narrower index such as the Philadelphia Stock Exchange Over-the-Counter Index.
Each of the exchanges has established
limitations governing the maximum number of call or put options on the same index that may be bought or written by a single investor, whether acting alone or in concert with others (regardless of whether such options are written on the same or
different exchanges or are held or written on one or more accounts or through one or more brokers). Under these limitations, option positions of all investment companies advised by Rafferty are combined for purposes of these limits. Pursuant to
these limitations, an exchange may order the liquidation of positions and may impose other sanctions or restrictions. These positions limits may restrict the number of listed options that a Fund may buy or sell.
Puts and calls on indices are similar
to puts and calls on securities or futures contracts except that all settlements are in cash and gain or loss depends on changes in the index in question rather than on price movements in individual securities or futures contracts. When a Fund
writes a call on an index, it receives a premium and agrees that, prior to the expiration date, the purchaser of the call, upon exercise of the call, will receive from a Fund an amount of cash if the closing level of the index upon which the call is
based is greater than the exercise price of the call. The amount of cash is equal to the difference between the closing price of the index and the exercise price of the call times a specified multiple (“multiplier”), which determines the
total value for each point of such difference. When a Fund buys a call on an index, it pays a premium and has the same rights to such call as are indicated above. When a Fund buys a put on an index, it pays a premium and has the right, prior to the
expiration date, to require the seller of the put, upon a Fund’s exercise of the put, to deliver to a Fund an amount of cash if the closing level of the index upon which the put is based is less than the exercise price of the put, which amount
of cash is determined by the multiplier, as described above for calls. When a Fund writes a put on an index, it receives a premium and the purchaser of the put has the right, prior to the expiration date, to require a Fund to
deliver to it an amount of cash equal to the difference
between the closing level of the index and the exercise price times the multiplier if the closing level is less than the exercise price.
Risks of Options on Indices
. If a Fund has purchased an index option and exercises it before the closing index value for that day is available, it runs the risk that the
level of the Index may subsequently change. If such a change causes the exercised option to fall out-of-the-money, a Fund will be required to pay the difference between the closing index value and the exercise price of the option (times the
applicable multiplier) to the assigned writer.
OTC Options
. Unlike exchange-traded options, which are standardized with respect to the underlying instrument, expiration date, contract size and strike price, the terms of
OTC options (options not traded on exchanges) generally are established through negotiation with the other party to the option contract. While this type of arrangement allows a Fund great flexibility to tailor the option to its needs, OTC options
generally involve greater risk than exchange-traded options, which are guaranteed by the clearing organization of the exchanges where they are traded.
Forward Contracts
. Each Fund may enter into equity, equity index or interest rate forward contracts for purposes of attempting to gain exposure to an index or group of
securities without actually purchasing these securities, or to hedge a position. Forward contracts are two-party contracts pursuant to which one party agrees to pay the counterparty a fixed price for an agreed upon amount of commodities, securities,
or the cash value of the commodities, securities or the securities index, at an agreed upon date. Because they are two-party contracts and because they may have terms greater than seven days, forward contracts may be considered to be illiquid for
the Fund’s illiquid investment limitations. A Fund will not enter into any forward contract unless Rafferty believes that the other party to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received
under a forward contract in the event of the default or bankruptcy of a counterparty. If such a default occurs, a Fund will have contractual remedies pursuant to the forward contract, but such remedies may be subject to bankruptcy and insolvency
laws which could affect the Fund’s rights as a creditor.
Futures Contracts and Options on Futures Contracts
. A futures contract obligates the seller to deliver (and the purchaser to take delivery of) the specified security on the
expiration date of the contract. An index futures contract obligates the seller to deliver (and the purchaser to take) an amount of cash equal to a specific dollar amount times the difference between the value of a specific index at the close of the
last trading day of the contract and the price at which the agreement is made. No physical delivery of the underlying securities in the index is made.
When a Fund writes an option on a
futures contract, it becomes obligated, in return for the premium paid, to assume a position in the futures contract at a specified exercise price at any time during the term of the option. If a Fund writes a call, it assumes a short futures
position. If it writes a put, it assumes a long futures position. When a Fund purchases an option on a futures contract, it acquires the right in return for the premium it pays to assume a position in a futures contract (a long position if the
option is a call and a short position if the option is a put).
Whether a Fund realizes a gain or
loss from futures activities depends upon movements in the underlying security or index. The extent of a Fund’s loss from an unhedged short position in futures contracts or from writing unhedged call options on futures contracts is potentially
unlimited. A Fund only purchases and sells futures contracts and options on futures contracts that are traded on a U.S. exchange or board of trade.
No price is paid upon entering into a
futures contract. Instead, at the inception of a futures contract a Fund is required to deposit “initial margin” in an amount generally equal to 10% or less of the contract value. Margin also must be deposited when writing a call or put
option on a futures contract, in accordance with applicable exchange rules. Unlike margin in securities transactions, initial margin does not represent a borrowing, but rather is in the nature of a performance bond or good-faith deposit that is
returned to a Fund at the termination of the transaction if all contractual obligations have been satisfied. Under certain circumstances, such as periods of high volatility, a Fund may be required by an exchange to increase the level of its initial
margin payment, and initial margin requirements might be increased generally in the future by regulatory action.
Subsequent “variation
margin” payments are made to and from the futures commission merchant daily as the value of the futures position varies, a process known as “marking-to-market.” Variation margin does not involve borrowing, but rather represents a
daily settlement of a Fund’s obligations to or from a futures commission merchant. When a Fund purchases an option on a futures contract, the premium paid plus transaction costs is all that is at risk. In contrast, when a Fund purchases or
sells a futures contract or writes a call or put option thereon, it is subject to daily variation margin calls that could be substantial in the event of adverse price movements. If a Fund has insufficient cash to meet daily variation margin
requirements, it might need to sell securities at a time when such sales are disadvantageous.
Purchasers and sellers of futures
contracts and options on futures can enter into offsetting closing transactions, similar to closing transactions in options, by selling or purchasing, respectively, an instrument identical to the instrument purchased or sold. Positions in futures
and options on futures contracts may be closed only on an exchange or board of trade that provides a secondary market. However, there can be no assurance that a liquid secondary market will exist for a particular contract at a particular time. In
such event, it may not be possible to close a futures contract or options position.
Under certain circumstances, futures
exchanges may establish daily limits on the amount that the price of a futures contract or an option on a futures contract can vary from the previous day’s settlement price; once that limit is reached, no trades
may be made that day at a price beyond the limit. Daily
price limits do not limit potential losses because prices could move to the daily limit for several consecutive days with little or no trading, thereby preventing liquidation of unfavorable positions.
If a Fund were unable to liquidate a
futures contract or an option on a futures position due to the absence of a liquid secondary market or the imposition of price limits, it could incur substantial losses. A Fund would continue to be subject to market risk with respect to the
position. In addition, except in the case of purchased options, a Fund would continue to be required to make daily variation margin payments and might be required to maintain cash or liquid assets in an account.
Risks of Futures Contracts and Options Thereon
. The ordinary spreads between prices in the cash and futures markets (including the options on futures markets), due to
differences in the natures of those markets, are subject to the following factors, which may create distortions. First, all participants in the futures market are subject to margin deposit and maintenance requirements. Rather than meeting additional
margin deposit requirements, investors may close futures contracts through offsetting transactions, which could distort the normal relationships between the cash and futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking delivery. To the extent participants decide to make or take delivery, liquidity in the futures market could be reduced, thus producing distortion. Third, from the point
of view of speculators, the deposit requirements in the futures market are less onerous than margin requirements in the securities market. Therefore, increased participation by speculators in the futures market may cause temporary price
distortions.
Risks Associated with Commodity Futures Contracts
. There are several additional risks associated with transactions in commodity futures contracts.
Storage
. Unlike the financial futures markets, in the commodity futures markets there are costs of physical storage associated with purchasing the underlying commodity. The
price of the commodity futures contract will reflect the storage costs of purchasing the physical commodity, including the time value of money invested in the physical commodity. To the extent that the storage costs for an underlying commodity
change while a Fund is invested in futures contracts on that commodity, the value of the futures contract may change proportionately.
Reinvestment
. In the commodity futures markets, producers of the underlying commodity may decide to hedge the price risk of selling the commodity by selling futures
contracts today to lock in the price of the commodity at delivery tomorrow. In order to induce speculators to purchase the other side of the same futures contract, the commodity producer generally must sell the futures contract at a lower price than
the expected future spot price. Conversely, if most hedgers in the futures market are purchasing futures contracts to hedge against a rise in prices, then speculators will only sell the other side of the futures contract at a higher futures price
than the expected future spot price of the commodity. The changing nature of the hedgers and speculators in the commodity markets will influence whether futures prices are above or below the expected future spot price, which can have significant
implications for a Fund. If the nature of hedgers and speculators in futures markets has shifted when it is time for a Fund to reinvest the proceeds of a maturing contract in a new futures contract, the Fund might reinvest at higher or lower futures
prices, or choose to pursue other investments.
Other Economic Factors
. The commodities which underlie commodity futures contracts may be subject to additional economic and non-economic variables, such as drought, floods,
weather, livestock disease, embargoes, tariffs, and international economic, political and regulatory developments. These factors may have a larger impact on commodity prices and commodity-linked instruments, including futures contracts, than on
traditional securities. Certain commodities are also subject to limited pricing flexibility because of supply and demand factors. Others are subject to broad price fluctuations as a result of the volatility of the prices for certain raw materials
and the instability of supplies of other materials. These additional variables may create additional investment risks which subject a Fund’s investments to greater volatility than investments in traditional securities.
Combined Positions
. A Fund may purchase and write options in combination with each other. For example, a Fund may purchase a put option and write a call option on the same
underlying instrument, in order to construct a combined position whose risk and return characteristics are similar to selling a futures contract. Another possible combined position would involve writing a call option at one strike price and buying a
call option at a lower price, in order to reduce the risk of the written call option in the event of a substantial price increase. Because combined options positions involve multiple trades, they result in higher transaction costs and may be more
difficult to open and close out.
Other Investment Companies
Open-end and Closed-end Investment Companies
. Each Fund may invest in the securities of other investment companies, including open- and closed-end funds, and ETFs.
Investments in the securities of other investment companies may involve duplication of advisory fees and certain other expenses. By investing in another investment company, a Fund becomes a shareholder of that investment company. As a result, Fund
shareholders indirectly will bear a Fund’s proportionate share of the fees and expenses of the other investment company, in addition to the fees and expenses Fund shareholders bear in connection with a Fund’s own operations.
Each Fund intends to limit its
investments in securities issued by other investment companies in accordance with the 1940 Act. Section 12(d)(1) of the 1940 Act precludes a Fund from acquiring (i) more than 3% of the total outstanding shares of another investment company; (ii)
shares of another investment company having an aggregate value in excess of 5% of the value of the total assets of the Fund; or (iii) shares of another registered investment company and all other investment companies having an aggregate value in
excess of 10% of the value of the total assets of the Fund. However, Section 12(d)(1)(F) of the 1940 Act provides that the provisions of paragraph 12(d) shall not apply to securities purchased or otherwise acquired by a Fund if (i) immediately after
such purchase or acquisition not more than 3% of the total outstanding shares of such investment company is owned by the Fund and all affiliated persons of the Fund; and (ii) the Fund has not offered or sold, and is not proposing to offer or sell
its shares through a principal underwriter or otherwise at a public or offering price that includes a sales load of more than 1 1/2%.
If a Fund invests in investment
companies pursuant to Section 12(d)(1)(F), it must comply with the following voting restrictions: when the Fund exercises voting rights, by proxy or otherwise, with respect to investment companies owned by the Fund, the Fund will either seek
instruction from the Funds' shareholders with regard to the voting of all proxies and vote in accordance with such instructions, or vote the shares held by a Fund in the same proportion as the vote of all other holders of such security. In addition,
an investment company purchased by a Fund pursuant to Section 12(d)(1)(F) shall not be required to redeem its shares in an amount exceeding 1% of such investment company’s total outstanding shares in any period of less than thirty days.
Shares of another investment company
or ETF that has received exemptive relief from the SEC to permit other funds to invest in the shares without these limitations are excluded from such restrictions to the extent that a Fund has complied with the requirements of such orders. To the
extent that a Fund invests in open-end or closed-end investment companies that invest primarily in the securities of companies located outside the United States, see the risks related to foreign securities set forth above.
Exchange-Traded Products
. Each Fund may invest in ETFs, which are registered investment companies, partnerships or trusts that are bought and sold on a securities exchange.
A Fund may also invest in exchange-traded notes (“ETN”), which are structured debt securities. Additionally, a Fund may invest in swap agreements referencing ETFs. Whereas ETFs’ liabilities are secured by their portfolio
securities, ETNs’ liabilities are unsecured general obligations of the issuer. Most ETFs and ETNs are designed to track a particular market segment or index. ETFs and ETNs share expenses associated with their operation, typically including,
with respect to ETFs, advisory fees. When a Fund invests in an ETF or ETN, in addition to directly bearing expenses associated with its own operations, it will bear its pro rata portion of the ETF’s or ETN’s expenses. The risks of owning
an ETF or ETN generally reflect the risks of owning the underlying securities the ETF or ETN is designed to track, although lack of liquidity in an ETF or ETN could result in it being more volatile than the underlying portfolio of securities. If a
Fund invests in ETFs or swap agreements referencing ETFs, the underlying ETFs may not necessarily track the same index as the Fund. In addition, because of ETF or ETN expenses, compared to owning the underlying securities directly, it may be more
costly to own an ETF or ETN. The value of an ETN security should also be expected to fluctuate with the credit rating of the issuer.
Money Market Funds
. Money market funds are open-end registered investment companies which have historically traded at a stable $1.00 per share price. In July 2014, the SEC
adopted amendments to money market fund regulations (“2014 Amendments”) intended to address perceived systemic risks associated with money market funds and to improve transparency for money market fund investors. In general, the 2014
Amendments require money market funds that do not meet the definitions of a retail money market fund or government money market fund to transact at a floating NAV per share (similar to all other non-money market mutual funds), instead of at a $1
stable share price, as has traditionally been the case. The 2014 Amendments also permit all money market funds to impose liquidity fees and redemption gates for use in times of market stress. The SEC also adopted additional diversification, stress
testing, and disclosure measures. The 2014 Amendments represent significant departures from the traditional operation of money market funds and the impact that these amendments might have on money market funds is unclear; however, any impact on the
trading and value of money market instruments as a result of the 2014 Amendments may negatively affect a Fund’s yield and return potential. The 2014 Amendments generally are not effective until October 2016.
A Fund may make investments in
the securities of real estate companies, which are regarded as those which derive at least 50% of their respective revenues from the ownership, construction, financing, management or sale of commercial, industrial, or residential real estate, or
have at least 50% of their respective assets in such real estate. Such investments include common stocks (including real estate investment trust shares, see “Real Estate Investment Trusts” below), rights or warrants to purchase common
stocks, securities convertible into common stocks where the conversion feature represents, in Rafferty’s view, a significant element of the securities’ value, and preferred stocks.
Real Estate Investment Trusts
(“REITs”)
A Fund may make investments in
REITs. REITs include equity, mortgage and hybrid REITs. Equity REITs own real estate properties, and their revenue comes principally from rent. Mortgage REITs loan money to real estate owners, and their revenue comes principally from interest earned
on their mortgage loans. Hybrid REITs combine characteristics of both equity and mortgage REITs. The value of an equity REIT may be affected by changes in the value of the underlying property, while a mortgage REIT may be affected by the quality of
the credit extended. The performance of both types of REITs depends upon conditions in the real estate industry, management skills and the amount of cash flow. The risks associated with REITs include defaults by borrowers, self-liquidation, failure
to qualify as a pass-through entity under the federal tax law, failure to qualify as an exempt entity under the 1940 Act and the fact that REITs are not diversified.
A Fund may enter into repurchase
agreements with banks that are members of the Federal Reserve System or securities dealers who are members of a national securities exchange or are primary dealers in U.S. government securities. Repurchase agreements generally are for a short period
of time, usually less than a week. Under a repurchase agreement, a Fund purchases a U.S. government security and simultaneously agrees to sell the security back to the seller at a mutually agreed-upon future price and date, normally one day or a few
days later. The resale price is greater than the purchase price, reflecting an agreed-upon market interest rate during a Fund’s holding period. While the maturities of the underlying securities in repurchase agreement transactions may be more
than one year, the term of each repurchase agreement always will be less than one year. Repurchase agreements with a maturity of more than seven days are considered to be illiquid investments. No Fund may enter into such a repurchase agreement if,
as a result, more than 15% of the value of its net assets would then be invested in such repurchase agreements and other illiquid investments. See “Illiquid Investments and Restricted Securities” above.
A Fund will always receive, as
collateral, securities whose market value, including accrued interest, at all times will be at least equal to 100% of the dollar amount invested by a Fund in each repurchase agreement. In the event of default or bankruptcy by the seller, a Fund will
liquidate those securities (whose market value, including accrued interest, must be at least 100% of the amount invested by a Fund) held under the applicable repurchase agreement, which securities constitute collateral for the seller’s
obligation to repurchase the security. If the seller defaults, a Fund might incur a loss if the value of the collateral securing the repurchase agreement declines and might incur disposition costs in connection with liquidating the collateral. In
addition, if bankruptcy or similar proceedings are commenced with respect to the seller of the security, realization upon the collateral by a Fund may be delayed or limited.
Reverse Repurchase Agreements
A Fund may borrow by entering
into reverse repurchase agreements with the same parties with whom it may enter into repurchase agreements. Under a reverse repurchase agreement, a Fund sells securities and agrees to repurchase them at a mutually agreed to price. At the time a Fund
enters into a reverse repurchase agreement, it will establish and maintain a segregated account with an approved custodian containing liquid high-grade securities, marked-to-market daily, having a value not less than the repurchase price (including
accrued interest). Reverse repurchase agreements involve the risk that the market value of securities retained in lieu of sale by a Fund may decline below the price of the securities a Fund has sold but is obliged to repurchase. If the buyer of
securities under a reverse repurchase agreement files for bankruptcy or becomes insolvent, such buyer or its trustee or receiver may receive an extension of time to determine whether to enforce a Fund’s obligation to repurchase the securities.
During that time, a Fund’s use of the proceeds of the reverse repurchase agreement effectively may be restricted. Reverse repurchase agreements create leverage, a speculative factor, and are considered borrowings for the purpose of a
Fund’s limitation on borrowing.
A Fund may engage in short sale
transactions under which a Fund sells a security it does not own. To complete such a transaction, a Fund must borrow the security to make delivery to the buyer. A Fund then is obligated to replace the security borrowed by purchasing the security at
the market price at the time of replacement. The price at such time may be more or less than the price at which the security was sold by a Fund. Until the security is replaced, a Fund is required to pay to the lender amounts equal to any dividends
that accrue during the period of the loan. The proceeds of the short sale will be retained by the broker, to the extent necessary to meet the margin requirements, until the short position is closed out.
Until a Fund closes its short
position or replaces the borrowed stock, a Fund will: (1) maintain an account containing cash or liquid assets at such a level that (a) the amount deposited in the account plus the amount deposited with the broker as collateral will equal the
current value of the stock sold short and (b) the amount deposited in the account plus the amount deposited with the broker as collateral will not be less than the market value of the stock at the time the stock was sold short; or (2) otherwise
cover a Fund’s short position.
A Fund may enter into swap
agreements. Swap agreements are generally two-party contracts entered into primarily by institutional investors for periods ranging from a day to more than one year. In a standard “swap” transaction, two parties agree to exchange the
returns (or differentials in rates of return) earned or realized on particular predetermined investments or instruments. The gross returns to be exchanged or “swapped” between the parties are calculated with respect to a “notional
amount,”
i.e.
, the return on or increase in value of a particular dollar amount invested in a “basket” of securities representing a particular index. Some swaps are, and more in the future
will be, centrally cleared. Swaps that are centrally-cleared are subject to the creditworthiness of the clearing organizations involved in the transaction. For example, an investor could lose margin payments it has deposited with the clearing
organization as well as the net amount of gains not yet paid by the clearing organization if it breaches its agreement with the investor or becomes insolvent or goes into bankruptcy. In the event of bankruptcy of the clearing organization, the
investor may be entitled to the net amount of gains the investor is entitled to receive plus the return of margin owed to it only in proportion to the amount received by the clearing organization’s other customers, potentially resulting in
losses to the investor.
An
interest rate swap is an agreement between two parties to exchange interest payments on a designated amount of two different securities for a designated period of time. For example, two parties may agree to exchange interest payments on variable and
fixed rate instruments. A Fund may enter into interest rate swap transactions to preserve a return or spread on a particular investment or a portion of its bond portfolio.
A total return swap is a contract
whereby one party agrees to make a series of payments to another party based on the change in the market value of the assets underlying such contract (which can include a security, commodity, index or baskets thereof) during the specified period. In
exchange, the other party to the contract agrees to make a series of payments calculated by reference to an interest rate and/or some other agreed-upon amount (including the change in market value of other underlying assets). A Fund may use total
return swaps to gain exposure to an asset without owning it or taking physical custody of it. For example, a Fund investing in total return commodity swaps will receive the price appreciation of a commodity, commodity index or portion thereof in
exchange for payment of an agreed-upon fee.
In a credit default swap, the credit
default protection buyer makes periodic payments, known as premiums, to the credit default protection seller. In return the credit default protection seller will make a payment to the credit default protection buyer upon the occurrence of a
specified credit event. A credit default swap can refer to a single issuer or asset, a basket of issuers or assets or index of assets, each known as the reference entity or underlying asset. A Fund may act as either the buyer or the seller of a
credit default swap. A Fund may buy or sell credit default protection on a basket of issuers or assets, even if a number of the underlying assets referenced in the basket are lower-quality debt securities. In an unhedged credit default swap, a Fund
buys credit default protection on a single issuer or asset, a basket of issuers or assets or index of assets without owning the underlying asset or debt issued by the reference entity. Credit default swaps involve greater and different risks than
investing directly in the referenced asset, because, in addition to market risk, credit default swaps include liquidity, counterparty and operational risk.
Credit default swaps allow a fund to
acquire or reduce credit exposure to a particular issuer, asset or basket of assets. If a swap agreement calls for payments by a fund, the Fund must be prepared to make such payments when due. If a Fund is the credit default protection seller, the
Fund will experience a loss if a credit event occurs and the credit of the reference entity or underlying asset has deteriorated. If a Fund is the credit default protection buyer, the Fund will be required to pay premiums to the credit default
protection seller.
Most swap
agreements entered into by a Fund calculate the obligations of the parties to the agreement on a “net basis.” Consequently, a Fund’s current obligations (or rights) under a swap agreement generally will be equal to the net amount
to be paid or received under the agreement based on the relative values of the positions held by each party to the agreement (the “net amount”). Payments may be made at the conclusion of a swap agreement or periodically during its
term.
Swap agreements do not
involve the delivery of securities or other underlying assets. Accordingly, if a swap is entered into on a net basis, if the other party to a swap agreement defaults, a Fund’s risk of loss consists of the net amount of payments that such Fund
is contractually entitled to receive, if any.
The net amount of the excess, if any,
of a Fund’s obligations over its entitlements with respect to a swap agreement entered into on a net basis will be accrued daily and an amount of cash or liquid asset having an aggregate NAV at least equal to the accrued excess will be
maintained in an account with the Custodian that satisfies the 1940 Act. A Fund also will establish and maintain such accounts with respect to its total obligations under any swaps that are not entered into on a net basis. Obligations under swap
agreements so covered will not be construed to be “senior securities” for purposes of a Fund’s investment restriction concerning senior securities.
Because they are generally two-party
contracts and may have terms of greater than seven days, swap agreements may be considered to be illiquid for a Fund’s illiquid investment limitations. A Fund will not enter into any swap agreement unless Rafferty believes that the other party
to the transaction is creditworthy. A Fund bears the risk of loss of the amount expected to be received under a swap agreement in the event of the default or bankruptcy of a swap agreement counterparty.
A Fund may enter into a swap
agreement with respect to an index in circumstances where Rafferty believes that it may be more cost effective or practical than buying the underlying securities represented by such index or a futures contract or an option on such index. The
counterparty to any swap agreement will typically be a bank, investment banking firm or broker-dealer. The counterparty will generally agree to pay a Fund the amount, if any, by which the notional amount of the swap agreement would have increased in
value had it been invested in the particular stocks represented in the index, plus the dividends that would have been received on those stocks. A Fund will agree to pay to the counterparty a floating rate of interest on the notional amount of the
swap agreement plus the amount, if any, by which the notional amount would have decreased in value had it been invested in such stocks. Therefore, the return to a Fund on any swap agreement should be the gain or loss on the notional amount plus
dividends on the stocks less the interest paid by a Fund on the notional amount.
The swap market has grown
substantially in recent years with a large number of banks and investment banking firms acting both as principals and as agents utilizing standardized swap documentation. In addition, as discussed above, some swaps currently are, and more in the
future will be, centrally cleared, which affects how swaps are transacted. As a result, the swap market has become relatively liquid in comparison with the markets for other similar instruments that are traded in the OTC market. Rafferty, under the
supervision of the Board, is responsible for determining and monitoring the liquidity of Fund transactions in swap agreements.
The use of equity swaps is a highly
specialized activity that involves investment techniques and risks different from those associated with ordinary portfolio securities transactions.
A Fund may also invest in unrated
debt securities. Unrated debt, while not necessarily lower in quality than rated securities, may not have as broad a market. Because of the size and perceived demand for the issue, among other factors, certain issuers may decide not to pay the cost
of getting a rating for their bonds. The creditworthiness of the issuer, as well as any financial institution or other party responsible for payments on the security, will be analyzed to determine whether to purchase unrated bonds.
U.S. Government Securities
A Fund may invest in securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities (“U.S. government securities”) in pursuit of its investment objective, in order to deposit such securities as initial or variation margin, as
“cover” for the investment techniques it employs, as part of a cash reserve or for liquidity purposes.
U.S. government securities are
high-quality instruments issued or guaranteed as to principal or interest by the U.S. Treasury Department (“U.S. Treasury”) or by an agency or instrumentality of the U.S. government. Not all U.S. government securities are backed by the
full faith and credit of the United States. Some are backed by the right of the issuer to borrow from the U.S. Treasury; others are backed by discretionary authority of the U.S. government to purchase the agencies’ obligations; while others
are supported only by the credit of the instrumentality. In the case of securities not backed by the full faith and credit of the United States, the investor must look principally to the agency issuing or guaranteeing the obligation for ultimate
repayment.
U.S. government
securities include U.S. Treasury Bills (which mature within one year of the date they are issued), U.S. Treasury Notes (which have maturities of one to ten years) and U.S. Treasury Bonds (which generally have maturities of more than 10 years). All
such U.S. Treasury securities are backed by the full faith and credit of the United States.
U.S. government agencies and
instrumentalities that issue or guarantee securities include the Federal Housing Administration, Fannie Mae
®
, the Farmers Home Administration, the
Export-Import Bank of the United States, the Small Business Administration, Ginnie Mae
®
, the General Services Administration, the Central Bank for
Cooperatives, the Federal Home Loan Banks, Freddie Mac
©
, the Farm Credit Banks, the Maritime Administration, the Tennessee Valley Authority, the
Resolution Funding Corporation and the Student Loan Marketing Association.
In September 2008, the U.S. Treasury
and the Federal Housing Finance Agency (“FHFA”) announced that Fannie Mae
®
and Freddie Mac
®
had been placed in conservatorship. Since that time, Fannie Mae
®
and Freddie Mac
®
have received significant
capital support through U.S. Treasury preferred stock purchases, as well as U.S. Treasury and Federal Reserve purchases of their mortgage backed securities (“MBS”). The FHFA and the U.S. Treasury (through its agreement to purchase Fannie
Mae
®
and Freddie Mac
®
preferred stock) have
imposed strict limits on the size of their mortgage portfolios. While the MBS purchase programs ended in 2010, the U.S. Treasury continued its support for the entities’ capital as necessary to prevent a negative net worth through at least
2012. Although the U.S. Treasury and other governmental entities provided significant support to Fannie Mae
®
and Freddie Mac
®
, there is no guarantee they would do so again. An FHFA stress test suggested that in a “severely adverse scenario” additional Treasury
support of between $84.4 billion and $190 billion (depending on the treatment of deferred tax assets) might be required. Nonetheless, no assurance can be given that Fannie Mae
®
and Freddie Mac
®
will remain successful in
meeting their obligations with respect to the debt and mortgage-backed securities that they issue.
In addition, the problems faced by
Fannie Mae
®
and Freddie Mac
®
, resulting in
their being placed into federal conservatorship and receiving significant U.S. government support, have sparked serious debate among federal policy makers regarding the continued role of the U.S. government in providing liquidity for mortgage loans.
In December 2011, Congress enacted the Temporary Payroll Tax Cut Continuation Act (“TCCA”) of 2011 which, among other provisions, requires that Fannie Mae
®
and Freddie Mac
®
increase their single-family
guaranty fees by at least 10 basis points and remit this increase to Treasury with respect to all loans acquired by Fannie Mae
®
or Freddie Mac
®
on or after April 1, 2012 and before January 1, 2022. Serious discussions among policymakers continue, however, as to whether Fannie Mae
®
and Freddie Mac
®
should be nationalized,
privatized, restructured, or eliminated altogether. Fannie Mae reported in the second quarter of 2014 that there was “significant uncertainty regarding the future of our company, including how long the company will continue to exist in its
current form, the extent of our role in the market, what form we will have, and what ownership interest, if any, our current common and preferred stockholders will hold in us after the conservatorship is terminated and whether we will continue to
exist following conservatorship.” Freddie Mac faces similar uncertainty about its future role. Fannie Mae
®
and Freddie Mac
®
also are the subject of several continuing legal actions and investigations over certain accounting, disclosure, or corporate governance matters,
which (along with any resulting financial restatements) may continue to have an adverse effect on the guaranteeing entities.
Yields on short-, intermediate- and
long-term U.S. government securities are dependent on a variety of factors, including the general conditions of the money and bond markets, the size of a particular offering and the maturity of the obligation. Debt securities with longer maturities
tend to produce higher capital appreciation and depreciation than obligations with shorter maturities and lower yields. The market value of U.S. government securities generally varies inversely with changes in the market interest rates. An increase
in interest rates, therefore, generally would reduce the market value of a Fund’s portfolio investments in U.S. government securities, while a decline in interest rates generally would increase the market value of a Fund’s portfolio
investments in these securities.
U.S. Government Sponsored Enterprises
(“GSEs”)
GSE securities are securities
issued or guaranteed by the U.S. government or its agencies or instrumentalities. Some obligations issued by GSEs and instrumentalities are supported by the full faith and credit of the U.S. Treasury; others by the right of the issuer to borrow from
the U.S. Treasury; others by discretionary authority of the U.S. government to purchase certain obligations of the agency or instrumentality; and others only by the credit of the agency or instrumentality. Those securities bear fixed, floating or
variable rates of interest. Interest may fluctuate based on generally recognized reference rates or the relationship of rates. While the U.S. government currently provides financial support to such GSEs or instrumentalities, no assurance can be
given that it will always do so, since it is not so obligated by law.
Certain U.S. government debt
securities, such as securities of the Federal Home Loan Banks, are supported by the right of the issuer to borrow from the U.S. Treasury. Others, such as securities issued by Fannie Mae
®
and Freddie Mac
®
, are supported only by the
credit of the corporation. In the case of securities not backed by the full faith and credit of the United States, a fund must look principally to the agency issuing or guaranteeing the obligation in the event the agency or instrumentality does not
meet its commitments. The U.S. government may choose not to provide financial support to GSEs or instrumentalities if it is not legally obligated to do so. A fund will invest in securities of such instrumentalities only when Rafferty is satisfied
that the credit risk with respect to any such instrumentality is comparatively minimal.
A Fund may enter into firm
commitment agreements for the purchase of securities on a specified future date. A Fund may purchase, for example, new issues of fixed-income instruments on a when-issued basis, whereby the payment obligation, or yield to maturity, or coupon rate on
the instruments may not be fixed at the time of transaction. A Fund will not purchase securities on a when-issued basis if, as a result, more than 15% of its net assets would be so invested. If a Fund enters into a firm commitment agreement,
liability for the purchase price and the rights and risks of ownership of the security accrue to a Fund at the time it becomes obligated to purchase such security, although delivery and payment occur at a later date. Accordingly, if the market price
of the security should decline, the effect of such an agreement would be to obligate a Fund to purchase the security at a price above the current market price on the date of delivery and payment. During the time a Fund is obligated to purchase such
a security, it will be required to segregate assets with an approved custodian in an amount sufficient to settle the transaction.
Zero-Coupon, Payment-In-Kind and Strip
Securities
A Fund
may invest in zero-coupon, payment-in-kind and strip securities of any rating or maturity. Zero-coupon securities make no periodic interest payment but are sold at a deep discount from their face value, otherwise known as “original issue
discount” or “OID.” The buyer earns a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The OID varies depending on the time remaining until
maturity, as well as market interest rates, liquidity of the security, and the issuer’s perceived credit quality. If the issuer defaults, a
Fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semi-annually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon security holders do not
receive interest payments, when interest rates rise, zero-coupon securities fall more dramatically in value than securities paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the
securities reflect a fixed rate of return. Payment-in-kind securities allow the issuer, at its option, to make current interest payments either in cash or in additional debt obligations of the issuer. Both zero-coupon securities and payment-in-kind
securities allow an issuer to avoid the need to generate cash to meet current interest payments.
An investment in zero-coupon
securities and delayed interest securities (which do not make interest payments until after a specified time) may cause a Fund to recognize income and be required to make distributions thereof to shareholders before it receives any cash payments on
its investment. Moreover, even though payment-in-kind securities do not pay current interest in cash, a Fund nonetheless is required to accrue interest income on these investments and to distribute the interest income at least annually to
shareholders. See “Dividends, Other Distributions and Taxes
–
Income from Zero Coupon and Payment-in-Kind Securities.” Thus, a Fund could be required at
times to liquidate other investments to satisfy distribution requirements.
A Fund may also invest in strips,
which are debt securities whose interest coupons are taken out and traded separately after the securities are issued but otherwise are comparable to zero-coupon securities. Like zero-coupon securities and payment-in-kind securities, strips are
generally more sensitive to interest rate fluctuations than interest paying securities of comparable term and quality.
Other Investment Risks and Practices
Borrowing
. A Fund may borrow money for investment purposes, which is a form of leveraging. Leveraging investments, by purchasing securities with borrowed money, is a
speculative technique that increases investment risk while increasing investment opportunity. Leverage will magnify changes in a Fund’s NAV and on a Fund’s investments. Although the principal of such borrowings will be fixed, a
Fund’s assets may change in value during the time the borrowing is outstanding. Leverage also creates interest expenses for a Fund. To the extent the income derived from securities purchased with borrowed funds exceeds the interest a Fund will
have to pay, that Fund’s net income will be greater than it would be if leverage were not used. Conversely, if the income from the assets obtained with borrowed funds is not sufficient to cover the cost of leveraging, the net income of a Fund
will be less than it would be if leverage were not used, and therefore the amount available for distribution to shareholders as dividends will be reduced. The use of derivatives in connection with leverage creates the potential for significant
loss.
A Fund may borrow
money to facilitate management of a Fund’s portfolio by enabling a Fund to meet redemption requests when the liquidation of portfolio instruments would be inconvenient or disadvantageous. Such borrowing is not for investment purposes and will
be repaid by the borrowing Fund promptly.
As required by the 1940 Act, a Fund
must maintain continuous asset coverage (total assets, including assets acquired with borrowed funds, less liabilities exclusive of borrowings) of 300% of all amounts borrowed. If at any time the value of the required asset coverage declines as a
result of market fluctuations or other reasons, a Fund may be required to sell some of its portfolio investments within three days to reduce the amount of its borrowings and restore the 300% asset coverage, even though it may be disadvantageous from
an investment standpoint to sell portfolio instruments at that time.
Lending Portfolio Securities
. Each Fund may lend portfolio securities with a value not exceeding 33 1/3% of its total assets to brokers, dealers, and financial institutions.
Borrowers are required continuously to secure their obligations to return securities on loan from a Fund by depositing any combination of short-term government securities, shares of registered and unregistered money market funds and cash as
collateral with a Fund. The collateral must be equal to at least 100% of the market value of the loaned securities, which will be marked to market daily. The value of this collateral could decline, causing the Fund to experience a loss. While a
Fund’s portfolio securities are on loan, a Fund continues to receive interest on the securities loaned and simultaneously earns either interest on the investment of the collateral or fee income if the loan is otherwise collateralized. A Fund
may invest the interest received and the collateral, thereby earning additional income. Loans would be subject to termination by the lending Fund on a four-business days’ notice or by the borrower on a one-day notice. Borrowed securities must
be returned when the loan is terminated. Any gain or loss in the market price of the borrowed securities that occurs during the term of the loan inures to the lending Fund and that Fund’s shareholders. A lending Fund may pay reasonable
finders, borrowers, administrative and custodial fees in connection with a loan. A Fund could lose money from securities lending if, for example, it is delayed or prevented from selling the collateral after a loan is made, in recovering the
securities loaned or if the Fund incurs losses on the reinvestment of cash collateral. Each Fund currently has no intention of lending its portfolio securities.
Portfolio Turnover
. The Trust anticipates that each Fund’s annual portfolio turnover will vary. A Fund’s portfolio turnover rate is calculated by the value of
the securities purchased or securities sold, excluding all securities whose terms-to-maturity at the time of acquisition were less than 397 days, divided by the average monthly value of such securities owned during the year. Based on this
calculation, instruments with remaining terms-to-maturity of less than 397 days are excluded from the portfolio turnover rate. Such instruments generally would include futures contracts and options, since such contracts
generally have remaining terms-to-maturity of less
than 397 days. In any given period, all of a Fund’s investments may have remaining terms-to-maturity of less than 397 days; in that case, the portfolio turnover rate for that period would be equal to zero. However, each Fund’s portfolio
turnover rate calculated with all securities whose terms-to-maturity were less than 397 days is anticipated to be unusually high.
High portfolio turnover involves
correspondingly greater expenses to a Fund, including brokerage commissions or dealer mark-ups and other transaction costs on the sale of securities and reinvestments in other securities. Such sales also may result in adverse tax consequences to a
Fund’s shareholders resulting from its distributions of increased net capital gains, if any, recognized as a result of the sales. The trading costs and tax effects associated with portfolio turnover may adversely affect a Fund’s
performance.
Correlation and Tracking Risk
Several factors may affect a
Fund's ability to obtain its daily leveraged investment objective. Among these factors are: (1) Fund expenses, including brokerage expenses and commissions and financing costs related to derivatives (which may be increased by high portfolio
turnover); (2) less than all of the securities in the Index being held by a Fund and securities not included in the Index being held by a Fund; (3) an imperfect correlation between the performance of instruments held by a Fund, such as other
investment companies, including ETFs, futures contracts and options, and the performance of the underlying securities in the cash market comprising an index; (4) bid-ask spreads; (5) a Fund holding instruments that are illiquid or the market for
which becomes disrupted; (6) the need to conform a Fund’s portfolio holdings to comply with the Fund’s investment restrictions or policies, or regulatory or tax law requirements; (7) market movements that run counter to a Fund’s
investments (which will cause divergence between a Fund and the Index over time due to the mathematical effects of leveraging); and (8) disruptions and illiquidity in the markets for securities or derivatives held by a Fund.
While index futures and options
contracts closely correlate with the applicable indices over long periods, shorter-term deviation, such as on a daily basis, does occur with these instruments. As a result, a Fund’s short-term performance will reflect such deviation from the
Index.
Even if there is a
perfect correlation between a Fund and the leveraged return of the Index on a daily basis, the symmetry between the changes in the Index and the changes in a Fund’s NAV can be altered significantly over time by a compounding effect. For
example, if the Bull Fund achieved a perfect leveraged correlation with the Index on every trading day over an extended period and the level of returns of the Index significantly increased during that period, a compounding effect for that period
would result, causing an increase in the Bull Fund’s NAV by a percentage that is somewhat greater than the percentage that the Index’s returns decreased. Conversely, if the Bear Fund maintained a perfect inverse leveraged correlation
with the Index over an extended period and if the level of returns of the Index significantly increased over that period, a compounding effect would result, causing a decrease of the Bear Fund’s NAV by a percentage that would be somewhat less
than the percentage that the Index returns increased.
Each Fund intends regularly to
use leveraged investment techniques in pursuing its investment objectives. Utilization of leverage involves special risks and should be considered to be speculative. Leverage exists when a Fund achieves the right to a return on a capital base that
exceeds the amount the Fund has invested. Leverage creates the potential for greater gains to shareholders of a Fund during favorable market conditions and the risk of magnified losses during adverse market conditions. Leverage is likely to cause
higher volatility of the NAV of each Fund’s Shares. Leverage may involve the creation of a liability that does not entail any interest costs or the creation of a liability that requires a Fund to pay interest which would decrease the
Fund’s total return to shareholders. If each Fund achieves its investment objective, during adverse market conditions, shareholders should experience a loss greater than they would have incurred had a Fund not been leveraged.
Special Note Regarding the Correlation
Risks of the Funds
. As discussed in the Prospectus, each Fund is “leveraged” in the sense that each has an investment objective to match 200% or -200% of the performance of the Index on a given day. Each
Fund is subject to all of the correlation risks described in the Prospectus. In addition, there is a special form of correlation risk that derives from each Fund’s use of leverage, which is that for periods greater than one day, the use of
leverage tends to cause the performance of a Fund to be either greater than, or less than, 200% or -200% of the performance of the Index.
A Fund’s return for periods longer
than one day is primarily a function of the following:
a) Index performance;
b) Index volatility;
c) financing rates associated with
leverage;
d) other fund
expenses;
e) dividends paid by
companies in the Index; and
f) period of time.
The fund performance for a Fund can
be estimated given any set of assumptions for the factors described above. The tables below illustrate the impact of two factors, Index volatility and Index performance, on a Fund. Underlying index volatility is a statistical measure of the
magnitude of fluctuations in the returns of an index and is calculated as the standard deviation of the natural logarithms of one plus the index return (calculated daily), multiplied by the square root of the number of trading days per year (assumed
to be 252). The tables show estimated Fund returns for a number of combinations of Index performance and Index volatility over a one year period. Assumptions used in the tables include: a) no dividends paid by the companies included in the Index; b)
no fund expenses; and c) borrowing/lending rates (to obtain leverage) of zero percent. If fund expenses were included, a Fund’s performance would be lower than shown.
As shown below, the Bull Fund would
be expected to lose 6.1% and the Bear Fund would be expected to lose 17.1% if the Index provided no return over a one year period during which the Index experienced annualized volatility of 25%. If the Index’s annualized volatility were to
rise to 75%, the hypothetical loss for a one year period widens to approximately 43.0% for the Bull Fund and 81.5% for the Bear Fund.
At higher ranges of volatility, there
is a chance of a significant loss of value even if the Index is flat. For instance, if the Index’s annualized volatility is 100%, it is likely that the Bull Fund would lose 63.2% of its value, and the Bear Fund would lose approximately 95.0%
of its value, even if the Index’s cumulative return for the year was only 0%. The volatility of ETFs or instruments that reflect the value of the Index such as swaps, may differ from the volatility of the Index.
In the tables below, areas shaded
green represent those scenarios where a Fund with the investment objective described will outperform (
i.e.
, return more than) the Index performance times the stated multiple in the Fund’s investment
objective; conversely areas shaded red represent those scenarios where the Fund will underperform (
i.e.
, return less than) the Index performance times the stated multiple in the Fund’s investment
objective.
The tables below are
intended to underscore the fact that the Funds are designed as short-term trading vehicles for investors who intend to actively monitor and manage their portfolios. They are not intended to be used by, and are not appropriate for, investors who do
not intend to actively monitor and manage their portfolios. For additional information regarding correlation and volatility risk for the Funds, see “Effects of Compounding and Market Volatility Risk” in the Prospectus.
Bull Fund
One
Year
Index
|
200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
-120%
|
-84.2%
|
-85.0%
|
-87.5%
|
-90.9%
|
-94.1%
|
-50%
|
-100%
|
-75.2%
|
-76.5%
|
-80.5%
|
-85.8%
|
-90.8%
|
-40%
|
-80%
|
-64.4%
|
-66.2%
|
-72.0%
|
-79.5%
|
-86.8%
|
-30%
|
-60%
|
-51.5%
|
-54.0%
|
-61.8%
|
-72.1%
|
-82.0%
|
-20%
|
-40%
|
-36.6%
|
-39.9%
|
-50.2%
|
-63.5%
|
-76.5%
|
-10%
|
-20%
|
-19.8%
|
-23.9%
|
-36.9%
|
-53.8%
|
-70.2%
|
0%
|
0%
|
-1.0%
|
-6.1%
|
-22.1%
|
-43.0%
|
-63.2%
|
10%
|
20%
|
19.8%
|
13.7%
|
-5.8%
|
-31.1%
|
-55.5%
|
20%
|
40%
|
42.6%
|
35.3%
|
12.1%
|
-18.0%
|
-47.0%
|
30%
|
60%
|
67.3%
|
58.8%
|
31.6%
|
-3.7%
|
-37.8%
|
40%
|
80%
|
94.0%
|
84.1%
|
52.6%
|
11.7%
|
-27.9%
|
50%
|
100%
|
122.8%
|
111.4%
|
75.2%
|
28.2%
|
-17.2%
|
60%
|
120%
|
153.5%
|
140.5%
|
99.4%
|
45.9%
|
-5.8%
|
Bear Fund
One
Year
Index
|
-200%
One
Year
Index
|
Volatility
Rate
|
Return
|
Return
|
10%
|
25%
|
50%
|
75%
|
100%
|
-60%
|
120%
|
506.5%
|
418.1%
|
195.2%
|
15.6%
|
-68.9%
|
-50%
|
100%
|
288.2%
|
231.6%
|
88.9%
|
-26.0%
|
-80.1%
|
-40%
|
80%
|
169.6%
|
130.3%
|
31.2%
|
-48.6%
|
-86.2%
|
-30%
|
60%
|
98.1%
|
69.2%
|
-3.6%
|
-62.2%
|
-89.8%
|
-20%
|
40%
|
51.6%
|
29.5%
|
-26.2%
|
-71.1%
|
-92.2%
|
-10%
|
20%
|
19.8%
|
2.3%
|
-41.7%
|
-77.2%
|
-93.9%
|
0%
|
0%
|
-3.0%
|
-17.1%
|
-52.8%
|
-81.5%
|
-95.0%
|
10%
|
-20%
|
-19.8%
|
-31.5%
|
-61.0%
|
-84.7%
|
-95.9%
|
20%
|
-40%
|
-32.6%
|
-42.4%
|
-67.2%
|
-87.2%
|
-96.5%
|
30%
|
-60%
|
-42.6%
|
-50.9%
|
-72.0%
|
-89.1%
|
-97.1%
|
40%
|
-80%
|
-50.5%
|
-57.7%
|
-75.9%
|
-90.6%
|
-97.5%
|
50%
|
-100%
|
-56.9%
|
-63.2%
|
-79.0%
|
-91.8%
|
-97.8%
|
60%
|
-120%
|
-62.1%
|
-67.6%
|
-81.5%
|
-92.8%
|
-98.1%
|
The
foregoing tables are intended to isolate the effect of Index volatility and Index performance on the return of a Fund. A Fund’s actual returns may be significantly greater or less than the returns shown above as a result of any of factors
discussed above or under “Effects of Compounding and Market Volatility Risk” in the Prospectus.
The Trust, on behalf of each
Fund, has adopted the following investment policies which are fundamental policies that may not be changed without the affirmative vote of a majority of the outstanding voting securities of the Fund. As defined by the 1940 Act, a “vote of a
majority of the outstanding voting securities of the Fund” means the affirmative vote of the lesser of (1) more than 50% of the outstanding shares of the Fund or (2) 67% or more of the shares present at a shareholders’ meeting, if more
than 50% of the outstanding shares are represented at the meeting in person or by proxy.
Each Fund’s investment objective
is a non-fundamental policy of the Fund. Non-fundamental policies may be changed by the Board without shareholder approval.
For purposes of the following
limitations, all percentage limitations apply immediately after a purchase or initial investment. Except with respect to borrowing money, if a percentage limitation is adhered to at the time of the investment, a later increase or decrease in the
percentage resulting from any change in value or net assets will not result in a violation of such restrictions. If at any time a Fund’s borrowings exceed its limitations due to a decline in net assets, such borrowings will be reduced promptly
to the extent necessary to comply with the limitation.
Each Fund may not:
1.
|
Borrow money, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
2.
|
Issue senior securities,
except to the extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
3.
|
Make loans, except to the
extent permitted by the 1940 Act, the rules and regulations thereunder and any applicable exemptive relief.
|
4.
|
Except for any Fund that
is “concentrated” in an industry or group of industries within the meaning of the 1940 Act, purchase the securities of any issuer (other than securities issued or guaranteed by the U.S. government or any of its agencies or
instrumentalities) if, as a result, 25% or more of a Fund’s total assets would be invested in the securities of companies whose principal business activities are in the same industry. However, each Fund that tracks the Index will only
concentrate its investment in a particular industry or group of industries to approximately the same extent as the Index is so concentrated.
|
5.
|
Purchase or sell real
estate, except that, to the extent permitted by applicable law, each Fund may (a) invest in securities or other instruments directly secured by real estate, and (b) invest in securities or other instruments issued by issuers that invest in real
estate.
|
6.
|
Purchase or sell
commodities or commodity contracts unless acquired as a result of ownership of securities or other instruments issued by persons that purchase or sell commodities or commodities contracts; but this shall not prevent a Fund from purchasing, selling
and entering into financial futures contracts (including futures contracts on indices of securities, interest rates and currencies), and options on financial futures contracts (including futures contracts on indices of securities, interest rates and
currencies), warrants, swaps, forward contracts, foreign currency spot and forward contracts and other financial instruments.
|
7.
|
Underwrite
securities issued by others, except to the extent that a Fund may be considered an underwriter within the meaning of the 1933 Act in the disposition of restricted securities or other investment company securities.
|
Portfolio Transactions and Brokerage
Subject to the general
supervision by the Trustees, Rafferty is responsible for decisions to buy and sell securities for each Fund, the selection of broker-dealers to effect the transactions, and the negotiation of brokerage commissions, if any. Rafferty expects that a
Fund may execute brokerage or other agency transactions through registered broker-dealers, for a commission, in conformity with the 1940 Act, the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder.
When selecting a broker or dealer to
execute portfolio transactions, Rafferty considers many factors, including the rate of commission or the size of the broker-dealer’s “spread,” the size and difficulty of the order, the nature of the market for the security,
operational capabilities of the broker-dealer and the research, statistical and economic data furnished by the broker-dealer to Rafferty.
In effecting portfolio transactions
for a Fund, Rafferty seeks to receive the closing prices of securities that are in line with those of the securities included in the Index and seeks to execute trades of such securities at the lowest commission rate reasonably available. With
respect to agency transactions, Rafferty may execute trades at a higher rate of commission if reasonable in relation to brokerage and research services provided to a Fund or Rafferty. Such services may include the following: information as to the
availability of securities for purchase or sale; statistical or factual information or opinions pertaining to investment; wire services; and appraisals or evaluations of portfolio securities. Each Fund believes that the requirement to always seek
the lowest possible commission cost could impede effective portfolio management and preclude a Fund and Rafferty from obtaining a high quality of brokerage and research services. In seeking to determine the reasonableness of brokerage commissions
paid in any transaction, Rafferty relies upon its experience and knowledge regarding commissions generally charged by various brokers and on its judgment in evaluating the brokerage and research services received from the broker effecting the
transaction.
Rafferty may use
research and services provided to it by brokers in servicing all funds; however, not all such services may be used by Rafferty in connection with a Fund. While the receipt of such information and services is useful in varying degrees and generally
would reduce the amount of research or services otherwise performed by Rafferty, this information and these services are of indeterminable value and would not reduce Rafferty’s investment advisory fee to be paid by a Fund.
Purchases and sales of U.S.
government securities normally are transacted through issuers, underwriters or major dealers in U.S. government securities acting as principals. Such transactions are made on a net basis and do not involve payment of brokerage commissions. The cost
of securities purchased from an underwriter usually includes a commission paid by the issuer to the underwriters; transactions with dealers normally reflect the spread between bid and asked prices.
No brokerage commissions are provided
for the Funds because they had not commenced operations prior to the date of this SAI.
Portfolio Holdings Information
Disclosure of a Fund’s
complete holdings is required to be made quarterly within 60 days of the end of each fiscal quarter in the Annual Report and Semi-Annual Report to Fund shareholders and in the quarterly holdings report on Form N-Q. These reports are available, free
of charge, on the EDGAR database on the SEC’s website at www.sec.gov. In addition, each Fund’s portfolio holdings will be made available on the Funds' website at www.direxioninvestments.com each day the Funds are open for business.
The portfolio composition file
(“PCF”) and the IIV, which contain portfolio holdings information, is made available daily, including to the Funds' service providers to facilitate the provision of services to the Funds and to certain other entities as necessary for
transactions in Creation Units. Such entities may be limited to National Securities Clearing Corporation (“NSCC”) members, subscribers to various fee-based services, investors that have entered into an authorized participant agreement
with the Distributor and the transfer agent or purchase Creation Units through a dealer that has entered into such an agreement (“Authorized Participants”), and other institutional market participants that provide information services.
Each business day, Fund portfolio holdings information will be provided to the Distributor or other agent for dissemination through the facilities of the NSCC and/or through other fee-based services to NSCC members and/or subscribers to the
fee-based services, including Authorized Participants, and to entities that publish and/or analyze such information in connection with the process of purchasing or redeeming Creation Units or trading shares of Funds in the secondary market.
Daily access to the PCF file and IIV
is permitted to: (i) certain personnel of service providers that are involved in portfolio management and providing administrative, operational, or other support to portfolio management; (ii) Authorized Participants through NSCC, and (iii) other
personnel of the Adviser and the Funds' distributor, administrator, custodian and fund accountant who are involved in functions which may require such information to conduct business in the ordinary course.
From time to time, rating and ranking
organizations such as Standard & Poor’s
®
and Morningstar
®
, Inc. may request complete portfolio holdings information in connection with rating a Fund. To prevent such parties from potentially misusing the
complete portfolio holdings information, a Fund will generally only disclose such information no earlier than one business day following the date of the information. Portfolio holdings information made available in connection with the
creation/redemption process may be provided to other entities that provide additional services to the Funds in the ordinary course of business after it has been disseminated to the NSCC.
In addition, the Funds' Chief
Compliance Officer (“CCO”) may grant exceptions to permit additional disclosure of the complete portfolio holdings information at differing times and with differing lag times to rating agencies and to the parties noted above, provided
that (1) a Fund has a legitimate business purpose for doing so; (2) it is in the best interests of shareholders; (3) the recipient is subject to a confidentiality agreement; and (4) the recipient is subject to a duty not to trade on the nonpublic
information. The CCO shall report any disclosures made pursuant to this exception to the Board.
The Board of Trustees
The Trust is governed by its Board
of Trustees (the “Board”). The Board is responsible for and oversees the overall management and operations of the Trust and the Funds, which includes the general oversight and review of the Funds' investment activities, in accordance
with federal law and the law of the State of Delaware, as well as the stated policies of the Funds. The Board oversees the Trust’s officers and service providers, including Rafferty, which is responsible for the management of the day-to-day
operations of the Funds based on policies and agreements reviewed and approved by the Board. In carrying out these responsibilities, the Board regularly interacts with and receives reports from senior personnel of service providers, including
personnel from Rafferty and U.S. Bancorp Fund Services, LLC (“USBFS”). The Board also is assisted by the Trust’s independent auditor (who reports directly to the Trust’s Audit Committee), independent counsel and other
professionals as appropriate.
Risk
Oversight
Consistent with
its responsibility for oversight of the Trust and the Funds, the Board oversees the management of risks relating to the administration and operation of the Trust and the Funds. Rafferty, as part of its responsibilities for the day-to-day operations
of the Funds, is responsible for day-to-day risk management for the Funds. The Board, in the exercise of its reasonable business judgment performs its risk management oversight directly and, as to certain matters, through its committees (described
below) and through the Board members who are not “interested persons” of the Funds as defined in Section 2(a)(19) of the 1940 Act (“Independent Trustees.”) The following provides an overview of the principal, but not all,
aspects of the Board’s oversight of risk management for the Trust and the Funds.
The Board has adopted, and
periodically reviews, policies and procedures designed to address risks to the Trust and the Funds. In addition, under the general oversight of the Board, Rafferty and other service providers to the Funds have themselves adopted a variety of
policies, procedures and controls designed to address particular risks to the Funds. Different processes, procedures and controls are employed with respect to different types of risks.
The Board also oversees risk
management for the Trust and the Funds through review of regular reports, presentations and other information from officers of the Trust and other persons. The Trust’s CCO and senior officers of Rafferty regularly report to the Board on a
range of matters, including those relating to risk management. The Board also regularly receives reports from Rafferty and USBFS with respect to the Funds' investments. In addition to regular reports from these parties, the Board also receives
reports regarding other service providers to the Trust, either directly or through Rafferty, USBFS or the CCO, on a periodic or regular basis. At least annually, the Board receives a report from the CCO regarding the effectiveness of the Funds'
compliance program. Also, on an annual basis, the Board receives reports, presentations and other information from Rafferty in connection with the Board’s consideration of the renewal of each of the Trust’s agreements with Rafferty and
the Trust’s distribution plan under Rule 12b-1 under the 1940 Act.
The CCO reports regularly to the
Board on Fund valuation matters. The Audit Committee receives regular reports from the Trust’s independent registered public accounting firm on internal control and financial reporting matters. On at least a quarterly basis, the Independent
Trustees meet with the CCO to discuss matters relating to the Funds' compliance program.
Board Structure and Related Matters
Independent Trustees constitute
two-thirds of the Board. The Trustees discharge their responsibilities collectively as a Board, as well as through Board committees, each of which operates pursuant to a charter approved by the Board that delineates the specific responsibilities of
that committee. The Board has established three standing committees: the Audit Committee, the Nominating and Governance Committee and the Qualified Legal Compliance Committee. For example, the Audit Committee is responsible for specific matters
related to oversight of the Funds' independent auditors, subject to approval of the Audit Committee’s recommendations by the Board. The members and responsibilities of each Board committee are summarized below.
The Board periodically evaluates its
structure and composition as well as various aspects of its operations. The Chairman of the Board is not an Independent Trustee and the Board has chosen not to have a lead Independent Trustee. However, the Board believes that its leadership
structure, including its Independent Trustees and Board committees, is appropriate for the Trust in light of, among other factors, the asset size and nature of the Funds, the number of series overseen by the Board, the arrangements for the conduct
of the Funds' operations, the number of Trustees, and the Board’s responsibilities. On an annual basis, the Board conducts a self-evaluation that considers, among other matters, whether the Board and its committees are functioning effectively
and whether, given the size and composition of the Board and each of its committees, the Trustees are able to oversee effectively the number of portfolios in the complex.
The Trust is part of the Direxion
Family of Investment Companies, which is comprised of the [ ] portfolios within the Trust, [ ] portfolios within the Direxion Funds and no portfolios within the Direxion Insurance Trust. The same persons who constitute the Board also constitute the
Board of Trustees of the Direxion Funds and the Direxion Insurance Trust.
The Board holds four regularly
scheduled in-person meetings each year. The Board may hold special meetings, as needed, either in person or by telephone, to address matters arising between regular meetings. During a portion of each in-person meeting, the Independent Trustees meet
outside of management’s presence. The Independent Trustees may hold special meetings, as needed, either in person or by telephone.
The Trustees of the Trust are
identified in the tables below, which provide information regarding their age, business address and principal occupation during the past five years including any affiliation with Rafferty, the length of service to the Trust, and the position, if
any, that they hold on the board of directors of companies other than the Trust as of the date of this SAI. Each of the Trustees of the Trust also serve on the Board of the Direxion Funds and Direxion Insurance Trust, the other registered investment
companies in the Direxion mutual fund complex. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019.
Interested Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Daniel
D. O’Neill
(1)
Age: 48
|
Chairman
of the Board of Trustees
|
Lifetime
of Trust until removal or resignation; Since 2008
|
Managing
Director of Rafferty, 1999-present.
|
[
]
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Eric
W. Falkeis
(2)
Age: 42
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2014
|
Chief
Operating Officer, since April 2014, Rafferty Asset Management, LLC; formerly, President Rafferty Asset Management, LLC, March 2013 –
April 2014; formerly, Senior Vice President, USBFS, September 2007
–
March 2013; Chief Financial Officer, USBFS, April 2006
–
March
2013; Vice President, USBFS, 1997-2007; formerly, Chief Financial Officer, Quasar Distributors, LLC (2000-2003).
|
[
]
|
Trustee,
Professionally Managed Portfolios (40 Funds).
|
Independent Trustees
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
Gerald
E. Shanley III
Age: 73
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2008
|
Retired,
Since 2002; Business Consultant, 1985-present; Trustee of Trust Under Will of Charles S. Payson, 1987-present; C.P.A., 1979-present.
|
[
]
|
None.
|
Name,
Address
and Age
|
Position(s)
Held
with Fund
|
Term
of
Office
and Length
of Time
Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships
Held by Trustee
During Past Five
Years
|
John
A. Weisser
Age: 75
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2008
|
Retired,
Since 1995; Salomon Brothers, Inc., 1971-1995, most recently as Managing Director.
|
[
]
|
Director,
The MainStay Funds Trust (39 Funds), The MainStay Funds (12 Funds), MainStay VP Fund Series (29 Funds), Mainstay Defined Term Municipal Opportunities Fund (1 Fund); Private Advisors Alternative Strategy Fund (1 Fund); Private Advisors Alternative
Strategies Master Fund (1 Fund).
|
David
L. Driscoll
Age: 47
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2014
|
Partner,
King Associates, LLP, since 2004; Board Advisor, University Common Real Estate, since 2012; Principal, Grey Oaks LLP since 2003; Member, Kendrick LLC, since 2006.
|
[
]
|
None.
|
Jacob
C. Gaffey
Age: 68
|
Trustee
|
Lifetime
of Trust until removal or resignation; Since 2014
|
Managing
Director of Loomis & Co. since 2012; Partner, Bay Capital Advisors, LLC 2008
–
2012.
|
[
]
|
None.
|
(1)
|
Mr. O’Neill is
affiliated with Rafferty. Mr. O’Neill is the Managing Director of Rafferty and owns a beneficial interest in Rafferty.
|
(2)
|
Mr. Falkeis is affiliated
with Rafferty. Mr. Falkeis is the Chief Operating Officer of Rafferty.
|
(3)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public [ ] of the [ ] funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to
the public [ ] of the [ ] funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
In addition to the information set
forth in the tables above and other relevant qualifications, experience, attributes or skills applicable to a particular Trustee, the following provides further information about the qualifications and experience of each Trustee.
Daniel D. O’Neill: Mr.
O’Neill has extensive experience in the investment management business, including as managing director of Rafferty. Mr. O’Neill has been the Managing Director of Rafferty since 1999.
Eric W. Falkeis: Mr. Falkeis has
extensive experience in the financial services business. He is a certified public accountant. Prior to joining Rafferty in 2013, Mr. Falkeis was Chief Financial Officer and Senior Vice President of USBFS. USBFS provides fund administration, fund
accounting and transfer agency services to registered investment companies and non-registered investment companies. Mr. Falkeis is currently the Chief Operating Officer of Rafferty.
Gerald E. Shanley III: Mr. Shanley
has extensive audit experience and spent ten years in the tax practice of an international public accounting firm. He is a certified public accountant and has a JD degree. He has extensive business experience as the president of a closely held
manufacturing company, a director of several closely held companies, a business and tax consultant and a trustee of a private investment trust. He has served on the boards of several charitable and not for profit organizations. He also has multiple
years of service as a Trustee.
John A. Weisser: Mr. Weisser has
extensive experience in the investment management business, including as managing director of an investment bank and a director of other registered investment companies. He also has multiple years of service as a Trustee.
David L. Driscoll: Mr. Driscoll has
extensive experience with risk assessment and strategic planning as a partner and manager of various real estate partnerships and companies.
Jacob C. Gaffey: Mr. Gaffey has
extensive experience with providing investment banking and valuation services to various companies. Mr. Gaffey has been a director and a member of an audit committee of a public company since 2011.
Board Committees
The Trust has an Audit Committee,
consisting of Messrs. Weisser, Shanley, Driscoll and Gaffey. The members of the Audit Committee are Independent Trustees. The primary responsibilities of the Trust’s Audit Committee are, as set forth in its charter, to make recommendations to
the Board Members as to: the engagement or discharge of the Trust’s independent registered public accounting firm (including the audit fees charged by the auditors); the supervision of investigations into matters relating to audit matters; the
review with the independent registered public accounting firm of the results of audits; and addressing any other matters regarding audits. The Audit Committee met four times during the Trust’s most recent fiscal year.
The Trust also has a Nominating and
Governance Committee, consisting of Messrs. Weisser, Shanley, Driscoll and Gaffey each of whom is an Independent Trustee. The primary responsibilities of the Nominating and Governance Committee are to make recommendations to the Board on issues
related to the composition and operation of the Board, and communicate with management on those issues. The Nominating and Governance Committee also evaluates and nominates Board member candidates. The Nominating and Governance Committee will
consider nominees recommended by shareholders. Such recommendations should be in writing and addressed to a Fund with attention to the Nominating and Governance Committee Chair. The recommendations must include the following Preliminary Information
regarding the nominee: (1) name; (2) date of birth; (3) education; (4) business professional or other relevant experience and areas of expertise; (5) current business and home addresses and contact information; (6) other board positions or prior
experience; and (7) any knowledge and experience relating to investment companies and investment company governance. The Nominating and Governance Committee did not meet during the Trust’s most recent fiscal year.
The Trust has a Qualified Legal
Compliance Committee, consisting of Messrs. Weisser, Shanley, Driscoll and Gaffey. The members of the Qualified Legal Compliance Committee are Independent Trustees of the Trust. The primary responsibility of the Trust’s Qualified Legal
Compliance Committee is to receive, review and take appropriate action with respect to any report (“Report”) made or referred to the Committee by an attorney of evidence of a material violation of applicable U.S. federal or state
securities law, material breach of a fiduciary duty under U.S. federal or state law or a similar material violation by the Trust or by any officer, director, employee or agent of the Trust. The Qualified Legal Compliance Committee did not meet
during the Trust’s most recent fiscal year.
Principal Officers of the Trust
The officers of the Trust conduct
and supervise its daily business. Unless otherwise noted, an individual’s business address is 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. As of the date of this SAI, the officers of the Trust, their ages,
their business address and their principal occupations during the past five years are as follows:
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Daniel
D. O’Neill
(1)
Age: 48
|
Chief
Executive
Officer and
Chief
Investment
Officer
|
One
Year;
Since 2008
|
Managing
Director of Rafferty, 1999-present.
|
[
]
|
N/A
|
Name,
Address
and Age
|
Position(s)
Held with
Fund
|
Term
of
Office and
Length of
Time Served
|
Principal
Occupation(s) During
Past Five Years
|
#
of
Portfolios
in the
Direxion
Family of
Investment
Companies
Overseen
by Trustee
(3)
|
Other
Trusteeships/
Directorships Held
by Trustee During
Past Five Years
|
Eric
W. Falkeis
(2)
Age: 42
|
Principal
Executive
Officer
|
One
Year;
Since 2014
|
Chief
Operating Officer, since April 2014, Rafferty Asset Management, LLC; formerly, President, Rafferty Asset Management, LLC, March 2013 –
April 2014; formerly, Senior Vice President, USBFS, September
2007
–
March 2013; Chief Financial Officer, USBFS, April 2006
–
March
2013; Vice President, USBFS, 1997-2007; formerly, Chief Financial Officer, Quasar Distributors, LLC (2000-2003).
|
[
]
|
Trustee,
Professionally
Managed Portfolios
(40 Funds).
|
Patrick
J. Rudnick
Age: 43
|
Principal
Financial
Officer and
Assistant
Secretary
|
One
Year;
Since 2010
|
Senior
Vice President and Principal Financial Officer, Rafferty Asset Management, LLC, since March 2013; formerly Vice President, USBFS (2006-2013); formerly, Manager, PricewaterhouseCoopers LLP (1999-2006).
|
N/A
|
N/A
|
Angela
Brickl
Age: 40
|
Chief
Compliance
Officer
Secretary
|
One
Year;
Since 2012
One Year; Since 2011
|
General
Counsel, since October 2010, and Chief Compliance Officer, since September 2012, Rafferty Asset Management LLC.
|
N/A
|
N/A
|
(1)
|
Mr. O’Neill serves as
Chairman of the Board of Trustees of the Direxion Funds, Direxion Insurance Trust and Direxion Shares ETF Trust.
|
(2)
|
Mr. Falkeis serves as a
Trustee of the Direxion Funds, Direxion Insurance Trust and Direxion Shares ETF Trust.
|
(3)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public [ ] of the [ ] funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to
the public [ ] of the [ ] funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
Because the Funds had not commenced
operations prior to the date of this SAI, no Trustee owned Shares of the Funds as of the calendar year ended December 31, 2015.
The following table shows the amount
of equity securities owned in the Direxion Family of Investment Companies by the Trustees as of the calendar year ended December 31, 2015:
Dollar
Range of Equity Securities Owned:
|
Interested
Trustees:
|
Independent
Trustees:
|
|
Daniel
D.
O’Neill
|
Eric
W.
Falkeis
|
Gerald
E.
Shanley III
|
John
Weisser
|
David
L.
Driscoll
|
Jacob
C.
Gaffey
|
Aggregate
Dollar Range of Equity Securities in the Direxion Family of Investment Companies
(1)
|
Over
$100,000
|
Over
$100,000
|
$0
|
$1-$10,000
|
$0
|
$0
|
(1)
|
The Direxion Family of
Investment Companies consists of the Direxion Shares ETF Trust which, as of the date of this SAI, offers for sale to the public [ ] of the [ ] funds registered with the SEC, the Direxion Funds which, as of the date of this SAI, offers for sale to
the public [ ] of the [ ] funds registered with the SEC and the Direxion Insurance Trust which, as of the date of this SAI, does not have any funds registered with the SEC.
|
The Trust’s Trust Instrument
provides that the Trustees will not be liable for errors of judgment or mistakes of fact or law. However, they are not protected against any liability to which they would otherwise be subject by reason of willful misfeasance, bad faith, gross
negligence or reckless disregard of the duties involved in the conduct of their office.
No officer, director or employee
of Rafferty receives any compensation from the Funds for acting as a Trustee or officer of the Trust. The following table shows the compensation earned by each Trustee for the Trust’s fiscal year ended October 31, 2015:
Name
of Person,
Position
|
Aggregate
Compensation
From the
Funds
(1)
|
Pension
or
Retirement Benefits
Accrued As Part of
the Trust’s
Expenses
|
Estimated
Annual Benefits
Upon Retirement
|
Aggregate
Compensation
From the Direxion
Family of
Investment
Companies Paid
to the Trustees
(2)
|
Interested
Trustees
|
Daniel
D. O’Neill
|
$0
|
$0
|
$0
|
$0
|
Eric
W. Falkeis
|
$0
|
$0
|
$0
|
$0
|
Independent
Trustees
|
Gerald
E. Shanley III
|
$75,000
|
$0
|
$0
|
$100,000
|
John
A. Weisser
|
$75,000
|
$0
|
$0
|
$100,000
|
David
L. Driscoll
|
$60,000
|
$0
|
$0
|
$80,000
|
Jacob
C. Gaffey
|
$60,000
|
$0
|
$0
|
$80,000
|
(1)
Costs associated with Trustee compensation are allocated
across the operational funds based on the net assets of each fund in the Trust.
(2)
For the fiscal year ended October 31, 2015, Trustees’
fees and expenses in the amount of $270,000 were incurred by the Trust.
Principal Shareholders, Control Persons and
Management Ownership
A principal shareholder is any
person who owns of record or beneficially 5% or more of the outstanding shares of a Fund. A control person is a shareholder that owns beneficially or through controlled companies more than 25% of the voting securities of a company or acknowledges
the existence of control. Shareholders owning voting securities in excess of 25% may determine the outcome of any matter affecting and voted on by shareholders of a Fund.
Because the Funds had not commenced
operations prior to the date of this SAI, the Funds did not have control persons or principal shareholders and the Trustees and Officers did not own shares of the Funds.
Rafferty Asset Management, LLC, 1301
Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019, provides investment advice to the Funds. Rafferty was organized as a New York limited liability company in June 1997.
Under an Investment Advisory
Agreement (“Advisory Agreement”) between the Trust, on behalf of each Fund, and Rafferty dated August 13, 2008, Rafferty provides a continuous investment program for each Fund’s assets in accordance with its investment objectives,
policies and limitations, and oversees the day-to-day operations of each Fund, subject to the supervision of the Trustees. Rafferty bears all costs associated with providing these advisory services and the expenses of the Trustees who are affiliated
with or interested persons of Rafferty. The Trust bears all other expenses that are not assumed by Rafferty as described in the Prospectus. The Trust also is liable for nonrecurring expenses as may arise, including litigation to which a Fund may be
a party. The Trust also may have an obligation to indemnify its Trustees and officers with respect to any such litigation.
The Advisory Agreement was initially
approved by the Trustees (including all Independent Trustees) and Rafferty, as sole shareholder of each Fund in compliance with the 1940 Act. The Advisory Agreement with respect to the Funds will continue in force for an initial period of two years
after the date of its approval. The Advisory Agreement is renewable from year
to year with respect to each Fund, so long as its
continuance is approved at least annually (1) by the vote, cast in person at a meeting called for that purpose, of a majority of the Independent Trustees of the Trust; and (2) by the majority vote of either the full Board or the vote of a majority
of the outstanding shares of a Fund. The Advisory Agreement automatically terminates on assignment and is terminable on a 60-day written notice either by the Trust or Rafferty.
Pursuant to the Advisory Agreement, each
Fund pays Rafferty a fee at an annualized rate based on a percentage of its average daily net assets of 0.75%.
Rafferty has contractually agreed to
waive 0.10% of its Management Fees through September 1, 2018. There is no guarantee that the management fee waiver will continue after September 1, 2018. This contractual fee waiver may be terminated at any time by the Board of Trustees.
No advisory fees are provided for the
Funds because they had not commenced operations prior to the date of this SAI.
Pursuant to a separate Management
Services Agreement, Rafferty performs certain administrative services on behalf of the Funds, such as negotiating, coordinating and implementing the Trust’s contractual obligations with the Funds' service providers; monitoring, overseeing and
reviewing the performance of such service providers to ensure adherence to applicable contractual obligations; and preparing or coordinating reports and presentations to the Board of Trustees with respect to such service providers as requested or as
deemed necessary; and other services that are described in the Management Services Agreement. For these services, the Trust pays to Rafferty a fee at the annual rate of 0.02% of average daily net assets for each of the Funds. This Management
Services Fee may be waived under the Operating Expense Limitation Agreement that Rafferty has entered into with each Fund. This arrangement may be terminated at any time by the approval of the Board.
Each Fund is responsible for its own
operating expenses. Rafferty has entered into an Operating Expense Limitation Agreement with each Fund. Under this Operating Expense Limitation Agreement, Rafferty has contractually agreed to cap all or a portion of its management fee and/or
reimburse each Fund for Other Expenses (excluding, as applicable, among other expenses, any front-end or contingent deferred sales loads, taxes, swap financing and related costs, acquired fund fees and expenses, dividends or interest on short
positions, other interest expenses, brokerage commissions, expenses incurred in connection with any merger or reorganization and extraordinary expenses such as litigation or other expenses outside the typical day-to-day operations of the Fund)
through September 1, 2018 to the extent that each Fund’s Total Annual Fund Operating Expenses exceed 0.85% of each Fund’s daily net assets. Any expense cap is subject to reimbursement by a Fund only within the following three years only
if overall expenses fall below these percentage limitations. This agreement may be terminated at any time at the discretion of the Board upon notice to the Adviser and without the approval of Fund shareholders. The agreement may be terminated by the
Adviser only with the consent of the Board.
Rafferty shall not be liable to the
Trust or any shareholder for anything done or omitted by it, except acts or omissions involving willful misfeasance, bad faith, negligence or reckless disregard of the duties imposed upon it by its agreement with the Trust or for any losses that may
be sustained in the purchase, holding or sale of any security.
Pursuant to Section 17(j) of the 1940
Act and Rule 17j-1 thereunder, the Trust and Rafferty have adopted Codes of Ethics. These codes permit portfolio managers and other access persons of a Fund to invest in securities that may be owned by a Fund, subject to certain restrictions.
Paul Brigandi and Tony Ng are
jointly and primarily responsible for the day-to-day management of the Funds. An investment trading team of Rafferty employees assists Mr. Brigandi and Mr. Ng in the day-to-day management of the Funds subject to their primary responsibility and
oversight. The Portfolio Managers work with the investment trading team to decide the target allocation of each Fund’s investments and on a day-to-day basis, an individual portfolio trader executes transactions for the Funds consistent with
the target allocation. The members of the investment trading team rotate among the various series of the Trust, including the Funds, periodically so that no single individual is assigned to a specific Fund for extended periods of time.
In addition to the Funds, Mr. Brigandi
and Mr. Ng manage the following other accounts as of [ ], 2016:
Accounts
|
Total
Number
of Accounts
|
Total
Assets
(In Billions)
|
Total
Number of
Accounts with
Performance
Based Fees
|
Total
Assets
of Accounts
with Performance
Based Fees
|
Registered
Investment Companies
|
[
]
|
$
[ ]
|
0
|
$0
|
Other
Pooled Investment Vehicles
|
0
|
$0
|
0
|
$0
|
Other
Accounts
|
0
|
$0
|
0
|
$0
|
Rafferty
manages no other accounts with investment objectives similar to those of the Funds. In addition, two or more funds advised by Rafferty may invest in the same securities but the nature of each investment (long or short) may be opposite
and in different proportions. Rafferty ordinarily
executes transactions for a Fund “market-on-close,” in which funds purchasing or selling the same security receive the same closing price.
Rafferty has not identified any
additional material conflicts between a Fund and other accounts managed by the investment team. However, other actual or apparent conflicts of interest may arise in connection with the day-to-day management of a Fund and other accounts. The
management of a Fund and other accounts may result in unequal time and attention being devoted to a Fund and other accounts. Rafferty’s management fees for the services it provides to other accounts varies and may be higher or lower than the
advisory fees it receives from a Fund. This could create potential conflicts of interest in which the portfolio manager may appear to favor one investment vehicle over another resulting in an account paying higher fees or one investment vehicle out
performing another.
The
investment team’s compensation is paid by Rafferty. Their compensation primarily consists of a fixed base salary and a bonus. The investment team’s salary is reviewed annually and increases are determined by factors such as performance
and seniority. Bonuses are determined by the individual performance of an employee including factors such as attention to detail, process, and efficiency, and are impacted by the overall performance of the firm. The investment team’s salary
and bonus are not based on a Fund’s performance and as a result, no benchmarks are used. Along with all other employees of Rafferty, the investment team may participate in the firm’s 401(k) retirement plan where Rafferty may make
matching contributions up to a defined percentage of their salary.
Mr. Brigandi and Mr. Ng did not own any
shares of the Funds as of [ ], 2016.
Proxy Voting Policies and Procedures
The Board has adopted proxy
voting policies and procedures (“Proxy Policies”) wherein the Trust has delegated to Rafferty the responsibility for voting proxies relating to portfolio securities held by a Fund as part of their investment advisory services, subject to
the supervision and oversight of the Board. The Proxy Voting Policies of Rafferty are attached as Appendix B. Notwithstanding this delegation of responsibilities, however, each Fund retains the right to vote proxies relating to its portfolio
securities. The fundamental purpose of the Proxy Policies is to ensure that each vote will be in a manner that reflects the best interest of a Fund and its shareholders, taking into account the value of a Fund’s investments.
More Information.
The actual voting records relating to portfolio securities for future 12-month periods ending June 30 will be available without charge, upon request by
calling toll-free, 866-476-7523 or by accessing the SEC’s website at www.sec.gov.
Fund Administrator, Fund Accounting Agent, Transfer
Agent and Custodian
U.S. Bancorp Fund Services, LLC,
615 East Michigan Street, Milwaukee, Wisconsin 53202, serves as the Funds' administrator. The Bank of New York Mellon, One Wall Street, New York, New York 10286, serves as the Funds' transfer agent, and custodian. Rafferty also performs certain
administrative services for the Funds.
Pursuant to a Fund Administration
Servicing Agreement between the Trust and USBFS, USBFS provides the Trust with administrative and management services (other than investment advisory services). As compensation for these services, the Trust pays USBFS a fee based on the
Trust’s total average daily net assets. USBFS also is entitled to certain out-of-pocket expenses.
Pursuant to a Fund Accounting
Agreement between the Trust and BNYM, BNYM provides the Trust with accounting services, including portfolio accounting services, tax accounting services and furnishing financial reports. As compensation for these accounting services, the Trust pays
BNYM a fee based on the Trust’s total average daily net assets and a minimum annual per fund fee, subject to certain negotiated fee waivers. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above, including
pricing expenses.
Pursuant to a
Custody Agreement, BNYM serves as the custodian of a Fund’s assets. The custodian holds and administers the assets in a Fund’s portfolios. Pursuant to the Custody Agreement, the custodian receives an annual fee based on the Trust’s
total average daily net assets and certain settlement charges. The custodian also is entitled to certain out-of-pocket expenses.
Pursuant to a Transfer Agency and
Service Agreement between the Trust and BNYM, BNYM provides the Trust with transfer agency services, which includes Creation and Redemption Unit order processing. As compensation for these transfer agency services, the Trust pays BNYM a fee based on
the Trust’s total average daily net assets and a minimum annual complex fee. BNYM also is entitled to certain out-of-pocket expenses for the services mentioned above.
No administrative and accounting
services fees, custodian fees or transfer agent fees are shown for the Funds because they had not commenced operations prior to the date of this SAI.
Foreside Fund Services, LLC,
located at 3 Canal Plaza, Suite 100, Portland, Maine 04101, serves as the distributor (“Distributor”) in connection with the continuous offering of each Fund’s shares. The Distributor is a broker-dealer registered with the SEC
under the Securities Exchange Act of 1934 and a member of the Financial Industry Regulatory Authority. The Trust
offers Shares of the Funds for sale through the
Distributor in Creation Units, as described below. The Distributor will not sell or redeem Shares in quantities less than Creation Units. The Distributor will deliver a Prospectus to persons purchasing Creation Units and will maintain records of
Creation Unit orders placed and confirmations furnished by it. Pursuant to a written agreement, the Adviser pays the Distributor for distribution-related services. For the fiscal year ended October 31, 2015, the Distributor received $763,485 as
compensation from Rafferty for distribution services for each series of the Trust. The Funds were not operational as of October 31, 2015, therefore Rafferty did not pay fees for distribution services for the Funds.
The Adviser may pay certain
broker-dealers, banks and other financial intermediaries for participating in activities that are designed to make registered representatives and other professionals more knowledgeable about exchange traded products, including each Fund, or for
other activities such as participating in marketing activities and presentations, educational training programs, conferences, the development of technology platforms and reporting systems. The Adviser had arrangements to make payments based on an
annual fee for its services, as well as based on the average daily assets held by Schwab customers in certain funds managed by the Adviser, for services other than for the educational programs and marketing activities described above, only to
Charles Schwab & Co., Inc. (“Schwab”). Pursuant to the arrangement with Schwab, Schwab has agreed to promote select funds managed by the Adviser, to Schwab’s customers and not to charge certain of its customers any commissions
when those customers purchase or sell shares of those funds. Payments to a broker-dealer or intermediary may create potential conflicts of interest between the broker-dealer or intermediary and its clients. These amounts, which may be significant,
are paid by the Adviser from its own resources and not from the assets of funds managed by the Adviser. Although a portion of the Adviser’s revenue comes directly or indirectly in part from fees paid by each Fund, other ETFs advised by the
Adviser or other exchange-traded products, these payments do not increase the price paid by investors for the purchase of shares of, or the cost of owning, a Fund or other funds managed by the Adviser.
Rule 12b-1 under the 1940 Act, as
amended, (the “Rule”) provides that an investment company may bear expenses of distributing its shares only pursuant to a plan adopted in accordance with the Rule. The Trustees have adopted a Rule 12b-1 Distribution Plan (“Rule
12b-1 Plan”) pursuant to which each Fund may pay certain expenses incurred in the distribution of its shares and the servicing and maintenance of existing shareholder accounts. The Distributor, as the Funds' principal underwriter, and Rafferty
may have a direct or indirect financial interest in the Rule 12b-1 Plan or any related agreement. Pursuant to the Rule 12b-1 Plan, each Fund may pay a fee of up to 0.25% of the Fund’s average daily net assets. No Rule 12b-1 fee is currently
being charged to the Funds.
The
Rule 12b-1 Plan was approved by the Board, including a majority of the Independent Trustees of the Funds. In approving the Rule 12b-1 Plan, the Trustees determined that there is a reasonable likelihood that the Rule 12b-1 Plan will benefit each Fund
and its shareholders. The Trustees will review quarterly and annually a written report provided by the Treasurer of the amounts expended under the Rule 12b-1 Plan and the purpose for which such expenditures were made.
The Rule 12b-1 Plan permits payments
to be made by each Fund to the Distributor or other third parties for expenditures incurred in connection with the distribution of Fund shares to investors and the provision of certain shareholder services. The Distributor or other third parties are
authorized to engage in advertising, the preparation and distribution of sales literature and other promotional activities on behalf of each Fund. In addition, the Rule 12b-1 Plan authorizes payments by each Fund to the Distributor or other third
parties for the cost related to selling or servicing efforts, preparing, printing and distributing Fund prospectuses, statements of additional information, and shareholder reports to investors.
Independent Registered Public Accounting Firm
Ernst & Young LLP
(“EY”), 5 Times Square New York, New York, 10036 is the independent registered public accounting firm for the Trust.
The Trust has selected K&L Gates
LLP, 1601 K Street, N.W., Washington, DC 20006, as its legal counsel.
Determination of Net Asset Value
A fund’s share price is
known as its NAV. Each Fund’s share price is calculated as of the close of regular trading on the NYSE, usually 4:00 p.m. Eastern Time (“Valuation Time”), each day the NYSE is open for business (“Business Day”). The
NYSE is open for business Monday through Friday, except in observation of the following holidays: New Year’s Day, Martin Luther King, Jr. Day, President’s Day, Good Friday, Memorial Day, July 4th, Labor Day, Thanksgiving Day and
Christmas Day. The NYSE may close early on the business day before each of these holidays and on the day after Thanksgiving Day. NYSE holiday schedules are subject to change without notice.
If the exchange or market on which a
Fund’s investments are primarily traded closes early, the NAV may be calculated prior to its normal calculation time. Creation/redemption transaction order time cutoffs would also be accelerated. The value of a Fund’s assets that trade
in markets outside the United States or in currencies other than the U.S. Dollar may fluctuate when foreign markets are open but a Fund is not open for business.
A security listed or traded on an
exchange, domestic or foreign, is valued at its last sales price on the principal exchange on which it is traded prior to the time when assets are valued. If no sale is reported at that time, the mean of the last bid and asked prices is used.
Securities primarily traded on the NASDAQ Global Market
®
(“NASDAQ
®
”) for which market quotations are readily available shall be valued using the NASDAQ
®
Official Closing Price (“NOCP”) provided by NASDAQ
®
each Business Day. The NOCP is the most recently reported price as of 4:00:02 p.m. Eastern Time, unless that price is outside the range of the
“inside” bid and asked prices’ in that case, NASDAQ
®
will adjust the price to equal the inside bid or asked price, whichever is
closer. If the NOCP is not available, such securities shall be valued at the last sale price on the day of valuation, or if there has been no sale on such day, at the mean between the bid and asked prices.
When market quotations for options
and futures positions held by a Fund are readily available, those positions will be valued based upon such quotations. Securities and other assets for which market quotations are not readily available, or for which Rafferty has reason to question
the validity of quotations received, are valued at fair value by procedures as adopted by the Board.
For purposes of determining NAV per
share of a Fund, options and futures contracts are valued at the last sales price of the exchange on which they trade. The value of a futures contract equals the unrealized gain or loss on the contract that is determined by marking the contract to
the last sale price for a like contract acquired on the day on which the futures contract is being valued. The value of options on futures contracts is determined based upon the last sale price for a like option acquired on the day on which the
option is being valued. A last sale price may not be used for the foregoing purposes if the market makes a limited move with respect to a particular instrument.
For valuation purposes, quotations of
foreign securities or other assets denominated in foreign currencies are translated to U.S. Dollar equivalents using the net foreign exchange rate in effect at the close of the stock exchange in the country where the security is issued. Short-term
debt instruments having a maturity of 60 days or less are valued at amortized cost, which approximates market value. If the Board determines that the amortized cost method does not represent the fair value of the short-term debt instrument, the
investment will be valued at fair value as determined by procedures as adopted by the Board. U.S. government securities are valued at the mean between the closing bid and asked price provided by an independent third party pricing service
(“Pricing Service”).
OTC securities held by a Fund will be
valued at the last sales price or, if no sales price is reported, the mean of the last bid and asked price is used. The portfolio securities of a Fund that are listed on national exchanges are valued at the last sales price of such securities; if no
sales price is reported, the mean of the last bid and asked price is used.
Swaps are valued based upon prices from
third party vendor models or quotations from market makers to the extent available.
Dividend income and other distributions
are recorded on the ex-distribution date.
Illiquid securities, securities for
which reliable quotations or pricing services are not readily available, all other assets not valued in accordance with the foregoing principles or for which pricing information is deemed unreliable, or to the Adviser’s knowledge, does not
reflect a significant event occurring in the market, the security or asset will be valued at their respective fair value as determined in good faith by, or under procedures established by, the Trustees, which procedures may include the delegation of
certain responsibilities regarding valuation to Rafferty or the officers of the Trust. The officers of the Trust report, as necessary, to the Trustees regarding portfolio valuation determinations. The Trustees, from time to time, will review these
methods of valuation and will recommend changes that may be necessary to assure that the investments of a Fund are valued at fair value.
Additional Information Concerning Shares
Organization and Description of
Shares of Beneficial Interest
The Trust is a Delaware statutory
trust and registered investment company. The Trust was organized on April 23, 2008, and has authorized capital of unlimited Shares of beneficial interest of no par value which may be issued in more than one class or series. Currently, the Trust
consists of multiple separately managed series. The Board may designate additional series of beneficial interest and classify Shares of a particular series into one or more classes of that series.
All Shares of the Trust are freely
transferable. The Shares do not have preemptive rights or cumulative voting rights, and none of the Shares have any preference to conversion, exchange, dividends, retirements, liquidation, redemption, or any other feature. Shares have equal voting
rights, except that, in a matter affecting a particular series or class of Shares, only Shares of that series of class may be entitled to vote on the matter. Trust shareholders are entitled to require the Trust to redeem Creation Units of their
Shares. The Trust Instrument confers upon the Broad of Trustees the power, by resolution, to alter the number of Shares constituting a Creation Unit or to specify that Shares of the Trust may be individually redeemable.
The Trust reserves the right to adjust the stock
prices of Shares of the Trust to maintain convenient trading ranges for investors. Any such adjustments would be accomplished through stock splits or reverse stock splits which would have no effect on the net assets of the applicable Fund.
Under Delaware law, the Trust is not
required to hold an annual shareholders meeting if the 1940 Act does not require such a meeting. Generally, there will not be annual meetings of Trust shareholders. Trust shareholders may remove Trustees from office by votes cast at a meeting of
Trust shareholders or by written consent. If requested by shareholders of at least 10% of the outstanding Shares of the Trust, the Trust will call a meeting of a Fund’s shareholders for the purpose of voting upon the question of removal of a
Trustee of the Trust and will assist in communications with other Trust shareholders.
The Trust Instrument disclaims
liability of the shareholders of the officers of the Trust for acts or obligations of the Trust which are binding only on the assets and property of the Trust. The Trust Instrument provides for indemnification from the Trust’s property for all
loss and expense of any Fund shareholder held personally liable for the obligations of the Trust. The risk of a Trust shareholder incurring financial loss on account of shareholder liability is limited to circumstances in which the Funds would not
be able to meet the Trust’s obligations and this risk, thus, should be considered remote.
If a Fund does not grow to a size to
permit it to be economically viable, the Fund may cease operations. In such an event, investors may be required to liquidate or transfer their investments at an inopportune time.
Book Entry Only System
The Depository Trust Company
(“DTC”) acts as securities depositary for the Shares. Shares of each Fund are represented by global securities registered in the name of DTC or its nominee and deposited with, or on behalf of, DTC. Except as provided below, certificates
will not be issued for Shares.
DTC has advised the Trust as follows:
it is a limited-purpose trust company organized under the laws of the State of New York, a member of the Federal Reserve System, a “clearing corporation” within the meaning of the New York Uniform Commercial Code, and a “clearing
agency” registered pursuant to the provisions of Section 17A of the Exchange Act. DTC was created to hold securities of its participants (“DTC Participants”) and to facilitate the clearance and settlement of securities transactions
among the DTC Participants in such securities through electronic book-entry changes in accounts of the DTC Participants, thereby eliminating the need for physical movement of securities certificates. DTC Participants include securities brokers and
dealers, banks, trust companies, clearing corporations and certain other organizations, some of whom (and/or their representatives) own DTC. More specifically, DTC is owned by a number of its DTC Participants and by the NYSE, the AMEX and the
Financial Industry Regulatory Authority. Access to the DTC system is also available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a DTC Participant, either directly or
indirectly (“Indirect Participants”). DTC agrees with and represents to DTC Participants that it will administer its book-entry system in accordance with its rules and by-laws and requirements of law. Beneficial ownership of Shares is
limited to DTC Participants, Indirect Participants and persons holding interests through DTC Participants and Indirect Participants. Ownership of beneficial interests in Shares (owners of such beneficial interests are referred to herein as
“Beneficial owners”) is shown on, and the transfer of ownership is effected only through, records maintained by DTC (with respect to DTC Participants) and on the records of DTC Participants (with respect to Indirect Participants and
Beneficial owners that are not DTC Participants). Beneficial owners will receive from or through the DTC Participant a written confirmation relating to their purchase of Shares. The laws of some jurisdictions may require that certain purchasers of
securities take physical delivery of such securities in definitive form. Such laws may impair the ability of certain investors to acquire beneficial interests in Shares.
Beneficial owners of Shares are not
entitled to have Shares registered in their names, will not receive or be entitled to receive physical delivery of certificates in definitive form and are not considered the registered holder thereof. Accordingly, each Beneficial owner must rely on
the procedures of DTC, the DTC Participant and any Indirect Participant through which such Beneficial owner holds its interests, to exercise any rights of a holder of Shares. The Trust understands that under existing industry practice, in the event
the Trust requests any action of holders of Shares, or a Beneficial owner desires to take any action that DTC, as the record owner of all outstanding Shares, is entitled to take, DTC would authorize the DTC Participants to take such action and that
the DTC Participants would authorize the Indirect Participants and Beneficial owners acting through such DTC Participants to take such action and would otherwise act upon the instructions of Beneficial owners owning through them. As described above,
the Trust recognizes DTC or its nominee as the owner of all Shares for all purposes. Conveyance of all notices, statements and other communications to Beneficial owners is effected as follows. Pursuant to the Depositary Agreement between the Trust
and DTC, DTC is required to make available to the Trust upon request and for a fee to be charged to the Trust a listing of Share holdings of each DTC Participant. The Trust shall inquire of each such DTC Participant as to the number of Beneficial
owners holding Shares, directly or indirectly, through such DTC Participant. The Trust shall provide each such DTC Participant with copies of such notice, statement or other communication, in such form, number and at such place as such DTC
Participant may reasonably request, in order that such notice, statement or communication may be transmitted by such DTC Participant, directly or indirectly, to such Beneficial owners. In addition, the Trust shall pay to each such DTC Participant a
fair and reasonable amount as reimbursement for the expenses attendant to such transmittal, all subject to applicable statutory and regulatory requirements.
Distributions of Shares shall be
made to DTC or its nominee, Cede & Co., as the registered holder of all Shares. DTC or its nominee, upon receipt of any such distributions, shall credit immediately DTC Participants’ accounts with payments in amounts
proportionate to their respective beneficial
interests in Shares as shown on the records of DTC or its nominee. Payments by DTC Participants to Indirect Participants and Beneficial owners of Shares held through such DTC Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers in bearer form or registered in a “street name,” and will be the responsibility of such DTC Participants. The Trust has no responsibility or liability for
any aspects of the records relating to or notices to Beneficial owners, or payments made on account of beneficial ownership interests in such Shares, or for maintaining, supervising or reviewing any records relating to such beneficial ownership
interests or for any other aspect of the relationship between DTC and the DTC Participants or the relationship between such DTC Participants 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 Exchange. The Trust will not make the DTC book-entry Dividend Reinvestment Service available for use by Beneficial Owners for reinvestment of their cash proceeds but certain brokers may make a dividend reinvestment service
available to their clients. Brokers offering such services may require investors to adhere to specific procedures and timetables in order to participate. Investors interested in such a service should contact their broker for availability and other
necessary details.
Purchases and Redemptions
The Trust issues and redeems
Shares of each Fund only in aggregations of Creation Units. The number of Shares of a Fund that constitute a Creation Unit for each Fund and the value of such Creation Unit as of each Fund’s inception were 50,000 and $2,000,000,
respectively.
See
“Purchase and Issuance of Shares in Creation Units” and “Redemption of Creation Units” below. The Board reserves the right to declare a split or a consolidation in the number of Shares outstanding of any Fund, and may make a
corresponding change in the number of Shares constituting a Creation Unit, in the event that the per Shares price in the secondary market rises (or declines) to an amount that falls outside the range deemed desirable by the Board for any other
reason.
Purchase and Issuance of
Creation Units
The Trust issues
and sells Shares only in Creation Units on a continuous basis through the Distributor, without a sales load, at their NAV next determined after receipt, on any Business Day (as defined above), of an order in proper form.
Creation Units of Shares may be
purchased only by or through an Authorized Participant. Such Authorized Participant will agree pursuant to the terms of such Authorized Participant Agreement on behalf of itself or any investor on whose behalf it will act, as the case may be, to
certain conditions, including that such Authorized Participant will make available an amount of cash sufficient to pay the Balancing Amount and the transaction fee described below. The Authorized Participant may require the investor to enter into an
agreement with such Authorized Participant with respect to certain matters, including payment of the Balancing Amount. Investors who are not Authorized Participants must make appropriate arrangements with an Authorized Participant. Investors should
be aware that their particular broker may not be a DTC Participant or may not have executed an Authorized Participant Agreement, and that therefore orders to purchase Creation Units of Shares may have to be placed by the investor’s broker
through an Authorized Participant. As a result, purchase orders placed through an Authorized Participant may result in additional charges to such investor.
Creation Units also will be sold only
for cash (“Cash Purchase Amount”) for the Bear Fund. Creation Units are sold at their NAV, plus a transaction fee, as described below.
Purchases through the Clearing Process
(Bull Fund)
An Authorized
Participant may place an order to purchase (or redeem) Creation Units (i) through the Continuous Net Settlement clearing processes of NSCC as such processes have been enhanced to effect purchases (and redemptions) of Creation Units, such processes
being referred to herein as the “Enhanced Clearing Process,” or (ii) outside the Enhanced Clearing Process, being referred to herein as the Manual Clearing Process. To purchase or redeem through the Enhanced Clearing Process, an
Authorized Participant must be a member of National Securities Clearing Corporation (“NSCC”) that is eligible to use the Continuous Net Settlement system. For purchase orders placed through the Enhanced Clearing Process, in the
Authorized Participant Agreement the Participant authorizes the Transfer Agent to transmit to the NSCC, on behalf of an Authorized Participant, such trade instructions as are necessary to effect the Authorized Participant’s purchase order.
Pursuant to such trade instructions to the NSCC, the Authorized Participant agrees to deliver the Portfolio Deposit and such additional information as may be required by the Transfer Agent or the Distributor. A purchase order must be received in
good order by the transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent’s automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to
receive that day's NAV per
Share. All other procedures set forth in the Authorized
Participant Agreement must be followed in order for you to receive the NAV determined on that day.
The consideration for purchase of a
Creation Unit of Shares of the Bull Fund consists of either cash or the Deposit Securities that is a representative sample of the securities in the Index, the Balancing Amount, and the appropriate Transaction Fee (collectively, the “Portfolio
Deposit”). The Balancing Amount will be the amount equal to the differential, if any, between the total aggregate market value of the Deposit Securities and the NAV of the Creation Unit(s) being purchased and will be paid to, or received from,
the Trust after the NAV has been calculated.
BNYM makes available through the NSCC
on each Business Day, either immediately prior to the opening of business on the Exchange or the night before, the list of the names and the required number of shares of each Deposit Security to be included in the current Portfolio Deposit (based on
information at the end of the previous Business Day) for the Bull Fund. Such Portfolio Deposit is applicable, subject to any adjustments as described below, in order to effect purchases of Creation Units of Shares of the Bull Fund until such time as
the next-announced Portfolio Deposit made available.
The identity and number of shares of
the Deposit Securities required for the Bull Fund changes as rebalancing adjustments and corporate action events are reflected from time to time by Rafferty with a view to the investment objective of the Bull Fund. The composition of the Deposit
Securities may also change in response to adjustments to the weighting or composition of the securities constituting the relevant securities index. In addition, the Trust reserves the right to permit or require the substitution of an amount of cash
(
i.e.
, a “cash in lieu” amount) to be added to the Balancing Amount to replace any Deposit Security which may not be available in sufficient quantity for delivery or for other similar reasons. The
adjustments described above will reflect changes, known to Rafferty on the date of announcement to be in effect by the time of delivery of the Portfolio Deposit, in the composition of the subject index being tracked by the Bull Fund, or resulting
from stock splits and other corporate actions.
In addition to the list of names and
numbers of securities constituting the current Deposit Securities of a Portfolio Deposit, on each Business Day, the Balancing Amount effective through and including the previous Business Day, per outstanding Share of the Bull Fund, will be made
available.
Shares may be issued
in advance of receipt by the Trust of all or a portion of the applicable Deposit Securities as described below. In these circumstances, the initial deposit will have a greater value than the NAV of the Shares on the date the order is placed in
proper form since, in addition to the available Deposit Securities, cash must be deposited in an amount equal to the sum of (i) the Balancing Amount, plus (ii) 115% of the market value of the undelivered Deposit Securities (the “Additional
Cash Deposit”). An additional amount of cash shall be required to be deposited with the Trust, pending delivery of the missing Deposit Securities to the extent necessary to maintain the Additional Cash Deposit with the Trust in an amount at
least equal to 115% of the daily marked to market value of the missing Deposit Securities. The Participation Agreement will permit the Trust to buy the missing Deposit Securities any time. Authorized Participants will be liable to the Trust for the
costs incurred by the Trust in connection with any such purchases. These costs will be deemed to include the amount by which the actual purchase price of the Deposit Securities exceeds the market value of such Deposit Securities on the day the
purchase order was deemed received by the Distributor plus the brokerage and related transaction costs associated with such purchases. The Trust will return any unused portion of the Additional Cash Deposit once all of the missing Deposit Securities
have been properly received by the Custodian Bank or purchased by the Trust and deposited into the Trust. In addition, a transaction fee, as listed below, will be charged in all cases. The delivery of Shares so purchased will occur no later than the
third Business Day following the day on which the purchase order is deemed received by the Distributor. Due to the schedule of holidays in certain countries, however, the delivery of Shares may take longer than three Business Days following the day
on which the purchase order is received. In such cases, the local market settlement procedures will not commence until the end of local holiday periods. A list of local holidays in the foreign countries or markets relevant to the international funds
is set forth under “Regular Foreign Holidays” below.
All questions as to the number of
shares of each security in the Deposit Securities and the validity, form, eligibility and acceptance for deposit of any securities to be delivered shall be determined by the Trust, and the Trust’s determination shall be final and
binding.
Purchases through the
Manual Clearing Process
An
Authorized Participant that wishes to place an order to purchase Creation Units outside the Enhanced Clearing Process must state that it is not using the Enhanced Clearing Process and that the purchase instead will be effected through a transfer of
securities and cash either through the Federal Reserve System (for cash and U.S. government securities) or directly through DTC. All Creation Unit purchases of the Bear Fund will be settled outside the Enhanced Clearing Process for cash equal to the
Creation Unit’s NAV (“Cash Purchase Amount”). Purchases (and redemptions) of Creation Units of the Bull Fund settled outside the Enhanced Clearing Process will be subject to a higher Transaction Fee than those settled through the
Enhanced Clearing Process. Purchase orders effected outside the Enhanced Clearing Process are likely to require transmittal by the Authorized Participant earlier on the Transmittal Date than orders effected using the Enhanced Clearing Process. Those
persons placing orders outside the Enhanced Clearing Process should ascertain the deadlines applicable to DTC and the Federal Reserve System (for cash and U.S. government securities) by contacting the operations department of the broker
or depository institution effectuating such transfer of
the Portfolio Deposit (for the Bull Fund), or of the Cash Purchase Amount (for the Bear Fund).
Rejection of Purchase Orders
The Trust reserves the absolute
right to reject a purchase order transmitted to it by the Distributor in respect of any Fund if (a) the purchaser or group of purchasers, upon obtaining the shares ordered, would own 80% or more of the currently outstanding Shares of any Fund; (b)
the Deposit Securities delivered are not as specified by Rafferty and Rafferty has not consented to acceptance of an in-kind deposit that varies from the designated Deposit Securities; (c) acceptance of the purchase transaction order would have
certain adverse tax consequences to the Fund; (d) the acceptance of the purchase transaction order would, in the opinion of counsel, be unlawful; (e) the acceptance of the purchase transaction order would otherwise, in the discretion of the Trust or
Rafferty, have an adverse effect on the Trust or the rights of beneficial owners; (f) the value of a Cash Purchase Amount, or the value of the Balancing Amount to accompany an in-kind deposit exceed a purchase authorization limit extended to an
Authorized Participant by the custodian and the Authorized Participant has not deposited an amount in excess of such purchase authorization with the custodian by 4:00 p.m. Eastern Time on the Transmittal Date; or (g) in the event that circumstances
outside the control of the Trust, the Distributor and Rafferty make it impractical to process purchase orders. The Trust shall notify a prospective purchaser of its rejection of the order of such person. The Trust and the Distributor are under no
duty, however, to give notification of any defects or irregularities in the delivery of purchase transaction orders nor shall either of them incur any liability for the failure to give any such notification.
Redemption of Creation Units
Shares may be redeemed only in
Creation Units at their NAV next determined after receipt of a redemption request in proper form by the Distributor on any Business Day. The Trust will not redeem Shares in amounts less than Creation Units. Beneficial owners also may sell Shares in
the secondary market, but must accumulate enough Shares to constitute a Creation Unit in order to have such Shares redeemed by the Trust. There can be no assurance, however, that there will be sufficient liquidity in the public trading market at any
time to permit assembly of a Creation Unit of Shares. Investors should expect to incur brokerage and other costs in connection with assembling a sufficient number of Shares to constitute a redeemable Creation Unit.
Placement of Redemption Orders Using
Enhanced Clearing Process (Bull Fund)
Orders to redeem Creation Units of
the Funds through the Enhanced Clearing Process must be delivered through an Authorized Participant that is a member of NSCC that is eligible to use the Continuous Net Settlement System. A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day’s NAV
per Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day.
With respect to the Bull Fund,
Rafferty makes available through the NSCC immediately prior to the opening of business on the Exchange on each day that the Exchange is open for business the Portfolio Securities that will be applicable (subject to possible amendment or correction)
to redemption requests received in proper form (as defined below) on that day (“Redemption Securities”). These securities may, at times, not be identical to Deposit Securities which are applicable to a purchase of Creation Units.
The redemption proceeds for a
Creation Unit consist of either cash or Redemption Securities, as announced by Rafferty through the NSCC on any Business Day, plus the Balancing Amount. The redemption transaction fee described below is deducted from such redemption proceeds.
Placement of Redemption Orders Outside
Clearing Process (Bull Fund and Bear Fund)
Orders to redeem Creation Units of
the Funds outside the Clearing Process must be delivered through a DTC Participant that has executed the Authorized Participant Agreement and, for the Fixed Income Funds, has the ability to transact through the Federal Reserve System. A DTC
Participant who wishes to place an order for redemption of Creation Units of a Fund to be effected outside the Clearing Process need not be an Authorized Participant, but such orders must state that the DTC Participant is not using the Clearing
Process and that redemption of Creation Units will instead be effected through transfer of Shares directly through DTC or the Federal Reserve System (for cash and U.S. government securities). A redemption order must be received in good order by the
transfer agent by 4:00 p.m. Eastern Time, whether transmitted by mail, through the transfer agent's automated system, telephone, facsimile or other means permitted under the Authorized Participant Agreement, in order to receive that day's NAV per
Share. All other procedures set forth in the Authorized Participant Agreement must be followed in order for you to receive the NAV determined on that day. The order must be accompanied or preceded by the requisite number of Shares of the Funds
specified in such order, which delivery must be made through DTC or the Federal Reserve System to the Custodian by the third Business Day following such Transmittal Date (“DTC Cut-Off Time”); and (iii) all other procedures set forth in
the Authorized Participant Agreement must be properly followed.
For the Bull Fund, if it is not
possible to effect deliveries of the Redemption Securities, the Fund may in its discretion exercise its option to redeem such Shares in cash, and the redeeming shareholder will be required to receive its redemption proceeds
in cash. In addition, an investor may request a
redemption in cash which the Fund may, in its sole discretion, permit. The Fund may also, in its sole discretion, upon request of a shareholder, provide such redeemer a portfolio of securities which differs from the exact composition of the Fund
Securities but does not differ in NAV.
After the Transfer Agent has deemed
an order for redemption of the Bull Fund’s shares outside the Clearing Process received, the Transfer Agent will initiate procedures to transfer the requisite Redemption Securities, which are expected to be delivered within three Business
Days, and the Balancing Amount minus the Transaction Fee. In addition, with respect to Bull Fund redemptions honored in cash, the redeeming party will receive the Cash Redemption Amount by the third Business Day following the Transmittal Date on
which such redemption order is deemed received by the Transfer Agent. Due to the schedule of holidays in certain countries, however, the receipt of the Cash Redemption Amount may take longer than three Business Days following the Transmittal Date.
In such cases, the local market settlement procedures will not commence until the end of local holiday periods. See below for a list of local holidays in the foreign country relevant to the international funds.
The redemption proceeds for a
Creation Unit of the Bear Fund will consist solely of cash in an amount equal to the NAV of the Shares being redeemed, as next determined after a receipt of a request in proper form, less the redemption transaction fee described below (“Cash
Redemption Amount”).
In
certain instances, Authorized Participants may create and redeem Creation Unit aggregations of the same Fund on the same trade date. In this instance, the Trust reserves the right to settle these transactions on a net basis.
The right of redemption may be
suspended or the date of payment postponed with respect to any Fund (1) for any period during which the 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 Fund’s portfolio securities or determination of its NAV is not reasonably practicable; or (4) in such other circumstance as is
permitted by the SEC.
Each Fund generally intends to
effect deliveries of Creation Units and portfolio securities on a basis of “T” plus three Business Days (
i.e.
, days on which the national securities exchange is open). A Fund may effect deliveries
of Creation Units and portfolio securities on a basis other than T plus three in order to accommodate local holiday schedules, to account for different treatment among foreign and U.S. markets of dividend record dates and ex-dividend dates or under
certain other circumstances. The ability of the Trust to effect in-kind creations and redemptions within three Business Days of receipt of an order in good form is subject, among other things, to the condition that, within the time period from the
date of the order to the date of delivery of the securities, there are no days that are holidays in the applicable foreign market. For every occurrence of one or more intervening holidays in the applicable foreign market that are not holidays
observed in the U.S. equity market, the redemption settlement cycle will be extended by the number of such intervening holidays. In addition to holidays, other unforeseeable closings in a foreign market due to emergencies may also prevent the Trust
from delivering securities within normal settlement periods. The securities delivery cycles currently practicable for transferring portfolio securities to redeeming Authorized Participants, coupled with foreign market holiday schedules, will require
a delivery process longer than seven calendar days for the international funds, in certain circumstances. The applicable holidays for certain foreign markets are listed in the table below. The proclamation of new holidays, the treatment by market
participants of certain days as “informal holidays” (
e.g.
, days on which no or limited securities transactions occur, as a result of substantially shortened trading hours), the elimination of
existing holidays or changes in local securities delivery practices could affect the information set forth herein at some time in the future.
The dates from January 1, 2016 through
December 31, 2016 in which the regular holidays affecting the relevant securities markets of the below listed countries are as follows:
Australia
|
|
Austria
|
|
Belgium
|
|
Brazil
|
|
Canada
|
|
Chile
|
|
China
|
January
1
January 26
March 14
March 25
March 28
April 25
June 13
August 1
October 3
November 1
December 23
December 26
December 27
December 30
|
|
January
1
January 6
March 25
March 28
May 5
May 16
May 26
August 15
October 26
November 1
December 8
December 26
December 30
|
|
January
1
March 25
March 28
May 5
May 6
May 16
July 21
August 15
November 1
November 11
December 26
|
|
January
1
January 25
February 8
February 9
February 10
March 25
April 21
May 26
September 7
October 12
November 2
November 15
December 24
December 25
December 31
|
|
January
1
February 15
March 25
May 23
June 24
July 1
August 1
September 5
October 10
November 11
December 26
|
|
January
1
March 25
June 27
August 15
September 19
October 10
October 31
November 1
December 8
|
|
January
1
January 18
February 8
February 9
February 10
February 11
February 12
February 15
March 25
March 28
April 4
May 2
May 30
June 9
June 10
July 1
July 4
September 5
September
15
September 16
October 3
October 4
October 5
October 6
October 7
October 10
November 11
November 24
December 26
December 27
|
Colombia
|
|
Czech
Republic
|
|
Denmark
|
|
Egypt
|
|
Finland
|
|
France
|
|
Germany
|
January
1
January 11
March 21
March 24
March 25
May 9
May 30
June 6
July 4
July 20
August 15
October 17
November 7
November 14
December 8
|
|
January
1
March 25
March 28
July 5
July 6
September 28
October 28
November 17
December 26
|
|
January
1
March 24
March 25
March 28
April 22
May 5
May 6
May 16
December 26
|
|
January
7
January 25
April 25
May 1
May 2July 6
July 7
September 11
September 12
October 2
October 6
December 11
|
|
January
1
January 6
March 24
March 25
March 28
May 5
June 24
December 6
December 26
|
|
January
1
March 25
March 28
May 5
May 16
July 14
August 15
November 1
November 11
December 26
|
|
January
1
March 25
March 28
May 5
May 16
May 26
October 3
November 1
December 26
|
Greece
|
|
Hong
Kong
|
|
Hungary
|
|
India
|
|
Indonesia
|
|
Ireland
|
|
Israel
|
January
1
January 6
March 14
March 25
March 28
April 29
May 2
June 20
August 15
October 28
December 26
|
|
January
1
February 8
February 9
February 10
February 11
February 12
March 24
March 25
March 28
April 4
May 2
June 9
June 10
June 30
July 1
September 15
September 16
September 30
October 3
October 4
October 5
October 6
October 7
October 10
December 23
December 26
December 27
|
|
January
1
March 14
March 15
March 25
March 28
May 16
October 31
November 1
December 26
|
|
January
26
February 19
March 7
March 24
March 25
April 1
April 8
April 14
April 15
April 19
July 6
August 15
August 17
September 5
September 13
October 11
October 12
October 31
November 14
November 12
December 12
|
|
January
1
February 8
March 9
March 25
May 5
May 6
July 4
July 5
July 6
July 7
July 8
August 17
September 12
December 12
December 26
|
|
January
1
January 18
February 15
March 17
March 25
March 28
May 2
May 30
June 6
July 4
August 1
August 29
September 5
October 10
October 31
November 11
November 24
December 23
December
26
December 27
December 30
|
|
March
24
April 22
April 24
April 25
April 26
April 27
April 28
April 29
May 11
May 12
June 12
August 14
October 2
October 3
October 4
October 11
October 12
October 16
October 17
October 18
October 19
October 20
October 23
October 24
|
Italy
|
|
Japan
|
|
Korea
|
|
Malaysia
|
|
Mexico
|
|
Morocco
|
|
The
Netherlands
|
January
1
January 6
March 25
March 28
June 2
August 15
December 8
December 26
|
|
January
1
January 11
February 11
March 21
April 29
May 3
May 4
May 5
July 18
August 11
September 19
September 22
October 10
November 3
November 23
December 23
|
|
January
1
February 8
February 9
February 10
March 1
April 13
May 5
June 6
August 15
September 14
September 15
September 16
October 3
December 30
|
|
January
1
January 25
February 1
February 8
February 9
May 2
June 22
July 6
July 7
August 31
September 12
September 16
October 3
December 12
December 26
|
|
January
1
February 1
March 21
March 24
March 25
September 16
November 2
November 21
December 12
|
|
January
1
January 11
July 7
September 13
October 3
November 18
December 12
|
|
January
1
March 25
March 28
December 26
|
New
Zealand
|
|
Norway
|
|
Peru
|
|
The
Philippines
|
|
Poland
|
|
Portugal
|
|
Russia
|
January
1
January 4
January 25
February 1
February 8
March 25
March 28
April 25
June 6
October 24
December 26
December 27
|
|
January
1
March 23
March 24
March 25
March 28
May 5
May 16
May 17
December 26
|
|
January
1
March 24
March 25
June 29
July 28
July 29
August 30
November 1
December 8
|
|
January
1
February 8
February 25
March 24
March 25
August 29
October 31
November 1
November 30
December 30
|
|
January
1
January 6
March 25
March 28
May 3
May 26
August 15
November 1
November 11
December 26
December 30
|
|
January
1
March 25
March 28
April 25
June 10
June 13
August 15
December 8
December 26
|
|
January
1
January 4
January 5
January 6
January 7
January 8
February 22
February 23
March 7
March 8
May 2
May 3
May 9
June 13
November 4
|
Singapore
|
|
South
Africa
|
|
Spain
|
|
Sweden
|
|
Switzerland
|
|
Taiwan
|
|
Thailand
|
January
1
February 8
February 9
March 25
May 2
July 6
August 9
September 12
December 26
|
|
January
1
March 21
March 25
March 28
April 27
May 2
June 16
August 9
December 16
December 26
|
|
January
1
January 6
March 24
March 25
March 28
July 25
August 15
October 12
November 1
December 6
December 8
December 26
|
|
January
1
January 5
January 6
March 24
March 25
March 28
April 30
May 4
May 5
June 6
June 24
November 4
December 26
|
|
January
1
March 25
March 28
April 18
May 5
May 16
August 1
September 12
December 26
|
|
January
1
February 4
February 5
February 8
February 9
February 10
February 11
February 12
February 29
April 4
April 5
May 2
June 9
June 10
September 15
September 16
October 10
|
|
January
1
February 22
April 6
April 13
April 14
April 15
May 2
May 5
May 6
May 20
July 1
July 18
July 19
August 12
October 24
December 5
December 12
|
Turkey
|
|
United
Kingdom
|
January
1
May 19
July 4
July 5
July 6
July 7
August 30
September 12
September 13
September 14
September 15
October 28
|
|
January
1
January 18
February 15
March 25
March 28
May 2
May 30
July 4
August 29
September 5
October 10
November 11
November 24
December 23
December 26
December 27
December 30
|
The longest redemption cycle for the
international funds is a function of the longest redemption cycles among the countries whose stocks are held by a fund.
Transaction fees are imposed as
set forth in the table in the Prospectus. Transaction Fees payable to the Trust are imposed to compensate the Trust for the transfer and other transaction costs of a Fund associated with the issuance and redemption of Creation Units of Shares. There
is a fixed and a variable component to the total Transaction Fee. A fixed Transaction Fee is applicable to each creation or redemption transaction, regardless of the number of Creation Units purchased or redeemed. In addition, a variable Transaction
Fee based upon the value of each Creation Unit also is applicable to each redemption transaction. The Transaction Fee applicable to the redemption of Creation Units will not exceed 2% of the value of the redemption proceeds.
Purchasers of Creation Units of the
Bull Fund for cash are required to pay an additional charge to compensate the relevant Fund for brokerage and market impact expenses relating to investing in portfolios securities. Where the Trust permits an in-kind purchaser to substitute cash in
lieu of depositing a portion of the Deposit Securities, the purchaser will be assessed an additional charge for cash purchases.
Purchasers of Shares in Creation
Units are responsible for the costs of transferring the securities constituting the Deposit Securities to the account of the Trust. The purchase transaction fees for in-kind purchases and cash purchases (when available) are listed in the table
below. Investors will also bear the costs of transferring securities from the Fund to their account or on their order. Investors who use the services of a broker or other such intermediary may be charged a fee for such services. In addition,
Rafferty may, from time to time, at its own expense, compensate purchasers of Creation Units who have purchased substantial amounts of Creation Units and other financial institutions for administrative or marketing services.
The method by which Creation
Units of Shares are created and traded may raise certain issues under applicable securities laws. Because new Creation Units of Shares are issued and sold by the Trust on an ongoing basis, at any point a “distribution,” as such term is
used in the Securities Act, may occur. Broker-dealers and other persons are cautioned that some activities on their part may, depending on the circumstances, result in their being deemed participants in a distribution in a manner which could render
them statutory underwriters and subject them to the prospectus delivery and liability provisions of the Securities Act. For example, a broker-dealer firm or its client may be deemed a statutory underwriter if it takes Creation Units after placing an
order with the Distributor, breaks them down into constituent Shares, and sells some or all of the Shares comprising such Creation Units directly to its customers; or if it chooses to couple the creation of a supply of new Shares with an active
selling effort involving solicitation of secondary market demand for Shares. A determination of whether a person is an underwriter for the purposes of the Securities Act depends upon all the facts and circumstances pertaining to that person’s
activities. Thus, the examples mentioned above should not be considered a complete description of all the activities that could lead to a categorization as an underwriter. Broker-dealer firms should also note that dealers who are effecting
transactions in Shares, whether or not participating in the distribution of Shares, are generally required to deliver a prospectus. This is because the prospectus delivery exemption in Section 4(3) of the Securities Act is not available in respect
of such transactions as a result of Section 24(d) of the 1940 Act. Broker-dealer firms should note that dealers who are not “underwriters” but are participating in a distribution (as contrasted to ordinary secondary market transaction),
and thus dealing with Shares that are part of an “unsold allotment” within the meaning of section 4(3)(C) of the Securities Act, would be unable to take advantage of the prospectus delivery exemption provided by section 4(3) of the
Securities Act. Firms that incur a prospectus-delivery obligation with respect to Shares are reminded that under Securities Act Rule 153 a prospectus delivery obligation under Section 5(b)(2) of the Securities Act owed to a national securities
exchange member in connection with a sale on the national securities exchange is satisfied by the fact that the Fund’s prospectus is available at the national securities exchange on which the Shares of such Fund trade upon request. The
prospectus delivery mechanism provided in Rule 153 is only available with respect to transactions on a national securities exchange and not with respect to “upstairs” transactions.
Dividends, Other Distributions and Taxes
Dividends and other
Distributions
As stated in
the Prospectus, each Fund declares and distributes dividends to its shareholders from its net investment income at least annually; for these purposes, net investment income includes dividends, accrued interest, and accretion of OID and market
discount, less amortization of market premium and estimated expenses, and is calculated immediately prior to the determination of a Fund’s NAV per share. Each Fund also distributes the excess of its net short-term capital gain over net
long-term capital loss (“short-term gain”), if any, annually but may make more frequent distributions thereof if necessary to avoid federal income or excise taxes. Each Fund may realize net capital gain
(
i.e.
, the excess of net long-term capital gain over net short-term capital loss) and thus anticipates making annual distributions thereof. The Trustees may revise this distribution policy, or postpone the
payment of distributions, if a Fund has or anticipates any large unexpected expense, loss or fluctuation in net assets that, in the Trustees’ opinion, might have a significant adverse effect on its shareholders.
Investors should be aware that if
shares are purchased shortly before the record date for any dividend or capital gain distribution, the shareholder will pay full price for the shares and receive some portion of the purchase price back as a taxable distribution (with the tax
consequences described in the Prospectus).
Taxes
Regulated Investment Company Status
. Each Fund is treated as a separate entity for federal tax purposes and intends to qualify for treatment as a RIC. If a Fund so qualifies
and satisfies the Distribution Requirement (defined below) for a taxable year, it will not be subject to federal income tax on the part of its investment company taxable income (generally consisting of net investment income, short-term gain, and net
gains and losses from certain foreign currency transactions, all determined without regard to any deduction for dividends paid) and net capital gain it distributes to its shareholders for that year.
To qualify for treatment as a RIC, a
Fund must distribute to its shareholders for each taxable year at least the sum of 90% of its investment company taxable income (“Distribution Requirement”) and 90% of its net exempt interest income and must meet several additional
requirements. For each Fund, these requirements include the following: (1) the Fund must derive at least 90% of its gross income each taxable year from the following sources (collectively, “Qualifying Income”): (a) dividends, interest,
payments with respect to securities loans, and gains from the sale or other disposition of securities or foreign currencies, or other income (including gains from options, futures, or forward contracts) derived with respect to its business of
investing in securities or those currencies, and (b) net income from an interest in a “qualified publicly traded partnership” (“QPTP”) (“Income Requirement”); and (2) at the close of each quarter of the
Fund’s taxable year, (a) at least 50% of the value of its total assets must be represented by cash and cash items, U.S. government securities, securities
of other RICs and other securities, with those other
securities limited, in respect of any one issuer, to an amount that does not exceed 5% of the value of the Fund’s total assets and that does not represent more than 10% of the issuer’s outstanding voting securities (equity securities of
QPTPs being considered voting securities for these purposes), and (b) not more than 25% of the value of its total assets may be invested in (i) securities (other than U.S. government securities or the securities of other RICs) of any one issuer,
(ii) securities (other than securities of other RICs) of two or more issuers the Fund controls that are determined to be engaged in the same, similar or related trades or businesses, or (iii) securities of one or more QPTPs (collectively,
“Diversification Requirements”). The Internal Revenue Service (“Service”) has ruled that income from a derivative contract on a commodity index generally is not Qualifying Income.
Although each Fund intends to satisfy
all the foregoing requirements, there is no assurance that a Fund will be able to do so. The investment by a Fund primarily in options and futures positions entails some risk that it might fail to satisfy one or both of the Diversification
Requirements. There is some uncertainty regarding the valuation of such positions for purposes of those requirements; accordingly, it is possible that the method of valuation a Fund uses, pursuant to which each of them would expect to be treated as
satisfying the Diversification Requirements, would not be accepted in an audit by the Service, which might apply a different method resulting in disqualification of one or more funds.
If a Fund failed to qualify for
treatment as a RIC for any taxable year, (1) its taxable income, including net capital gain, would be taxed at corporate income tax rates (up to 35%), (2) it would not receive a deduction for the distributions it makes to its shareholders, and (3)
the shareholders would treat all those distributions, including distributions of net capital gain, as dividends (that is, ordinary income, except for the part of those dividends that is “qualified dividend income” (described in the
Prospectus) (“QDI”)) if certain holding period and other requirements are met) to the extent of the Fund’s earnings and profits; those dividends would be eligible for the dividends-received deduction available to corporations under
certain circumstances. In addition, the Fund would be required to recognize unrealized gains, pay substantial taxes and interest, and make substantial distributions before requalifying for RIC treatment. However, the Regulated Investment Company
Modernization Act of 2010 (“RIC Mod Act”) provides certain savings provisions that enable a RIC to cure a failure to satisfy any of the Income and Diversification Requirements as long as the failure “is due to reasonable cause and
not due to willful neglect” and the RIC pays a deductible tax calculated in accordance with those provisions and meets certain other requirements.
Excise Tax
. Each Fund will be subject to a nondeductible 4% excise tax (“Excise Tax”) to the extent it fails to distribute by the end of any calendar year
substantially all of its ordinary income for that year and capital gain net income for the one-year period ending on October 31 of that year, plus certain other amounts.
Income from Foreign Securities
. Dividends and interest a Fund receives, and gains it realizes, on foreign securities may be subject to income, withholding, or other taxes
imposed by foreign countries and U.S. possessions that would reduce the yield and/or total return on its securities. Tax conventions between certain countries and the United States may reduce or eliminate these taxes, however, and many foreign
countries do not impose taxes on capital gains in respect of investments by foreign investors.
Gains or losses (1) from the
disposition of foreign currencies, including forward currency contracts, (2) on the disposition of each foreign-currency-denominated debt security that are attributable to fluctuations in the value of the foreign currency between the dates of
acquisition and disposition of the security, and (3) that are attributable to fluctuations in exchange rates that occur between the time a Fund accrues dividends, interest, or other receivables, or expenses or other liabilities, denominated in a
foreign currency and the time the Fund actually collects the receivables or pays the liabilities, generally will be treated as ordinary income or loss. These gains or losses will increase or decrease the amount of a Fund’s investment company
taxable income to be distributed to its shareholders.
Each Fund may invest in the stock of
“passive foreign investment companies” (“PFICs”). A PFIC is any foreign corporation (with certain exceptions) that, in general, meets either of the following tests for a taxable year: (1) at least 75% of its gross income is
passive or (2) an average of at least 50% of its assets produce, or are held for the production of, passive income. Under certain circumstances, a Fund will be subject to federal income tax on a portion of any “excess distribution” it
receives on the stock of a PFIC or of any gain on its disposition of the stock (collectively, “PFIC income”), plus interest thereon, even if the Fund distributes the PFIC income as a dividend to its shareholders. The balance of the PFIC
income will be included in the Fund’s investment company taxable income and, accordingly, will not be taxable to it to the extent it distributes that income to its shareholders. Fund distributions thereof will not be eligible for the maximum
federal income tax rates applicable to QDI.
If a Fund invests in a PFIC and
elects to treat the PFIC as a “qualified electing fund” (“QEF”), then, in lieu of the foregoing tax and interest obligation, the Fund would be required to include in income each taxable year its pro rata share of the
QEF’s annual ordinary earnings and net capital gain -- which the Fund probably would have to distribute to satisfy the Distribution Requirement and avoid imposition of the Excise Tax -- even if the Fund did not receive those earnings and gain
from the QEF. In most instances it will be very difficult, if not impossible, to make this election because of certain requirements thereof.
Each Fund may elect to “mark to
market” its stock in any PFIC. “Marking-to-market,” in this context, means including in gross income each taxable year (and treating as ordinary income) the excess, if any, of the fair market value of the PFIC’s
stock over a Fund’s adjusted basis therein as
of the end of that year. Pursuant to the election, a Fund also would be allowed to deduct (as an ordinary, not a capital, loss) the excess, if any, of its adjusted basis in PFIC stock over the fair market value thereof as of the taxable year-end,
but only to the extent of any net mark-to-market gains with respect to that stock the Fund included in income for prior taxable years under the election. A Fund’s adjusted basis in each PFIC’s stock with respect to which it makes this
election would be adjusted to reflect the amounts of income included and deductions taken thereunder.
Derivatives Strategies
. The use of derivatives strategies, such as writing (selling) and purchasing options and futures contracts and entering into forward contracts,
involves complex rules that will determine for income tax purposes the amount, character, and timing of recognition of the gains and losses a Fund realizes in connection therewith. Gains from the disposition of foreign currencies (except certain
gains therefrom that may be excluded by future regulations), and gains from options, futures, and forward contracts a Fund derives with respect to its business of investing in securities or foreign currencies, will be treated as Qualifying Income.
Each Fund will monitor its transactions, make appropriate tax elections, and make appropriate entries in its books and records when it acquires any foreign currency, option, futures contract, forward contract, or hedged investment to mitigate the
effect of these rules, seek to prevent its disqualification as a RIC, and minimize the imposition of federal income and excise taxes.
Some futures contracts, foreign
currency contracts that are traded in the interbank market, and “nonequity” options (
i.e.
, certain listed options, such as those on a “broad-based” securities index)
—
except any “securities futures contract” that is not a “dealer securities futures contract” (both as defined in the Code) and any interest rate
swap, currency swap, basis swap, interest rate cap, interest rate floor, commodity swap, equity swap, equity index swap, credit default swap, or similar agreement
—
in
which a Fund invests may be subject to Code section 1256 (collectively “section 1256 contracts”). Section 1256 contracts that a Fund holds at the end of its taxable year must be “marked to market” (that is, treated as having
been sold at that time for their fair market value) for federal income tax purposes, with the result that unrealized gains or losses will be treated as though they were realized. Sixty percent of any net gain or loss recognized on these deemed
sales, and 60% of any net realized gain or loss from any actual sales of section 1256 contracts, will be treated as long-term capital gain or loss, and the balance will be treated as short-term capital gain or loss. These rules may operate to
increase the amount that a Fund must distribute to satisfy the Distribution Requirement (
i.e.
, with respect to the portion treated as short-term capital gain), which will be taxable to its shareholders as
ordinary income when distributed to them, and to increase the net capital gain a Fund recognizes, without in either case increasing the cash available to it. A Fund may elect not to have the foregoing rules apply to any “mixed straddle”
(that is, a straddle, which the Fund clearly identifies in accordance with applicable regulations, at least one (but not all) of the positions of which are section 1256 contracts), although doing so may have the effect of increasing the relative
proportion of short-term capital gain (taxable as ordinary income) and thus increasing the amount of dividends it must distribute. Section 1256 contracts also may be marked-to-market for purposes of the Excise Tax.
Code section 1092 (dealing with
straddles) also may affect the taxation of options, futures, and forward contracts in which a Fund may invest. That section defines a “straddle” as offsetting positions with respect to actively traded personal property; for these
purposes, options, futures, and forward contracts are positions in personal property. Under that section, any loss from the disposition of a position in a straddle may be deducted only to the extent the loss exceeds the unrealized gain on the
offsetting position(s) of the straddle. In addition, these rules may postpone the recognition of loss that otherwise would be recognized under the mark-to-market rules discussed above. The regulations under section 1092 also provide certain
“wash sale” rules, which apply to transactions where a position is sold at a loss and a new offsetting position is acquired within a prescribed period, and “short sale” rules applicable to straddles. If a Fund makes certain
elections, the amount, character, and timing of recognition of gains and losses from the affected straddle positions would be determined under rules that vary according to the elections made. Because only a few of the regulations implementing the
straddle rules have been promulgated, the tax consequences to a Fund of straddle transactions are not entirely clear.
If a call option written by a Fund
lapses (
i.e.
, terminates without being exercised), the amount of the premium it received for the option will be short-term capital gain. If a Fund enters into a closing purchase transaction with respect to a
written call option, it will have a short-term capital gain or loss based on the difference between the premium it received for the option it wrote and the premium it pays for the option it buys. If such an option is exercised and a Fund thus sells
the securities or futures contract subject to the option, the premium the Fund received will be added to the exercise price to determine the gain or loss on the sale. If a call option purchased by a Fund lapses, it will realize short-term or
long-term capital loss, depending on its holding period for the option. If a Fund exercises a purchased call option, the premium it paid for the option will be added to the basis in the subject securities or futures contract.
If a Fund has an “appreciated
financial position” - generally, an interest (including an interest through an option, futures, or forward contract or short sale) with respect to any stock, debt instrument (other than “straight debt”), or partnership interest the
fair market value of which exceeds its adjusted basis - and enters into a “constructive sale” of the position, the Fund will be treated as having made an actual sale thereof, with the result that it will recognize gain at that time. A
constructive sale generally consists of a short sale, an offsetting notional principal contract, or a futures or forward contract a Fund or a related person enters into with respect to the same or substantially identical property. In addition, if
the appreciated financial position is itself a short sale or such a contract, acquisition of the underlying property or substantially identical property will be deemed a constructive sale. The foregoing will not apply, however, to a Fund’s
transaction during any
taxable year that otherwise would be treated as a
constructive sale if the transaction is closed within 30 days after the end of that year and the Fund holds the appreciated financial position unhedged for 60 days after that closing (
i.e.
, at no time during
that 60-day period is the Fund’s risk of loss regarding that position reduced by reason of certain specified transactions with respect to substantially identical or related property, such as having an option to sell, being contractually
obligated to sell, making a short sale, or granting an option to buy substantially identical stock or securities).
Income from Zero-Coupon and Payment-in-Kind Securities
. A Fund may acquire zero-coupon or other securities (such as strips) issued with OID. As a holder of those securities,
a Fund must include in its gross income the OID that accrues on the securities during the taxable year, even if it receives no corresponding payment on them during the year. Similarly, a Fund must include in its gross income securities it receives
as “interest” on payment-in-kind securities. With respect to “market discount bonds” (
i.e.
, bonds purchased at a price less than their issue price plus the portion of OID previously
accrued thereon), a Fund may elect to accrue and include in income each taxable year a portion of the bonds’ market discount. Because each Fund annually must distribute substantially all of its investment company taxable income, including any
accrued OID and other non-cash income, to satisfy the Distribution Requirement and avoid imposition of the Excise Tax, a Fund may be required in a particular year to distribute as a dividend an amount that is greater than the total amount of cash it
actually receives. Those distributions will be made from a Fund’s cash assets or from the proceeds of sales of portfolio securities, if necessary. A Fund may realize capital gains or losses from those sales, which would increase or decrease
its investment company taxable income and/or net capital gain.
Income from REITs
. A Fund may invest in REITs that (1) hold residual interests in real estate mortgage investment conduits (“REMICs”) or (2) engage in mortgage
securitization transactions that cause the REITs to be taxable mortgage pools (“TMPs”) or have a qualified REIT subsidiary that is a TMP. A portion of the net income allocable to REMIC residual interest holders may be an “excess
inclusion.” The Code authorizes the issuance of regulations dealing with the taxation and reporting of excess inclusion income of REITs and RICs that hold residual REMIC interests and of REITs, or qualified REIT subsidiaries that are TMPs.
Although those regulations have not yet been issued, the U.S. Treasury Department and the Service issued a notice in 2006 (“Notice”) announcing that, pending the issuance of further guidance, the Service would apply the principles in the
following paragraphs to all excess inclusion income, whether from REMIC residual interests or TMPs.
The Notice provides that a REIT must
(1) determine whether it or its qualified REIT subsidiary (or a part of either) is a TMP and, if so, calculate the TMP’s excess inclusion income under a “reasonable method,” (2) allocate its excess inclusion income to its
shareholders generally in proportion to dividends paid, (3) inform shareholders that are not “disqualified organizations” (
i.e.
, governmental units and tax-exempt entities that are not subject to
the unrelated business income tax) of the amount and character of the excess inclusion income allocated thereto, (4) pay tax (at the highest federal income tax rate imposed on corporations) on the excess inclusion income allocable to its
shareholders that are disqualified organizations, and (5) apply the withholding tax provisions with respect to the excess inclusion part of dividends paid to foreign persons without regard to any treaty exception or reduction in tax rate. Excess
inclusion income allocated to certain tax-exempt entities (including qualified retirement plans, individual retirement accounts, and public charities) constitutes unrelated business taxable income to them.
A RIC with excess inclusion income is
subject to rules identical to those in clauses (2) through (5) (substituting “who are nominees” for “that are not ‘disqualified organizations’” in clause (3) and inserting “record” after
“its” in clause (4)). The Notice further provides that a RIC is not required to report the amount and character of the excess inclusion income allocated to its shareholders that are not nominees, except that (1) a RIC with excess
inclusion income from all sources that exceeds 1% of its gross income must do so and (2) any other RIC must do so by taking into account only excess inclusion income allocated to the RIC from a REIT the excess inclusion income of which exceeded 3%
of the REIT’s dividends. A Fund will not invest directly in REMIC residual interests, and does not intend to invest in REITs that, to its knowledge, invest in those interests or are TMPs or have a qualified REIT subsidiary that is a TMP.
Taxation
of Shareholders
.
Basis
Election and Reporting
. A shareholder’s basis in Shares of a Fund that he or she acquires after December 31, 2011 (“Covered Shares”), will be determined in accordance with the Fund’s default
method, which is average basis, unless the shareholder affirmatively elects in writing (which may be electronic) to use a different acceptable basis determination method, such as a specific identification method. The basis determination method a
Fund shareholder elects (or the default method) may not be changed with respect to a redemption of Covered Shares after the settlement date of the redemption.
In addition to the requirement to
report the gross proceeds from redemptions of shares, each Fund (or its administrative agent) must report to the Service and furnish to its shareholders the basis information for Covered Shares and indicate whether they had a short-term (one year or
less) or long-term (more than one year) holding period. Fund shareholders should consult with their tax advisers to decide the best Service-accepted basis determination method for their tax situation and to obtain more information about how the
basis reporting law applies to them.
Foreign Account Tax Compliance Act
(“FATCA”)
. As mentioned in the Prospectus, under FATCA “foreign financial institutions” (“FFIs”) or “non-financial foreign entities” (“NFFEs”) that are Fund
shareholders may be subject to a generally nonrefundable 30% withholding tax on (1) income dividends, and (2) certain capital gain distributions and the proceeds of a redemption of Shares a Fund pays after December 31, 2018. That withholding tax
generally can be avoided, however, as discussed below.
An FFI can avoid FATCA withholding by
becoming a “participating FFI,” which requires the FFI to enter into a tax compliance agreement with the Service. Under such an agreement, a participating FFI agrees to (1) verify and document whether it has U.S. accountholders, (2)
report certain information regarding their accounts to the Service, and (3) meet certain other specified requirements.
The U.S. Treasury has negotiated
intergovernmental agreements (“IGAs”) with certain countries and is in various stages of negotiations with other foreign countries with respect to one or more alternative approaches to implement FATCA; entities in those countries may be
required to comply with the terms of the IGA instead of Treasury regulations. An FFI resident in a country that has entered into a Model I IGA with the United States must report to that country’s government (pursuant to the terms of the
applicable IGA and applicable law), which will, in turn, report to the Service. An FFI resident in a Model II IGA country generally must comply with U.S. regulatory requirements, with certain exceptions, including the treatment of recalcitrant
accountholders. An FFI resident in one of those countries that complies with whichever of the foregoing applies will be exempt from FATCA withholding.
An NFFE that is the beneficial owner
of a payment from a Fund can avoid FATCA withholding generally by certifying its status as such and, in certain circumstances that it does not have any substantial U.S. owners or by providing the name, address, and taxpayer identification number of
each such owner. The NFFE will report to the Fund or other applicable withholding agent, which will, in turn, report information to the Service.
Those non-U.S. shareholders also may
fall into certain exempt, excepted, or deemed compliant categories established by Treasury regulations, IGAs, and other guidance regarding FATCA. An FFI or NFFE that invests in a Fund will need to provide the Fund with documentation properly
certifying the entity’s status under FATCA to avoid FATCA withholding. The requirements imposed by FATCA are different from, and in addition to, the tax certification rules to avoid backup withholding described above. Foreign investors are
urged to consult their tax advisers regarding the application of these requirements to their own situation and the impact thereof on their investment in a Fund.
* * * * *
The foregoing is only a general
summary of some of the important federal tax considerations generally affecting the Funds. No attempt is made to present a complete explanation of the federal tax treatment of the Funds' activities, and this discussion is not intended as a
substitute for careful tax planning. Accordingly, potential investors are urged to consult their own tax advisers for more detailed information and for information regarding any state, local, or foreign taxes applicable to a Fund and to
distributions therefrom.
For
federal income tax purposes, a Fund is generally permitted to carry forward a net capital loss in any year to offset net capital gains, if any, during its taxable years following the year of the loss. The carryforward of capital losses realized in
taxable years beginning prior to December 23, 2010, however, is limited to an eight-year period following the year of realization. Thereafter, capital losses carried forward will retain their character as either short-term or long-term capital
losses rather than being considered all short-term as under previous law. A Fund must use losses that do not expire before it uses losses that do expire and a Fund’s ability to utilize capital losses in a given year or in total may be limited.
To the extent subsequent net capital gains are offset by such losses, they would not result in federal income tax liability to a Fund and as noted above, would not be distributed as such to shareholders.
Capital
Loss Carryforwards
. Pursuant to the Regulated Investment Company Modernization Act of 2010, capital losses sustained in future taxable years will not expire and may be carried over without
limitation.
Because the Funds had not commenced
operations prior to the date of this SAI, no financial statements are available for the Funds.
APPENDIX A
Description of Corporate Bond Ratings
Moody’s Investors Service and
Standard and Poor’s are two prominent independent rating agencies that rate the quality of bonds. Following are expanded explanations of the ratings shown in the Prospectus and this SAI.
Moody’s Investors Service
–
Global Long-Term Ratings
Ratings assigned on Moody’s
global long-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector
entities. Long-term ratings are assigned to issuers or obligations with an original maturity of one year or more and reflect both on the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event
of default. Such ratings have been published by Moody’s Investors Service, Inc. and Moody’s Analytics Inc.
Aaa
:
Obligations rated Aaa are judged to be of the highest quality, subject to the lowest level of credit risk.
Aa
:
Obligations rated Aa are judged to be of high quality and are subject to very low credit risk.
A
:
Obligations rated A are judged to be upper-medium grade and are subject to low credit risk.
Baa
:
Obligations rated Baa are judged to be medium-grade and subject to moderate credit risk and as such may possess certain speculative characteristics.
Ba
:
Obligations rated Ba are judged to be speculative and are subject to substantial credit risk.
B
:
Obligations rated B are considered speculative and are subject to high credit risk.
Caa
:
Obligations rated Caa are judged to be speculative of poor standing and are subject to very high credit risk.
Ca
:
Obligations rated Ca are highly speculative and are likely in, or very near, default, with some prospect of recovery of principal and interest.
C
:
Obligations rated C are the lowest rated and are typically in default, with little prospect for recovery of principal or interest
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category. Additionally, a “(hyb)” indicator is appended to all ratings of hybrid securities issued by banks, insurers, finance companies, and securities firms.*
* By their terms, hybrid securities
allow for the omission of scheduled dividends, interest, or principal payments, which can potentially result in impairment if such an omission occurs. Hybrid securities may also be subject to contractually allowable write-downs of principal that
could result in impairment. Together with the hybrid indicator, the long-term obligation rating assigned to a hybrid security is an expression of the relative credit risk associated with that security.
Moody’s Investors Service
–
National Scale Long-Term Ratings
Moody’ s long-term National
Scale Ratings (NSRs) are opinions of the relative creditworthiness of issuers and financial obligations within a particular country. NSRs are not designed to be compared among countries; rather, they address relative credit risk within a given
country. Moody’s assigns national scale ratings in certain local capital markets in which investors have found the global rating scale provides inadequate differentiation among credits or is inconsistent with a rating scale already in common
use in the country. In each specific country, the last two characters of the rating indicate the country in which the issuer is located (
e.g.
, Aaa.br for Brazil).
Aaa.n
:
Issuers or issues rated Aaa.n demonstrate the strongest creditworthiness relative to other domestic issuers.
Aa.n
:
Issuers or issues rated Aa.n demonstrate very strong creditworthiness relative to other domestic issuers.
A.n
:
Issuers or issues rated A.n present above-average creditworthiness relative to other domestic issuers.
Baa.n
:
Issuers or issues rated Baa.n represent average creditworthiness relative to other domestic issuers.
Ba.n
:
Issuers or issues rated Ba.n demonstrate below-average creditworthiness relative to other domestic issuers
B.n
:
Issuers or issues rated B.n demonstrate weak creditworthiness relative to other domestic issuers.
Caa.n
:
Issuers or issues rated Caa.n demonstrate very weak creditworthiness relative to other domestic issuers.
Ca.n
:
Issuers or issues rated Ca.n demonstrate extremely weak creditworthiness relative to other domestic issuers.
C.n
:
Issuers or issues rated C.n demonstrate the weakest creditworthiness relative to other domestic issuers.
Note: Moody’s appends numerical
modifiers 1, 2, and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the obligation ranks in the higher end of its generic rating category; the modifier 2 indicates a mid-range ranking; and the modifier 3
indicates a ranking in the lower end of that generic rating category.
Standard and Poor’s
–
Long-Term Issue Credit Ratings*
Issue credit ratings are based, in
varying degrees, on Standard & Poor's analysis of the following considerations:Likelihood of payment
—
capacity and willingness of the obligor to meet its financial
commitment on an obligation in accordance with the terms of the obligation;Nature of and provisions of the obligation and the promise we impute.Protection afforded by, and relative position of, the obligation in the event of bankruptcy,
reorganization, or other arrangement under the laws of bankruptcy and other laws affecting creditors' rights.
Issue ratings are an assessment of
default risk, but may incorporate an assessment of relative seniority or ultimate recovery in the event of default. Junior obligations are typically rated lower than senior obligations, to reflect the lower priority in bankruptcy, as noted above.
(Such differentiation may apply when an entity has both senior and subordinated obligations, secured and unsecured obligations, or operating company and holding company obligations.)
AAA
: An
obligation rated 'AAA' has the highest rating assigned by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA
: An
obligation rated 'AA' differs from the highest-rated obligations only to a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A
: An
obligation rated 'A' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher-rated categories. However, the obligor's capacity to meet its financial commitment on the
obligation is still strong.
BBB
: An
obligation rated 'BBB' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
BB; B; CCC;
CC; and C
: Obligations rated 'BB', 'B', 'CCC', 'CC', and 'C' are regarded as having significant speculative characteristics. 'BB' indicates the least degree of speculation and 'C' the highest. While such obligations
will likely have some quality and protective characteristics, these may be outweighed by large uncertainties or major exposures to adverse conditions.
BB
:
An obligation rated 'BB' is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions which could lead to the obligor's inadequate
capacity to meet its financial commitment on the obligation.
B
: An
obligation rated 'B' is more vulnerable to nonpayment than obligations rated 'BB', but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair
the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC
:
An obligation rated 'CCC' is currently vulnerable to nonpayment, and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business,
financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC
: An
obligation rated 'CC' is currently highly vulnerable to nonpayment. The 'CC' rating is used when a default has not yet occurred, but Standard & Poor's expects default to be a virtual certainty, regardless of the anticipated time to
default.
C
: An obligation rated 'C' is currently highly vulnerable to nonpayment, and the obligation is expected to have lower relative seniority or lower ultimate recovery compared to obligations that are rated
higher.
D
: An obligation rated 'D' is in default or in breach of an imputed promise. For non-hybrid capital instruments, the 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard
& Poor's believes that such payments will be made within five business days in the absence of a stated grace period or within the earlier of the stated grace period or 30 calendar days. The 'D' rating also will be used upon the filing of a
bankruptcy petition or the taking of similar action and where default on an obligation is a virtual certainty, for example due to automatic stay provisions. An obligation's rating is lowered to 'D' if it is subject to a distressed exchange
offer.
NR
: This indicates that no rating has been requested, or that there is insufficient information on which to base a rating, or that Standard & Poor's does not rate a particular obligation as a matter of
policy.
*The ratings from
'AA' to 'CCC' may be modified by the addition of a plus (+) or minus (-) sign to show relative standing within the major rating categories.
Moody’s Investors Service
–
Short Term Obligation Ratings
The Municipal Investment Grade (MIG)
scale is used to rate US municipal bond anticipation notes of up to three years maturity. Municipal notes rated on the MIG scale may be secured by either pledged revenues or proceeds of a take-out financing received prior to note maturity. MIG
ratings expire at the maturity of the obligation, and the issuer’s long-term rating is only one consideration in assigning the MIG rating. MIG ratings are divided into three levels
—
MIG 1 through MIG 3
—
while speculative grade short-term obligations are designated SG.
MIG 1
:
This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2
:
This designation denotes strong credit quality. Margins of protection are ample, although not as large as in the preceding group.
MIG 3
:
This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well-established.
SG
: This
designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
Standard and Poor’s
–
Municipal Short-Term Note Ratings
A Standard & Poor's U.S.
municipal note rating reflects Standard & Poor's opinion about the liquidity factors and market access risks unique to the notes. Notes due in three years or less will likely receive a note rating. Notes with an original maturity of more than
three years will most likely receive a long-term debt rating. In determining which type of rating, if any, to assign, Standard & Poor's analysis will review the following considerations:Amortization
schedule
—
the larger the final maturity relative to other maturities, the more likely it will be treated as a note; andSource of
payment
—
the more dependent the issue is on the market for its refinancing, the more likely it will be treated as a note.
SP-1
:
Strong capacity to pay principal and interest. An issue determined to possess a very strong capacity to pay debt service is given a plus (+) designation.
SP-2
:
Satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the term of the notes.
SP-3
:
Speculative capacity to pay principal and interest.
Moody’s Investors Service
–
Global Short Term Rating Scale
Ratings assigned on Moody’s
global short-term rating scale are forward-looking opinions of the relative credit risks of financial obligations issued by non-financial corporates, financial institutions, structured finance vehicles, project finance vehicles, and public sector
entities. Short-term ratings are assigned to obligations with an original maturity of thirteen months or less and reflect the likelihood of a default on contractually promised payments and the expected financial loss suffered in the event of
default.
P-1
: Issuers (or supporting institutions) rated Prime-1 have a superior ability to repay short-term debt obligations.
P-2
:
Issuers (or supporting institutions) rated Prime-2 have a strong ability to repay short-term debt obligations.
P-3
:
Issuers (or supporting institutions) rated Prime-3 have an acceptable ability to repay short-term obligations.
NP
:
Issuers (or supporting institutions) rated Not Prime do not fall within any of the Prime rating categories.
Standard and Poor’s
–
Short-Term Issue Credit Ratings
A-1
:
A short-term obligation rated 'A-1' is rated in the highest category by Standard & Poor's. The obligor's capacity to meet its financial commitment on the obligation is strong. Within this category, certain obligations are designated with a plus
sign (+). This indicates that the obligor's capacity to meet its financial commitment on these obligations is extremely strong.
A-2
:
A short-term obligation rated 'A-2' is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than obligations in higher rating categories. However, the obligor's capacity to meet its financial
commitment on the obligation is satisfactory.
A-3
:
A short-term obligation rated 'A-3' exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the
obligation.
B
: A short-term obligation rated 'B' is regarded as vulnerable and has significant speculative characteristics. The obligor currently has the capacity to meet its financial commitments; however, it faces major ongoing
uncertainties which could lead to the obligor's inadequate capacity to meet its financial commitments.
C
: A
short-term obligation rated 'C' is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation.
D
: A
short-term obligation rated 'D' is in payment default. The 'D' rating category is used when payments on an obligation are not made on the date due, unless Standard & Poor's believes that such payments will be made within any stated grace period.
However, any stated grace period longer than five business days will be treated as five business days. The 'D' rating also will be used upon the filing of a bankruptcy petition or the taking of a similar action and if payments on an obligation are
jeopardized.
Standard
& Poor's assigns "dual" ratings to all debt issues that have a put option or demand feature as part of their structure. The first rating addresses the likelihood of repayment of principal and interest as due, and the second rating addresses only
the demand feature. The long-term rating symbols are used for bonds to denote the long-term maturity and the
short-term rating symbols for the put option (for
example, 'AAA/A-1+'). With U.S. municipal short-term demand debt, note rating symbols are used with the short-term issue credit rating symbols (for example, 'SP-1+/A-1+').
APPENDIX B
Direxion Shares ETF Trust
Proxy Voting Policies and Procedures
Recognizing the increased scrutiny
that both institutions and corporations are under, it is important to have corporate governance that appreciates the importance of consistently applied policy guidelines that are aligned with investors’ views on key issues. With this in mind
we currently use ISS’s proxy voting service to execute ballots on behalf of the Direxion Shares ETF Trust (collectively, the “Trust”). ISS prepares custom research and votes per their recommendation. If we agree with their
recommendation, no action is required. However, we retain the right and ability to override the vote if you disagree with ISS’s vote recommendation.
Rafferty Asset
Management, LLC (“Rafferty”) views seriously its responsibility to exercise voting authority over securities that are owned by the Trust.
To document that proxies are being voted,
ISS (on behalf of the Trust) will maintain a record reflecting when and how each proxy is voted consistent with the requirements of Rule 206(4)-6 under the Investment Advisors Act of 1940 and other applicable regulations. Rafferty will make its
proxy voting history and policies and procedures available to shareholders upon request.
II.
|
Guidelines for Voting Proxies
|
Rafferty
generally follows the recommendations of ISS’s proxy voting guidelines as outlined below. Proxy proposals are considered on their own merits and a determination is made as to support or oppose management’s recommendation. Rafferty will
typically accept ISS’s recommendations on social issues as it does not have the means to evaluate the economic impact of such proposals, or determine a consensus among shareholders’ social or political viewpoints.
III.
|
Review and Compliance
|
It is
Rafferty’s responsibility to oversee ISS’s proxy voting to ensure compliance and timely reporting to US Bank. Reports are verified monthly through ISS’s Votex website. ISS provides US Bank with the NP-X file covering the period
from July 1st through June 30th of the following year. US Bank files the NP-X with the SEC on the Trust’s behalf. These records are maintained for five years and the previous two years proxy voting records can be accessed by contacting US
Bank.
Below is a summary outlining
ISS’s US Proxy Voting Guidelines.
BOARD OF DIRECTORS:
Voting on Director Nominees in Uncontested
Elections
General Recommendation
: Generally vote for director nominees, except under the following circumstances:
1. Accountability
Vote against
(1)
or withhold from the entire board of directors (except new nominees
(2)
, who should be considered case- by-case) for the following:
Problematic Takeover Defenses
Classified Board Structure:
1.1.
|
The board is classified,
and a continuing director responsible for a problematic governance issue at the board/committee level that would warrant a withhold/against vote recommendation is not up for election. All appropriate nominees (except new) may be held accountable.
|
(1)
|
In
general, companies with a plurality vote standard use “Withhold” as the contrary vote option in director elections; companies with a majority vote standard use “Against”. However, it will vary by company and the proxy must be
checked to determine the valid contrary vote option for the particular company.
|
(2)
|
A “new
nominee” is any current nominee who has not already been elected by shareholders and who joined the board after the problematic action in question transpired. If ISS cannot determine whether the nominee joined the board before or after the
problematic action transpired, the nominee will be considered a “new nominee” if he or she joined the board within the 12 months prior to the upcoming shareholder meeting.
|
Director Performance Evaluation:
1.2.
|
The board lacks
accountability and oversight, coupled with sustained poor performance relative to peers. Sustained poor performance is measured by one- and three-year total shareholder returns in the bottom half of a company’s four-digit GICS industry group
(Russell 3000 companies only). Take into consideration the company’s five-year total shareholder return and operational metrics. Problematic provisions include but are not limited to:
|
•
|
A classified board
structure;
|
•
|
A supermajority vote
requirement;
|
•
|
Either a plurality vote
standard in uncontested director elections or a majority vote standard with no plurality carve-out for contested elections;
|
•
|
The inability of
shareholders to call special meetings;
|
•
|
The inability of
shareholders to act by written consent;
|
•
|
A dual-class capital
structure; and/or
|
•
|
A non
–
shareholder-approved poison pill.
|
Poison Pills:
1.3.
|
The company’s poison
pill has a “dead-hand” or “modified dead-hand” feature. Vote against or withhold from nominees every year until this feature is removed;
|
1.4.
|
The board adopts a poison
pill with a term of more than 12 months (“long-term pill”), or renews any existing pill, including any “short-term” pill (12 months or less), without shareholder approval. A commitment or policy that puts a newly adopted pill
to a binding shareholder vote may potentially offset an adverse vote recommendation. Review such companies with classified boards every year, and such companies with annually elected boards at least once every three years, and vote against or
withhold votes from all nominees if the company still maintains a non-shareholder-approved poison pill; or
|
1.5.
|
The board makes a material
adverse change to an existing poison pill without shareholder approval. Vote case-by-case on all nominees if:
|
1.6.
|
The board
adopts a poison pill with a term of 12 months or less (“short-term pill”) without shareholder approval, taking into account the following factors:
|
•
|
The date of the
pill‘s adoption relative to the date of the next meeting of shareholders
—
i.e.
whether the company had time to put
the pill on the ballot for shareholder ratification given the circumstances;
|
•
|
The issuer’s
rationale;
|
•
|
The issuer’s
governance structure and practices; and
|
•
|
The
issuer’s track record of accountability to shareholders.
|
Problematic Audit-Related
Practices
Generally vote
against or withhold from the members of the Audit Committee if:
1.7.
|
The non-audit fees paid to
the auditor are excessive (see discussion under “Auditor Ratification”);
|
1.8.
|
The company receives an
adverse opinion on the company’s financial statements from its auditor; or
|
1.9.
|
There
is persuasive evidence that the Audit Committee entered into an inappropriate indemnification agreement with its auditor that limits the ability of the company, or its shareholders, to pursue legitimate legal recourse against the audit firm.
|
Vote
case-by-case on members of the Audit Committee and potentially the full board if:
1.10.
|
Poor accounting practices
are identified that rise to a level of serious concern, such as: fraud; misapplication of GAAP; and material weaknesses identified in Section 404 disclosures. Examine the severity, breadth, chronological sequence, and duration, as well as the
company’s efforts at remediation or corrective actions, in determining whether withhold/against votes are warranted.
|
Problematic Compensation Practices/Pay for
Performance Misalignment
In the
absence of an Advisory Vote on Executive Compensation ballot item or in egregious situations, vote against or withhold from the members of the Compensation Committee and potentially the full board if:
1.11.
|
There is a significant
misalignment between CEO pay and company performance (pay for performance);
|
1.12.
|
The company maintains
significant problematic pay practices;
|
1.13.
|
The board exhibits a
significant level of poor communication and responsiveness to shareholders;
|
1.14.
|
The company fails to submit
one-time transfers of stock options to a shareholder vote; or
|
1.15.
|
The
company fails to fulfill the terms of a burn rate commitment made to shareholders.
|
Vote case-by-case on Compensation
Committee members (or, in exceptional cases, the full board) and the Management Say-on-Pay proposal if:
1.16.
|
The company’s previous
say-on-pay received the support of less than 70 percent of votes cast, taking into account:
|
•
|
The company's response,
including:
|
•
|
Disclosure of engagement
efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
•
|
Specific actions taken to
address the issues that contributed to the low level of support;
|
•
|
Other recent compensation
actions taken by the company;
|
•
|
Whether the issues raised
are recurring or isolated;
|
•
|
The company's ownership
structure; and
|
•
|
Whether the
support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Unilateral Bylaw/Charter
Amendments
1.17.
|
Generally vote against or
withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if the board amends the company's bylaws or charter without shareholder approval in a manner that materially
diminishes shareholders' rights or that could adversely impact shareholders, considering the following factors:
|
•
|
The board's rationale for
adopting the bylaw/charter amendment without shareholder ratification;
|
•
|
Disclosure by the company
of any significant engagement with shareholders regarding the amendment;
|
•
|
The level of impairment
of shareholders' rights caused by the board's unilateral amendment to the bylaws/charter;
|
•
|
The board's track record
with regard to unilateral board action on bylaw/charter amendments or other entrenchment provisions;
|
•
|
The company's ownership
structure;
|
•
|
The company's existing
governance provisions;
|
•
|
The timing of the board's
amendment to the bylaws/charter in connection with a significant business development; and,
|
•
|
Other
factors, as deemed appropriate, that may be relevant to determine the impact of the amendment on shareholders.
|
Unless the adverse amendment is
reversed or submitted to a binding shareholder vote, in subsequent years vote case- by-case on director nominees. Generally vote against (except new nominees, who should be considered case-by-case) if the directors:
•
|
Classified the board;
|
•
|
Adopted supermajority
vote requirements to amend the bylaws or charter; or
|
•
|
Eliminated
shareholders' ability to amend bylaws.
|
1.18.
|
For newly public
companies, generally vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company's public offering, the
company or its board adopted bylaw or charter provisions materially adverse to shareholder rights, considering the following factors:
|
•
|
The level of impairment
of shareholders' rights caused by the provision;
|
•
|
The disclosed rationale
for adopting the provision;
|
•
|
The ability to change the
governance structure in the future (
e.g.
, limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements to amend the bylaws or charter);
|
•
|
The ability of
shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure; and,
|
•
|
A
public commitment to put the provision to a shareholder vote within three years of the date of the initial public offering.
|
Unless the adverse provision is reversed
or submitted to a vote of public shareholders, vote case-by-case on director nominees in subsequent years.
Governance Failures
Under extraordinary circumstances, vote
against or withhold from directors individually, committee members, or the entire board, due to:
1.19.
|
Material failures of
governance, stewardship, risk oversight
(3)
, or fiduciary responsibilities at the company;
|
1.20.
|
Failure to replace management
as appropriate; or
|
1.21.
|
Egregious
actions related to a director’s service on other boards that raise substantial doubt about his or her ability to effectively oversee management and serve the best interests of shareholders at any company.
|
2. Responsiveness
Vote case-by-case on individual
directors, committee members, or the entire board of directors as appropriate if:
2.1.
|
The board failed to act on a
shareholder proposal that received the support of a majority of the shares cast in the previous year. Factors that will be considered are:
|
•
|
Disclosed outreach
efforts by the board to shareholders in the wake of the vote;
|
•
|
Rationale provided in the
proxy statement for the level of implementation;
|
•
|
The subject matter of the
proposal;
|
•
|
The level of support for
and opposition to the resolution in past meetings;
|
•
|
Actions taken by the
board in response to the majority vote and its engagement with shareholders;
|
•
|
The continuation of the
underlying issue as a voting item on the ballot (as either shareholder or management proposals); and
|
•
|
Other
factors as appropriate.
|
2.2.
|
The board failed to act on
takeover offers where the majority of shares are tendered;
|
2.3.
|
At the previous board
election, any director received more than 50 percent withhold/against votes of the shares cast and the company has failed to address the issue(s) that caused the high withhold/against vote;
|
2.4.
|
The board implements an
advisory vote on executive compensation on a less frequent basis than the frequency that received the majority of votes cast at the most recent shareholder meeting at which shareholders voted on the say-on-pay frequency; or
|
2.5.
|
The
board implements an advisory vote on executive compensation on a less frequent basis than the frequency that received a plurality, but not a majority, of the votes cast at the most recent shareholder meeting at which shareholders voted on the
say-on-pay frequency, taking into account:
|
•
|
The board's rationale for
selecting a frequency that is different from the frequency that received a plurality;
|
•
|
The company's ownership
structure and vote results;
|
•
|
ISS' analysis of whether
there are compensation concerns or a history of problematic compensation practices; and
|
•
|
The
previous year's support level on the company's say-on-pay proposal.
|
3. Composition
Attendance at Board and Committee
Meetings:
3.1.
|
Generally vote against or
withhold from directors (except new nominees, who should be considered case-by- case
(4)
) who attend less than 75 percent of the aggregate of their board
and committee meetings for the period for which they served, unless an acceptable reason for absences is disclosed in the proxy or another SEC filing. Acceptable reasons for director absences are generally limited to the following:
|
•
|
Medical issues/illness;
|
•
|
Family emergencies; and
|
•
|
Missing only
one meeting (when the total of all meetings is three or fewer).
|
3.2.
|
If the proxy disclosure is
unclear and insufficient to determine whether a director attended at least 75 percent of the aggregate of his/her board and committee meetings during his/her period of service, vote against or withhold from the director(s) in question.
|
(3)
|
Examples of
failure of risk oversight include, but are not limited to: bribery; large or serial fines or sanctions from regulatory bodies; significant adverse legal judgments or settlements; hedging of company stock; or significant pledging of company stock.
|
(4)
|
For new nominees only,
schedule conflicts due to commitments made prior to their appointment to the board are considered if disclosed in the proxy or another SEC filing.
|
Overboarded Directors:
Vote against or withhold from individual
directors who:
3.3.
|
Sit on more than six public
company boards; with respect to annual meetings on or after Feb. 1, 2017
(5)
, sit on more than five public company boards; or
|
3.4.
|
Are CEOs
of public companies who sit on the boards of more than two public companies besides their own
— withhold only at their outside boards
(6)
.
|
4. Independence
Vote against or withhold from Inside
Directors and Affiliated Outside Directors (per the Categorization of Directors) when:
4.1.
|
The inside or affiliated
outside director serves on any of the three key committees: audit, compensation, or nominating;
|
4.2.
|
The company lacks an audit,
compensation, or nominating committee so that the full board functions as that committee;
|
4.3.
|
The company lacks a formal
nominating committee, even if the board attests that the independent directors fulfill the functions of such a committee; or
|
4.4.
|
Independent directors
make up less than a majority of the directors.
|
Independent Chair (Separate
Chair/CEO)
General Recommendation
: Generally vote for shareholder proposals requiring that the chairman’s position be filled by an independent director, taking into consideration the following:
•
|
The scope of the
proposal;
|
•
|
The company's current
board leadership structure;
|
•
|
The company's governance
structure and practices;
|
•
|
Company performance; and
|
•
|
Any
other relevant factors that may be applicable.
|
Regarding the scope of the proposal,
consider whether the proposal is precatory or binding and whether the proposal is seeking an immediate change in the chairman role or the policy can be implemented at the next CEO transition.
Under the review of the company's
board leadership structure, ISS may support the proposal under the following scenarios absent a compelling rationale: the presence of an executive or non-independent chair in addition to the CEO; a recent recombination of the role of CEO and chair;
and/or departure from a structure with an independent chair. ISS will also consider any recent transitions in board leadership and the effect such transitions may have on independent board leadership as well as the designation of a lead director
role.
When considering the
governance structure, ISS will consider the overall independence of the board, the independence of key committees, the establishment of governance guidelines, board tenure and its relationship to CEO tenure, and any other factors that may be
relevant. Any concerns about a company's governance structure will weigh in favor of support for the proposal.
The review of the company's
governance practices may include, but is not limited to poor compensation practices, material failures of governance and risk oversight, related-party transactions or other issues putting director independence at risk, corporate or management
scandals, and actions by management or the board with potential or realized negative impact on shareholders. Any such practices may suggest a need for more independent oversight at the company thus warranting support of the proposal.
ISS' performance assessment will
generally consider one-, three, and five-year TSR compared to the company's peers and the market as a whole. While poor performance will weigh in favor of the adoption of an independent chair policy, strong performance over the long-term will be
considered a mitigating factor when determining whether the proposed leadership change warrants support.
(5)
|
This policy change includes a
1-year transition period to allow time for affected directors to address necessary changes if they wish.
|
(6)
|
Although all of a
CEO’s subsidiary boards will be counted as separate boards, ISS will not recommend a withhold vote from the CEO of a parent company board or any of the controlled (>50 percent ownership) subsidiaries of that parent, but may do so at
subsidiaries that are less than 50 percent controlled and boards outside the parent/subsidiary relationships.
|
Proxy Access
General Recommendation
: Generally vote for management and shareholder proposals for proxy access with the following provisions:
•
|
Ownership threshold:
maximum requirement not more than three percent (3%) of the voting power;
|
•
|
Ownership duration:
maximum requirement not longer than three (3) years of continuous ownership for each member of the nominating group;
|
•
|
Aggregation: minimal or
no limits on the number of shareholders permitted to form a nominating group;
|
•
|
Cap:
cap on nominees of generally twenty-five percent (25%) of the board.
|
Review for reasonableness any other
restrictions on the right of proxy access.
Generally vote against proposals that
are more restrictive than these guidelines.
Proxy Contests/Proxy Access
—
Voting for Director Nominees in Contested Elections
General Recommendation
: Vote case-by-case on the election of directors in contested elections, considering the following factors:
•
|
Long-term financial
performance of the company relative to its industry;
|
•
|
Management’s track
record;
|
•
|
Background to the
contested election;
|
•
|
Nominee qualifications
and any compensatory arrangements;
|
•
|
Strategic plan of
dissident slate and quality of the critique against management;
|
•
|
Likelihood that the
proposed goals and objectives can be achieved (both slates); and
|
•
|
Stock
ownership positions.
|
In the case of candidates nominated
pursuant to proxy access, vote case-by-case considering any applicable factors listed above or additional factors which may be relevant, including those that are specific to the company, to the nominee(s) and/or to the nature of the election (such
as whether or not there are more candidates than board seats).
CAPITAL/RESTRUCTURING
Common Stock Authorization
General Recommendation
: Vote for proposals to increase the number of authorized common shares where the primary purpose of the increase is to issue shares in connection with a transaction on the same ballot that warrants support.
Vote against proposals at companies with
more than one class of common stock to increase the number of authorized shares of the class of common stock that has superior voting rights.
Vote against proposals to increase the
number of authorized common shares if a vote for a reverse stock split on the same ballot is warranted despite the fact that the authorized shares would not be reduced proportionally.
Vote case-by-case on all other proposals
to increase the number of shares of common stock authorized for issuance. Take into account company-specific factors that include, at a minimum, the following:
•
|
Past Board Performance:
|
•
|
The company's use of
authorized shares during the last three years
|
•
|
The Current Request:
|
•
|
Disclosure in the proxy
statement of the specific purposes of the proposed increase;
|
•
|
Disclosure in the proxy
statement of specific and severe risks to shareholders of not approving the request; and
|
•
|
The
dilutive impact of the request as determined relative to an allowable increase calculated by ISS (typically 100 percent of existing authorized shares) that reflects the company's need for shares and total shareholder returns.
|
ISS will apply the relevant
allowable increase below to requests to increase common stock that are for general corporate purposes (or to the general corporate purposes portion of a request that also includes a specific need):
A.
|
Most companies:
100 percent
of existing authorized shares.
|
B.
|
Companies with less than 50
percent of existing authorized shares either outstanding or reserved for issuance:
50 percent
of existing authorized shares.
|
C.
|
Companies with one- and
three-year total shareholder returns (TSRs) in the bottom 10 percent of the U.S. market as of the end of the calendar quarter that is closest to their most recent fiscal year end:
50 percent
of existing
authorized shares.
|
D.
|
Companies
at which both conditions (B and C) above are both present:
25 percent
of existing authorized shares.
|
If there is an acquisition, private
placement, or similar transaction on the ballot (not including equity incentive plans) that ISS is recommending FOR, the allowable increase will be the greater of (i) twice the amount needed to support the transactions on the ballot, and (ii) the
allowable increase as calculated above.
Mergers and Acquisitions
General Recommendation
: Vote case-by-case on mergers and acquisitions. Review and evaluate the merits and drawbacks of the proposed transaction, balancing various and sometimes countervailing factors including:
•
|
Valuation
- Is the value to be received by the target shareholders (or paid by the acquirer) reasonable? While the fairness opinion may provide an initial starting point for assessing valuation reasonableness, emphasis is placed
on the offer premium, market reaction and strategic rationale.
|
•
|
Market reaction
- How has the market responded to the proposed deal? A negative market reaction should cause closer scrutiny of a deal.
|
•
|
Strategic rationale
- Does the deal make sense strategically? From where is the value derived? Cost and revenue synergies should not be overly aggressive or optimistic, but reasonably achievable. Management should also have a favorable
track record of successful integration of historical acquisitions.
|
•
|
Negotiations and
process
- Were the terms of the transaction negotiated at arm's-length? Was the process fair and equitable? A fair process helps to ensure the best price for shareholders. Significant negotiation "wins" can also
signify the deal makers' competency. The comprehensiveness of the sales process (
e.g.
, full auction, partial auction, no auction) can also affect shareholder value.
|
•
|
Conflicts of interest
- Are insiders benefiting from the transaction disproportionately and inappropriately as compared to non-insider shareholders? As the result of potential conflicts, the directors and officers of the company may be more
likely to vote to approve a merger than if they did not hold these interests. Consider whether these interests may have influenced these directors and officers to support or recommend the merger. The CIC figure presented in the "ISS Transaction
Summary" section of this report is an aggregate figure that can in certain cases be a misleading indicator of the true value transfer from shareholders to insiders. Where such figure appears to be excessive, analyze the underlying assumptions to
determine whether a potential conflict exists.
|
•
|
Governance
- Will the combined company have a better or worse governance profile than the current governance profiles of the respective parties to the transaction? If the governance profile is to change for the worse, the
burden is on the company to prove that other issues (such as valuation) outweigh any deterioration in governance.
|
COMPENSATION
Executive Pay Evaluation
Underlying all evaluations are five
global principles that most investors expect corporations to adhere to in designing and administering executive and director compensation programs:
1.
|
Maintain appropriate
pay-for-performance alignment, with emphasis on long-term shareholder value: This principle encompasses overall executive pay practices, which must be designed to attract, retain, and appropriately motivate the key employees who drive shareholder
value creation over the long term. It will take into consideration, among other factors, the link between pay and performance; the mix between fixed and variable pay; performance goals; and equity-based plan costs;
|
2.
|
Avoid arrangements that risk
“pay for failure”: This principle addresses the appropriateness of long or indefinite contracts, excessive severance packages, and guaranteed compensation;
|
3.
|
Maintain an independent
and effective compensation committee: This principle promotes oversight of executive pay programs by directors with appropriate skills, knowledge, experience, and a sound process for compensation decision-making
(
e.g.
, including access to independent expertise and advice when needed);
|
4.
|
Provide shareholders with
clear, comprehensive compensation disclosures: This principle underscores the importance of informative and timely disclosures that enable shareholders to evaluate executive pay practices fully and fairly;
|
5.
|
Avoid
inappropriate pay to non-executive directors: This principle recognizes the interests of shareholders in ensuring that compensation to outside directors does not compromise their independence and ability to make appropriate judgments in overseeing
managers’ pay and performance. At the market level, it may incorporate a variety of generally accepted best practices.
|
Advisory Votes on Executive Compensation
—
Management Proposals (Management Say-on- Pay)
General Recommendation
: Vote case-by-case on ballot items related to executive pay and practices, as well as certain aspects of outside director compensation.
Vote against Advisory Votes on Executive
Compensation (Management Say-on-Pay
—
MSOP) if:
•
|
There is a significant
misalignment between CEO pay and company performance (pay for performance);
|
•
|
The company maintains
significant problematic pay practices;
|
•
|
The
board exhibits a significant level of poor communication and responsiveness to shareholders.
|
Vote against or withhold from the
members of the Compensation Committee and potentially the full board if:
•
|
There is no MSOP on
the ballot, and an against vote on an MSOP is warranted due to pay for performance misalignment, problematic pay practices, or the lack of adequate responsiveness on compensation issues raised previously, or a combination thereof;
|
•
|
The board fails to
respond adequately to a previous MSOP proposal that received less than 70 percent support of votes cast;
|
•
|
The company has recently
practiced or approved problematic pay practices, including option repricing or option backdating; or
|
•
|
The
situation is egregious.
|
Primary Evaluation Factors for Executive
Pay
Pay-for-Performance
Evaluation
ISS annually
conducts a pay-for-performance analysis to identify strong or satisfactory alignment between pay and performance over a sustained period. With respect to companies in the Russell 3000 or Russell 3000E Indices
(7)
, this analysis considers the following:
1.
|
Peer Group
(8)
Alignment:
|
•
|
The degree of alignment
between the company's annualized TSR rank and the CEO's annualized total pay rank within a peer group, each measured over a three-year period.
|
•
|
The
multiple of the CEO's total pay relative to the peer group median.
|
2.
|
Absolute Alignment
(9)
–
the absolute alignment between the trend in CEO pay and
company TSR over the prior five fiscal years
–
i.e.
, the difference between the trend in annual pay changes and the
trend in annualized TSR during the period.
|
If the above analysis demonstrates
significant unsatisfactory long-term pay-for-performance alignment or, in the case of companies outside the Russell indices, misaligned pay and performance are otherwise suggested, our analysis may include any of the following qualitative factors,
as relevant to evaluating how various pay elements may work to encourage or to undermine long-term value creation and alignment with shareholder interests:
•
|
The ratio of performance-
to time-based equity awards;
|
•
|
The overall ratio of
performance-based compensation;
|
•
|
The completeness of
disclosure and rigor of performance goals;
|
•
|
The company's peer group
benchmarking practices;
|
•
|
Actual results of
financial/operational metrics, such as growth in revenue, profit, cash flow, etc., both absolute and relative to peers;
|
•
|
Special circumstances
related to, for example, a new CEO in the prior FY or anomalous equity grant practices (
e.g.
bi-annual awards);
|
•
|
Realizable pay
(10)
compared to grant pay; and
|
•
|
Any
other factors deemed relevant.
|
Problematic Pay Practices
The focus is on executive compensation
practices that contravene the global pay principles, including:
•
|
Problematic practices
related to non-performance-based compensation elements;
|
•
|
Incentives that may
motivate excessive risk-taking; and
|
•
|
Options Backdating.
|
(7)
|
The Russell 3000E Index
includes approximately 4,000 of the largest U.S. equity securities.
|
(8)
|
The revised peer group is
generally comprised of 14-24 companies that are selected using market cap, revenue (or assets for certain financial firms), GICS industry group, and company's selected peers' GICS industry group, with size constraints, via a process designed to
select peers that are comparable to the subject company in terms of revenue/assets and industry, and also within a market cap bucket that is reflective of the company's. For Oil, Gas & Consumable Fuels companies, market cap is the only size
determinant.
|
(9)
|
Only Russell 3000 Index
companies are subject to the Absolute Alignment analysis.
|
(10)
|
ISS research reports include
realizable pay for S&P1500 companies.
|
Problematic Pay Practices related to
Non-Performance-Based Compensation Elements
Pay elements that are not directly
based on performance are generally evaluated case-by-case considering the context of a company's overall pay program and demonstrated pay-for-performance philosophy. Please refer to ISS' Compensation FAQ document for detail on specific pay practices
that have been identified as potentially problematic and may lead to negative recommendations if they are deemed to be inappropriate or unjustified relative to executive pay best practices. The list below highlights the problematic practices that
carry significant weight in this overall consideration and may result in adverse vote recommendations:
•
|
Repricing or replacing of
underwater stock options/SARS without prior shareholder approval (including cash buyouts and voluntary surrender of underwater options);
|
•
|
Excessive perquisites or
tax gross-ups, including any gross-up related to a secular trust or restricted stock vesting;
|
•
|
New or extended
agreements that provide for:
|
•
|
CIC payments exceeding 3
times base salary and average/target/most recent bonus;
|
•
|
CIC severance payments
without involuntary job loss or substantial diminution of duties ("single" or "modified single" triggers);
|
•
|
CIC payments with excise
tax gross-ups (including "modified" gross-ups);
|
•
|
Insufficient
executive compensation disclosure by externally- managed issuers (EMIs) such that a reasonable assessment of pay programs and practices applicable to the EMI's executives is not possible.
|
Incentives that may Motivate Excessive
Risk-Taking
•
|
Multi-year guaranteed
bonuses;
|
•
|
A single or common
performance metric used for short- and long-term plans;
|
•
|
Lucrative severance
packages;
|
•
|
High pay opportunities
relative to industry peers;
|
•
|
Disproportionate
supplemental pensions; or
|
•
|
Mega
annual equity grants that provide unlimited upside with no downside risk.
|
Factors that potentially mitigate the
impact of risky incentives include rigorous claw-back provisions and robust stock ownership/holding guidelines.
Options Backdating
The following factors should be examined
case-by-case to allow for distinctions to be made between “sloppy” plan administration versus deliberate action or fraud:
•
|
Reason and motive for the
options backdating issue, such as inadvertent vs. deliberate grant date changes;
|
•
|
Duration of options
backdating;
|
•
|
Size of restatement due
to options backdating;
|
•
|
Corrective actions taken
by the board or compensation committee, such as canceling or re-pricing backdated options, the recouping of option gains on backdated grants; and
|
•
|
Adoption
of a grant policy that prohibits backdating, and creates a fixed grant schedule or window period for equity grants in the future.
|
Compensation Committee Communications and
Responsiveness
Consider the
following factors case-by-case when evaluating ballot items related to executive pay on the board’s responsiveness to investor input and engagement on compensation issues:
•
|
Failure to respond to
majority-supported shareholder proposals on executive pay topics; or
|
•
|
Failure to adequately
respond to the company's previous say-on-pay proposal that received the support of less than 70 percent of votes cast, taking into account:
|
•
|
The company's response,
including:
|
•
|
Disclosure of engagement
efforts with major institutional investors regarding the issues that contributed to the low level of support;
|
•
|
Specific actions taken to
address the issues that contributed to the low level of support;
|
•
|
Other recent compensation
actions taken by the company;
|
•
|
Whether the issues raised
are recurring or isolated;
|
•
|
The company's ownership
structure; and
|
•
|
Whether
the support level was less than 50 percent, which would warrant the highest degree of responsiveness.
|
Equity-Based and Other Incentive
Plans
General Recommendation
: Vote case-by-case on certain equity-based compensation plans
(11)
depending on a combination of certain plan features and
equity grant practices, where positive factors may counterbalance negative factors, and vice versa, as evaluated using an "equity plan scorecard" (EPSC) approach with three pillars:
•
|
Plan Cost: The total
estimated cost of the company’s equity plans relative to industry/market cap peers, measured by the company's estimated Shareholder Value Transfer (SVT) in relation to peers and considering both:
|
•
|
SVT based on new shares
requested plus shares remaining for future grants, plus outstanding unvested/unexercised grants; and
|
•
|
SVT based only on new
shares requested plus shares remaining for future grants.
|
•
|
Plan Features:
|
•
|
Automatic
single-triggered award vesting upon a change in control (CIC);
|
•
|
Discretionary vesting
authority;
|
•
|
Liberal share recycling
on various award types;
|
•
|
Lack of minimum vesting
period for grants made under the plan.
|
•
|
Grant Practices:
|
•
|
The company’s three
year burn rate relative to its industry/market cap peers;
|
•
|
Vesting requirements in
most recent CEO equity grants (3-year look-back);
|
•
|
The estimated duration of
the plan (based on the sum of shares remaining available and the new shares requested, divided by the average annual shares granted in the prior three years);
|
•
|
The proportion of the
CEO's most recent equity grants/awards subject to performance conditions;
|
•
|
Whether the company
maintains a claw-back policy;
|
•
|
Whether the
company has established post exercise/vesting share-holding requirements.
|
Generally vote against the plan proposal
if the combination of above factors indicates that the plan is not, overall, in shareholders' interests, or if any of the following egregious factors apply:
•
|
Awards may vest in
connection with a liberal change-of-control definition;
|
•
|
The plan would permit
repricing or cash buyout of underwater options without shareholder approval (either by expressly permitting it
–
for NYSE and Nasdaq listed companies -- or by
not prohibiting it when the company has a history of repricing
–
for non-listed companies);
|
•
|
The plan is a vehicle for
problematic pay practices or a significant pay-for-performance disconnect under certain circumstances; or
|
•
|
Any
other plan features are determined to have a significant negative impact on shareholder interests.
|
SOCIAL/ENVIRONMENTAL ISSUES (SHAREHOLDER
PROPOSALS)
Global Approach
Issues covered under the policy
include a wide range of topics, including consumer and product safety, environment and energy, labor standards and human rights, workplace and board diversity, and corporate political issues. While a variety of factors goes into each analysis, the
overall principle guiding all vote recommendations focuses on how the proposal may enhance or protect shareholder value in either the short or long term.
General Recommendation
: Generally vote case-by-case, taking into consideration whether implementation of the proposal is likely to enhance or protect shareholder value, and in addition the following will also be considered:
•
|
If the issues presented
in the proposal are more appropriately or effectively dealt with through legislation or government regulation;
|
•
|
If the company has
already responded in an appropriate and sufficient manner to the issue(s) raised in the proposal;
|
•
|
Whether the proposal's
request is unduly burdensome (scope or timeframe) or overly prescriptive;
|
•
|
The company's approach
compared with any industry standard practices for addressing the issue(s) raised by the proposal;
|
•
|
If the proposal requests
increased disclosure or greater transparency, whether or not reasonable and sufficient
|
•
|
information is currently
available to shareholders from the company or from other publicly available sources; and
|
•
|
If the
proposal requests increased disclosure or greater transparency, whether or not implementation would reveal proprietary or confidential information that could place the company at a competitive disadvantage.
|
(11)
Proposals evaluated under the EPSC policy generally
include those to approve or amend (1) stock option plans for employees and/or employees and directors, (2) restricted stock plans for employees and/or employees and directors, and (3) omnibus stock incentive plans for employees and/or employees and
directors.
Climate Change/Greenhouse Gas (GHG) Emissions
General Recommendation
: Generally vote for resolutions requesting that a company disclose information on the risks related to climate change on its operations and investments, such as financial, physical, or regulatory risks,
considering:
•
|
Whether the company
already provides current, publicly-available information on the impact that climate change may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;
|
•
|
The company’s level
of disclosure is at least comparable to that of industry peers; and
|
•
|
There
are no significant controversies, fines, penalties, or litigation associated with the company’s environmental performance.
|
Generally vote for proposals requesting
a report on greenhouse gas (GHG) emissions from company operations and/or products and operations, unless:
•
|
The company already
discloses current, publicly-available information on the impacts that GHG emissions may have on the company as well as associated company policies and procedures to address related risks and/or opportunities;
|
•
|
The company's level of
disclosure is comparable to that of industry peers; and
|
•
|
There
are no significant, controversies, fines, penalties, or litigation associated with the company's GHG emissions.
|
Vote case-by-case on proposals that call
for the adoption of GHG reduction goals from products and operations, taking into account:
•
|
Whether the company
provides disclosure of year-over-year GHG emissions performance data;
|
•
|
Whether company
disclosure lags behind industry peers;
|
•
|
The company's actual GHG
emissions performance;
|
•
|
The company's current GHG
emission policies, oversight mechanisms, and related initiatives; and
|
•
|
Whether the
company has been the subject of recent, significant violations, fines, litigation, or controversy related to GHG emissions.
|
Board Diversity
General Recommendation
: Generally vote for requests for reports on a company's efforts to diversify the board, unless:
•
|
The gender and racial
minority representation of the company’s board is reasonably inclusive in relation to companies of similar size and business; and
|
•
|
The
board already reports on its nominating procedures and gender and racial minority initiatives on the board and within the company.
|
Vote case-by-case on proposals asking a
company to increase the gender and racial minority representation on its board, taking into account:
•
|
The degree of existing
gender and racial minority diversity on the company’s board and among its executive officers;
|
•
|
The level of gender and
racial minority representation that exists at the company’s industry peers;
|
•
|
The company’s
established process for addressing gender and racial minority board representation;
|
•
|
Whether the proposal
includes an overly prescriptive request to amend nominating committee charter language;
|
•
|
The independence of the
company’s nominating committee;
|
•
|
Whether the company uses
an outside search firm to identify potential director nominees; and
|
•
|
Whether the
company has had recent controversies, fines, or litigation regarding equal employment practices.
|
Sustainability Reporting
General Recommendation
: Generally vote for proposals requesting that a company report on its policies, initiatives, and oversight mechanisms related to social, economic, and environmental sustainability, unless:
•
|
The company already
discloses similar information through existing reports or policies such as an environment, health, and safety (EHS) report; a comprehensive code of corporate conduct; and/or a diversity report; or
|
•
|
The
company has formally committed to the implementation of a reporting program based on Global Reporting Initiative (GRI) guidelines or a similar standard within a specified time frame.
|
Environmental, Social, and Governance (ESG)
Compensation-Related Proposals
General Recommendation
: Vote case-by-case on proposals to link, or report on linking, executive compensation to sustainability (environmental and social) criteria, considering:
•
|
Whether the company has
significant and/or persistent controversies or regulatory violations regarding social and/or environmental issues;
|
•
|
Whether the company has
management systems and oversight mechanisms in place regarding its social and environmental performance;
|
•
|
The degree to which
industry peers have incorporated similar non-financial performance criteria in their executive compensation practices; and
|
•
|
The
company's current level of disclosure regarding its environmental and social performance.
|
This document and all of the
information contained in it, including without limitation all text, data, graphs, and charts (collectively, the "Information") is the property of Institutional Shareholder Services Inc. (ISS), its subsidiaries, or, in some cases third party
suppliers.
The Information has
not been submitted to, nor received approval from, the United States Securities and Exchange Commission or any other regulatory body. None of the Information constitutes an offer to sell (or a solicitation of a n offer to buy), or a promotion or
recommendation of, any security, financial product or other investment vehicle or any trading strategy, and ISS does not endorse, approve, or otherwise express any opinion regarding any issuer, securities, financial products or instruments or
trading strategies.
The user of
the Information assumes the entire risk of any use it may make or permit to be made of the Information.
ISS MAKES NO EXPRESS OR IMPLIED
WARRANTIES OR REPRESENTATIONS WITH RESPECT TO THE INFORMATION AN D EXPRESSLY DISCLAIMS ALL IMPLIED WARRANTIES (INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF ORIGINALITY, ACCURACY, TIMELINESS, NON-INFRINGEMENT, COMPLETENESS,
MERCHANTABILITY, AND FITNESS for A PARTICULAR PURPOSE) WITH RESPECT TO ANY OF THE INFORMATION.
Without limiting any of the foregoing
and to the maximum extent permitted by law, in no event shall ISS have any liability regarding any of the Information for any direct, indirect, special, punitive, consequential (including lost profits ), or any other damages even if notified of the
possibility of such damages. The foregoing shall not exclude or limit any liability that may not by applicable law be excluded or limited.
DIREXION SHARES ETF TRUST
PART C
OTHER INFORMATION
|
|
|
|
|
(a)
|
|
(i)
|
|
Certificate of Trust dated April 23, 2008 is herein incorporated by reference from the Direxion Shares ETF Trusts (the Trust) Initial Registration Statement on Form N-1A filed with the Securities and
Exchange Commission (SEC) on April 30, 2008.
|
|
|
|
|
|
(ii)
|
|
Trust Instrument is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
(b)
|
|
|
|
Amended and Restated By-Laws dated February 12, 2015 is herein incorporated by reference from the
Post-Effective
Amendment No. 121 to the Trusts Registration Statement filed on Form
N-1A with the SEC on February 26, 2015.
|
|
|
|
(c)
|
|
|
|
Shareholders Rights are contained in Articles IV, V, VI, IX, and X of the Trusts Trust Instrument and Articles V, VI, VII, VIII and IX of the Trusts By-Laws.
|
|
|
|
(d)
|
|
(i)(A)
|
|
Investment Advisory Agreement between the Trust and Rafferty Asset Management, LLC (RAM) dated August 13, 2008 filed herewith.
|
|
|
|
|
|
(i)(B)
|
|
Amended Schedule A to the Investment Advisory Agreement filed herewith.
|
|
|
|
(e)
|
|
(i)(A)
|
|
Distribution Agreement between the Trust and Foreside Fund Services, LLC (Foreside) dated March 31, 2009 filed herewith.
|
|
|
|
|
|
(i)(B)
|
|
Amended Exhibit A to the Distribution Agreement filed herewith.
|
|
|
|
|
|
(ii)
|
|
Form of Authorized Participant Agreement is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
(f)
|
|
|
|
Bonus, profit sharing contracts None.
|
|
|
|
(g)
|
|
(i)(A)
|
|
Form of Custody Agreement between the Trust and The Bank of New York (BONY) is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with
the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Tenth Amended Schedule II to the Custody Agreement is herein incorporated by reference from the Post-Effective Amendment No. 133 to the Trusts Registration Statement filed on Form N-1A with the SEC on June 3,
2015.
|
|
|
|
|
|
(ii)
|
|
Custody Agreement between the Trust and U.S Bank National Association is herein incorporated by reference from the Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form N-1A with the SEC on
September 16, 2013.
|
1
|
|
|
|
|
(h)
|
|
(i)(A)
|
|
Form of Transfer Agency and Service Agreement between the Trust and BONY is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on
August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Ninth Amended Appendix I to the Transfer Agency and Service Agreement is herein incorporated by reference from the Post-Effective Amendment No. 133 to the Trusts Registration Statement filed on Form N-1A with the SEC on
June 3, 2015.
|
|
|
|
|
|
(ii)
|
|
Transfer Agency and Service Agreement between the Trust and U.S. Bancorp Fund Services, LLC is herein incorporated by reference from the Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form
N-1A with the SEC on September 16, 2013.
|
|
|
|
|
|
(iii)
|
|
Fund Administration Agreement between the Trust and U. S. Bancorp Fund Services, LLC is herein incorporated by reference from the Post-Effective Amendment No. 80 to the Trusts Registration Statement filed on Form N-1A with
the SEC on November 30, 2012.
|
|
|
|
|
|
(iv)(A)
|
|
Fund Accounting Agreement between the Trust and BONY is herein incorporated by reference from the
Post-Effective
Amendment No. 80 to the Trusts Registration Statement filed on Form
N-1A with the SEC on November 30, 2012.
|
|
|
|
|
|
(iv)(B)
|
|
Amended Exhibit A to the Fund Accounting Agreement between the Trust and BONY is herein incorporated by reference from the Post-Effective Amendment No. 133 to the Trusts Registration Statement filed on Form N-1A with the
SEC on June 3, 2015.
|
|
|
|
|
|
(v)
|
|
Fund Accounting Agreement between the Trust and U.S. Bancorp Fund Services, LLC is herein incorporated by reference from the Post-Effective Amendment No. 89 to the Trusts Registration Statement filed on Form N-1A with the
SEC on September 16, 2013.
|
|
|
|
|
|
(vi)(A)
|
|
Advisory Fee Waiver Agreement is herein incorporated by reference from the Post-Effective Amendment No. 69 to the Trusts Registration Statement filed on Form N-1A with the SEC on June 13, 2012.
|
|
|
|
|
|
(vi)(B)
|
|
Amended Schedule A to the Advisory Fee Waiver Agreement filed herewith.
|
|
|
|
|
|
(vii)(A)
|
|
Second Amended and Restated Operating Expense Limitation Agreement is herein incorporated by reference from the Post-Effective Amendment No. 155 to the Trusts Registration Statement filed on Form N-1A with the SEC on
December 18, 2015.
|
|
|
|
|
|
(vii)(B)
|
|
Amended Appendix A to the Second Amended and Restated Operating Expense Limitation Agreement filed herewith.
|
|
|
|
|
|
(viii)(A)
|
|
Management Services Agreement is herein incorporated by reference from the Post-Effective Amendment No. 155 to the Trusts Registration Statement filed on Form N-1A with the SEC on December 18, 2015.
|
|
|
|
|
|
(viii)(B)
|
|
Amended Schedule A to the Management Services Agreement filed herewith.
|
|
|
|
(i)
|
|
|
|
Opinion and consent of counsel to be filed by amendment.
|
|
|
|
(j)
|
|
|
|
Power of Attorney and Certified Resolutions is herein incorporated by reference from the Post-Effective Amendment No. 118 to the Trusts Registration Statement filed on Form N-1A with the SEC on December 22, 2014.
|
|
|
|
(k)
|
|
|
|
Financial Statements omitted from prospectus None.
|
|
|
|
(l)
|
|
|
|
Initial Capital Agreement is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August 20,
2008.
|
2
|
|
|
|
|
(m)
|
|
(i)(A)
|
|
Rule 12b-1 Distribution Plan is herein incorporated by reference from the Pre-Effective Amendment No. 1 to the Trusts Registration Statement filed on Form N-1A with the SEC on August 20, 2008.
|
|
|
|
|
|
(i)(B)
|
|
Amended Appendix A to the Rule 12b-1 Distribution Plan filed herewith.
|
|
|
|
(n)
|
|
|
|
Rule 18f-3 Plan None.
|
|
|
|
(o)
|
|
|
|
Reserved.
|
|
|
|
(p)
|
|
|
|
Code of Ethics for the Trust and RAM is herein incorporated by reference from the Post-Effective Amendment No. 158 to the Trusts Registration Statement filed on Form N-1A with the SEC on February 26, 2016.
|
Item 29.
|
Persons Controlled by or Under Common Control with Registrant
|
Immediately prior to the
public offering of the Registrants shares for each series, the following persons may be deemed individually to control the Funds or the Trust:
Rafferty Asset Management, LLC will be the sole shareholder immediately prior to the public offering of each Fund.
Article IX of the Trust Instrument of the Registrant provides as
follows:
Section 1. LIMITATION OF LIABILITY. All persons contracting with or having any claim against the Trust or a particular
Series shall look only to the assets of the Trust or Assets belonging to such Series, respectively, for payment under such contract or claim; and neither the Trustees nor any of the Trusts officers or employees, whether past, present or
future, shall be personally liable therefor. Every written instrument or obligation on behalf of the Trust or any Series may contain a statement to the foregoing effect, but the absence of such statement shall not operate to make any Trustee or
officer of the Trust liable thereunder. Provided they have exercised reasonable care and have acted under the reasonable belief that their actions are in the best interest of the Trust, the Trustees and officers of the Trust shall not be responsible
or liable for any act or omission or for neglect or wrongdoing of them or any officer, agent, employee, investment adviser, principal underwriter or independent contractor of the Trust, but nothing contained in this Trust Instrument or in the
Delaware Act shall protect any Trustee or officer of the Trust against liability to the Trust or to Shareholders to which he or she would otherwise be subject by reason of willful misfeasance, bad faith, gross negligence or reckless disregard of the
duties involved in the conduct of his or her office.
Section 2. INDEMNIFICATION.
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(a)
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Subject to the exceptions and limitations contained in subsection (b) below:
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(i)
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every person who is, or has been, a Trustee or an officer, employee or agent of the Trust, including persons who act at the request of the Trust as directors, trustees, officers, employees or agents of another
organization in which the Trust has an interest as a shareholder, creditor or otherwise (Covered Person) shall be indemnified by the Trust or the appropriate Series to the fullest extent permitted by law against liability and against all
expenses reasonably incurred or paid by him or her in connection with any claim, action, suit or proceeding in which he or she becomes involved as a party or otherwise by virtue of his or her being or having been a Covered Person and against amounts
paid or incurred by him or her in the settlement thereof.
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3
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(ii)
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as used herein, the words claim, action, suit or proceeding shall apply to all claims, actions, suits or proceedings (civil, criminal or other, including appeals), actual
or threatened, and the words liability and expenses shall include, without limitation, counsel fees, costs, judgments, amounts paid in settlement, fines, penalties and other liabilities.
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(b)
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No indemnification shall be provided hereunder to a Covered Person:
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(i)
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who shall have been adjudicated by a court or body before which the proceeding was brought (A) to be liable to the Trust or its Shareholders by reason of willful misfeasance, bad faith, gross negligence or reckless
disregard of the duties involved in the conduct of his or her office or (B) not to have acted in good faith in the reasonable belief that his or her action was in the best interest of the Trust; or
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(ii)
|
in the event of a settlement, if there has been a determination that such Covered Person engaged in willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of his or
her office: (A) by the court or other body approving the settlement; (B) by at least a majority of those Trustees who are neither Interested Persons of the Trust nor are parties to the matter based upon a review of readily available facts
(as opposed to a full trial-type inquiry); or (C) by written opinion of independent legal counsel based upon a review of readily available facts (as opposed to a full trial-type inquiry).
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(c)
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The rights of indemnification herein provided may be insured against by policies maintained by the Trust, shall be severable, shall not be exclusive of or affect any other rights to which any Covered Person may now or
hereafter be entitled and shall inure to the benefit of the heirs, executors and administrators of a Covered Person. Nothing contained herein shall affect any rights to indemnification to which Trust personnel other than Covered Persons may be
entitled by contract or otherwise under law.
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(d)
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To the maximum extent permitted by applicable law, expenses in connection with the preparation and presentation of a defense to any claim, action, suit or proceeding of the character described in subsection (a) of
this Section shall be paid by the Trust or applicable Series from time to time prior to final disposition thereof upon receipt of an undertaking by or on behalf of such Covered Person that such amount will be paid over by him or her to the Trust or
applicable Series if it is ultimately determined that he or she is not entitled to indemnification under this Section.
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(e)
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Any repeal or modification of this Article IX by the Shareholders, or adoption or modification of any other provision of this Trust Instrument or the By-laws inconsistent with this Article, shall be prospective only, to
the extent that such, repeal or modification would, if applied retrospectively, adversely affect any limitation on the liability of any Covered Person or indemnification available to any Covered Person with respect to any act or omission which
occurred prior to such repeal, modification or adoption.
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Section 3. INDEMNIFICATION OF SHAREHOLDERS. If any Shareholder
or former Shareholder of any Series is held personally liable solely by reason of his or her being or having been a Shareholder and not because of his or her acts or omissions or for some other reason, the Shareholder or former Shareholder (or his
or her heirs, executors, administrators or other legal representatives or, in the case of any entity, its general successor) shall be entitled out of the Assets belonging to the applicable Series to be held harmless from and indemnified against all
loss and expense arising from such liability. The Trust, on behalf of the affected Series, shall, upon request by such Shareholder or former Shareholder, assume the defense of any claim made against him or her for any act or obligation of the Series
and satisfy any judgment thereon from the Assets belonging to the Series.
Article IX, Section 3 of the By-laws of the Registrant
provides as follows:
Section 3. Advance Payment of Indemnifiable Expenses. Expenses incurred by an agent in connection with the
preparation and presentation of a defense to any proceeding may be paid by the Trust from time to time prior to final disposition thereof upon receipt of an undertaking by, or on behalf of, such agent that such amount will be paid over by him or her
to the Trust if it is ultimately determined that he or she is not entitled to indemnification; provided, however, that (a) such agent shall have provided
4
appropriate security for such undertaking, (b) the Trust is insured against losses arising out of any such advance payments, or (c) either a majority of the Trustees who are neither
Interested Persons of the Trust nor parties to the proceeding, or independent legal counsel in a written opinion, shall have determined, based upon a review of the readily available facts (as opposed to a trial-type inquiry or full investigation),
that there is reason to believe that such agent will be found entitled to indemnification.
Section 7 of the Investment Advisory
Agreement provides as follows:
The Adviser shall not be liable for any error of judgment or mistake of law or for any loss suffered by
the Trust or any Fund in connection with the matters to which this Agreement relate except a loss resulting from the willful misfeasance, bad faith or gross negligence on its part in the performance of its duties or from reckless disregard by it of
its obligations and duties under this Agreement. Any person, even though also an officer, partner, employee, or agent of the Adviser, who may be or become an officer, trustee, employee or agent of the Trust shall be deemed, when rendering services
to the Trust or acting in any business of the Trust, to be rendering such services to or acting solely for the Trust and not as an officer, partner, employee, or agent or one under the control or direction of the Adviser even though paid by it.
Section 6 of the Distribution Agreement provides as follows:
(a) The Trust agrees to indemnify and hold harmless the Distributor, its affiliates and each of their directors, officers and employees and
agents and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act (any of the Distributor, its officers, employees, agents and directors or such control persons, for purposes of this paragraph, a
Distributor Indemnitee) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in
connection therewith) arising out of or based upon (i) any claim that the Registration Statement, Prospectus, Statement of Additional Information, Product Description, shareholder reports, sales literature and advertisements specifically
approved by the Trust and Investment Adviser or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact or omitted to state a material fact required to be stated therein or
necessary in order to make the statements therein (and in the case of the Prospectus, Statement of Additional Information and Product Description, in light of the circumstances under which they were made) not misleading under the 1933 Act, or any
other statute or the common law, (ii) the breach by the Trust of any obligation, representation or warranty contained in this Agreement or (iii) the Trusts failure to comply in any material respect with applicable securities laws.
The Trust does not agree to indemnify the Distributor or hold it harmless to the extent that the statement or omission was made in
reliance upon, and in conformity with, information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Distributor Indemnitee with respect to any untrue statement or omission made in the Registration
Statement, Prospectus, Statement of Additional Information or Product Description that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy of the Prospectus (or such amendment or supplement) was not
sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation to such person in any case where such delivery is required by the 1933 Act and the Trust had notified the Distributor of
the amendment or supplement prior to the sending of the confirmation. In no case (i) is the indemnity of the Trust in favor of any Distributor Indemnitee to be deemed to protect the Distributor Indemnitee against any liability to the Trust or
its shareholders to which the Distributor Indemnitee would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its obligations under this
Agreement, or (ii) is the Trust to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Distributor Indemnitee unless the Distributor Indemnitee shall have notified the Trust in writing of
the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon Distributor Indemnitee (or after Distributor Indemnitee shall have received notice of
service on any designated agent).
5
Failure to notify the Trust of any claim shall not relieve the Trust from any liability that it
may have to any Distributor Indemnitee against whom such action is brought unless failure or delay to so notify the Trust prejudices the Trusts ability to defend against such claim. The Trust shall be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to Distributor Indemnitee,
defendant or defendants in the suit. In the event the Trust elects to assume the defense of any suit and retain counsel, Distributor Indemnitee, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained
by them. If the Trust does not elect to assume the defense of any suit, it will reimburse the Distributor Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to
notify the Distributor promptly of the commencement of any litigation or proceedings against it or any of its officers or Trustees in connection with the issuance or sale of any of the Creation Units or the Shares.
(b) The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and officers and any person who controls the Trust
within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the Trust Affiliates) against any loss,
liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon
(i) the allegation of any wrongful act of the Distributor or any of its directors, officers, employees, (ii) the breach of any obligation, representation or warranty pursuant to this Agreement by the Distributor, (iii) the
Distributors failure to comply in any material respect with applicable securities laws, including applicable FINRA regulations, or (iv) any allegation that the Registration Statement, Prospectus, Statement of Additional Information,
Product Description, shareholder reports, any information or materials relating to the Funds (as described in section 3(g)) or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a
material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with information
furnished to the Trust by or on behalf of the Distributor, it being understood that the Trust will rely upon certain information provided by the Distributor for use in the preparation of the Registration Statement, Prospectus, Statement of
Additional Information, Product Description, shareholder reports or other information relating to the Funds or made public by the Trust.
In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be deemed to protect any Trust Affiliate against any
liability to the Trust or its security holders to which such Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by reason of its reckless disregard of its
obligations and duties under this Agreement, or (ii) is the Distributor to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Trust Affiliate unless the Trust Affiliate shall have
notified the Distributor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon the Trust Affiliate (or after the Trust
Affiliate shall have received notice of service on any designated agent).
Failure to notify the Distributor of any claim shall not relieve
the Distributor from any liability that it may have to the Trust Affiliate against whom such action is brought unless failure or delay to so notify the Distributor prejudices the Distributors ability to defend against such claim. The
Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the defense, the defense shall be conducted
by counsel chosen by it and satisfactory to the Trust, its officers and Board and to any controlling person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the defense of any suit and retain counsel,
the Trust or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the defense of any suit, it will reimburse the
Trust, its officers and Trustees or controlling person or persons, defendant or defendants in the suit, for the reasonable fees and
6
expenses of any counsel retained by them. The Distributor agrees to notify the Trust promptly of the commencement of any litigation or proceedings against it or any of its officers or directors
in connection with the issuance or sale of any of the Creation Units or the Shares.
(c) No indemnified party shall settle any claim
against it for which it intends to seek indemnification from the indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior written notice to and consent from the indemnifying party, which consent shall not be unreasonably
withheld. No indemnified or indemnifying party shall settle any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. This section 6 shall survive the termination of this
Agreement.
Section 13 of the Authorized Participant Agreement provides as follows:
(a) The Participant hereby agrees to indemnify and hold harmless the Distributor, the Funds, the Index Receipt Agent, their respective
subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an Indemnified Party), from and against any loss,
liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Participant of any provision of this Agreement; (ii) any failure on the part of the Participant to perform
any of its obligations set forth in this Agreement; (iii) any failure by the Participant to comply with applicable laws, including rules and regulations of self-regulatory organizations; (iv) actions of such Indemnified Party in reliance
upon any instructions issued in accordance with the Fund Documents, AP Handbook or Annex II (as each may be amended from time to time) reasonably believed by the Distributor and/or the Index Receipt Agent to be genuine and to have been given by the
Participant; or (v) the Participants failure to complete a Purchase Order or Redemption Order that has been accepted. The Participant understands and agrees that the Funds as third party beneficiaries to this Agreement are entitled to
proceed directly against the Participant in the event that the Participant fails to honor any of its obligations under this Agreement that benefit the Fund. The Distributor shall not be liable to the Participant for any damages arising out of
mistakes or errors in data provided to the Distributor, or out of interruptions or delays of communications with the Indemnified Parties who are service providers to the Fund, nor is the Distributor liable for any action, representation, or
solicitation made by the wholesalers of the Fund.
(b) The Distributor hereby agrees to indemnify and hold harmless the Participant and the
Index Receipt Agent, their respective subsidiaries, affiliates, directors, officers, employees, and agents, and each person, if any, who controls such persons within the meaning of Section 15 of the 1933 Act (each an Indemnified
Party), from and against any loss, liability, cost, or expense (including attorneys fees) incurred by such Indemnified Party as a result of (i) any breach by the Distributor of any provision of this Agreement; (ii) any failure
on the part of the Distributor to perform any of its obligations set forth in this Agreement; (iii) any failure by the Distributor to comply with applicable laws, including rules and regulations of self-regulatory organizations; or
(iv) actions of such Indemnified Party in reliance upon any representations made in accordance with the Fund Documents and AP Handbook (as each may be amended from time to time) reasonably believed by the Participant to be genuine and to have
been given by the Distributor. The Participant shall not be liable to the Distributor for any damages arising out of mistakes or errors in data provided to the Participant, or out of interruptions or delays of communications with the Indemnified
Parties who are service providers to the Fund, nor is the Participant liable for any action, representation, or solicitation made by the wholesalers of the Fund.
(c) The Funds, the Distributor, the Index Receipt Agent, or any person who controls such persons within the meaning of Section 15 of the
1933 Act, shall not be liable to the Participant for any damages arising from any differences in performance between the Deposit Securities in a Fund Deposit and the Funds benchmark index.
The general effect of this Indemnification will be to indemnify the officers, trustees, employees and agents of the Registrant from costs and
expenses arising from any action, suit or proceeding to which they may be made a party by reason of their being or having been a trustee, officer, employee or agent of the Registrant, except where such action is determined to have arisen out of the
willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of the trustees, officers, employees or agents office.
7
Insofar as indemnification for liability arising under the Securities Act of 1933 may be
permitted to trustees, officers and controlling persons of the Registrant pursuant to the foregoing or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a trustee, officer or controlling
person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such trustee, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
Item 31.
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Business and Other Connections of Investment Adviser
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Rafferty Asset Management, LLC
(Rafferty) provides investment advisory services to all Funds of the Trust. Rafferty was organized as a New York limited liability corporation in June 1997. Lawrence C. Rafferty controls Rafferty through his ownership in Rafferty
Holdings, LLC. Raffertys offices are located at 1301 Avenue of the Americas (6th Avenue), 28th Floor, New York, New York 10019. Information as to the directors and officers of Rafferty is included in its current Form ADV filed with the SEC
(File No. 801-54679).
Item 32.
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Principal Underwriter
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(a) Foreside Fund Services, LLC, the Registrants principal
underwriter, also serves as principal underwriter for the following investment companies registered under the Investment Company Act of 1940, as amended: ABS Long/Short Strategies Fund, Absolute Shares Trust, AdvisorShares Trust, American Beacon
Funds, American Beacon Select Funds, Archstone Alternative Solutions Fund, Ark ETF Trust, Avenue Mutual Funds Trust, BP Capital TwinLine Energy Fund, Series of Professionally Managed Portfolios, BP Capital TwinLine MLP Fund, Series of Professionally
Managed Portfolios, Braddock Multi-Strategy Income Fund, Series of Investment Managers Series Trust, Bridgeway Funds, Inc., Calamos ETF Trust, Capital Innovations Global Agri, Timber, Infrastructure Fund, Series of Investment Managers Series Trust,
Center Coast MLP Focus Fund, Series of Investment Managers Series Trust, Context Capital Funds, CornerCap Group of Funds, Corsair Opportunity Fund, , Evanston Alternative Opportunities Fund, Exchange Listed Funds Trust, FlexShares Trust, Forum
Funds, Forum Funds II, FQF Trust, FSI Low Beta Absolute Return Fund, Gottex Trust, Henderson Global Funds, Horizon Spin-off and Corporate Restructuring Fund, Series of Investment Managers Series Trust
(f/k/a Liberty Street Horizon Fund),
Horizons ETF Trust, Infinity Core Alternative Fund, Ironwood Institutional Multi-Strategy Fund LLC, Ironwood Multi-Strategy Fund LLC, John Hancock Exchange-Traded Fund Trust, Little Harbor Multistrategy Composite Fund, Lyons Funds, Manor
Investment Funds, Miller/Howard Funds Trust, Montage Managers Trust, Palmer Square Opportunistic Income Fund, PENN Capital Funds Trust, Performance Trust Mutual Funds, Series of Trust for Professional Managers, Pine Grove Alternative Fund, Pine
Grove Alternative Institutional Fund, Plan Investment Fund, Inc., PMC Funds, Series of Trust for Professional Managers, Precidian ETFs Trust, Quaker Investment Trust, Ramius Archview Credit and Distressed Feeder Fund, Ramius Archview Credit and
Distressed Fund, Recon Capital Series Trust, Renaissance Capital Greenwich Funds, Robinson Opportunistic Income Fund, Series of Investment Managers Series Trust, Robinson Tax Advantaged Income Fund, Series of Investment Managers Series Trust,
Salient MF Trust, SharesPost 100 Fund, Sound Shore Fund, Inc., Steben Alternative Investment Funds, Steben Select Multi-Strategy Fund, The 504 Fund, The Roxbury Funds, TIFF Investment Program, Toroso Newfound Tactical Allocation Fund, Series of
Investment Managers Series Trust, TrimTabs ETF Trust, Turner Funds, U.S. Global Investors Funds, West Loop Realty Fund, Series of Investment Managers Series Trust
(f/k/a Chilton Realty Income & Growth Fund),
Wintergreen Fund, Inc.,
WisdomTree Trust.
8
(b) The following table identifies the officers of Foreside and their positions, if any, with the
Registrant. The business address of each of these individuals is also indicated below.
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Name
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Business Address
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Position with Underwriter
|
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Position
with
Registrant
|
Richard J. Berthy
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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President, Treasurer and Manager
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None
|
Mark A. Fairbanks
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|
Three Canal Plaza, Suite 100,
Portland, Maine
04101
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Vice President
|
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None
|
Jennifer K. DiValerio
|
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899 Cassatt Road,
400 Berwyn Park, Suite
110,
Berwyn, PA 19312
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Vice President
|
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None
|
Nanette K. Chern
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
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Vice President and Chief Compliance Officer
|
|
None
|
Jennifer E. Hoopes
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Three Canal Plaza, Suite 100,
Portland, Maine
04101
|
|
Secretary
|
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None
|
Item 33.
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Location of Accounts and Records
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The books and records required to be maintained by
Section 31(a) of the Investment Company Act of 1940, as amended, (the 1940 Act) are maintained in the physical possession of the Direxion Shares ETF Trusts investment adviser, subadviser, administrator, custodian,
subcustodian, or transfer agent.
Item 34.
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Management Services
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Not applicable.
Not applicable.
9
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, (the Securities Act) and the 1940 Act, the Registrant
certifies that this Post-Effective Amendment No. 171 to its Registration Statement meets all the requirements for effectiveness pursuant to Rule 485(b) of the Securities Act, and the Registrant has duly caused this Post-Effective Amendment
No. 171 to its Registration Statement on Form N-1A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York and the State of New York on October 19, 2016.
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DIREXION SHARES ETF TRUST
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By:
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/s/ Daniel D. ONeill*
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Daniel D. ONeill
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Chief Executive Officer
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Pursuant to the requirements of the Securities Act, this Post-Effective Amendment No. 171 to its
Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
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Signature
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Title
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Date
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/s/ Daniel D. ONeill*
Daniel D. ONeill
|
|
Chairman of the Board, Chief Executive Officer and Chief Investment Officer
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October 19, 2016
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/s/ Gerald E. Shanley III*
Gerald E. Shanley III
|
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Trustee
|
|
October 19, 2016
|
|
|
|
/s/ John Weisser*
John Weisser
|
|
Trustee
|
|
October 19, 2016
|
|
|
|
/s/ Jacob C. Gaffey*
Jacob C. Gaffey
|
|
Trustee
|
|
October 19, 2016
|
|
|
|
/s/ David L. Driscoll*
David L. Driscoll
|
|
Trustee
|
|
October 19, 2016
|
|
|
|
/s/ Eric W. Falkeis*
Eric W. Falkeis
|
|
Trustee and Principal Executive Officer
|
|
October 19, 2016
|
|
|
|
/s/ Patrick J. Rudnick*
Patrick J. Rudnick
|
|
Principal Financial Officer and Assistant Secretary
|
|
October 19, 2016
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*By: /s/ Angela Brickl
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Attorney-In-Fact pursuant to the Power of Attorney filed with Post-Effective Amendment No. 118 to the
Trusts Registration Statement filed with the SEC on December 22, 2014.
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INDEX TO EXHIBITS
|
|
|
Exhibit
Number
|
|
Description
|
|
|
(d)(i)(A)
|
|
Investment Advisory Agreement
|
|
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(d)(i)(B)
|
|
Amended Schedule A to the Investment Advisory Agreement
|
|
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(e)(i)(A)
|
|
Distribution Agreement
|
|
|
(e)(i)(B)
|
|
Amended Exhibit A to the Distribution Agreement
|
|
|
(h)(vi)(B)
|
|
Amended Schedule A to the Advisory Waiver Agreement
|
|
|
(h)(vii)(B)
|
|
Amended Appendix A to the Second Amended and Restated Operating Expense Limitation Agreement
|
|
|
(h)(viii)(B)
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|
Amended Schedule A to the Management Services Agreement
|
|
|
(m)(i)(B)
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|
Amended Appendix A to the Rule 12b-1 Distribution Plan
|
DIREXION SHARES ETF TRUST
INVESTMENT ADVISORY AGREEMENT
This Investment Advisory Agreement is made as of August 13, 2008, between Direxion Shares ETF Trust (the Trust), a Delaware
statutory trust, and Rafferty Asset Management, LLC, a New York limited liability corporation (the Adviser).
WHEREAS, the
Trust is registered under the Investment Company Act of 1940, as amended (the Act), as an open-end management investment company consisting of one or more investment series of shares, each having its own assets and investment policies;
WHEREAS, the Adviser provides investment advice and is registered with the Securities and Exchange Commission (the SEC) as an
investment adviser under the Investment Advisers Act of 1940, as amended (the Advisers Act); and
WHEREAS, the Trust desires
to retain the Adviser to perform investment advisory services for each series of the Trust listed in one or more Schedules attached hereto (collectively, the Funds), and the Adviser is willing to perform such services on the terms and
conditions set forth in this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual covenants herein contained, it is
agreed between the parties hereto as follows:
1.
APPOINTMENT
.
The Trust hereby appoints the Adviser, subject to the
direction and control of the Trusts Board of Trustees (the Board), to manage the investment and reinvestment of the assets of each Fund listed on Schedule A of this Agreement (as such schedule may be amended from time to time) for
the period and on the terms set forth in this Agreement. The Adviser accepts such appointment and agrees to render the services herein set forth for the compensation as set forth on Schedule A. In the performance of its duties, the Adviser will act
in the best interests of the Trust and each Fund and will comply with (a) applicable laws and regulations, including, but not limited to, the 1940 Act, (b) the terms of this Agreement, (c) the Trusts Declaration of Trust,
By-Laws and currently effective registration statement under the Securities Act of 1933, as amended, and the 1940 Act, and any amendments thereto, (d) the stated investment objective, policies and restrictions of each applicable Fund, and
(e) such other guidelines as the Board reasonably may establish.
2.
DUTIES AS INVESTMENT ADVISER
.
(a) Subject to the supervision of the Board, the Adviser will provide a continuous investment program for each Fund, including investment
research and management with respect to all securities, investments and cash equivalents in each Fund. The Adviser will determine from time to time what securities and other investments will be purchased, retained or sold by each Fund. To carry out
such decisions, the Adviser hereby is authorized, as agent and attorney-in-fact for the Trust, for the account of, at the risk of and in the name of the Trust, to place orders and issue instructions with respect to those transactions of the Funds.
The Adviser will exercise
full discretion and act for each Fund in the same manner and with the same force and effect as such Fund itself might or could do with respect to purchases, sales, or other transactions, as well
as with respect to all other things necessary or incidental to the furtherance or conduct of such purchases, sales or other transactions. The Adviser will be responsible for preserving the confidentiality of information concerning the holdings,
transactions, and business activities of each Trust and each Fund in conformity with the requirements of the 1940 Act, other applicable laws and regulations, and any policies that are approved by the Board.
(b) The Adviser will place orders pursuant to its investment determinations for each Fund either directly with the issuer or through other
brokers. In the selection of brokers and the placement of orders for the purchase and sale of Fund investments for the Funds, the Adviser shall use its best efforts to obtain for the Funds the most favorable price and execution available, except to
the extent it may be permitted to pay higher brokerage commissions for brokerage and research services as described below. In using its best efforts to obtain the most favorable price and execution available, the Adviser, bearing in mind the
Trusts best interests at all times, shall consider all factors it deems relevant, including by way of illustration, price, the size of the transaction, the nature of the market for the security, the amount of the commission, the timing of the
transaction taking into account market prices and trends, the reputation, experience and financial stability of the broker involved and the quality of service rendered by the broker in other transactions. Subject to such policies as the Board may
determine, the Adviser shall not be deemed to have acted unlawfully or to have breached any duty created by this Agreement or otherwise solely by reason of its having caused a Fund to pay a broker that provides brokerage and research services to the
Adviser an amount of commission for effecting a portfolio investment transaction in excess of the amount of commission another broker would have charged for effecting that transaction if the Adviser determines in good faith that such amount of
commission was reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Advisers overall responsibilities with respect to the Trust and to
other clients of the Adviser as to which the Adviser exercises investment discretion. In no instance will portfolio securities of any Fund be purchased from or sold to the Adviser or any affiliated person of the Adviser. The Trust agrees that any
entity or person associated with the Adviser that is a member of a national securities exchange is authorized to effect any transaction on such exchange for the account of the Trust which is permitted by Section 11(a) of the Securities Exchange
Act of 1934, as amended, and the rules thereunder, and the Trust has consented to the retention of compensation for such transactions.
(c) The Adviser will report to the Board at each meeting thereof all changes in the Funds since the prior report, and also will keep the Board
informed of important developments affecting the Trust, Funds and the Adviser, and on its own initiative, will provide the Board from time to time such information as the Adviser may believe appropriate for this purpose, whether concerning the
individual companies whose securities are included in a Funds holdings, the industries in which they engage, or the economic, social or political conditions prevailing in each country in which the Fund maintains investments. The Adviser also
make available to the Board upon request any economic, statistical and investment services normally available to institutional or other customers of the Adviser.
(d) The Adviser will from time to time employ or associate with such persons as the Adviser
believes to be particularly fitted to assist in the execution of the Advisers duties hereunder, the cost of performance of such duties to be borne and paid by the Adviser. No obligation may be incurred on the Trusts behalf in any such
respect.
(e) The Adviser, unless and until otherwise directed by the Board, will exercise all rights of security holders with respect to
securities held by each Fund, including, but not limited to: voting proxies, converting, tendering, exchanging or redeeming securities; acting as a claimant in class action litigation (including litigation with respect to securities previously
held), and exercising rights in the context of a bankruptcy or other reorganization.
(f) Any of the foregoing functions with respect to
any or all Funds may be delegated by the Adviser, at the Advisers expense, to another appropriate party (including an affiliated party), subject to such approval by the Board and shareholders of each affected Fund as may be required by the
1940 Act. The Adviser shall oversee the performance of delegated functions by any such party and shall furnish to the Trust with quarterly evaluations and analyses concerning the performance of delegated responsibilities by those parties.
3.
COMPLIANCE WITH RULE 38a-1
.
The Adviser shall maintain policies and procedures that are reasonably designed to prevent
violations of the federal securities laws, and shall employ personnel to administer the policies and procedures who have the requisite level of skill and competence required to effectively discharge its responsibilities. The Adviser shall also
provide the Trusts chief compliance officer with periodic reports regarding its compliance with the federal securities laws, and shall promptly provide special reports in the event of any material violation of the federal securities laws.
4.
SERVICES NOT EXCLUSIVE
.
The services furnished by the Adviser hereunder are not to be deemed exclusive and the Adviser shall
be free to furnish similar services to others so long as its services under this Agreement are not impaired thereby.
5.
BOOKS AND
RECORDS
.
(a) The Adviser shall maintain records for each Fund relating to portfolio transactions and the placing and allocation
of brokerage orders as are required to be maintained by the Trust under Rule 31a-1 of the Act. The Adviser shall prepare and maintain, or cause to be prepared and maintained, in such form and in such locations as may be required by applicable law,
all documents and records relating to the services provided by the Adviser pursuant to this Agreement required to be prepared and maintained by the Trust pursuant to the rules and regulations of any national, state or local government entity with
jurisdiction over the Trust, including the Internal Revenue Service.
(b) In compliance with the requirements of Rule 31a-3 under the 1940
Act, the Adviser hereby agrees that all records which it maintains for the Trust are the property of the Trust and further agrees to surrender promptly to the Trust any of such records upon the Trusts request. The Adviser further agrees to
preserve for the periods prescribed by Rule 31a-2 under the 1940 Act the records required to be maintained by Rule 3la-1 under the 1940 Act.
6.
EXPENSES
.
During the term of this Agreement, the Trust will bear all expenses
not specifically assumed by the Adviser incurred in its operations and the offering of its shares. Expenses borne by the Trust will include, the following (or each Funds proportionate share of the following): (a) brokerage commissions
relating to securities purchased or sold by the Trust or any losses incurred in connection therewith; (b) fees payable to and expenses incurred on behalf of the Trust by the Adviser; (c) expenses of organizing the Trust and the Funds;
(d) filing fees and expenses relating to the registration and qualification of the Trusts shares and the Trust under federal or state securities laws and maintaining such registrations and qualifications; (e) distribution fees;
(f) fees and salaries payable to the members of the Board and officers who are not officers or employees of the Adviser or interested persons (as defined in the 1940 Act) of any investment adviser or distributor of the Trust; (g) taxes
(including any income or franchise taxes) and governmental fees; (h) costs of any liability, uncollectible items of deposit and other insurance or fidelity bonds; (i) any costs, expenses or losses arising out of any liability of or claim
for damage or other relief asserted against the Trust for violation of any law; (j) legal, accounting and auditing expenses, including legal fees of special counsel for the independent trustees; (k) charges of custodians, transfer agents,
registrars and other agents; (l) expenses associated with the Trusts compliance program pursuant to Rule 38a-1 under the 1940 Act, including the costs associated with the staff necessary to manage the program; (m) expenses of setting
in type and printing prospectuses and supplements thereto for existing shareholders, reports and statements to shareholders and proxy material; (n) any extraordinary expenses (including fees and disbursements of counsel) incurred by the Trust;
and (o) fees and other expenses incurred in connection with membership in investment company organizations.
The Trust may pay
directly any expense incurred by it in its normal operations and, if any such payment is consented to by the Adviser and acknowledged as otherwise payable by the Adviser pursuant to this Agreement, the Trust may reduce the fee payable to the Adviser
pursuant to paragraph 7 hereof by such amount. To the extent that such deductions exceed the fee payable to the Adviser on any monthly payment date, such excess shall be carried forward and deducted in the same manner from the fee payable on
succeeding monthly payment dates.
7.
LIMITATION OF LIABILITY OF THE ADVISER
.
The Adviser shall not be liable for any error
of judgment or mistake of law or for any loss suffered by the Trust or any Fund in connection with the matters to which this Agreement relate except a loss resulting from the willful misfeasance, bad faith or gross negligence on its part in the
performance of its duties or from reckless disregard by it of its obligations and duties under this Agreement. Any person, even though also an officer, partner, employee, or agent of the Adviser, who may be or become an officer, trustee, employee or
agent of the Trust shall be deemed, when rendering services to the Trust or acting in any business of the Trust, to be rendering such services to or acting solely for the Trust and not as an officer, partner, employee, or agent or one under the
control or direction of the Adviser even though paid by it.
8.
LIMITATION OF LIABILITY OF THE TRUST AND THE FUNDS
.
The
Adviser is hereby expressly put on notice of the limitation of liability as set forth in the Trust Instrument and agrees that obligations assumed by the Trust hereunder shall be limited in all cases to the Trust and its assets, and if the liability
relates to one or more Funds, the obligations
hereunder shall be limited to the respective assets of that Fund. The Adviser further agrees that it shall not seek satisfaction of any obligation from the shareholders or any individual
shareholder of a Fund, nor from the Trustees or any individual Trustee of the Trust.
9.
NON-BINDING AGREEMENT
.
This
Agreement is executed by the Trustees and/or officers of the Trust in their capacities as Trustees and/or officers and the obligations of this Agreement are not binding upon any of them or the shareholder individually; rather, they are binding only
on the assets and the property of the Trust.
10.
COMPENSATION
.
For the services provided and the expenses assumed pursuant
to this Agreement with respect to each Fund, the Trust will pay the Adviser, effective from the date of this Agreement, a fee that is computed daily and paid monthly from each Funds assets at the annual rates as percentages of that Funds
average daily net assets as set forth in the attached Schedule A, which schedule can be modified from time to time to reflect changes in annual rates or the addition or deletion of a Fund from the terms of this Agreement, subject to appropriate
approvals required by the 1940 Act. If this Agreement becomes effective or terminates with respect to any Fund before the end of any month, the fee for the period from the effective date to the end of the month or from the beginning of such month to
the date of termination, as the case may be, shall be prorated according to the proportion that such period bears to the full month in which such effectiveness or termination occurs.
11.
DURATION AND TERMINATION
.
This Agreement shall become effective upon its execution; provided, that with respect to any Fund
now existing or hereafter created, this Agreement shall not take effect unless it first has been approved (i) by a vote of the majority of those trustees of the Trust who are not parties to this Agreement or interested persons of such party,
cast in person at a meeting called for the purpose of voting on such approval, and (ii) if required by the 1940 Act or applicable staff interpretations therof, by vote of a majority of that Funds outstanding voting securities. This
Agreement shall remain in full force and effect continuously thereafter until terminated without the payment of any penalty as follows:
(a) By vote of a majority of its trustees, or by the affirmative vote of a majority of the outstanding shares of such Fund, the Trust may at
any time terminate this Agreement with respect to any or all Funds by providing not more than 60 days written notice delivered or mailed by registered mail, postage prepaid, to the Adviser at its principal offices; or
(b) With respect to any Fund, this Agreement shall be approved for an initial period of two year and at least annually thereafter by
(i) the Trustees or the shareholders of that Fund by the affirmative vote of a majority of the outstanding shares of such Fund, and (ii) a majority of the Trustees who are not interested persons of the Trust or of the Adviser or of any
subadviser, by vote cast in person at a meeting called for the purpose of voting on such approval. If the continuance of this Agreement is not approved at least annually after the initial two-year period, then this Agreement shall automatically
terminate at the close of business on the second anniversary of its execution, or upon the expiration of one year from the effective date of the last such continuance, whichever is later; provided, however, that if the continuance of this Agreement
is submitted to the shareholders of a Fund for their approval and such shareholders fail to approve such continuance of this Agreement as provided herein, the Adviser may continue to serve hereunder in a manner consistent with the 1940 Act and the
rules and regulations thereunder with respect to that Fund; or
(c) The Adviser may at any time terminate this Agreement with respect to any or all Funds by not
less than 60 days written notice delivered or mailed by registered mail, postage prepaid to the Trust.
(d) This Agreement
automatically and immediately will terminate in the event of its assignment.
12.
AMENDMENT OF THIS AGREEMENT
.
No provision
of this Agreement may be changed, waived, discharged or terminated orally, except by an instrument in writing signed by the party against which enforcement of the change, waiver, discharge or termination is sought. No material amendment of this
Agreement with respect to any Fund shall be effective except, if required by law, by vote of the holders of a majority of that Funds outstanding voting securities.
13.
GOVERNING LAW
.
This Agreement shall be construed in accordance with the laws of the State of New York, without giving effect
to the conflicts of laws principles thereof, and in accordance with the 1940 Act. To the extent that the applicable laws of the Commonwealth of Massachusetts conflict with the applicable provisions of the 1940 Act, the latter shall control.
14.
FORCE MAJEURE
.
The Adviser shall not be liable for delays or errors occurring by reason of circumstances beyond its control,
including but not limited to acts of civil or military authority, national emergencies, work stoppages, fire, flood, catastrophe, acts of God, insurrection, war, riot, or failure of communication or power supply. In the event of equipment breakdowns
beyond its control, the Adviser shall take reasonable steps to minimize service interruptions but shall have no liability with respect thereto.
15.
DEFINITIONS
.
As used in this Agreement, the terms majority of the outstanding voting securities,
interested person, and assignment shall have the same meanings as such terms have in the 1940 Act.
16.
SEVERABILITY
.
If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective successors.
17.
MISCELLANEOUS
.
The captions in this
Agreement are included for convenience of reference only and in no way define or delimit any of the provisions hereof or otherwise affect their construction or effect.
IN WITNESS WHEREOF
, the parties hereto have caused this instrument to be executed by their
officers designated below as of the day and year first above written.
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Attest:
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DIREXION SHARES ETF TRUST
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By:
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/s/ Kathleen A. Haley
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By:
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/s/ Daniel ONeill
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Daniel ONeill
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President
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Attest:
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RAFFERTY ASSET MANAGEMENT, LLC
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By:
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/s/ Kathleen A. Haley
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By:
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/s/ Daniel ONeill
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Daniel ONeill
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Managing Director
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Schedule A
to the Investment Advisory Agreement
between Direxion Shares ETF Trust and Rafferty Asset Management, LLC
Pursuant to section 1 of the Investment Advisory Agreement between Direxion Shares ETF Trust (the Trust) and Rafferty Asset
Management, LLC (Rafferty), the Trust hereby appoints Rafferty to manage the investment and reinvestment of the Funds of the Trust listed below. As compensation for such, the Trust shall pay to Rafferty pursuant to section 7 of the
Investment Advisory Agreement a fee, computed daily and paid monthly, at the following annual rates as percentages of each Funds average daily net assets:
ACTIVELY MANAGED FUNDS
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Direxion Auspice Broad Commodity Strategy ETF
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0.50
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%
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NON-LEVERAGED FUNDS
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Direxion NASDAQ-100
®
Equal Weighted Index
Shares
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0.30
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%
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Direxion S&P 500
®
Volatility Response
Shares
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0.45
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%
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Direxion All Cap Insider Sentiment Shares
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0.45
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%
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Direxion Zacks MLP High Income Shares
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0.60
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%
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Direxion iBillionaire Index ETF
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0.45
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%
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1X BEAR FUNDS
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Direxion Daily 7-10 Year Treasury Bear 1X Shares
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0.35
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%
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Direxion Daily 20+ Year Treasury Bear 1X Shares
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0.35
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%
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Direxion Daily Corporate Bond Bear 1X Shares
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0.35
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%
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Direxion Daily S&P 500
®
Bear 1X
Shares
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0.35
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%
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Direxion Daily Municipal Bond Taxable Bear 1X Shares
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0.35
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%
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Direxion Daily Small Cap Bear 1X Shares
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0.35
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%
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Direxion Daily Total Bond Market Bear 1X Shares
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0.35
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%
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Direxion Daily CSI 300 China A Share Bear 1X Shares
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0.60
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%
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Direxion Daily S&P Biotech Bear 1X Shares
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0.35
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%
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Direxion Daily Healthcare Bear 1X Shares
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0.35
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%
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Direxion Daily CSI 500 China A Share Bear 1X Shares
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0.60
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%
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Direxion Daily SME-ChiNext 100 China A Shares Bear 1X Shares
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0.60
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%
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Direxion Daily CSI China Internet Bear 1X Shares
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0.60
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%
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Direxion Daily MSCI China A Bear 1X Shares
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0.60
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%
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Direxion Daily Greece Bear 1X Shares
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0.60
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%
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Direxion Daily Cyber Security & IT Bear 1X Shares
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0.35
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%
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Direxion Daily Pharmaceutical & Medical Bear 1X Shares
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0.35
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%
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Direxion Daily Frontier 100 Bear 1X Shares
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0.35
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%
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Direxion Daily Emerging Markets Bond Bear 1X Shares
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0.35
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%
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Direxion Daily Consumer Staples Bear 1X Shares
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0.35
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%
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Direxion Daily Consumer Discretionary Bear 1X Shares
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0.35
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%
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Direxion Daily Energy Bear 1X Shares
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0.35
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%
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Direxion Daily Financial Bear 1X Shares
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0.35
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%
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Direxion Daily Industrials Bear 1X Shares
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0.35
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%
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Direxion Daily Materials Bear 1X Shares
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0.35
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%
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Direxion Daily Technology Bear 1X Shares
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0.35
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%
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Direxion Daily Utilities Bear 1X Shares
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0.35
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%
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Direxion Daily European Financials Bear 1X Shares
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0.35
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%
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Direxion Daily Gold Miners Index Bear 1X Shares
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0.35
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%
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Direxion Daily Dow 30 Bear 1X Shares
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0.35
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%
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Direxion Daily High Yield Bear 1X Shares
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0.35
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%
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LEVERAGED FUNDS
1.25X Funds
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Direxion Daily S&P 500
®
Bull 1.25X
Shares
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0.45
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%
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Direxion Daily Small Cap Bull 1.25X Shares
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0.45
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%
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Direxion Daily FTSE Developed Markets Bull 1.25X Shares
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0.45
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%
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Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
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0.45
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%
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2X Funds
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Direxion Daily S&P 500
®
Bull 2X
Shares
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0.50
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%
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Direxion Daily CSI 300 China A Share Bull 2X Shares
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0.75
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%
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Direxion Daily Small Cap Bull 2X Shares
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0.50
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%
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Direxion Daily S&P 500 Low Volatility Bull 2X Shares
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0.75
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%
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Direxion Daily S&P 500 Low Volatility Bear 2X Shares
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0.75
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%
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Direxion Daily MLP Bull 2X Shares
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0.75
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%
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Direxion Daily MLP Bear 2X Shares
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0.75
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%
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Direxion Daily Emerging Market Bond Bull 2X Shares
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0.75
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%
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Direxion Daily Emerging Market Bond Bear 2X Shares
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0.75
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%
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Direxion Daily Cyber Security & IT Bull 2X Shares
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0.75
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%
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Direxion Daily Cyber Security & IT Bear 2X Shares
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0.75
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%
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Direxion Daily Pharmaceutical & Medical Bull 2X Shares
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0.75
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%
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Direxion Daily Pharmaceutical & Medical Bear 2X Shares
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0.75
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%
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Direxion Daily CSI 500 China A Share Bull 2X Shares
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0.75
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%
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Direxion Daily SME-ChiNext 100 China A Shares Bull 2X Shares
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0.75
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%
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Direxion Daily CSI China Internet Bull 2X Shares
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0.75
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%
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Direxion Daily MSCI China A Bull 2X Shares
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0.75
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%
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Direxion Daily Greece Bull 2X Shares
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0.75
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%
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Direxion Daily Clean Energy Bull 2X Shares
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0.60
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%
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Direxion Daily Clean Energy Bear 2X Shares
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0.60
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%
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Direxion Daily Biotech Bull 2X Shares
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0.60
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%
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Direxion Daily Biotech Bear 2X Shares
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0.60
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%
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Direxion Daily European Financials Bull 2X Shares
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0.60
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%
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Direxion Daily European Financial Bear 2X Shares
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0.60
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%
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Direxion Daily High Yield Bull 2X Shares
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0.60
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%
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Direxion Daily High Yield Bear 2X Shares
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0.60
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%
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Direxion Daily Silver Miners Index Bull 2X Shares
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0.75
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%
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Direxion Daily Silver Miners Index Bear 2X Shares
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0.75
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%
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3X Funds
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Direxion Daily 7-10 Year Treasury Bull 3X Shares
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0.75
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%
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Direxion Daily 7-10 Year Treasury Bear 3X Shares
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0.75
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%
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Direxion Daily 20+ Year Treasury Bull 3X Shares
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0.75
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%
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Direxion Daily 20+ Year Treasury Bear 3X Shares
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0.75
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%
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Direxion Daily Brazil Bull 3X Shares
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0.75
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%
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Direxion Daily FTSE China Bull 3X Shares
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0.75
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%
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Direxion Daily FTSE China Bear 3X Shares
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0.75
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%
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Direxion Daily Clean Energy Bull 3X Shares
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0.75
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%
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Direxion Daily Clean Energy Bear 3X Shares
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0.75
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%
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Direxion Daily Corporate Bond Bull 3X Shares
|
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0.75
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%
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Direxion Daily Corporate Bond Bear 3X Shares
|
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0.75
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%
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Direxion Daily Developed Markets Bull 3X Shares
|
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0.75
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%
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Direxion Daily Developed Markets Bear 3X Shares
|
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0.75
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%
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Direxion Daily Emerging Markets Bull 3X Shares
|
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0.75
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%
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Direxion Daily Emerging Markets Bear 3X Shares
|
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0.75
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%
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Direxion Daily Energy Bull 3X Shares
|
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0.75
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%
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Direxion Daily Energy Bear 3X Shares
|
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0.75
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%
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Direxion Daily Financial Bull 3X Shares
|
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0.75
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%
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Direxion Daily Financial Bear 3X Shares
|
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0.75
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%
|
Direxion Daily Gold Miners Index Bull 3X Shares
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0.75
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%
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Direxion Daily Gold Miners Index Bear 3X Shares
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0.75
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%
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Direxion Daily Healthcare Bull 3X Shares
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0.75
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%
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Direxion Daily Healthcare Bear 3X Shares
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0.75
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Direxion Daily India Bull 3X Shares
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0.75
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Direxion Daily Latin America Bull 3X Shares
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0.75
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Direxion Daily Mid Cap Bull 3X Shares
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0.75
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%
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Direxion Daily Mid Cap Bear 3X Shares
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0.75
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Direxion Daily Municipal Bond Taxable Bull 3X Shares
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0.75
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Direxion Daily Natural Gas Related Bull 3X Shares
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0.75
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%
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Direxion Daily Natural Gas Related Bear 3X Shares
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0.75
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Direxion Daily Real Estate Bull 3X Shares
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0.75
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Direxion Daily Real Estate Bear 3X Shares
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0.75
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Direxion Daily Regional Banks Bull 3X Shares
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0.75
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Direxion Daily Regional Banks Bear 3X Shares
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0.75
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Direxion Daily Retail Bull 3X Shares
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0.75
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Direxion Daily Russia Bull 3X Shares
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0.75
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Direxion Daily Russia Bear 3X Shares
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0.75
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Direxion Daily S&P 500
®
Bull 3X
Shares
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0.75
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Direxion Daily S&P 500
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Bear 3X
Shares
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0.75
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Direxion Daily Semiconductor Bull 3X Shares
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0.75
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Direxion Daily Semiconductor Bear 3X Shares
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0.75
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%
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Direxion Daily Small Cap Bull 3X Shares
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0.75
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Direxion Daily Small Cap Bear 3X Shares
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0.75
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Direxion Daily South Korea Bull 3X Shares
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0.75
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Direxion Daily Technology Bull 3X Shares
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0.75
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Direxion Daily Technology Bear 3X Shares
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0.75
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Direxion Daily Junior Gold Miners Index Bull 3X Shares
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0.75
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Direxion Daily Junior Gold Miners Index Bear 3X Shares
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0.75
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Direxion Daily FTSE Europe Bull 3X Shares
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0.75
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Direxion Daily Japan Bull 3X Shares
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0.75
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Direxion Daily Homebuilders & Supplies Bull 3X Shares
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0.75
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Direxion Daily Homebuilders & Supplies Bear 3X Shares
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0.75
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Direxion Daily S&P Biotech Bull 3X Shares
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0.75
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Direxion Daily S&P Biotech Bear 3X Shares
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0.75
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Direxion Daily Oil & Gas Exp. & Prod. Bull 3X Shares
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Direxion Daily Oil & Gas Exp. & Prod. Bear 3X Shares
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Direxion Daily FTSE Cürex USD Bull 3X Shares
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0.75
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Direxion Daily FTSE Cürex USD Bear 3X Shares
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0.75
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Direxion Daily FTSE Cürex EUR Bull 3X Shares
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0.75
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Direxion Daily FTSE Cürex EUR Bear 3X Shares
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0.75
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Direxion Daily FTSE Cürex YEN Bull 3X Shares
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0.75
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Direxion Daily FTSE Cürex YEN Bear 3X Shares
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0.75
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Direxion Daily S&P 500 Low Volatility Bull 3X Shares
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0.75
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Direxion Daily S&P 500 Low Volatility Bear 3X Shares
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0.75
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Direxion Daily MLP Bull 3X Shares
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0.75
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Direxion Daily MLP Bear 3X Shares
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0.75
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Direxion Daily Emerging Market Bond Bull 3X Shares
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0.75
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Direxion Daily Emerging Market Bond Bear 3X Shares
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0.75
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Last Updated: August 23, 2016
DISTRIBUTION AGREEMENT
This Distribution Agreement (the Agreement) is made this 31
st
day of March
2009, by and between Direxion Shares ETF Trust, a Delaware statutory trust (the Trust) having its principal place of business at 33 Whitehall Street, 10
th
Floor, New York, New York
10004, and Foreside Fund Services, LLC, a Delaware limited liability company (the Distributor) having its principal place of business at Three Canal Plaza, Portland, ME 04101.
WHEREAS
, the Trust is, or will be, a registered open-end management investment company organized as a series trust offering a number of
portfolios of securities (each a Fund and collectively the Funds), having filed with the Securities and Exchange Commission (the Commission) a registration statement on Form N-1A under the Securities Act of 1933,
as amended (the 1933 Act), and the Investment Company Act of 1940, as amended (the 1940 Act);
WHEREAS
, the
Trust intends to create and redeem shares of beneficial interest, no par value per Share (the Shares) of each Fund on a continuous basis at their net asset value only in aggregations constituting a Creation Unit, as such term is defined
in the Registration Statement;
WHEREAS
, the Shares of each Fund will be listed on one or more national securities exchanges
(together, the Listing Exchanges);
WHEREAS
, the Trust desires to retain the Distributor to act as the distributor with
respect to the issuance and distribution of Creation Units of Shares of each Fund, hold itself available to receive and process orders for such Creation Units in the manner set forth in the Trusts Prospectus, and to enter into arrangements
with broker-dealers who may solicit purchases of Shares and with broker-dealers and others to provide for servicing of shareholder accounts and for distribution assistance, including broker-dealer and shareholder support;
WHEREAS
, the Distributor is a registered broker-dealer under the Securities Exchange Act of 1934, as amended (the 1934 Act)
and a member of the Financial Industry Regulatory Authority (FINRA) (the successor organization to the National Association of Securities Dealers, Inc.); and
WHEREAS
, the Distributor desires to provide the services described herein to the Trust.
NOW, THEREFORE
, in consideration of the mutual promises and undertakings herein contained,
the parties agree as follows:
The Trust hereby appoints the Distributor as the exclusive distributor
for Creation Unit aggregations of Shares of each Fund listed in Exhibit A hereto, as may be amended by the Trust from time to time on written notice to the Distributor, on the terms and for the period set forth in this Agreement and subject to the
registration requirements of the federal securities laws and of the laws governing the sale of securities in the various states, and the Distributor hereby accepts such appointment and agrees to act in such capacity hereunder.
Wherever they are used herein, the following terms have the following
respective meanings:
(a) Prospectus means the Prospectus and Statement of Additional Information
constituting parts of the Registration Statement of the Trust under the 1933 Act and the 1940 Act as such Prospectus and Statement of Additional Information may be amended or supplemented and filed with the Commission from time to time;
(b) Registration Statement means the registration statement most recently filed from time to time by the
Trust with the Commission and effective under the 1933 Act and the 1940 Act, as such registration statement is amended by any amendments thereto at the time in effect;
(c) All capitalized terms used but not defined in this Agreement shall have the meanings ascribed to such terms in the
Registration Statement and the Prospectus.
3.
|
Duties of the Distributor
|
(a) The Distributor agrees to act as
agent of the Trust in connection with the receipt and processing of all orders for purchases and redemptions of Creation Units of each Fund from DTC Participants or participants in the Continuous Net Settlement System of the National Securities
Clearing Corporation (the NSCC Participants) that have executed a Participant Agreement (the Authorized Participants), as defined in paragraph 3(b) hereof, with the Distributor and Transfer Agent and to transmit such orders
to the Trust in accordance with the Registration Statement and Prospectus; provided, however, that nothing herein shall affect or limit the right and ability of the Trust to accept Deposit Securities and related Cash Components through or outside
the Clearing Process, and as provided in and in accordance with the Registration Statement and Prospectus. The Trust acknowledges that the Distributor shall not be obligated to accept any certain number of orders for Creation Units; provided,
however, that the Distributor shall accept all orders submitted in proper form unless the Adviser has notified the Distributor that it is in the best interests of a Fund to suspend sales or redemptions of Creation Units. Nothing herein shall prevent
the Distributor from entering into like distribution arrangements with other investment companies.
2
(b) The Distributor agrees to act as agent of the Trust with respect to
the continuous distribution of Creation Units of each Fund as set forth in the Registration Statement and in accordance with the provisions thereof. The Distributor further agrees as follows: (i) the Distributor shall enter into selected or
soliciting dealer participant agreements (Participant Agreements) with DTC or NSCC Participants between and among Authorized Participants, the Distributor and the Transfer Agent, such Participant Agreements to be in the forms as approved
by the Board of Trustees of the Trust for the purchase of Creation Units of the Funds, in accordance with the Registration Statement and Prospectus; (ii) the Distributor shall generate, transmit and maintain copies of confirmations of Creation
Unit purchase and redemption order acceptances to the purchaser or redeemer (such confirmations will indicate the time such orders were accepted and will be made available to the Trust promptly upon request); (iii) the Distributor shall deliver
copies of the Prospectus, included in the Registration Statement, to purchasers of such Creation Units and upon request the Statement of Additional Information; and (iv) the Distributor shall maintain telephonic, facsimile and/or access to
direct computer communications links with the Transfer Agent.
(c) The Distributor agrees to use all reasonable
efforts, consistent with its other business, to secure purchasers of Creation Units through Authorized Participants in accordance with the procedures set forth in the Prospectus and the Participant Agreement and to perform the services contemplated
herein on a continuous basis.
(d) All activities by the Distributor and its agents and employees, which are
primarily intended to result in the sale of Creation Units, shall comply with the Registration Statement and Prospectus, any and all exemptive orders issued to the Trust in connection with the offering of Fund Shares and Creation Units under this
Agreement of which the Distributor has received advanced notice, the instructions of the Adviser and the Board of Trustees of the Trust, the Trust Instrument, and all applicable laws, rules and regulations including, without limitation, all rules
and regulations made or adopted pursuant to the 1940 Act by the Commission or any securities association registered under the 1934 Act, including the FINRA and the Listing Exchanges.
(e) Except as otherwise noted in the Registration Statement and Prospectus, the offering price for all Creation Units
of Shares will be the aggregate net asset value of the Shares per Creation Unit of the relevant Fund, as determined in the manner described in the Registration Statement and Prospectus.
(f) If and whenever the determination of net asset value is suspended and until such suspension is terminated, no
further orders for Creation Units will be processed by the Distributor except such unconditional orders as may have been placed with the Distributor before it had knowledge of the suspension. In addition, the Trust reserves the right to suspend
sales and Distributors 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.
3
(g) The Distributor is not authorized by the Trust to give any information
or to make any representations other than those contained in the Registration Statement or Prospectus or contained in shareholder reports or other material that may be prepared by or on behalf of the Trust for the Distributors 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 Trusts shareholders to which the Distributor would otherwise be subject by reason of willful misfeasance, bad
faith or gross negligence in the performance of its duties or by reason of its reckless disregard in the performance of its obligations and duties under this Agreement.
(h) The Distributor shall ensure that all direct requests for Prospectuses, Statements of Additional Information,
Product Descriptions and periodic fund reports, as applicable, are fulfilled. In addition, the Distributor shall arrange to provide the Listing Exchange with copies of Prospectuses and Statements of Additional Information and Product Descriptions to
be provided to purchasers in the secondary market. The Distributor will generally make it known in the brokerage community that Prospectuses and Statements of Additional Information and Product Descriptions are available, including by (i) advising
the Listing Exchanges on behalf of its member firms of the same, (ii) making such disclosure in all marketing and advertising materials prepared and/or filed by the Distributor with the FINRA, and (iii) as may otherwise be required by the
Commission. The Distributor shall consult with the Adviser and the Trust with respect to the production and printing of Prospectuses to be used in connection with creations by Authorized Participants of Creation Units. The Distributor shall not bear
any costs associated with printing Prospectuses, Statements of Additional Information and all other such materials.
(i) The Distributor agrees to make available, at the Trusts request, one or more members of its staff to attend
Board meetings of the Trust in order to provide information with regard to the ongoing distribution process and for such other purposes as may be requested by the Board of Trustees of the Trust.
(j) The Distributor shall review and approve all sales and marketing materials for compliance with applicable laws and
conditions of any applicable exemptive order, and file such materials with the FINRA when necessary or appropriate. All such sales and marketing materials must be approved, in writing, by the Distributor prior to use, such approval not to be
unreasonably withheld.
(k) The Distributor shall not offer any Shares and shall not accept any orders for the
purchase or sale of Shares hereunder if and so long as the effectiveness of the Registration Statement then in effect or any necessary amendments thereto shall be suspended under any of the provisions of the 1933 Act or if and so long as a current
prospectus as required by Section 10 of the 1933 Act is not on file with the Commission; provided, however, that nothing contained in this paragraph shall in any way restrict or have any application to or bearing upon the Trusts obligation to
redeem or repurchase any Shares from any shareholder in accordance with provisions of the Prospectus or Registration Statement.
(l) If the Trust adopts any distribution and/or shareholder servicing
plan(s) pursuant to Rule 12b-1 under the 1940 Act (the Plan), the Distributor shall enter into selling and/or investor servicing agreements (Sales and Investor Services Agreements) with various broker-dealers and any other
financial institution exempt under federal or state securities laws from registration as a broker or dealer authorized by the Investment Adviser, consistent with applicable law and the Registration Statement and Prospectus, to sell Shares and
provide services to shareholders. The Distributor further agrees as follows: (i) the Distributor shall administer on behalf of the Trust any Plan(s) adopted by the Trust under rule 12b-1; (ii) the Distributor shall, at its own expense, set up and
maintain a system of recording payments of fees and reimbursement of expenses disseminated pursuant to this Agreement and other agreements related to any such Plan(s) and, pursuant to the 1940 Act, report such payment activity to the Trust at least
quarterly; (iii) the Distributor shall receive from the Trust all distribution and shareholder servicing fees, as applicable, at the rate and to the extent payable under the terms and conditions set forth in any Plan(s) adopted by the Trust,
applicable to the appropriate class of shares of each Portfolio, as such Plan(s) may be amended from time to time, and subject to any further limitations on such fees as the Board of Trustees of the Trust may impose; and (iv) the Distributor shall
pay, from the fees received from the Trust pursuant to any such Plan(s), all fees and make reimbursement of all expenses, pursuant to and in accordance with such Plan(s) and any and all Sales and Investor Services Agreements. In no event shall
Distributor (i) pay any fees pursuant to any such Plan(s) until it has received payment of such fees from the Trust or the Adviser or (ii) be entitled to retain for its own account any amount accrued pursuant to any such Plan(s).
(n) The Distributor has as of the date hereof, and shall at all times have and maintain, net capital of not less than
that required by Rule 15c3-1 under the 1934 Act, or any successor provision thereto. In the event that the net capital of the Distributor shall fall below that required by Rule 15c3-1, or any successor provision thereto, the Distributor shall
promptly provide notice to the Trust and the Investment Adviser of such event.
(o) The Distributor agrees to
maintain, and preserve for the periods prescribed by Rule 31a-2 under the 1940 Act, such records as are required to be maintained by Rule 31a-1(d) under the 1940 Act.
(p) The Distributor agrees to maintain compliance policies and procedures (a Compliance Program) that is
reasonably designed to prevent violations of the Federal Securities Laws (as defined in Rule 38a-1 of the 1940 Act) with respect to the Distributors services under this Agreement, and to provide any and all information with respect to the
Compliance Program, including without limitation, information and certifications with respect to material violations of the Compliance Program and any material deficiencies or changes therein, as may be reasonably requested by the Trusts Chief
Compliance Officer or Board of Trustees.
5
(a) The Trust agrees to issue Creation
Units of each Fund and to request DTC to record on its books the ownership of the Shares constituting such Creation Units in accordance with the book-entry system procedures described in the Prospectus in such amounts as the Distributor has
requested through the Transfer Agent in writing or other means of data transmission, as promptly as practicable after receipt by the Trust of the requisite Deposit Securities and Cash Component (together with any fees) and acceptance of such order,
upon the terms described in the Registration Statement. The Trust may reject any order for Creation Units or stop all receipts of such orders at any time upon reasonable notice to the Distributor, in accordance with the provisions of the Prospectus
and Statement of Additional Information.
(b) The Trust agrees that it will take all action necessary to register
an indefinite number of Shares under the 1933 Act. The Trust will make available to the Distributor such number of copies of its then currently effective Prospectus and Statement of Additional Information and Product Description as the Distributor
may reasonably request. The Trust will furnish to the Distributor copies of semi-annual reports and annual audited reports of the Trusts books and accounts made by independent public accountants regularly retained by the Trust and such other
publicly available information that the Distributor may reasonably request for use in connection with the distribution of Creation Units. The Trust shall keep the Distributor informed of the jurisdictions in which the Trust has filed notice filings
for Shares for sale under the securities laws thereof and shall promptly notify the Distributor of any change in this information. The Distributor shall not be liable for damages resulting from the sale of Shares in authorized jurisdictions where
the Distributor had no information from the Trust that such sale or sales were unauthorized at the time of such sale or sales.
(a) The Distributor shall be entitled to no
compensation or reimbursement of expenses from the Trust for the services provided by the Distributor pursuant to this Agreement. The Distributor may receive compensation from the Adviser related to its services hereunder or for additional services
as may be agreed to between the Adviser and Distributor.
(b) The Trust shall bear the cost and expenses of: (i) the
registration of the Shares for sale under the Securities Act; and (ii) the registration or qualification of the Shares for sale under the securities laws of the various States;
(c) The Distributor shall pay (i) all expenses relating to Distributors broker-dealer qualification and
registration under the 1934 Act; (ii) the expenses incurred by the Distributor in connection with routine FINRA filing fees; and (iii) all other standard overhead expenses incurred by Distributor in connection with its business that are not normally
charged to clients, such as office space, equipment, and salaries.
6
(d) Notwithstanding anything in this Agreement to the contrary, the
Distributor and its affiliates may receive compensation or reimbursement from the Trust and the Adviser with respect to any services not included under this Agreement, as may be agreed upon by the parties from time to time.
(a) The Trust agrees to indemnify and hold
harmless the Distributor, its affiliates and each of their directors, officers and employees and agents and any person who controls the Distributor within the meaning of Section 15 of the 1933 Act (any of the Distributor, its officers, employees,
agents and directors or such control persons, for purposes of this paragraph, a Distributor Indemnitee) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss,
liability, claim, damages or expense and reasonable counsel fees incurred in connection therewith) arising out of or based upon (i) any claim that the Registration Statement, Prospectus, Statement of Additional Information, Product Description,
shareholder reports, sales literature and advertisements specifically approved by the Trust and Investment Adviser or other information filed or made public by the Trust (as from time to time amended) included an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary in order to make the statements therein (and in the case of the Prospectus, Statement of Additional Information and Product Description, in light of the circumstances
under which they were made) not misleading under the 1933 Act, or any other statute or the common law, (ii) the breach by the Trust of any obligation, representation or warranty contained in this Agreement or (iii) the Trusts failure
to comply in any material respect with applicable securities laws.
The Trust does not agree to indemnify the Distributor or hold it
harmless to the extent that the statement or omission was made in reliance upon, and in conformity with, information furnished to the Trust by or on behalf of the Distributor. The Trust will also not indemnify any Distributor Indemnitee with respect
to any untrue statement or omission made in the Registration Statement, Prospectus, Statement of Additional Information or Product Description that is subsequently corrected in such document (or an amendment thereof or supplement thereto) if a copy
of the Prospectus (or such amendment or supplement) was not sent or given to the person asserting any such loss, liability, claim, damage or expense at or before the written confirmation to such person in any case where such delivery is required by
the 1933 Act and the Trust had notified the Distributor of the amendment or supplement prior to the sending of the confirmation. In no case (i) is the indemnity of the Trust in favor of any Distributor Indemnitee to be deemed to protect the
Distributor Indemnitee against any liability to the Trust or its shareholders to which the Distributor Indemnitee would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its duties or by
reason of its reckless disregard of its obligations under this Agreement, or (ii) is the Trust to be liable under its indemnity agreement contained in this Section with respect to any
7
claim made against any Distributor Indemnitee unless the Distributor Indemnitee shall have notified the Trust in writing of the claim within a reasonable time after the summons or other first
written notification giving information of the nature of the claim shall have been served upon Distributor Indemnitee (or after Distributor Indemnitee shall have received notice of service on any designated agent).
Failure to notify the Trust of any claim shall not relieve the Trust from any liability that it may have to any Distributor Indemnitee against
whom such action is brought unless failure or delay to so notify the Trust prejudices the Trusts ability to defend against such claim. The Trust shall be entitled to participate at its own expense in the defense, or, if it so elects, to assume
the defense of any suit brought to enforce any claims, but if the Trust elects to assume the defense, the defense shall be conducted by counsel chosen by it and satisfactory to Distributor Indemnitee, defendant or defendants in the suit. In the
event the Trust elects to assume the defense of any suit and retain counsel, Distributor Indemnitee, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Trust does not elect to
assume the defense of any suit, it will reimburse the Distributor Indemnitee, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Trust agrees to notify the Distributor promptly of the
commencement of any litigation or proceedings against it or any of its officers or Trustees in connection with the issuance or sale of any of the Creation Units or the Shares.
(b) The Distributor agrees to indemnify and hold harmless the Trust and each of its Trustees and officers and any
person who controls the Trust within the meaning of Section 15 of the 1933 Act (for purposes of this paragraph, the Trust and each of its Trustees and officers and its controlling persons are collectively referred to as the Trust
Affiliates) against any loss, liability, claim, damages or expense (including the reasonable cost of investigating or defending any alleged loss, liability, claim, damages or expense and reasonable counsel fees incurred in connection
therewith) arising out of or based upon (i) the allegation of any wrongful act of the Distributor or any of its directors, officers, employees, (ii) the breach of any obligation, representation or warranty pursuant to this Agreement by the
Distributor, (iii) the Distributors failure to comply in any material respect with applicable securities laws, including applicable FINRA regulations, or (iv) any allegation that the Registration Statement, Prospectus, Statement of Additional
Information, Product Description, shareholder reports, any information or materials relating to the Funds (as described in section 3(g)) or other information filed or made public by the Trust (as from time to time amended) included an untrue
statement of a material fact or omitted to state a material fact required to be stated therein or necessary in order to make the statements not misleading, insofar as such statement or omission was made in reliance upon, and in conformity with
information furnished to the Trust by or on behalf of the Distributor, it being understood that the Trust will rely upon certain information provided by the Distributor for use in the preparation of the Registration Statement, Prospectus, Statement
of Additional Information, Product Description, shareholder reports or other information relating to the Funds or made public by the Trust.
8
In no case (i) is the indemnity of the Distributor in favor of any Trust Affiliate to be
deemed to protect any Trust Affiliate against any liability to the Trust or its security holders to which such Trust Affiliate would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of its
duties or by reason of its reckless disregard of its obligations and duties under this Agreement, or (ii) is the Distributor to be liable under its indemnity agreement contained in this Section with respect to any claim made against any Trust
Affiliate unless the Trust Affiliate shall have notified the Distributor in writing of the claim within a reasonable time after the summons or other first written notification giving information of the nature of the claim shall have been served upon
the Trust Affiliate (or after the Trust Affiliate shall have received notice of service on any designated agent).
Failure to notify the
Distributor of any claim shall not relieve the Distributor from any liability that it may have to the Trust Affiliate against whom such action is brought unless failure or delay to so notify the Distributor prejudices the Distributors ability
to defend against such claim. The Distributor shall be entitled to participate at its own expense in the defense or, if it so elects, to assume the defense of any suit brought to enforce the claim, but if the Distributor elects to assume the
defense, the defense shall be conducted by counsel chosen by it and satisfactory to the Trust, its officers and Board and to any controlling person or persons, defendant or defendants in the suit. In the event that Distributor elects to assume the
defense of any suit and retain counsel, the Trust or controlling person or persons, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel retained by them. If the Distributor does not elect to assume the
defense of any suit, it will reimburse the Trust, its officers and Trustees or controlling person or persons, defendant or defendants in the suit, for the reasonable fees and expenses of any counsel retained by them. The Distributor agrees to notify
the Trust promptly of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of any of the Creation Units or the Shares.
(c) No indemnified party shall settle any claim against it for which it intends to seek indemnification from the
indemnifying party, under the terms of section 6(a) or 6(b) above, without the prior written notice to and consent from the indemnifying party, which consent shall not be unreasonably withheld. No indemnified or indemnifying party shall settle
any claim unless the settlement contains a full release of liability with respect to the other party in respect of such action. This section 6 shall survive the termination of this Agreement.
(a) The Distributor represents and warrants
that (i) it is duly organized as a Delaware limited liability company and is and at all times will remain duly authorized and licensed under applicable law to carry out its services as contemplated herein; (ii) the execution, delivery and
performance of this Agreement are within its power and have been duly authorized by all necessary action; (iii) its entering into this Agreement or providing the services contemplated hereby does not conflict with or constitute a default
9
or require a consent under or breach of any provision of any agreement or document to which the Distributor is a party or by which it is bound, including but not limited to any agreement with any
Listing Exchange; (iv) it is registered as a broker-dealer under the 1934 Act and is a member of the FINRA; and (v) it has in place compliance policies and procedures reasonably designed to prevent violations of the Federal Securities Laws
as that term is defined in Rule 38a-1 under the 1940 Act.
(b) To the extent applicable, the Distributor will comply
with any requirements set forth in (i) the 1934 Act Rule 19b-4 relief provided to the Listing Exchanges in connection with the offering of Fund Shares and Creation Units under this Agreement and with respect to which the Distributor receives
adequate advance notice; (ii) any and all exemptive orders issued to the Trust in connection with the offering of Fund Shares and Creation Units under this Agreement under the 1940 Act or 1934 Act with respect to which the Distributor receives
adequate advance notice; and (iii) the Registration Statement and Prospectus.
(c) The Distributor and the
Trust represent and warrant that: (i) it understands that pursuant to various U.S. regulations, it is required to establish an anti-money laundering program, which satisfies the requirements of Title III of the Uniting and Strengthening America
by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the USA Patriot Act); (ii) it has developed, implemented, and will maintain such an anti-money laundering program and will comply with all
applicable laws and regulations designed to guard against money laundering activities set out in such program; and (iii) it will allow for appropriate regulators to examine its anti-money laundering books and records.
(d) The Distributor and the Trust represent and warrant that: (i) it has procedures in place reasonably designed
to protect the privacy of non-public personal consumer/customer financial information to the extent required by applicable law, rule and regulation; (ii) it will comply with all of the applicable terms and provisions of the 1934 Act; and
(iii) it will provide certifications to the Trust in order to assist the Trust in complying with certain rules under the 1940 Act (by way of example only, Rules 30a-2, 30a-3 and 38a-1) and in connection with the filing of certain Forms (by way
of example only, Form N-CSR).
(e) The Trust represents and warrants that (i) it is duly organized as a
Delaware statutory trust and is and at all times will remain duly authorized to carry out its obligations as contemplated herein; (ii) it is, or will be within a reasonable date, registered as an investment company under the 1940 Act;
(iii) the execution, delivery and performance of this Agreement are within its power and have been duly authorized by all necessary action; (iv) its entering into this Agreement does not conflict with or constitute a default or require a
consent under or breach of any provision of any agreement or document to which the Trust is a party or by which it is bound; (v) the Registration Statement and each Funds Prospectus have been prepared, and all sales literature and
advertisements specifically approved by the Trust and the Investment Adviser in writing or other materials prepared by or on behalf of the Trust for the Distributors use (Sales
10
Literature and Advertisements) shall be prepared, in all materials respects, in conformity with applicable requirements under the 1933 Act, the 1940 Act and the rules and regulations of the
Commission (the Rules and Regulations); and (vi) the Registration Statement and each Funds Prospectus contain, and all Sales Literature and Advertisements shall contain, all material statements required to be stated therein in
accordance with the 1933 Act, the 1940 Act and the Rules and Regulations; and (vii) all statements of fact contained therein, or to be contained in all Sales Literature and Advertisements, are or will be true and correct in all material
respects at the time indicated or on the effective date, as the case may be, and (viii) the Registration Statement, and Sales Literature and Advertisements, when it shall become effective or be authorized for use, will not include an untrue
statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading to a purchaser of Shares; and (viii) it shall not file any amendment to the Registration
Statement or Prospectus without giving the Distributor reasonable notice thereof in advance, provided however, that nothing contained in this Agreement shall in any way limit the Trusts right to file at any time such amendments to any
Registration Statement and/or supplements to any Prospectus, of whatever character, as the Trust may deem advisable, such right being in all respects absolute and unconditional. The Trust and the Adviser shall not be responsible in any way for any
information, statements or representations given or made by the Distributor or its representatives or agents other than such information, statements or representations as are contained in such Prospectus or Registration Statement or financial
reports filed on behalf of the Trust or in any Sales Literature and Advertisements.
8.
|
Duration, Termination and Amendment.
|
(a) This Agreement shall
be effective on March 31, 2009, and unless terminated as provided herein, shall continue until August 1, 2010, and thereafter from year to year, provided such continuance is approved annually (i) by vote of a majority of the Trustees or by
the vote of a majority of the outstanding voting securities of the Fund and (ii) by the vote of a majority of those Trustees who are not parties to this Agreement or interested persons of any such party cast in person at a meeting called for
the purpose of voting on such approval. This Agreement may be terminated at any time, without the payment of any penalty, as to each Fund (i) by vote of a majority of those Trustees who are not parties to this Agreement or interested persons of
any such party or (ii) by vote of a majority of the outstanding voting securities of the Fund, on at least sixty (60) days prior written notice to the Distributor. This Agreement shall automatically terminate without the payment of any penalty
in the event of its assignment. As used in this paragraph, the terms vote of a majority of the outstanding voting securities, assignment, affiliated person and interested person shall have the
respective meanings specified in the 1940 Act.
(b) The Distributor agrees to notify the Adviser immediately in the
event of its expulsion or suspension by FINRA. Expulsion of the Distributor by FINRA will automatically terminate this Agreement immediately without notice. Suspension of the Distributor by FINRA will terminate this Agreement effective immediately
upon written notice of termination to the Distributor from the Adviser.
11
(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.
Any notice or other communication authorized or required by this Agreement to
be given to either party shall be in writing and deemed to have been given when delivered in person or by confirmed facsimile, or posted by certified mail, return receipt requested, to the following address (or such other address as a party may
specify by written notice to the other):
If to the Distributor
:
Foreside Fund Services, LLC
ATTN: Chief Compliance Officer
Three Canal Plaza, Suite 100
Portland, ME 04101
Telephone: (207) 553-7111
Facsimile: (207) 553-7151
If to the Trust
:
Direxion Shares ETF Trust
c/o
Rafferty Asset Management LLC
ATTN: Daniel ONeill
33 Whitehall Street, 10
th
Floor
New York, New York 10004
Telephone: (646) 572-3465
Facsimile: (646) 572-3496
This Agreement shall be governed by, and construed in accordance with,
the laws of the state of Delaware, without giving effect to the choice of laws provisions thereof.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute one and the same instrument.
12
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 Agreements intent and purpose, be amended, to the extent legally possible, in order to effectuate the
intended results of such invalid provisions.
The Distributor will maintain at its expense an errors and omissions
insurance policy adequate to cover services provided by the Distributor hereunder.
During the term of this Agreement, the Distributor and the Trust may
have access to confidential information relating to such matters as either partys business, trade secrets, systems, procedures, manuals, products, contracts, personnel, and clients. As used in this Agreement, Confidential
Information means information belonging to one of the parties that is of value to such party and the disclosure of which could result in a competitive or other disadvantage to such party. Confidential Information includes, without limitation,
financial information, proposal and presentations, reports, forecasts, inventions, improvements and other intellectual property; trade secrets; know-how; designs, processes or formulae; software; market or sales information or plans; customer lists;
and business plans, prospects and opportunities (such as possible acquisitions or dispositions of businesses or facilities). Confidential Information includes information developed by either party in the course of engaging in the activities provided
for in this Agreement, unless: (i) the information is or becomes publicly known through lawful means; (ii) the information is disclosed to the other party without a confidential restriction by a third party who rightfully possesses the
information and did not obtain it, either directly or indirectly, from one of the parties, as the case may be, or any of their respective principals, employees, affiliated persons, or affiliated entities. The parties understand and agree that all
Confidential Information shall be kept confidential by the other both during and after the term of this Agreement. Each party shall maintain commercially reasonable information security policies and procedures for protecting Confidential
Information. The parties further agree that they will not, without the prior written approval by the other party, disclose such Confidential Information, or use such Confidential Information in any way, either during the term of this Agreement or at
any time thereafter, except as required in the course of this Agreement and as provided by the other party or as required by law. Upon termination of this Agreement for any reason, or as otherwise requested by the Trust, all Confidential Information
held by or on behalf of Trust shall be promptly returned to the Trust, or an authorized officer of the Distributor will certify to the Trust in writing that all such Confidential Information has been destroyed. This section 14 shall survive the
termination of this Agreement. Notwithstanding the foregoing, a party may disclose the others Confidential Information if (i) required by law, regulation or legal process or if requested by the Commission or other governmental regulatory
agency with jurisdiction over the parties hereto or (ii) requested to do so by the other party; provided that in the event of (i), the disclosing party shall give the other party reasonable prior notice of such disclosure to the extent
reasonably practicable and shall reasonably cooperate with the other party (at such other partys expense) in any efforts to prevent such disclosure.
13
15.
|
Limitation of Liability.
|
This Agreement is executed by or on behalf of the Trust with
respect to each of the Funds and the obligations hereunder are not binding upon any of the trustees, officers or shareholders of the Trust individually but are binding only upon the Fund to which such obligations pertain and the assets and property
of such Fund. Separate and distinct records are maintained for each Fund and the assets associated with any such Fund are held and accounted for separately from the other assets of the Trust, or any other Fund of the Trust. The debts,
liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to a particular Fund of the Trust shall be enforceable against the assets of that Fund only, and not against the assets of the Trust generally or any
other Fund, and none of the debts, liabilities, obligations, and expenses incurred, contracted for, or otherwise existing with respect to the Trust generally or any other Fund shall be enforceable against the assets of that Fund. The
Trusts Trust Instrument is on file with the Trust.
14
IN WITNESS WHEREOF
, the parties hereto have caused this Agreement to be executed by their
officers designated below as of the date first set forth above.
DIREXION SHARES ETF TRUST
By:
/s/ Daniel D. ONeill
Name: Daniel D.
ONeill
Title: President
FORESIDE FUND SERVICES,
LLC
By:
/s/ Richard J. Berthy
Name: Richard J. Berthy
Title: Vice
President
15
Appendix A
ACTIVELY MANAGED FUNDS
Direxion Auspice Broad Commodity Strategy ETF
NON-LEVERAGED FUNDS
Direxion NASDAQ-100
®
Equal Weighted Index Shares
Direxion All Cap Insider Sentiment Shares
Direxion S&P 500
®
Volatility Response Shares
Direxion Zacks MLP High Income Shares
Direxion iBillionaire Index ETF
1X BEAR FUNDS
Direxion Daily 7-10 Year Treasury Bear 1X Shares
Direxion Daily 20+ Year Treasury Bear 1X Shares
Direxion Daily Corporate Bond Bear 1X Shares
Direxion Daily S&P 500
®
Bear 1X Shares
Direxion Daily Municipal Bond Taxable Bear 1X Shares
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily Total Bond Market Bear 1X Shares
Direxion Daily CSI 300 China A Share Bear 1X Shares
Direxion Daily S&P Biotech Bear 1X Shares
Direxion Daily Healthcare Bear 1X Shares
Direxion Daily CSI 500 China A Share Bear 1X Shares
Direxion Daily SME-ChiNext 100 China A Shares Bear 1X Shares
Direxion Daily CSI China Internet Bear 1X Shares
Direxion Daily MSCI China A Bear 1X Shares
Direxion Daily Cyber Security & IT Bear 1X Shares
Direxion Daily Greece Bear 1X Shares
Direxion Daily Pharmaceutical & Medical Bear 1X Shares
Direxion Daily Frontier 100 Bear 1X Shares
Direxion Daily Emerging Markets Bond Bear 1X Shares
Direxion Daily Consumer Staples Bear 1X Shares
Direxion Daily Consumer Discretionary Bear 1X Shares
Direxion Daily Energy Bear 1X Shares
Direxion Daily Financial Bear 1X Shares
Direxion Daily Industrials Bear 1X Shares
Direxion Daily Materials Bear 1X Shares
Direxion Daily Technology Bear 1X Shares
Direxion Daily Utilities Bear 1X Shares
Direxion Daily European Financials Bear 1X Shares
Direxion Daily Gold Miners Index Bear 1X Shares
Direxion Daily Dow 30 Bear 1X Shares
Direxion Daily High Yield Bear 1X Shares
LEVERAGED FUNDS
1.25X Funds
Direxion
Daily S&P 500
®
Bull 1.25X Shares
Direxion Daily FTSE Developed Markets Bull
1.25X Shares
Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
Direxion Daily Small Cap Bull 1.25X Shares
2X Funds
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily S&P 500 Low Volatility Bull 2X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 2X Shares
|
Direxion Daily MLP Bull 2X Shares
|
|
Direxion Daily MLP Bear 2X Shares
|
Direxion Daily Emerging Market Bond Bull 2X Shares
|
|
Direxion Daily Emerging Market Bond Bear 2X Shares
|
Direxion Daily Cyber Security & IT Bull 2X Shares
|
|
Direxion Daily Cyber Security & IT Bear 2X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 2X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 2X Shares
|
Direxion Daily CSI 500 China A Share Bull 2X Shares
|
|
|
Direxion Daily SME-ChiNext 100 China A Shares Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Bull 2X Shares
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
Direxion Daily Clean Energy Bull 2X Shares
|
|
Direxion Daily Clean Energy Bear 2X Shares
|
Direxion Daily Greece Bull 2X Shares
|
|
|
Direxion Daily Biotech Bull 2X Shares
|
|
Direxion Daily Biotech Bear 2X Shares
|
Direxion Daily European Financials Bull 2X Shares
|
|
Direxion Daily European Financials Bear 2X Shares
|
Direxion Daily High Yield Bull 2X Shares
|
|
Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Silver Miners Index Bull 2X Shares
|
|
Direxion Daily Silver Miners Index Bear 2X Shares
|
3X Funds
|
|
|
Direxion Daily 7-10 Year Treasury Bull 3X Shares
|
|
Direxion Daily 7-10 Year Treasury Bear 3X Shares
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
Direxion Daily Brazil Bull 3X Shares
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
Direxion Daily Clean Energy Bull 3X Shares
|
|
Direxion Daily Clean Energy Bear 3X Shares
|
Direxion Daily Corporate Bond Bull 3X Shares
|
|
Direxion Daily Corporate Bond Bear 3X Shares
|
Direxion Daily Developed Markets Bull 3X Shares
|
|
Direxion Daily Developed Markets Bear 3X Shares
|
Direxion Daily Emerging Markets Bull 3X Shares
|
|
Direxion Daily Emerging Markets Bear 3X Shares
|
Direxion Daily Energy Bull 3X Shares
|
|
Direxion Daily Energy Bear 3X Shares
|
Direxion Daily Financial Bull 3X Shares
|
|
Direxion Daily Financial Bear 3X Shares
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
Direxion Daily Healthcare Bull 3X Shares
|
|
Direxion Daily Healthcare Bear 3X Shares
|
Direxion Daily India Bull 3X Shares
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
Direxion Daily Municipal Bond Taxable Bull 3X Shares
|
|
|
|
|
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
Direxion Daily Real Estate Bull 3X Shares
|
|
Direxion Daily Real Estate Bear 3X Shares
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
Direxion Daily Retail Bull 3X Shares
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
Direxion Daily Russia Bear 3X Shares
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
Direxion Daily Small Cap Bull 3X Shares
|
|
Direxion Daily Small Cap Bear 3X Shares
|
Direxion Daily South Korea Bull 3X Shares
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
Direxion Daily Japan Bull 3X Shares
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
Direxion Daily Homebuilders & Supplies Bear 3X Shares
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
Direxion Daily Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily FTSE Cürex USD Bull 3X Shares
|
|
Direxion Daily FTSE Cürex USD Bear 3X Shares
|
Direxion Daily FTSE Cürex EUR Bull 3X Shares
|
|
Direxion Daily FTSE Cürex EUR Bear 3X Shares
|
Direxion Daily FTSE Cürex YEN Bull 3X Shares
|
|
Direxion Daily FTSE Cürex YEN Bear 3X Shares
|
Direxion Daily S&P 500 Low Volatility Bull 3X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 3X Shares
|
Direxion Daily MLP Bull 3X Shares
|
|
Direxion Daily MLP Bear 3X Shares
|
Direxion Daily Emerging Market Bond Bull 3X Shares
|
|
Direxion Daily Emerging Market Bond Bear 3X Shares
|
Last Updated: August 23, 2016
SCHEDULE A
TO DIREXION SHARES ETF TRUST ADVISORY FEE WAIVER AGREEMENT
As of September 1, 2011 through September 1, 2018 (the applicable Period)
Advisory fee limit applicable to each Fund:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fund
|
|
Rate
|
|
|
Limit
|
|
|
Rate
after
Limit
|
|
Non-Leveraged Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion S&P 500
®
Volatility Response
Shares
|
|
|
0.45
|
%
|
|
|
0.10
|
%
|
|
|
0.35
|
%
|
|
|
|
|
1.25X Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily S&P 500
®
Bull 1.25X
Shares
|
|
|
0.45
|
%
|
|
|
0.15
|
%
|
|
|
0.30
|
%
|
Direxion Daily Small Cap Bull 1.25X Shares
|
|
|
0.45
|
%
|
|
|
0.15
|
%
|
|
|
0.30
|
%
|
Direxion Daily FTSE Developed Markets Bull 1.25X Shares
|
|
|
0.45
|
%
|
|
|
0.15
|
%
|
|
|
0.30
|
%
|
Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
|
|
|
0.45
|
%
|
|
|
0.15
|
%
|
|
|
0.30
|
%
|
|
|
|
|
2X Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily Cyber Security & IT Bull 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Direxion Daily Cyber Security & IT Bear 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Direxion Daily Pharmaceutical & Medical Bull 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Direxion Daily Pharmaceutical & Medical Bear 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Direxion Daily Silver Miners Index Bull 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Direxion Daily Silver Miners Index Bear 2X Shares
|
|
|
0.75
|
%
|
|
|
0.15
|
%
|
|
|
0.60
|
%
|
Tiered Advisory Fee Limit for each of the leveraged Funds listed below:
|
|
|
|
|
|
|
|
|
|
|
Net Assets
|
|
|
|
Net Assets
|
|
|
Rate
|
|
0
|
|
>
|
|
$
|
1,500,000,000
|
|
|
|
0.75
|
%
|
$1,500,000,000
|
|
>
|
|
$
|
2,000,000,000
|
|
|
|
0.70
|
%
|
$2,000,000,000
|
|
>
|
|
$
|
2,500,000,000
|
|
|
|
0.65
|
%
|
$2,500,000,000
|
|
>
|
|
$
|
3,000,000,000
|
|
|
|
0.60
|
%
|
$3,000,000,000
|
|
>
|
|
$
|
3,500,000,000
|
|
|
|
0.55
|
%
|
$3,500,000,000
|
|
>
|
|
$
|
4,000,000,000
|
|
|
|
0.50
|
%
|
$4,000,000,000
|
|
>
|
|
$
|
4,500,000,000
|
|
|
|
0.45
|
%
|
$4,500,000,000 and above
|
|
|
|
|
|
|
|
|
0.40
|
%
|
Funds
Direxion
Daily S&P 500
®
Bull 3X Shares
Direxion Daily S&P 500
®
Bear 3X Shares
Direxion Daily Mid Cap Bull 3X Shares
Direxion Daily Mid Cap Bear 3X Shares
Direxion Daily Small Cap
Bull 3X Shares
Direxion Daily Small Cap Bear 3X Shares
Direxion Daily Developed Markets Bull 3X Shares
Direxion Daily Developed Markets Bear 3X Shares
Direxion Daily Emerging Markets Bull 3X Shares
Direxion Daily
Emerging Markets Bear 3X Shares
Direxion Daily FTSE China Bull 3X Shares
Direxion Daily FTSE China Bear 3X Shares
Direxion Daily India
Bull 3X Shares
Direxion Daily Latin America Bull 3X Shares
Direxion Daily Energy Bull 3X Shares
Direxion Daily Energy Bear
3X Shares
Direxion Daily Financial Bull 3X Shares
Direxion
Daily Financial Bear 3X Shares
Direxion Daily Technology Bull 3X Shares
Direxion Daily Technology Bear 3X Shares
Direxion Daily Real
Estate Bull 3X Shares
Direxion Daily Real Estate Bear 3X Shares
Direxion Daily 7-10 Year Treasury Bull 3X Shares
Direxion Daily
7-10 Year Treasury Bear 3X Shares
Direxion Daily 20+ Year Treasury Bull 3X Shares
Direxion Daily 20+ Year Treasury Bear 3X Shares
Direxion Daily
Corporate Bond Bull 3X Shares
Direxion Daily Corporate Bond Bear 3X Shares
Direxion Daily High Yield Bull 3X Shares
Direxion Daily High
Yield Bear 3X Shares
Direxion Daily Municipal Bond Bull 3X Shares
Direxion Daily Clean Energy Bull 3X Shares
Direxion Daily Clean
Energy Bear 3X Shares
Direxion Daily Healthcare Bull 3X Shares
Direxion Daily Healthcare Bear 3X Shares
Direxion Daily Retail
Bull 3X Shares
Direxion Daily Semiconductor Bull 3X Shares
Direxion Daily Semiconductor Bear 3X Shares
Direxion Daily Gold
Miners Index Bull 3X Shares
Direxion Daily Gold Miners Index Bear 3X Shares
Direxion Daily Natural Gas Related Bull 3X Shares
Direxion Daily
Natural Gas Related Bear 3X Shares
Direxion Daily Russia Bull 3X Shares
Direxion Daily Russia Bear 3X Shares
Direxion Daily Junior Gold
Miners Index Bull 3X Shares
Direxion Daily Junior Gold Miners Index Bear 3X Shares
Direxion Daily Regional Banks Bull 3X Shares
Direxion Daily
Regional Banks Bear 3X Shares
Direxion Daily Brazil Bull 3X Shares
Direxion Daily FTSE Europe Bull 3X Shares
Direxion Daily South
Korea Bull 3X Shares
Direxion Daily Japan Bull 3X Shares
Direxion Daily Homebuilders & Supplies Bull 3X Shares
Direxion Daily Homebuilders & Supplies Bear 3X Shares
Direxion Daily S&P Biotech Bull 3X Shares
Direxion Daily
S&P Biotech Bear 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
Direxion Daily FTSE Cürex USD Bull 3X Shares
Direxion Daily FTSE Cürex USD Bear 3X Shares
Direxion Daily
FTSE Cürex EUR Bull 3X Shares
Direxion Daily FTSE Cürex EUR Bear 3X Shares
Direxion Daily FTSE Cürex YEN Bull 3X Shares
Direxion Daily
FTSE Cürex YEN Bear 3X Shares
Direxion Daily S&P 500 Low Volatility Bull 3X Shares
Direxion Daily S&P 500 Low Volatility Bear 3X Shares
Direxion Daily MLP Bull 3X Shares
Direxion Daily MLP Bear 3X
Shares
Direxion Daily Emerging Market Bond Bull 3X Shares
Direxion Daily Emerging Market Bond Bear 3X Shares
Last
Updated: August 23, 2016
APPENDIX A
Operating Expense Limitation Agreement
Direxion Shares ETF Trust
Rafferty Asset Management, LLC has contractually agreed to cap all or a portion of its management fee and/or reimburse each Fund for Other
Expenses through September 1, 2018, to the extent that a Funds Total Annual Fund Operating Expenses exceeds a Funds daily net assets as listed below.
ACTIVELY MANAGED FUNDS
|
|
|
|
|
Direxion Auspice Broad Commodity Strategy ETF
|
|
|
0.70
|
%
|
NON-LEVERAGED FUNDS
|
|
|
|
|
Direxion NASDAQ-100
®
Equal Weighted Index
Shares
|
|
|
0.35
|
%
|
Direxion S&P 500
®
Volatility Response
Shares
|
|
|
0.45
|
%
|
Direxion All Cap Insider Sentiment Shares
|
|
|
0.65
|
%
|
Direxion Zacks MLP High Income Shares
|
|
|
0.65
|
%
|
Direxion iBillionaire Index ETF
|
|
|
0.65
|
%
|
1X BEAR FUNDS
|
|
|
|
|
Direxion Daily 7-10 Year Treasury Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily 20+ Year Treasury Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Corporate Bond Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily S&P 500 Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Municipal Bond Taxable Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Small Cap Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Total Bond Market Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily CSI 300 China A Share Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily S&P Biotech Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Healthcare Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily CSI 500 China A Share Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily SME-ChiNext 100 China A Shares Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily CSI China Internet Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily MSCI China A Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily Greece Bear 1X Shares
|
|
|
0.80
|
%
|
Direxion Daily Cyber Security & IT Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Pharmaceutical & Medical Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Frontier 100 Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Emerging Markets Bond Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Consumer Staples Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Consumer Discretionary Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Energy Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Financial Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Industrials Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Materials Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Technology Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Utilities Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily European Financials Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Gold Miners Index Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily Dow 30 Bear 1X Shares
|
|
|
0.45
|
%
|
Direxion Daily High Yield Bear 1X Shares
|
|
|
0.45
|
%
|
A-1
LEVERAGED FUNDS
1.25X Funds
|
|
|
|
|
Direxion Daily S&P 500
®
Bull 1.25X
Shares
|
|
|
0.35
|
%
|
Direxion Daily FTSE Developed Markets Bull 1.25X Shares
|
|
|
0.35
|
%
|
Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
|
|
|
0.35
|
%
|
Direxion Daily Small Cap Bull 1.25X Shares
|
|
|
0.35
|
%
|
2X Funds
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily S&P 500
®
Cap Bull 2X
Shares
|
|
|
0.60
|
%
|
|
|
|
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
0.60
|
%
|
|
|
|
|
|
|
Direxion Daily S&P 500 Low Volatility Bull 2X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily S&P 500 Low Volatility Bear 2X Shares
|
|
|
0.95
|
%
|
Direxion Daily MLP Bull 2X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily MLP Bear 2X Shares
|
|
|
0.95
|
%
|
Direxion Daily Emerging Market Bond Bull 2X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Emerging Market Bond Bear 2X Shares
|
|
|
0.95
|
%
|
Direxion Daily Cyber Security & IT Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily Cyber Security & IT Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily Pharmaceutical & Medical Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily Pharmaceutical & Medical Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily CSI 500 China A Share Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily SME-ChiNext 100 China A Shares Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily CSI China Internet Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Greece Bull 2X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Clean Energy Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily Clean Energy Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily Biotech Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily Biotech Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily European Financials Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily European Financials Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily High Yield Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily High Yield Bear 2X Shares
|
|
|
0.80
|
%
|
Direxion Daily Silver Miners Index Bull 2X Shares
|
|
|
0.80
|
%
|
|
Direxion Daily Silver Miners Index Bear 2X Shares
|
|
|
0.80
|
%
|
A-2
3X Funds
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily 7-10 Year Treasury Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily 7-10 Year Treasury Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily 20+Year Treasury Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily 20+Year Treasury Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Brazil Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily FTSE China Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Clean Energy Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Clean Energy Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Corporate Bond Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Corporate Bond Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Developed Markets Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Developed Markets Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Emerging Markets Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Emerging Markets Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Energy Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Energy Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Financial Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Financial Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Healthcare Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Healthcare Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily India Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Municipal Bond Taxable Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Real Estate Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Real Estate Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Retail Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Russia Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily S&P 500
®
Bull 3X
Shares
|
|
|
0.95
|
%
|
|
Direxion Daily S&P 500
®
Bear 3X
Shares
|
|
|
0.95
|
%
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Small Cap Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Small Cap Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily South Korea Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Technology Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Japan Bull 3X Shares
|
|
|
0.95
|
%
|
|
|
|
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Homebuilders & Supplies Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
|
|
0.95
|
%
|
A-3
|
|
|
|
|
|
|
|
|
|
|
Direxion Daily Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Oil & Gas Exp. & Prod. Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily FTSE Cürex USD Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily FTSE Cürex USD Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily FTSE Cürex EUR Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily FTSE Cürex EUR Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily FTSE Cürex YEN Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily FTSE Cürex YEN Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily S&P 500 Low Volatility Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily S&P 500 Low Volatility Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily MLP Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily MLP Bear 3X Shares
|
|
|
0.95
|
%
|
Direxion Daily Emerging Market Bond Bull 3X Shares
|
|
|
0.95
|
%
|
|
Direxion Daily Emerging Market Bond Bear 3X Shares
|
|
|
0.95
|
%
|
Last Updated: August 23, 2016
A-4
DIREXION SHARES ETF TRUST
The maximum annualized fee rate pursuant to Paragraph 1 of the Direxion Shares ETF Trust Distribution Plan shall be 0.25% for the following
Funds:
ACTIVELY MANAGED FUNDS
Direxion Auspice Broad Commodity Strategy ETF
NON-LEVERAGED FUNDS
Direxion NASDAQ-100
®
Equal Weighted Index Shares
Direxion All Cap Insider Sentiment Shares
Direxion S&P 500
®
Volatility Response Shares
Direxion Zacks MLP High Income Shares
Direxion iBillionaire Index ETF
1X BEAR FUNDS
Direxion Daily 7-10 Year Treasury Bear 1X Shares
Direxion Daily 20+ Year Treasury Bear 1X Shares
Direxion Daily Corporate Bond Bear 1X Shares
Direxion Daily S&P 500
®
Bear 1X Shares
Direxion Daily Municipal Bond Taxable Bear 1X Shares
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily Total Bond Market Bear 1X Shares
Direxion Daily CSI 300 China A Share Bear 1X Shares
Direxion Daily S&P Biotech Bear 1X Shares
Direxion Daily Healthcare Bear 1X Shares
Direxion Daily CSI 500 China A Share Bear 1X Shares
Direxion Daily SME-ChiNext 100 China A Shares Bear 1X Shares
Direxion Daily CSI China Internet Bear 1X Shares
Direxion Daily MSCI China A Bear 1X Shares
Direxion Daily Cyber Security & IT Bear 1X Shares
Direxion Daily Greece Bear 1X Shares
Direxion Daily Pharmaceutical & Medical Bear 1X Shares
Direxion Daily Frontier 100 Bear 1X Shares
Direxion Daily Emerging Markets Bond Bear 1X Shares
Direxion Daily Consumer Staples Bear 1X Shares
Direxion Daily Consumer Discretionary Bear 1X Shares
Direxion Daily Energy Bear 1X Shares
Direxion Daily Financial Bear 1X Shares
Direxion Daily Industrials Bear 1X Shares
Direxion Daily Materials Bear 1X Shares
Direxion Daily Technology Bear 1X Shares
Direxion Daily Utilities Bear 1X Shares
Direxion Daily European Financials Bear 1X Shares
Direxion Daily Gold Miners Index Bear 1X Shares
Direxion Daily Dow 30 Bear 1X Shares
Direxion Daily High Yield Bear 1X Shares
LEVERAGED FUNDS
1.25X Funds
Direxion
Daily S&P 500
®
Bull 1.25X Shares
Direxion Daily FTSE Developed Markets Bull
1.25X Shares
Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
Direxion Daily Small Cap Bull 1.25X Shares
2X Funds
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
|
Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily S&P 500 Low Volatility Bull 2X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 2X Shares
|
Direxion Daily MLP Bull 2X Shares
|
|
Direxion Daily MLP Bear 2X Shares
|
Direxion Daily Emerging Market Bond Bull 2X Shares
|
|
Direxion Daily Emerging Market Bond Bear 2X Shares
|
Direxion Daily Cyber Security & IT Bull 2X Shares
|
|
Direxion Daily Cyber Security & IT Bear 2X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 2X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 2X Shares
|
Direxion Daily CSI 500 China A Share Bull 2X Shares
|
|
|
Direxion Daily SME-ChiNext 100 China A Shares Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Bull 2X Shares
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
Direxion Daily Clean Energy Bull 2X Shares
|
|
Direxion Daily Clean Energy Bear 2X Shares
|
Direxion Daily Greece Bull 2X Shares
|
|
|
Direxion Daily Biotech Bull 2X Shares
|
|
Direxion Daily Biotech Bear 2X Shares
|
Direxion Daily European Financials Bull 2X Shares
|
|
Direxion Daily European Financials Bear 2X Shares
|
Direxion Daily High Yield Bull 2X Shares
|
|
Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Silver Miners Index Bull 2X Shares
|
|
Direxion Daily Silver Miners Index Bear 2X Shares
|
3X Funds
|
|
|
Direxion Daily 7-10 Year Treasury Bull 3X Shares
|
|
Direxion Daily 7-10 Year Treasury Bear 3X Shares
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
Direxion Daily Brazil Bull 3X Shares
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
Direxion Daily Clean Energy Bull 3X Shares
|
|
Direxion Daily Clean Energy Bear 3X Shares
|
Direxion Daily Corporate Bond Bull 3X Shares
|
|
Direxion Daily Corporate Bond Bear 3X Shares
|
Direxion Daily Developed Markets Bull 3X Shares
|
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Direxion Daily Developed Markets Bear 3X Shares
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Direxion Daily Emerging Markets Bull 3X Shares
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Direxion Daily Emerging Markets Bear 3X Shares
|
Direxion Daily Energy Bull 3X Shares
|
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Direxion Daily Energy Bear 3X Shares
|
Direxion Daily Financial Bull 3X Shares
|
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Direxion Daily Financial Bear 3X Shares
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
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Direxion Daily Gold Miners Index Bear 3X Shares
|
Direxion Daily Healthcare Bull 3X Shares
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Direxion Daily Healthcare Bear 3X Shares
|
Direxion Daily India Bull 3X Shares
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Direxion Daily Latin America Bull 3X Shares
|
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Direxion Daily Mid Cap Bull 3X Shares
|
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Direxion Daily Mid Cap Bear 3X Shares
|
Direxion Daily Municipal Bond Taxable Bull 3X Shares
|
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Direxion Daily Natural Gas Related Bull 3X Shares
|
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Direxion Daily Natural Gas Related Bear 3X Shares
|
Direxion Daily Real Estate Bull 3X Shares
|
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Direxion Daily Real Estate Bear 3X Shares
|
Direxion Daily Regional Banks Bull 3X Shares
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Direxion Daily Regional Banks Bear 3X Shares
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Direxion Daily Retail Bull 3X Shares
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Direxion Daily Russia Bull 3X Shares
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Direxion Daily Russia Bear 3X Shares
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
Direxion Daily Semiconductor Bull 3X Shares
|
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Direxion Daily Semiconductor Bear 3X Shares
|
Direxion Daily Small Cap Bull 3X Shares
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Direxion Daily Small Cap Bear 3X Shares
|
Direxion Daily South Korea Bull 3X Shares
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Direxion Daily Technology Bull 3X Shares
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Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
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Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
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Direxion Daily Japan Bull 3X Shares
|
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Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
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Direxion Daily Homebuilders & Supplies Bear 3X Shares
|
Direxion Daily S&P Biotech Bull 3X Shares
|
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Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily Oil & Gas Exp. & Prod. Bull 3X Shares
|
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Direxion Daily Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily FTSE Cürex USD Bull 3X Shares
|
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Direxion Daily FTSE Cürex USD Bear 3X Shares
|
Direxion Daily FTSE Cürex EUR Bull 3X Shares
|
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Direxion Daily FTSE Cürex EUR Bear 3X Shares
|
Direxion Daily FTSE Cürex YEN Bull 3X Shares
|
|
Direxion Daily FTSE Cürex YEN Bear 3X Shares
|
Direxion Daily S&P 500 Low Volatility Bull 3X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 3X Shares
|
Direxion Daily MLP Bull 3X Shares
|
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Direxion Daily MLP Bear 3X Shares
|
Direxion Daily Emerging Market Bond Bull 3X Shares
|
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Direxion Daily Emerging Market Bond Bear 3X Shares
|
Up to 0.25% of average daily net assets. The current authorized maximum annualized fee is 0% of average daily net assets.
Last Updated: August 23, 2016
SCHEDULE A
TO THE MANAGEMENT SERVICES AGREEMENT
BETWEEN DIREXION SHARES ETF TRUST
AND RAFFERTY ASSET MANAGEMENT, LLC
Rafferty Asset Management, LLC shall be paid 0.02% to provide the services listed on Schedule B to the Direxion Shares ETF Trust.
ACTIVELY MANAGED FUNDS
Direxion Auspice Broad Commodity Strategy ETF
NON-LEVERAGED FUNDS
Direxion NASDAQ-100
®
Equal Weighted Index Shares
Direxion S&P 500
®
Volatility Response Shares
Direxion All Cap Insider Sentiment Shares
Direxion Zacks MLP High Income Shares
Direxion iBillionaire Index ETF
1X BEAR FUNDS
Direxion Daily 7-10 Year Treasury Bear 1X Shares
Direxion Daily 20+ Year Treasury Bear 1X Shares
Direxion Daily Corporate Bond Bear 1X Shares
Direxion Daily S&P 500
®
Bear 1X Shares
Direxion Daily Municipal Bond Taxable Bear 1X Shares
Direxion Daily Small Cap Bear 1X Shares
Direxion Daily Total Bond Market Bear 1X Shares
Direxion Daily CSI 300 China A Share Bear 1 Shares
Direxion Daily S&P Biotech Bear 1X Shares
Direxion Daily Healthcare Bear 1X Shares
Direxion Daily CSI 500 China A Share Bear 1X Shares
Direxion Daily SME-ChiNext 100 China A Shares Bear 1X Shares
Direxion Daily CSI China Internet Bear 1X Shares
Direxion Daily MSCI China A Bear 1X Shares
Direxion Daily Greece Bear 1X Shares
Direxion Daily Cyber Security & IT Bear 1X Shares
Direxion Daily Pharmaceutical & Medical Bear 1X Shares
Direxion Daily European Financials Bear 1X Shares
Direxion Daily Gold Miners Index Bear 1X Shares
Direxion Daily Dow 30 Bear 1X Shares
Direxion Daily High Yield Bear 1X Shares
LEVERAGED FUNDS
1.25X Funds
Direxion
Daily Small Cap Bull 1.25X Shares
Direxion Daily FTSE Developed Markets Bull 1.25X Shares
Direxion Daily S&P 500
®
Bull 1.25X Shares
Direxion Daily FTSE Emerging Markets Bull 1.25X Shares
2X Funds
|
|
|
Direxion Daily S&P 500
®
Bull 2X Shares
|
|
|
Direxion Daily CSI 300 China A Share Bull 2X Shares
|
|
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Direxion Daily Small Cap Bull 2X Shares
|
|
|
Direxion Daily S&P 500 Low Volatility Bull 2X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 2X Shares
|
Direxion Daily MLP Bull 2X Shares
|
|
Direxion Daily MLP Bear 2X Shares
|
Direxion Daily Emerging Market Bond Bull 2X Shares
|
|
Direxion Daily Emerging Market Bond Bear 2X Shares
|
Direxion Daily Cyber Security & IT Bull 2X Shares
|
|
Direxion Daily Cyber Security & IT Bear 2X Shares
|
Direxion Daily Pharmaceutical & Medical Bull 2X Shares
|
|
Direxion Daily Pharmaceutical & Medical Bear 2X Shares
|
Direxion Daily CSI 500 China A Share Bull 2X Shares
|
|
|
Direxion Daily SME-ChiNext 100 China A Shares Bull 2X Shares
|
|
|
Direxion Daily CSI China Internet Bull 2X Shares
|
|
|
Direxion Daily MSCI China A Bull 2X Shares
|
|
|
Direxion Daily Greece Bull 2X Shares
|
|
|
Direxion Daily Clean Energy Bull 2X Shares
|
|
Direxion Daily Clean Energy Bear 2X Shares
|
Direxion Daily Biotech Bull 2X Shares
|
|
Direxion Daily Biotech Bear 2X Shares
|
Direxion Daily European Financials Bull 2X Shares
|
|
Direxion Daily European Financials Bear 2X Shares
|
Direxion Daily High Yield Bull 2X Shares
|
|
Direxion Daily High Yield Bear 2X Shares
|
Direxion Daily Silver Miners Index Bull 2X Shares
|
|
Direxion Daily Silver Miners Index Bear 2X Shares
|
3X Funds
|
|
|
Direxion Daily 7-10 Year Treasury Bull 3X Shares
|
|
Direxion Daily 7-10 Year Treasury Bear 3X Shares
|
Direxion Daily 20+ Year Treasury Bull 3X Shares
|
|
Direxion Daily 20+ Year Treasury Bear 3X Shares
|
Direxion Daily Brazil Bull 3X Shares
|
|
|
Direxion Daily FTSE China Bull 3X Shares
|
|
Direxion Daily FTSE China Bear 3X Shares
|
Direxion Daily Clean Energy Bull 3X Shares
|
|
Direxion Daily Clean Energy Bear 3X Shares
|
Direxion Daily Corporate Bond Bull 3X Shares
|
|
Direxion Daily Corporate Bond Bear 3X Shares
|
Direxion Daily Developed Markets Bull 3X Shares
|
|
Direxion Daily Developed Markets Bear 3X Shares
|
Direxion Daily Emerging Markets Bull 3X Shares
|
|
Direxion Daily Emerging Markets Bear 3X Shares
|
Direxion Daily Energy Bull 3X Shares
|
|
Direxion Daily Energy Bear 3X Shares
|
Direxion Daily Financial Bull 3X Shares
|
|
Direxion Daily Financial Bear 3X Shares
|
Direxion Daily Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Gold Miners Index Bear 3X Shares
|
Direxion Daily Healthcare Bull 3X Shares
|
|
Direxion Daily Healthcare Bear 3X Shares
|
|
|
|
Direxion Daily India Bull 3X Shares
|
|
|
Direxion Daily Latin America Bull 3X Shares
|
|
|
Direxion Daily Mid Cap Bull 3X Shares
|
|
Direxion Daily Mid Cap Bear 3X Shares
|
Direxion Daily Municipal Bond Taxable Bull 3X Shares
|
|
|
Direxion Daily Natural Gas Related Bull 3X Shares
|
|
Direxion Daily Natural Gas Related Bear 3X Shares
|
Direxion Daily Real Estate Bull 3X Shares
|
|
Direxion Daily Real Estate Bear 3X Shares
|
Direxion Daily Regional Banks Bull 3X Shares
|
|
Direxion Daily Regional Banks Bear 3X Shares
|
Direxion Daily Retail Bull 3X Shares
|
|
|
Direxion Daily Russia Bull 3X Shares
|
|
Direxion Daily Russia Bear 3X Shares
|
Direxion Daily S&P 500
®
Bull 3X Shares
|
|
Direxion Daily S&P 500
®
Bear 3X Shares
|
Direxion Daily Semiconductor Bull 3X Shares
|
|
Direxion Daily Semiconductor Bear 3X Shares
|
Direxion Daily Small Cap Bull 3X Shares
|
|
Direxion Daily Small Cap Bear 3X Shares
|
Direxion Daily South Korea Bull 3X Shares
|
|
|
Direxion Daily Technology Bull 3X Shares
|
|
Direxion Daily Technology Bear 3X Shares
|
Direxion Daily Junior Gold Miners Index Bull 3X Shares
|
|
Direxion Daily Junior Gold Miners Index Bear 3X Shares
|
Direxion Daily FTSE Europe Bull 3X Shares
|
|
|
Direxion Daily Japan Bull 3X Shares
|
|
|
Direxion Daily Homebuilders & Supplies Bull 3X Shares
|
|
Direxion Daily Homebuilders & Supplies Bear 3X Shares
|
Direxion Daily S&P Biotech Bull 3X Shares
|
|
Direxion Daily S&P Biotech Bear 3X Shares
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bull 3X Shares
|
|
Direxion Daily S&P Oil & Gas Exp. & Prod. Bear 3X Shares
|
Direxion Daily FTSE Cürex USD Bull 3X Shares
|
|
Direxion Daily FTSE Cürex USD Bear 3X Shares
|
Direxion Daily FTSE Cürex EUR Bull 3X Shares
|
|
Direxion Daily FTSE Cürex EUR Bear 3X Shares
|
Direxion Daily FTSE Cürex YEN Bull 3X Shares
|
|
Direxion Daily FTSE Cürex YEN Bear 3X Shares
|
Direxion Daily S&P 500 Low Volatility Bull 3X Shares
|
|
Direxion Daily S&P 500 Low Volatility Bear 3X Shares
|
Direxion Daily MLP Bull 3X Shares
|
|
Direxion Daily MLP Bear 3X Shares
|
Direxion Daily Emerging Market Bond Bull 3X Shares
|
|
Direxion Daily Emerging Market Bond Bear 3X Shares
|
Last Updated: August 23, 2016